Atax 2-Miral PDF

EXEMPTIONS AND DEDUCTIONS FROM GROSS
INCOME
As to claimants
I.
DEDUCTIONS vs. EXCLUSIONS
his cost of doing

business
living expenses
Can be claimed by all

taxpayers, corporate
or otherwise
Can be claimed only by

individual taxpayers
DEDUCTION is an outflow of wealth.

EXCLUSION is an inflow of wealth but is not considered as gross
income because there is a law which grants it as exempted from
gross income.
EXCLUSION
DEDUCTION
Pertains to the computation

of Gross Income
Pertain to computation of Net

Income
Something received or earned

by the taxpayer which do not
form part of gross income
Something spent or paid in

earning gross income.
Flow of wealth to the

taxpayer which are not
treated as part of gross
income for purposes of
computing the taxpayers
taxable income due to the
following reasons:
The amounts which the law

allows to be subtracted from
gross income in order to arrive at
net income
a.
It is exempted by the
fundamental law;
b.
It is exempted by a
statute; and
c.
It does not fall within

the definition of
income.
Note that deductions are outflow

of income since they represent
money spent or the taxpayers
expenses.
III.
BASIC PRINCIPLES GOVERNING DEDUCTIONS
(1) The taxpayer seeking a deduction must point to some

specific provisions of the statute authorizing the
deduction; and
(2) He must be able to prove that he is entitled to the
deduction authorized or allowed.
Deductions have generally been deemed to be a matter of legislative
grace. They are allowed only where there is a clear provision in the
statute for the deduction claimed; and where particular deductions
are authorized by the statute, no others may be made.
Note that the taxable gross income is affected by exclusions
because the latter are omitted from the former and are not reported
on the income tax return but it is not affected by deductions
because they are subtracted after gross income is determined and
are reported on the return.
IV.
1.
2.
3.
4.
KINDS OF ALLOWABLE DEDUCTIONS

OPTIONAL STANDARD DEDUCTION
ITEMIZED DEDUCTIONS (Section 34A K and Section 34M)
PERSONAL BASIC EXEMPTIONS AND ADDITIONAL
EXEMPTIONS
PREMIUMS ON HEALTH AND HOSPITAL INSURANCE
OPTIONAL STANDARD DEDUCTION

II.
DEDUCTIONS vs. EXEMPTIONS
Default is itemized deduction. In lieu of the itemized

deduction (IDs), an individual taxpayer (i.e.
resident/non-resident citizen, resident alien, taxable
estate and trust) other than non-resident alien, may
elect optional standard deduction (OSD) in an amount
not exceeding 40% of his gross sales or gross receipts,
as the case may be.
If 40% OSD is higher than ID, then choose OSD in

order to arrive at a lesser net income
PERSONAL EXPEMPTIONS are arbitrary amounts allowed for

personal, living or family expenses of the taxpayer. The amount has
been calculated to roughly equivalent to the minimum of
subsistence.
ALLOWABLE
DEDUCTIONS
EXEMPTIONS
Refer
to
actual
expenses incurred in
the pursuit of trade,
business or practice
of profession
Arbitrary
amounts
allowed by law
As to nature
Constitute
expenses
Pertain to
expenses
As to purpose
To
enable
the
taxpayer to recoup
As to amount
business
Who can avail?

a.
Citizens who are purely engaged in trade or

business;
b.
Citizens who are mixed earners both

compensation earners and engaged in trade,
business or profession;
c.
Resident aliens but only those expenses incurred

in the Philippines;
personal
Allowed to cover
personal, family and
TAXATION NOTES - FINALS| 404 |marukoi.mhealler
d.
Partners in GPPs;
e.
Corporations
Itemized Deductions:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
- Only DC, RFC can claim OSD

Who cannot claim OSD?
a.
Individual taxpayer earning purely compensation

income;
b.
Non Resident Aliens;

Note that in IDs, NRA-ETB may claim such
deduction but not NRA-NETB. As to OSD, theres
no distinction. All NRAs are NOT allowed to
claim such deduction.
c.
Special employees
Conditions or Requisites:
a.
OSD is available only to citizens or resident

aliens; thus non-resident aliens are NOT entitled
to claim the OSD;
b.
The standard deduction is OPTIONAL (i.e. Unless

the taxpayer signifies in his return his intention
to elect the OSD, he shall be considered as
having availed himself of the IDs);
c.
Such election, when made by a qualified

taxpayer, is irrevocable for the taxable year for
which the ITR is made; however, he can change
to IDs in succeeding year(s);
d.
The amount of standard deduction is limited to

40% of taxpayers gross income; and
e.
An individual taxpayer who is entitled to and

claimed for OSD shall not be required to submit
with his return such financial statements
otherwise required by the Tax Code.
Expenses
Interests
Taxes
Losses
Bad Debts
Charitable Contributions
Research and Development
Contributions to Pension Trust
Depreciation
Depletion of oil, gas, wells and mines
PERSONAL BASIC EXEMPTIONS AND ADDITIONAL EXEMPTIONS

-
Individuals entitled to avail of PBE and AE are the

following:
a.
Resident citizens of the Philippines;
b.
Non-resident citizens with respect only to

income derived from Philippine sources;
c.
Resident aliens with respect only to income

derived from Philippine sources;
d.
Non-resident aliens engaged in trade, business

or in the exercise of a profession in the
Philippines with respect to income from
Philippine sources, provided there is reciprocity;
Reciprocity means that the foreign country

where the NRA-ETB is a citizen grants
exemptions to Filipinos not residing there
but doing trade or business therein. The
amount granted should NOT exceed the
amount of personal exemptions allowed
under our laws.
Example:
If US grants only 24K as exemptions, then
the Philippines grants US NRA-ETB only 24K
as exemption.
ITEMIZED DEDUCTIONS
-
If US grants 75K as exemptions, the

Philippines grants US NRA-ETB only 50K as
exemption.
Individuals entitled to avail of IDs are the following:

a.
Citizens of the Philippines (RC and NRC);
b.
Resident Aliens;
c.
Non-Resident Aliens Engaged in Trade or

Business in the Philippines;
d.
-
Estates and Trusts
NRA-NETB are taxed on the basis of their gross

income, hence cannot avail of the IDs.
As to corporations, only DC and RFC may claim

deductions. The latter being entitled only with
respect to expenses related to Philippine income
only.
2
e.
Estates and Trusts

RC
NRC
RA
NRA-ETB
Personal
Exemption
within
within
Additional
Exemption
within
within
subject
to rule
on
reciprocity
NRANETB
Personal Basic Exemption. Each individual is allowed a

basic personal exemption of P50,000. In the case of
married individuals where only one of the spouses is

deriving gross income, only such spouse shall be allowed
the personal exemption
PREMIUMS ON HEALTH AND HOSPITAL INSURANCE

Limitations:
Additional Exemption for Dependents. There is allowed an

additional exemption of P25,000 for each qualified
dependent not exceeding four (4).
-
The additional exemption for dependents shall be

claimed by only one of the spouses in case of married
individuals.
In the case of legally separated spouses, the

additional exemptions may be claimed only by the
spouse who has custody of the child or children.
The total amount of additional exemptions that may

be claimed by both shall not exceed the maximum
additional exemptions for four (4) dependents (Sec.
35 [A,B]) or 100,000.
Dependent means a legitimate, illegitimate or legally

adopted child
Conditions for a child to be considered a dependent:
Chiefly dependent upon the taxpayer for

support;
Living with the taxpayer;
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.
a.
It must not be more than P2,400.00 a year (or 200.00

a month). The P2,400.00 is the maximum amount
that can be claimed as deductions regardless of the
amount of the premiums actually paid.
b.
The family must have an income of not more than

P250,000.00 a year.
Family income means income of the immediate
family.
c.
The claimant must be the spouse claiming the

additional exemption.
Note: For the deductions to be allowed, the payments

should be on health and/or hospitalization insurance of
the individual taxpayer including his family.
V.
ENTITLEMENT TO DEDUCTIONS, In General
RC
NRC
RA
NRA-ETB
NRA-NETB
SPECIAL EMPLOYEES
DEDUCTIONS
TAX BASE
net income
net income
net income
net income
gross income
subject to 15% tax
rate on their income
in the form of
salaries, honoraria,
wages, emoluments
and remuneration
and other similar
income.
Change of Status (GR: interpret in favor of the taxpayer)

i.
ii.
iii.
If the taxpayer marries or should have additional

dependent(s) during the taxable year, the
taxpayer may claim the corresponding personal
or additional exemption, as the case may be, in
full for such year.
If the taxpayer dies during the taxable year, his
estate may still claim the personal and additional
exemptions for himself and his dependent(s) as
if he died at the close of such year.
If the spouse or any of the dependents dies or
any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully
employed during the taxable year, the taxpayer
may still claim the same exemptions as if the
spouse or any of the dependents died, or as if
such dependents married, become twenty-one
years old or become gainfully employed at the
close of such year.
Who are Special Employees?

-
These are employees occupying supervisory or

management position of technical knowledge.
a.
Aliens employed by Regional Area HQ of Multinational

Companies
b.
Aliens employed by Operating HQ
c.
Aliens employed by Offshore Banking Unit
d.
Aliens employed by Petroleum Service Contractors and

Subcontractors
Note:
-
The same tax treatment shall apply to Filipino

employees occupying the same position as an alien
employed in the above-mentioned MNCs.
Any income earned from all other sources within the

Philippines shall be subject to pertinent income tax
(5-32%), as the case may be, imposed under the NIRC.
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;
Note:
The foregoing special corporations shall be subjected

to 10% tax rate on their income except for the
RAHQs.
RAHQs are branches established in the Philippines by

MNCs and which headquarters do not earn or derive
income from the Philippines and which act as
supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the
Asia-Pacific Region and other foreign markets. RAHQs
only facilitate operations and not income-earning.
Hence, they are not taxable as opposed to ROHQs.
A person is said to be financially interested in the

taxpayers business if he is a stockholder thereof or
he is to receive as his compensation a share of the
property in the business.
Examples:
ROHQs earn income from performing administrative

and financial functions for affiliates, subsidiaries, or
branches in the Asia-Pacific Region and other foreign
markets.
VI.
NON-DEDUCTIBLE ITEMS
The following are not deductible in computing taxable net income:

1.
Personal, living or family expenses;

-
2.
3.
These are not deductible since the same are

considered as already contemplated under the
personal basic exemption.
Where ABC Company paid premiums on the

life of Mr. Chairman, the premiums are nondeductible if ABC is the beneficiary since it
is as if it just transferred its money from
one pocket to another.
But where the beneficiary is the employee

or his family, the premiums paid by ABC
Company for the insurance of Mr. Chairman
is deductible.
Where a corporation is a family

corporation, the premiums paid by such
corporation on the life insurance policy
covering the life of its president with his
wife as the beneficiary are not deductible,
the corporation being indirectly the
beneficiary under the policy.
Losses from sales and exchanges of property directly or

indirectly.
-
This is to prevent simulated sales between related

taxpayers which results to tax avoidance.
Any amount paid out for new buildings or for permanent

improvements, or betterments made to increase the value
of any property or estate;
a.
Between members of a family (brother, sister of

half or full blood, spouse, ascendant, lineal
descendants);
These are capital expenditures which will increase the

value or quality of the taxpayers property and serve
as additional source of income.
b.
These costs will have to be spread out over the life of

the property DEPRECIATION.
Except in case of distributions in liquidation,

between an individual and a corporation more
than 50% in value of the outstanding stock of
which is owned directly, by or for such an
individual;
xxxxxx
Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or
has been made;
-
Also considered as capital expenditures.
Such improvements must extend the life of the

property for more than one year. In other words,
such repairs must be extraordinary.
4.
5.
Expenses for repairs are DEDUCTIBLE if such repairs

are incidental or ordinary and do not materially add
to value of the property nor appreciably prolong its
life.
Premiums paid on any life insurance policy covering the

life of any officer or employee, or of any person financial
4
XYZ CORP
A 60%
B 10%
C 20%
D 10%
Any loss derived from the sale between XYZ and

A shall be a non-deductible loss.
If XYZ sells to BCD at a loss, said loss is
deductible.
XYZ CORP
DEF CORP
A 10% B 10% C 10%
D 60% E 20%
j D 10%
DEF 60%
F 10%
G 10%
If XYZ sells to B at a loss, it is still deductible.

[10% + (60% x 60%) = 46%
c.
Except in case of distributions in liquidation,

between two corporations more than 50% in
value of the outstanding stock of each of which
is owned, directly or indirectly, by or for same
individual, if either one of such corporation is a
personal holding company or a foreign personal
holding company; or
d.
Between the grantor and a fiduciary of any trust;

or
e.
Between fiduciary of a trust and the fiduciary of

another trust, if the same person is a grantor
with respect to each trust; or
f.
ESTATES AND TRUSTS
I.
DEFINITION OF TERMS
ESTATE
-
The mass of property, rights and obligation left

behind by the decedent upon his death. For purposes
of income tax, an estate may be one that is under
judicial administration or one that is not under
judicial administration.
It is an arrangement whereby the trustor grants the

control of certain property in the person of the
trustee for the benefit of the beneficiary.
TRUST
Between a fiduciary of a trust and a beneficiary

of such trust
II.
GROSS INCOME INCLUSTIONS ESTATES & TRUSTS
III.
The gross income of an estate is practically

the same as that of an individual taxpayer.
INCOME OF ESTATES AND TRUSTS WHICH ARE

INCLUDED FOR INCOME TAXATION
a.
Income accumulated in trust for the benefit of

unborn or unascertained person or persons with
contingent interests and income accumulated or
held for future distribution under the terms of
the will or trust.
b.
Income which is to be distributed currently by

the fiduciary to the beneficiaries, and income
collected by a guardian or an infant which is to
be held or distributed as the court may direct.
c.
Income received by estates of deceased persons

during the period of administration or
settlement of the estate.
d.
Income which, in the discretion of the fiduciary,

may be either distributed to the beneficiaries or
accumulated.
Ex.
If there is an estate subject to settlement but not yet
partitioned:
-
Any income generated will not be subjected to

any income estate tax
Each heirs will be taxed on their individual tax

return
If there are 4 apartments left to the heirs but the

heirs added two more apartments and generated an
income of 1M:
5
IV.
Treated as unregistered partnership, subject to

the 30% tax rate.
GROSS INCOME DEDUCTIONS ALLOWED TO ESTATES

AND TRUSTS
a.
The amount of the income of the estate or trust

for the taxable year which is to be distributed
currently by the fiduciary to the beneficiaries.
b.
The amount of the income collected by a

guardian of an infant which is to be held or
distributed as the court may direct.
c.
The amount of the income of the estate or trust

for its taxable year, which is properly paid or
credited during such year to the legatee, heir or
beneficiary.
or diverted to purposes other than for the

exclusive benefit of the employees.
However, any amount actually distributed to any
employee or distributee shall be taxable to him in the
year which so distributed to the extent that it exceeds
the amount contributed by such employee or
distributee.
NOTE: The amount so allowed as a deduction

shall be included in computing the taxable
income of the heirs, beneficiaries or legatees,
whether distributed or not.
V.
EXEMPTION ALLOWED TO ESTATES AND TRUSTS
P50,000 personal exemption just like an

individual taxpayer
Ex.
DECEDENT
ESTATE INCOME
= 50K PBE
= can no longer
claim PBE
Jan 1
VI.
Aug 4
Dec 31
EXCEPTION FROM TAXATION

Employees trust which forms part of a pension,
stock, bonus or profit-sharing plan of an employer for
the benefit of some or all his employees shall be
exempt from income tax:
a.
If contributions are made to the trust by such

employer, or employees or both, for the purpose
of distributing to such employees the earnings
and the principal of the fund accumulated by the
trust in accordance with such plan; and
b.
If under the trust instrument, it is impossible, at

any time prior to the satisfaction of all liabilities
with respect to employees under the trust, for
any part of the corpus or income to be used for
CORPORATE INCOME TAXATION

I.
INTRODUCTION AND DEFINITION OF TERMS
CORPORATION includes partnership no matter how created or

organized, joint account companies, insurance companies and other
associations except:
1.
General professional partnership
2.
Joint Venture for the purpose of undertaking

construction projects
3.
Subject to tax on their separate income
If joint venture is not for construction, it will be

subject to 30% income tax
Joint consortium for the purpose of engaging in

petroleum, geothermal and other energy operations
pursuant to a consortium agreement with the
government
-
Must be with the government in order that it will

be exempt from 30% corporate income tax.
PARTNERSHIP an association of two or more persons where each

partner contribute money, property or industry to a common fund
with the intention of dividing profits among themselves
i.
The partners in a partnership are considered as

stockholders for tax purposes. The profits distributed
to them are considered as dividends.
ii.
For taxation purposes, business partnerships are

taxable irrespective of whether it was orally
constituted or in writing and whether or not it is
registered with the SEC.
JOINT VENTURE created when 2 corporations, while registered

and operating separately, are placed under one sole management
which operated the business affairs of said companies as though
they constituted a single entity thereby obtaining substantial
economy and profits in the operation.
JOINT ACCOUNT created when 2 persons form or create a
common fund and such persons engages in a business for profit. This
may result in a taxable unregistered association or partnership
JOINT STOCK COMPANIES the midway between a corporation
and a partnership, a hybrid personality, somewhat a corporation
because this is managed by a Board of directors and such persons
may transfer their share/s without the consent of others, and
somewhat a partnership because it is an association, and persons or
members of the same contribute fund, money to a common fund.
EMERGENCY OPERATION these may be formed by 2 corporations
with separate personalities. If they form that emergency operation
(it is a really a special activity) to engage in a joint venture.
Corporation 1 may be taxed only from the income derived from such
business. The income derived from such emergency operation
should also be included in that taxable income subject to corporate
income tax. In the same way, that corporation 2, has a separate and
distinct personality; if its a part of that emergency operation, the
income derived from such special activity should also be included in
the income of that corporation 2, subject to corporate income tax,
even if it is not registered with the Securities and Exchange
Commission.
CO-OWNERSHIP
General Rule: As a rule, tax exempt, because a coownership is not a partnership but formed and organized not for
profit but for common enjoyment of the property or for the
preservation of the property. And any income as an incidence
thereof is taxed at 5-32% since it forms part of the ordinary income
of the co-owners. But the co-ownership itself is tax exempt.
GENERAL PROFESSIONAL PARTNERSHIPS - partnerships formed by

person for the sole purpose of exercising their common profession,
no part of the income of which is derived from engaging in any
trade or business. Persons engaged in business as partners in a
GPP, shall be liable for income tax only in their separate and
individual capacities.
i.
ii.
Exceptions:
For purposes of computing the distributive share of the

partners, the net income of the partnership shall be
computed in the same manner as a corporation. Each
partner shall report as gross income his distributive share,
actually or constructively received, in the net income of
the partnership. Income of a GPP is deemed constructively
received by the partners.
The undistributed shares will still be considered as
constructive income already taxable on the part of the
individual partners. Now, even if the GPP is not subject to
30% corporate tax rate on the net income, the net income
is considered as earned by the partners composing the
GPP. And taxable separately on such partners to 5%- 32%.
The partners and the GPP are required to file individual
ITR.
7
When the income of the co-ownership is invested by

the co-owners in other income producing activities;
or
b.
When there is no attempt to divide inherited

property for more than ten (10) years and the said
property was not under any administration
proceedings nor held in trust, an unregistered
partnership is deemed to exist, which is thereby
subjected to 30% corporate income tax.
II.
1.
TAXABLE CORPORATIONS
DOMESTIC CORPORATIONS (DC) See Section 27

-
2.
iii.
a.
A corporation formed or organized under Philippine

laws. It is subject to tax on its net taxable income
from sources WITHIN and WITHOUT the Philippines.
RESIDENT FOREIGN CORPORATION (RFC) See Section 28A

-
A corporation formed, organized, authorized or

existing under the laws of any foreign country, and
engaged in trade or business WITHIN the Philippines.

