Tax 1

TAX 1 Finals Reviewer
1. Definition of a corporation for tax purposes
MAIN TIP from ma’am: so long as an entity walks like a corp, acts like a corp, as a general rule, it will be TAXED
like a corp. The term “corporation” is all encompassing. Any of the entities considered as a corporation need
not be in any standard form or conform with the usual requirements of law.
Definition: Sec 22 (B) of the tax code. The language of the provision itself does not define what a corporation is,
it mere enumerates the entities that are considered corporations.
Entities considered to be corporations:

A. Corporations (whether registered or not, licensed or not)
B. Partnerships, no matter how created (whether registered or not)
C. Other Associations (joint-stock companies, joint accounts, insurance companies)
“an association of person or companies jointly undertaking some commercial enterprise; generally
all contribute assets and share risks. It requires a community of interest in the performance of the
subject matter, a right to direct and govern the policy in connection therewith, and (a) duty, which
may be altered by agreement, to share both in profit and losses.”
PROFIT must have been the object of the association. If yes, then taxed as a corp, regardless if they
retain the profits or not. (Afisco Insurance Corporation, et. al. vs. CA)
D. Joint Ventures or Consortium

note:
General Rule: joint ventures are taxed like corporations
Exception: those formed for the purpose of undertaking:
1) construction projects or
2) engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government
[part of tips: difference bet requisites/elements of taxable and non-taxable JV/C]
taxable non-taxable
from BIR Rulings: from RR 10-2012

1. each party to the venture must make a 1. For an undertaking of a construction project
contribution, not necessarily of capital, but by 2. Should involve the pooling of resources by
way of services, skill, knowledge, material or licensed local contractors (i.e, those licensed
money; by Philippine Contractors Accreditation Board
2. profits must be shared; [PCAB] )
3. there must be a joint proprietary interest and 3. The contractors MUST be engaged in
right of mutual control over the subject construction business
matter of the enterprise; 4. The JV itself MUST be licensed under PCAB
4. usually, there is single business transaction
rather than a general or continuous * absent any of the above, JV = taxable
transaction * discussion on why they are not taxable is under “Not
Taxable as a Corporation”
B.G.P. VILLALUZ 2nd Sem – SY 16-17

2. Types of corporations
a. Entities treated as a “corporation” for income tax purposes
(check above)
b. Domestic corporation - corp organized under the laws of the Philippines
c. Foreign corporation - corp formed, organized, exists under laws other than those of the Philippines
Types of Foreign Corporations:

(1) resident foreign corporation - corporations that are considered “doing business” in the Phils.
“Doing business” doing acts that imply a continuity of commercial dealings or arrangements
(Mentholatum v Mangliman) [note: mere investment is not considered doing business]
(2) non-resident foreign corporation - a FC not engaged in or doing business in the Philippines.
(remember the 180 days rule discussed before under individual tax payer)
3. Tax base
Type of corporation Tax base
Domestic corporation Worldwide income
Resident foreign corporation (RFC) Income from within PH
Non-resident foreign corporation (NRFC) Income from within PH
4. Tax rates
Type of corporation Tax rate
In general, whichever is higher:

● Regular corporate income tax (RCIT)
30% of taxable income
● Minimum corporate income tax (MCIT)
Domestic corporation
2% of gross income
Entitled to optional standard deductions (OSD)

● 40% of gross income
In general, whichever is higher:

● Regular corporate income tax (RCIT)
● Minimum corporate income tax (MCIT)
2% of gross income
Resident foreign corporation (RFC) Entitled to optional standard deductions (OSD)

● 40% of gross income
RFCs are subject to any or some of the following:

● Capital Gains Tax
● Final Tax on Passive Income
● Normal Tax or Minimum Corporate Income Tax (MCIT) or

Type of corporation Tax rate
Gross Income Tax (GIT)

● Branch Profit Remittance Tax (BPRT)
In general, regular corporate income tax (RCIT)

Non-resident foreign corporation NOTE: NRFCs are NOT required to file tax returns. Taxes are withheld at source.
(NRFC)
NRFCs are NOT entitled to OSD.
See separate table for specific income tax rates for NRFCs.
Income tax rates: Non-Resident Foreign Corporations (NRFCs)
Income Tax rate
Gross income - including

● Interest
● Dividends
● Rents
● Royalties
● Salaries 30% Effective 1 Jan 2009
● Premiums (except reinsurance premiums) Generally Final Withholding Tax (taxed at
● Annuities source)
● Emoluments
Other fixed or determinable annual periodic or casual gains, profits

and income
Capital gains (except from sale of domestic shares of stock not

traded in the local stock exchange)
NRFC Tax rate
Cinematographic film owner, lessor, distributor 25% of gross income
Owner or lessor of vessels chartered by PH nationals 4.5% of gross rentals, lease or charter fees or charters to
Filipino citizens or corporations as approved by the
maritime industry authority
Owner of lessor of aircrafts, machineries and other 7.5% of gross rentals or fees
equipment
Interest on foreign loans contracted on or after 1 Aug 1986 20%

NRFC Tax rate
Income from transactions with depository banks under the Exempt

Expanded Foreign Currency Deposit System (EFCDS)
Income from transactions with Offshore Banking Units Exempt

(OBUs)
Dividends from a domestic corporation 30% (Effective 1 Jan 2009) or 15%*
*Subject to the condition that the country in which the

NRFC is domiciled shall allow a credit against the tax due
from the NRFC taxes deemed to have been paid in the
Philippines ~TAX TREATIES!!!~
5. Not taxable as a corporation

a. General professional partnerships
GENERAL RULE: The law provides that partnerships and joint ventures are liable for income tax.
EXCEPTION: General Professional Partnerships. Section 26 of the NIRC provides that persons
engaging in business as partners in a GPP shall be liable for income tax only in their separate and
individual capacities, computed on their respective distributive shares of the partnership profit. The
reason behind this is that GPPs are formed by persons for the sole purpose of exercising their
common profession, wherein no part of the income of which is derived from engaging in any trade or
business.
b. Joint venture or consortium for engaging in petroleum, coal, geothermal and other energy operations
under a service contract with the PH gov’t
GENERAL RULE: The law provides that partnerships and joint ventures are liable for income tax.
EXCEPTION: Joint venture (JV) or consortium formed for the purpose of undertaking construction
projects. RR No. 10-2012 provides that the members to a joint venture not taxable as a corporation
shall each be responsible in reporting and paying appropriate income taxes on their respective share
to the joint ventures profit.
Note in applying the exception: This shall not include those who are mere suppliers of goods, services,
or capital to a construction project.
Note in applying the exception: This may include JVs involving foreign contractors IF: 1) the foreign
contractor has a special license from PCAB; and 2) the construction project is certified by the
appropriate Tendering Agency as a foreign-finance project wherein international bidding is allowed.
Supplementary reading: BIR Ruling No. 108-10 (Case including Aurora as owner of the property,
contributing the property to a Joint Development Agreement with Avida; and Avida contributing
project development services to the project; wherein in return for their respective contributions, each
party shall receive respective saleable units [house and lots] from the project [residential subdivision])
- The court ruled that the Joint Development Agreement (JDA) is not subject to income tax since the
allocation of the saleable units is in consideration of their respective contributions in the joint venture.
It does not constitute a taxable event since no income was realized by either Aurora or Avida. They

will only realize income upon their respective sales of the units allocated to each of them.
Requirements to be considered as a Joint Venture for construction: (RR No. 10-2012)

