Income Taxation: Income Tax System Features of Philippine Income Tax Law

THE AWESOME NOTES
TAXATION; NIRC Page 1 of 38

INCOME TAXATION PHILIPPINE FOLLOWS SEMI SCHEDULAR
OR SEMI GLOBAL TAX SYSTEM.
INCOME TAX SYSTEM FEATURES OF PHILIPPINE

INCOME TAX LAW
GLOBAL TAX SYSTEM
the total allowable deductions as well as DIRECT TAX
personal and additional exemptions, in case of the tax burden is borne by the income recipient
qualified individuals, or the total allowable
deductions only, in case of corp,
are deducted from the gross income

upon whom the taxis imposed
PROGRESSIVE TAX
- to arrive at a net taxable income tax bases increases as the tax rate increases.
subject to graduated tax rates, in case ff consti: Congress shall evolve a

of an individual, or corporate tax date,
in the case of corp. progressive systeM of taxation
COMPREHENSIVE
GIST: baed on: citizenship principle, residence
all items of gross income, deductions principle and source principle.
and personal and additional - any of the 3 is enough to justify the imposition
exemptions, if any, of income tax on the resident citizen and
are reported in one income tax domestic corp that are taxed on worldwide
return
- to be filed at least annually,
- and the applicable tax rate

income.
SEMI-SCHEDULAR OR SEMI-GLOBAL
applied on the tax base. SYSTEM OF TAXATION
SCHEDULAR TAX SYSTEM
different types of income are subject to
different sets of graduated or flat income rates.
the applicable tax rate/s will depend CRITERIA IN IMPOSING
on PHILIPPINE INCOME TAX
- the classification of the taxable
income
and the basis could be CITIZENSHIP PRINCIPLE
- gross income (without
• RESIDENT CITIZENS; taxable both for
deductions) or income from sources within and income
- net income (the gross without the Philippines
income less allowable
• NON-RESIDENT CITIZENS; taxable only for
deductions)
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX

income from sources within the Phil
RESIDENCE PRINCIPLE
SYSTEM
• RESIDENT ALIENS; taxable only for income
a system of taxation wherein both global and from sources within the Phil, and exempt
schedular tax system is being applied,

depending on the kind of income. from sources outside.
SOURCE PRINCIPLE
GLOBAL TAX SYSTEM IS APPLIED FOR
• NON-RESIDENT ALIENS; are subject to Phil
1. compensation income income tax only on income from sources
2. business or professional income within the Phil
3. capital gain and passive income not subject this is despite of the fact that he never
to Final Withholding Tax; anf set foot in the Phil.

4. other incomes
SCHEDULAR TAX SYSTEM IS APPLIED FOR

~~~~~~~~~~~~~~~~
1. passive investment income subject to Final

Withholding Tax
2. capital gain from the sale or transfer of
shares of stocks of a domestic corps; and

3. real properties classified as capital assets
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prepared by: ronie ablan
THE AWESOME NOTES

KINDS OF TAXPAYERS CITIZENS

INDIVIDUAL TAXPAYERS
• RESIDENT; taxable for income from sources
TYPES
within and without
see mamalateo's book pg, 78. may

1. personal income tax on individuals
2. regular corporate income tax corp corp
3. minimum corporate income tax on corp
question ako.
• NON-RESIDENT; taxable only for income

4. capital gain tax (such as: [a] sale of shares
of stocks of a domestic corp by a person from sources within the Phil, and exempt for
who is not a dealer in securities and ; [b] on
sale of real property classified as a capital income from sources outside the Phil.
FOR IMMIGRANTS AND

asset by a person who is not a real estate
dealer or developer) EMPLOYEES OF A FOREIGN
5. tax on passive investment income (such as: ENTITY ON PERMANENT BASIS
interest, dividend, royalty)
6. fringe benefit tax
- treated as non-resident citizens
FOR OVERSEAS CONTRACT

7. branch profit remittance tax on Phil
branches of foreign corp WORKERS
8. tax on improperly accumulated earning tax - to be deemed as non-resident citizen,
of corp he must be physically present abroad
most of the time during the calendar

9. final withholding tax on certain income.
year (183 days).
- however, physical presence abroad
ALIENS

need not be continuous.
TAXABLE PERIOD • RESIDENT; aliens actually present in the Phil

who is not mere transient or sojourner (those
who comes to the Phil for a definite urpose,
CALENDAR METHOD which in its nature may be promptly
ITR, whether for an individual or for cop, accomplished),
assoc, or partnership, are required to be filed but whose purpose is of such nature
that an extended stay may be

on Dec. 31st of every year
necessary for its accomplishment, and
to that end the alien makes his home
temporarily in the Phil
FISCAL PERIOD AN ALIEN LOSES HIS RESIDENT

corporation, assoc, or partnership may with the STATUS
approval of the Commissioner of IR, file their
returns and compute their income on the basis ~ if he actually leaves the Phil
of a fiscal year
- an accounting period of 12 months
• NON-RESIDENT
ENGAGED IN TRADE OR BUSINESS

ending on the last day of the month
IN THE PHILIPPINES
other than Dec.
DOES NOT APPLY TO

- if the aggregate period of his stay in
the Phil is more than 180 days during
any calendar year.

- individual taxpayer
SHORT PERIOD
- same tax treatment as for income
incurred by Resident Alien; such as
an accounting period of a taxpayer for less 1. e n t i t l e d t o d e d u c t i o n s a n d
than 12 mos, as when the annual accounting exemptions
period of a subsidiary is changed to conform 2. graduated income tax rate of 5%
with the annual accounting period adopted by to 32%
its foreign parent company 3. passive investment income 20%
for easy consolidation of their audited FIT
NOT ENGAGED IN TRADE OR
worldwide financial statements.
THIS IS AS AN EXE TO THE RULE

BUSINESS IN THE PHILIPPINES
- if the aggregate period of his stay is
- that the accounting period or taxable less than 180 days
year consist of 12 months. 
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THE AWESOME NOTES

- the tax treatment for income from
sources within shall be
1. 25% GIT for compensation
CORPORATIONS
DOMESTIC CORPORATIONS
income, business or professional corporations created or organized in the Phil or
income, capital gain, passive
investment income and others
under its laws.
2. C a p i t a l G a i n Ta x o r S t o c k
Transaction Tax for sale or
exchange of shares of stocks in a

FOREIGN CORPORATION
RESIDENT FOREIGN CORP

domestic corp and from real - foreign corporation engaged in trade
property located in the Phil.
SPECIAL CLASSES OF INDIVIDUAL

or business in the Phil
- subject to either preferential tax rate
or corporate income tax/minimum

EMPLOYEES
FF EMPLOYEES ENTITLED TO

corporate income tax.
NON-RESIDENT FOREIGN CORP

PREFERENTIAL TAX RATES - foreign corporation not engaged in
alien individual employed by: trade or business in the Phil
1. Regional or area headquarters and regional - for income from sources within,
operating headquarters of multinational subject to 35% Final Corporate Income
companies in the Phil Tax, which must be withhold by the
2. Offshore banking units established in the
Phil
3. Foreign service contractor or sub-contractor

Philippine payor of the income.
WHEN DEEMED ENGAGED IN

engaged in petroleum operations in the TRADE OR BUSINESS IN THE PHIL

Phil.
RATE: 15% preferential income tax

continuity of commercial dealings and
arrangements, and contemplates, to
that extent, the performance of acts or
rate in their gross compensation works or the exercise of some of the
income from sources within. functions normally incident to, and in

- by way of FIT. progressive prosecution of commercial
gain or for the purpose of business
FILIPINOS EMPLOYED IN MULTINATIONAL
C O M PA N I E S A L S O E N J O Y S T H E
PREFERENTIAL TAX RATE OF 15%

organization.
TEST:
- for Filipinos employed and occupying the there must be continuity of
same position as those of aliens employed by conduct and intention to
the entities mentioned above, establish a continuous
Regardless of WON business, such as
- there is an alien executive occupying appointment of a local
the same position
HOW DOES THIS WORKS

agent, not of
temporary character
- only when Filipino employed in RHQ BEST EXAMPLE OF RFC

or ROHQ choose to be taxed at 15% PHILIPPINE BRANCH OF A
preferential tax rate on their gross FOREIGN CORPORATION DULY

income or at the graduated tax rates. LICENSED BY THE SEC
~ in here,the taxpayer is the branch

MINIMUM WAGE EARNERS

and not the foreign corp itself.
EXE: should the FC transact

business in the Phil directly
and independently of its

branch. (Marubeni Case)
2 TYPES OF RFC
• those that do not derive any income
from sources within the Phil, thus

exempt from income tax
ie. Regional or Area HQ

- for the amount received by it
do not include fees or
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THE AWESOME NOTES

compensation for services

rendered.
JOINT VENTURES
ELEMENTS OF JV
• those that are engaged in trade or 1. each party to the venture must make a
business in the Phil and thus contribution, not necessarily of capital, but
subject to income tax, at: by way of services, skill, knowledge,
1. preferential tax rate; or material or money
2. normal corporate income tax 2. profits must be shared among the parties
rate or minimum corporate 3. there must be a joint proprietary interest
income tax rate, whichever is and right of mutual control over the subject
higher
BRANCHES ENGAGED IN TRADE

matter of the enterprise; and
4. usually there is a single business
transaction
OR BUSINESS IN THE PHILIPPINES, WHEN TAXABLE
ENTITLED TO PREFERENTIAL TAX 1. a domestic corp jointly owner by individuals
RATE and by 2 or more existing DC or FC, that is
1. the ROHQ of multinational corp in incorporated under the law of the Phil, duly
the Phil authorized to sell various registered and licensed by the SEC (this is
s e r v i c e s t o t h e i r a f fi l i a t e s , even if the JV is engaged in business of
subsidiaries or branches within the construction or energy-related activity)
Asia-Pacific Region and are taxed 2. Unincorporated JV or consortium, engaged
at 10% on their income from in any other line of business other than
sources within construction or energy-related activity, with
2. offshore banking units and foreign
currency deposit units of
Philippine branches of foreign

operating contract with the govt.
EXAMPLES:
banks, are taxed at 10% on their 1. joint emergency operations of 2
interest income on foreign business companies
currency loans to residents 2. leasing of 24 properties by 3
3. International air carriers (whether siblings to various tenants under
online or offline), and international common management for 15
shipping lines are taxed on their years
Gross Phil Billings at 2.5% 3. insurance pool or clearing house
4. foreign service-contractors and composed of 41 non-life insurance
sub-contractors engaged in corp for he purpose of allocating
petroleum operations in the Phil
5. Registered enterprises with PEZA,
SBMA, CDA, CJHDA and other

WHEN EXEMPT
and distributing the risk.
special zones and freeport zones.
