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TAXATION I – INCOME TAXATION

TITLE I. GENERAL PROVISIONS
SECTION I. BASIS OF INCOME TAXATION: Basis of Government’s right to impose tax on income:
Partnership theory

SECTION II. DEFINITION
1. Income – all wealth which flows into the taxpayer other than a mere return of capital. It includes the
forms of income specifically described as gains and profits including gains derived from the sale or
other disposition of capital assets
- a sale does not necessarily mean income.
- it includes both taxable and non-taxable income.

2. Capital – denotes the original investment or fund used in order to generate earnings (income).
3. Gross Receipts – receipts which may constitute capital as well as income

4. Revenue – refers to all funds/income derived by the government whether from tax or other sources.
Revenue is to the government as income is to private persons or corporations. (Commissioner vs.
BOAC, 149 SCRA 395)

SECTION III. SOURCES OF INCOME
1. Property
2. Labor (Service)
3. Sale/exchange of capital asset and activity

 For tax purposes, income from whatever source forms part of the taxpayer’s income.

Examples:
1. Treasure found or punitive damages representing profits loss.
2. Amount received by mistake
3. Cancellation of the taxpayer’s indebtedness. (Sec. 50, RR. No.2)
a) Payment of income
b) Gift
c) Capital transaction
4. Payment of usurious interest
5. Illegal gains - “Moral turpitude is not a touchstone of taxability.” (P. Hsbough Milk Co., 26 T.C. 707)
6. Tax refund
7. Bad debt recovery

SECTION IV. CLASSIFICATIONS OF INCOME SUBJECT TO PHILIPPINE INCOME
TAX

1. Compensation Income
2. Professional Income
3. Business Income
4. Passive Income
5. Capital gains
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SECTION V. TESTS TO DETERMINE IF INCOME IS TAXABLE
1. DEFINITION: Taxable Income – means the pertinent items of gross income specified in the Tax
Code, less the deductions and/or personal and additional exemptions,
if any, authorized for such types of income by the Tax Code or
other special laws. (Sec. 31, NIRC of 1997)

2. REQUISITES FOR INCOME TO BE TAXABLE:
1. Existence of income - There must be gain or profit, whether in cash or its equivalent.
2. Realization of income - The gain must be realized or received. Thus, not all economic gains
constitute taxable income.
3. Recognition of Income - The gain must not be excluded by law or treaty from taxation.

DETAILS OF REQUISITES FOR INCOME TO BE TAXABLE:
1. Existence of Income - There must be gain or profit, whether in cash or its equivalent.
2. Realization of Income - The gain must be realized or received. Thus, not all economic gains
constitute taxable income.

GENERAL RULE:
 A mere increase in the value of property without actual realization, either through sale or other
disposition is not taxable.
 A mere expectation of profits is not an income.

EXCEPTION:
 Economic benefit principle (BIR Ruling No. 029 – 98, March 19, 1998, Revenue
Memorandum Circular 70-2010)

- receipt here includes constructive receipt. (Doctrine of Constructive Receipt of Income)

- Income which is credited to the account of or set apart for a taxpayer and which may be
drawn upon by him at any time is subject to tax for the year during which so credited or
set apart, although not then actually reduced to possession.

- To constitute receipt in such a case, the income must be credited to the taxpayer without
any substantial limitation or restriction as to the time or manner of payment or condition
upon which payment is to be made. [Section 52, Revenue Regulations 2]

Example: Partner’s distributive share in the profits of a general professional
partnership is regarded as received by the partner, although not yet distributed.

 TESTS TO DETERMINE WHETHER INCOME IS EARNED:

a. Realization test (BIR Ruling 091-99, 8 July 1999);

b.Claim of right doctrine or doctrine of ownership, command or control (CIR vs.
Javier,199SCRA824);

c. Economic benefit test or doctrine of proprietary interest (BIR Ruling 123-97, 10 Nov.
1997 and BIR Ruling 029-98, 19 Mar. 1998);

d. Severance test

e. All events test
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3. Recognition of Income - The gain must not be excluded by law or treaty from taxation.

 METHODS OF ACCOUNTING (RECOGNITION OF INCOME)

A.) CASH METHOD - recognition of income and expense dependent on inflow or outflow of
cash (meaning, you recognize the income when you actually receive the cash payment for the
sale, and you recognize the expense when you actually pay cash for the expense)

B.) ACCRUAL METHOD - method under which income, gains and profits are included in
gross income when earned whether received or not, and expenses are allowed as deductions
when incurred, although not yet paid. It is the right to receive and not the actual receipt that
determines the inclusion of the amount in gross income Case: CIR vs. Isabela Cultural Corp,
12 Feb. 2007

C.) SPECIAL METHODS

1. INSTALLMENT

i. Sales of dealers in personal property
• Under Rules and Regulations (R&R) prescribed by the Sec. of Finance,
upon recommendation of the Commissioner: a person who regularly sells or
otherwise disposes of personal property on the installment plan may return as
income therefrom in any taxable year that proportion of the installment
payments actually received in that year, which the gross profit realized or to
be realized when payment is completed, bears to the contract price.

Example: Sale in 2011 payable in 2 equal annual installments. How to compute
for income: Contract Price/ Installments

Receivable P100,000
Cost 75,000
(GP) P 25,000

 Installments payable in 2 equal annual installments
GP/Contract Price ratio = 25T/100T = 25%
Collections in 2011 = P50T
Income for 2011 = P50T x 25% = P12,500

ii. Sales of realty and casual sales of personalty
a) in cases of:

(i) casual sale or other casual disposition of personal property (other than
inventory on hand of the taxpayer at the close of the taxable year) for a
price > P1,000, or

(ii) sale or other disposition of real property, if in either case the initial
payments do not exceed 25% of the selling price

- income may be recognized same as in sales of dealer in personal
property in (1).

iii. Sales of real property considered as capital asset by individuals
 Individual who sells of disposes of real property, considered as capital
asset & is otherwise qualified to report the gain under (2) above may pay the
capital gains tax in installments under R&R to be promulgated by the Sec. of
Finance, upon recommendation of the Commissioner

2. DEFERRED PAYMENT

3. LONG-TERM CONSTRUCTION CONTRACT – PERCENTAGE OF
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COMPLETION
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4. FARMING

SECTION VI. INCOME TAX IN GENERAL
1. Income tax – a tax on all yearly profits arising from property, profession, trade or offices or as a tax on
person’s income, emoluments, profits and the like.

2. Nature of Philippine Income Tax:

1. It is a/an
a. direct tax
b. progressive tax (mainly)
c. excise tax
2. It is based on income, either gross or net, realized in one taxable year.
3. It is comprehensive.
4. It uses a semi-schedular or semi-global tax system.

3. Types of Philippine Income Tax

1. Net income tax
a. Graduated income tax on individuals
b. Normal corporate income tax on corporations
2. Gross income tax
a. Minimum corporate income tax of 2% of the gross income
b. Improperly Accumulated Earnings tax of 10% on improperly accumulated earnings
c. Optional Corporate Income Tax of 15% on Gross Income.
d. Gross Philippine Billings Tax
e. Gross onshore income Tax
f. Final withholding tax on passive income
g. Capital gains tax
3. Fringe benefit tax
4. Branch profit remittance tax
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Those not residing in the Philippines. INDIVIDUAL TAXPAYERS KINDS OF INDIVIDUAL TAXPAYERS 1) Citizens a) Resident citizens . NOTA BENE: For purposes of income tax. b) Non-resident citizens . TITLE II. 4. However. . Income taxpayers. for 183 days or more by the end of the year. in order to qualify as a non-resident citizen.) A citizen who shall have stayed outside the Phils. 3. 5. either as immigrant or for employment or on permanent basis. and 3. WHO IS A TAXPAYER? Under Sec 22(N). an overseas contract worker who is a Filipino citizen and deriving income from abroad is deemed a non- resident citizen and therefore taxed only on income sourced within the 5 Philippines. are classified as follows: 2.) A citizen who has been previously considered as non-resident citizen and who arrives in the Phils. the worker Page must be physically present abroad most of the time or at least 183 days (continuous or not) during the calendar year. who leaves the country during the taxable year to reside abroad.) One who establishes to the satisfaction of the Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with a definite intention to reside therein. or both. KINDS OF TAXPAYERS A.) A citizen of the Phils. Source of income (Source Principle). with distinction based on the amount of income subject to tax. Residence of the taxpayer (Residence Principle). A “non-resident citizens” means 1.Those residing in the Philippines unless he qualifies as a non- resident under Sec. Nationality (Citizenship Principle) 2. SITUS OF INCOME TAXATION (Comprehensive Tax Situs)  SITUS OF INCOME TAXATION: IT IS DETERMINED BY THE: 1. 2. or the applicable tax rates. DETAILS OF SITUS OF INCOME TAXATION: 1 TAXPAYER. a taxpayer is any person subject to [income] tax. 22 (E) of the NIRC. NATIONALITY AND RESIDENCE 2 GENERAL CLASSIFICATION OF TAXPAYERS 1. who works and derive from abroad and whose employment thereat requires him to be physically present abroad “most of the time” (183 days) during the taxable year.) A citizen of the Phils. at any time during the taxable year to reside permanently in the country.