It is subject to tax on its net taxable income from
sources within the Philippines.
DC
Within and
Without
Net Taxable
Income
Expense
Deduction
Within and
Without
30%
Income
Tax Base
Being engaged in business implies continuity of

commercial transactions or dealings; continuity of
business or continuity of intention to conduct
continuous (regular) business.
3.
For tax purposes, for as long as it is formed,

organized, authorized under foreign laws and
engaged in business in Philippines, it is considered as
RFC even if 100% owned by Filipinos.
NON-RESIDENT FOREIGN CORPORATIONS (NRFC) See Section

26B
-
Expense
Deductions
Allowed
Tax Rate
Such gross income may include interests, dividends,

rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic, or
casual gains, profits, and income and capital gains,
EXCEPT, capital gains from the sale of shares of stock
not traded in the stock exchange.
30%
30%
Doing business in the Philippines would require

the determination of whether the activity you are
doing in the Philippines is done in a continuous
basis or regular basis.
Filing of an Income Tax Return (ITR)
Resident foreign corporations are also required to file an

ITR at the end of the year and/or a quarterly basis.
1. Foreign Laws
Non-resident foreign corporations do not file quarterly or

annual ITR. Any payments made to non-resident foreign
corporations are subjected to final withholding tax.
Income remitted to NRFCs is already net of the withheld
tax in the Philippines.
2. Abroad
Payments to:
3. Within
If allowed to deduct
expense depends on:
Non-RFC - withhold 30% of the tax
Non-resident aliens not engaged in trade or business

withhold 25%
(RFC will receive 70% free from tax already or 75% for
NRA-NETB)
Resident Foreign
Corporation
1.
2.
3.
None Allowed
Domestic corporations are required to declare their

income in a quarterly basis. These are mere estimates and
at the end of the year it is annualized. Done through Selfassessment (without waiting to be assessed by BIR)
2. Within and Without

3. NET Taxable income
(allowed to deduct
expense within and
without)
Gross Income
FOREIGN
1. Philippine Laws (formed

and organized)
Net Taxable
Income
Expense
Deduction
Within
If it is registered as a Philippine branch of a foreign

company, it is automatically considered as a resident
foreign corporation. However, non-registration is not
necessary to be considered as RFC. The criteria is WON
you are DOING BUSINESS IN THE PHILIPPINES
o
CORPORATION
DOMESTIC
NRFC
Within
What makes a foreign corporation Resident and what makes it a

non-resident corporation?
A corporation formed, organized, authorized, or

existing (foae) under the laws of any foreign country.
It is subject to tax on its gross income from sources
WITHIN the Philippines.
RFC
Within
Taxed at NET
Allowed to
deduct expenses
WITHIN
Tax Rate: 30%
REASON: the Philippine government does not

have jurisdiction over these taxpayers, hence,
the government cannot expect them to declare
their income at the end of the year or on a
quarterly basis. Any payor of the income,
meaning to whom these persons is transacting
with has the obligation of a withholding agent.
As a withholding agent, he will be liable for nonwithholding.
Withholding with finality it is the final

withholding tax considered as the full and final
payment of the tax.
Non-Resident Foreign
Corporation
1.
2.
3.
Taxed at GROSS
NOT Allowed to
deduct expenses
Tax Rate: 30%
Non-Resident Foreign Corporation

-
Gross income of non-resident foreign corporations

includes the same gross income that has been enumerated
in non-resident aliens not engaged in trade or business,
such as (a) interests, (b) dividends, (c) rents, (d) royalties,
(e) salaries, (f) premiums (except reinsurance premiums),
(g) annuities, (h) emoluments or other fixed or
determinable annual, periodic or casual gains, profits and
income, and (i) capital gains, except capital gains subject
to tax under subparagraphs (C) and (d)
Except: Capital gains on sale of shares of stocks which are
not listed and traded, which will be subject to the same
rate of: 5% and 10%
III.
It did it not include in the exception the capital

gains on the sale of real property unlike NRANETB because NRFCs are not expected to have
real properties in the Philippines.
INCOME TAX EXEMPT ENTITIES, Section 30

a.
Sec. 22
b.
Sec. 30
c.
Sec. 72
1. General Professional Partnership

2. Joint venture for the purpose of undertaking construction
projects.
3. Joint consortium for the purpose of engaging in petroleum,
geothermal and other energy operations pursuant to a
consortium agreement with the government
4. Labor, agricultural or horticultural organization not
organized principally for profit
-
May derive income from such business as long as it is

merely incidental (the organization is still exempt).
It is important that in the articles of incorporation of this

tax-exempt organization, it must be clearly provided that it
is not formed or organized for profit.
5. Mutual savings bank not having capital stock represented

by shares and cooperative bank without capital stock
organized and operated for mutual purposes and without
profit
6. A beneficiary society, order or association, operating for the
exclusive benefits of the members such as fraternal
organization operating under the lodge system (one which
must operate under a parent and subsidiary associations), or a
payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order or
association, or non-stock corporation or their dependents
7. Cemetery company owned and operated exclusively for the

benefit of its members (must be a non-profit cemetery)
Requisites:
a. Owned and operated exclusively for the benefit of its
owners
b. Not operated for profit
8. Non-stock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans; no part of its income or asset shall belong to or
inure to the benefit of any member, organizer, officer, or any
specific person
9. Business league, chamber of commerce, or board of trade,
not organized for profit, and no part of the net income of
which insures to the benefit of any private stockholder or
individual
Requisites:
a. This must be established for common business interest
b. No part of the income shall inure to the benefit of a
particular individual
10. Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare
11. Farmers associations or like associations, organized and
operated as a sales agent, for the purpose of marketing the
products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the
basis of the quantity produce finished by them (must be a
non-profit association)
12. Farmers cooperative or other mutual typhoon or fire
insurance company, mutual ditch or irrigation company, or
like organization of a purely local character, the income of
which consists solely of assessments, dues, and fees collected
from members of the sole purpose of meeting its expenses
13. Government educational institution
14. Non-stock and non-profit educational institution
General
Rule:
All
corporations,
agencies
or
instrumentalities owned and controlled by the
government shall pay such rate of tax upon their taxable
income as are imposed upon corporations or associations
engaged in a similar business, industry of activity.
Exceptions:
15. GSIS (Government Service Insurance System)
16. SSS (Social Security System)
17. PHIC (Philippine Health Insurance Corporation)
18. PCSO ( Philippine Charity Sweepstakes Office)
19. NAPOCOR (Special Law)
C.
From number 15-19 of outline, their exemption does not

come from Section 30, but from Section 27(c) which
covers domestic corporations.
Condominium Corporations
GR: GOCCs are taxable entities
General Rule:
EXC:
Condominium Corporations are not subject to 30% income tax.

Collection of association dues, utility, common charges expense are
not for profit
GSIS
SSS
Exception:
PHIC
Once collections of condominium corporations exceed more than

that which they require for the maintenance of the building, it will
be subject to tax. (only the difference will be subject to tax)
PCSO
NAPOCOR
3 Categories of Tax-Exempt Entities:

A.
Those which do not come within the definition of a

corporation
B.
Tax Exempt Entities under Section 30
Filing of ITR
These exempt entities are still required to file ITR. Even if it is among
the tax exempt entities, but you are registered for BIR purposes, you
are expected to file an ITR year in year out. All you have to do is
simply put there the details, whatever proceeds there is, the
expense, and at the bottom that it is exempt.
Except:
1.
Income from the use of properties, real or

personal
2.
Income from activities conducted for profit
If you want to avoid the reportorial requirements, anyway you are

not liable for income tax, you have to prove before the BIR, get a
ruling that you are exempt so that you will be taken out from the
coverage of those who are required to file an ITR.
Example:
If there is a cemetery, and there is a big space rented out
for a concert, will the proceeds be subject to tax?
IV.
TYPES/CLASSIFICATION OF INCOME
1. Gross Income, Inclusions
YES, it is taxable. Regardless of the use of the proceeds.
a)
COMPENSATION FOR SERVICES
Legal basis
b)
GROSS INCOME FROM TRADE OR THE EXERCISE OF A

PROFESSION
c)
GAINS DERIVED FROM DEALINGS IN PROPERTY
d)
INTERESTS
There is a caveat in the last paragraph

of Section 30, that notwithstanding
that these exempt entities have been
granted exemption from income taxes,
they will still be subject to income tax
if and when they realize income
coming from any of these three:
1.
The usage of a real property,

whether it is regular or not.
2.
The usage of a personal property,

whether regular or not.
3.
Any activity made for profit,

which is regular.
These are subject to income tax

regardless of how the proceeds will be
used or utilized.
May or may not be subject to final withholding tax.

-
Interest on bank deposit/deposit substitutes/trust

fund and similar arrangement (subj. to FWT)
Interest from lending/interest income from bonds
Interest on foreign bonds/government bonds
Interest on treasury bills
Interest earned from deposits maintained under the

FCDU system (subj. to FWT)
Interest income of pawnshop operators
Determine if interests form part of the corporations active or

passive income:
10
If Passive Income subject to 20% fwt
a.
Refer to Tax Code Section 42 (4) for complete list.

Royalties include supply of scientific, technical,
industrial or commercial, knowledge or information.
b.
If you purchase a software, it can be covered as

royalty payment or not.
If Active Income subject to 30% corporate income tax

e)
RENTS (2 Types)
Operating Lease
a contract under which the asset is not wholly

amortized during the primary period of the lease, and
where the lessor does not rely solely on the rentals
during the primary period for his profits, but looks for
the recovery of the balance of his costs and for the
rest of his profits from the sale or the re-lease of the
returned assets at the end of the primary lease
period.
Normal rent/lease that we know.
What you are paying is for the temporary use of

property without the transfer of ownership at the end
of the lease period.
The owner of the property does not foresee

relinquishing ownership over it at the end of the
contract period, while the one using it is only paying
for the temporary usage of it.
c.
g)
f)
But the software you purchase is an offshelf

available to all. You are not required to pay
royalty fees for that. It is simply the purchase of
an item.
also called the full payout lease, a contract

involving payment over an obligatory period (also
called the primary or basic period) of specified rental
amounts for the use of a lessors property, sufficient
in total to amortize the capital outlay of the lessor
and to provide for the lessors borrowing costs and
profits. Obligatory period is primary non-cancellable
period of the lease which in no case shall be less than
730 days. Lessee exercises choice over the asset.
Lease to own in common term; A purchase of the
property
The owner will relinquish ownership over the

property at the end of the contract, while the one
leasing it will become the owner of the property.
The owner of the property is expecting that over the

lease period not to go below 730 days, he will recover
the full value of the property. So if youre in a
financial lease, whatever you are paying to the lessor
is an advance to the purchase price, you dont
recognize it as an expense in your books. If youre
into business and you lease out under financial lease,
whatever payments you are making is not an
expense, but is an advance payment, part of the
purchase price.
ROYALTIES
So royalties are more on the privilege of

having the right to use a scientific or
technical knowledge.
If you purchase a franchise, it may be subjected to

the normal 30% income tax if it becomes part of the
corporations regular activity. (i.e. McDonalds
franchises)
Any distribution made by a corporation to its

shareholders out of its earnings on profits and payable
to its shareholders, whether in money or in other
property.
It is for the operation of the business of the one

leasing it.
11
DIVIDENDS
Financial Lease
It will be royalty payment if what you purchase is

customized, with the transfer of technical
knowledge.
Requirements for dividend declaration, in general:

1.
Unrestricted retained earnings
2.
Board of Directors declaration
3.
Absence of prohibition in any loan agreement
Types of dividends
1. Cash dividends cash given as dividends.
If the recipient of the disguised dividend is an

individual
10% - for Resident citizens, Non-resident
citizens and resident aliens
20% - for non-resident aliens engaged in trade
or business
25% - for non-resident aliens NOT engaged in
trade or business
If the recipient is a domestic corporation or resident

foreign corporation payments to such corporations
of dividends ARE NOT AS YET TAXABLE. (to be
discussed in succeeding topic)
If the recipient is a NRFC, dividends are subjected to

30% fwt
2. Property dividends -
Property in kind (All encompassing; whatever property

you would wish to give to your stockholders it will be
taxable.)
These are dividends paid in securities or other

property, in which the earnings of a corporation have
been invested are income to recipients to the amount
of the full market value of such property when
receivable by individual stockholders.
will surrender that, and the corporation will

redeem that thereafter, in lieu of Php1 M each in
cash. This amounts to circumventing the law
wherein instead of declaring outright the cash
dividend, you went through the path of stock
dividends first then exemption. That is subject to
tax, as if it was an automatic declaration of cash
dividends.
2.
Note: A dividend paid in stock of another corporation

is not a stock dividend, even though the stock
distributed was acquired through the transfer by the
corporation declaring the dividends of property to the
corporation the stock of which is distributed as a
dividend.
It may also be in the form of common stocks held by

AA Corporation in BB Corporation that are given to
stockholders of AA Corporation. These common stocks
are held by AA Corporation as investments or assets.
Hence, assets/property of a corporation that are
distributed as dividends are property dividends even if
they may be stocks in another corporation.
Corporation will remit the FWT (final withholding tax)

in behalf of the recipient. The corporation will have to
collect in cash from the stockholders the value of the
FWT but the withholding agent is still the corporation.
Before the dividends will be given out, 10% will be
remitted to BIR, such being paid by the stockholder to
the corporation, who will in turn remit it to the
government.
How much is deducted from the books of the

Corporation?
Its really the value in the books (Book Value), not
the fair market value. For tax purposes, 10% will
be computed in the fair market value. But for the
books of the corporation, what will be deducted is
the actual cost that went out of its ownership.
3. Stock Dividends - transfer from profits to the capital.
General Rule: Stock Dividends are NOT taxable.

Stock Dividend representing the transfer of surplus
to capital account shall not be subject to tax.
Exception: Stock dividends will be taxable when:

1.
If subsequently cancelled and redeemed by the

corporation - If in order to avoid the tax on
dividends, you declare stock dividends and the
corporation will cancel or redeem it right after.
Imagine 20M will be declared as stock dividend.
As a rule, it is not taxable. But if behind that,
there is already an agreement that after
declaration it will be cancelled or redeemed by
the corporation, meaning as stockholders you
12
If it leads to a substantial alteration in the

proportion of tax ownership in a corporation.
Capital
Million
40
Profits
Million
360
Illustration: 42 M as stock dividend

Beginiing Investment
Declared 42 Million
as Stock Dividends
Declared SD
39 (classmates)
= 1 M each
1M
=
Total
New investment
=
2M
1 (X)
=1M
3M
4M
2 Million
TAXABLE!!!
Say you want 42 M to be declared as stock

dividend. But the problem is, you are 40. All of
you 39 classmates will receive 1 M each. But the
1 person, X, will receive the 2 M remaining. It
will lead to an alteration of the interest of
proportional holdings in the corporation. Instead
of all of you equally owning the corporation
through shares, she will now have an advantage.
Her total investment will be 4 M. Her original 1
M plus the 3 M stock dividends. All the rest will
be having only 2 M. Since it lead to a substantial
alteration or dilution in your interest or
ownership, it will now be subject to tax.
But what is subject to tax is only the difference
of 1 M.
Rationale: Because she received an income
more than the other stockholders. What she will
be receiving is more than what you will be
receiving in the future. Substantial Alteration (as
long as there is dilution in the original proportion
of ownership)
4. Disguised dividends
These are payments which are equivalent to dividend

distribution. In the case of excessive payment by
corporations, if such payments correspond or bear a
close relationship to stockholdings, and are found to
be a distribution of earnings or profits, the excessive
payments will be treated as dividends.
Disguised dividends are payments made by the

corporation to the stockholders in any other form,
other than dividend payment.
Examples: a. 1M for honorarium of BODs b.