ALL OTHERS, the tax will be either of

1. unincorporated joint venture engaged in
consortium or energy project
2. foreign joint venture or consortium that
the ff, whichever is higher does not sell goods nor perform services in
• Normal Corporate Income Tax: 35% the Phil. (only among non-resident foreign
corporate income tax based on net corp connected with local project in the
taxable income from sources within;
or
• Minimum Corporate Income Tax:
Phil.)
W H E N I T I S TA X A B L E ( A S
2% of their gross income from PARTNERSHIP)
sources within. after the completion of the construction

project and taxable on subsequent
sale or lease of the developed
condominium floors or units to
customers. (regular income tax and

expanded withholding tax)
EXE TO EXE:
the ff is still not taxable
1. allocation of floors, units or lots;
being a mere return of capital
2. distribution of developed lots or
units; akin to partitioning
commonly owned property
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THE AWESOME NOTES

PARTNERSHIP
GEN RULE: same treatment as an ordinary

ESTATE AND TRUST
ESTATE; defined

corporation. created by operation of law, when an individual
dies, leaving properties to his compulsory or
10% in the distributable net income
after tax of a partnership
- akin to 10% dividend tax for shs of a

other heirs.
TRUST; defined

corp.
AFTER-TAX NET INCOME PROFIT

is a legal arrangement whereby the owner of
the property (the trustor) transfers ownership to
a person (the trustee) who is to hold and
- the net profit of the partnership control the property belonging to the owner's
computed in accordance with the instructions, for the benefit of a designated
generally accepted principles of
accounting, less the corporate income
person/s (the beneficiary/ies)

tax.
NOTE:

GEN RULE: taxed same as an individual.
EXE:
the taxable income declared by the • entitled to the deduction in computing the ext
partnership for a taxable year after taxable income of estate or trust, for he
deducting the corporate income tax amount of
imposed 1. income for the year which is to be
• shall be deemed to have been distributed currently by the fiduciary to
actually or constructively received the beneficiaries; and
by the partners in the same taxable 2. the income collected by a guardian of
year, and an infant which is to be held or
• shall be taxed to them in their
individual capacity, whether actually distributed as the court may direct.
distributed or not.
EXE: WHEN NOT TAXABLE

HOWEVER; the amount deductible
- shall be included in computing the
taxable income of the beneficiaries,
1. GPP whether distributed to them or
2. unincorporated Joint Venture or Consortium
engaged in construction or energy-related
not.
projects.
GENERAL PROFESSIONAL PARTNERSHIP

• ALSO: in re; for the income received by
the estate, as a deduction in computing
the taxable income of the estate or trust
is a partnership formed by persons for the sole the income received by the estate of
purpose of exercising their common tue deceased person during the period
profession, of administration or settlement of the
no part of the income of which is estate, should the fiduciary, in his
derived from engaging in any trade or discretion, distributed to the legatee,
business.
WHO IS TAXABLE THEN

heir or beneficiary
HOWEVER; the amount so allowed to

THE PARTNERS themselves and not the be deducted shall be included in
partnership (although the partnership may be computing the taxable income of the
required to file ITR)
are liable for the payment of income
tax in their individual capacity

LHB
NOTE: IN RE; TRUST

- computed on their respective • income of trust, will be taxed to the trustor,
distributive shares of the partnership where the trust executed by him is revocable
profit. • income of trust us taxable to the trustee,
- whether their shares are actually where the trust is irrevocable
distributed or not. (Principle of • they are only entitled to personal exemption
Constructive Receipt of Profit) equivalent to a single individual in the

- NIT 5% - 32%
amount of 20k.
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THE AWESOME NOTES

CO-OWNERSHIP
FOR INCOME TAX PURPOSES
• the individual co-owners in a co-ownership
report their shares of the income from the
property owned in common by them in their
individual tax returns for the year, and
• the co-ownership is not considered as a
separate taxable entity or corp
TA X A B L E A S U N R E G I S T E R E D
PARTNERSHIP; when
should the co-owner invest the income of the
co-ownership in any income producing
activities, after partition

- taxable as corp.
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THE AWESOME NOTES

IT DOES NOT INCLUDE
1. deposit of property that does not increase
INCOME TAXATION the networth of the taxpayer
2. increase in networth due to correction of
errors in book entries
INCOME TAX; defined 3. voluntary assessment by a corporation paid
tax on all yearly profits arising from property, by its shs
professions, trades or offices or a tax on a 4. security deposit paid to a lessor
person's income, emoluments, profits and the 5. contributions by lot owners for the memorial
park care funds, and

like.
6. loan proceeds are not income of the
NATURE
A DIRECT TAX borrower
- on actual or presumed income (gross or net)

of the taxpayer received, accrued, or realized
NATURE
TAXABLE INCOME; defined

during the taxable year.
the pertinent items of gross income specified in
the NIRC,

GENERAL PRINCIPLES
GEN RULE:
LESS the deductions and/or personal
and additional exemptions, if any,
- authorized for such type of income by

there must be an actual income, gain or profit
EXE:
the NIRC or other special laws
in sale of real property located in the Phil WHEN IS INCOME TAXABLE

classified as a capital asset 1. there is income, gain or profit
2. such is received, accrued or realized during

- presumed gain.
the taxable year; and
TAX BASE:
6% CGT ON
3. not exempt from income tax.
• the actual consideration or

• the FMV

WHEN INCOME IS TAXABLE
- whichever is higher
- whether the seller makes a profit or
EXISTENCE OF INCOME
incurs a loss from the sale.

INCOME

INCOME; defined
amount of money coming to a person or
corporation within a specified time, whether for
payment of services, interest or profit from

REALIZATION OF INCOME
investment.
Unless otherwise specified, income
TEST OF REALIZATION

means cash or its equivalent.

IT INCLUDES
1. increase in inventory at the end of the
taxable year (but increase in the value of
real property is merely an increase in the
capital, and not as an income)

2. transfer of appreciated to employee for ACTUAL VS. CONSTRUCTIVE
services rendered; and
3. just compensation paid by government for
RECEIPT
property acquired by expropriation.

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THE AWESOME NOTES

RECOGNITION OF AN INCOME INSTALLMENT DEFERRED PERCENTAGE
income is recognized after the ff conditions has PAYMENT PAYMENT COMPLETEION
been met:
1. the earning process is complete ir virtually appropriate this includes: is applicable in
complete; and when: 1. agreement of case of:
- collections of purchase and b u i l d i n g ,

2. an exchange has taken place
MEANING:
the proceeds of
sale and income
extends over
sale which
contemplate that
a conveyance is
construction,
installation
c o n t r a c t s
relatively long not to be made covering a
the revenue must be earned before periods of time at the outset, but period in excess
they are received, and amount and there is only after all or of 1 year
received in advance are not treated as strong possibility substantial - whereby, gross
revenue of the period in which they are that full portion of the income derived
collection will not selling price has from such
earned be made been paid

2. sales in which
contract may be
reported upon

METHOD OF ACCOUNTING there is an
immediate
transfer of title,
the vendor being
the basis of the
percentage of
completion
CASH METHOD ACCRUAL protected by
METHOD mortgage or
other liens as to
d e f e r r e d
all items of gross a method of payments
income received accounting for
during the year shall income in the period in here: methods in
be accounted for in it is earned, if installment determining the
such taxable year; regardless of payment has. percentage of
been made, the completion of a
and whether it has been taxpayer shall contract:
the only expense received or not. only recognize 1. cost incurred
actually paid shall - same as for the the gross profit under the
on sale in contract as of
be claimed as expenses, it shall be proportion to the the end of the
deductions during accounted for in the cash collected tax year are
the year (regardless period they were during the year compared with
of the taxable year incurred, and not in the estimated
total to be
when the services is the period they are performed; or
performed or the paid 2. the work
expenses incurred). performed on
the contract as
of the end of the
admits both actual tax year is
and constructive compared with
receipt of cash or its the estimated
work to be
equivalent preformed.
IN SALE OF
R E
PROPERTY
does
A
not
L

exceeds 25% of
exceeds 25% of the selling price
the selling price
NOTES: IN RE: PERCENTAGE METHOD

ADDED REQUIREMENT FOR LONG-TERM
CONTRACT

- a contract taking more than a year for completion
certificate of the architect or engineer showing the

percentage of completion during the taxable year of the
entire work performed under the contract
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THE AWESOME NOTES

TEST IN DETERMINING WHETHER INCOME

IS EARNED FOR TAX PURPOSES
REALIZATION TEST
GROSS INCOME
there is no taxable income until
- there is a separation from capital of GROSS INCOME; defined
something of exchangeable value, thereby
supplying the realization or transmutation
income, gain, or profit subject to tax

which would result in the receipt of income.
IN HERE: stock dividend is not treated

IT INCLUDES:
FOR COMPUTING NORMAL CORPORATE

as an income INCOME TAX
- as it merely represent the equity 1. c o m p e n s a t i o n f o r p e r s o n a l a n d
interest in the corporation that professional services

declared it.
CLAIM OF RIGHT DOCTRINE

2. business income
3. income derived from whatever sources,
A K A : D O C T R I N E O F O W N E R S H I P,
COMMAND OR CONTROL

whether legal or illegal
EXE: tax exempt by Consti, tax treaty

taxable gain is conditioned upon
• the presence of a claim of right to the alleged
gain and

and statutes
FOR COMPUTING MINIMUM CORPORATE

• the absence of a definite unconditional INCOME TAX
obligation to return or repay that which would
otherwise constitute gain.

all items of income and profits
EXE:
ECONOMIC BENEFIT TEST, 1. exempt income
A K A : D O C T R I N E O F P R O P R I E TA RY
INTEREST
any economic benefit to the employee that
2. income subject to FIT
ALSO: RR 9-98
increases his networth, whatever may have OTHER MISCELLANEOUS INCOME
been the mode by which it is effected, is

taxable
- gain from non-recurring sale of equipments
HENCE: IN STCOK OPTION CONCEPT OF INCOME FROM WHATEVER

the difference between the FMV of the
shares at the time the option is
exercised and the option price

SOURCES DERIVED
constitute additional compensation

income to the employee at the time of

the exercise. (note: not at the time of

the grant)
SEVERANCE TEST

GROSS INCOME vs NET INCOME vs
NOT SURE HERE, BUT IN MAMALATEO'S TAXABLE INCOME
B O O K : I N C O M E F R O M W H AT E V E R
SOURCE GROSS NET INCOME TAXABLE
all income not expressly excluded or exempted INCOME INCOME
from the class of taxable income irrespective of
income, gain or gross income the pertinent
the voluntary or involuntary action of the profit subject to less statutory items of gross
taxpayer in producing the income, and tax deductions and income specified

regardless of the source of income, is taxable.