. or under its laws. a. and who is not a citizen thereof.Those residing in the Philippines though not a citizen thereof. CORPORATE TAXPAYERS KINDS OF CORPORATE TAXPAYERS 1) Domestic corporations . and who are not mere transients or sojourners. Resident . b) Non-resident aliens .Those who are actually present in the Phils.Those created or organized in the Phils.Those foreign corporation not engaged in trade or business within the Phils. 2) Aliens a) Resident aliens . . 6 Page . For an aggregate period of more than 180 days during the calendar year. organized or existing under any laws other than those of the Phils. (1) Engaged in trade or business – comes and stays in the Phils. 2) Foreign corporations .Those not residing in the Phils.Those foreign corporation engaged in trade or business within the Phils.Those created.includes performance of personal services within the Phils. Non-resident . b. (2) Not engaged in trade or business B.

22 (C ) Foreign Corporations Resident Foreign Corporations Sec. 3. 22( DD) and Regional Operating Headquarters Sec. 22(E) Residents of the Philippines (5%-34%) Sec. TABLE: SUMMARY OF SITUS OF INCOME IN RELATION TO TAXPAYER’S NATIONALITY AND RESIDENCE. 22(D) Non-resident Sec. 22 (G) Not engaged in Trade or Business in the Philippines (25% of GI) Individuals Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies (15% of GI) Special classes of Individual Employed by Offshore Banking Units Individuals (15% of GI) Individual Employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines (15% of GI) Estates and Trusts Domestic Corporations (30%) Sec. lessors or distributors Non-resident owners or lessors of vessels chartered by Philippine Nationals Non-resident lessors of aircraft. machinery and other equipment 7 Page .: Primary Classification Sub-Classification/s Citizens of the Residents of the Philippines (5%-34%) Philippines Not residents of the Philippines (5%-34%) Sec. 22 (H) Sec. 22 (EE) of Multinational Companies Non-resident cinematographic film owners. 22 (I) Proprietary educational institutions and non-profit hospitals Domestic Depositary Bank (Foreign Currency Deposit Units) Resident international carriers Offshore Banking Units Corporations Resident Depositary Bank (Foreign Currency Deposit Units) Special Classes of Corporations Regional or Area Headquarters Sec. 22(F) Engaged in Trade or Business Aliens Not Residents of the in the Philippines (5%-34%) Philippines Sec.

gains. Inc. notes. British Overseas Airways Corporation (BOAC). 153793. v. 579.R. profits and income from sale of real property as well as from personal property outside the Philippines 3.R. deposits and the like earned abroad . No. Without the Philippines . Province of Camarines Norte. Collector of Internal Revenue. notes. transaction tax EXCLUSIONS/EXEMPTIONS 8 Page . 2006. as well as from personal property purchased in the Philippines. Source Principle In general. Ltd. R.gains. Baier-Nickel. etc. 121 Phil.interest on bonds. 6 March 1991.rentals and royalties from property located within the Philippines . passive income.transportation or other services rendered partly within and partly outside . income may be earned from: 1. No..compensation for labor/service derived from Philippine sources (Alexander Howden & Co. Ltd. or vice versa Pertinent Items Subject to Final Tax (i. No. G. G.rentals and royalties from property located outside the Philippines . 149 SCRA 395. Japan Airlines. G. L-18349. The Shell Company of the Phils. 30 July 1966) 2. .compensation for labor/service rendered outside the Philippines .dividends declared by non-resident foreign corporations ... 13 SCRA 601 (1965).e. vs. 3. August 29. Within the Philippines . Commissioner of Internal Revenue v. deposits and the like earned in the Philippines (residence of debtor) . Partly within and partly without the Philippines . profits and income from sale of real property located in the Phils. The Municipality of Jose Panganiban. (CIR vs.interest on bonds.dividends declared by domestic corporations .the sale of personal property produced within the sold outside. Commissioner of Internal Revenue v. 60714. capital gains.

Income received or earned but is not taxable as income because it is exempted by law or by treaty. AND DEDUCTIONS. It is a final settlement of the income tax due on said income. -Income of individuals may either be subject to graduated income tax rates or to preferential tax rates. TITLE III. ALLOWABLE ITEMIZED DEDUCTIONS AGAINST BUSINESS INCOME/CAPITAL GAINS OR OTHER TYPES OF INCOME 2. 9 Page . PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE-ONLY FOR INDIVIDUAL TP =INCOME AFTER DEDUCTIONS LESS: PERSONAL EXEMPTIONS – ONLY FOR INDIVIDUAL TP =TAXABLE INCOME DEFINITION:  Gross Income – Means all income derived from whatever source x x x (Sec. 40% OPTIONAL STANDARD DEDUCTION IN LIEN OF ITEMIZED DEDUCTIONS 3. FINAL TAX.GROSS INCOME WITH EXCLUSIONS/EXEMPTIONS. EXCLUSIONS FROM GROSS INCOME = ITEMS OF TAXABLE GROSS INCOME LESS: TAXABLE GROSS INCOME SUBJECTED TO FINAL TAXES = TAXABLE GROSS INCOME BEFORE ALLOWABLE DEDUCTIONS LESS: ALLOWABLE DEDUCTIONS 1. EXEMPT ACTIVITIES OF EXEMPT CORPORATIONS/ENTITIES 2. FORMULA: ITEMS OF GROSS INCOME LESS: 1. 32)  Income subject to final tax – Income collected through the withholding tax system.  Exclusions .

retirement gratuities. emoluments. DA-233-2007. Any amount received by an employee or by his heirs from the employer due to death. SECTION 2. moral. wages. Agricultural labor paid entirely in products of the farm where the labor is performed. Sec. Actual. fees. 2007.resident citizens or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions. Sec. 17 Apr. 4. 32(B)(6)(a) 2. 2009). -Includes salaries. Benefits received from the GSIS Act of 1937. 32(B)(6)(b) 3. EXCLUDED/EXEMPT 1. tips amd gratuities. and the retirement gratuity received by government officials and employees.LESS A.DEFINITION AND COMPOSITION Compensation Income .  The benefit plan must be approved by the BIR. bonuses. Sec. pensions. other than compensation income. private or public. it does not include compensation for services rendered by an independent contractor and income derived from professional partnership. retirement. DA-018-2008. such as retrenchment. fixed or variable allowances (BIR Ruling No. Sec. or iii. or ii. BIR Ruling No. Social security benefits. BIR Ruling No. Services by a citizen or resident of the Philippines for a foreign government of an international organization. Payment of benefits under the law of the United States administered by the United States Veterans Administration. 16 Jan. -However. or iv. Retirement benefits received under Republic Act 7641 and those received by officials and employees of private firms under a reasonable private benefit plan maintained by the employer which meets the following requirements:  The plan must be reasonable.Payment for services. and  The retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer. honoraria. 15 Dec. 78 (A) 10 9. fringe benefits.is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money. is considered as having been earned at the place where the activity or service was performed. separation pay. sickness or other physical disability or for any cause beyond the control of said employee. Sec. redundancy or cessation of business. Compensation Income shall not include remuneration paid for: i. at the time of separation. COLA. had rendered less than ten (10) years of service and/or is below fifty (50) years of age.COMPENSATION INCOME SECTION 1. hazard and emergency pay. commissions. exemplary and nominal damages in connection with a final judgment or compromise Page agreement arising out of or related to an employer-employee relationship. 32(B)(6)(f) 8. . 2008. Casual labor not in the course of the employer’s trade or business. 32(B)(6)(d) 6. Payment of benefits made under the Social Security System. proceeds from profit-sharing. Sec. CHAPTER 1. Domestic service in a private home. etc. 5.  The retiring official must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement. overtime. 32(B)(6)(e) 7. pensions and other similar benefits received by residents or non. Amounts received by reason of involuntary separation will be exempt from income tax even if the employee. DA-778-2009. PERA. .

BIR Ruling 019-02: To be considered “de minimis” medical allowance. Laundry allowance of P300 per month.000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees. Per month amounting to not more than P1. 32(B)(1) 11. Sec. 32(B)(5) 14. the ff. ii. The amount actually given and actually spent shall not exceed P10.Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month. f. on account of illness. h. Amounts received by the insured as a return of premium Sec. Flowers. birth of a baby. privileges. contentment or efficiency of his employees. (R. Medical benefits given to the employees by the employer not exceeding P10. 32(B)(2) 12. Facilities or privileges are of relatively small value which are offered or furnished by the employer merely as a means of promoting the health.000. Regs.000 per employee per annum. No. for length of service or safety achievement.g. However. 32(B)(4) 13. and – removed i. Income exempt under any treaty obligation binding upon the Philippine government Sec. etc. c. the excess shall be taxable to the employee if such excess is beyond ₱ 82. However. j.000 of other benefits (#17). e. 15. conditions must concur: i.000 per annum. The amount given to the EE shall be for his own medical expense.R. 2. books or similar items given to employees under special circumstances. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees. effective 1 January 2012) e. (Convenience of the Employer Rule) (Revenue Audit Memo No. interest payments agreed under the policy for the amounts which are held by the insured will be included in the gross income. which must be in the form of a tangible personal property other than cash or gift certificate. b. e. 23 April 1987) De minimis benefits [Sec. 2-98 as amended by Rev. goodwill. Compensation for injuries or sickness Sec. [as enumerated in RR 03-98. marriage.000 in any given calendar year. Rev. (R. as amended by RR 10- 00] – removed (R. iii.Company picnics and sports tournaments in the Philippines and are participated exclusively by employees. Rice subsidy of P1500 per month or one sack of 50 kg.R. d. fruits. if the employer pays more Page than the ceilings.500 granted by an employer to his employees (RR 5-2008). The EE must fully substantiate with or in his name the medical allowance to be granted. 5-2011) 11 The amount of de minimis benefits conforming to the ceilings herein prescribed shall not be considered in determining the ₱ 82. 10. 3-2015) . and facilities which are given to employees for the exclusive benefit or convenience of the employer. 8-2000] a. Employee achievement awards. with an annual monetary value not exceeding P10. Benefits. Regs. 1-87.78. Life insurance proceeds paid to the heirs or beneficiaries upon death of the employee.Uniforms given to employees by the employer not exceeding P5.g. Christmas and major anniversary celebrations not exceeding P5. 8-2012.R. Daily meal allowance for overtime work not exceeding twenty-five (25%) of the basic minimum wage. g.1 (A) (3).000 per annum. f.