Buying motor vehicles and distributing to
stockholders but recorded as an expense and not
as dividends
The point is, whenever there are huge amounts
of payments to the owners not considered as
dividends, they are actually disguised dividends.
Are disguised dividends taxable? Yes.
Refer to NIRC Section 32 (B) [i.e. Life insurance, 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, etc.]
V.
DEDUCTIONS
Fundamental Principles
i. The taxpayer must prove that there is a law authorizing
deductions
If given to non-stockholders, then it depends. If

given as compensation to employee, then it will
be subjected to 5-32% and appropriate
withholding tax should be withheld from such
compensation.
iii. If the law provides for requirement that the amount or the
expense payment needs to be withheld of tax, a tax should have
been withheld, otherwise, the deduction is not allowed
If the value you receive is less than your investment

then it is a loss while if it is higher than your
investment then it is a gain. The liquidating dividend is
not automatically treated as income but still needs to
be compared with your investment to determine if it is
gain or loss.
h)
ANNUITIES
i)
PRIZES AND WINNINGS
j)
PENSIONS
13
2. Gross Income Exclusions
Liquidating dividends are treated as Capital Gains or

Losses but NOT the type which is subject to capital
gains tax. It si also not subject to FWT. They will be
considered as OTHER INCOME of the corporation.
Hence, for individuals it will be treated as OTHER
INCOME subject to 5-32% or 25% if NRA-NETB and for
corporations it is subject to 30%.
OTHERS
ii. The taxpayer must prove that he is entitled to deductions

(requisites are met)
Liquidating dividends given can be in the form of cash

or properties or other remaining assets of the
corporation. It is NOT subject to the FWT of 10%, 20%
or 25%.
l)
If given to stockholders, same as cash dividends
Whenever a corporation dissolves, liquidates and

winds up its business operations, it may happen that
assets will be left after paying all the creditors and
these assets will be distributed to the stockholders in
accordance with the proportion of ownership that they
have in the business and its called liquidating
dividends. It is taxable.
PARTNERS DISTRIBUTIVE SHARE FROM THE NET INCOME

OF THE GPP
5. Liquidating Dividends
-
k)
iv. Always, we construe it strictly against the taxpayer (strictissimi

juris)
Deductions and/or exemptions are available to individual
taxpayers
1. Personal and additional exemptions
2. Premiums on health and hospitalization insurance
3. Itemized deductions, or in lieu of such, optional

standard deductions (OSD)
Deductions and/or exemptions are available to corporations

YES, But only DC and RFC. No deductions allowed for NRFC.
Itemized Expenses or in lieu of such, optional standard

deductions [EX.IN.TA.LO.BA.DEP.DEP.CHA.RE.PEN]
o
Rationale: Corporations venture into activities which

are for profit. Therefore, it is for business and with it
comes the incurrence of business expenses.
Exemptions are not available because it covers
personal and family living expenses and corporations
are not natural persons.
OSD (optional standard deductions) can be claimed by

corporations except NRFC.
o
REASON for exception: Such corporation is taxed at

gross. It is not allowed deductions hence, since OSD is
in lieu of deductions, therefore NRFCs are not
allowed OSD also.
Optional Standard Deduction

-
A standard deduction available to corporation, except

non-resident, in an amount not exceeding forty percent
(40%) of the gross income, in lieu of itemized deductions.
Unless the taxpayer signifies in its return its intention to
elect the optional standard deduction, it shall be
considered as having availed of the itemized deductions.
Such election when made in the return shall be
irrevocable for the taxable year in which the return is
made. A taxpayer who is entitled to and claimed for the
optional standard deduction shall not be required to
submit with its tax return such financial statements
otherwise required in the Tax Code.
Exception: NRA-ETB in the case of individuals,

allowed itemized deductions but not OSD
Benefit of claiming OSD is that there is no need

to substantiate it with receipts unlike if itemized
deductions then your books will be audited to
determine whether you really have incurred
such and whether it is substantiated with official
receipts, or invoices or in contracts.
Ordinary expenses (OE) refers to the expenses which are

normal, usual or common to the business, trade or
profession of the taxpayer. An expense is ordinary when it
is commonly incurred in the trade or business of the
taxpayer as distinguished from capital expenditures. The
payments, however, need not be normal or habitual in the
sense that the taxpayer will have to make them often. The
payment may be unique or non-recurring to the particular
taxpayer affected.
Necessary expenses (NE) one which is useful and

appropriate in the conduct of the taxpayers trade or
profession.
1. Individuals, whoever that individual is, if he is

purely earning income from ER-EE relationship,
forget about itemized deduction because
itemized deduction is only in business, trade, or
profession.
2. If the individual is a NRA-NETB, no itemized
deduction.
Business Expense - refer to all 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 the exercise of a profession.
Capital Expenses - are expenditures for the extraordinary

repairs which are capitalized and subject to depreciation.
These are expenses which tend to increase the value or
prolong the life of the taxpayers property. Not deductible
OUTRIGHT.
What important requisite for the deductibility of an expense is not

complied with by a capital expenditure making it non-deductible on
the year of incurrence?
3. NRFC are never allowed itemized deduction or

OSD.
The default choice is ITEMIZED DEDUCTIONS, unless you

expressly opt for OSD. Option of choosing OSD is
irrevocable for one year. The option is made at the
beginning of the year on the ITR report of the first quarter.
-
For GPPs, the option of the GPP will also be the

option of the individual partners.
Extra-Ordinary Expenses - these are amortized or

depreciated. They are deductible as amortization or
depreciation expense.
Business Expense vs. Capital Expense
Who are NOT allowed to claim itemized deductions?

-
Ordinary Expenses vs. Necessary Expenses
NO, OSD is in lieu of itemized deductions. So if a

corporation or any taxpayer is not allowed to
claim itemized deductions, there is no OSD
allowed.
ITEMIZED DEDUCTIONS
1. EXPENSES
Can OSD be allowed as a deduction if the corporation is

not allowed to claim itemized deductions?
-
VI.
Capital expenditures are extraordinary expenses which

prolong the life of an asset that has been repaired. It either
increases the value or increases the life or prolongs the life
of the asset such that it violates the rule for an expense to
be deductible, it must be paid or incurred during the
taxable year. Taking into consideration the Matching
Principle, only a fraction of such capital expenditures are
treated as deductible each year. They are deductible in the
form of amortization and depreciation expense.
Common Requisites for Deductibility of Ordinary and Necessary

Expenses
Additional Requirement for Deductibility of Certain Payments
i.
The expenses must be ordinary and necessary;
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 a
deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the BIR. (Section 34k)
ii.
It must be paid or incurred during the taxable year

(whether calendar or fiscal year);
14
Exception: NET OPERATING LOSS CARRY-OVER
If the expense that youre claiming as a deductible

item this year is an expense for the operation of
the previous year, it is not deductible expense. So

your expense claims must be paid this year or if
not paid this year, it must have been incurred.
then it can be supported by contracts or

acknowledgment receipts.
However:
iii.
iv.
It must be paid or incurred in connection with the trade,

business or profession of the taxpayer;
It must be reasonable in amount;
As a rule, the only proscription as regards the

amount claimed as deductible expense is that said
amount is reasonable.
Except:
Entertainment,
Amusement
and
Recreation expense (EAR expense) has a limit as
provided by tax rules and regulations since this
type of expense has been abused.
o
v.
Under the COHAN RULE, some expenses need not be

supported by official receipts or sales invoice for as
long as it can be substantiated with other adequate
records proving that in fact it has been purchased by
the company and the goods received by the company
were actually converted to the product sold. Such are
enough proof that expenses had been paid or
incurred. But this does not apply in all instances.
The limits are: to the extent only of 1%

of the net sales if the corporation is
engaged in services. And 0.5% of the net
sales if the corporation is into the sale of
goods or properties.
REASON for the difference: Because those
engage in services usually needs more
representation expense to entertain their
clients or treat them over meetings, lunch
meetings, etc. But if it is goods or
properties, so long as you have the
product, you can sell it.
vi.
It must not be against law, morals, public policy or public

order
Special Requisites for Deductibility of these Expenses:

i. This must be reasonable, meaning, this must not
be ostensible; and
ii. These are, in fact, payments for personal
services actually rendered.
Special Requisites for Deductibility of Bonuses to
Employees:
Salaries or bonuses of directors as provided under

the Corporation Code should not exceed 10% of
the net income of the corporation because if it
exceeds, it will be considered already as disguised
dividends.
i.
Adequate records
Amount of expense being deducted
Date and place where such expense is paid or

incurred
Nature of expense direct connection or relation of

the expense being deducted to the development,
management, operation and/or conduct of the trade,
business, or profession of the taxpayer
15
The evidence must be recognized or produced

by the third party. If the evidence solely
comes from the company, it is self-serving so
it is not sufficient evidence. If no OR or invoice
The bonuses are made in good faith;
ii. They are given for personal services actually

rendered; and
It must be substantiated by sufficient evidence such as

official receipts and other official records;
Official receipts
Example: Bribes and kickbacks given to

government personnel and revolutionary taxes
given to rebels are not deductible
Compensation For Services Rendered
If you are engaged in both sale of goods

and services, then still apply the formula
to the corresponding nature of sale.
This requisite need not be complied with if claiming

for OSD because the law in OSD says, whether or not
you have incurred actual expenses.
iii. They do not exceed a reasonable compensation

for the services rendered, when added to the
stipulated salaries, measured by the amount and
quality of services performed in relation to the
taxpayers business.
Bonuses must be given in good faith and in determining
whether bonuses will form part of the compensation for
services rendered, you have to consider the (1) nature of
the business, (2) the financial capacity of the taxpayer and
(3) the extent of the services rendered.
Advertising And Promotional Expense (APE)
-
It must be reasonable. As long as it is beneficial for the

current year, it is deductible.
Advertising expense to build the goodwill of the business,

or creating a name for the company, future recall, etc
(usually if it is excessive i.e. CLEAR advertisements) are
NOT DEDUCTIBLE for the current year but such expense is

amortized up to the useful life of the advertisement
Litigation Expenses
-
Litigation expenses defrayed by a taxpayer to collect

apartment rentals and to eject delinquent tenants are
ordinary and necessary expenses in pursuing his business.
However, litigation expenses that are incurred in the

defense or protection of title are capital in nature and not
deductible.
Rental Expenses
This only pertains to Operating Leases
i.
The rental payment is required as a condition for

continued use or possession;
ii.
The purpose is for trade, business or profession;
iii.
The taxpayer must not be the owner of the property

or he has no equitable title over the property. The
taxpayer must not be taking title to the property.
i.
The expenses must be reasonable and necessary;
This is subject to withholding tax.
ii.
They must be incurred or paid while away from home;

and
iii.
They must be paid or incurred in the conduct of trade or

business.
iv.
TE are deductible even if its not receipted because theyre

TE that we incur without having a receipt from the
carriers, etc
iv.
Travel Expenses (TE)

Special Requisites for Deductibility of Traveling Expenses:
Entertainment, Amusement And Representation Expenses (EAR)

Special Requisites for Deductibility of EAR Expenses:
i.
Reasonable in amount;
ii.
Incurred during the taxable period;
iii.
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 profession;
iv.
Option To Private Educational Institution (OPEI)

In addition to the allowable deductions, a private educational
institution may, at its option, elect either:
A. Deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the taxable
year for the expansion of school facilities; or
Not to exceed such ceiling as the Secretary of Finance

may, by rules and regulations, prescribe; and
- of 1% of net sales for sellers of goods
B. To deduct allowance for depreciation thereof.
- 1% of net sales for sellers of services

v.
Any expense incurred for entertainment amusement

or recreation which is contrary to law, morals, public
policy, or public order shall in no case be allowed as a
deduction.
2.
INTEREST EXPENSE (IE)
Repairs And Maintenance Expense

-
Expenses for repairs are deductible if such repairs are

incidental or ordinary, that is, made to keep the property
used in the trade or business of the taxpayer in an
ordinarily efficient operating condition.
Repairs in the nature of replacement to the extent that
they arrest deterioration and prolong the life of the
property are capital expenditures and should be debited
against the corresponding allowance for depreciation.
NOTE: if the cost of the repair increases the life of an asset
for a period of more than (1) year, that amount is
considered
extra-ordinary repair. Otherwise, it is
considered ordinary repair.
Supplies And Materials

-
PEIs have the option to deduct capital expenditures in the

year it was paid or incurred or the other option is to
depreciate the expense over the useful life of the asset.
The amount of interest paid or incurred within a taxable

year on indebtedness in connection with the taxpayers
profession, trade or business shall be allowed as deduction
from gross income.
Requisites for Deductibility

i.
This must be paid or incurred during the taxable year;
ii.
This must be incurred in connection with the trade,

business or profession of the taxpayer;
iii.
There must be an obligation which is valid and

subsisting;
iv.
There must be an agreement in writing to pay

interest;
v.
This must observe the limitation under the arbitrage

rule; and
This must be actually consumed during the taxable year.

16
vi.
This must not be between related taxpayers.
b.
Additional requisites:
vii.
There must be an obligation which is valid and

subsisting
viii.
There must be an agreement in writing to pay the

interest
ix.
It must observe the limitation under the Arbitrage

Rule
x.
This must not be between related taxpayers
Between a corporation and an individual; that

individual owns or controls more than 50% of the
outstanding capital stock of such corporation
d.
Parties to a trust;
d.1. grant or fiduciary
d.2. fiduciary of one trust and fiduciary of another
trust but there is only one grantor
Allowed as a deduction. This type of interest meets the

above requisites. Only the interest is deductible and does
not include the compromise and surcharge.
Interest Expenses which are Non-Deductible

i.
d.3. beneficiary and fiduciary

iv.
Interest paid
purposes.
v.
Interest paid in advance through discount or

otherwise by an individual taxpayer reporting
income on the cash basis. Such interest shall be
allowed as a deduction in the ear the indebtedness
is paid.
vi.
Interest on
exploration
BUT if it is not dependent upon corporate profits

or earnings, it is deductible. If it is payable on a
particular date or maturity without regard to the
corporate profits, it is deductible.
vii.
Interest on unclaimed salaries of the employees
viii.
33% of the interest income subjected to final tax

(arbitrage rule when applicable)
SCRIP DIVIDEND is a dividend given by a

corporation in the form of a promissory note.
The interest paid thereon is actually interest on
the corporations indebtedness to the
stockholder. As such, the interest paid on scrip
dividend is a deductible expense on the part of
the corporation.
Arbitrage Rule
Interest expense on preferred stock.

-
ii.
As a rule, interest on preferred stock is not

deductible because there is no obligation to
speak of. It is in effect an interest on dividend.
Reason: the payment is dependent upon the
profits of the corporation. It will only be paid if
the corporation earns profits. Not an actual loan
of money.
When there is no agreement in writing to pay

interest.
This does not meet the requisite for deductibility
iii.
Interest expense on loan entered into between

related taxpayers
Related taxpayers:
a.
Members of the same family which includes:

a.1. spouses
a.2. brothers and sisters
a.3. descendants and ascendants
17
Controlling interest means more than 50%
c.
Delinquency Interest on Tax Payments
Between 2 corporations owned or controlled by one

individual. He must have a controlling interest over
these 2 corporations. OR if one corporation is
considered as personal holding company of another
corp.
or
calculated
obligation
to
for
finance
cost-keeping
petroleum
The taxpayers allowable deduction for IE shall be reduced

by an amount equal to 33% of the interest income earned
by him which has been subjected to final tax.
The arbitrage rule automatically limits the deductibility of

the IE by reducing 33% of the interest income subject to
final tax, whether or not engaged in back-to-back loan
transactions. [Only applicable when there is interest
income subject to final tax i.e. interest income from
deposits in banks and other financial institutions or FCDUs]
Example: Lets say that the company has an IE of 600K

but it has no interest income, is the IE deductible
fully? YES. Say for example, Co. A (earning interest
income of 100K subject to 20% final tax), Co. B
(earning 100K interest income from loans to
employees) and Co. C (no interest income). All of
them obtained the 1M loan running for 10 years
wherein they would be liable each for 600K annually
as IE. Which of the 3 corporations can claim the full
600K as expense and which cannot?
Co. A cannot claim fully the 600K as a deductible

IE but only 567K (600K [33% x 100K]). The
arbitrage rule applies since Co. A is earning

interest income subjected to final tax. If there is
no such interest income, the arbitrage will not
apply, hence, automatically deduct interest
payment in full.
Co. B can fully claim the 600K as a deductible IE

since its interest income is not subjected to final
tax. Interest income subjected to final tax is only
those coming from the banking institutions.
Co. C can fully claim the 600K as a deductible IE

since it is not earning interest income.
Optional treatment of IE (OTIE)
To discourage Back-to-Back loan

transactions obtaining loan from one
bank and invest it to another bank in
order to benefit the difference
between the tax due on interest
income and the tax benefit from the IE.
If the IE is 100K, interest income subject to final

tax is 100K, do you have a deductible IE? YES.
You have a deductible IE of 67K (100K [33% x
100K]).
If the interest income is 500K subject to final tax,
IE is 100K, do you have a deductible IE? NO. 33%
of 500K is 165K. So the 165K will be deducted to
100K, which results to no deductible IE.
Theoretical interest
-
Its an interest which is computed or calculated, not paid or

incurred, for the purpose of determining the opportunity cost
of investing in a business. Its not real. Theres no payment at
all. Thus, its neither deductible nor taxable.
Imputed interest
-
Sec. 50 of the tax code Allocation of Income and Deductions

In the case of 2 or more organizations, trades or businesses
(whether or not incorporated and whether or not organized in
the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to
distribute, apportion, or allocate gross income or deductions
between or among such organization, trade or business, if he
determines that such distribution, apportionment, or allocation
is necessary in order to prevent evasion of taxes or clearly to
reflect the income of any such organizations, trades or
businesses.
Such provision is powerful in the sense that the BIR can do
anything with it so long as it sees relationships between
corporations.
18
RATIONALE:
claimed because IE must be stipulated in writing

and there is no interest payment made. But the
BIR can impute an interest based on the legal
rate of 12% and subject such interest income on
the part of Co. A to tax. But Co. B is absolutely
not allowed to claim the IE for no interest has
been paid and there is no stipulation in writing.
Example: If Co. A is related to Co. B as the

controlling or fully owning the other corporation,
any expense loan (lets say 1M) to Co. B, which is
interest-free, so Co. A did not earn any interest
income. Can Co. B deduct IE? Here, no IE can be
3.
Ergo, one company can be compelled to pay

taxes on interest income but the other company
cannot claim such as 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.
Same concept as capitalizable repairs and
maintenance.
TAXES
General Rule:
All taxes, national or local, paid or incurred within the taxable
year in connection with the taxpayers trade, business or
profession are deductible from gross income.
Exception:
i. Special Assessment on Real Properties tax imposed on the
improvement of a parcel of land
ii. Income Tax Philippine and Foreign Income Tax
- However, Foreign Income tax, at the option of
the taxpayer, may be claimed as tax expense (if RC or DC,
bec. They are taxable for global income) or tax credit
If the foreign tax is claimed as

credit, you cannot claim it as
expense. But if you claim it as
expense, you cannot claim it as
credit.
Claiming it as a tax credit, you can claim

the full benefit of the tax paid abroad
since tax credit is a deduction from
Philippine income tax. But if you claim it
as an expense, only to the extent of 30%
of that foreign tax will it reduce the tax
due since tax deduction, as an expense, is
a deduction from gross income in
computing the net income. Thus, tax
credit is more beneficial.
a
a
a
a
tax
tax
tax
tax
iii. Taxes which are not connected with the trade, business or
profession of the taxpayer
-Example: Revolutionary taxes
iv. Transfer Estates Estate Tax and Donors Tax; not related
to trade or business
v. Value-Added Tax indirect tax, tax that is shouldered by

the customers
3. It has been paid or incurred during

the taxable
vi. Electric Energy Consumption Tax (BP No. 36)
4. It has been paid or incurred in

connection with trade, business or
profession
5. Substantiated with O.Rs
6. Its not contrary to law, public policy

or morals
Requisites for deductibility of taxes

a.
b.
This must be paid or incurred within the taxable

year; and
This must be taxes paid or incurred in
connection with the trade, business or
profession of the taxpayer.
Tax Deduction v. Tax Credit
What type of taxpayer can offset the foreign taxes directly

by 100% against the Philippine tax due?
a. Taxes, as deductions include those taxes which are paid

or incurred in connection with the trade, business or
profession of the taxpayer. However, the source of a tax
credit is foreign income tax paid, war profit tax, excess
profit tax paid to a foreign country.
b. Taxes, as deductions, may be claimed as deductions

from gross income in computing the net income WHILE tax
credit is a deduction from Philippine Income Tax.
c. The foreign income tax paid to the foreign country is not
always the amount that may be claimed as tax credit
because under the limitation provided under the Tax Code,
it must not be more than the ratio of foreign income to
the total income multiplied by the Philippine Income Tax.
TAX DEDUCTION
TAX CREDIT
Sales
Less: Direct Cost
____________
Gross Income
Less: Expenses
(incl. taxes as deduction)
__________
Taxable income
Tax rate 30%
___________
Tax Due
Sales
Less: Direct Cost
____________
Gross Income
Less: Expenses
__________
Taxable income
Tax rate 30%
___________
Tax Due
Less: Tax Credit
___________
Tax Payable
Is the real property tax (local tax) payment made by the

corporation on its real property used in trade or business a
deductible expense for purposes of computing income tax
liability, not real property tax liability?
-
YES. Real property taxes (and other taxes

allowed as expenses i.e. custom duties) are
deductible so long as:
i. Resident Citizens since liable of income

within and without to avoid double taxation
ii. Domestic corporations since liable of

income within and without to avoid double
taxation
iii. Members of GPPs
iv. Beneficiaries of estates and trusts
19
1. It is ordinary and necessary
2. Reasonable in amount
NRC, NRAs, RFC and NRFCs cannot claim as

deductions foreign tax expenses paid since
they pertain to income earned outside the
Philippines.
Limitations on deductions for NRA-ETB and RFC:

In the case of a NRA-ETB in the Philippines and a RFC,
deductions for taxes shall only be allowed only if and to
the extent that they are connected with income from
sources within the Philippines.
Foreign tax credit can only be claimed or offsetted against the
Philippine tax due if the Philippine tax due is that of a resident
citizen or domestic corporation because these two types of
taxpayers are taxable on income within and income without. If you
say within and without, the Philippine tax already comprises of tax
on the Philippine income and tax on the foreign income. Therefore,
component of that is a foreign tax, which should rightfully be
managed.
-
Say for example, this is a resident citizen, lets say

income within is 1M, income without is 1M.
Philippine tax is still at 300,000, for income within and
without. Foreign tax paid is 300,000. Can the taxpayer
claim the foreign income tax as an expense deduction
or offsetted as a tax credit?
NRC not included because liable of

income within only no double
taxation
Yes, since a resident citizen is taxable within

and without, and required to declare the
total global income, he can also claim it as
an expense or as a tax credit, directly
offsetted against the Philippine income tax
due.
Same facts, can Mr X claim 300,000 as foreign tax

credit? The amount claimed is subject to Global and
Per Country limitations
Per Country
Limitation
LIMIT
MR. X, Resident Corporation:

Tax Due
Within = 1,000,000 = 300,000
Without = 1,000,000 = 300,000
1 million
2 million
X 300,000 = Max 150,000
Therefore, of 300,000 is recognized by

Philippine government.
1,000,000
Global
Income
6,000,000
Country B
Per Country
Income
Global
Income
200,000
Lower
Amount
x
1,800,000
=
300,000
400,000
300,000
x
1,800,000
=
600,000
500,000
500,000
6,000,000
800,000
Global
Limitation
Formula: -
Country A
Per Country
Income
Actual
The tax credit that shall be allowed only be to

the extent of the foreign tax component in the
Philippine tax due. [since it will decrease taxes to
be paid to the government, amount claimed as
tax credit is whichever is lower; Lifeblood
doctrine]
LIMIT
All Foreign
Income
3,000,000
Global
Income
6,000,000
x
1,800,000
=
900,000
Lower
Amount
(PCL)
800,000
Tax
Credit
800,000
Limitations on Credit
The amount of the credit taken shall be subject to each of
the following limitations:
-
Per country Limitation the amount of credit in

respect to the tax paid or incurred to any country
shall not exceed the same proportion of the tax
against which the credit is taken, which the taxpayers
taxable income from sources within such country
bears to his entire taxable income for the same
taxable year; and
Global Limitation the total amount of credit shall
not exceed the same proportion of the tax against
which such credit is taken, which the taxpayers
taxable income from sources without the Philippines
taxable under this title bears to his entire taxable
income for the same taxable year.
Taxable
Income
Country
Tax Due
Per
Country
Limit
1,000,000
400,000
300,000
2,000,000
500,000
600,000
Phils
3,000,000
1,800,000
Global
Limit
900,000
20
300,000
500,000
In effect, you will only be liable to tax amounting to 1,000,000 to the

BIR
Tax Due
1,800,000
Less: Tax Credit
800,000
Tax Payable
1,000,000
Proof of Credits (Tax Credits)

The credits shall be allowed only if the taxpayer establishes to the
satisfaction of the Commissioner the following:
a.
The total amount of income from sources without the

Philippines
b.
The total amount of income derived from each country, paid

or incurred to which is claimed as a credit; and
c.
All other information necessary for the verification and

computation of such credits.
Tax Subsequently Refunded of Credited

Total:
*1M + 2M + 3M = 6M * 30% = 1.8M
Tax Credit
allowed
Hence, the tax credit allowed is 800,000.
800,000
Taxes previously allowed as deductions, 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 such deduction.
YEAR 1
Year 2008
10,000,000
7,000,000
Sales
Cost
Gross Income
Less: Expenses
3,000,000
2,000,000
Tax 1,000,000
Net Taxable Income 1,000,000
1,000,000
2,000,000
10,000,000
8,000,000
2,000,000
4,000,000
(3,000,000)
10,000,000
4,000,000
6,000,000
2,000,000
4,000,000
Taxable Income
-0-
-0-
-0-
No taxable income because:

Net Taxable Income: 4,000,000
Less:
Loss on Year 1:
3,000,000
Loss on Year 2:
1,000,000
No Taxable Income
Assuming in 2010, you have overpaid 500K in Real property

taxes. If, such amount is refunded in year 2011, the whole 500K
would NOT be taxable. You have not benefitted from the
claiming of Real property tax (RPT) as deductions since even
without the RPT, you would still have a taxable income of zero.
The 3M loss in year 1 and year 2 is carried over to the next 3

consecutive years. Consequently, the NOLCO can be fully
applied in year 3. Therefore, your taxable income would be
zero. The NOLCO can only be applied in the year you obtain an
income (that is why in year 2, you just accumulate it).
If the loss in the first year, is not used up the next 3 years,
whether fully or partially, it goes down the drain, it is no longer
th
usable in the 4 year after it has been suffered as a loss. Only 3
years at a time. Year 1 is allowed 3 years. Year 2 has a life of 3
years.
However, if the amount of a tax refunded is a tax which is nondeductible (i.e. VAT or income tax), then such will surely not be
taxable in the year they are refunded since you did not receive
a benefit from them (they are non-deductible).
*Running of NOLCO is not tolled by the use of OSD

-
4. LOSSES
Classification of Losses
a.
Ordinary Losses losses sustained in the course of trade,

business or profession of the taxpayer
Net operating loss the excess allowable deduction

over gross income of the business in a taxable year
Net operating loss carry over (NOLCO) shall be

carried over as a deduction from the gross income for
the next 3 consecutive taxable years immediately
following the year of loss. Such loss shall be allowed
as a deduction if it had not been previously offset as a
deduction from gross income. However, any loss
incurred in a taxable year during which the taxpayer
was exempt from income tax shall not be allowed as a
deduction.
Lets change the facts. This is XYZ Corporation, it has been given
4 years income tax holiday. For the first 4 years of operation, it
th
totally suffered annual operating losses. In the 5 year of
operation, it earned income. Can the losses suffered in the
previous years be used up to offset against the taxable income
th
in the 5 year? No.
-
- can be claimed as deductible expense
21
-0-
Tax 1,000,000
Net Taxable Income 0
10,000,000
8,000,000
2,000,000
5,000,000
(3,000,000)
Year 2010
10,000,000
9,000,000
Gross Income
Less: Expenses
YEAR 3
Sales
Less: Cost
Gross Income
Less: Expenses
Net Taxable Income
Lets put that into illustration. In 2008, you have overpaid 500K
in Real property taxes. If, such amount is refunded in year 2009,
the whole 500K would be taxable.
Sales
Cost
YEAR 2
Why? Whats the reason? Whenever a corporation is

at a stage or it is granted exemption from income
taxes, any losses suffered during those years covered
by the exemption cannot be considered as a loss or
carry over. It will not benefit years that the
corporation will subsequently be taxable.
NOLCO shall be allowed only if there has been no substantial

change in the ownership of the business or enterprise.
-
There is no substantial change when:

i.
Not less than 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 75% of the paid up

capital of the corporation, if the
business is in the name of the
corporation, is held by or on behalf of

the same persons.
-
ii.
Securities becoming worthless (investment in a

corporation which is dissolving; can be in the form of
Liquidating dividends that is lesser than your initial
investment) Exc. If you are into trading of securities
iii.
Abandonment losses in the case of natural resources

(wherein you have invested in a property hoping to
find natural resources or minerals only to find out
that there is none. So abandonment losses are
treated as capital loss because you are not yet in the
operation of the mining business. You are still in the
exploratory stage.)
iv.
Loss from wash sale or stock securities
XYZ Corporation and ABC Corporation, both companies owned

80% by A. Shown below are the list of shares in each company.
A 80%
A 80%
XYZ Corp
ABC Corp
U 5%
Year 1
V 5%
LOSS
W 5%
X 5%
Year 5
b.
Year 5
C 5%
D 5%
E 5%
Wash sale occurs where it appears that within a period

beginning 30 days before the date of the sale or disposition of
shares of stock or securities ending 30 days after such date, the
taxpayer has acquired (by purchase or exchange) or has
entered into a contract or option to so acquire, substantially
identical stock or securities. No deduction for loss shall be
allowed for wash sales 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.
Capital Loss Carry Over. Carry over of Losses from sale or

exchange of capital assets for one year (only to the next year
not 3 years) which can only be availed of by individuals
A total of 100% ownership for both companies. Year 1 until

year 5, operate at a loss. Year 1 to year 5 for ABC
Corporation operated positive. The stockholders of XYZ
Corporation could not use the losses suffered in year 1 to
the next 3 years nor the losses in year 2 to the next years.
Why? Because it consistently operated at a loss.
Year 1
INCOME
B 5%
In this case, ABC has been paying huge income taxes.

So what stockholders of both corporation decided was
to merge in the hope of using the losses of XYZ
Corporation to offset against the income of ABC
Corporation and claim it as a deductible expense.
There are only 3 types of capital assets which can give

rise to capital transactions.
Is it allowed? Yes as long as the change in ownership is

not less than 75%.
Should it be more than 75%? Which means? Not less

than 75% is 75% or above.
Sale of real properties classified as capital

assets.
So if the facts above is changed to 75% ownership: Can the

loss be considered as deductible in the merged
corporation? Yes. It is still deductible because after the
merger, the ownership is still owned by A at 75%.
Sale of shares of stock wherein you are

not a broker of securities subject to
capital gains tax.
And ALL other capital assets.
Combining corporations in order to use up the losses

suffered by 1 corporation is allowed so long as there is no
substantial change in ownership from the individual
corporations down to the merged corporation.
Capital Losses governed by rules on loss from sale or
exchange of capital assets. Losses from sales or exchanges
of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges.
- cannot be claimed as deductible expenses
Net Capital Loss the excess of capital loss over capital gains
Net capital loss carry over (NCLCO) not available to corporate

tax payers
Capital Losses include the following:

i.
22
Loss arising from failure to exercise privilege to sell or

buy property (option money not availed)
Real properties are taxable on the gross selling price

or fair market value whichever is higher. So any loss
that you suffered from the sale of this property
cannot be carried over because it is on a per
transaction basis and you are never taxed on the
profit alone. You are taxable on the gross selling price
or the fair market value itself.
But on the other 2, you can have capital losses.

(Meaning capital losses can only arise in sales of
shares of stocks and all other capital assets. Never on
the sale of real properties.)
o
Motor vehicle that you personally own.

So if you sell a motor vehicle that you
personally own. You are not in the
business of leasing or buying or selling of
motor vehicles. You bought it at Php
4million and sold it at Php 2Million, you
suffered a loss. This is capital loss. And
there is also what we call as, NET CAPITAL
LOSS CARRY OVER.
the amount not compensated by insurance is

deductible
CAPITAL ASSETS:
Applicable NCLCO?
1. Real Property
6% Capital Gains Tax
X
2. Shares of Stock 5% / 10%
3. All other MV (personally own)
Bought
4Million
Sold
2Million
Capital Loss
2Million
NCLCO can only be carried over the NEXT YEAR ONLY!
NOLCO
Operating Loss
Carried over to the next 3
succeeding years
Allowed to both individual and
corporate taxpayer
c.
5.
The loss is not claimed as a deduction for estate tax

purposes; and
6.
If it is a casualty loss, the taxpayer has filed a sworn

declaration of loss within 45 days after the date of
discovery of the casualty or robbery, theft or
embezzlement. [state the nature or event, the
property lost or damaged, value estimation and
insurance, if any]
Carry this
over the
NEXT
YEAR!
NCLCO
Capital Loss
Carried over only to the next
succeeding year
Not allowed for corporations,
only individual taxpayer
Wagering or gambling losses the amount that is

deductible must not exceed the gains. Capital losses can
NEVER BE DEDUCTED AGAINST ORDINARY INCOME.
Capital losses can be charged against capital gains to the
extent of the gain. Any excess so long as it is NOT ILLEGAL
losses can be carried over as an individual taxpayer to the
next year.
MATCHING PRINCIPLE the losses if incurred in past

year should only be claimed as expense during that
year and not on the year of discovery. If loss is caused
by an employee, remedy is to treat that as a bad debt
expense against the erring employee in the year of
discovery.
5. BAD DEBTS
-
These debts are due to the taxpayer which are usually

ascertained to be worthless and charged off within the
taxable year. (meaning it is very much doubtful that the
borrower will pay. Therefore you must take the necessary
steps to prove worthlessness and support it by proper
substantiation in order to claim it as expense)
*The death of the borrower does not render the payable

worthless since you can still go after the estate.
Requisites for deductibility of bad debts
d.
e.
f.
Casualty losses include losses from fire, storm

shipwreck, other casualty losses, robbery, embezzlement
and theft. Must meet the requirements below in order to
be deductible.
Abandonment losses in the event that 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 deduction. (only pertains to Petroleum
operations)
Special losses i.e. loss arising from voluntary removal of
buildings as an incident to renewal or replacement
a.
It must be
indebtedness
b.
Must be ascertained to be worthless
The loss must be incurred by the taxpayer in the

course of his trade, business or profession
2.
Loss must be actually sustained and charged off

within the taxable year, and not mere anticipated
losses;
3.
Must be evidenced by a closed and complete

transaction (fixed identifiable event)
4.
23
Must not be compensated by insurance or other

forms of indemnity. If it is partly compensated, only
valid
and
subsisting
(if you are an insurance company, the borrower

should be declared insolvent or dissolved)
c.
Must be charged off and uncollectible within the

taxable year
d.
Must be uncollectible in the near future and
e.
Must arise from trade, business or profession of

the taxpayer
f.
Must not be between related taxpayers
Common Requisites for deductibility of losses

1.
for
Steps to prove worthlessness

1.
There must be a statement of account sent to

the debtor
2.
A collection letter
3.
If he failed to pay, refer the case to a lawyer
4.
If lawyer may send a demand letter to the

debtor
5.
If the debtor still fails to pay the same, file an

action in court for collection
Agreement as to useful life on which Depreciation Rate is based

-
Bad debts charged off subsequently collected

-
If the recovery of bad debts, resulted in a tax benefit to

the tax payer, that is taxable. If it did not result in any tax
benefit to the taxpayer, that is not taxable.
Here, follow the rule in TAX REFUNDS
6. DEPRECIATION
-
The gradual diminution of the useful value of the property

used in trade, business or profession of the taxpayer,
arising from wear or tear or natural obsolescence. The
term is also applied to amortization of the value of
intangible assets, the use of which in trade or business is
definitely limited in duration.
Requisites for deductibility of depreciation

a.
The property must be used in the trade, business

or profession of the taxpayer
b.
There must be depreciable properties

The non-depreciable properties are:
24
i.
Personal property not used in trade

business or profession of the taxpayer
ii.
Inventoriable stock and securities
iii.
Land
iv.
Mining and other natural resources
c.
The allowance for depreciation must be

reasonable
d.
This must be charged off during the taxable year
e.
A statement on the allowance must be attached

to the return
f.
The method in computing the allowance for

depreciation must be in accordance with the
method prescribed by the Secretary of Finance
upon the recommendation of the BIR
Commissioner. This method includes:
i.
Declining Balance Method
ii.
Sum of Years Digit Method
iii.
Straight line Method
iv.
Any other method as may be

prescribed by the Secretary of Finance
upon the recommendation of the BIR
Commissioner.
where the tax payer and the CIR (Commissioner of Internal

Revenue/ BIR Commissioner) have entered into an
agreement in writing specifically dealing with the useful
life and rate of depreciation of the 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.
*If there is a change in Estimated Useful Life
G.R. No need for approval from BIR
Exception : When there was previous agreement with CIR
*If the property is appraised and you found out

that the value of the property has substantially increased. You
will not change the amount of depreciation. The appraisal will
only affect the value of the property when sold but not for
depreciation purposes.
Deduction for obsolescence
if the whole or any portion of physical property is clearly

shown by the taxpayer as being affected by economic
conditions that will result in its being abandoned at a
future date prior to the end of its natural life, so that
depreciation deductions alone would be insufficient to
return the cost at the end of its economic terms of
usefulness, a reasonable deduction for obsolescence, in
addition to depreciation, may be allowed.
Depreciation of patent or copyright

-
In computing a depreciation allowance in the case of

patent or copyright, the capital sum to be replaced is the
cost or other basis of the patent or copyright. The
allowance should be computed by an apportionment of
the cost or other basis of the patent or copyright over the
life of the patent or copyright since its grant, or since its
acquisition by the taxpayer, or since March 1, 1913 as the
case may be.
NOTE : If tangible property depreciation expense; if intangible (i.e.

patents/copyright, purchased goodwill) amortization expense
7. DEPLETION
-
The exhaustion of natural resources like mines and oil and

gas wells as a result of production or severance from such
mines or wells. These are non-replaceable assets.
Requisites for deductibility of depletion

-
Same as that of depreciation, except that the

properties involved are natural resources
Depletion v. depreciation
Depletion and Depreciation are predicated on the

same basic premise of avoiding tax on capital.
Deletion is based upon the concept of the exhaustion
of a natural resource whereas depreciation is based
upon the concept of the exhaustion of the property,
not otherwise a natural resource, used in a trade or
business or held for the production of income. Thus,
depletion and depreciation are made applicable to
different types of assets.
corporation of the taxpayers taxable income

(except where donation is deductible in full) to be
determined without the benefit of the
contribution
b.
Requisites for deductibility of charitable and other contributions
Determination of amount of depletion cost

-
1.
The contribution must actually be paid or made to the

Philippine Government or any political subdivision or to
any of the domestic corporations or associations specified
by the Tax Code;
2.
No part of the Net Income of the beneficiary must inure to

the benefit of any private stockholder or individual
3.
It must be made within the taxable year
4.
It must not exceed 10% in the case of an individual and 5%

in the case of a corporation of the taxpayers taxable
income (except where the donation is deductible in full) to
be determined without the benefit of the contribution;
and
5.
It must be evidenced by adequate record or receipts
Essential Factors:
a.
The basis of the property
b.
The estimated total recoverable units in the

property; and
c.
The number of units recovered during the

taxable year.
Intangible cost in petroleum operations
any cost incurred in petroleum operations which in

itself has no salvage value and which is incidental to
and which is incidental to and necessary for the
drilling of wells and preparation of wells for the
production of petroleum.
Charitable and other contributions which are fully deductible

-
NOTE:
But natural resources sometimes is undetermined.