1. Formed for the undertaking of a construction project; and
2. should involve joining or pooling of resources by licensed local contractors; that is, licensed as general
contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and
Industry (DTI);
3. these local contractors are engaged in construction business; and
4. The Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors Accreditation
Board (PCAB) of the Department of Trade and Industry (DTI).
6. Income; sources of income

a. The law provides that income may be derived from 6 sources. These are Interest, Dividends, Services,
Rentals and Royalties, Sale of Real Property, and Sale of Personal Property.
b. Moreover, the principle on what constitutes taxable income anent corporate income taxation is
“where” the income is derived.
c. The table, as provided in the powerpoint presentation of Atty. Villaluz, ~the greatest tax professor in
the universe~, maps out the rules on how sources of income are taxed. (pages 44-46 of the
presentation, part 1, on corporate income)
d. (at the moment, please refer to the table given in the slide. I will research first how to copy and paste
properly since i am a caveman) (tenks paeng the keymaster for the table)
Income Principle From Sources Within PH
If derived within PH
Interest Where the capital is employed
Includes interest on bonds, notes or other interest bearing
obligations of residents
Received from domestic corporations
Dividends Where the capital is employed Received from foreign corporations; if 50% or more of the gross
income of said corporation for the immediately preceding 3-year
period was PH-sourced
Services Where the service is performed If performed with PH
Location of property or interest If property is located in PH

Rentals and royalties
in such property
Sale of real property Location of property If property is located in PH
Where corporation was Sale of shares in a domestic corporation

incorporated
For property purchased and Personal property purchased in or outside the PH but sold in PH
Sale of personal
sold - place of sale
property
For personal property produced in whole or in part and sold
For property produced and sold
outside; or produced in whole or in part of and sold within; gain is
- apportioned
considered derived from partly within and without the Philippines

7. Deductions
a. Itemized deductions
IN GENERAL: All deductions need to be substantiated
i. Expenses - should be ordinary and necessary trade, business or professional expenses,
paid/incurred during the taxable year, FOR the development, management, operation and/or
conduct of trade such as:
1) Salaries and other remuneration
2) Travel expenses
3) Rentals
4) Entertainment, Amusement, and Recreation (EAR) expenses directly related to or in
furtherance of trade
1. Requirements for deductibility

1) Ordinary and necessary in carrying on the trade or business or exercise of a
profession
2) Paid or incurred during the taxable year
3) Substantiated with official receipts or adequate records* (substantiated by
showing amount to be deducted AND connection or relation to the business)
4) Amount must be reasonable (CIR v General Foods)
5) If subject to withholding, proof that amount is actually paid and properly withheld
6) Not contrary to law, morals, public policy, public order (e.g bribes, kickbacks)
*RAMO No 1-87 information that substantiates:

● Name and address of vendor
● Amount of expense
● Consideration paid for it
● Date and place of expense
● Description of items purchased or services rendered
● Purpose of expense
● Relation to the business of the expense
FEW NOTES:
➔ Expenses MUST be substantiated, will be disallowed if otherwise
➔ A deductible expense can only be claimed IN THE YEAR it was incurred. If
you forgot to deduct it for this year, ~s o o r e e h~ ka na lang, you cannot
deduct it the following year
➔ Purchase vouchers/invoice OF the company is sufficient enough to
substantiate the expense PROVIDED that the voucher contains a) name &
address of the farmer/vendor b) his signature c) name and address of the
purchaser (applies expenses where transaction is done with marginalized
earners)
2. When is expense considered as ordinary and necessary

Ordinary: payment that is normal in relation to business, and does not mean that
payments are habitual or recurring.
Necessary: when it is useful or helpful to the business OR if purpose is to realize

profits or minimize losses

FOR ADVERTISING EXPENSES:

CIR v General Foods Phils Inc
Facts:
★ General Foods Inc (GF) filed its ITR claiming, among others, deduction as business
expense Tang’s media advertising expense worth P9.4m (supposedly to stimulate
current sale of Tang, BUT in their letter protest they said it was “to protect the
corporation’s brand franchise, then under review”), which amounted to almost half
of the total media and advertising expense.
★ The CIR disallowed 50% of the P9.4 and assessed GF for deficiency. Main reason
for assessment: FAILED TO PASS test determining that it is an ORDINARY
expense.
○ Test:
■ reasonableness of the amount incurred
■ amount is NOT capital outlay to create good will
★ The CTA dismissed GF’s appeal saying a) the amount is too big for one expense,
and b) the expense is believed to have been incurred “to create or maintain some
form of good will for the taxpayer’s trade or business” as opposed to “to stimulate
current sale”
○ Cited Welch v Helvering: efforts to establish reputation are akin to
ACQUISITION of capital assets, and therefore not a business expense
★ On appeal, CA allowed the expense. BASIS: expense is reasonable and it was not
sufficiently established to be excessive
Issue: Was the expense ordinary and necessary, therefore fully deductible? NO, the amount is
unreasonable for BEING INORDINATELY LARGE, meaning it cannot be considered as
ORDINARY
Ruling:
SC agreed with the CIR. It stated that there are two kinds of advertising expense
(1) To stimulate CURRENT sales
(2) To stimulate FUTURE sales
(1) is deductible PROVIDED that it passes the test of reasonableness, pointing to it being
ordinary. (2) is NOT deductible. Why? Because it is considered a capital expenditure (see
CTA ruling), and being such, it has to be spread out over a reasonable period of time.
There are two conditions to be met in determining what kind of advertising expense was
incurred:
a) Assess whether or not it is a capital outlay by looking at the nature or purpose of
the expenditure
b) See whether the expenditure is ordinary or necessary
Court said that the Tang expense falls under (2) = capital expenditure. GF said themselves
that it was to protect the brand’s franchise; and brand = goodwill, so it was to maintain
goodwill.
3. Entertainment, amusement, and representation (EAR) expenses

Requirements for deductibility:
(1) Paid or incurred during the taxable year
(2) Must be a) directly connected to dev, mgt, ops or b) directly related or in
furtherance of conduct of trade or business.
(3) Must not be contrary to law, morals, etc. (kickbacks)

(4) Not paid directly to any government employee or official, or any other persons or
GPP IF it constitutes a bribe or kickback
(5) Must be duly substantiated by adequate proof
(6) If subject to withholding, amount should have been withheld and paid
General principles on EAR: account title should be “entertainment, amusement, and

recreation expense” in the taxpayer’s FS and ITR. Separate expense items from Ordinary
expenses, advertising expenses etc
INCLUDES both representation expense and/or depreciation or rental expense of

entertainment facilities WITH guests
Representation Expense: Representation facilities:

Expenses incurred IN CONNECTION with ITEM of real or personal property used by the
conduct or trade or business or exercise of taxpayer PRIMARILY for EAR of guests OR
profession IN entertaining, providing employees.
amusement/recreation at dining places,
places of amusements, theaters, concerts, MUST:
sporting events, country clubs etc. (a) For part of the assets of the
taxpayer [either owned or leased]
* in the case of country/sports clubs: they are (b) Taxpayer CLAIMS depreciation (for
presumed to be fringe benefit UNLESS owned) or rental (for leased)
taxpayer can prove it is an expense. HOW? expenses
Through receipts showing:
(a) Amount of expense Examples:
(b) Date and place Yacht IF not restricted to be used by a
(c) Purpose SPECIFIC officer or employee (it would be
(d) Professional or business relation fringe benefit if exclusively used)
(e) Name and person/company
entertained WITH CONTACT Vacay homes, Condos
DETAILS
DOES NOT INCLUDE: fixed representation

allowance (since it’s subject to WHT)
“Guests” are persons or entities with which the taxpayer has direct business relationship (i.e.,
clients/customers) which DOES NOT INCLUDE people from the same company (employees,
officers, partners, directors, SH, trustees) of the taxpayer.
WHY? Because why would spend to represent your own business to your own people?? They
already know the business. LOL no, it’s because they can be considered as an ordinary
business expense (samples below)
EXCLUSIONS (not included as EAR)