ALL EVENTS TEST

exemptionsqq in the NIRC,
LESS the
deductions and/
or personal and
under accrual method of accounting, an additional
expense was deductible for the taxable year in exemptions, if
any,
which all the events had occurred which - authorized for
determined the fact of the liability and the such type of
amount thereof could be determined with income by the
NIRC or other
reasonable accuracy. (when performed and not special laws
when the fact of obligation to perform is

determined.

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THE AWESOME NOTES

CLASSIFICATION OF INCOME AS TO

SOURCE
SOURCES OF INCOME SUBJECT TO TAX
GROSS INCOME INCLUDES (BUT NOT

INCOME WITHIN AND INCOME WITHOUT LIMITED) THE FF
1. compensation for services in whatever form
KIND OF DETERMINING FACTOR paid, including, but not limited to fees,
INCOME
salaries, wages, commissions and similar
INTEREST residence of the person paying the its
interest 2. derived from the conduct of trade or
business or the exercise of profession
COMPENSATI place of performance 3. derived from dealings in property
ON (services) 4. interest
SALE OF for goods produced and sold in the
5. rents
PERSONAL Phil 6. royalties
PROPERTY

- income within
for goods produced abroad and sold

7. dividends
8. annuities
9. prizes and winnings
outside Phil

-income without
produced within but sold outside and

10. pensions and
11. partner's distributive shares from the net
vice versa
- partly within and partly without income of the GPP
SALE OF for stocks of DC

COMPENSATION INCOME
SHARES OF
STOCK
- always income within
for stocks of FC
COMPENSATION; defined
all remuneration for services performed by an
- treated as personal property, employee for his employer under an emp-emp
hence, would depend where the relationship, unless specifically excluded by
stock was sold
SALE
R E A L
OF location of the real property

the code.
COMPENSATION INCOME; includes

PROPERT - cash value of all remuneration paid
un any medium other than cash, such
RENTALS AND the location of the property or where a s ; h o n o r a r i u m , b e n e fi t s a n d
ROYALTIES it is to be used,
- with regard to royalties, as to the allowance, personal emergency relief
compensation. allowance, longevity pay, subsistence
allowance, hazard pay, annuities,
DIVIDENDS if from DC

- always from sources within
if from FC

pension, etc.
ITEMS NOT INCLUDED

- only treated as income within if the renumeration paid for

ff are present:
50% 3 YEAR RULE

1. agricultural labor paid entirely in
products of the farm where the
1. at least 50% of its gross income is labor is preformed
from sources within the Phil; and 2. domestic service in private home
2. such gross income must be for the
3 year period, ending with the close
3. casual labor not in the course of
of the taxable year preceding the the employer's trade or business;
declaration of such dividenc and

INCOME PARTLY WITHIN AND PARTLY
4. services by citizen or resident of
the Phil for foreign organization or
international organization

WITHOUT 5. also those subject to GIT or FIT
COMPUTED BY:
first deducting the expenses, losses or other
and not NIT
note: FREE BOARD AND LODGING is

deductions apportioned or allocated thereto includible in the gross income for purposes of
and a ratable part of any EL/Od which cannot computing the taxable income, when:
be definitely allocated to some items of or - ie. driver of a lawyer

classes of gross income
FORMULA: in determining the allowable

• if the lawyer is a corporate lawyer, the
value of the board and lodging shall be
included in the gross
deduction to the gross income derived within - as the employer has no place of
GROSS INCOME (PHIL) X EXPENSE W business where the free board and
GROSS INCOME (W)  lodging may be given
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THE AWESOME NOTES

• if the lawyer is self-employed, the driver
shall be taxed only as to his wage, not
including the value of the free board and

WHO ARE LIABLE TO PAY FOR FBT
• THE EMPLOYER; if received by managerial

lodging and supervisory employees. but allowed to
PROVIDED: the same as business expense
1. the board and lodging is given • T H E E M P L O Y E E ; f o r r a n k - a n d - fi l e
within the premises of the place of employees, subject to NIT and withholding. in
business of the employer; and
2. it is given as a condition of the sense, it is not subject to FBT.
employment
OTHERWISE:
WHEN FRINGE BENEFIT IS NOT SUBJECT
TO FRINGE BENEFIT TAX
1. those received by rank-and-file employees
- the value of the board and lodging 2. required by the nature of or necessary to
shall be included in the gross of the the trade, business or profession of the

employer.
FRINGE BENEFIT
employer
3. given for the convenience or advantage of
the employer
any good, service or other benefits furnished 4. authorized and exempted from income tax
or granted in cash or in kind by an employer to under the code or any soecial laws

an individual employee.
EXAMPLES OF FRINGE BENEFIT,

5. contribution of the employer for the benefit
of the employee to retirement, insurance
and hospitalization benefit plans (but in
such as, but not limited to the ff: excess, shall be subject to FBT. ie. in
1. housing excess than what is required by SSS or
2. expense account (eto yung GSIS)
expenses incurred by a 6. de minimis benefits
managerial employee which he 7. RR no 3-98: for housing units
can be reimbursed) • situated inside or adjacent to the
3. vehicle of any kind premises of a business or factory
4. household personnel, such as (deemed adjacent to the remises of
maid, driver and others the business if; it is located within the
5. interest on loan at less than the maximum 50 meters from the
market rate to the extent of the perimeter of the business enterprise.
difference between the market • temporary housing unit fir 3 months or
rate and actual rate granted
6. membership fees, dues and other
expenses borne by the employer
less
DE MINIMUS BENEFITS; defined

for the employee in social and limited to facilities or privileges
athletic clubs or other similar furnished or offered by an employer to
organizations his employee that are
7. expenses for foreign travels 1. relatively of small value; and
8. holiday and vacation expenses 2. offered or furnished by the
9. educational assistance to the employer as a means of promoting
employee or his dependents the health, goodwill, contentment,
10. life or health insurance and other
non-life insurance premiums or
similar amounts in excess of what
or efficiency of his employees.
PROFESSIONAL INCOME
the law allows
SPECIAL TREATMENT OF FRINGE BENEFIT

fees received by a professional from the
practice of his profession
PROVIDED: That there is no emp-emp

TAX relationship between him and his
client.

GEN RULE: 32% fringe benefit tax
EXE:
- otherwise, it is deemed

compensation income.
• 25% FBT: if received by NRANET/B WHY THE NEED TO DISTINGUISH AGAINST

• 15% FBT: received by an alien individual COMPENSATION INCOME
employed by a R/AHQ, ROHQ, Offshore - in compensation income, no allowable
banking units,mor foreign petroleum service
contractor or sub-contractor, or any of their
Filipino individual employees who are

deduction is allowed.
employed and occupying same position as

those held by the alien employees.
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THE AWESOME NOTES

INCOME FROM TRADE OR BUSINESS
FOR MANUFACTURING, MERCHANDISING

CAPITAL ASSET
those, which is not classified as an ordinary
asset

AND MINING BUSINESS
total sale
in case of deed of exchange executed by the
parties voluntarily and without financial
consideration, both parties (deemed 2
LESS: cost of goods sold transactions) shall be subject to capital gain
PLUS: any income from investments
and from incidental or outside
tax.

operations or source
NOTE: subtraction should not be made

NOTE: for capital gain tax, it is payable by the
seller, ordinarily. however, if without valuable
consideration, both the transferor and
for depreciation, depletion, selling
expenses or losses, or for items not
ordinarily used in computing the cost

transferee are liable to capital gain tax.
NOTE: ordinary asset is subject to graduated

of good sold.
TRADE OR BUSINESS; defined

income tax rates or normal corporate income
tax, and expanded withholding tax. while
capital asset, for RC, NRC, Aliens (whether a
continuity of commercial dealings and resident or not) and DC, shall be subject to
arrangements, final capital gain tax based on 6% of the gsp or
and contemplates, to the extent,
• the performance of acts or works or
the exercise of some of the

fmv at the time of the sale, whichever is higher.
NOTE: for FC., always subject to normal

functions normally incident to, and corporate income tax and expanded
• in progressive prosecution of,
commercial gain or for the purpose
and object of the business

withholding tax.
TYPES OF GAIN FROM DEALING IN
organization.
INCLUDES INCOME FROM LEASE OF REAL

PROPERTY
ORDINARY INCOME VS CAPITAL GAIN

PROPERTY
RC, NRC, RA, NRAET/B

what distinguishes capital gain from ordinary
income is that, the latter is derived from sale of
capital assets, while the former is derived from

- graduated rate NIT
NRENET/B
sale of ordinary assets
- ordinarily, capital gain is included in the gross
income, which shall be subject to NIT.

- 25% final withholding tax
DC
EXE:
1. sale of shares of stocks of a DC and
FC following 50% 3 YEAR RULE
- 35% corporate tax, or 2% minimum corporate 2. sale or exchange of real proper located

income tax, whichever is higher
in the Phil held as a capital asset
NRFC

- 35% corporate tax, subject to withholding.
ACTUAL GAIN VS PRESUMED GAIN
AS A GEN RULE: there must be an actual

INCOME FROM DEALINGS IN PROPERTY gain.
EXE: presumed gain for sale of real property

TYPES OF PROPERTY
ORDINARY ASSET
located within the Phil, based on the gsp or
fmv, whichever is higher.
and sale of shares of stock of a DC, not
1. stocks in trade of the taxpayer or other
property of a kind which would properly be
traded.

included in the inventory of the taxpayer if
on hand at the close of the taxable year
2. property held by the taxpayer primarily for

NET CAPITAL GAIN VS NET CAPITAL LOSS
NET CAPITAL GAIN; defined

sake to customers in the ordinary course of excess of gain from sale or exchange of capital
his trade or business assets, over losses from such sale or
3. property used in the ordinary corse of his
trade or business, of a character which is
subject to allowance for depreciation

exchange
NET CAPITAL LOSS; defined

4. real property used in trade or business of excess of losses from sale or exchange of
the taxpayer capital assets, over gains from such sale or
ie. real estate dealer exchange
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THE AWESOME NOTES

LONG TERM CAPITAL GAIN VS SHORT INCOME TAX TREATMENT OF CAPITAL
TERM CAPITAL GAIN

material only for individual taxpayer
LOSS
CAPITAL LOSS LIMITATION RULE

IN RE: LONG TERM CAPITAL GAIN losses fro sale or exchange of capital asset
- gain from sale or exchange of capital asset, shall be allowed only to the extent of he capital
held for more than 12 months
- only 50% of which is taxable in case of gain
gain from such sale or exchange.