You will have to depend on how much the estimated
produce from that parcel of land.
If you think you can produce 10 truck loads

of diamonds in 10 years, you cannot divide
it for over 10 years. The only thing that you
can do if you expect 10 truckloads of
diamonds is if you can produce this year 2
truckloads, over 10 expected, then 20% of
your cost of your property should be
depleted already.
o
If you produce 5 truckloads in the

first year, estimated is 10. So of
the natural resources should be
depleted as of that year.
8. CHARITABLE CONTRIBUTIONS
Kinds of Charitable contributions
a.
Ordinary those which are subject to limitations as to the

amount deductible from gross income
25
If the Contributions are given to the following:

c.
Depletion refers only to natural resources. It is easier to depreciate

than to deplete. Because depreciation is an exact computation. You
only have a formula. If it will exist for 10 years, then divide it for ten
years.
-
Special those which are deductible in full from gross

income
Government or to any of its agencies or political

subdivisions, including GOCCs, exclusively to
finance, to provide for, or to be used in
undertaking priority projects (SHE):
i.
Sports Development,
Invention
ii.
Health and Human Settlement
iii.
Educational
Development
and
Science
and
Economic
d.
Foreign government or institution and

international civic organizations (i.e UNICEF,
WHO)
e.
Accredited NGO
NGO means non-profit Domestic Corporation which are formed

and organized for any of the following purposes
i.
Research Health
ii.
Education
iii.
Charitable, Cultural, Character Building
iv.
Sports Development
Welfare
and
Social
Limitations: it must not exceed 10% in the case

of an individual and 5% in the case of a
*Who accredits them? DepEd,

(corresponding govt branch)
CHED,
DSWD,
DOST
For NGO to be accredited - Not more than 30% of its funding or

donations or contributions would be used for administrative
purposes.
Special Contributions Deductible

Govt, Foreign Govt,
Accredited NGO
Not inure to benefit of
a private stockholder
Within Taxable Year
Adequately Supported
Fully Deductible
(100%)
1
2
3
4
5
Ordinary Contributions
Deductible
NGOs
have a different depreciable life. For R & D, it must be

5 years)
Non-deductible Research and Development Expenditures
a.
Contributions NonDeductible
All others (i.e. to politicians)
Not inure to benefit of a

private stockholder
Within Taxable Year
Sufficient Records
Partially Deductible (5%,
10%)
Amount spent for the acquisition or

improvements of land or for the improvement or
development of natural resources (capitalized
hence not deductible outright)
b. Amount paid or incurred for the purpose of

ascertaining the existence, location, extent or
quality of any natural resources like deposits of
ore or other minerals including oil gas.
10. PENSION TRUST CONTRIBUTIONS

a) Contributions
If fully deductible:
Sales
Cost
11Million
9 Million
Gross Income
Less: Expenses
2 Million
1 Million
Taxable/
Net Income
CD
1 Million
(1Million)
Tax Due
- 0 c-
If OC-D (partially deductible):

Note:
Expenses
here do
not
include
charitabl
e
donation
s
Sales
Cost
11Million
9 Million
a.
Current Year the contribution is considered as

ordinary and necessary expenses fully deductible
b.
Past Years if it refers to the services rendered

for the past 10 years, the contribution is
deductible but apportioned over the next 10
years (i.e. 1/10 deductible every year)
Gross Income 2 Million

Less: Expenses 1 Million
Taxable/
Net Income
CD
1 Million
50,000
Tax Due
950,000
b)
Requisites for deductibility of Contributions to Pension

Trusts
a.
Another exception provided by your special law is when you

adopt a school [ adopt-a-school program]. You provide books,
computer equipments etc, and whenever you do that, have
yourself accredited and whatever your donation to that school
is, its fully 100% deductible plus 50% deductible. This is beyond
the tax code, this is special law. So if you donate 1M in books to
a school that you have adopted, your deductible donation is
1.5M.
There must be a pension or retirement plan

established by the employer (reasonable private
benefit plan)
- must be approved by the BIR
b.
The pension must be reasonable and actually

sound
c.
Contribution must be given by the employer to

that pension plan
d.
Research and Development Expense can be capitalized or

deducted as expense outright
The amount contributed must no longer be

subject to the control or disposition of the
employer
e.
- if capitalized, it is claimed as expense in 5 years as

amortization expense (expense / 5)
The payment has not yet been allowed as a

deduction
f.
This must be for the benefit of the employees
g.
This deduction 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
9. RESEARCH AND DEVELOPMENT EXPENSES

-
Amortization of Certain Research and Development Expenditures

(capitalized)
a.
Paid or incurred by the taxpayer in connection with

his trade, business or profession;
b.
Not treated as an expense
c.
Chargeable to capital account but not chargeable to

property of a character which is subject to
depreciation or depletion (bec. the property may
26
Every corporation is encouraged to have a retirement plan in order

to provide for retiring employees
Corporation
Retirement
Plan
Employees
Past service cost = divide by 10 ( claim only

1/10 for the year)
Separate Entity
2010
Deductible Expense? Yes!
VII.
Reasonable, the contribution

must be given by the employer
and the amount contributed must
no longer be under the control of
the corporation. Once the
corporation has transferred the
money, the corporation may no
longer get back the money or use
it in their operations.
Second requisite, the payment
has not yet been allowed as a
deduction it cannot be deducted
twice. And plan is for the benefit
of the employees and deductions
apportioned in equal portions
over 10 consecutive years
beginning in the year in which the
transfer was first made.
27
TAX RATES
Classifications
Sources
Tax base
Entitled
Deduction
Tax Rate
DC
Within &
without
Taxable
Income
Yes
30%
RFC
Within
Taxable
Income
Yes
30%
NRFC
Within
Gross
Income
No
30%
Optional: Domestic Corporations and Resident Foreign

Corporations have the option to be taxed at 15% of gross
income, provided certain conditions are satisfied.
Conditions before exercising the option:
1.
2.
3.
4.
Distinguish between CURRENT

SERVICE COST and PAST SERVICE
COST
A tax effort ratio of 20% of the GNP

A ratio of 40% of income tax collection to
total tax revenues
A VAT tax effort ratio of 4% of the GNP
A 0.9% ratio of the Consolidated Public
Sector Financial Position to GNP
This is available to firms whose ration of cost of sales to

gross sales or receipts from all sources do not exceed 55%.
If it is for that year, it can be deductible if it

is considered as ordinary expense for that
year. But if such deductions were made for
services that have been rendered for the
past years, you can have it amortized over a
period of 10 years. Divide the amount to be
paid over the next 10 years.
Current service cost = deductible in full
2Million
General Rule: 30% effective January 1, 2009 (except in special cases)
Are all contributions made by a corporation to a

retirement plan deductible? No.
100% Deductible
1/10 DR
Ex. In your retirement plan, 1M must be contributed per year. If

you skipped the 2010 contributions and contributed 2M in
2011, then your deductible expense for 2011 is 1.1M (1M
+ 100K which is 1/10 of 1M)
Yes. In order for the contributions to be

deductible, the amount contributed to the
plan must be:
o
Contribution:
This is the retirement plan, this is the corporation. If you

have a retirement plan, any money that is placed by the
corporation here, for whose benefit is this? For the
employees. This is a separate entity from the corporation.
If the corporation puts in money to this retirement plan
for the exclusive benefit of its employees, this is totally a
separate entity and any income earned from this plan is
not an income of the corporation. Mind you, the income of
this retirement plan is totally tax free. Would the transfer
of funds to this retirement plan by the corporation be a
deductible expense?
2011
1Million For Current Year
1Million For Past year
Once elected by the corporation, the option shall be

irrevocable for the 3 consecutive years (NOTE: not next
three consecutive years but 3 consecutive years which
means it includes the current year).
-
Where shall you apply the 15%?
Sales
Cost
11,000,000
9,000,000
15% Gross Income

Less
2,000,000 = 300,000
500,000
30% Net Income
1,500,000 = 400,000
Commencement of business operation shall mean the

registration of the business with the BIR
An entity liable for 30% NCIT is liable for MCIT; entities

NOT liable for 30% NCIT is not liable for MCIT
55% of 11M is
6,050,000.
If the corporation is not subject to the 30%

normal corporate income tax (NCIT), then it
will not also be subject to the MCIT. Hence,
if the corporation is under another tax
regime other than 30% NCIT, then MCIT will
not apply.
MCIT will not apply in the following

instances
Since the cost of sales exceed 55% or

P6,050,000, then Gross Income Taxation
cannot be availed.
Would everybody be allowed to choose 15% gross

income taxation? NO.
Only available to domestic corporations and

resident foreign corporations.
Non-resident foreign corporations are not

expected to file these tax returns and are
subject to final withholding tax of 30%.
Ex. If the business started on 2009,

MCIT is applicable beginning 2013
a.
The corporation is a Private

Educational Institution or Nonprofit Hospital subject to 10%.
However, if income from
unrelated activities exceeds 50%
of total income then it will now
be subject to 30%. Consequently,
MCIT
will
now
apply.
[Predominance test]
b.
Subject to Income Tax Holiday

(ITH). However, after the ITH, it
will now be subject to NCIT and
also MCIT if applicable.
c.
Subject to 5% income tax for

PEZA-registered or Subic Bay
free Port-registered corporation
for registered activities. If
company
ventures
into
unregistered activities, subject to
30% NCIT and 2% MCIT.
Exceptions to the General Rule:

a.
b.
MCIT- a minimum corporate income tax of 2% of the gross

income as of the end of the taxable year. It is imposed on a
taxable corporation beginning on the 4ht taxable year
immediately following the year in which such corporation
commenced its business operations, when the minimum
income tax is greater than the normal income tax. The 30%
rate may not be applied if it is lower than the 2% of gross
income of such corporate taxpayer.
Special Rates
i.e. Proprietary Educational Institution 10% etc.
MINIMUM CORPORATE INCOME TAX

A corporation is required to pay the MCIT if:
-
The minimum corporate income tax rate of 2% of gross

income means that the corporate income taxpayer must
pay corporate income tax not lower than 2% of its gross
income. If the normal corporate income tax (subjected to
30%) is lower than the 2% MCIT, the corporation must pay
the 2% minimum.
In other words, the normal income tax rate of 30% shall

not be applied if this results to a lower tax due than when
the 2% MCIT is applied on gross income
Applicable only to DOMESTIC CORP. and RESIDENT

FOREIGN CORP.
2% of the gross income as of the end of the taxable year is

th
imposed on a taxable corporation beginning the 4
taxable year immediately following the year in which the
corporation commenced its business operations, when the
minimum income tax is greater than the normal income
tax.
28
a. the normal corporate income tax (30% of taxable

income) is less than the 2% of gross income tax [NCIT
< MCIT] or
b. the corporation is operating at a loss.
-
NCIT and MCIT are mutually exclusive. You cannot be

liable for both at the same time.
Your actual tax liability to the government is

always the 30% tax. But in years wherein
the corporation is operating at a loss, you
dont have 30% tax, you will have to pay the
2% MCIT. Or in years wherein the
corporations regular tax on net income is
lower than 2% MCIT, you have to pay the
2% MCIT. Whichever is more favorable and
higher in taxes to the government for your
operations, you have to pay it to the
government. (Life-blood doctrine). MCIT is

only a temporary tax, in the long run, unless
there are expired MCIT, the taxes paid over
the years will always equal the NCIT paid
since the excess of MCIT over NCIT can be
carried-over.
-
For manufacturing concern: Cost of goods manufactured

and sold shall include all costs of production of finished
goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance and other
costs incurred to bring raw materials to the
factory/warehouse. (Section 27A and 27E)
For a service concern: Cost of services shall mean all direct
costs and expenses necessarily incurred to provide the
services required by the customers and clients including:
When do you begin to impose the MCIT? In the fourth

taxable year immediately following the year the
corporation has commenced (pertains to registration with
BIR) business operations.
So, in 2005 December 24: you registered your business.
When should you start comparing your 2% MCIT against
your 30% normal corporate tax? In 2009.
Its the fourth year after 2005. Beginning the fourth

taxable year following the year in which you commenced
your business operations.
For trading concern: Cost of goods sold shall include the

invoice cost of goods sold, plus import duties, freight in
transporting the goods to the place where the goods are
actually sold, including insurance while the goods are in
transit. (Section 27A and 27E)
Rationale: Corporations are abusing the claiming of

expenses. They bloat the expenses (overstate) resulting to
either minimal net taxable income or they bloat this to the
extent of reporting a loss, therefore there will be no
income tax. And normally you dont exist for 10 years at a
loss, you should have closed your business already. This is
what the BIR was looking into since there are corporations
which were operating at a loss for more than 10 years. The
problem was there was over-claiming of expenses, now at
least the BIR is assured, if you report a loss, there is still
collection of 2% of gross income.
COST OF GOODS shall include all business expenses

directly incurred to produce the merchandise to bring
them to their present location and use (Section 27A and
27E)
You registered your business with BIR in 2005, assuming

you follow the calendar year, when is the year after you
commenced business operations 2006. So fourth year is
2009. [Tip: Just add 4 to the year you registered your
business with the BIR. No need to count ^_^ i.e 2005 + 4 =
2009]
(A) salaries and employee benefits of personnel,

consultant specialists directly rendering the service and
(B) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost
of supplies. Provided, however, that in case of banks,
cost of services shall include interest expense.
Carry Forward of Excess Minimum Tax
Any excess of the minimum corporate income tax over the normal
income tax shall be carried forward and credited against the normal
income tax for the 3 immediately succeeding taxable years.
The 2% MCIT is based on gross income.

Relief from MCIT under certain conditions:
The Secretary of Finance may suspend the imposition
of the MCIT on any corporation which suffers losses
on account of:
(1) prolonged labor dispute (more than 6
months);
NO. Only to the NCIT
4th
year
5th
year
6th
year
7th
year
8th
year
9th year
Sale
Less: Cost
10M
5M
10M
2M
10M
2M
10M
3M
10M
4M
10M
4M
Gross
income
(2% MCIT)
Less: Expenses
5M
8M
8M
7M
6M
6M
5M
7.8M
7.7M
6.8M
5.5M
5.6M
200K
300K
200K
500K
400K
Net
income
NCIT)
taxable
(30%
(2) force majeure; and
30% tax
(NCIT)
due
60K
90K
60K
150K
120K
(3) legitimate business reverses
MCIT (2%)
Paid
to
the
government
0
0
160K
160K
160K
160K
140K
140K
120K
0
120K
20K
Excess MCIT
100K
170K
250K
100K
Definition of Terms
GROSS INCOME derived from business shall equivalent to
gross sales less sales returns, discounts and allowances
and cost of goods sold (Sec. 27A and 27E)
For taxpayers engaged in sale of services, gross income
means gross receipts less sales returns, allowances and
discounts, and cost of services
29
Can you offset the excess MCIT against MCIT?
th
th
Technically, you apply MCIT on the 5 year which is the 4 year

immediately following the year you commenced business operation.
th
Given the table above, in the 4 year, how much are you going
to pay to the government?
-
Remember, when do we commence computing

MCIT?
Beginning the 4 taxable year following the
year that you commence business
operations or which means to say, following
the year you registered your business for
BIR purposes.
th
So in the 4 year, how much is your tax liability?

ZERO. MCIT is zero. At this point, youre not yet liable
th
to MCIT because MCIT will commence at the 4
taxable year following the year that you commence
th
business operations, which in fact is the 5 year. In
th
this case, it is still the 4 year.
th
Lets go to the 5 year. How much is your liability to the

government? 160K. Whichever is HIGHER between MCIT &
NCIT
-
How much is your excess MCIT to be carried forward?

100K.
Your true tax liability to the government is only the

NCIT, but you paid the MCIT of 160K because MCIT is
higher than NCIT. Therefore, you have a reserve of
100K that is creditable against your future tax liability
in the succeeding 3 consecutive years. However, this
can only be creditable against NCIT not against MCIT.
How much is your MCIT? 120K.
How much is your NCIT? 120K.
So, therefore, you pay 20K to the government [120K100K]
You only pay the MCIT if the company is operating at

a loss or when NCIT is lower than MCIT. In this case,
its equal, so you still pay the NCIT. But since you have
an excess reserve still of 100K coming from the prior
years, you can offset it against the 120K, which is the
NCIT, so therefore, you only pay 20K.
At any point, did any excess MCIT expire? Was there an

expiration of excess MCIT, meaning, it was carried forward for 3
years but was never used? NO
How much is your total tax due (NCIT) from the 5 year to the
th
9 year? 480K
th
How much did you actually pay to the government?

480K still. (They are equal as long as there is no
expired MCIT)
The difference is that your true tax liability is always

the 30% NCIT. But at any point that you operated at a
loss or your NCIT is lower than MCIT, you will be
required by the government to pay MCIT as an
advance payment for future years. Whatever excess
MCIT that you pay to the government will be
creditable to the next 3 years.
th
Can you not deduct your reserve of 100K?
th
In the 9 year, how much will you pay to the government?
Lets go to the 6 year. How much will you pay to the

government? 160K because MCIT is higher than NCIT
-
th
offsettable against the 150K NCIT, so the remaining

reserve is 100K [250K-150K]. First-in, First-out (FIFO)
NO, because excess MCIT is only offsettable

against the NCIT. It cannot be credited
against the MCIT. You always have to pay
the MCIT, whatever it is. But once you reach
to the point that your liability is already the
NCIT, its when you can use the reserve. In
this case, your payment to the government
is MCIT so, therefore, you cannot deduct
the reserve yet.
So how much is your reserve at this point? 170K.

th
Example: Where MCIT expires

4th
year
5th
year
6th
year
7th
year
8th
year
9th
year
Sale
10M
10M
10M
10M
10M
10M
Less: Cost
5M
2M
2M
3M
4M
4M
Gross income
(2% MCIT)
5M
8M
8M
7M
6M
6M
Less:
Expenses
5M
7.8M
7.7M
6.8M
5.7M
5.4M
Net taxable
income (30%
NCIT)
200K
300K
200K
300K
600K
30% tax due

(NCIT)
60K
90K
60K
90K
180K
MCIT (2%)
160K
160K
140K
120K
120K
Paid to the
government
160K
160K
140K
120K
Excess MCIT
100K
170K
250K
180K*
. Lets go to the 7 year. How much is MCIT? 140K

-
How much are you going to pay to the government?

140K because MCIT is higher than the NCIT.
How much is your reserve now? 250K.

th
In the 8 year, how much will you pay to the government?