(1) Expenses treated as compensation or fringe benefit
(2) For charitable/fund raising events
(3) Business meetings of SH, partners, directors (ordinary expense)
(4) Attending/sponsoring employees to attend professional organization meetings
(ordinary expense)
(5) For events organized for PR and Marketing, including concerts, workshops,
seminars, conventions etc. (advertising expense is a separate type of business
expense)

(6) Other expenses of similar nature: to promote company good will
Two conditions for claiming EAR expense:

(1) Amount must be within the ceiling limits
(2) Must be verified and audited by the BIR - if taxpayer is found to have shifted the EAR
expense to any other expense to avoid being subjected to the ceiling amount, the
amount shifted will be disallowed
CEILING AMOUNT for EAR
For those engaged in the sale of For those engaged in the sale of services:
goods/properties:
0.50% of net sales 1% of net revenues
Gross Sales Gross Revenue

LESS LESS
Sales Returns Discounts for property
Sales Allowance NET REVENUE
Sales Discounts
NET SALES
[this is specifically mentioned in ma’am’s tips]

For those engaged in the sale of both goods and services, the apportionment formula shall
be applied. NOTE: here, the full amount cannot be claimed because they must ALWAYS fall
WITHIN the ceiling.
Apportionment Formula and steps
(1) Net Sales / Net Revenues x Total EAR * do this for each
Total of both expense
(2) Compute separately for the ceiling of each using the formulas above
(3) Amounts must be within whatever you get from (2), so if it’s more than that,
SOOREEH, hanggang limit amount lang pwede i claim. BUT if what is computed
from (1) is lower than from (2), (2) shall be the claimable amount
(4) Add the amounts computed from each.
(5) POOF that’s the EAR you can claim
Illustration from ma’am’s slides:

XYZ Corporation is engaged in the sale of goods and services with net sales/net revenue of
PhP 400,000 and PhP 200,000 respectively. The actual EAR expense for the taxable quarter
totaled to PhP 6,000.
(1) APPORTIONMENT FORMULA:

Sale of Goods (PhP 400,000/PhP 600,000) x PhP 6,000 = PhP 4,000
Sale of Services (PhP 200,000/PhP 600,000) x PhP 6,000 = PhP 2,000
(2) Ceiling amounts

Sale of Goods (PhP 400,000 x 0.50%) = PhP 2,000
Sale of Services (PhP 200,000 x 1%) = PhP 2,000

What you can claim as EAR: P4,000
ii. Interest expense (RR 13-2000)

“Interest” payment for the forbearance or use of money during AND after the term of a loan
with the detention of money note: these do not cover penalties nor surcharges (in cases of
payment default)

(1) An existing indebtedness [there is a valid loan]
(2) Interest has been paid or incurred
(3) Indebtedness MUST be that of the taxpayer [not on behalf of others]
(4) Proceeds of the indebtedness is used in the conduct, dev, mgt, or in the
course of the taxpayer’s trade or business (see Metro Inc ruling)
(5) Interest was paid or incurred during the taxable year [rule: same with
ordinary expense, if it was not claimed for year it was incurred/paid, it’s
over]
(6) Interest must be stipulated in writing [Art. 1956; see Metro Inc v CIR
below]
(7) Interest is legally due
(8) Indebtedness is not between related taxpayers under Sec 34(B)(2)(b) [see
below under “relationships covered”, Sky Internet v CIR and the Samsung
BIR Ruling for rules] if paid to related taxpayers, not allowed as deduction
(9) Interest not incurred to finance petroleum explorations (why? By express
provision of law: refers to service contracts - part of their undertaking
there is to provide for financing, interest is already part of exploration
cost)
(10) If incurred on an indebtedness to acquire property, the interest was not
treated as a capital expenditure (capital expenditure is spread over time
as a depreciation expense)
Related partied under Sec 34(B)(2)(b)

(a) Between members of family (shall include only his brothers and sisters
[whether whole or half-blood], spouse, ancestors, and lineal descendants)
(b) Between grantor and fiduciary of any trust

(c) Between the fiduciary of a trust and fiduciary of another trust if the
grantor of each is the same
(d) Between a fiduciary of a trust and a beneficiary of such trust
(e) Except in cases of distributions in liquidations, between an individual and
a corporation, where more than 50% in value of the latter’s OCS is owned
directly or indirectly by the former.
(f) Except in cases of distributions in liquidations, between two corporations,
where more than 50% in value of either corporations is owned, directly or
indirectly, by of for the same individual, IF either one of such corporations
is a personal holding company or a foreign personal holding company
Metro Inc v CIR (must be in writing)

Facts:
★ Metro Inc received an assessment from BIR finding deficiency taxes amounting to
more than P50m. They then protested and requested that the assessment be
reconsidered. One of the things protested was the disallowed Interest and bank
charge, claiming that the interest expense deducted represented interests paid on
various loans from different banks.
★ CIR’s basis for disallowing them:
○ Metro Inc’s failure to substantiate the claims. It merely submitted bank
certifications and credit advances. The did not present the main loan
agreement which is vital
○ Metro Inc failed to show that the proceeds of the loans were used in
connection to its business
Issue: Can the interest expense be claimed? NO, SC found CIR’s basis to be valid.
Ruling:
The foremost requirement for the deduction of an interest expense is that it must be
stipulated in writing? Why? Because law (Art. 1956) provides that “No interest shall be due
unless it has been in writing”. The very existence of the interest is dependent on this
requirement.
It can be inferred from this that for interest payment to be deductible, it must be supported
by a written agreement of the indebtedness, the term of which stipulates for the payment of
an interest.
The documents Metro Inc presented were not sufficient to show existence of the loan, they
failed to submit the loan agreement, which is the most vital evidence for an interest claim.
The written agreement of the indebtedness is an indispensable requirement to support a
claim for deductibility of interest payment. Mere certification of the alleged creditors of the
debt or the payment of the interests cannot dispense with the written agreement of the
indebtedness requisite. Otherwise, the law could be easily circumvented.
Although the promissory notes submitted may be considered as valid proof of the
indebtedness, Metro Inc failed to prove that the proceeds were used in connection to its
business (also a requisite for deductibility). Metro Inc’s claim that the proceeds were used to
pay for its foreign currency or working capital requirements were not corroborated by any
documentary evidence whatsoever.
Sky Internet, Inc v CIR (related parties)

Facts:

★ Sky Internet, Inc (SkyNet), obtained loans from Sky Vision, its major stockholder
owning 99.84% of SkyNet’s OCS, allegedly as its working capital.
★ The following year, SkyNet claimed the a deduction for the interest expense paid
on the interest of the loan.
★ CIR then assessed SkyNet for deficiency income tax as a result of the interest
expense deduction. CIR’s basis for the assessment:
○ Interest expense is NOT deductible because it was paid to and between
related parties as defined under Sec 34(B)(2)(b): SkyNet is a wholly-
owned subsidiary of Sky Vision (because of the 99.84% share
ownership)
★ As for SkyNet’s defense, it claims that they were not related parties as
contemplated by law because no SH owns directly or indirectly more than 50% of
the OCS of each corporation.
Issue: Are SkyNet and Sky Vision related parties as contemplated by law? NO, not one
individual is shown to own more than 50% of either companies’ OCS.
Ruling:
In order for interest expense to be deductible, it must be shown that:
(a) There is an indebtedness
(b) That is it incurred by the taxpayer
(c) That there must be a legal liability to pay
The existence of the indebtedness incurred is undisputed. (but it was not mentioned in the
case how) As for the third requisite, the relationship of the parties need to be discussed to
determine whether there was a legal liability to pay because they were not related parties.
2 requisites in determining if two corporations related parties