or 50% of which is deductible, in case of loss
IN RE: SHORT TERM CAPITAL GAIN

GIST: capital loss can only be
deducted from the capital gain
- for transaction involving capital
- gain from sale or exchange of capital asset
held for less than 12 mos
- 100% of the gain realized by an individual is

assets in the same taxable year.
RATION:

taxable. as ordinary loss are those related to
trade or business, while capital loss is
DOES NOT APPLY: to those transaction where

gain is presumed.
not related to trade or business.
NOTE HOWEVER THAT

COMPUTATION OF THE AMOUNT OF GAIN ordinary loss may be deducted from

OR LOSS
IF THE PROPERTY IS ACQUIRED BY

capital gain, as capital gain is included

in the gross income.
PURCHASE APPLIES TO : individual and corp.

- Basis: the acquisition cost
IF THE PROPERTY IS ACQUIRED BY

EXE: Banks, incorporated under Phil
Laws.
INHERITANCE NET LOSS CARRY-OVER RULE

- basis; FMV at the time of the acquisition or any capital loss sustained by the taxpayer

GSP, whichever is higher
IF ACQUIRED BY DONATION OR GIFT

during a taxable year, shall be treated in the
succeeding taxable year as a loss from sake or
exchange of a capital asset held for not more
- Basis; shall be the sane as if the property
was in the hands of the donor who did not
acquire the property by way of gift. so kung

than 12 mos
REQUISITES:
anu yung value nung property when the donor 1. applies only to individual taxpayer
purchased or acquired by inheritance, yun 2. the loss should not exceed the net

yung basis na gagamitin ni donee.
EXE: if the basis is greater than the

income for the taxabke year when
the loss was incurred
3. here must be a capital gaun from
FMV of the property at the time of the which the carriedover loss can be

gift, the FMV shall be used as a basis
IF THE PROPERTY WAS ACQUIRED FOR

deducted.
SALE OF PRINCIPAL RESIDENCE

LESS THAN ADEQUATE CONSIDERATION exempt to FIT, if all the requisites are present:
IN MONEY OR MONEY WORTH 1. what was disposed of is the principal

- Basis: the amount paid by transferee or buyer
WHEN THE PROPERTY WAS ACQUIRED IN

residence of the taxpayer
2. proceeds of which is fully utilized in
acquiring or constructing a new principal
A TRANSACTION WHERE GAIN OR LOSS IS residence
NOT RECOGNIZED 3. acquisition or construction of the new
- Basis: the entire amount of the gain or loss residence is within 18 mos from the sale or

shall be recognized.
ELEMENT WHE GAIN ARE NOT

disposition
4. the historical cost or adjusted basis of the
real property sold or disposed shall be
TA X A B L E A N D L O S S N O T carried to the hew principal residence built
DEDUCTIBLE: 5. taxpayer should inform the BIR of his
1. it is a contract of exchange intention to avail of he exemption within 30
2. the parties are parties to the days from sale or disposition
merger or consolidation; and 6. can only be availed once every 10 years

3. t h e s u b j e c t m a t t e r i s o n e
specifically provided by law.
7. applcable only to individual taxpayer
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THE AWESOME NOTES

PASSIVE INVESTMENT INCOME
INTEREST INCOME
NOTE: discounts are treated in the same

manner as interest income
interest received or credited to the account of INTEREST INCOME FROM PHILIPPINE

the depositor or investor are included in their CURRENCY DEPOSIT AND DEPOSIT
gross income
UNLESS: they are exempted from tax
SUBSTITUTE

or subject to FIT
INTEREST; defined
• 20% FIT of gross interest income
- includes depositor enterprise
registered with PEZA, SBMA, CDA
amount which a depository bank may pay on and other economic zones and free
savings and time deposits in accordance with

the rates authorized by the BSP port zones and senior citizens
DEPOSIT SUBSTITUTES; defined

an alternative form of obtaining fund from the

• 25% GIT for NRANET/B
• when exempt from tax

public, other than deposits, if the depositor is an
through the issuance, endorsement or 1. employee trust fund or
acceptance of debt instruments for the
borrower's own account,
for the purpose of
2. accredited retirement plan
INTEREST INCOME ON FOREIGN

1. r e l e n d i n g o r p u r c h a s i n g o f
receivables and other obligations,
or

CURRENCY DEPOSIT
• 7.5% FWT on gross interest income

2. financing their own needs or the from foreign currency deposit with OBU
need of their agent or dealers.
OBTAINING FUNDS FROM THE PUBLIC;

or FCDU in the Philippines.
if from sources without

means: - for individual (RC); subject to
- borrowing from 20 or more individual or graduated income tax rate

corporate lenders at any one time.
EX OF INSTRUMENTS
- for DC; normal corporate income
tax of 35%
banker's acceptance, promissory notes, • 10% FWT on interest income from

repurchase agreements.
NOTE: not deemed as deposit substitute

foreign currency transaction
INTEREST INCOME FROM

debt instrument TRADITIONAL LOANS BY LOCAL
- debt instrument issued for inter-bank call
loans with maturity of not more than 5
days to cover deficiency in reserves

BANKS AND OTHER CREDITORS
subject to graduated income tax rate NIT,

against deposit substitute, including those

between banks and quasi-banks.
or normal corporate income tax.
GEN RULE: not subject ti creditable

YIELD; defined
synonymous with interest
- it is the difference between the amount the

withholding tax
EXE:
lender or investor loaned or placed and the 1. NRANET/B - 25% FIT
amount he received upon maturity of the 2. NRFC - 20% FIT
deposit substitute or debt instrument, which in 3. m a d e b y a To p 1 0 , 0 0 0
no case be lower than the rate prevailing at the
time of the issuance or renewal of said debt Corporation

instrument.
OTHER TRUST ARRANGEMENT; defined

INTEREST ON FOREIGN LOANS

EXTENDED BY NRFC
on yield or income not previously subjected to GEN RULE:

FIT, pertaining to all and other trust and similar 20% FWT, exe lower rate is imposed
arrangements, whether covered by a trust
indenture or agreement or by an investment or
portfolio management agreement or any other

under tax treaty.
EXE: when not taxable, if the loan is

similar document involving the investment or granted by:

management of funds. 1. foreign govt
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THE AWESOME NOTES

2. financial inst owned, controlled or STOCK DIVIDEND
enjoying refinancing from foreign govt is a dividend payable in reserve or
3. int'l or regional financing institution increase of additional stock of the
established by governments
INTEREST INCOME FROM LONG-TERM

corporation. it involves no disbursement,
and the corporation parts with nothing to
the shs who receive, not an actual
DEPOSITS OR INVESTMENTS OF

INDIVIDUALS IS EXEMPT
dividend but a certificate of stock.
GEN RULE:
EXE: should the holder of the certificate not subject to tax, as it does not
pre-terminate the deposit or investment constitute income, neither it
before the 5th year, a final tax shall be confers no different interest or
imposed on the entire income and shall be
deducted and withheld by the depository
bank; at the ff rate

right than did the old.
EXE: WHEN STOCK DIVIDEND

• 4 years to less than 5 years - 5%
• 3 years to less than 4 years - 12%
IS TAXABLE

• less than 3 years - 20%
NOTE: if the depositor or investor is a

1. if it constitute an income;
when it gives a shareholder
an interest different from than
corporation, interest income from long which his former stockholding
term deposit is always taxable and not represented

subject to preferential tax rate. 2. subsequent cancellation and
redemption of the stock

DIVIDEND INCOME
DIVIDEND; defined
dividend; equivalent to cash
dividend
a corporate profit set aside, declared and ROYALTY INCOME

ordered by the directors to be paid to the shs is a valuable property that can be developed

on demand or at a fixed time
IT COMPRISES

and sold in a regular basis for consideration,
GEN RULE: an ordinary income, as it

any distribution whether in cash or other is being developed and sold on a
property in the ordinary course of
business, even though extraordinary in
amount made gy DC, Joint Stock Co.,

regular basis. an active income
EXE: deemed a passive income when

Partnership, Joint Account, Association, - profit or gain received for the use of
Insurance Co., to shareholders or

members out of its earnings or profits.
intellectual property
CASH DIVIDEND
RENTAL INCOME
is disbursement to shs of the accumulated

earnings, and the corporation parts
irrevocably with all interest therein.

LEASE OF PERSONAL PROPERTY
- when declared and paid to the

shs, such cash becomes the
absolute property of the shs and
cannot be reached by creditors of
the shs.
PROPERTY DIVIDEND
is a dividend payable in property, which
may be investments in shares of stock of a
corporation, or real property, or some
other property owned by the corporation,

paying the dividend
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THE AWESOME NOTES

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THE AWESOME NOTES

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THE AWESOME NOTES

EXCLUSION FROM GROSS INCOME
the items that are not included in the
determination of gross income either because

EXEMPTION UNDER THE CONSTITUTION
EXEMPT FROM TAX:

1. they represent retrun of capital or are not income derived by national govt or its
an income, gain or profit political subdivision from the exercise of
2. they are subject to another kind of internal any essential govt functions or from any
revenue tax; or
3. they are income, gain or profit that are
expressly exempt from income tax under

public utility.
NOTE: while LGU has no power to tax the

the Constitution,tax treaty or general or National Government, but the latter may
special laws. tax the former, so long as it is not being tax

for profit arising from
• the operation of public utilities and
EXCLUSION DEDUCTION • the exercise of essential govt
functions.
refers to flow of refers to the amount HENCE: only limited when the profit is
wealth to the
taxpayer which are
received, which the
law allows to be
from the exercise of proprietary functions.
not treated as part

of the gross income
deducted from gross
income in order to
EXEMPTION UNDER THE TAX CODE

arrive at net income

PROCEEDS OF LIFE INSURANCE
EXEMPT FROM TAX

VS. TAX CREDIT The proceeds of life insurance policies
paid to the heirs or beneficiaries upon the
death of the insured, whether in a single

sum or otherwise,
HOWEVER
if such amounts are held by the insurer
under an agreement to pay interest
thereon,
TAXPAYER WHO MAY AVAIL OF THE the interest payments shall be

EXCLUSION
included in gross income.
NOTE: the reservation of the right to

designate or substitute the beneficiary for
another is not important for income tax
purposes, although it is material for estate

tax purposes.
RATION WHY PROCEEDS OF LIFE

INSURANCE IS EXEMPT FROM TAX
- as proceeds of life insurance is really a
contract of indemnity, rather than an

income to the heirs or beneficiaries.