9504. (R. overtime pay. hazard pay. 27 July 2009) 12 Page . SSS. Thirteenth (13th) month pay and other benefits such as Christmas bonus. 32(B)(7)(f) – RMC 53-2011. GSIS. 6 of R. RMC 27-2011 18. 32(B)(7)(e) * Revenue Regulation 3-2015 19.A. if the employee is required to account/liquidate for said expenses. 9504) 20. The excess of actual expenses over advances made shall be treated as taxable income if such amount is not returned to the employer. gifts and other benefits of similar nature to the extent that the total amount thereof does not exceed P82. productivity incentive bonus. 2707) 21.A. Sec. Tax exemption of allowances paid to military personnel. loyalty awards. Anyone earning at least the minimum wage (including holiday pay. and night shift differential) in his/her region and has no other reportable income will not pay income tax. Tax exemption of qualified senior citizen – provided he qualifies to be a minimum wage earner in accordance with R.A. 9994. 17. Advances or reimbursements for travelling. 22. representation and other ordinary and necessary expenses incurred by the employee in the performance of his duties. Medicare and Pag-ibig contributions and union dues of individual employees.A. Salaries and stipends in dollars received by non-Filipino citizens serving as staff of the IRRI and the Ford Foundation (R. 16.000. (Sec. Sec.

Not taxable a. suspend. Sec. transfer. d) Residential property purchased by ER and ownership is transferred to EE as his usual place of residence. (Labor Code) Supervisory employees . Expenditures supported by receipts in the name of the employer and expenditure that do not partake the nature of a personal expense attributable to the employee b.those who. Sec. c) Temporary housing for an employee for 3 months or less. or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees). recall. B. EXPENSE ACCOUNT Taxable a. Not taxable a) Housing privilege of military officials of the AFP located inside or near the military camps. e) Residential property transferred to employee at less than employer’s acquisition cost. assign or discipline employees. Representation and Transportation Allowances (RATA) 13 Page . Expenses incurred by the employee which are paid or reimbursed by his employer not supported by receipts in the name of the employer b. ITMES SUBJECT TO FRINGE BENEFIT TAX 1. DEFINITION Fringe Benefits Tax Fringe benefits – refer to any good. discharge. in the interest of the employer. (Labor Code) II. 2. b) A housing unit which is situated inside or at most 50 m from the perimeter of the business premises. HOUSING Taxable a) Lease of residential property for the use of the employee as his usual place of residence b) Residential Property owned by employer and assigned to employee as his usual place of residenc c) Residential property purchased by employer on installment basis for the use of employer as his usual place of residence. lay-off. SUBJECT TO FINAL TAX – [FRINGE BENEFIT TAX SINCE THIS IS A COMPENSATION INCOME AS A CONSEQUENCE OF EMPLOYER-EMPLOYEE RELATIONSHIP] I. effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. 33(B) Rank and file employees shall mean all employees who are holding neither managerial nor supervisory position. Personal expense of the employee which are paid or reimbursed by his employer w/n supported by receipts in the name of the employer c. Household expenses of the employee borne by the employer. service. 22 (AA) Managerial employee – is one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire.

Educational Assistance granted to the dependents of the employee through a competitive scheme under a scholarship program of the company. 3. 14 Page . c) shoulders a portion of the amount of the purchase price of a motor vehicle in the name of the employee d) Purchases the car on installment in the name of the employee. a. LIFE OR HEALTH INSURANCE AND OTHER NON-LIFE INSURANCE PREMIUMS OR SIMILAR AMOUNTS IN EXCESS OF WHAT THE LAW ALLOWS. EXPENSES FOR FOREIGN TRAVEL. However. the entire cost will be considered taxable fringe benefit. EXCEPT: a) Contribution of the employer for the benefits of the employee pursuant to existing laws. b) provides the employee with cash for the purchase of a motor vehicle in the name of the employee. 4. 7. b) The cost of premium borne by the employer for the group insurance of his employees. documents and evidence showing the business purpose of the employees’ travel must be presented otherwise. delivery service and other non-personal uses. EXCEPT Where the expenses for foreign travel paid by the employer for the employee are for the purpose of attending business meeting or convention. and b) Cost of economy or business class airline ticket. MOTOR VEHICLE Taxable when employer: a) Purchase the motor vehicle in the name of the employee. if the ticket is a first class one. EDUCATIONAL ASSISTANCE Education granted to employee Requisites: 1) Educational grant whereby the study is directly connected with the trade. HOLIDAY AND VACATION EXPENSES 8. Likewise. 30% of the cost of the ticket shall be subject to a fringe benefit tax. business or profession of the ER. 9. DUES AND OTHER EXPENSES BORNE BY THE EMPLOYER FOR THE EMPLOYEE IN SOCIAL AND ATHLETIC CLUBS OR OTHER SIMILAR ORGANIZATIONS 6. Travel expenses should be supported by documents proving the actual occurrences of the meetings or conventions. e) owns and maintains a fleet of motor vehicle not normally used in business f) leases and maintains a fleet of motor vehicles not normally used in business g) the use of yacht whether owned and maintained or leased by the employer  How about use of aircraft (including helicopters)? Not taxable Motor vehicles used for sales. freight. INTEREST ON LOAN AT LESS THAN MARKET RATE TO THE EXTENT OF THE DIFFERENCE BETWEEN THE MARKET RATE AND ACTUAL RATE GRANTED 5. 2) And there is a written contract obligating the EE to remain under the employment for a certain period. MEMBERSHIP FEES. The exemption covers only the following expenses: a) Inland travel expenses except lodging cost in hotel averaging US$ 300 or less per day.

IV . Benefits granted to the rank and file. Tax Rate and Tax Base – GENERALLY . III.BENEFITS NOT SUBJECT TO FRINGE BENEFITS TAX: 1. 203 SCRA 72 15 Page . Those that are exempted from income tax. or necessary to the trade. the tax rate is 15% of the grossed-up monetary value (GMV). regional operating headquarters. 4.FRINGE BENEFIT TAX. -It is a tax on the income of the employee although paid by the employer on behalf of the employee. 2. and hospitalization benefit plans. insurance. whether granted under a CBA or not. -The employer can claim the fringe benefit and the fringe benefit tax as a deductible expense from his gross income. business or profession of the employer. Contributions of the employer for the benefit of the employee retirement. Benefits granted to employees as required by the nature of.32% of the grossed-up monetary value (GMV) GMV represents the whole amount of income realized by the employee. b) c) For fringe benefits received by alien individuals and Filipino citizens employed by regional or area headquarters. SPECIAL CASES: a) For fringe benefits received by non-resident alien not engaged in trade of business (NRANETB). offshore banking units (OBUs). 3. HOW COMPUTED Fringe Benefits Tax – tax imposed on fringe benefits which are granted or are paid by an employer to an employee occupying managerial or supervisory position. (Convenience of the Employer Rule) CIR v. De minimis benefits 5. Benefits granted for the convenience of the employer. 6. or foreign service contractor. the tax rate is 25% of thegrossed-up monetary value (GMV). CA.

and (b) taxes withheld on compensation income. 6.A. and Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income due from the payee on the said income. C. cooks. Minimum wage earners 16 Page .57 (A). c) Premium payments on health and/or hospitalization insurance Sec. 3. [1st and 2nd sentences. No. 2-98] Kinds of creditable withholding taxes: (a) taxes withheld on income payments covered by the expanded withholding tax. 3. BASIC RULES ON COMPENSATION WITHHOLDING TAXES GENERAL RULE. TYPES OF WITHHOLDING AT SOURCE: 1) Final Withholding tax. Sec. Regs. 257(B). for a foreign government or an international organization. No.compensation income that is neither exempt/excluded nor subject to a final tax. D. 2. b) Additional exemption for qualified dependent child (R.all salaries earned by persons as government or non-government employees are subject to withholding tax. 9504). Sec. gardener. family drivers and the like 5.. PART OF THE PERTINENT ITEMS OF GROSS INCOME . 2-98] 2) Creditable Withholding tax Under the creditable withholding tax system. Rev. 1st par. Rev. Regs. Remuneration for casual labor not in the course of the employer’s trade/ business 4. 34(M) SECTION 3. Compensation for services by a citizen or resident of the Phils. illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age. unmarried and not gainfully employed or if such dependent. is incapable of self-support because of mental or physical defect. The income recipient is still required to file an income tax return and/or pay the difference between the tax withheld and the tax due on the income. ALLOWABLE DEDUCTIONS FROM GROSS COMPENSATIOIN INCOME a) Basic Personal exemption (R. DEFINITION Withholding Taxes – is a systematic way of collecting taxes at source. 9504). Remuneration paid to agricultural labor and paid entirely in products of the farm. EXCEPTIONS: 1. regardless of age. Remuneration for private service performed by maids.WITHHOLDING TAX [OF THE COMPENSATION INCOME OF THE EMPLOYEE BY THE EMPLOYEE] 1. a "dependent" means a legitimate. 2. [1st sentence.A. taxes withheld on certain income payments are intended to equal or at least approximate the tax due from the payee on the said income. Commission paid by an insurance agent to his sub-agents 2.