(1) An individual owns more than 50% in value of the OCS of each corporation
(2) Either 1 or the corporations is a personal holding company
Here, Sky Vision’s SH is comprised mostly of other corporations who are further owned by
different individuals. Because of the diffused ownership in both corporations, it cannot be
said that an individual SH owned more than 50% of the OCS of both SkyNet and SkyVision.
The largest individual SHs are the Lopez siblings, who together - not individually - own
38.65% and 38.54% of each company, well below the 50% threshold.
[individual stock ownership of a company is called the Attribution Rule discussed in the
Samsung BIR Ruling]
Samsung BIR Ruling (related parties)

Facts:
★ CPRC is a real estate company. It has two major SHs: Retirement Plan, which
owns 59.7% of the stocks and SemCo with 39.8%
★ Semphil is a manufacturing corporation, whose facilities stand in Calamba Park. It
established the Retirement Plan, which is a duly approved benefit plan for
Semphil’s employees, which was placed under trust to handle the account.
★ Sometime in the past, CPRC obtained loans from Semphil. It was used to buy the
land where Semphil’s facilities stood. CPRC then leased out the said land and
derives rental income as a result. CPRC continues to pay interests on the loan and
have claimed deductions for them.
Issue: Both CPRC and Semphil are now asking an opinion on whether:
(a) If loan transaction is an arrangement between related parties. THEY WERE NOT

(b) All the interests paid on the loan are allowable deductions from GI YES, they fully
complied with the requisites
Fallo: the interest paid on the loans are allowed to be deducted from GI
Ruling:
Before interests can be allowed as a deduction, it must comply with all the requisites for
deductibility. In the this, all except for the related party requisite was clearly shown to have
been complied with.
To determine whether CPRC and Semphil are related parties, the meaning of “individual”
under Sec 36 (B)(3) needs to be determined. “Individual” in the provision refers to natural
persons only, excluding estates, trusts, and corporations. Relevant to this is the provision on
personal holding company under the Tax Code of 1939 as implemented by RR 2,, insofar as
determination based on stock ownership is concerned is this:
● When a stock is not owned by an individual (if it is own for or by corporations,
estates, trusts), it shall be considered being owned proportionately by the
individual SH, partners, or beneficiaries.
Therefore, in the case of multi-tiered corporation, the attribution rule must be allowed to run
continuously along the chain of ownership, until it finally reaches the individual SH. To
determine if the relationship prohibition applies, the ownership of both corporations must be
traced to the level of the individual SH.
Based on the capital structure of both CPRC and Semphil, it is clear that no stock from both
company is held by the same individual, because there were no natural individual holding
them. It was mentioned that the Retirement Plan owns 59.7% of CPRC, the former’s
shareholding cannot be attributed to either Semphil or Semco, and therefore neither of them
derived any benefit from the fund. Neither did both company exercise control, either
individually or together, Retirement Plan’s funds since it was managed by an independent
trustee.
Rules on deductibility:
As a general rule, the entire amount of interest expense paid is deductible.
Limitations are as follows:
(1) The amount of the interest expense is reduced by 33% of interest income earned, which had
been subjected to final withholding tax, depending on the year when the interest income was
earned.
WHAT IT MEANS: so long as, during the taxable year, an interest expense is incurred and an
interest income is earned, the amount of interest expense will be reduced by 33% of the
income earned.
BUT interests paid on unpaid business related taxes SHALL NOT be reduced even if interest
income is earned. why? MORE MOOLAH FOR GOVERNMENT, because it would be paid to the
government. They wouldn’t want to reduce the amount they’re gonna get.
ILLUSTRATION based on ma’am’s slides

Liza Soberano Inc has a deposit with ABS bank. At the same time, it obtained a loan from
CBN finance corp in connection with the operations of its business. For 2017, assume the
following:
Liza Soberano Inc’s Net Income before interest expense is PhP 1,000,000
Interest income from ABS bank (subject to final tax) is PhP 180,000, which makes the Final
tax amount on the interest income PhP 36,000

Interest Expense on the loan: PhP 150,000
First of all, 36k is irrelevant, because basis IS amount of interest income NOWHERE is it
mentioned that the amount of final tax is factored in the equation, so do not be confused by
it if ma’am decides to put this with the facts.
The deductible interest expense is
IF the interest expense is paid due to unpaid business related taxes, the whole PhP 150,000
will be deductible, so the taxable income would become
(2) For the modified interest timing deductions: An individual taxpayer reporting income on cash
basis incurs an indebtedness within the taxable year which:
(a) an interest paid in advance through discount - interest is allowed as a deduction in
the year when the entire amount of utang had been fully paid
(b) If payable in periodic amortization - the amount of corresponding interest expense
is deductible in the year it was paid. (say the interest payable is 10k payable in 5
years. 10k divided by 5 years equals 2k to be paid yearly. 2k paid can be claimed
as an interest expense deduction, every year for 5 years)
(3) Optional Treatment of interest expense on capital expenditure
● Taxpayer may only choose either to deduct the expense IN FULL in the year it was
incurred OR deduct as depreciation expense and amortized over time.
● Cannot choose both because it would amount to
iii. Taxes
1. Deductible taxes
Requisites for deductibility:
(1) paid or incurred within the taxable year,
(2) in connection with the taxpayer’s trade/biz/profession
(3) Must be imposed DIRECTLY upon the taxpayer
Taxes deductible: ALL TAXES EXCEPT THOSE ENUMERATED IN SEC 34(C), such as:
(1) Documentary stamp taxes
(2) Occupational taxes
(3) Privilege and license taxes
(4) Excise taxes
(5) Import duties
(6) communitiy
Taxes NOT deductible:

(1) Philippine income tax

(2) Foreign income tax (if taxpayer avails of the foreign tax credit:
2Bdiscussed below)
(3) Estate and Donor’s tax
(4) Taxes assessed against local benefits of a kind that tends to increase the
value of the property assessed
(5) VAT
Limitations on Deductions:
● NRA & FC - their tax deductions are limited only IF and to the extent that
the income came FROM sources WITHIN the Philippines
● For RC and DC - they may claim foreign tax credits or deductions IF they
paid for any income tax to foreign countries.
2. Tax credits - these form part of the Gross Income

IF any of the deducted tax paid is refunded or credited, it SHALL form part of
GROSS INCOME in the year of receipt to the extent of income tax benefit. [tax
benefit rule]
WHY? HOW? You paid a tax under protest. Some time later, you get back the
amount you protested - it was refunded or credited to you. It would be included in
your gross income because you benefited from the deduction when you paid the
tax. The refund or crediting HAS TO BE REPORTED to the BIR.
3. Foreign tax credits

➢ A taxpayer is given two options on what to do with taxes paid in foreign
countries: either they claim it as a deduction from Gross Income OR claim
it as a foreign tax credit.
➢ Requirements to for claiming foreign taxes paid
(1) Must be either a RC, DC, members of GPPs, beneficiaries of
estates and trusts
Why only them? Because FTC is allowed for taxes paid for
income derived from sources OUTSIDE the philippines. ^^ are the
only ones taxed on sources including those outside the Phils
(2) Show proof of the total amount of the income from the foreign
source
(3) Proof of the amount of income derived from each country (if there
are multiple countries), and the foreign tax paid or incurred, which
is being claimed as a credit
(4) Other information necessary for the verification and computation
of the credit
➢ How is the amount to be credited determined?