RETURN OF PREMIUM PAID

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

AMOUNT RECEIVED UNDER LIFE NOTE: WHEN DAMAGES
INSURANCE, ENDOWMENT OR AWARDED BY THE COURT IS

ANNUITY CONTRACT
EXEMPT FROM TAX

TAXABLE
• insider profit recovered by a
corporation from the insider, are
amount received, other than the amount taxed to the corp
by reason of the death of the insured and • when it is in the nature of
interest payment on such amount, under compensation (ie. accrued
life insurance, endowment or annuity vacation allowance or sick

contract.
EXE: when taxable

leave credit)
INCOME EXEMPT UNDER TAX TREATY

if the amount received exceeds the Income of any kind, to the extent required
aggregate premium or consideration paid, by any treaty obligation binding upon the
whether or or paid during the taxable year,
- the excess shall be included in
Government of the Philippines.

the gross income NOTE: for exemption to apply, it must be
categorically and unmistakable expressly,
NOTE:
in case of transfer for valuable
consideration by assignment or otherwise,

and cannot be just implied therein.
NORE: no exemption of interest on govt

of life insurance, endowment or annuity
contract, or any interest therein
ONLY THE ACTUAL VALUE

securities.
RETIREMENT BENEFITS, PENSIONS,

• of such consideration and
• the amount of the premium and
other sum subsequently paid by

GRATUITIES, ETC.
Retirement benefits received under

the transferee Republic Act No. 7641
- are exempt from tax.
VALUE OF THE PROPERTY ACQUIRED

those received by officials and employees
of private firms, whether individual or
corporate, in accordance with a
BY GIFT, BEQUEST, DEVISE OR reasonable private benefit plan maintained

DESCENT
EXE: taxable yung income from the

by the employer:
PROVIDED,

property.
The value of property acquired by gift,

1. That the retiring official or
employee has been in the
service of the same employer
bequest, devise, or descent: Provided, for at least 10 Years and
however, That income from such property, 2. is not less than 50 years of
as well as gift, bequest, devise or descent age at the time of his
of income from any property, in cases of
transfers of divided interest, shall be retirement:

included in gross income.
AMOUNTS RECEIVED THROUGH

Provided, further, That the benefits
granted under this subparagraph
shall be availed of by an official or

ACCIDENT OR HEALTH INSURANCE
EXEMPT FROM TAX

employee only once.
EXE TO EXE: when always

amounts received, through Accident or exempt from tax: terminal leave
Health Insurance or under Workmen's pay
Compensation Acts, as compensation for when separation is caused by:
personal injuries or sickness, 1. death
PLUS the amounts of any 2. sickness
damages received, 3. other physical disability
- whether by suit or agreement, on 4. from causes beyond the
account of such injuries or control of the employee or
sickness. official (involuntary and the
(compensation for personal

injuries and damages) cause is not initiated by him)

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THE AWESOME NOTES

REASONABLE PRIVATE BENEFIT PLAN;
means
a pension, gratuity, stock bonus or profit-
sharing plan maintained by an employer
for the benefit of some or all of his officials
or employees,
• wherein contributions are made by such
employer for the officials or employees,
or both, for the purpose of distributing to
such officials and employees the
earnings and principal of the fund thus
accumulated, and
• wherein its is provided in said plan that
at no time shall any part of the corpus or
income of the fund be used for, or be
diverted to, any purpose other than for
the exclusive benefit of the said officials
and employees.
LIKEWISE; the ff shall be exempt

1. SSS Benefits
2. GSIS benefits
3. P a y m e n t u n d e r U S v e t e r a n
Administration
4. Retirement benefit from foreign
government agencies, and other
institutions, private or public
5. separation pay for causes beyond the
control of the employee

WINNINGS, PRIZES, AWARDS
WHN EXEMPT FROM TAX

• Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary, or

civic achievement
PROVIDED
1. The recipient was selected
without any action on his part
to enter the contest or
proceeding; and
2. The recipient is not required to
render substantial future
services as a condition to
receiving the prize or award.
• Prizes and Awards in Sports

Competition. - All prizes and awards
granted to athletes in local and
international sports competitions and
tournaments whether held in the
Philippines or abroad and sanctioned by

their national sports associations.
REQ FOR EXEMPTION

that it must be sanction by

Philippine Olympic Committee
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THE AWESOME NOTES

DEDUCTIONS FROM GROSS INCOME SALE OF STOCK IN TRADE BY A REAL
ESTATE DEALER AND DEALER IN
PRELIMINARY
• deduction are construed strictly against the
SECURITIES
taxpayer claiming it. NOT ALLOWED TO CONSIDER

the amount representing return of capital
3 TYPES OF DEDUCTION FROM GROSS
INCOME
1. itemized deduction in Sec. 34 (A) to (J) and RATHER

through cost of sales
(M) available to all kinds of taxpayer what is deducted is

engaged in trade or business or practice of THE TOTAL COST
profession in the Phil specifically identifiable to the real
2. OSD in Sec. 34 (L) available only to property or shares of stock sold or
individual taxpayer deriving business,
professional, capital gains and passive
income not subject to FIT.

exchanged.
EXE: WHEN ESTIMATED COST

3. Special deductions in Sec. 37 and 38, both IS PROPER
of the Tax Code, and in special laws like - for computation of the cost of
BOI law (EO 226)
GEN RULE
building projects on pre-sale
stage.
on the theory that income
1. deduction must be paid or incurred in tax is a tax in gross or net
connection with the taxpayer's trade,
business or profession
2. deduction must be supported by adequate SALE OF SERVICES

income.
receipts or invoices the entire gross receipts are treated as

3. additional requirement to the withholding
see: requisites for deductibility of

part of the income
HENCE: NO DEDUCTION, right?

expenses - as they do not take or assume
any risk of loss similar to seller of
WHEN RECEIPT/ INVOICES SHALL
NOT BE REQUIRED inventory of goods.
- in case of OSD
RETURN OF CAPITAL

ITEMIZED DEDUCTION
IN GENERAL
(COST OF SALES OR SERVICES) FF DEDUCTIBLE ITEMS
the amount representing return of capital 1. expenses
• should be deducted from the proceeds from 2. interest
sales of assets and 3. taxes

• should not be subject to income tax.
SALE OF INVENTORY OF GIIDS BY

4. losses
5. bad debts
6. depreciation
MANUFACTURERS AND DEALERS OF 7. charitable and other contributions
PROPERTIES
the proceeds here consist of the ff
8. contribution to pension trust
1. the return of the capital (not taxable);

and
2. the gain from sale of goods or

EXPENSES
REQUISITES
properties
DEDUCTIBLE
1. it must be ordinary and necessary
2. it must be paid or incurred during the
taxable year
• cost of goods manufactured and sold 3. it must be paid or incurred in carrying
(for manufacturers) and on or which are directly attributable to
• cost of sales (for dealers) the development, management,

operation and/or conduct of the trade,
business or exercise of profession
4. it must be supported by adequate
invoices or receipt
5. it is not contrary to law, public policy or
morals; and
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THE AWESOME NOTES

6. the tax required to be withheld on the WA G E S , S A L A R I E S A N D O T H E R
expense paid or payable is shown to F O R M S O F C O M P E N S AT I O N ,
have been remitted to the BIR
2 KINDS OF DEDUCTIBLE EXPENSES

INCLUDING THE GROSSED-UP
MONETARY VALUE OF THE FRINGE
BENEFIT SUBJECT TO FBT WHICH
1. ORDINARY EXPENSE; a payment,
which is normal in relation to the
business of the taxpayer and the

SHOULD HAVE BEEN PAID
3 KINDS OF EXPENSES
surrounding circumstances CONTEMPLATED HERE
2. N E C E S S A R Y E X P E N S E S ; 1. salaries and wages
expenditure appropriate or helpful in 2. other forms of compensation for
the development of the taxpayer's personal services actually rendered;
business or that the same is proper for and
the purpose of realizing a profit or 3. the grossed-up monetary value of

minimizing a loss
NOTE: CAPITAL EXPENDITURE

fringe benefit subject to FBT which
should have been paid
IS NOT DEDUCTIBLE
ie. expenses incurred in effort to
OTHER KINDS OF COMPENSATION

establish its goodwill.
RATION: because it is not a

• BONUS

To be Deductible
business expense. it is a capital - the bonus must arise from the

expenditure. haha
SUBJECT TO TEST OF
personal service that had been
rendered in carrying the trade or
business. otherwise, not deemed

REASONABLENESS
PAID AND INCURRED DURING THE

an ordinary or necessary expense

TAXABLE YEAR
HENCE: expenses are deductible in the

NOTES
extra bonus must be given in gf. hence, if
given during the time when the company is
year they were incurred and not in the year suffering from losses, it is deemed not

that they were billed. normal to the business, and consequently
not treated as an ordinary or necessary
KINDS OF EXPENSES
1. salaries, wages and other forms of
compensation for personal services

expense.
GROSSED-UP MONETARY VALUE OF

actually rendered, including the FRINGE BENEFIT
grossed-up monetary value of the with respect to the benefits given to
fringe benefit subjected to fringe managerial employees, not pursuant to
benefit tax which tax should have been trade or business
paid may be claimed as a deduction,
2. traveling or transportation expenses provided;
3. cost of materials
4. rentals and/ or other payments for use
or possession of property
- FBT (FIT) has been paid.
HENCE: Fringe Benefit can be

5. repairs and maintenance deducted from the gross only
6. expenses under lease agreement when
7. entertainment/ recreation expenses 1. if given in pursuit of its trade
8. political campaign expenses or business; or
9. training expenses 2. e v e n i f n o t , i f g i v e n t o

managerial employees and
the FBT has been paid
NOTE: BRIBES, KICKBACKS AND

OTHER SIMILAR PAYMENTS
- not deductible, as they are not ordinary
or necessary expense to the trade,
business or profession, and being contrary

to law, public policy and morals.
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THE AWESOME NOTES

TRAVELING OR TRANSPORTATION EXPENSES UNDER LEASE

EXPENSE

AGREEMENT
DEDUCTIBLE
a reasonable allowance for travel
expenses, here and abroad, while away
from home

in pursuit of trade, business or
profession
 

HOWEVER: ff Sec. 34(1)(a)(ii)
- deemed fringe benefit. so follow the rules
on fringe benefit whether it is deductible or

EXPENSES FOR PROFESSIONALS
FF ARE DEDUCTIBLE EXPENSES

not.
