Income Taxation

Review Notes
Compiled by: Karl Guinucud
 I. Inherent Powers of the State

1. Police Power – power to make and implement laws for the general welfare
2. Taxation Power – power to enforce contribution to raise government funds; it is an inherent
power by which the sovereign through its law-making body raises revenue to defray the necessary
expenses of the government.
3. Eminent Domain Power – power to take private property for public use with just
compensation

II. Similarities and Differences

POLICE
Power to MAKE and
IMPLEMENT laws for
the general welfare
Broader in application
Property is taken or
destroyed to promote
general welfare
Can be expressly delegated
Limited to the cost of
regulation, license and
other necessary expense
Relatively FREE from
Constitutional limitations
Superior to Non-
Impairment Clause
TAXATION
Power to ENFORCE
contributionto raise
government funds
Plenary, comprehensive,
and supreme BUT NOT
ABSOLUTE
Money is taken to support
the government
Cannot be delegated, if
delegated, it should be to
the legislative department
of the LGU (e.g. to make
ordinances)
Generally, NO limit on
amount
Subject to
Constitutional and
Inherent limitations
Inferior to Non-
Impairment Clause
EMINENT DOMAIN
Power to TAKE private
propertyfor public use
with just compensation
Merely to take private
property
Property is taken for public
use
Can be expressly delegated
No imposition as to
amount, instead, it is the
Government which is to
compensate the property
taken.
Superior to and may
override Constitutional
impairment provision

III. Concept of Taxation

1. Principles or Canons of a Sound Taxation System (FEA)
a. Fiscal Adequacy – sufficiency to meet government expenditures and other public needs
(Government Budget Balance). This is in consonance of the Lifeblood Theory.
a.1. Budget Deficit = Government Revenues < Government Expenditures
a.2. Budget Surplus = Government Revenues > Government Expenditures
 b. Equality or Theoretical Justice – based on the taxpayer’s ability to pay; must be
progressive
c. Administrative Feasibility – capability of being effectively enforced. Tax laws should
not obstruct business growth and economic development.

2. Purpose
a. Primarily, to raise revenue
b. To regulate (inflation, economic and social stability, social control, etc.)
c. To compensate the benefits provided by the government to the people

3. Characteristics (ILS)
a. Inherent power of the state.
b. Exclusively lodged with the legislative body
c. Subject to inherent and constitutional limitations

4. Nature
a. Plenary – full and complete in all respect
b. Comprehensive – it covers persons, businesses, activities, professions, rights and
privileges.
c. Supreme – it is supreme ONLY insofar as the selection of the subject of taxation is
concerned
d. Not Absolute – it is subject to limitations

5. Limitations in Taxation Power

a. Inherent Limitations (PENTI)
a.1. Public purpose
a.2. Exemption of the Government
a.3. Non-delegability of the power to tax
a.4. Territoriality
a.5. International Comity

b. Constitutional Limitations
b.1. Due process clause
b.2. Equal protection clause
b.3. Freedom of speech and of the press
b.4. Non-impairment of contracts
b.5. Rule requiring that appropriations, revenue and tariff bills shall originate exclusively
from the House
of Represenatatives (Congress)
b.6. Uniformity, equality, and progressivity of taxation
b.7. Tax exemption of the properties actually, directly and exclusively used for religious,
charitable and
educational purposes.
b.8. Voting requirement (2/3) in connection with the legislative grant of tax exemption
b.9. Non-impairment of the jurisdiction of the Supreme Court in tax cases
b.10. Exemption from taxes of the revenues and assets of educational institutions, including
grants,
endowments, donations and contributions
 b.11. Power of the President to veto any particular item (item veto) or items in an
appropriation, revenue or tariff bill (pocket veto).
b.12. Necessity of an appropriation before money may be paid out of the public treasury
b.13. Non-appropriation of public money or property for the use, benefit or support of any
sect, church
or system of religion

IV.Double Taxation
- It is taxing the same property twice when it should be taxed once.