FORMULA and PROCESS:
(1) LIMITATION 1: Compute for tax credit limit using Taxable Income
on a per country basis: * TI = Taxable Income
TI from Foreign Country x Philippine Income

Total TI FROM ALL sources tax ACTUALLY paid

● Repeat for as many countries there are. List them all

down.
● LOWER amount between the result and the actual tax
amount paid of each will be summed up
● Hold the summed up amount. let’s label it Sum1
(2) LIMITATION 2: Compute for tax credit limit using Taxable Income
of the aggregate amount of ALL foreign countries
TI from all OUTSIDE SOURCES x Philippine Income

Total TI FROM ALL sources tax ACTUALLY paid
● Let’s label the result here Sum2

● The amount of tax credit would be whichever is LOWER
between Sum1 and Sum2
➢ When does this happen and how is the very confusing formulas applied?
Say Coco Martin, a resident citizen, signs with a modelling agency in the
US, and got 2 projects from it, one in the US and another in the UK . If both
the US and UK IRS makes him pay for income tax on whatever
compensation he received from his modelling gigs, when he goes back to
the Phils he can claim those as either deductions from his income tax OR
tax credits. How much credit can Coco claim?
Applying and plugging in values to the above formulas, these figures will
come out:
Foreign Tax Computed using Computed using

paid Limitation 1 limitation 2
US 6,840 5,504
UK 1,000 2,752
TOTAL 6,504 8,256
Coco can then claim tax credits only for 6,504 for his hot bod gig, because
it’s the lower of the two amounts.
BUT if Coco opts to deduct the foreign taxes paid, the actual amount
would form part of all other deductions under Itemized deduction.

iv. Losses
1. Requirements for deductibility (in general)

(1) If incurred in trade, profession or business;
(2) Of property connected with the trade, business or profession, if the loss
arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement.
Ordinary losses
- Losses incurred in trade, business or profession (e.g. losses from
destruction or disposal of inventory, machinery or equipment which have
been declared as waste or obsolete due to spoilage, deterioration,
obsolescence, expiration or other causes, rendering the same unfit for
sale or for use in production.)
- Losses of property connected with trade, business or profession, due to
casualty, robbery, theft, and embezzlement.
Capital losses
- Losses from (allowable only to the extent of capital gains) sales or
exchanges of capital assets
- Losses resulting from securities becoming worthless and which are
capital assets (considered loss from sale or exchange) on last day of the
taxable year
- Losses from short sales of property
- Losses due to failure to exercise privileges or options to buy or sell
property
Other kind of losses

- Losses from wash sales of stock and securities
- Wagering losses
- Abandonment losses in petroleum operations
- Losses due to voluntary removal of buildings, machinery
- Losses of the useful value of capital assets due to some change in
business conditions
2. Casualty losses
The term “casualty” is the complete or partial destruction of property resulting

from an identifiable event of a sudden, unexpected or unusual nature. It denotes
accident, some sudden invasion by hostile agency, and excludes progressive
deterioration through steadily operating cause.
Generally, “theft” is the criminal appropriation of another’s property.
“Embezzlement” is the fraudulent appropriation of another’s property by a person to

whom it is entrusted or into whose hands it has lawfully come. (Rev. Regs No. 12-
77)

Requisites for deductibility (casualty losses)

(1) A taxpayer may be entitled to claim as business deductions, casualty
losses incurred for properties actually used in the business enterprise that
were damaged and reported as losses in the appropriate declaration filed
with the BIR.
The loss of assets not used in the course of business and/or are personal in
nature shall therefore not be allowed.
(2) Properties that shall be reported as casualty losses must have been
properly reported as part of the taxpayer's assets in the taxpayer's
accounting records and financial statements in the year immediately
preceding the occurrence of the loss, with the costs of acquisition clearly
established and recorded. Otherwise, the claim for deduction shall not be
allowed.
(3) The amount of loss that shall be compensated by insurance coverage

should not be claimed as a deductible loss.
(4) If the insurance proceeds exceed the net book value of the damaged
assets, SUCH EXCESS shall be subject to the regular income tax, but not
VAT, since the indemnification is not an actual sale of goods by the
insured company to the insurance company.
(5) The deduction of assets as capital losses must be properly recorded in the
accounting reports, with the adjustment of the applicable accounts.
(6) The restoration of the damaged property or the acquisition of new property
to replace it must be properly recorded and recognized as either repairs
expense or capitalized asset.
Revenue Regulations No. 12-77

The amount of casualty loss deductible is limited to the DIFFERENCE
between the value of the property immediately preceding the casualty and
its value immediately thereafter, but SHALL NOT EXCEED an amount equal
to the cost or other adjusted basis of the property, or depreciated cost in
the case of property used in business, reduced by any insurance or other
compensation received.
The fair market value of the property immediately before and immediately
after the casualty for purposes of determining the amount of casualty loss
deductible shall be ascertained by an impartial but competent appraisal.
RMO NO. 031-09 (October 16, 2009)

Prescribes the policies and guidelines that shall govern the declaration of
casualty losses incurred by taxpayers, and the reporting of such losses
filed at the concerned Revenue District Offices.

In case of casualty loss, a notice of loss must be filed with the BIR within
45 days from the date of the event that gave rise to the casualty.
The taxpayer must prove the elements of the loss claimed, such as the
actual nature of the occurrence of the event and the amount of the loss.
(Proof may include, among others, photographs of the property,
documentary evidence, insurance policy, and police report.)
3. Net operating loss carry over (NOLCO)
NOLCO shall mean the EXCESS of allowable deductions over gross income of the
business in a taxable year.
The net operating loss (NOL) of the business or enterprise for any taxable year
immediately preceding the current taxable year, which had not been previously offset
as deduction from gross income shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable years immediately following the
year of such loss. Provided, however, that any net loss incurred in a taxable year
during which the taxpayer was exempt from income tax shall not be allowed as a
deduction.
Requisites for deductibility (NOLCO)

a. The taxpayer was not exempt from income tax the year the loss was
incurred;
b. There has been NO SUBSTANTIAL CHANGE IN THE OWNERSHIP of the

business or enterprise wherein:
i. AT LEAST 75% of nominal value of outstanding issued shares is

held by or on behalf of the same persons; OR
ii. AT LEAST 75% of the paid up capital of the corporation is held by

or on behalf of the same persons.
Taxpayers ENTITLED to NOLCO

Domestic and resident foreign corporations subject to the normal income tax (e.g.,
manufacturers and traders) or preferential tax rates (e.g., private educational
institutions, hospitals, and regional operating headquarters)
Taxpayers NOT ENTITLED to NOLCO

● Offshore banking unit (OBU) of a foreign banking corporation
● Foreign Currency Depository Unit (FCDU) of a domestic or foreign banking
corporation
● Board of Investments (BOI) registered enterprises enjoying the ITH
incentive on their registered activities; NOLCO sustained during period of
ITH may not be deducted.
● Enterprises registered with the PEZA and R.A. No. 7227 [e.g., Subic Bay
Metropolitan Authority (SBMA) registered enterprises] on their registered

activities; NOLCO sustained only during the period of registration shall not
be allowed.
● Foreign corporations engaged in international shipping or air carriage
business in the Philippines.
● Other persons, natural or juridical, enjoying exemption from income tax;
NOLCO sustained during period of exemption shall not be allowed.
Section 6 of RR No. 14-2001