RENTALS AND/OR OTHER PAYMENTS

1. the cost of supplies used by him or in
the practice of his profession
2. those paid in the operation and repair
FOR USE OR POSSESSION OF of transportation equipment used in

PROPERTY
DEDUCTIBLE
making professional calls
3. dues to professional societies and
subscription to professional journals
reasonable allowance for rentals and/or 4. rents paid for office rooms
the payments which are required as a 5. expense of the fuel, light, water,
condition for the continued use or telephone, etc., used in such office;
possession for the purpose of trade, and
business or profession, 6. hire of office assistants
of property to which the taxpayer 7. amount of books, furniture and
• has nit taken or is not taking professional instruments and
title; or equipment, the useful life of which is
• in which he has no equity other
than that of a lessee, user or
short.
possessor
REPAIR AND MAINTENANCE &

HENCE: if the useful life of books,
furniture and equipment is of
permanent character

COST OF MATERIALS
FF ARE NOT DEDUCTIBLE ITEMS:

- not deductible.
NOTE: premium paid for

when treated as a capital expenditure insurance in malpractice is
1. any amount paid out for new buildings deductible. but the tuition fees for
or for permanent improvements or pre-bar classes and bar
betterment made to increase the value
of any property or estate
2. any amount expended for restoring

examination fees is not deductible.
ENTERTAINMENT AND RECREATION

property or in making good the
exhaustion thereof, for which an
EXPENSE

allowance is or has been made
EXE: in private educational

CONDITION OF DEDUCTIBILITY
• that it is directly connected to the
development, management and
institution, where it may opt to operation of the TB/P of the taxpayer
deduct it either as: or, that it is directly related or in
a. e x p e n d i t u r e s o t h e r w i s e furtherance of his TB/P
considered as capital outlays • not to exceed the ceiling as he Sec of
of depreciable assets, Finance may by rules and regulation
incurred during the taxable prescribe, upon the recommendation of
year for the expansion of the Commissioner;
school facilities; or taking into consideration
b. allowance for depreciation - the nature and character of the
thereof.
RATION WHY ALLOWED

industry TB/P of the taxpayer
provided further
- that such is not contrary

to give it an opportunity to expand
and/or improve its facilities. to LMPP
AAA - BASTE / ATB

THE AWESOME NOTES

RR NO 10-2002 INTEREST
LIMITATION OF THE AMOUNT TO BE the amount paid by a debtor to his creditor for

DEDUCTIBLE FROM THE GROSS
• IF ENGAGED IN SELLING GOODS;

the use or forbearance of money
the amount of interest expense paid or
incurred within a taxable year on
amount to be deducted shall not indebtedness in connection with the
exceed .5% of the gross receipt
• IF ENGAGED IN SELLING SERVICES;

taxpayer's trade, business or exercise
of profession,
- shall be allowed as deduction from

amount not more than 1% of its gross
receipt. the taxpayer's gross income
REQUISITES FOR DEDUCTIBILITY

POLITICAL CAMPAIGN EXPENSES
NOT DEDUCTIBLE
1. there must be a valid and existing
indebtedness
2. the indebtedness must be that of the
- as it is not directly attributable, to the taxpayer
development, management, operation 3. the interest must be legally due and
and/or conduct of a trade, business or stipulated in writing

profession 4. interest expense must be paid or
incurred during the taxable year

TRAINING EXPENSES 5. the indebtedness must be connected
with the taxpayer's TB/P
6. the interest payment arrangement must

not be between related taxpayers as
expressed in Sec. 34(B)(2)(b), in re to

Sec. 36(B)
7. the interest is not expressly disallowed

by law to be deducted from the
taxpayer's gross income (ie. interest on

indebtedness to finance petroleum
operations
NOTE: SUBSTANTIATION REQUIREMENT 8. the amount of interest deducted from
no deduction from gross income shall be gross income does not exceed the limit
allowed, unless the taxpayer shall substantiate
it with sufficient evidence of
1. the amount of the expenses being
set forth in the law. (33%)
NON-DEDUCTIBLE INTEREST
deducted; and
2. the direct connection or relation of the
EXPENSE
expenses being deducted to the

development, management, operation and/
• INTEREST PAID IN ADVANCE
or conduct of the TBP
FURTHERMORE: Esso vs Commissioner

EXE:
if the entire amount of principal
obligation has been paid on the
CONDITION FOR EXPENSES TO BE year the debt was incurred and the
DEDUCTIBLE (BUSINESS TEST) interest paid
1. the expense must be ordinary and - the entire amount of interest
necessary corresponding to the principal is
2. it must be paid and incurred within taxable
year
3. paid and incurred while carrying trade or

deductible
if only a portion of the principal

business has been paid
- interest expense to be deducted
shall only be in an amount
corresponding to the amount the

principal paid.
say: 1M yung utang. 20% interest.

800k yung inadvance, yung 200k
represent the interest. this was
incurred on 2013. supposing at the
end of 2013, debtor was only able
to pay the amount of 500k. in
AAA - BASTE / ATB

THE AWESOME NOTES

here, the amount deductible for NOTE: once the taxpayer elects to
the interest expense shall be treat the interest as an interest
- 100k. (50% of principal obligation expense, by deducting it to the

x interest paid)
• NO DEDUCTION SHALL BE ALLOWED

gross income, he can no longer
apply the same as capital
expenditure.
BETWEEN RELATED PARTIES - otherwise, would constitute

double tax benefits which is not
THE FF ARE RELATED PARTIES
1. m e m b e r s o f t h e f a m i l y,
brother/sister, whether full or

authorized under the law.
• REDUCTION OF INTEREST EXPENSE/

half blood
2. between an individual and a
corporation, in which more

INTEREST ARBITRAGE
the law provides that interest

than 50% in value of its OCS expense shall be reduced by 33%
is owned directly or indirectly
by such individual
3. between grantor and fiduciary

of the interest interest income.
FORMULA:
of any trust Interest Income
4. between fiduciary of a trust X 33%
and beneficiary of a trust, if LESS: interest expense
the same person is the interest expense allowed as

grantor with respect to each
trust
deduction
QUERY: if no interest income, is

• IF THE INDEBTEDNESS WAS the whole amount of interest

INCURRED TO FINANCE PETROLEUM
OPERATION
TAXES

expense deductible?
all taxes, national or local, paid or accrued

INTEREST SUBJECT TO SPECIAL during the taxable year in connection with TB/P

RULES of the taxpayer are deductible from gross

income.

• INTEREST PAID IN ADVANCE
• I N T E R E S T P E R I O D I C A L LY
1. payment must be for taxes
AMORTIZED
• INTEREST EXPENSE INCURRED TO

2. taxes are imposed by law upon
the taxpayer
3. taxes must be paid or accrued
ACQUIRE PROPERTY FOR USE OF during the taxable year in
TB/P
IN HERE;
connection with the taxpayer's TB/
P; and
4. taxes are not specifically excluded
OPTIONAL TREATMENT OF bylaw from being deducted from
INTEREST EXPENSE
the taxpayer has the option to:
1. use the interest expense as a

the taxpayer's gross income
NON-DEDUCTIBLE TAXES
deduction; or 1. Philippine income tax
2. t r e a t i t a s a c a p i t a l 2. Foreign income tax, should the
expenditure subject to taxpayer avail of the tax credit

allowance and depreciation
SHOULD TAXPAYER OPT TO

benefit.
3. Estate and donor's taxes
4. Special assessments on real
T R E AT I T A S I N T E R E S T property OR taxes assed against
EXPENSE local benefits of a kind tending to
- the full amount may be deducted increase the value of the property

in the year it was incurred assessed.

5. Electric energy consumption tax
OTHERWISE; IF HE OPT IT AS
CAPITAL EXPENDITURE
- he can only deduct the periodic

amortization of such expenditure
AAA - BASTE / ATB

THE AWESOME NOTES

TREATMENT OF SURCHARGES/ TAX CREDIT TAX DEDUCTION
INTERESTS/ FINES FOR

DELINQUENCY
gross income
LESS: deductions
gross income
LESS: deductions
NET INCOME
X tax rate
NET INCOME
X tax rate
INCOME TAX DUE

LESS: tax credit
N E T I N C O M E TA X
INCOME TAX DUE
PAYABLE
LIMITATIONS
FOR RC AND DC
- only when they should
LIMITATION
FOR NRAET/B
- the allowed deduction for
signify in the return their

desire to avail of the said
taxes shall only be up to
the extent of taxes
credit
- for the amount of income
taxes paid or incurred by
incurred in connection with
their income from sources
within the Phil
them during the taxable

year to an foreign country
F O R E S TAT E A N D
PARTNERSHIP
- to avail the tax credit

benefit, the distributable

share of the income of
such partnership or trust is
reported for purposes of
T R E AT M E N T O F S P E C I A L
income tax.
NOTE: failure to signify to

ASSESSMENT
avail the tax credit benefit,
barred to claim the same.
- but may still use the tax
paid in foreign country as
deduction.
reduces the tax liability reduces the taxable

itself income or net income,
which serves as the basis
for the tax

LIMITATIONS ON TAX CREDIT
• the amount of the credit in respect to the
tax paid or incurred to any country shall
not exceed
the same proportion of the tax
against which such credit is taken,
- which the taxpayer's taxable
income from sources within such
country, under this title, bears to
his entire taxable income for the

same taxable year.
• the the amount of the tax credit shall not

exceed
the same proportion of the tax
against which such credit is taken,
- which the taxpayer's taxable
income from sources without the
Phil taxable under (income tax)
bears to his entire taxable income
FORMULA

for the same taxable year.
GROSS INCOME (PHIL)

GROSS INCOME (WORLD)
X income tax due in Phil
= Tax Credit 
AAA - BASTE / ATB

THE AWESOME NOTES

LOSSES WAGERING LOSSES
GENERALLY CLASSIFIED INTO losses from wagering transaction is
1. those incurred in trade or business for profit allowed only to the extent of the gains
2. those incurred in any transaction entered
into for profit, although not connected with
the trade or business; and

from such transactions
NET OPERATING LOSS CARRY-OVER

3. casualty losses that arise from fire, storm, the net operating loss of the business or
shipwreck, or other casualty, or from enterprise for any taxable year
robbery or theft, even though not immediately preceding the current taxable
connected with the trade or business of the year,
taxpayer. which has not been previously

offset as deduction from gross
1. the losses must be that of the taxpayer
2. is actually sustained and charged off
income
SHALL BE CARRIED OVER AS

within the taxable year DEDUCTION FROM THE
3. the loss is evidenced by a closed and GROSS INCOME
completed transaction - for the next 3 consecutive
4. is not claimed as a deduction for estate taxable years immediately
tax purposes
5. not compensated for by insurance or
otherwise

following the year of such loss
EXE: WHEN IT CAN BE

6. in case of an individual, the loss must CARRIED OVER EXCEEDING 3
be connected with his TB/P, or incurred YEARS
in any transaction entered into for profit - the net operating loss of mines
through not connected with his TB/P other than oil and gas wells,
7. in case of casualty loss, it has been incurred in any of the first 10

reported to the IR within 45 days from
the date of the loss
years of operation
- can be carried over to

OTHER TYPE OF LOSSES
CAPITAL LOSS
the first of the 5 taxable
years following the loss
losses incurred from sales or exchange of IT SHALL NOT BE ALLOWED AS

capital assets
LIMITATION ON THE AMOUNT

DEDUCTION WHEN
• any net loss incurred in a taxable year
during which the taxpayer was exempt
DEDUCTIBLE from income tax; also
- only to the extent of gains from • it there is a substantial change in the

sale or exchange of capital assets
within the same taxable year.
ownership of the business or enterprise
THERE IS NO SUBSTANTIAL
SECURITIES BECOMING WORTHLESS CHANGE OF OWNERSHIP
shall be deemed as loss from sale or WHEN
exchange of capital assets (treated as not less than 75% in nominal
capital loss) value of the outstanding issued
- on the last day of such taxable shares, if the business is in the

year.