-
30
ZERO. Here, the NCIT is higher than the MCIT,

therefore, you dont need to pay the MCIT. You pay
the NCIT supposedly. But since in this case, you have
an existing 250K total of excess MCIT, such excess is
th
*Excess MCIT as of 7 year
250 K
th
Less: Expired MCIT from 5 year
activity exceeds
50% of its total
gross income)
(100K)
th
Add: Excess MCIT for 8 year (120K 90K)
30 K __
th
Excess MCIT as of 8 year
Proprietary Educational Institution
180K
th
th
The 100K excess MCIT from the 5 year expires in the 8 year if
unused. [Can only be carried forward to next 3 consecutive
years]
-
When excess MCIT expires, your total tax payment

over the years will no longer correspond to your NCIT
for such years because some of the MCIT paid were
not offsetted from the NCIT. This is the reason why if
rd
some companies feel that on the 3 year of the
excess MCIT, something is expiring, report a higher
NCIT so you can utilize your excess MCIT
1.
2.
ProprietaryEducational
Institution
Non-ProfitHospital
Within
without
Within
without
and
-
and
-
Taxable
Income
Taxable
Income
10%
(if
its
income derived
from unrelated
trade, business
or activity does
not exceed 50%
of its total gross
income); or
30%
(if
its
income
from
unrelated trade,
business
or
activity exceeds
50% of its total
gross income)
31
10%
(if
its
income derived
from unrelated
trade, business
or activity does
not exceed 50%
of its total gross
income); or
30%
(if
its
income
from
unrelated trade,
business
or
NPH can be tax exempt if they

operate for charitable purposes
(Lung Center case)
Unrelated trade business or other activity

-
Means any trade, business or other activity, the conduct of

which is not substantially related to the exercise or
performance of such educational institution or hospital of
its primary purpose or function
Note: Use the PREDOMINANCE TEST (whichever income is greater).

Hence, if equal, apply 10%. All or nothing. Do not apportion
10% or 30%. Everything subjected to 10% or 30% depending on
which income is greater. ALWAYS base on GROSS INCOME not
net income.
Tax Rate
-
(should be non-profit) same rule as Proprietary

Educational Institutions
SPECIAL DOMESTIC CORPORATIONS

Tax base
If
government
educational
institutions exempt (one of the
exempt entities)
Non-Profit Hospitals
MCIT means that you are required to pay regularly to

the government. Its just an advance payment. You
can utilize it afterwards. Its in order to plug the
loophole in the tax code wherein the taxpayer is
abusing the expenses that they claim as deductible.
You can zero out your net taxable income by claiming
huge expenses then when you zero out your net
taxable income, youre not required to pay any
income tax due. But because of the MCIT, you will be
paying MCIT due. And in order to avoid expiring the
rd
MCIT, at some point, in the 3 year, you will be
honest enough to declare your true income tax in
order to be liable for NCIT.
Sources
any private school maintained and administered by private

individual or group with an issued permit to operate from
DECS or CHED or TESDA as the case may be.
RATIONALE: Because of the vital social functions these corporations

perform, the law encourages them to engage in unrelated trade,
business or activity, subject to limitation, while enjoying a lower rate
of 10%
SPECIAL RESIDENT FOREIGN CORPORATIONS

Sources
1.
International
Carrier
2.
International
Shipping
Within
Tax Base
Gross
Billings
Phil.
Gross
Billings
Phil.
Within
Tax Rate
2.5%
2.5%
For purposes of International Air carrier, Gross Philippine Billings refer to the
amount of gross revenue derived from (a) carriage of persons, (b) excess
baggage, (c) cargo and (d) mail originating from the Philippines in a
continuous and uninterrupted flight irrespective of the place of sale or issue,
and the place of payment of the ticket or passage document. Tickets
revalidated, exchanged and/or endorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane in a
port or point in the Philippines. (Refuelling is not considered an interruption)
For purposes of International Shipping, Gross Philippine Billings means gross

revenue whether from (a) passenger, (b) cargo or (c) mail originating from
already engaged in selling tickets. On the

normal basis, it becomes subject to the 30%
tax.
the Philippines up to final destination, regardless of the place of sale or

payments of the passenger or freight documents.
3.
Offshore
Banking Units
Within
Income derived
from
foreign
currency
transactions with
nonresidents,
offshore banking
units
in
the
Phils.,
local
commercial
banks,
inc.
branches
of
foreign
banks
that may be
authorized
by
the
BSP
to
transact business
with OBUs.
Exempt
Income derived
from
foreign
currency loans
granted
to
residents.
Exempt
Regional Operating Headquarters (ROHQs)

-
A branch established in the Philippines by multinational

companies which are engaged in any of the ff. services:
general administration and planning; business planning
and coordination; sourcing and procurement of raw
materials and components; corporate finance advisory
services; marketing control and sales promotion; training
and personnel management; logistic services; research
and development services and product development;
technical support and maintenance; data processing and
communications; and business development.
They are subject to 10% tax. They generate profits.

However, if they perform activities not related to the
purpose for which they were established, they will now be
subject to 30%. 10% special rate only applies to activities
for which they were established.
Remember also that employees of these ROHQs of

multinational corporations are given the preferential rate
of 15% so long as theyre occupying, if foreigner,
managerial or technical, if Filipino, managerial and
technical positions. (ROHQs still required to withhold on
compensation of their employees)
10%
Income of nonresidents
(individual/
corporation)
from OBUs
4.
Tax on branch
profits
remittances
5.
RAHQs
6.
ROHQs
Within
Total
profits
applied or
earmarked
for
remittance,
without
deduction
for the tax
component
s thereof.
15%
N/A
Exempt
Taxable
Income
10%
Regional or Area Headquarters (RAHQs)
International Air Carrier (IAC) and International Shipping (IS)

-
taxable within on their tax base of Gross Phil. Billings (GPB)

at the tax rate of 2.5%.
What is important is that the flight or voyage originates

from the Philippines irrespective of place of sale or
payment
32
If the existence of such corporation is really

to sell tickets, whatever the port of origin or
airport of origin is, it will be subject to the
normal tax of 30% because the 2.5% on GPB
refers only to the revenues based on a flight
originating from the Phil. in a continuous
and uninterrupted flight.
Now, if and when a foreign corporation, like

SILKAIR or QATAR AIRWAYS, open up an
agency or outlet here in the Phil. selling
tickets, whatever the destination is or the
port of origin or airport of origin, it will
already be covered by the normal tax rate
for RFC, not the special rate. Why? Its
A branch established in the Philippines by multinational

companies and which headquarters do not earn or derive
income from the Philippines and which act as supervisory,
communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets.
Being non-operational, it is not subject to income tax.
Off-shore Banking Units (OBUs)

-
extensions of foreign banks
They are RFCs and thus taxable only on income derived

within the Philippines
But what type of income is subject to tax?
Income derived by the OBUs from foreign

currency loans to residents is subject to the
preferential rate of 10%.
If derived from foreign currency loans or

transactions to
a. non-residents, b. other OBUs, c. local

commercial banks - it will be exempt.
If income derived from investments or
deposits or other loans to non-residents,
whether individual or corporation, it is
exempt.
Rationale: If it is a loan, situs is the
residence of the borrower
G.R. If income derived from non-residents

(incl. Other OBUs) exempt.
Exception local commercial banks (even if

local, it is still exempt)
2.
Non Resident
Owner or Lessor of
Vessels Chartered to
Filipino nationals or
Corporations
Within
Gross rentals,
lease or
charter fees
4.5%
Within
Gross rentals
or fees
7.5%
The Charter Agreement of

which is approved by
Marine Industry Authority
3.
Non-Resident
Owner or Lessor of
aircraft, Machinery and
Equipment
Non-Resident Cinematographic Film Owner, Lessor Or Distributor

BRANCH PROFITS REMITTANCE TAX (BPRT)
Tax on profits remitted by branches of NRFC. Hence, it

presupposes a Head Office (NRFC) Branch (RFC) relationship.
-
taxed at 25% on their gross income derived from within.

o
NRFC can either:

1. Establish a subsidiary corporation in the Phils which
is a domestic corporation (has its own set of
stockholders and own set of Board of Directors and is
a separate corporation distinct from the parent corp)
or
Non-Resident Owner Or Lessor Of Vessels Chartered To Filipino

Nationals Or Corporations
-
2. Create a branch in the Phils. which is a resident

foreign corporation (do not have its own stockholders
or BOD).
-
Branch profit remittance tax only apply to a Head

Office (NRFC) Branch (RFC) relationship (Single
Entity Concept)
The relationship of NRFC with domestic corp is called

parent-subsidiary relationship and not subject to
BPRT
Hence, if profits are remitted by branch to

head office (NRFC), then it is subject to 15%
BPRT. However, if it is the subsidiary
corporation who would remit to the parent,
such will be considered as dividends subject
to 15% tax.
A cinematographic film owner, lessor or

distributor does not include leasing out DVDs or
CDs. What it includes is only films one which is
used for movies.
taxed at 4.5% on gross rentals, lease or charter fees

derived from within
o
The Charter Agreement of which is approved by

Maritime Industry Authority.
Whatever the arrangement is with the lease,

whether it be by bareboat charter or demise
charter, whether its with crew or not, its
covered by the 4.5% on gross income for the
lease payments.
Non-Resident Owner Or Lessor Of Aircraft, Machinery And

Equipment
taxed at 7.5% on gross rentals or fees derived from within
REMEMBER: These are NRFC so these taxes are withheld in advance.

Income pertains to income derived within the Phils.
NOTE: If there is a conflict between a tax treaty and a municipal

law, that which benefits the taxpayer shall prevail
SPECIAL NON-RESIDENT FOREIGN CORPORATIONS (NRFCS)
1.
Non Resident
Cinematographic Firm
Owner,
Lessor
Distributor
33
Sources
Tax base
Tax Rate
Within
Gross Income
25%
or
PASSIVE INCOME
(These incomes must be derived from the Philippines)
DC
NRFC
This should be included in its gross
income subjected to 30% tax. BUT
in the case of interest on loans
which have been made on or after
August 1, 1986, the same is subject
to 20% final tax.
Interest Income on bank Deposit
2.
Interest income on Bank Deposit

Under the Expanded Foreign
Currency Deposit
System
FCDU (Foreign currency deposit
unit)
7.5%
7.5%
3.
A. Royalties Derived Within the

Philippines (General)
20%
20%
30%
B. Royalties Derived Within the

Philippines (Literary works,
books and musical composition)
10%
10%
30%
4.
a.
Capital Gains Derived From its

Sale of Shares of Stock
If it is listed and traded thru
local stock exchange:
of 1% of the Gross Selling
Price
b.
20%
If income is derived from outside
sources, it is treated as OTHER INCOME
subj. to 30% bec. there is no w/holding
agent abroad
RFC
20%
If it is an OBU and earns interest
from a NRFC, then it is exempt. Such
will be considered income derived
w/out
1.
Tax exempt
Rationale: Just like placing your
deposit or investment in an OBU. Its
offshore. Its outside the jurisdiction
of the Phils.
This rule applies BOTH to corporate and individual taxpayers.

Note: Only the first sale for the year amounting to 100K is subject to 5%; the subsequent sales are subject to 10%
If it is NOT listed or traded thru

local stock exchange:
Not over P100,000: 5%
Over P100,000:
10%
5.
6.
Capital gains Derived from the

Sale of Real Property Which is
not Used in Trade or Business
Branch Profit remitted by a
branch office
(Exception: If you are enjoying
income tax holiday or PEZA-
34
6% of the GSP or ZV (or FMV)

whichever is higher
Not Applicable
Should be treated as OTHER INCOME SUBJECT TO 30%
Subject to Branch Profit Remittance

tax of 15%, the basis of the tax is the
amount applied for or earmarked for
remittance
Not Applicable
7.
registered or special economic

zones not subject to 15% BPRT
but 5% special tax, unless for
unregistered activities)
Dividends
Received
from
Domestic Corporation
Exempt
NOTE: Royalties should be considered first as a

passive income before you apply the special
rates of 10%, 20% and 30%. If the royalty income
is already an active income that is earned in the
usual course of trade or business of the
corporation, it will be subject to the ordinary tax
rate of 30%. (i.e. McDo franchises are
considered as active income)
Exempt
Branch Profits Remittance Tax (BPRT)

-
Can a DC be liable for the 15% BPRT? NO. BPRT is only

applicable to RFC. DC Can never be subject to BPRT.
When is BPRT due to the government?

o
For capital gains derived from the sale of shares of stock:

o
If it is listed and traded thru local stock

exchange: of 1% of the GSP
- listed means enlisted with the Philippine Stock
Exchange
BPRT is due to the government when a RFC,

which is a home-office branch here in the
Philippines of a NRFC remits profits to such
NRFC.
BPRT vis--vis intercorporate dividends or under the tax

sparing credit rule. What is the difference between the
two?
NRFC
If it is not listed or traded thru local stock

exchange:
Not over 100K 5% and over 100K 10%
Same rate applicable to individual

taxpayers. Note that whether the seller
is DC, RFC or NRFC, the same rate
applies. This is an exception for
NRFCs.?
If you have many transactions for the
year, the 5% is applied only to the first
100,000. The subsequent sales are
already subjected to 10%.
Capital gains derived from the sale of real property.
35
These dividends received from DC by

NRFC is subject to 15% Final tax
IF: the foreign government of that
foreign corp. allows a tax credit at
least 15% of the taxes deemed paid
in the Philippines by NRFC.
For DC 6% of the GSP or Zonal Value,

whichever is higher
For RFC and NRFC should be treated as OTHER

INCOME subject to 30%
100%
DC
RFC
Subsidiary Corp.
Phil. Branch
A. Relationship between NRFC and DC is Parentsubsidiary relationship. Remittance of income to

NRFC is considered a dividend subject to 15%
B. relationship between NRFC and RFC is Head

Office- Branch relationship applying the SINGLE
ENTITY CONCEPT. Here, remittance of income is
subject to 15% BPRT.
So either way, the amount received by the NRFC

will be net of the 15% tax.
Would all Phil. branches of a NRFC, when it earmarks

profits for remittance abroad, be liable for the 15% BPRT?
o
As a rule, Phil. branches of a NRFC is liable for 15% BPRT
on the total profits that it earmarks for remittance abroad
except if the Phil. branch is located within the economic
zone that is legally recognized by the government.
NOTE: The basis of BPRT is not the actual amount remitted
but the profits that are EARMARKED or APPLIED FOR
Remittance.
The reason why intercorporate tax on dividends

is at 15% are:
1. In order to equal the rate of the

BPRT (also 15%)
2. As a rule, NRFC will be taxed at 30%

on gross income including dividends
earned from a DC. But if there is a tax
credit that is granted by the foreign
country to Phil. corporations, not a
resident there, equivalent to 15% then,
we can only impose tax of 15% as well.
It means to say that 30% tax rate of
NRFC less the tax credit that is
expected to be granted by the foreign
country to Phil. corporations at 15% so the difference is 15%. The
difference of 15% is the rate of
intercorporate tax on dividends. TAX
SPARING CREDIT PRINCIPLE
Ex. It could be that the RFC will earmark 2M as remittance

but will only actually remit to the NRFC 1.5M. The 500K
will be used by the RFC to further its operations. The
amount subject to BPRT is the 2M profit that was
earmarked.
NOTE: There was a case decided by BIR pertaining to
remittance by a branch (RFC) to Head Office (NRFC)
wherein such amount included previous advances given by
the Head Office pertaining to construction projects. Such
amount is not subjected to 10% BPRT since they are not
profits remitted but consists of return of excess funds
previously advanced
Inter-Corporate Dividends
NOTE: Intercorporate dividends of (a) DC to DC or (b) DC to RFC
are exempt from taxes. These will further be distributed to
individuals and it is upon such distribution wherein tax will be
applied. It has not yet reached the ultimate recipient which are
the stockholders/individuals. Otherwise, there will be double
taxation.
NOTE: In a case, where there is a RFC owned by a NRFC and then

both of them invested in a DC, the SINGLE ENTITY CONCEPT will not
apply to dividends distributed by DC to both RFC and NRFC. The
dividends distributed by DC to RFC is exempt while the dividends
distributed by DC to NRFC is subject to 15% intercorporate
dividends. NRFC cannot say that it should also be exempt under
justification that the RFC and NRFC is a single entity concept.
VIII.
TAX ON IMPROPERLY ACCUMULATED EARNINGS
TAX SPARING CREDIT (Sections 28B (5)b)- 15%

Sec. 29, Tax Code. See also similar provision in the Corporation Code.
Purpose: To attract investors in the Philippines
There is no statutory provision that requires actual grant of tax
credit by the foreign government. Neither is there a Revenue
Regulation requiring actual grant. It is clear that the provision of the
law says allows. (As long as allowed, you can already claim the tax
credit, it need not be actually granted) So, it is enough to prove that
the foreign government allows tax credit. It is not incumbent upon
the foreign government to prove the amount actually granted.
o
All income received by a NRFC will be subject to

30% tax except capital gains from the sale of
shares of stock, not traded in the stock
exchange.
However, for dividends declared and paid by a
subsidiary corporation to a NRFC, such amount
will be subject to 15% tax.
If the foreign government of such NRFC allows or
grants tax credit to Phil. corporations located
abroad, the intercorporate dividends would be
subject to 15% tax, not the 30% tax. (Even before
when our tax was 35%, the tax sparing credit
rule still applied and 15% tax was still applicable
on dividends but the tax credit was 20%)
36
In addition to the other income taxes, there is hereby imposed for

each taxable year on the improperly accumulated taxable income of
each corporation an improperly accumulated earnings tax equal to
10% of the improperly accumulated taxable income.
NOTE: BIR subjects 10% of Improperly accumulated earnings
NOTE: SEC subjects you to 10,000 fixed rate for every year of
violation (for improperly accumulating earnings)
1.
Coverage
For corporations using the calendar basis, the
accumulated earnings tax shall not apply on improperly
accumulated income as of December 31, 1997.
For corporations adopting the fiscal year accounting
period, the improperly accumulated income not subject to
this tax shall be reckoned as of the end of the month
comprising the 12-month period of FY 1997-98
Average for the dividends or

accumulated earnings that is a
probable area for imposing the 10%
IAET would only start from 1998. Your
dividends or accumulated earnings
from Dec. 31 down would still be free

from the IAET because this kind of tax
has already been effective Jan. 1, 1998.
And if youre operating on a fiscal year
basis, which means that you start at
any day other than Jan. 1, your free
coverage from IAET would be starting
from the last month in 1998 which is
the end of your fiscal year. So if your
fiscal year is Nov. 1 ending in Oct. 31.
Oct. 31, 1998 down would still be free
from IAET. So you will be subject to
IAET starting Nov. 1, 1998.
2.
3.
Exceptions to IAET
The IAET shall not apply to:

a.
Publicly held corporations (PHC)

Rationale: IT is difficult to come into agreement to retain /
accumulate earnings. Usually earnings are declared as
dividends
-
Includes all publicly listed companies (all PLC are PHC

but not all PHC are PLC)
A PHC is such that is not a closely held corporation. A

closely held corporation is one where at least 50% of
the capital stock or voting power is held by not more
than 20 individuals. Closely held corporations are
subject to 10% IAET. It is important to differentiate
because only Publicly held corporations are not
subject to IAET
All family corporations are closely-held corporation

but not all closely held corporations are family
corporations
Corporations Subject to Improperly Accumulated Earnings Tax