● Corporations allowed to claim NOLCO deductions effectively cannot enjoy
the benefit of NOLCO for as long as it is subject to MCIT in any taxable
year.
● In this case, the running of the three-year period for the expiry of NOLCO is
not interrupted by the fact that such corporation is subject to MCIT in any
taxable year during such three-year period.
Section 7 of RR No. 14-2001
● The NOLCO shall be separately shown in the taxpayer's ITR (also shown in
the Reconciliation Section of the ITR).
● The Unused NOLCO shall be presented in the Notes to the Financial
Statements (FS) showing, in detail:
○ The taxable year in which the NOL was sustained or incurred, and
○ Any amount thereof claimed as NOLCO deduction within 3
consecutive years immediately following the year of such loss.
● Failure to comply with this requirement will disqualify the taxpayer from
claiming the NOLCO.
v. Bad debts
Debts resulting from the worthlessness or uncollectibility, in whole or in part, of the amounts
due to the taxpayer by others arising from money lent or from uncollectible amounts of
income from goods sold or services rendered
1. Requirements for deductibility (RR No. 5-99, as amended by RR No. 25-2002)

a. There must be an existing indebtedness due to the taxpayer which must
be valid and legally demandable;
b. MUST NOT BE sustained in a transaction entered into between related

parties enumerated under Section 36 (B) of the 1997 Tax Code.
c. Must be connected with the taxpayer’s trade, business or practice of

profession;
d. Must be actually charged off in the books of accounts of the taxpayer as

of the end of the taxable year (see additional conditions below);
e. Must be actually ascertained to be worthless and uncollectible as of the

end of the taxable year, EXCEPT FOR BANKS where the BSP shall ascertain

the worthlessness and uncollectibility of the bad debts and shall approve
the writing-off of said debts (see additional conditions below)
Charged off in the books of accounts of the taxpayer (Additional conditions)

Before a taxpayer may charge off and deduct a debt, he must ascertain and be able
to demonstrate with reasonable degree of certainty the uncollectibility of the debt.
The CIR will consider all pertinent evidence, including:
- The value of the collateral, if any, securing the debt and the financial
condition of the debtor in determining whether the debt is worthless, or;
- The assigning of the case of collection to an independent collection

lawyer who is not under the employ of the taxpayer and who shall report
on the legal obstacle and the virtual impossibility of collecting the same
from the debtor and who shall issue a statement under oath showing the
propriety of the deductions thereon made for alleged debts.
- Also, in no case may a receivable from an insurance or surety company be

written-off from the taxpayer's books and claimed as bad debts deduction
UNLESS such company has been declared closed due to insolvency or for
any such similar reason by the Insurance Commissioner (e.g. flight or
disappearance of debtor).
Worthless and uncollectible (Additional conditions)

Where the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all probability not
result in the satisfaction of execution on a judgment, a showing of these facts will
be sufficient evidence of the worthlessness of the debt for the purpose of
deduction.
While a mere hope probably will not justify postponement of the deduction, a
reasonable possibility of recovery will permit the account to be carried along
notwithstanding that the probabilities are that the debt may not be collected at all.
The creditor may offer evidence to show some expectation that the debt would
have been paid in the intervening years, and that subsequently, the hope was
shattered or appeared to have been unfounded. If, for example, the creditor could
show that during the years he attempted to collect the debt, the debtor had
property the title of which was in dispute but which would enable him to pay his
debts when the title was cleared, the creditor would be entitled to defer the
deduction on the ground that there was no genuine ascertainment of
worthlessness.
In general, a debt is not worthless simply because it is of doubtful value or difficult

to collect. Worthlessness is not determined by an inflexible formula or slide rule
calculation but upon the exercise of sound business judgment. The determination
of worthlessness in a given case must depend upon the particular facts and the
circumstances of the case. A taxpayer may not postpone a bad debt deduction on
the basis of a mere hope of ultimate collection or because of a continuance of
attempts to collect notes which have long become overdue, and where there is no

showing that the surrounding circumstances differ from those relating to other
notes which were charged off in a prior year.
Circumstances affecting worthlessness

The following, in addition to the reasonable efforts to collect, may justify an
ascertainment of the worthlessness of a debt:
- The flight or disappearance of a debtor

- Insufficiency of collateral
- Bankruptcy or insolvency
- Loss of evidence of indebtedness
- Death of debtor leaving no assets
- Absence of visible properties of the debtor
- Fruitless efforts to collect small amounts from debtors scattered all over
the country
Banks (RR No. 25-2002)

In the case of banks, the CIR shall determine whether or not bad debts are
worthless and uncollectible in the manner provided in RR No. 5-99.
Without prejudice to the Commissioner’s determination of the worthlessness and

uncollectibility of debts, the taxpayer shall submit a BSP/Monetary Board written
approval of the writing off of the indebtedness from the banks’ books of accounts
at the end of the taxable year.
Receivables from insurance/surety companies (RR No. 25-2002)

IN NO CASE may a receivable from an insurance or surety company be written off
from the taxpayer’s books and claimed as bad debts deduction UNLESS such
company has been declared closed due to insolvency or for any such similar reason
by the Insurance Commissioner.
Tax benefit rule on recovery of bad debts

A debt which was previously found to be worthless and written-off in a prior year
and subsequently collected DOES NOT render the deduction unallowable or illegal.
(CTA Case No. 367, January 30, 1961)
The recovery of bad debts previously allowed as deduction in the preceding year or
years shall be included as part of the taxpayer's gross income in the year of such
recovery to the extent of the income tax benefit of said deduction. (RR No. 5-99)
vi. Depreciation
1. Definition: refers to the periodic reduction of the value of a tangible permanent
asset due to passage of time, wear and tear and obsolescence.
2. For intangible assets (e.g. patents, copyrights, franchise), the annual allowance to
reduce their useful value is called “amortization.”

3. Depreciation expense is allowed as a deduction from gross income to enable

taxpayers to recover the acquisition cost of the property used in the practice of
profession, business or trade.
❖ In the case of property held by one person for life with remainder to
another person, the deduction shall be computed as if the life tenant were
the absolute owner of the property and shall be allowed to the life tenant.
❖ In the case of property held in trust, the allowable deduction shall be
apportioned between the income beneficiaries and the trustees in
accordance with the pertinent provisions of the instrument creating the
trust, or in the absence of such provisions, on the basis of the trust
income allowable to each. (Sec. 34F, NIRC)

1. It must be reasonable
2. It must be charged off during the year.
3. It must be for property used or employed in the business, or temporarily not in
use.
4. It must be supported by a statement submitted together with the tax return.
5. Methods of Computing Depreciation

1. Straight-line method
2. Declining-balance method
3. Sum-of-the-year digit method
4. Any other method which may be prescribed by the Sec. of Finance upon
recommendation of the BIR.
6. The taxpayer and the BIR Commissioner may agree on the estimated useful life and
the rate of depreciation of any property, which rate shall be binding to the taxpayer
and the BIR. However, if the useful life of the property estimated under previous
factual conditions is no longer reasonable, the law allows the taxpayer to lengthen
or shorten the property’s useful life in light of prevailing factual conditions. (BIR
Ruling 042-2010)
7. The depreciation cost of an asset must be must be premised on its acquisition

cost, and not on its appraised value. The reason is that deduction from gross
income are privileges, not matters of right. Also, what the taxpayer would recover
will be, not only the acquisition cost, but also profit, which transgresses the
underlying purpose of a depreciation allowance.
No depreciation is allowable on the appraisal increase of fixed assets. Any

foreseeable salvage value is to be deducted from the cost of the asset in
determining the basis of depreciation. (RMC 70-2010)
8. Depreciation of intangibles.
If the use of such intangibles in business is limited in duration, it may be subject of
a depreciation allowance. However, if its use is not so limited, it will not usually be a
proper subject of such an allowance.