NOTE: the securities must be a

name of the corp, is held by or on
behalf of the same person
not less than 75% of the paid-up
capital asset. calital of the corporation, if the
- hence, if it is an ordinary asset, it business is in the name of a
is not deductible from the gross.
LOSSES ON WASH SALES OF STOCKS

corporation, is held by or on

behalf of the same person.
OR SECURITIES NET OPERATING LOSS; defined

see sec. 38 the excess of allowable deduction over
gross income of the business in a taxable

year
AAA - BASTE / ATB

THE AWESOME NOTES

BAD DEBTS DEPRECIATION
debts resulting from the worthlessness or is the gradual diminution in the useful value of
uncollectibility, in whole or in part, of amount tangible property
due the taxpayer by others, resulting from wear and tear and
arising from money lent or from
uncollectible amount of income from normal obsolescence.

goods sold or services rendered

ALSO APPLIES IN
amortization of the value of intangible assets,
the use of which in the trade or business is
1. t h e d e b t m u s t a c t u a l l y b e
ascertained to be worthless
2. the debt must have a value when

definitely limited in duration.

acquired or created 1. the allowance for depreciation
3. g e n u i n e c r e d i t o r - d e b t o r must be reasonable
relationship must exist 2. it must be for property arising out
4. it must be charged within the of its use in the trade or business
taxable year or out of its not being used
5. the debt must not be between temporarily during the year; and
related parties 3. it must be charged off during the
6. it must be connected with the TB/ taxable year from the taxpayer's
P of the taxpayer
FACTORS TO CONSIDER WON BAD

books of account
WHO MAY CLAIM

DEBT EXISTS the person who sustains an economic
1. debtor has no property nor visible loss from the decrease in property
income value due to depreciation.
2. d e b t o r h a s b e e n a d j u d g e d USUALLY:
bankrupt or insolvent the person who owns and has
3. collateral shares have become a capital investment in the
worthless
4. there are numerous debtors with
small amounts of debts and further

property
LIMITATION
action on the account would entail depreciation cannot go beyond
expenses exceeding the amount acquisition cost of the property and
sought to be collected.
NOTE:

cannot be based on appraisal value
METHOD OF COMPUTING
unpaid wages cannot be claimed as
deduction (bad debt), unless the
claiming taxpayer included the same in

DEPRECIATION ALLOWANCE
S T R A I G H T- L I N E M E T H O D ; b y

his gross.
EFFECT OF RECOVERY OF BAD

dividing the depreciable value over the

estimated useful life

DEBTS

DECLINING-BALANCE METHOD
TAX BENEFIT RULE

where the creditor was allowed a
deduction of bad debts, but said debts

SUM-OF-THE-YEARS- DIGIT
are subsequently recovered,
the previous deduction of bad
debt will nit be cancelled
METHOD
- but the recovered amount will

be added in the computation
of the gross income.
AAA - BASTE / ATB

THE AWESOME NOTES

C H A R I TA B L E AND OTHER science and culture, and in

CONTRIBUTIONS

economic development according
to the National Priority Plan
determined by NEDA
1. the charitable contribution must 2. foreign institutions or international
actually be paid or made to the organization in pursuance of or in
Phil gov't or any political compliance with agreements,
subdivision thereof exclusively for treaties, or commitments entered
public purpose, or any of into by the govt and the foreign
accredited domestic corporation or institutions or international
association specified in the Tax organizations or in pursuance of
Code special laws.
2. it must be made within the taxable
year
3. i t m u s t n o t e x c e e d 1 0 %
3. accredited NGO
PENSION TRUST CONTRIBUTION

(individual) or 5% (corporation) of the reasonable amount transferred or paid by
the taxpayer's taxable income the employer into the pension trusts of the
before charitable contribution
(whether deductible in full or
partial)

employees

4. it must be evidenced by adequate 1. such amount must not have been
receipts or records previously allowed as deduction
5. t h e a m o u n t o f c h a r i t a b l e 2. such must be apportioned in equal
contribution of property other than parts over a period of 10
money shall be based on the consecutive years beginning with
acquisition cost of said property.

the year in which the transfer or
payment is made

AMOUNT THAT MAY BE DEDUCTED
FIRST: it must not exceed 10%

DEDUCTION UNDER SPECIAL LAWS
(individual) or 5% (corporation) of the

taxpayer's taxable income before
charitable contribution (whether

deductible in full or partial)

SECOND: full or partial.
WHEN PARTIAL DEDUCTION

if the donee is any of the ff:
1. the govt of the Philippines or any
of its agencies or any political
subdivision thereof, for its use
exclusively for public purpose
2. accredited DC or Assoc organized
and operated exclusively for
religious, charitable, scientific,
youth and sports development,
cultural or educational purpose, or
for rehabilitation of veterans
3. social welfare institutions; and
4. NGO
WHEN FULL DEDUCTION

if the donee is any of the ff:
1. the govt of the Philippines or any
of its agencies or any political
subdivision thereof, including fully-
owned government corporations,
exclusively to finance, to provide
for, or to be used in undertaking
priority activities in education,
health, youth and sports
development, human settlements,
AAA - BASTE / ATB

THE AWESOME NOTES

OPTIONAL STANDARD DEDUCTION
instead of availing of the itemized deduction,

WHO IS A DEPENDENT
- to claim a deduction in an amount not is a legitimate, illegitimate or legally

exceeding 40% of their gross income
REQ: taxpayer must signify in his return his

adopted child
1. chiefly dependent upon and living
with the taxpayer
intention to elect the OSD 2. such dependent is not more than
OTHERWISE: failure to elect, deemed 21 yrs of age, or regardless of
to have chosen itemized deduction
NOTE: once election has been made,

age, is incapable of self-support
because of mental or physical
defect
it shall be irrevocable for the taxable 3. unmarried; and

year for which the return was made.
WHO ARE ENTITLED TO AVAIL OSD

4. not gainfully employed
BASED FROM THE FOREGOING, A

1. individual; exe NRANETB (so pwede lang FAMILY OF SIX (husband, wife and 4
ay yung RC, NRC, RA) dependents)
2. corporation; exe NRFCNETB (so pwede - can claim up to 200k as personal
lang DC and RFC)

3. partnership; exe GPP
exemption
STATUS AT THE END OF THE YEAR RULE

RATION WHY THE EXEMPTION if the change of the status will not benefit a
- because GIT applies to them, which taxpayer
is not subject to deductions - such change shall be treated as if it occurred
- as for the GPP, exempt kasi sila sa
tax. individual partners yung taxable
at the close of the taxable year

not the GPP. HENCE: change of status of the taxpayer shall
be effective only if such change will benefit the
PERSONAL AND ADDITIONAL EXEMPTION

MINIMUM WAGE EARNERS LAW RA 9504
taxpayer.
ie. should the taxpayer have add a dependent

NOTE: FF EXEMPTION CAN ONLY BE in the middle of the taxable year
CLAIMED BY: - may claim the corresponding exemption may
1. RC
2. NRC
3. OCW and Seamen;

be claimed in full for such taxable year
should one of the dependent die during the

4. RA and taxable year

5. NRAET/B (subject to qualifications)
BASIC EXEMPTION IN THE AMOUNT OF

- the taxpayer may still claim 25k at the close

of the taxable year.
Php 50,000.oo, for

1. single individual
2. married individual

EXEMPTION CLAIMED BY NRA
REQ:

3. head of the family
NOTE: if married individual

1. he must be a NRAET/B/exercise of
profession in the Phil
2. should file a true and accurate return of his
- if only one spouse is deriving an total income received by him from all
income, he alone can can claim the sources within the Phil
50k exemption. if both are earning, 3. extent of personal exemption is equal to the

both can claim 50k exemption
ADDITIONAL EXEMPTIONS FOR

exemption allowed in the income tax law in
the country of which they are subject or
citizen,
TAXPAYERS WITH DEPENDENTS • to the citizen of the Phil not residing in

Php 25,000.oo each
REQ:
such country
• not exceeding 25k
1. only for married individual (valid) NOTE: minimum wage earners are exempt
2. allowed only foe each dependent not
exceeding 4 (so maximum ay 100k)
3. can be claimed only by one spouse, and if

from tax.
legally separated, can be claimed only by

the spouse who has custody over the
children
AAA - BASTE / ATB

THE AWESOME NOTES

ITEMS NOT DEDUCTIBLE
GEN RULE:
not deductible in the sense that the ff items are

not related to the TB/P of the taxpayer
FF ITEMS ARE NOT DEDUCTIBLE

• personal, living and family expense
• any amount paid out of new buildings or for

permanent improvements, or betterment
made to increase the value of the property or

estate (Capital Expenditures)
EXE: in intangible drilling and

development cost incurred in
petroleum operations, which are

deductible.
• any amount expended in restoring property

or in making good the exhaustion thereof, for
which allowance is or has been made (Major
Repairs)
• premium paid on any life insurance policy

covering life of any officer or employee, or of
any person financially interested in any trade
or business carried on by the taxpayer,
individual or corporation, when the taxpayer
is directly or indirectly a beneficiary under
such policy, or when such is not normal,
usual or customary.
NOTE: this only refers to the premium

paid for the life insurance of a rank-

and-file employee
AS: if given to managerial and

supervisory employees, such shall
constitute as a fringe benefit subject to
FBT/FIT
- and the same can be deducted only

after FBT/FIT has been paid.