32(B)(3) 3. 32(B)(7) (b) 4. Tax-exemption for 10-year period of the income generated from commercial sale of the invention of inventors (R.Gains or profits derived from rendering services. 7. shall be included in gross income. devise or descent of income from any property. CHAPTER 2. bequest. as well as gift. devise. 9.LESS A. bonds or other domestic securities. Sec. business or utilization of capital assets. SECTION 2 .Any other income that is not derived from personal services or not related to an employer – employee relationship and is generally subject to tax on net income basis. or descent: Provided. however. Income exempt under any treaty obligation binding upon the Philippine Government Sec. The amount received by the insured. (ii) financing institutions owned. 7459). 32(B)(2) 2. . discounts and allowances and cost of goods sold. as a return of premiums paid by him under life insurance. manufacturing products. Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.term construction contracts. selling merchandise. Income from Business . That income from such property. 322 (B) (5) 6. PART OF THE PERTINENT ITEMS OF GROSS INCOME 1. or from interest on deposits in banks in the Philippines by (i) foreign governments. farming and long. "COST OF GOODS SOLD' shall include all business expenses directly incurred to 17 produce the merchandise to bring them to their present location and use. Sec. either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.The value derived from an exercise of profession. Income earned by Barnagay Micro Business Enterprise (BMBE) B. or enjoying refinancing from foreign governments. bequest. stocks. The value of property acquired by gift. debentures or other certificate of indebtedness with a maturity of more than five (5) years. FORMULA FOR SOLVING GROSS INCOME NET SALES LESS: COST OF GOODS SOLD/COST OF SALES =GROSS INCOME GROSS INCOME derived from business shall be equivalent to gross sales less sales returns. 32(B)(7) (a) 5. 8. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code. in cases of transfers of divided interest.A. or annuity contracts. Page GROSS INCOME = NET SALES – COST OF GOODS SOLD/COST OF SALES .INCOME DERIVED FROM THE CONDUCT OF TRADE OR BUSINESS OR THE EXERCISE OF A PROFESSION SECTION 1 – DEFINITION Professional Income . endowment. controlled. EXCLUDED/EXEMPT 1. and (iii) international or regional financial institutions established by foreign governments.Gains realized from the same or exchange or retirement of bonds. Sec. Income derived from investments in the Philippines in loans. INCOME SUBJECT TO FINAL TAX C.

Gross receipts from sale of livestock and products purchased from others. AND SERVICING a) For a manufacturing concern. Miscellaneous income such as rent received on crop shares. 2. plus import duties. GROSS INCOME FROM LONG TERM CONSTRUCTION CONTRACTS When income is derived from construction contracts. GROSS INCOME FROM FARMING Income from farming refers to earnings derived from its operation by a person. CLASSIFICATION OF GROSS INCOME FROM BUSINESS/PROFESSION: 1) Manufacturing. such as raw materials used. merchandising. etc. direct labor and manufacturing overhead. It includes the following: 1. Cash received from sale of products raised in the farm. Methods of Computing Gross Income Derived from Farming: 1. freight in transporting the goods to the place where the goods are actually sold. freight cost. 'cost of goods manufactured and sold' shall include all costs of production of finished goods. 18 Page . 2. 3. GROSS INCOME FROM MANUFACTURING. c) In the case of taxpayers engaged in the sale of service. 'cost of goods' sold shall include the invoice cost of the goods sold. [Section 22(S). allowances and discounts. and 4. 'gross income' means gross receipts less sales returns. proceeds of insurance on growing crops. and servicing 2) Farming 3) Long term contract -The term “trade or business” includes the performance of the functions of a public office. Gains from sale of work animals and farm equipment. the completion of which usually covers a period over one year. NIRC] DETAILS OF CLASSIFICATION: 1. 2. b) For a trading or merchandising concern. MERCHANDISING. insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. Accrual basis 3. Cash basis 2. including insurance while the goods are in transit.

The evidence must establish the ff: a) the amount of expenses being deducted b) the direct relation of such to the development. Expenses II. Depletion VIII. business or profession of the taxpayer. business or profession It must be directly connected with trade or business or profession of the taxpayer. Losses V. Bad debts VI. Depreciation VII. operation. and/or conduct of the trade. Research and Development X. Charitable and other contributions IX. Itemized deductions 2. ITEMIZED DEDUCTIONS I. ALLOWABLE DEDUCTIONS FROM GROSS BUSINESS/PROFESSIONAL INCOME Kinds of Deductions: 1. b) Deductions must be supported by adequate receipts or invoices The claimed deduction must be evidenced by official receipts or other adequate records. Special deductions General rules: a) Deductions must be paid or incurred in connection with the taxpayer’s trade. management. Optional standard deduction (OSD) 3. Note: Cohan Rule Principle DETAILS OF THE KINDS OF DEDUCTIONS 1. Pension and trust contribution -----------NEXT PAGE-DETAILS OF EACH ITEMIZED DEDUCTIONS--------- 19 Page . Interest III. D. Taxes IV.

Travelling expenses 3. b) must be paid or incurred during the taxable year. public moral or law Cases: Hospital De San Juan De Dios vs. ESSO Standard Eastern Inc. Rent expenses 6. SUBSTANTIATION TEST: It must be substantiated with sufficient evidence. CIR (10 May 1990).Section 36(A)(2). EXPENSES A. CIR (175 SCRA 158-159). Representation and Entertainment expenses 4. ELECT: a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities. business or exercise of a profession. who is constituted as a withholding agent of the government. or b) to deduct allowance for depreciation thereof Sec. vs. Compensation for personal services 2. AT ITS OPTION. c) must be paid or incurred in carrying on or which are directly attributable to the development. I. such as official receipts or other adequate records. CIR (1982). Repairs Cases: Aguinaldo Industries vs. and b) the direct connection or relation of the expense being deducted to the development. management. 34(A)(2) . B. SPECIAL CASE OF EXPENSES FOR: -A PRIVATE EDUCATIONAL INSTITUTION MAY. 34(A)(2) ALLOWANCE FOR BUSINESS EXPENSE DEPRECIATION No carryover There is carryover Can claim it for a longer period depending on Can be claimed for one only year the life span of the property 20 If the amount of capital outlay is substantial. * The tax required to be withheld on the amount paid or payable must have been paid to the BIR by the taxpayer. BUSINESS TEST: a) must be ordinary and necessary. and e) must not be against public policy. showing: a) the amount of the expense being deducted. (3) not applicable Thus: General Rule: These expenditures are not deductible as business expense Exception: Private educational institution can claim it under Sec. KINDS OF BUSINESS EXPENSES: 1. Cost of material and supply 7. management. d) must be reasonable. it It can accommodate all of the expenses Page cannot accommodate all of the incurred expenses incurred . business or profession of the taxpayer. operation and/or conduct of the trade. operation and/or conduct of the trade. Isabela Cultural Corporation (12 February 2007) 2. REQUISITES FOR DEDUCTIBILITY 1. CIR vs.It must be those referred under section 27 . Advertising and Promotional expenses 5.

◦ Grantor and fiduciary (trustee) of any trust. b) the indebtedness must be that of the taxpayer c) the indebtedness must be connected with the trade. business or exercise of profession. NON DEDUCTIBLE INTEREST EXPENSES a) Interest paid on preferred stock which is considered interest on capital by virtue of RMC 17-71 b) Interest on undrawn salaries and bonuses c) Interest on capital for cost keeping d) Interest paid where parties provide no stipulation to pay interest in writing e) Interest on indebtedness if incurred to finance petroleum and on interest paid on indebtedness paid in advance through discount or otherwise f) Section 34(B)(2) 21 Page . the same was not treated as a capital expenditure. 34(B)(2)(b). REQUISITES FOR DEDUCTIBILITY: a) there must be indebtedness. ◦ Fiduciary and another fiduciary – same grantor ◦ Fiduciary and beneficiary or such trust h) The interest must not be incurred to finance petroleum operations. (tax arbitrage) g) The interest payment arrangement must not be between related taxpayer as mandated in Sec. II. penalties and surcharges on taxes are not deductible b) Interest paid by corporation on script dividends c) Interest on deposits paid by the authorized bank of the CB d) Interest paid by legal or equitable owner on mortgage of real property C. business or profession of the taxpayer d) the interest must have been paid or incurred during the taxable year e) the interest must have been stipulated in writing f) the deduction for interest expense shall be reduced by an amount equal to 33% of the interest income subject to final tax. both of the Tax Code of 1997. *Interest between related taxpayers: ◦ Members of the family ◦ Individual and corp. i) In case of interest incurred to acquire property used in trade. in relation to Sec. *Optional treatment-? B. DEDUCTIBLE INTEREST EXPENSES: a) Interest on taxes. ◦ Between corps. fines. 36(B). INTEREST A. However.