Hence, trademarks which have a remaining lifespan of 10 years are regarded as

intangible assets that are subject to depreciation (BIR RUling DA 162-2007).
9. Depreciation of properties used in petroleum operations

Estimated useful life
1. The useful life of properties used in or related to production of petroleum shall
be 10 years or such shorter life as may be permitted by the BIR Comm.
2. Properties not used directly in the production of petroleum shall be
depreciated under the straight-line method on the basis of an estimated life of
5 years. (Sec. 34(F)(4),NIRC)
10. Depreciation of properties in mining operations

An allowance for depreciation in respect to all properties used in mining operations,
other than petroleum operations, shall be determined as follows:
1. At the normal rate od depreciation if the expected life of 10 years or less; or
2. Depreciated over any number of years between 5 years and the expected life if
the latter is more than 10 years; and
3. The depreciation thereon allowed as deduction from taxable income.
The contractor should notify the BIR Comm. at the beginning of the depreciation
period as to which depreciation rate will be used. (Sec. 34(F) (5), NIRC)
11. In depreciation deductible by nonresident aliens engaged in trade or business or

resident foreign corporations, the depreciable asset must be located in the PH.
vii. Depletion
1. Depletion is the exhaustion of natural resources as a result of production or severance.
2. GENERAL RULE: A reasonable allowance shall be allowed as deduction in the following
cases: 1) for entities engaged in oil and gas wells or mines; and 2) those under a cost
depletion method.
● EXCEPTION: The law provides that if the depletion allowance has equaled the
invested capital, it shall not be allowed as deduction.
3. Cost depletion
viii. Charitable and other contributions

1. The law provides that the requisites for deductibility of charitable contributions are
as follows:
a. Actually paid or made to the Philippine Government or any political
subdivision thereof, or any of the domestic corporation or association
specified in the Tax Code
b. Made within the taxable year
c. Not exceeding 10% (individuals) or 5% (corporations) of the taxpayer’s
taxable income before charitable contributions
d. Evidenced by adequate receipts or records (actual receipt by accredited
NGO of the donation; the date of receipt; the amount if in cash; and the
acquisition cost if it is a property). If the donation is above P50,000, notice
to the RDO is required and certificate of donation must be attached.

2. The law provides that contributions to the following institutions are deductible in
full:
a. Donations to the Government, its entities, political subdivisions or fully
owned corporations exclusively for undertaking priority activities in
accordance with the national priority plan to be determined by NEDA
b. Donations to foreign institutions or international organizations pursuant
to agreements, treaties entered into by Government or special laws (The
Integrated Bar of the Philippines, Development Academy of the Philippines,
Aquaculture Department of SEA Fisheries and Development Center, University of
the Philippines (UP) and other State Colleges and Universities, Cultural Center of
the Philippines, National Commission for Culture and Arts, International Rice
Research Institute, Department of Science and Technology, International Red
Cross and Red Crescent Movement/Philippine National Red Cross.)
c. Donations to accredited Non-Government Organizations (non-profit
domestic corporation) - Conditions are 1) Shall make utilization directly
for the conduct of activities for the purpose which it is organized not later
than march 15, unless an extended period is granted by law; 2) all
charitable contribution of property other than money shall be based on
acqusition cost; 3) all members of the BOT did not receive remuneration;
4) their level of administrative expenses do not exceed 30 percent for the
taxable year; and 5) their assets would be distributed to another
accredited NGO for similar purposes in case of dissolution, or distributed
depending on the court’s discretion.
d. Donations of prizes and awards to athletes.
3. Donations are subject to a limitation, which is 10% of net income for individual
taxpayers and 5% of net income for corporate taxpayers, when they are made to:
a. The government for public purposes
b. Accredited domestic corporations for religious, charitable, scientific, etc.
purposes
c. Social welfare institutions
d. Non-accredited NGOs
ix. Research and development

1. GENERAL RULE: A taxpayer may treat research or development expenditures
which are paid or incurred by him during the taxable year in connection with his
trade ,business or profession as ordinary and necessary expenses which are not
chargeable to capital account.The expenditures so treated shall be allowed as
deduction during the taxable year when paid or incurred
2. The law provides that research and development shall be allowed as a deduction if
it is incurred in connection with the trade, business or profession of the taxpayer;
and if not charged to capital account.
x. Pension trust
1. An employer establishing or maintaining trust to provide for the payment of
reasonable pensions to his employees shall be allowed as a deduction a reasonable
amount transferred or paid into such trust during the taxable year in excess of such
contributions, but only if such amount:
1. Has not theretofore been allowed as deduction, and

2. Is apportioned in equal parts over a period of 10 consecutive years beginning

with the year in which the transfer or payment is made. (Sec. 34J, NIRC)
2. Contributions made to a pension trust may be claimed as deduction in the following

manner:
1. Amount contributed for the normal service cost - 100% deductible; and
2. Amount contributed for the past service cost - 1/10 of the amount contributed
is deductible in year the contribution is made, the remaining balance will be
amortized equally over 9 consecutive years.
3. Requisites for deductibility of payments to pension trusts:

1. There must be a pension or retirement plan established to provide for the
payment of reasonable pensions to employees;
2. The pension plan is reasonable and actuarially sound;
3. It must be funded by the employer
4. The amount contributed must no longer be subject to employer’s control or
disposition; and
5. The payment has not theretofore been allowed before as deduction
4. Past service cost
5. RA 4917
GR: The retirement benefits received by officials and employees of private firms,
whether individual or corporate, in accordance with a reasonable private benefit
plan maintained by the employer shall be exempt from all taxes and shall not be
liable to attachment, garnishment, levy or seizure by or under any legal or equitable
process whatsoever
EXCEPT: to pay a debt of the official or employee concerned to the private benefit
plan or that arising from liability imposed in a criminal action.
Limitations:
1. That the retiring official or employee has been in the service of the same employer
for at least 10 years and is not less than 50 years of age at the time of his
retirement.
2. That such benefits be availed only once
3. That in case of separation of an official or employee from the service of the
employer due to death, sickness or other physical disability or for any cause beyond
the control of the said official or employee, any amount received by him or by his
heirs from the employer as a consequence of such separation shall likewise be
exempt as hereinabove provided.
“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 and
employees, wherein contributions are made by such employer or officials and employees, or
both, for the purpose of distributing to such official and employees the earnings and
principal of the fund thus accumulated, and wherein it is provided in said plan that at no time

shall any party of the corpus or income of the fund be use for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
6.
7. Private retirement benefit plan
b. Optional standard deduction (OSD)