NOTE: may case, yung ginawang

beneficiary ay yung heirs nung govt
employee not connected with the
company
- considered not usual or customary.
wala kasing insurable interest, at yung
payment ng premium would constitute

as a bribe,
• loss from sales or exchanges of property
between related parties
OTHER NON-DEDUCTIBILE ITEMS

1. interest expense, bad debts, and losses
from sakes of property between related
parties
2. non-deductible interest, taxes and losses
3. losses from wash sales of stock or
securities
AAA - BASTE / ATB

THE AWESOME NOTES

EXEMPT CORPORATIONS
P R O P R I E TA RY E D U C AT I O N A L
GOVERNMENT OWNED OR CONTROLLED

CORPORATION

INSTITUTIONS AND HOSPITALS
THE FF ARE EXEMPT FROM TAX

GEN RULE: taxable. normal rate of 30% of its

net income
1. non-stock, non-profit educational EXE: FF ARE EXEMPTED FROM TAX

institution 1. SSS

2. government educational institution 2. PHIC
3. PCSO
SUBJECT TO LOWER RATE OF 10%
OF THE NET INCOME; if the ff
requisites are present

4. GSIS
ALSO THE FF ARE EXEMPT SUBJECT TO

1. it must be stock and non-profit QUALIFICATION
institution those corporations whose income is derived
2. it must be a private educational or from
hospital institution 1. any Public Utility
3. their gross income from unrelated 2. Exercise of any Essential Govt Functions
trade, business or other activity, if accruing to the Govt of the Phil or to any of
any, does not exceed 50% of their
gross income from all sources;
and

its political subdivision
NOTE:
4. must have been issued a permit to National Government can tax itself
operate from DECS, CHEF or except public utilities or exercising

TESDA essential govt function accruing to the
Govt of the Phil or any of its political
UNRELATED TRADE, BUSINESS OR
OTHER ACTIVITY
any trade, business or other activity,

subdivision
For LGU; is prohibited from taxing the

the conduct of which is nit substantially ff
related to the exercise or performance 1. national givt
by such educational institution or 2. its agencies and instrumentalities
hospital of its primary purpose or

function. 3. other LGU
OTHER EXEMPT CORPORATION OR

hence, if a school is selling balut and
earned 50k therefrom. its total income
amount to 90k,

ASSOCIATION
1. L a b o r, a g r i c u l t u r a l o r h o r t i c u l t u r a l

- di entitled for a lower rate of 10% organization not organized principally for
profit;
2. Mutual savings bank not having a capital

stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit;
3. A beneficiary society, order or association,
operating fort he exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or
mutual aid association or a nonstock
corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to the
members of such society, order, or
association, or nonstock corporation or their
dependents;
4. Cemetery company owned and operated
exclusively for the benefit of its members;
5. Nonstock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
AAA - BASTE / ATB

THE AWESOME NOTES

shall belong to or inures to the benefit of - hence, it can be deduced that the
any member, organizer, officer or any partnership did not earn any income
specific person; other than from the exercise of
6. Business league chamber of commerce, or
board of trade, not organized for profit and
no part of the net income of which inures to
profession.
JOINT-VENTURE
the benefit of any private stock-holder, or
individual;
see qualifications
7. Civic league or organization not organized

for profit but operated exclusively for the
promotion of social welfare;

8. A nonstock and nonprofit educational
institution;
9. Government educational institution;
10. Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of
a purely local character, the income of
which consists solely of assessments,
dues, and fees collected from members for
the sole purpose of meeting its expenses;
and
11. Farmers', fruit growers', 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, less the necessary
selling expenses on the basis of the
quantity of produce finished by them;
NOTE: TAXABLE HOWEVER FOR INCOME

FROM
property, real or personal, or from an activity
conducted for profit
regardless of the disposition of the

proceeds of the sale or income.

ALSO:
GENERAL PROFESSIONAL PARTNERSHIP

REQUISITES
1. formed by person for the sole purpose of
exercising their common profession
2. no part of the income of which is derived

from engaging in any trade or business
OTHERWISE:
Treated as taxable corporation. same
treatment for taxable corp.
- subject to RCIT and their share in the
profit shall be deemed as dividend

subject to FIT
EXE: even though GPP engaged in

trade or business, but the income is a
passive income
- not subject to RCIT
- since the passive income is not
included in the gross income and
subject to a separate return and liable
for FIT
AAA - BASTE / ATB

THE AWESOME NOTES

AAA - BASTE / ATB

THE AWESOME NOTES

(b) Any amount received by an official or
not exceed Thirty thousand pesos
(P30,000) which shall cover: (i) Benefits
employee or by his heirs from the received by officials and employees of the
employer as a consequence of separation national and local government pursuant to
of such official or employee from the Republic Act No. 6686; (ii) Benefits
service of the employer because of death received by employees pursuant to
sickness or other physical disability or for Presidential Decree No. 851, as amended
any cause beyond the control of the said by Memorandum Order No. 28, dated

official or employee.
(c) The provisions of any existing law to

August 13, 1986; (iii) Benefits received by
officials and employees not covered by
Presidential decree No. 851, as amended
the contrary notwithstanding, social by Memorandum Order No. 28, dated
security benefits, retirement gratuities, August 13, 1986; and (iv) Other benefits
pensions and other similar benefits such as productivity incentives and
received by resident or nonresident Christmas bonus: Provided, further, That
citizens of the Philippines or aliens who the ceiling of Thirty thousand pesos
come to reside permanently in the (P30,000) may be increased through rules
Philippines from foreign government and regulations issued by the Secretary of
agencies and other institutions, private or Finance, upon recommendation of the

public.
(d) Payments of benefits due or to become

Commissioner, after considering among
others, the effect on the same of the
inflation rate at the end of the taxable year.
due to any person residing in the (f) GSIS, SSS, Medicare and Other
Philippines under the laws of the United Contributions. - GSIS, SSS, Medicare and
States administered by the United States Pag-ibig contributions, and union dues of

Veterans Administration.
(e) Benefits received from or enjoyed

individuals.
(g) Gains from the Sale of Bonds,
Debentures or other Certificate of
under the Social Security System in Indebtedness. - Gains realized from the
accordance with the provisions of Republic same or exchange or retirement of bonds,

Act No. 8282.
(f) Benefits received from the GSIS under

d e b e n t u r e s o r o t h e r c e r t i fi c a t e o f
indebtedness with a maturity of more than
five (5) years.
Republic Act No. 8291, including (h) Gains from Redemption of Shares in
retirement gratuity received by government Mutual Fund. - Gains realized by the

officials and employees.
(7) Miscellaneous Items. - (a) Income

investor upon redemption of shares of
stock in a mutual fund company as defined
in Section 22 (BB) of this Code.
Derived by Foreign Government - Income SEC. 33. Special Treatment of Fringe
derived from investments in the Philippines Benefit. -
in loans, stocks, bonds or other domestic (A) Imposition of Tax.- A final tax of thirty-
securities, or from interest on deposits in four percent (34%) effective January 1,
banks in the Philippines by (i) foreign 1998; thirty-three percent (33%) effective
governments, (ii) financing institutions January 1, 1999; and thirty-two percent
owned, controlled, or enjoying refinancing (32%) effective January 1, 2000 and
from foreign governments, and (iii) thereafter, is hereby imposed on the
i n t e r n a t i o n a l o r r e g i o n a l fi n a n c i a l grossed-up monetary value of fringe
institutions established by foreign benefit furnished or granted to the
governments. employee (except rank and file employees
(b) Income Derived by the Government or as defined herein) by the employer,
its Political Subdivisions. - Income derived whether an individual or a corporation
from any public utility or from the exercise (unless the fringe benefit is required by the
of any essential governmental function nature of, or necessary to the trade,
accruing to the Government of the business or profession of the employer, or
Philippines or to any political subdivision when the fringe benefit is for the

thereof.
(c) Prizes and Awards -

convenience or advantage of the
employer).
(e) 13th Month Pay and Other Benefits. -

Gross benefits received by officials and
employees of public and private entities:
Provided, however, That the total
exclusion under this subparagraph shall
AAA - BASTE / ATB


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Income Taxation: Income Tax System Features of Philippine Income Tax Law

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THE AWESOME NOTES

TAXATION; NIRC Page 1 of 38

INCOME TAX SYSTEM FEATURES OF PHILIPPINE

SEMI-SCHEDULAR OR SEMI-GLOBAL TAX

SCHEDULAR TAX SYSTEM IS APPLIED FOR

1. passive investment income subject to Final

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KINDS OF TAXPAYERS CITIZENS

• RESIDENT; taxable for income from sources

see mamalateo's book pg, 78. may

• NON-RESIDENT; taxable only for income

FOR IMMIGRANTS AND

FOR OVERSEAS CONTRACT

TAXABLE PERIOD • RESIDENT; aliens actually present in the Phil

FISCAL PERIOD AN ALIEN LOSES HIS RESIDENT

ENGAGED IN TRADE OR BUSINESS

DOES NOT APPLY TO

THIS IS AS AN EXE TO THE RULE

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RESIDENT FOREIGN CORP

property located in the Phil.

SPECIAL CLASSES OF INDIVIDUAL

NON-RESIDENT FOREIGN CORP

WHEN DEEMED ENGAGED IN

RATE: 15% preferential income tax

the same position

HOW DOES THIS WORKS

- only when Filipino employed in RHQ BEST EXAMPLE OF RFC

EXE: should the FC transact

ie. Regional or Area HQ

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BRANCHES ENGAGED IN TRADE

special zones and freeport zones.

ALL OTHERS, the tax will be either of

sources within. after the completion of the construction

commonly owned property

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GEN RULE: same treatment as an ordinary

AFTER-TAX NET INCOME PROFIT

EXE: WHEN NOT TAXABLE

GENERAL PROFESSIONAL PARTNERSHIP

WHO IS TAXABLE THEN

HOWEVER; the amount so allowed to

NOTE: IN RE; TRUST

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separate taxable entity or corp

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- on actual or presumed income (gross or net)

TAXABLE INCOME; defined

in sale of real property located in the Phil WHEN IS INCOME TAXABLE

• the actual consideration or

incurs a loss from the sale.

property acquired by expropriation.

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earned be made been paid

NOTES: IN RE: PERCENTAGE METHOD

certificate of the architect or engineer showing the

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IN HERE: stock dividend is not treated

FOR COMPUTING NORMAL CORPORATE

CLAIM OF RIGHT DOCTRINE

EXE: tax exempt by Consti, tax treaty

FOR COMPUTING MINIMUM CORPORATE