It must be paid or incurred within the taxable year. barter or exchange of s/s listed and traded through the local stock exchange. REQUISITES FOR DEDUCTIBILITY 1. LIMITATION In the case of a nonresident alien individual engaged in trade or business (NRAETB) and a resident foreign corporation (RFC). 8. Estate and donor’s taxes 4. 5. NON-DEDUCTIBLE TAXES 1. Examples: a) Import duties b) Business taxes c) Occupation taxes d) Privilege and license taxes e) Excise taxes f) Documentary stamp taxes g) Automobile registration fees h) Real property taxes 3. 4. B. It must be paid or incurred in connection with the taxpayer’s trade. III. profession or business. the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. It must be imposed directly on the taxpayer. Taxes which are not in connection with the trade. Income tax imposed by the Philippine gov’t. 2. business or profession of taxpayer. It must not be specifically excluded by law from being deducted from the taxpayer’s gross income. Final Taxes 3. income tax deducted from the gross income all taxes are allowed to be deducted only foreign income taxes may be claimed as with the exception of the taxes credits expressly excluded 22 Page . C. Foreign income tax. if not claimed as tax credit 2. Energy Taxes D. TAX CREDIT VS TAX DEDUCTION Tax Credit Tax Deduction deducted from Phil. Stock transaction tax on the sale. Taxes assessed against local benefits tending to increase the value of the property 6. TAXES A. 7. Value – added Tax (VAT) 9.

storms. Capital losses are deductible only to the extent of the capital gain. For the individual the reportable percentages of capital gain or loss shall be: a. Rules: a. d. f. profession or business. abandonment of petroleum operations. business or profession. A. not applicable under OSD. b. storms. loss on exchange between related parties. shipwreck. e. loss on voluntary removal of buildings. Example: a. Net capital gain is added to ordinary gain but net capital loss is not deductible from ordinary gain. 2. carried over for the next 3 immediately succeeding years. or practice of profession. sale or exchange of capital assets. 4. e) The loss must not be compensated for by insurance or otherwise. d) The loss must not be compensated for by insurance or otherwise. Casualty losses – loss of properties used in trade. 5. Deductible only up to the extent of capital gains. 100% if the capital asset is held for one year or less 23 b. or robbery. Net operating loss carryover (NOLCO) – arises when allowable deductions exceeds gross income. business or profession. C. 50% if the capital asset is held for more than one year Page . 3. e. Example: a. PREFERENTIAL TAX TREATMENT FOR CAPITAL GAIN (LOSS): 1. write-off of inventories. b. loss for failure to exercise option to buy capital asset. foreign exchange losses 2. b. c. or from robbery. KINDS OF LOSSES 1. theft or embezzlement. c. securities becoming worthless. Special losses – with special or specific rules based on its nature. loss from illegal transactions. if the loss arises from fires. h) The loss must not be claimed as deduction for estate tax purposes in the estate tax return. c) The loss must be connected with the taxpayer’s trade. b) There must be an actual loss suffered in a closed and completed transaction. not applicable against MCIT. IV. d. shrinkage of value of shares. or other casualties. Transaction losses – losses arising from closed and completed transaction in the conduct of trade and business. forms part of allowable deductions as a special allowable deduction upon application. 3. Examples: a. business. LOSSES LOSSES actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: a) If incurred in trade. REQUISITES FOR DEDUCTIBILITY a) The loss must be that of the taxpayer. shipwreck. b) Of property connected with the trade. wagering/gambling losses. short sales of properties. f) The loss must be actually sustained and charge – off during the taxable year. Net ordinary loss is deductible from net capital gain. B. 4. c. or other casualties. loss on sale of ordinary assets b. declaration of loss must be filed within 45 days from the occurrence of the casualty loss. g) In the case of casualty loss. Arising from fires. d. theft or embezzlement. Capital losses – losses from capital asset other than those subjected to capital gains tax.

It is the reduction of cost or value of natural resources such as oil and gas wells and mines as the resources are converted into inventories. CHARITABLE AND OTHER CONTRIBUTIONS REQUISITES FOR DEDUCTIBILITY A. VII. LIMITATION: A reasonable allowance for depletion computed using the cost- depletion method shall be granted provided that the allowance for depletion shall not exceed the capital invested. Government or any of its agencies or political subdivision or to any domestic corporations or associations specified by the Tax Code or other entities as allowed by the Tax Code and existing special laws. V. or out of its not being used temporarily during the year 3) It must be charged-off during the taxable year. (Basilan Estates. VIII. 3) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. Comm. A. off within the taxable year. DEPLETION OF OIL AND GAS WELL AND MINES Depletion . wear and tear. VI. BAD DEBTS Bad debts . 2) The same must be connected with the taxpayer’s trade. REQUISITES FOR DEDUCTIBILITY 1) The allowance for depreciation must be reasonable 2) It must be for property arising out of its use or employment in the business or trade. The term is also applied to amortization of value of intangible assets the use of which in trade or business is definitely limited in duration.is the exhaustion of natural resources due to production. vs. 5 September 1967) A. Inc. 24 Page . 4) A statement on the allowance must be attached to the return. 2) It must be made within the taxable year. REQUISITES FOR DEDUCTIBILITY 1) The contribution must actually be paid or made to the Phil. and normal obsolescence. and 4) It must be evidenced by adequate records or receipts. 3) It must not exceed 10% of the individual’s taxable income and 5% of the corporation’s taxable income before deducting the contribution (applicable only to contributions with limit).Debts due to the taxpayer when actually ascertained to be worthless and charged. REQUISITES FOR DEDUCTIBILITY 1) There must be a valid and subsisting debt. business or practice of profession. 4) The same must be actually charged-off the books of accounts of the taxpayer as of the end of the taxable year. 5) The property must have a limited useful life.. A. 36 (B) of the NIRC. DEPRECIATION Depreciation-The gradual diminution in the useful value of tangible property used in trade or business resulting from exhaustion.

e. Economic development 2) According to the national priority plan determined by NEDA provided. e. c. or commitments entered into by the government of the and the foreign laws or international organizations or in pursuance of special laws. or for the g. Charitable. Youth and sports development. d. or to be used in undertaking priority activities in: a. Cultural. and 3) Donations to social welfare institutions or to non-government organizations in accordance with rules and regulations promulgated by the Secretary of Finance provided. Science and culture. that donations not in accordance with the said annual priority plan shall be with limit. Scientific. Education. Rehabilitations of veterans. no part of the net income of which inures to the benefit of any private stockholders or individual. Health. Religions. b. Human settlements. d. Educational purposes. DEDUCTIONS Contributions deductible in full under the Tax Code: 1) Donations to the government of the Philippines or to any of its agencies or political subdivisions including fully-owned government corporations exclusively to finance. C. Youth and sports development. 25 Page . LIMITATION The following are subject to limit: 1) Donations to the Philippine government or any of its agencies or any political subdivision thereof exclusively for public purposes. b. treaties. 2) Donations to accredited domestic corporations or associations organized and operated exclusively for: a. B. 3) Donations to foreign institutions or international organizations in pursuance or compliance with agreements. to provide for. c. and f. or f. and 4) Donations to certain accredited non-government organization.

IX. Any expenditure incurred in ascertaining the existence.e. so long as an activity still contains an element of uncertainty/technical risk. extent.e.. X. REQUISITES FOR DEDUCTIBILITY 1) The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to its employees. as an outright deduction for the full expenditure). RESEARCH AND DEVELOPMENT Research and Development. 2) The pension plan is reasonable and actuarially sound. 26 Page ..e.. and 5) The payment has not therefore been allowed as a deduction. or 2) Deferred asset (or deferred expense) which is periodically subject to amortization B. 4) The amount contributed must no longer be subject to its control or disposition. or quality of any deposit of ore or other mineral. A. used in connection with research and development.are for improvements of processes and formulas as well as the development of improved or new products. PENSION TRUST A. location. SPECIAL CASE: R&D expenditures which are paid or incurred by a taxpayer during the taxable year in connection with his trade. business or profession may be treated EITHER as: 1) Ordinary and necessary expenses allowed as deduction during the taxable year when paid or incurred (i. R&D only extends from the laboratory or drawing board to prototype status. Any expenditure for the acquisition or improvement of land or the improvement of depreciable property. i. the employer contributes cash to the plan. 2. LIMITATION ON DEDUCTION The above tax treatment of R&D expenses does NOT apply to: 1. i. it is within the realm of R&D. including oil or gas. 3) It must be funded by the employer. REQUISITES FOR DEDUCTIBILITY AS A GENERAL RULE.

NRC. resident aliens.] *NOTE: The “cost of sales” in case of individual seller of goods. or the “cost of services” in the case of individual seller of services. required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts (non-life insurance) [Sec. Net additions. 2.. he is considered as having availed of the itemized deductions. 2. is not allowed to be deducted for purposes of determining the basis of the OSD. Such election.may be taken by an individual. OPTIONAL STANDARD DEDUCTIONS OPTIONAL STANDARD DEDUCTION as amended by R. Premiums paid on hospitalization insurance. Available only to citizens. Income currently distributed to beneficiaries under estates and trusts. if any. The amount of standard deduction is limited to forty percent (40%) of: Gross income – DC and RFC Gross sales or receipts – RC. is irrevocable for the year in which made.A. The standard deduction is optional. OSD is not available against compensation income arising out of an employer-employee relationship. SPECIAL DEDUCTIONS SPECIAL DEDUCTIONS: 1. he can change to itemized deductions in succeeding years. in lieu of itemized deductions A. Quarterly income tax returns are only interim computations on the taxable income for the year 4. 61 (A)] 3. *Since an individual in business or in the practice of profession is required to file quarterly income tax returns. the OSD or Itemized Deductions is against the gross income of the year. Proof of actual expenses is not required.i. RA [However.e. domestic corporations and resident foreign corporations. Basic and Personal Exemptions 27 Page . REQUISITES: 1. but the taxpayer should keep records pertaining to his gross income during the taxable year. can he choose the OSD in his quarterly returns and then choose the itemized deductions in his annual income tax return. 3. [Sec. Section 37 of the NIRC e. however. i. 9504 . [Sec. when made by the qualified taxpayer. unless the taxpayer signifies in his return his intention to elect this deduction. 3. 37 (A)] 4. or vice versa? YES. 5. 34 (M)] 2.