Only domestic and Resident Foreign Corporations (RFCs) are entitled to OSD, NOT Non-Resident
Foreign Corporations (NRFCs)
OSD is 40% of a corporation’s gross income. Passive income which have been subjected to a final tax at
source shall not form part of the gross income for purposes of computing the 40% OSD.
For other taxpayers allowed by law to report their income and deductions under a different method of
accounting (e.g. percentage of completion basis, etc.) other than cash and accrual method of
accounting, the “gross income” shall be determined in accordance with said acceptable method of
accounting.
“Gross Income” shall mean the gross sales LESS returns, discounts and allowances and Cost of Goods
Sold (COGS).
“Gross sales” shall include only sales contributory to income taxable under Section 27 (A) of the 1997
Tax Code.
“COGS” shall include the purchase price or cost to produce the merchandise and all expenses directly
incurred in bringing them to their present location and use.
IMPORTANT: COGS is treated differently for TRADING or MERCHANDISING and MANUFACTURING.
Type of activity/corporation COGS treatment
Trading or merchandising Means the invoice COGS, PLUS import duties, freight in transporting the
goods to the place where the goods are actually sold, including
insurance while the goods are in transit.
Manufacturing All costs incurred in the production of the finished goods such as raw
materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.
The term may be used interchangeably with “cost of goods

manufactured and sold”.
ALSO IMPORTANT: “Gross income” is treated differently for SELLERS OF GOODS and SELLERS OF
SERVICES

Type of
“Gross income”
corporation
Seller of “Gross sales” LESS returns, discounts and allowances and Cost Of Goods Sold (COGS).
GOODS
“Gross receipts” LESS sales returns, allowances, discounts and cost of services
NOTES:
“Gross receipts” means amounts actually or constructively received during the taxable year.
However, for taxpayers engaged as sellers of services but employing the accrual basis of accounting for
their income, the term “gross receipts” shall mean amounts earned as gross revenue during the taxable
Seller of
year.
SERVICES
“Cost of services” means all direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including (a) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service, and (b) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and cost of supplies: Provided,
however, that “cost of services” shall not include interest expense except in the case of banks and other
financial institutions.
Examples in determining the basis of the 40% OSD (RR No. 16-08)
Suppose a retailer of goods, whose accounting method is under the accrual basis, has a gross sales of
PhP 1,000,000 with a cost of sales amounting to PhP 800,000. The computation of the OSD for
corporations shall be determined as follows:
Gross sales Php 1,000,000
LESS: COGS 800,000
Basis of the OSD (Gross income) Php 200,000
MULTIPLY by OSD Rate 40%
OSD Php 80,000
If the taxpayer opts to use the OSD in lieu of the itemized deduction allowed under Section 34 of the
1997 Tax Code, as amended, his/ its net taxable income shall be as follows:
Gross sales Php 1,000,000
LESS: COGS 800,000

Gross income Php 200,000
LESS: OSD (maximum) 80,000
Net taxable income Php 120,000
Making the election (OSD)
The election to claim EITHER the OSD or the itemized deduction for the taxable year must be signified
by checking the appropriate box on the ITR filed for the first quarter of the taxable year.
Once the election to avail of the OSD or itemized deduction is signified in the return, it shall be
irrevocable for the taxable year for which the return is made.
8. Minimum corporate income tax (MCIT)

a. Who are liable
i. The law provides that corporate taxpayers, specifically Domestic and Foreign Resident
Corporations are liable to pay MCIT.
b. When the MCIT commences

i. The law provides that a minimum corporate income tax of 2% of gross income shall be
imposed on a domestic corporation and resident foreign corporation beginning on the fourth
taxable year immediately following the year in which such corporation commenced its
business operations when: 1. the MCIT is greater than the RCIT for the taxable year. 2. such
operation has zero or negative taxable income
c. Exemption from MCIT

i. The law provides that the following are exempted from MCIT:
1. Resident foreign corporations engaged in business as international carriers
2. Resident foreign corporations engaged as OBUs
3. Resident foreign corporations engaged in business as ROHQs
4. Firms that are taxed under a special income tax regime.
d. NOTE: Gross income on MCIT

i. For purposes of MCIT, the term "gross income" means gross sales less sales returns,
discounts, and allowances and cost of goods sold, in case of sale of goods, or gross revenue
less sales returns, discounts, allowances and cost of services/direct cost, in case of sale of
services. Note: “Cost of goods sold” shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use while “cost of
services” shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customs and clients. As noted by the Supreme Court in
COMMISSIONER VS. PAL [JULY 7, 2009], inclusions and exclusions/deductions from gross
income for MCIT purposes are limited to those directly arising from the conduct of the
taxpayer’s business. It is thus more limited than the gross income used in the computation
of basic corporate income tax.
9. Filing of tax return and payment of taxes (Check slides)

Tax 1

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TAX 1 Finals Reviewer

1. Definition of a corporation for tax purposes

Entities considered to be corporations:

D. Joint Ventures or Consortium

[part of tips: difference bet requisites/elements of taxable and non-taxable JV/C]

from BIR Rulings: from RR 10-2012

B.G.P. VILLALUZ 2nd Sem – SY 16-17

Types of Foreign Corporations:

Domestic corporation Worldwide income

Resident foreign corporation (RFC) Income from within PH

Non-resident foreign corporation (NRFC) Income from within PH

In general, whichever is higher:

Entitled to optional standard deductions (OSD)

In general, whichever is higher:

Resident foreign corporation (RFC) Entitled to optional standard deductions (OSD)

RFCs are subject to any or some of the following:

B.G.P. VILLALUZ 2nd Sem – SY 16-17

Type of corporation Tax rate

Gross Income Tax (GIT)

In general, regular corporate income tax (RCIT)

Income tax rates: Non-Resident Foreign Corporations (NRFCs)

Income Tax rate

Gross income - including

Other fixed or determinable annual periodic or casual gains, profits

Capital gains (except from sale of domestic shares of stock not

NRFC Tax rate

Cinematographic film owner, lessor, distributor 25% of gross income

Interest on foreign loans contracted on or after 1 Aug 1986 20%

B.G.P. VILLALUZ 2nd Sem – SY 16-17

NRFC Tax rate

Income from transactions with depository banks under the Exempt

Income from transactions with Offshore Banking Units Exempt

Dividends from a domestic corporation 30% (Effective 1 Jan 2009) or 15%*

*Subject to the condition that the country in which the

5. Not taxable as a corporation

B.G.P. VILLALUZ 2nd Sem – SY 16-17

Requirements to be considered as a Joint Venture for construction: (RR No. 10-2012)

6. Income; sources of income

Income Principle From Sources Within PH

Received from domestic corporations

Services Where the service is performed If performed with PH

Location of property or interest If property is located in PH

Sale of real property Location of property If property is located in PH

Where corporation was Sale of shares in a domestic corporation

B.G.P. VILLALUZ 2nd Sem – SY 16-17

1. Requirements for deductibility

*RAMO No 1-87 information that substantiates:

2. When is expense considered as ordinary and necessary

Necessary: when it is useful or helpful to the business OR if purpose is to realize

B.G.P. VILLALUZ 2nd Sem – SY 16-17

FOR ADVERTISING EXPENSES:

3. Entertainment, amusement, and representation (EAR) expenses

B.G.P. VILLALUZ 2nd Sem – SY 16-17

General principles on EAR: account title should be “entertainment, amusement, and

INCLUDES both representation expense and/or depreciation or rental expense of

Representation Expense: Representation facilities:

DOES NOT INCLUDE: fixed representation

EXCLUSIONS (not included as EAR)

B.G.P. VILLALUZ 2nd Sem – SY 16-17

(6) Other expenses of similar nature: to promote company good will

Two conditions for claiming EAR expense:

CEILING AMOUNT for EAR

Gross Sales Gross Revenue

[this is specifically mentioned in ma’am’s tips]