1. Direct Duplicate Taxation – double taxation in the objectionable or prohibited sense; not
allowed in the Philippines. This constitutes a violation of substantive due process.
Elements:
i. Same property or subject matter is taxed twice
ii. Same purpose
iii. Same taxing authority
iv. Same jurisdiction
v. Same taxing period
vi. Same kind or character of tax

2. Indirect Duplicate Taxation – legal/permissible. The absence of one or more of the above-
mentioned elements.

V. Theories of Taxation

1. Necessity Theory (Theory of Taxation) – the power to tax is an attribute of sovereignty

emanating from necessity (national defense, health, education, public facilities, etc.).
2. Lifeblood Theory (Importance of Taxation) – without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it.
3. Benefits – Protection Theory/ Reciprocal Duties (Basis of Taxation) – there is a
symbiotic relationship between the State and the citizens whereby in exchange of the protection and
benefits that the citizens received from the State, taxes are paid.

VI.Aspects of Taxation (shared by both executive and legislative body)

1. Levy – the imposition or making of tax laws
2. Assessment – similar to audit
3. Collection – enforcement of tax

Note:
a. Levy is often called as tax legislation.
b. Assessment and collection are collectively termed as tax administration.
c. Levy and assessment comprise the impact of taxation, while tax collection comprises
the incidence of taxation.
d. An impact of taxation is a point on which tax is originally imposed.
e. An incident of taxation is a point on which the tax burden finally rests or settles down.

VII. Doctrines of Taxation

1. May the court interfere with tax legislation?
Answer: As long as the legislature, in imposing a tax, does not violate applicable constitutional
limitations or restrictions, it is not within the province of the courts to inquire into the wisdom or policy
of the exaction, the motives behind it, the amount to be raised or the persons, property or other
privileges to be taxed. The court’s power is limited only to the application and interpretation of the law.

2. Is the doctrine of equitable recoupment followed in the Philippines?

Answer: No. A tax presently being assessed against a taxpayer may not be recouped or set-off against
an overpaid tax, the refund of which is already barred by prescription.

3. May a tax be subject of compensation or set-off?

Answer: Generally, no. Taxes cannot be the subject of compensation or set-off. Taxes are not
contractual obligations but one arising out of duty to the government.

4. What is a taxpayer suit?

Answer: It is a case fied by a bona fide taxpayer impugning the validity, legality or constitutionality of
a tax law or its implementation.
5. What is the nature of our tax laws?
Answer: Internal revenue laws are not political in nature. In times of war, they are deemed to be the
laws of the occupied territory and not of the occupying enemy. Tax laws are civil and not penal in nature,
although there are penalties provided for their violation.
6. A tax statute is construed against the government, liberally in favor of the taxpayer; while tax
exemptions are construed against the taxpayer and liberally in favor of the government.

7. Tax laws are special laws which prevail over a general law.

8. Tax laws operate prospectively unless the purpose of the legislature is to give a retrospective effect.

VIII. Concept of a Tax

1. It is an enforced proportional contribution from the persons and property levied by the law-
making body of the State.

2. Taxation vs. Tax

a. Taxation is the process or means of imposing and enforcing contributions.
b. Tax is the enforced contribution, itself, which generally payable in money.

3. Characteristics of Taxes
a. Forced charge
b. Generally payable in money
c. Exclusively levied by the legislative body
d. Assessed in accordance with some reasonable rule of apportionment (ability-to-pay
principle)
e. Imposed by the State within its jurisdiction
f. Levied for public purpose

4. Classification of Taxes
a. As to subject matter:
 i. Personal tax – imposed upon persons of certain class with fixed amount (e.g.
Community tax or poll tax)
ii. Property tax – assessed on property of certain class (e.g. Real Property tax)
iii. Excise tax – imposed on the exercise of privilege (e.g. income tax, donor’s tax, estate
tax, etc.)
iv. Custom duties – charged upon the commodities being imprted into or exported from
a country (e.g. tariffs)

b. As to burden:
i. Direct tax – both incidence or liability for the payment of tax as well as the impact or
burden of the tax falls on the same person (e.g. income tax)
ii. Indirect tax – the incidence or liability for the payment of tax falls on one person but
the impact or burden of the tax falls on another person (e.g. VAT)

c. As to purpose
i. General tax – levied for the general or ordinary purposes of the government
ii. Special tax – levied for special purpose

d. As to measure of application
i. Specific tax – imposes a specific sum by the head or number or by some standard of
weight or measurement (e.g. excise tax on cigarettes)
ii. Ad Valorem tax – tax upon the value of the article or thing subject to taxation (e.g.
VAT of 12% regardless of the value of sales)

e. As to taxing authority
i. National tax – levied by the National Government (e.g. income tax, business taxes,
transfer taxes)
ii. Local tax – imposed by the Local Government (e.g. Poll tax, real property taxes)

f. As to rate
i. Progressive tax – rate or amount of tax increases as the amount of income increases
(e.g. normal/tabular/schedular tax of 5% - 32%, tabular tax for donor’s tax and estate tax)
ii. Regressive tax – rate dcreases as the amount of income to be taxed increases (not
applicable in the Philippines)
iii. Proportionate tax – based on fixed proportion or rate of the value of the property
assessed (e.g. VAT of 12%)