GAINS DERIVED FROM DEALINGS IN PROPERTY SECTION 1. stock or security given in exchange less cash and FMV of property given in exchange add dividend and/or gain recognized 28 8. Reg. No. Rev. By gift – same basis as it would have been in the hands of the donor or the last preceding owner by whom it was not acquired by gift. but not the loss is to be recognized. then for the purpose of determining loss shall be such fair market value. Rev. 136. except that if such basis is greater than the FMV of the property at the time of the gift. Property transferred in the hands of transferee if the exchange is one where the gain. or for property in case of exchange. GAIN excess of the AMOUNT REALIZED therefrom over the BASIS OR ADJUSTED BASIS for determining gain. if any. COMPOSITION Gains Derived From Dealings In Property . CHAPTER 3 . but not the loss is to be recognized – same basis as it would be in the hands of Page transferor increased by the amount of gain recognized to the transferor on the transfer. No.) acquired before 1 March 1913 – FMV on such date b. B. 2) 2. or from a combination of both sale and exchange. 40 (B)] – depends primarily on the manner in which the taxpayer acquired the property. LOSS excess of the BASIS OR ADJUSTED BASIS over the AMOUNT REALIZED for determining loss. MEASUREMENT OF GAIN/LOSS A. Acquired (other than capital assets) for less than an adequate consideration in money or money’s worth – amount paid by the transferee 6. 5. No. Rev.) acquired on or after 1 March 1913 – Cost plus expenses of acquisition (Sec. 7. Stock or security or property received if the exchange is one where gain/loss may be recognized – same as the basis of the stock. if any. 40 (A)] -BASIS OF PROPERTY [SEC.COMPOSITION AND MEASUREMENT OF GAIN/LOSS 1. By devise. personal or mixed) for money in case of sale. 2) 3.includes all gains or losses derived from the disposition of property (real.basis of the property. or security or property given in exchange. -AMOUNT REALIZED = sum of money received plus the fair market value of the property (other than money) received [Sec. By purchase: a. Reg. . Reg. Included in the inventory – latest inventory value (Sec. 136. bequest or inheritance – FMV or value of such property at the time of the acquisition (death of decedent) (Sec. 2) 4. Stock or security or property received if the exchange is one where the gain. 2. 1. 139.

CLASSIFICATION OF CAPITAL ASSETS FOR INCOME TAX PURPOSES: 1. and Real property used in trade or business. trade or business. Property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business. TWO KINDS OF ASSETS/PROPERTIES: a) ORDINARY ASSETS [Sec. Sale of real property 3. 4) Property used in trade or business which in subject to the allowance for depreciation. 3) Property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business. 3. Stock in trade. SECTION 2. 2. Property used in trade or business which in subject to the allowance for depreciation. Sale of shares of stock of a domestic corporation not listed and traded through a local stock exchange 2. TYPES OF GAINS FROM DEALINGS IN PROPERTY (1) Ordinary income vis-à-vis Capital gain Includes any gain from the sale or exchange of property which is not a capital asset. Net capital Lossis the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. 2. 4. 2) Property of a kind which would properly be included in the inventory if on hand at the close of the taxable year. Net capital loss Net Capital gainis the excess of the gains from sales or exchange of capital assets over the losses from such sales or exchanges. and Real property used in trade or business b) CAPITAL ASSETS 1. Sale of capital assets other than stocks and real property (sale of personal property considered as capital asset other than shares of stock) 2. 39 (A)] COMPOSITION:  Refer to properties held by the taxpayer in the pursuit of his profession. 29 Page . COMPOSITION  Property held by the taxpayer (whether or not connected with his trade or business) but does not include: 1.ASSETS 1. (2) Actual gain vis-à-vis Presumed gain (3) Long term capital gain vis-à-vis Short term capital gain (4) Net capital gain. Property of a kind which would properly be included in the inventory if on hand at the close of the taxable year. they are: 1) Stock in Trade.

Gain from sale. Gain from sale. [Sec.LESS A. PART OF THE PERTINENT ITEMS OF GROSS INCOME 1. EXCLUDED/EXEMPT [Sec. [Sec. exchange or other disposition of real property located in the Philippines. No.If the transferor of the shares is an individual. exchange or other disposition of other personal property classified as capital asset. Between corporation which are parties to a merger or consolidation (property for stock) b. barter. Sale/disposition of principal residence [Sec. notwithstanding the provisions of Section 39 of the Tax Code . or other disposition of real property classified as ordinary assets (although subject to creditable withholding tax) 2. Between a stockholder of a corporation party to a merger or consolidation and the other party corporation (stock for stock) c. 24(C)] . 6-2008) 2.24 (D)(2)] 4. Exchange solely in kind in legitimate mergers and consolidation which includes: a. INCOME SUBJECT TO FINAL TAX 1. 40 (C)(2)] 1. Transfer or exchange of property for stock resulting in acquisition of corporate control (Property for stock) [Sec. classified as capital assets. Reg. the rule on holding period and capital loss carry- over will not apply. 3. Shares listed and traded in the stock exchange B. exchange. Gain from sale. exchange or other disposition of personal property classified as ordinary assets except shares of stock. as amended. barter. exchange or other disposition of shares of stock in a domestic corporation not listed and traded through a local stock exchange. Sale. 24(D)(1)] C. SECTION 3. 40 (C)(2)] 3. 30 Page . (Rev. Between a security holder of a corporation which is a party to a merger or consolidation and the other corporation (securities for securities or stock) 2. Sale.

corporate or otherwise (lending is the main course of business or merely incidental and not subjected to final withholding tax ) CIR v. c) Expanded foreign currency deposit system by nonresidents. notes or other interest-bearing obligation of residents. B.R. [Sec. Jan. b) BSP prescribed form of investments maturing more than 5 years. common or individual trust funds. 1990 31 Page . No. a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long term deposit or investment certificate. L-54908. 2.An earning derived from depositing or lending of money. Interest income from any currency bank deposit or yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements. is subject to income tax. Interest income from long-term deposit or investment in the form of savings. No. G. 24(B)(1)] 2. Rules General rule: Interest received by a taxpayer. Interest earned if received from: a) By members from duly-registered cooperative (Rev. 20-2001). deposit substitutes. Interests on bonds. investment management accounts and other investments evidenced by certificates in such form prescribed by the BSP. INCOME SUBJECT TO FINAL TAX 1. 24(B)(1)] a) These must have a maturity period of not less than five years and must be issued by banks in denominations of P10. Mitsubishi. 22. Interest earnings from long-term deposits or investments where the holder of the certificate pre terminate the deposit or investment before the fifth year. – 20% [Sec. – 7 ½% [Sec. Except: When interest income is exempted by law from income tax. a tax shall be imposed on the entire income (final tax) 2. b) Applicable only to individual taxpayers except NRANETB c) If the holder pre-terminate before the 5th year. Regs. whether usurious or not. goods or credits. SECTION 2 . Interest income from a depositary bank under the expanded foreign currency deposit system. PASSIVE INCOMES [Chapters 4-12] CHAPTER 4 – INTEREST SECTION 1.LESS A. [Sec. and d) A tenant who paid to a landowner on the price of land under a tenant-purchaser agreement as part of CARP. Definition Interest.DEFINITION AND RULES 1. 24(B)(1)] 3. 24(B)(1)] C.000. EXCLUDED/EXEMPT 1. PART OF THE PERTINENT ITEMS OF GROSS INCOME 1.

2. Those derived from natural resources or products such as coal. . silver. December 10. NRFC = 32% FWT 32 C. oil. 2) Other royalties (eg. the entire amount is taxable in the year it is received. the value of the improvements should be reported as income of the lessor.DEFINITION ROYALTIES .These are the compensations or payments for the use of property and are paid to the owner of a right.DEFINITION Rents. INCOME SUBJECT TO FINAL TAX 1) Royalties on books. b) If the advance payment is a security deposit which restricts the lessor as to its use. 2010) B. *NRANETB = 25% FWT. and other similar products) – 20% [Sec. literary works and musical compositions – 10% [Sec. PART OF PERTINENT ITEMS OF GROSS INCOME Page 1. 32(B)(5) B. gold. Royalties paid by a foreign corporation to resident citizens and domestic corporations. copper. 24(B)(1)] -paid by domestic corp. SECTION 2 – LESS A. SECTION 2 – LESS A. De la Salle University. EXCLUDED/EXEMPT 1) Income exempt under any treaty obligation binding upon the Philippine government Sec. INCOME SUBJECT TO FINAL TAX – NONE C. then such amount should be excluded in the determination of rental income. Inc. CHAPTER 5 – RENTS SECTION 1. take note of a CTA case (Commissioner of Internal Revenue v. 24(B)(1)] –paid by domestic corp. It includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor.refer to earning derived from leasing real estate as well as personal property. EXCLUDED/EXEMPT – NONE * However. PART OF PERTINENT ITEMS OF GROSS INCOME CHAPTER 6 – ROYALTIES SECTION 1. 622. Leasehold improvement When the lessee erected or built permanent improvements on the leased property which will become the property of the lessor upon the expiration of the lease. gas. advance rent and taxes paid by lessee to or for a lessor? 1.. SECTION 2 – TAX TREATMENT ON PREPAID RENT AND LEASEHOLD IMPROVEMENT BY LESSEE TO OR FOR A LESSOR Tax treatments of leasehold improvements. Prepaid Rent a) If the advance payment is received without restrictions as to its use. CTA EB No.