(IAET)
The IAET shall apply to every corporation formed or
availed for the purpose of avoiding the income tax with
respect to shareholders or the shareholders of any other
corporations, by permitting earnings and profits to
accumulate instead of being distributed or divided.
Assets
100M
Liabilities
80M
Net worth
20M
50%
Capital Stock 1M
1M as capital stock
50%
More than
CLOSELY-HELD
CORPORATION
1 individual
20 individuals
Profits (retained earnings) 19M

18M for future expansion
RATIONALE FOR IAET: Improper accumulation of profits. Profits

could have been distributed to stockholders and thereby subjected
to 10% tax for such dividends. This serves as a penalty.
-
Profits improperly accumulated which are already

subjected to 10% tax when distributed as dividends are
still subject to 10% on such dividends or 20%/25%
(depending on recipient). This will not constitute double
taxation because they are taxed for different purposes.
If you accumulate profits more than 100% of your paid-in
capital (1M in the illustration), then it will serve as an
indicator or red flag that you may be improperly
accumulating earnings. However, the tax base is not the
whole profits. (See formula below)
37
So the basis of the 10% IAET is not the

retained earnings in the illustration
given above but the formula on the
TAX BASE (IAE).
b.
Banks and other non-bank financial intermediaries

- For liquidity purposes. Liquidity pertains to the
availability of cash to pay sudden withdrawals of clients
c.
Insurance companies
d.
- Not covered by IAET because theyre

required to maintain some reserves
and regulated with the Insurance
Commission
Revenue Regulations No. 2-01

i.
Taxable partnerships [no capital stock]
ii.
GPP [exempt under tax code]
iii.
Non-taxable Joint ventures [exempt under tax

code]
iv.
Branch (RFC) of NRFC, since they do not have

capital stock
v.
Enterprise Duly Registered With PEZA (RA 7916)

And Pursuant To Bases And Conversion
Development Act Of 1992 (RA 7227) And Under
Special Economic Zones
5.
Subsidiaries required to maintain certain amount to

make investments in other corporations
Computation of Improperly Accumulate Taxable Income

Taxable Income adjusted by (these items are added):
They are subject to 5% on registered

activities in lieu of national taxes, but if they opt
to be subjected to 30% then they will now be
subject to 10% IAET. Reason they may opt to be
subject to 30% is when they have huge operating
expense
4.
Evidence of Purpose to Avoid Income Tax

Prima Facie evidence: The fact that any corporation is a
mere holding company or investment company
Evidence Determinative of Purpose: The fact that the
earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation,
by clear preponderance of evidence, shall prove the
contrary.
The term reasonable needs of the business includes the reasonably

anticipated needs of the business.
-
Immediate needs of the business including reasonably

anticipated needs
Corp. should prove an immediate need for the

accumulation or direct correlation of anticipated needs to
such accumulation of profits
Examples:
Allowance for the increase in the accumulation of

earnings up to 100% paid-up capital of the
corporation
Earnings reserved for definite corporate expansion

projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or
equivalent body (should be proven by board
resolution, blueprints and other sufficient supporting
documents)
Building, plants or equipment acquisition as approved

by Board of Directors (in a board resolution)
Earnings reserved for compliance with any loan

covenant or pre-existing obligation established under
a legitimate business agreement Required by law to
be retained
Earnings required by law or applicable regulations to

be retained by the corporation or in respect of which
there is legal prohibition against its distribution
38
These are added to reflect the true earnings of the

Corporation. Letter A-C are income that are not
included in the computation of the taxable income so
they should be added back. Letter D results to a
deduction in the present taxable income based on
losses from previous years. This should be added back
to reflect the true income for the year.
a.
Income exempt from tax
b.
Income excluded from gross income
c.
Income subject to final tax
d.
Amount of net operating loss carry over

deducted (NOLCO)
And reduced by the sum of (these items are deducted):

-
Dividends are deducted from the time of the date of

declaration in the books of the Corporation. Income
tax is a non-deductible expense in the computation of
taxable income however it should be deducted for
purposes of computing IAE.
a.
Dividends actually or constructively paid; and
b.
Income tax paid for the taxable year.
Formula:
Taxable Income + Income exempt from tax + Income
excluded from gross income + income subject to final tax +
amount of NOLCO deducted dividends actually or
constructively paid income tax paid for the taxable year
= Tax base subjected to 10% IAET
Remedy (to avoid being subjected to IAET):
1. Having a Board resolution for expansion projects (supported
by blue prints, etc.)
2. Having a Board Resolution for declaring dividends within one
year after taxable year (date of declaration of dividends already
decreases the amount of earnings)
IAET when paid? 15 days after the end of the taxable period
the real estate business of the deceased parent, such

properties which are ordinarily held for sale for
customers maybe converted into capital assets.
CAPITAL TRANSACTIONS
I.
INTRODUCTION
CAPITAL TRANSACTIONS
-
Involve the sale or exchange of capital assets:

1.
Real Properties (6% CGT)
2.
Shares of Stock (1/2 of 1% of GSP or

5%/10%)
3.
Other Capital Assets (5-32% if individual;

30% if corporation)
CAPITAL ASSET
-
B.
Capital Assets
a.
Properties not considered as ordinary assets (all

assets other than the 4 things mentioned above)
b.
Properties used in trade or business classified as

capital assets:
Accounts receivable
1.
Unless you are in a business

of
selling
accounts
receivable, it is considered as
capital asset.
2.
If you have an accounts

receivable or collectible from
your customer and you are
short of cash and would like
to assign that receivable or
collectible
to
another
corporation by selling your
right to collect. Even if the
Accounts receivable pertains
to collectibles arising from
trade, business or profession
but because youre not into
selling
receivable
or
collectible,
its
still
considered
as
capital
transaction.
Property held by the taxpayer whether or not connected

with his trade or business except ordinary assets.
CAPITAL GAIN
-
Gain from the sale or exchange of capital asset
CAPITAL LOSS
-
Loss incurred from the sale or exchange of capital asset
NET CAPITAL GAIN

-
The excess of capital gain over capital loss
NET CAPITAL LOSS

-
The excess of capital loss over capital gain
Property for investment in stock

1.
II.
A.
ASSETS
Ordinary Assets, Section 39 (A)(1)

a.
Stock in trade or property of the taxpayer which

may be properly included in the inventory at the
end of the taxable.
b.
Property primarily held for sale to customers in

the ordinary course of trade or business
c.
Property used in trade or business subject to

depreciation, which means that this must be
depreciable property
d.
Real property used in trade or business
If you have a business and

youd like to invest in
another business, so long as
youre not a
holding
company
engaged
in
investing another business,
the investment in capital
stock is still considered as
capital asset if you are not
into trading shares. But if
youre a broker of shares,
thats
automatically
considered
as
ordinary
assets.
Subdivision lots to tenants at the

instance of the government
Interest of a partner in a partnership
Can an OA be converted into a CA?

YES. The properties of a taxpayer engaged in real
estate business are considered as ordinary assets. If
the taxpayer dies, these properties will be
transmitted to the heirs. Should the heirs discontinue
39
Note:
All properties not used in trade or business are
generally considered as Capital Assets
Can a CA be converted into an OA?
YES. Land inherited by the heirs from their deceased

parents is considered as capital asset. In the event
that this property is substantially improved by the
heirs and sold at a profit, said capital asset may be
converted into an ordinary asset. The profit derived
from the sale of the land is already considered as
ordinary gain.
identical the same stocks or securities. Sale may also

include exchange or option to sell securities.
Tax Consequence:
The gain is taxable as capital gain, because the seller is
not engaged in such business (the seller here is not a
dealer in securities). If there is a loss, since it is classified
as capital transaction, such is considered capital loss.
The capital gain is taxable but the capital loss incurred
from wash sale transaction is not deductible. A
different rule applies if it is entered into by a dealer in
securities, as it becomes a transaction made in the
regular course of trade or business. (This is an
exception, where loss is not deductible)
Even if you are not registered as engaging in real estate

business, real assets can still be considered as ordinary asset if
you have been regularly selling real assets
Therefore, if you sold house and lots 12 times

last year every month, can you already be
subject to the OT of 5-32% as an individual or
will you still be covered 6% CGT?
Because of the regularity and the continuity of

the conduct of the buying and selling of real
estate properties, you will already be considered
as engaging in ordinary transactions of buying
and selling real estate properties. CGT of 6% will
no longer apply.
Registration of activities as real estate business is

not necessary for you to be covered by 5-32%.
BIR has already set the limit. If you are able to sell at
least 6 real properties in one year on your individual
capacity without registration, you will be considered
as in the regular conduct of selling real properties
ordinary transactions. If you sell lower than 6 during
the calendar year, still capital transactions, without
BIR registration. So you stop at 5.
NOTE: Mere amendment of the purpose of its business does not

convert OA to CA. As long as you were initially engaged in real Estate
Business, abandonment of the assets does not convert OA to CA. On
the other hand, if you were never into real estate business, then 2
years abandonment of the property, or if the property was idle 2
years before the sale, the property if initially treated as OA can be
converted into CA (upon showing of proof).
C.
6.
Failure to exercise option or privilege to buy or sell

property
2.
Distribution of assets or shares of stock to stockholder

upon liquidation of a corporation (5-32% if individual;
30% if corporation)
3.
Readjustment of partners interest in a partnership
4.
Retirement bonds So long as taxpayer is not a dealer

of bonds. Otherwise, it is an ordinary transaction.
5.
Wash Sale
61 days sale 30 days before the sale, the seller
acquired substantially identical securities OR 30 days
after the sale, he acquired identical or substantially
40
Your reckoning point is WON 30 days before

the sale, you acquired the same or
substantially similar shares or 30 days after.
Its a wash sale. It is in effect a simulated sale.
Is the gain taxable or is the loss deductible in
this kind of transaction?
In all cases, the question whether the gain is

taxable or not, lifeblood doctrine, the gain is
taxable and the loss, being a simulated sale, is
not deductible.
Short Sale
A transaction wherein a person sells securities which he
does not own yet (provided however, that he has
ownership of the securities at the time of delivery he
has the right to transfer ownership)
Selling something you do not own yet however when
you are going to transfer the property, you should have
the right of ownership (because you cannot sell what
you do not own)
Is the gain taxable and is the loss deductible?
Special Capital Transactions

1.
YES. The gain is taxable and the loss is

deductible.
Tax Consequence:
Gains or losses from short sales of property shall be
considered as gains or losses from sales or
exchanges of capital assets. If there is a gain, the
gain is taxable. If there is a loss, the loss is
deductible.
Wash Sale vs. Short Sale
-
Both may be classified as capital transactions.
- In wash sale, the loss that may be incurred is not

deductible, whereas in short sale, the loss is
deductible.
RULE: Capital transactions, whenever a loss is

deductible, only offset it against the capital gains. Do
not cross the border of offsetting the capital losses from
ordinary income.
D.
property was with the seller the

holding period (for how many months
was it with the taxpayer whos selling
it). If the taxpayer sold it within a few
months, 12 months or less, everything
is taxable and deductible (100%). If the
property has been held on to by the
taxpayer for more than 12 months,
only 50% is taxable or 50% is
deductible.
Rules Governing Capital Transactions
1. Holding-period rule
Applies only to individual taxpayers because the capital

gain derived from capital transaction of corporate
taxpayers is always 100% recognized irrespective of the
number of months during which the property was in the
possession of the corporate taxpayer.
In the case of the 1 parcel of land, you

gained 500K and 100% of 500K, which
is 500K, is taxable because such land
was held on to for 12 months. While
nd
the 2 parcel of land, you gained 1M
but only 50% of 1M, which is 500K, is
taxable because such land was held for
more than 12 months.
The reason for such rule is that

whenever you purchase a personal
property, you are not expected to
dispose of it easily. When you dispose
of personal property more often within
1 year, you are considered to be in
trade or business but not necessarily.
So gain 100% is taxable or 50% is
taxable. Its the same way that the loss
is only 50% deductible or 100%
deductible.
- For capital transactions of corporations, always 100%
If the property has been held by the taxpayer for a period

of not more than 12 months, the gain or loss is 100%
recognized.
RATIONALE: To penalize you for selling it early (within 12
months), since capital assets are supposed to be kept for a
long period of time
If the property has been held for more than 12 months,

the gain or loss is 50% recognized.
2 parcel of Lands acquired on June 31, 2009 each having a
Cost of 1M
Gain
1) December 31, 2009

Selling price 1.5M
2) October 5, 2010
Selling price 2M
100% of 500K
500K
50% of 1M
500K
nd
Another example: Lets change the facts. The 2

parcel of land was sold for .5M. Other facts are
the same with the preceding example. What will
happen?
Change of facts:
1) Dec. 31, 2009
Selling price 1.5M
2) Oct. 5, 2010
Selling price .5M
100% of 500K
500K
50% of (500K)
(250K)
st
nd
In this case, the sale of the 2 parcel

of land constitutes a loss of (500K).
50% of (500K) is (250K). Is the (250K)
recognized loss deductible on the
capital gain of 500K from the sale of
st
the 1 parcel of land?
Not deductible against 500K

bec. not on the same year
Example: You have 2 parcels of land. Youre not

engaged in the real estate business or in any
other businesses wherein the land is used in
trade or business. You purchased such lands Jan.
ST
31, 2009 for a cost of 1M each. The 1 parcel of
land, you sold it at Dec. 31, 2009 for the selling
nd
price of 1.5M. The 2 parcel of land, you sold it
on Oct. 5, 2010 for the selling price of 2M.
41
For individual taxpayers holding capital

assets which they sell, you have to
consider the period within which the
NO.
The
loss
is
deductible but not
against such 500K. The
loss
is
deductible
against the capital gain
that has been earned in
2010 but not against the
500K because such 500K
was earned a year ago,
in 2009.
Assuming that you had no other

transactions in 2010, no other sale,
you have a loss of (250K), can you carry
forward such loss?
NO. The net capital loss

carry-over rule cannot
be applied.
The net capital loss carryover rule provides that if any

individual taxpayer sustains
in any taxable year a net
capital loss, such loss (in an
amount not in excess of the
net income for such year)
shall be treated in the
succeeding taxable year as a
loss from the sale or
exchange of a capital asset
held for not more than 12
months.
a loss from the sale or exchange of a capital

asset held for not more than 12 months.
General Rule: Expenses must be paid or incurred during the
taxable year.
Exception: Net Capital Loss Carry-Over.
REQUISITES
1. Its a capital loss. Its the excess of the loss over the
capital income or capital gains.
2. It only applies to individuals.
In this case, since the loss of

(250K) was from the sale of a
capital asset held for more
than 12 months, the net
capital loss carry-over rule
cannot be applied.
3. It only applies to capital assets held for not more than 1

year.
4. It can be carried over only to the succeeding next year
by an individual. If it remain unutilized, it will no longer be
nd
usable the 2 year succeeding.
2. Net Capital Loss Carry Over Rule

-
applies only to assets held for not more than 12 months
It only applies to capital transactions subjected to 100%

under the Holding Period rule and not to those subjected
to 50%. (Please see immediately preceding example)
5. Limited to an amount NOT in excess of the net income

in the year incurred.
You have to consider that it should not exceed the net income
from the ordinary transactions of the year when such loss is
incurred. You have to look into how much is the net income
from ordinary transactions in the year such loss is incurred.
3. Capital loss limitation rule

-
Capital losses are deductible only to the extent of capital

gains during the year on a yearly basis.
There is a wall between capital transactions and ordinary

transactions. You cannot commingle them. Capital loss can
be deductible only up to capital gain. So if you have capital
loss of 2M and capital gain of 1M. Only 1M of capital loss
should be applied to the capital gain to have a net capital
gain of zero. If you are an individual, you can carry over
the capital loss (subject to requisites), however if you are a
corporation, then you cannot carry over excess capital loss
and such will no longer be deductible.
Can capital loss limitation rule apply to corporations as

well?
YES. Such rule applies to both individual and

corporate taxpayers, EXCEPT on banks and trust
companies (because they are considered as
dealer in securities)
4. Net capital loss carry-over rule

Applies only to individual taxpayers
-
42
If any individual taxpayer sustains in any taxable

year a net capital loss, such loss (in an amount
NOT in excess of the net income for such year)
shall be treated in the succeeding taxable year as
Example: Assuming that the (250K)

net loss arose from the sale of capital
assets held for not more than 12
months. If the ordinary net income in
2010 is 250K, you can carry-over such
(250K) loss in the succeeding taxable
year. If the ordinary net income is
only 200K in 2010, you can carry-over
only 200K. If the ordinary net income
is 500K, you can carry-over 250K it
should not exceed.
TWO IMPORTANT LIMITATIONS IN NCLCO

-
Limit as to period applied only to next succeeding year
Limit as to amount applied only in an amount not

exceeding net income (from ordinary transactions) in the
year incurred
The difference between net operating loss carryover (NOLCO) and net capital loss carry-over
(NCLCO) is that:
a. NOLCO can be carried over for the succeeding 3
consecutive years but net capital loss carry-over
can be carried only to the next year.
b. NOLCO involves loss arising from ordinary
transactions while net capital loss carry-over
involves loss arising from capital transactions.
c. Net capital loss carry-over can only be availed
of by individual taxpayers while NOLCO can be
availed of both by individual and corporate

taxpayers so long as theyre registered for
business.
would result to a higher

consequently higher taxes.
-
d. NCLCO is limited as to amount while NOLCO

has no such limitation
E.
Gains Derived from Dealings in Property
This may include sale or exchange of goods or properties.