5. Impositions Other Than Tax

a. Toll – charged for the cost and maintenance of the property used
b. Penalty – punishment for the commission of a crime
c. Compromise Penalty – amount collected in lieu of criminal prosecution in cases of
tax violation
d. Special Assessment – levied on land based entirely on the benefit accruing thereon
as a result of the improvements or public works undertaken by the government within the
vicinity
e. License or Fee – regulatory imposition in the exercise of the police power
f. Margin Fee – exaction designed to stabilize the currency
g. Debt – a sum of money due upon contract or one which is evidenced by judgment
 h. Subsidy – a legislative grant of money in aid of a private enterprise deemed to promote
the public welfare
i. Custom Duties and fees – duties charged upon commodities on their being
transported into or exported from the country.
j. Impost – in general sense, it signifies any tax, tribute or duty; in limited sense, it means
a duty on imported goods and merchandise
k. Tithe – contributions given to a church or sect
l. Tribute – imposed by a monarch.

IX. Escape from Taxation

1. Tax Avoidance (Tax Planning) – legal and permissible means
a. Shifting – the process by which the tax burden is transferred from the statutory
taxpayer to another without violating the law.
b. Transformation – the manufacturer or producer pays the tax imposed upon him and
endeavors to recoup himself by improving his process of production, thereby turning out his
units of production at a lower cost.
c. Capitalization – a mere increase in the value of the property is not an incoem but
merely an unrealized increase in capital.
d. Tax-exemption – a grant of immunity to a particular persons or corporations from the
obligation to pay taxes
2. Tax Evasion (Tax Dodging) – the use of illegal or fraudulent means to defeat or lessen the payment
of tax

X. Tax Laws, BIR Rulings and Revenue Regulations

1. Tax laws
- A tax law is a set of rules that provide means for the State to raise revenues.
- All revenue bills must originatefrom the House of Representatives (Congress). After
passing 3 readings by a majority vote in technical committee, it shall be elevated to the
Senate which needs to pass the same 3 readings. The President’s signature is necessary so
that the bill becomes a law.
- In case of doubt, tax statutes are construed against the Government in favor of the
taxpayer.
- In case of doubt, tax exemptions are construed against the taxpayer in favor of the
Government.

2. Revenue Regulations
- These are interpretations of an administrative body (BIR) intended to clarify or explain
the tax laws and carry into effect its general provisions by providing details of administration
and procedure.
- It is promulgated (made) by the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue (quasi-legislative function).
- It must be reasonable, within the authority conferred, not contrary to laws, must be
published and prospective in application.

3. BIR Rulings
- The BIR issues a general interpretation of tax laws usually upon a requrest of a taxpayer
to clarify a provision of law.

I. Pro-Forma Computation
1. For INDIVIDUALS whose gross income solely includes compensation, allowances
and other remunerationsarising from the employer-employee relationship, passive
income and capital gains not subjected to final tax and CGT:

Compensation income xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Gross Income xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx

2. For INDIVIDUALS with business or professional income:

Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net income from business or profession xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx

3. For INDIVIDUALS whose income includes both compensation, business income

and passive incomes and capital gains not subjected to final tax and CGT:

Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Total Gross Income before compensation income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net Income from Business or Profession xx
Add: Compensation Income xx
Total Income xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
II. Classes of Individual Taxpayer and Their Situs

1. Resident Citizen (RC) – taxable globally (within and outside)

2. Non-resident Citizen (NRC) – taxable for incomes derived within the Philippines only
a. Who establishes to the satisfaction of the CIR the fact of their physical presence abroad
with a definite intention to reside therein;
b. Who leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis;
c. Who stays outside the Philippines for more than 183 days
d. A citizen who has been previously considered as non-resident citizen and who arrives in
the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which
he arrives in the Philippines with respect to his income derived from sources abroad until
the date of his arrival in the Philippines.
e. Overseas Contract Workers (OCWs). They are Filipino citizens employed in foreign
countries who are physically present in a foreign country as a consequence of their
employment thereat. To be considered as an OCW or OFW, he or she must be duly
registered as such with the Philippine Overseas Employment Administration
(POEA) with a valid Overseas Employment Certificate (OEC).