(2) Stock dividend . Seifert. A. 108576. Under the NIRC. proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a tax of a taxable dividend. G. PART OF PERTINENT ITEMS OF GROSS INCOME Page 1. 301 SCRA 152) b) The recipient is other than the stockholder.DEFINITION Dividends . Dividends received from a foreign corporation . This process amounts to distribution of taxable dividends which is just delayed so as to escape the tax. Depending on the circumstances. (Sec. Intercorporate dividends (DC to DC or RFC) B.R. corporate earnings may be distributed under the guise of initial capitalization by declaring the stock dividends previously issued and later redeem or cancel said dividends by paying cash to the stockholder. EXCLUDED/EXEMPT 1.Involves the transfer of a portion of retained earnings to capital stock by action of stockholders. Cash and/or property dividends2 actually or constructively received by an individual from: a) a domestic corporation b) a joint stock company c) insurance or mutual fund companies d) regional operating headquarters of multinational companies [Sec. 24(B)(2)] C or RA = 10% FWT. 20. if a corporation.73 (B). KINDS (1) Cash dividend . a) These shares are later redeemed for a consideration by the corporation or otherwise conveyed by the stockholder to the extent of such contribution. Jan.A dividend paid in property of a corporation such as stock investment. NIRC). NRAETB = 20% FWT. the amount received in redemption CIR v. Soriano Corp. (CIR vs.A dividend paid in cash and is taxable to the extent of the cash received. whether in money or in other property SECTION 2 – KINDS AND RULES A. (4) Liquidating dividend . stock dividends are nothing but a representation of interest in the corporate entity. INCOME SUBJECT TO FINAL TAX 1. bands or securities held by the corporation and to the extent of the FMV of the property received at the time of the distribution. NRANETB = 25% FWT. (3) Property dividend . CHAPTER 7 – DIVIDENDS SECTION 1. (Bachrach vs. RULES General rule: A mere issuance of stock dividends is not subject to income tax. No. after the distribution of a non-taxable stock dividend. Exceptions: When stock dividends are subject to tax. Before disposition thereof. Pure stock dividends 2. B. 1999 or cancellation of the stock shall be treated as a taxable dividend to the extent that it represents a distribution of earnings or profits.. it simply means the capitalization of retained earnings. SECTION 2 – LESS A. 57 PHIL 483) c) A change in the stockholder’s equity results by virtue of the stock dividend issuance. because it merely represents capital and it does not constitute income to its recipient.any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders.A dividend distributed to the shareholders upon dissolution of the corporation. NRFC = 15% 33 C. CA.

as a return of premiums paid by him under life insurance. artistic. 32(B)(2)] C. scientific. EXCLUDED/EXEMPT 1. PART OF PERTINENT ITEMS OF GROSS INCOME  Any excess of the return of premiums CHAPTER 9 – PRIZES AND AWARDS SECTION 1. 2. directly or in trust. 3.amounts payable yearly or at other regular intervals for a certain or uncertain period. literary or civic achievements are exclusions from gross income if: a. [Sec. 32 (B)(7)(d)] B. SECTION 2 – LESS A. PART OF PERTINENT ITEMS OF GROSS INCOME 34 1. [Sec. The recipient was selected without any action on his part to enter a contest or proceedings. 32(B)(1)] 2. . The recipient is not required to render substantial future services as a condition to receiving the prize or award. Proceeds of life insurance paid by reason of the death of the insured to his estate or to any beneficiary. INCOME SUBJECT TO FINAL TAX 1. Prizes of P10. Prizes won abroad . endowment.Contest prizes and awards received are generally taxable. charitable.000 and below Page 2. Prizes and awards received in recognition of religious. Return of insurance premium SECTION 2 – LESS A. educational. 32 (B)(7)(c)] 2. Annuities . Such payment constitutes gain derived from labor. Income exempt under any treaty obligation binding upon the Philippine government Sec.DEFINITION 1. 32(B)(5) B.COMPOSITION Prizes and awards: -reward for a contest/competition. whether in a single sum or otherwise. INCOME SUBJECT TO FINAL TAX  Prizes that are more than P10. [Sec. The amounts received by the insured.000 – 20% C. CHAPTER 8 – ANNUITIES PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF INSURANCE SECTION 1. either during the term or at maturity of the term mentioned in the contract or upon surrender of the contract. EXCLUDED/EXEMPT 1. and b. [Sec. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured. or annuity contracts.They also represent as installment payments for life insurance sold by insurance companies. Prizes and awards granted to athletes in local and int’l sports competitions and tournaments held in the Philippines and abroad and sanctioned by their national associations.

OR SEPARATION PAY SECTION 1. including retirement gratuity received by government officials and employees. 32(B)(6)(c) 4.DEFINITION Winnings – a reward for an event that depends on chance. [Sec. EXCLUDED/EXEMPT 1. 32(B)(6)(b)] 3. Retirement benefits received under RA 7641 and those received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer. 32(B)(6)(a)] 2. [Sec. Benefits received from or enjoyed under the Social Security System. INCOME SUBJECT TO FINAL TAX 1. Any amount received by an employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death. [Sec. pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions. [Sec. 32(B)(6)(f)] B. SECTION 2 – LESS A. SECTION 2 – LESS A. All winnings regardless of amount – 20% C. 32(B)(6)(e)] 6. Pensions that do not comply with the requirements for exemption provided under [Sec. age. Philippine Charity Sweepstakes and Lotto winnings [Sec. CHAPTER 10 – WINNINGS SECTION 1. EXCLUDED/EXEMPT 1. [Sec. loss or injury. INCOME SUBJECT TO FINAL TAX – NONE C. The social security benefits. 32 (6)] 35 Page . 32(B)(6)(d) 5. 24(B)(1) B. Winnings won outside of the Philippines CHAPTER 11 – PENSIONS RETIREMENT BENEFIT. in consideration of past services. Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration [Sec.DEFINITION Pension refers to allowance paid regularly to a person on his retirement or to his dependents on his death. sickness. meritorious work. PART OF PERTINENT ITEMS OF GROSS INCOME 1. other physical disability or for any cause beyond the control of the employee. PART OF PERTINENT ITEMS OF GROSS INCOME 1. Benefits received from the GSIS. retirement gratuities.

amount to: 1. the transaction has the effect of the payment of a dividend. a gift. a payment of income. 36 Page . PART OF PERTINENT ITEMS OF GROSS INCOME 1. dependent upon the circumstances. SECTION 2 – LESS A.The cancellation and forgiveness of indebtedness may.DEFINITION Forgiveness of debt . B. a capital transaction. If a domestic corporation to which a stockholder is indebted forgives the debt. INCOME SUBJECT TO FINAL TAX 1. in consideration thereof cancels the debt. who. C. thus subject to a final tax. the amount of the debt is a gift not subject to income tax. EXCLUDED/EXEMPT 1. or 3. When an individual performs services for a creditor. CHAPTER 12 – FORGIVENESS OF DEBT SECTION 1. When a creditor merely desires to benefit a debtor and without any consideration cancels the debt. 2.

22(E) Residents of the Philippines (5%-34%) Sec. 3. For an aggregate period of 37 more than 180 days during the calendar year. b) Non-resident citizens . either as immigrant or for employment or on permanent basis.KINDS OF INDIVIDUAL TP KINDS OF INDIVIDUAL TAXPAYERS 1) Citizens a) Resident citizens . at any time during the taxable year to reside permanently in the country.) One who establishes to the satisfaction of the Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with a definite intention to reside therein. . A “non-resident citizens” means 1. who works and derive from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. TITLE IV. and who are not mere transients or sojourners.) A citizen of the Phils. 22 (E)of the NIRC. b) Non-resident aliens . who leaves the country during the taxable year to reside abroad. for 180 days or more by the end of the year.Those residing in the Philippines unless he qualifies as a non-resident under Sec.Those not residing in the Phils.TAXPAYERS CHAPTER 1 – INDIVIDUAL TP SECTION 1. 4.CHART. . 22 (G) Not engaged in Trade or Business in the Philippines (25% of GI) Individuals Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies (15% of GI) Special classes of Individual Employed by Offshore Banking Units Individuals (15% of GI) Individual Employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines (15% of GI) SECTION 2 . 22(F) Engaged in Trade or Business Aliens Not Residents of the in the Philippines (5%-34%) Philippines Sec. SUMMARY OF INDIVIDUAL TP Primary Sub-Classification/s Classification Citizens of the Residents of the Philippines (5%-34%) Philippines Not residents of the Philippines (5%-34%) Sec.Those not residing in the Philippines. and who is not a citizen thereof. 2.includes performance of personal services within the Phils.Those residing in the Philippines though not a citizen thereof.Those who are actually present in the Phils. 2) Aliens a) Resident aliens . Page (2) Not engaged in trade or business .) A citizen of the Phils. 5.) A citizen who has been previously considered as non-resident citizen and who arrives in the Phils.) A citizen who shall have stayed outside the Phils. (1) Engaged in trade or business – comes and stays in the Phils.

10%(2000). GIW 25% 10% FINAL WITHHOLDING TAX (FWT) literary. SUMMARY OF HOW INDIVIDUAL TPs ARE TAXED Category of Resident Nonresident Income CITIZEN ALIEN CITIZEN NRAEBT NRAEBT All sources Within Within Within Within Compensation. Winnings/Prizes of 20% FINAL WITHHOLDING TAX (FWT) P10. Royalty. EXEMPT Sweepstakes/Lotto 38 Page . FWT GIW 20% dividends Interest (Foreign currency deposit GIW 7.000 or Schedular Normal Tax Rate less Proprietary. 10% (in excess of P100. Business/Profession GIW 25% Prizes of P10.000) FWT on net capital gains sale of shares Sale of shares EXEMPT Capital gains on 6% FWT of Gross Selling Price or FMV whichever is higher sale of real property Winnings on Phil.CHART.000 & below Royalties-books. musical Interest (long term EXEMPT investment) Cash/Property 6%(1998).000). SECTION 3.) Capital gains on 5% (not over P100. N/A educational/Hospital Cinematographic GIW 25% Film and the like Interest.5% FWT EXEMPT sys.