-
if the property is sold for cash: sale
If its property for another property: exchange
the property received must have a fair market value;
b.
the property disposed of must be substantially

different from the property received.
It simply means that if youre selling a property

today, Oct. 5, 2010. Youre selling it at 1M. The
property that youre selling has been donated to
you. The law says that the amount that you have
to deduct as cost in determining your income
subject to tax would be the amount as if it is in
the hands of the donor. It means at the time it
was donated. If at the time it was donated, its
value was 500K. Then you deduct it from the 1M,
so you get an income of 500K taxable.
But theres an exception to the rule. If the 500K

that youre deducting (FMV at the time of
donation) is greater than the FMV today, Oct. 5,
2010, say for example, the FMV of the property
today is 200K so you use such 200K. Lifeblood
doctrine. Why? If you use 200K, the taxable
income is 800K. [This is from last year. NO
example given by Ms. Tiu. Im not sure if this is
how the exception should be interpreted, basta
bottom line, use the lower FMV as cost. The law
is in favor of higher profits]
What type of property do you think that the

FMV is lower today than the time it was
donated?
Depreciable assets.
Example: Motor vehicles.
Basic Formula in Determining the Gain or Loss (Sale or

Exchange of Property)
Amount Received or Realized LESS Cost or
Adjusted Basis
Determination of the Cost or Adjusted Basis, Section 40B
It depends upon the manner of acquisition:
a.
If it was acquired through purchase: cost of property.
b.
If the property sold was previously acquired through

inheritance: the fair market value (FMV) of the
property at the acquisition. (acquisition in inheritance
is at the moment of death)
c.
If the property sold was acquired through donation:

the same as if it would be in the hands of the donor
(this is not necessarily the same as the FMV at the
time of donation)
Exception to the General Rule: if the basis is
greater than the FMV of the property at the time
of the donation/gift then, for the purpose of
determining loss, the basis shall be such FMV.
RATIONALE for the exception: The lesser FMV is
used. This would result to a higher profit from
such transaction since the minuend is lesser.
Higher profit results to higher taxes.
d.
If the property sold was acquired for less than an

adequate consideration in money or moneys worth:
the amount paid by the transferee for the property.
Ex. Acquisition cost = Php 10, Selling price = 1M,
Fair Market value = 500K
Profit from this sale is computed using this
formula: SP AC. Hence profit is 999,990 (1M
10). Use the acquisition cost of the property. This
43
and
The basic formula in determining the gain that you derived

from selling your real property or property, in general, is
the amount that you received as consideration for the
property. This is basically the GSP or any consideration. It
may be exchange of property or may be sale of property.
But as to how much is subject to tax, you have to
determine what the basis of the cost of the property is.
The cost of the property that youre selling or exchanging
would differ according to how you acquired your property.
Gains from Exchange of Property, Requisites

a.
income
No Gain, No Loss Recognized

General Rule: in the sale or exchange of property, the gain
is taxable and the loss is deductible.
Exception: No gain or loss shall be recognized
a) Transactions made pursuant to plan of merger or
consideration.
Otherwise known as Tax Exempt Transactions or
Transactions Solely in Kind
i.
A corporation, party to a merger or

consolidation exchanges its properties
solely for stock in a corporation, which is a
party to the merger or consolidation.
ii.
A stockholder of a corporation party to a

merger or consolidation exchanges his stock
solely for stock in another corporation,
party to that merger or consolidation.
ABC
7M
Corp.
2M
- this is analogous to transaction between

related taxpayers
b) If a person (natural or juridical), alone or together
with others or not exceeding four (4), exchanges his
property for stock in a corporation and this person
or persons, after this exchange, acquired controlling
interest over that corporation. This means that they
acquired at least 51% of the shares of stock of such
corporation.
9M
7
5 people
12 people
LAND
This is also a transaction solely in kind.
ABC
Corp.
(5M cap)
46M
7M
Change of facts: ABC Corp. has a capitalization of

2M owned equally by 5 people/stockholders.
You together with 6 others have a 7M parcel of
land. You want to invest in ABC Corp. So you
want to put in the parcel of land so youll be
given 7M worth of shares of stock. So the total
capitalization of ABC Corp. is 9M [2M + 7M]
owned by 12 people [5 + 7]. Is the gain from the
exchange of property subject to CGT? Is it
covered under the tax-free exchange?
YES, but partially.
If more than 5 people contribute, do not

automatically consider it as already not under
the exception. First, determine whether any 5 of
them meet the requisite. Use any 5 of them (first
highest 5). If at most 5 of them contribute at
least 51% of the total shares of stock then, the
gain or loss is not taxable/deductible.
In this case, the first 5 transfers amounts to 5M

(1M each individual). 5M over 9M total capital
stock is 55.55%. [5M/9M = 55.55%]. Thus, the
first 5 transfers acquired more than 51% so that
they have acquired controlling interest over the
capital stock of ABC Corp. Therefore, even if the
transfer numbers more than 5 people, so long as
the first highest 5, would acquire controlling
interest over the new capital stock of the
corporation, they (the first highest 5) will be
granted exemption from the 6% CGT. Since in
this case, the 7M is equally owned by the 7
people, so you know that the first 5 would have
5M. And 5M/9M is more than 51%. Therefore,
the gains from the exchange of property will not
be subject to the 6% CGT with respect only to
the first 5.
5M
51M
4 ( U & 3)
exch. Land
for stocks
4 people
5 persons (ABC)
9 people
LAND
46M
So that the facts would be that there are 4

people who invested 46M parcel of land in
exchange for the 46M shares in ABC Corp. So the
total capitalization is 51M and there are already
9 people owning ABC Corp.
In this case, the 5 people acquired controlling
interest over ABC Corp. because they own 46M
shares out of the total 51M shares from the
exchange of property (more than 51%), so
therefore, this case is covered by the exception,
and as such, the 46M parcel of land is exempted
from the 6% CGT and documentary stamp tax.
*Note: maximum of 5 persons, not necessarily 5
*Note: at least 51%, not just more than 50%. If
50.5% then it did not meet the requisite.
44
7 people
U&6
Instances where gain is recognized and loss is not recognized:

o
1. Wash sale
2. Illegal transactions
3. Those transactions involving related taxpayers
4. Transactions not solely in kind
ACCOUNTING PERIODS
METHODS OF ACCOUNTING
TAX RETURNS AND TAX PAYMENTS
I.
HOLDING
PERIOD
NONDEDUCTIBI
LITY
OF
CAPITAL
LOSSES
NET
CAPITAL
LOSS
CARRY
OVER
It means to say that transactions not

solely in kind is when the transfer
involves cash. If cash, in addition to
property, is transferred, in exchange
for shares, its no longer exchange
solely in kind, therefore, no exemption
from CGT.
INDIVIDUAL
CORPORATION
The percentages of gain or

loss to be taken into account
shall be the ff:
a.
100% - if the capital
assets have been
held for 12 mos or
less; and
b. 50% - if the capital
asset has been held
for more than 12
mos.
Capital losses are allowed
only to the extent of the
capital gain; hence, the net
capital
loss
is
NOT
deductible
Capital gains and losses

are 100% recognized.
(There is no holding
period)
ALLOWED
The net capital loss (in an
amount not in excess of the
taxable
income
before
personal exemption for such
year) shall be treated in the
succeeding year (but not
beyond 12 months) as a
deduction as short-term
capital loss (at 100%) from
the net capital gains.
ACCOUNTING PERIODS
1.
a.
Calendar year January 1 to December 31
b.
Fiscal Year an accounting period of 12 months

ending on the last day of any month other than
December
(starting any day of the year and
ending 365/366 days after)
2.
Taxable Year
-
3.
Capital losses are allowed

to the extent of the
capital gains; hence, the
net capital loss is NOT
deductible.
Except:
If any domestic bank or
trust
company,
a
substantial part of whose
business is the receipt of
deposits, sells any bond,
debenture,
note
or
certificate
or
other
evidence of indebtedness
issued by any corporation
(including one issued by a
government or political
subdivision)
NOT ALLOWED
4.
II.
The calendar or the fiscal year ending during

such calendar year, upon the basis of which the
net income is computed.
When Calendar Year is Used

a.
If the taxpayer chooses the calendar year
b.
If the taxpayer has no annual accounting period
c.
If the taxpayer does not keep its books
d.
If the taxpayer is an individual (if individual, no

choice. It would only be Calendar Year)
When the Commissioner is Authorized to Terminate

the Taxable Period (the CIR can implement Jeopardy
assessment)
a.
When the taxpayer retired form business subject

to tax
b.
When he intends to leave the Philippines
c.
When he removes his property from the

Philippines
d.
When he hides or conceal his property
e.
When he performs any act tending to obstruct

the proceedings for the collection of the tax for
the past or current quarter or year
f.
When he renders the collection of the tax totally

or partly ineffective
METHODS OF ACCOUNTING
1.
45
Two Kinds
Two Kinds
a.
Calendar year January 1 to December 31
b.
Fiscal Year an accounting period of 12 months

ending on the last day of any month other than
December
(starting any day of the year and
ending 365/366 days after)
d.
NOTE: Only NRA-NETB are not required to file

returns. They are subject to final withholding tax. Tax with finality
hence, no need to file returns.
2.
2.
3.
4.
III.
Taxable Year
Instances when Individuals are Not Required to File

Returns
a.
An individual whose gross income does not

exceed his total personal and additional
exemptions. However, a Filipino Citizen and any
alien individual engaged in business or practice
of profession within the Philippines shall file an
income tax return, regardless of the amount of
gross income.
b.
An individual with respect to pure compensation

income derived from sources within the
Philippines, the income on tax on which has
been correctly withheld.
The calendar or the fiscal year ending during

such calendar year, upon the basis of which the
net income is computed.
When Calendar Year is Used

a.
If the taxpayer chooses the calendar year
b.
If the taxpayer has no annual accounting period
c.
If the taxpayer does not keep its books
d.
If the taxpayer is an individual (if individual, no

choice. It would only be Calendar Year)
a.
When the taxpayer retired form business subject

to tax
b.
When he intends to leave the Philippines
c.
When he removes his property from the

Philippines
d.
When he hides or conceal his property
e.
When he performs any act tending to obstruct

the proceedings for the collection of the tax for
the past or current quarter or year
f.
When he renders the collection of the tax totally

or partly ineffective
Individuals Required to File Returns
General Rule:
46
HOWEVER, an individual deriving compensation

concurrently from two or more employers at any
time during the taxable year shall file an income
tax return. Further, an individual whose pure
compensation income derived from sources
within the Philippines exceeds P60,000 shall also
file an income tax return.
When the Commissioner is Authorized to Terminate

the Taxable Period (the CIR can implement Jeopardy
assessment)
RETURNS AND PAYMENT OF TAX

1.
Every non-resident alien engaged in trade or

business or in the exercise of a profession in the
Philippines
a.
Every Filipino Citizen residing in the Philippines
b.
Every Filipino citizen residing outside the

Philippines, on his income from sources within
the Philippines
c.
Every alien residing in the Philippines, on income

derive for sources within the Philippines
3.
c.
An individual whose sole income has been

subjected to a final withholding tax.
d.
An individual who is exempt from income tax

(i.e. minimum wage-earners)
Substituted Filing of Income Tax Returns

Individual
taxpayers
receiving
purely
compensation, regardless of amount, from only
one employer in the Philippines for the calendar
year, the income tax of which has been withheld
correctly by the employer (tax due = tax withheld)
shall not be required to file the Individual Income
Tax Return.
Requisites:
1. Employer-Employee relationship (you are an
employee)
2. One employer
3. Taxes correctly withheld
A senior citizen who is a compensation income
earner deriving from only one employer an annual
taxable income exceeding the poverty level or the
amount determined by the NEDA thru the NSCB
on a particular year, but whose income had been
subjected to the withholding tax on
compensation, shall, although not exempt from
income tax, be entitled to the substituted filing of

income tax return under Revenue Regulations No.
2-98, as amended.
4.
of income but the returns so filed shall be

consolidated by the BIR for the purposes of
verification foe the taxable year.
Individuals Not Qualified for Substituted Filing
Return of parent to include the income of children
a.
Individuals deriving compensation form 2 or

more employers concurrently or successively at
anytime during the taxable year (it includes
changing jobs within the year)
b.
Employees deriving compensation income,

regardless of the amount, whether from a single
or several employers during the calendar year,
the income tax of which has not been withheld
correctly, resulting to collectible or refundable
return.
The income of unmarried minors derived from

property received form a living parent shall be
included in the return of the parent, except when
the donors tax has been paid on such property or
when the transfer of such property is exempt from
donors tax.
c.
6.
Self-employed Individuals
Every individual subject to income tax, who is
receiving self-employment income, whether it
constitutes the sole source of his income or in
combination with salaries, wages and other fixed
or determinable income, shall make and file a
declaration of his estimated income for the
current taxable year on or before April 15 of the
same taxable year.
Employees whose gross compensation income

do not exceed the statutory minimum wage or P
5,000 per month (P60,000 a year), whichever is
higher, including employees of the government
of the Philippines, or any of its political
subdivisions, agencies or instrumentalities, with
salary grades 1 to 3.
Non-resident Filipino citizens with respect to

income from without the Philippines and nonresident aliens not engaged in trade or business in
the Philippines are not required to render a
declaration of estimate income tax.
The statutory minimum wage of minimum wage

earners, including overtime pay, holiday pay,
night differential and hazard pay, are exempt
from income tax.
7.
d.
Individuals deriving other non-business, nonprofessional-related income in addition to

compensation income not otherwise subject to
final tax.
e.
Individuals receiving purely compensation

income from a single employer, although the
income tax of which has been correctly withheld,
but whose spouse fails under a), b), c) and d)
above.
f.
Non-resident aliens engaged in trade or business

in the Phils deriving purely compensation
income, or compensation income and other nonbusiness, non-professional-related income.
8.
When to File Returns

a.
On or before April 15 of each year covering

income from the preceding taxable year
b.
Thirty (30) days from each transaction and a final

consolidated return on or before April 15
covering all stock transactions of the preceding
year in case of sale or exchange of stock not
traded through a local stock exchange
c.
Thirty (30) days following each sale or other

disposition in case of sale or disposition or real
property.
Payment of Estimated Income Tax by Individuals

Four (4) installments:
Employees not qualified for substituted filing but are

required to file the Income Tax Return shall file the
same not later than April 15 of the year immediately
following the taxable year. Provided, that employees
with previous/successive employer/s within the
taxable year shall furnish their new employer with BIR
Form No. 2316 issued by the previous employer/s.
5.
Husband and Wife

Married individuals, whether citizens, residents or
non-resident aliens, who do not derive income
purely from compensation, shall file a return for the
taxable year to include the income of both spouses.
However, if it is impracticable for the spouses to file
one return, each spouse, may file a separate return
47
Estimated Tax the amount which the individual

declared as income tax in his final adjusted and
annual income tax return for the preceding year
minus the sum of the credits allowed against said
tax. If, during the current taxable year, the taxpayer
reasonably expects to pay a bigger income tax, he
shall file an amended declaration during any interval
of installment payment dates.
a.
Quarterly income tax return; and
The tax computed shall be decreased by the

amount of tax previously paid or assessed during
the preceding quarters and shall be paid not
later than 45 days from the close of each of the
9.
first 3 quarters of the taxable year. Whether

calendar or fiscal year
- only if income tax due exceeds 2,000 and applies

only to INDIVIDUALS and not to corporations
b.
Final or adjusted return
- 1 payment on/or before April 15
If the sum of the quarterly tax payments made

during the said taxable year is not equal to the
total tax due on the entire taxable income of
that year, the corporation shall either:
- 2 payment on/or before July 15
i.
Pay the balance of tax still due; or
ii.
Carry-over the excess credit; or
iii.
Be credited or refunded with the

excess amount paid.
Return and Payment of Estimated Income Tax by

Corporations
Every corporation subject to income tax,
except foreign corporations not engaged in
trade or business in the Phils, shall render in
duplicate, a true and accurate:
st
nd
b.
Payment of Capital Gains Tax
It shall be paid on the date the return is filed. In

case the taxpayer elects and is qualified to
report the gain by installments, the tax due from
each installment shall be paid within the 30 days
from the receipts of such payments.
Every corporation deriving capital gains from the
sale or exchange of shares of stock not traded
through a local stock exchange shall file a return
within thirty (30) days after each transaction and
a final consolidated return of all transactions
th
during the taxable year on or before the 15 day
th
of the 4 month following the close of the
taxable year.
- PAY AS YOU FILE
A. Quarterly income tax return; and

-
The tax computed shall be decreased by the

amount of tax previously paid or assessed during
the preceding quarters and shall be paid not
later than 60 days from the close of each of the
first 3 quarters of the taxable year, whether
calendar or fiscal
c.
Where to file Returns

a.
Authorized agent bank
b.
Revenue district officer
c.
Collection agent
B. Final or adjusted return
d.
If the sum of the quarterly tax payments made

during the said taxable year is not equal to the
total tax due on the entire taxable income of
that year, the corporation shall either:
Duly-authorized treasurer of the city or

municipality in which such person has
his legal residence or principal place of
business in the Philippines
e.
Office of the CIR if there be no legal

residence or place of business in the
Philippines.
i.
Pay the balance of tax still due; or
ii.
Carry-over the excess credit; or
iii.
Be credited or refunded with the

excess amount paid.
- END -
NOTE: if individuals file quarterly returns 45 days after end of

quarter (April 15, August 15, November 15 and April 15 (annual ITR))
If Corporation file quarterly returns 60 days after end of
quarter
a.
Installment Payments
A taxpayer, other than a corporation, may opt to

pay the tax in 2 equal installments when the tax
due is in excess of Php 2,000. In such cases, the
first installment shall be paid at the time the
return is filed and the second installment on or
before July 15 following the close of the calendar
year.
48

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EXEMPTIONS AND DEDUCTIONS FROM GROSS

DEDUCTIONS vs. EXCLUSIONS

his cost of doing

Can be claimed by all

Can be claimed only by

DEDUCTION is an outflow of wealth.

Pertains to the computation

Pertain to computation of Net

Something received or earned

Something spent or paid in

Flow of wealth to the

The amounts which the law

It does not fall within

Note that deductions are outflow

BASIC PRINCIPLES GOVERNING DEDUCTIONS

(1) The taxpayer seeking a deduction must point to some

KINDS OF ALLOWABLE DEDUCTIONS

OPTIONAL STANDARD DEDUCTION

DEDUCTIONS vs. EXEMPTIONS

Default is itemized deduction. In lieu of the itemized

If 40% OSD is higher than ID, then choose OSD in

PERSONAL EXPEMPTIONS are arbitrary amounts allowed for

Who can avail?

Citizens who are purely engaged in trade or

Citizens who are mixed earners both

Resident aliens but only those expenses incurred

TAXATION NOTES - FINALS| 404 |marukoi.mhealler

- Only DC, RFC can claim OSD

Individual taxpayer earning purely compensation

Non Resident Aliens;

OSD is available only to citizens or resident

The standard deduction is OPTIONAL (i.e. Unless

Such election, when made by a qualified

The amount of standard deduction is limited to

An individual taxpayer who is entitled to and

PERSONAL BASIC EXEMPTIONS AND ADDITIONAL EXEMPTIONS

Individuals entitled to avail of PBE and AE are the

Resident citizens of the Philippines;

Non-resident citizens with respect only to

Resident aliens with respect only to income

Non-resident aliens engaged in trade, business

Reciprocity means that the foreign country

If US grants 75K as exemptions, the

Individuals entitled to avail of IDs are the following:

Citizens of the Philippines (RC and NRC);

Non-Resident Aliens Engaged in Trade or

Estates and Trusts

NRA-NETB are taxed on the basis of their gross

As to corporations, only DC and RFC may claim

Estates and Trusts

Personal Basic Exemption. Each individual is allowed a

married individuals where only one of the spouses is

PREMIUMS ON HEALTH AND HOSPITAL INSURANCE

Additional Exemption for Dependents. There is allowed an

The additional exemption for dependents shall be

In the case of legally separated spouses, the

The total amount of additional exemptions that may

Dependent means a legitimate, illegitimate or legally

Conditions for a child to be considered a dependent:

Chiefly dependent upon the taxpayer for

Living with the taxpayer;

Not more than twenty-one (21) years of

Not gainfully employed or if such