Final tax on passive income DETAILS OF INCOME TAXES OF A CORPORATION 1. 22 (C ) – 30% on Taxable Income Foreign Corporations Resident Foreign Corporations Sec.1. CHAPTER 2 – CORPORATION TP SECTION 1.5% final tax . 1. and 2. – NORMAL CORPORATE INCOME TAX (NCIT) Estates and Trusts Domestic Corporations Sec.Those foreign corporation not engaged in trade or business within the Phils.5% Gross Philippine Billings Corporations Offshore Banking Units – 10% of gross onshore income Special Classes Resident Depositary Bank (Foreign Currency Deposit Units) .3 Gross Income Tax (GIT) – 15% 2. machinery and other equipment - 7.1 Normal Corporate Income Tax (NCIT) – 30% or 1. joint accounts (cuentas en participacion). a. INCLUDES: 1.30% on Taxable Income Sec. a general professional partnership. 2.2 Minimum Corporate Income Tax (MCIT) – 2% or 1. 2. However.10% of of Corporations gross onshore income Regional or Area Headquarters Sec. 22( DD) and Regional Operating Headquarters Sec. coal.COMPOSITION AND KINDS 1. organized or existing under any laws other than those of the Phils. associations or insurance companies. 22 (EE) of Multinational Companies Non-resident cinematographic film owners. 22(D) Non-resident Sec. it does NOT INCLUDE: 1. Improperly Accumulated Earnings Tax (IAET) – 10% 3. Capital Gains Tax – on sale of real property or on sale of shares of stock 5. 2) Foreign corporations .INCOME TAXES OF A CORPORATION Corporations may be subjected to the following income taxes: 1. 22 (H) . geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. lessors or distributors - 25% final tax Non-resident owners or lessors of vessels chartered by Philippine 39 Nationals – 4. 22 (I) . as used in income taxation. 3. Resident .Those foreign corporation engaged in trade or business within the Phils. KINDS OF CORPORATE TAXPAYERS 1) Domestic corporations . 1. COMPOSITION Corporations. or under its laws. joint stock companies. Brach remittance profit 4. Non-resident .5% final tax Page Non-resident lessors of aircraft. partnerships.Those created or organized in the Phils. a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum. SECTION 2.Those created. no matter how created or organized. b.30% on Gross Income Proprietary educational institutions and non-profit hospitals – 10% of their taxable income Domestic Depositary Bank (Foreign Currency Deposit Units) – 10% of gross onshore income Resident international carriers – 2.

robbery. or c) -because of legitimate business reverses (substantial losses due to fire. IMMEDIACY TEST . -taxpayer shall pay the MCIT whenever it is greater than the NCIT. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) There is imposed for each taxable year. It is equal to 2% of the gross income of a corporation at the close of each taxable quarter.The President. 2. by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. What is meant by “reasonable needs of the business” is determined by the IMMEDIACY TEST.2. and 2) reasonably anticipated needs. -covers domestic and resident foreign corporations which are subject to NCIT. . . 1. includes armed conflicts like war or insurgency). – MINIMUM CORPORATE INCOME TAX (MCIT) DEFINITION: Minimum Corporate Income Tax (MCIT) – is an estimate of the income tax that is due from a firm. theft or other economic reasons).it starts on the 4th year of its business operations. may allow domestic corporations the option to be taxed at fifteen percent (15%) of gross income. upon the recommendation of the Secretary of Finance. a tax equal to 10% of the improperly accumulated taxable income of domestic and closely held corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation. 1.Only domestic and closely-held corporations are liable for IAET. Exception: The use of undistributed earnings and profits for the reasonable needs of the business would not generally make the accumulated or undistributed earnings subject to the tax. 40 Page . after the following conditions have been satisfied: Tax effort ratio 20% of GNP Ratio of IT collection to total tax revenue 40% VAT tax effort 4% of GNP Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP 0. 1. or b) -because of force majeure (acts of God and other calamity. 1.90% Ratio of the Corporation’s Cost of Sales to Gross Sales Does not exceed 55% -The election of the gross income tax option by the corporation shall be irrevocable for three (3)consecutive taxable years during which the corporation is qualified under the scheme.“carry-forward” provision *The Secretary of Finance is authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers LOSSES: a) -on account of prolonged labor dispute (losses from a strike staged by employees that lasts for more than 6 months and caused the temporary shutdown of operations). .3 – GROSS INCOME TAX (GIT) .It states that the “reasonable needs of the business” are the: 1) immediate needs of the business. in addition to other taxes.

CAPITAL GAINS TAX 5. order. Taxable partnerships. order or association. organizer. Farmers' or other mutual typhoon or fire insurance company. Insurance companies. or individual. no part of its net income or asset shall belong to or inures to the benefit of any member. 4. Non.A. 3. 9. FINAL TAX ON PASSIVE INCOME ALREADY DISCUSSED IN TITLE III SECTION 3 – TAX EXEMPT CORPORATIONS A. and cooperative bank without capital stock organized and operated for mutual purposes and without profit. 6. 6. Farmers'. and 7. Government educational institution. General professional partnerships.taxable joint ventures. 7916. fruit growers'. Exempt: Profits remitted derived from activities registered with the Philippine Economic Zone Authority (PEZA) 4. Cemetery company owned and operated exclusively for the benefit of its members. less the Page necessary selling expenses on the basis of the quantity of produce finished by them. charitable. and c) under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes. or non-stock corporation or their dependents.A. or other benefits exclusively to the members of such society. b) pursuant to the Bases Conversion and Development Act of 1992 under R. athletic. or cultural purposes. or mutual aid association or a non-stock corporation organized by employees providing for the payment of life. 8. and fees collected from members for the sole purpose of meeting its expenses. Labor. 7227. 10. accident. Nonstock corporation or association organized and operated exclusively for religious. sickness. or like organization of a purely local character. 5. 3. agricultural or horticultural organization not organized principally for profit. Enterprises that are registered: a) with the Philippine Economic Zone Authority (PEZA) under R. officer or any specific person. not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder. and 41 11. mutual ditch or irrigation company. A beneficiary society. or for the rehabilitation of veterans. or association. BRANCH PROFIT REMITTANCE TAX Tax base: Profits applied or earmarked for remittance Tax Rate: 15% final tax Condition: Branch profits are effectively connected with the conduct of its trade or business in the Philippines. the income of which consists solely of assessments. 7. EXEMPT CORPORATIONS FROM IAET: 1. scientific. dues. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare. Banks and other non-bank financial intermediaries. Publicly-held corporations. 2. . or board of trade. A nonstock and nonprofit educational institution. Business league chamber of commerce. national or local. Mutual savings bank not having a capital stock represented by shares. 5. TAX EXEMPT CORPORATIONS (NIRC): 1. operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system. or like association 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. mutual or cooperative telephone company. 4. 2. 3.

Cooperatives (Rev. R. GSIS 2. SSS 3. 48-91) 2. PCSO C. TAX EXEMPT GOCCS: 1. B. 2067) 42 Page . Cir. TAX EXEMPT CORPORATIONS UNDER SPECIAL LAWS: 1. Mem.A. Foundation created for scientific advancement (Sec. PHILIPPINE HEALTH INSURANCE CORP. 24. 4.

less the normal corporate income tax thereon. actually or constructively received. stock bonus or profit- sharing plan of an employer for the benefit of some or all of his employees i.TAXATION OF GENERAL PROFESSIONAL PARTNERSHIPS RULES: 1. EXCEPTION The tax shall not apply to employee's trust which forms part of a pension. The taxable income of the partnership. the net income of the GPP shall be computed in the same manner as a corporation. Income which. CHAPTER 4 – ESTATES AND TRUSTS TP SECTION 1. . if under the trust instrument it is impossible. and 4. Income received by estates of deceased persons during the period of administration or settlement of the estate. 2. may be either distributed to the beneficiaries or accumulated.TAXATION OF ESTATES AND TRUSTS 1. at any time prior to the satisfaction of all liabilities with respect to employees under the trust. and 43 ii.  The share of a partner shall be subject to a creditable withholding income tax of 15%.TAXATION OF PARTNERSHIPS RULES: 1. CHAPTER 3 – PARTNERSHIP TP SECTION 1. but is not subject to the improperly accumulated earnings tax [IAET]. normal tax. or diverted to. The partnership is subject to the same rules on corporations (capital gains tax. Page purposes other than for the exclusive benefit of his employees. Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests. For purposes of computing the distributive share of the partners. 2. 3. or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan. The partners shall only be liable for income tax only in their separate and individual capacities. 3. for any part of the corpus or income to be used for. including: 1. 4. and income collected by a guardian of an infant which is to be held or distributed as the court may direct. 3. Income which is to be distributed currently by the fiduciary to the beneficiaries. minimum corporate income tax [MCIT] and gross income tax [GIT]). is the distributable net income of the partnership. 2. final tax on passive income. if contributions are made to the trust by such employer. The partnership must file quarterly and year-end income tax returns. whether actually distributed or not. Such share will be subjected to a final tax of 10% to be withheld by the partnership. 2. and income accumulated or held for future distribution under the terms of the will or trust. A GPP as such shall not be subject to the income tax. APPLICATION: The tax imposed upon individuals shall apply to the income of estates or of any kind of property held in trust. The share of a partner in the partnership’s distributable net income of a year shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity. or employees. in the discretion of the fiduciary. Each partner shall report as gross income his distributive share. in the net income of the partnership. SECTION 2.