3. Resident Alien (RA) – taxable for incomes derived within the Philippines only
a. We generally consider as residents those whose length of assignments are indefinite or
exceeding two (2) years (BIR Rulings Nos. 051-81 and 052-81).

4. Non-resident Alien Engaged in Trade or Business (NRAETB) – taxable for

incomes derived within the Philippines only.
a. The term trade or business shall not include performance of services by the taxpayer as
an employee.
b. A nonresident alien individual who shall come in the Philippines and stay herein for an
aggregate period of more than 180 days during any calendar year shall be deemed as doing
business in the Philippines

5. Non-resident Alien Not Engaged in Trade or Business (NRANETB) – taxable for

incomes derived within the Philippines only

6. Special Taxpayer – Taxed at their gross income at 15% when:

a. Any Filipino or Foreign individual employed, either holding a managerial or
supervisory position, or a rank-and-file, in any of the following:
i. Offshore Banking Units (OBUs)
ii. Regional Area Headquarter or Regional Operating Headquarter of a multinational
company
iii. Petroleum contractor or subcontractor
b. A special taxpayer, generally, shall be taxed at 15% of his total GROSS
COMPENSATION INCOME. Thus, he cannot claim personal exemptions. However:
i. If a special taxpayer is a Filipino, he may opt to be taxed at 15% final tax or using the
tabular tax if his gross compensation income is at least P 975,000.
ii. Aliens are only taxed at 15%.
iii. All other income shall be taxed according to pertinent provisions of NIRC.
III. Components of Gross Income
1. Compensation Income
All remunerations paid to the employee arising from an employer-employee relationship
which include, but not limited to:
a. Salaries and wages
b. Bonuses and allowances
c. Holiday pay, Overtime pay, Night shift differential, and Hazard Pay received by
persons other than an MWE.
d. De minimis and other fringe benefits not subjected to fringe benefit tax (given
to rank-and-file), subject to P82,000 limit
e. Separation Pay, Retirement pay, and similar remunerations which do not meet
the requirements.
f. De Minimis and other Fringe Benefits (See discussions on Fringe Benefits)
g. Fees, honoraria, emoluments, commissions, etc.
Remember:
Every income is generally taxable, unless, specifically exempted by the law and
the requirements to be exempted are met.

Situs of Compensation Income:

place where the services are rendered regardless of the residence of payor (Sec. 155, RR
02-40)

2. Business and/or Professional Income

a. Arise from selling goods or services.
b. Whether individual or corporate taxpayer, may include:
- Sale of goods and properties (real or personal)
- Sale of services (professional services, lease of properties, etc.)
Note: Withholding taxes from professional incomes and other sale of services
which are subject to CWT must be correctly withheld.

3. Passive Income
General Rule: Passive income earned within the Philippines are taxable unless specifically
exempted by law.
Exception: If the passive income is not subjected to final tax, such is added to the gross income
subject to normal tax.

a. Subject to Final Withholding Tax

INDIVIDUALS
i. Interest on currency bank deposits, yield and other monetary benefit
from deposit substitute, trust and similar arrangement within the
Philippines; Royalty from patents and franchises, prizes exceeding P10,000
and winnings regardless of the amount: 20% final tax
ii. Royalty from books, literary works and musical compositions, and cash
and property dividend from domestic corporation: 10% final tax
iii. Interest on FCD under the expanded FCDS: 7.5%, except non-
residents (NRC and NRAs)
 CORPORATION
i. Interest on FCD under the expanded FCDS: 7.5%, except non-
resident foreign corporation
ii. Interest on currency bank deposits, yield and other monetary benefit
from deposit substitute, trust and similar arrangement; Royalty from patents
and franchises, prizes exceeding P10,000 and winnings regardless of the
amount: 20% final tax.
iii. Dividend from domestic corporation: exempt, intercorporate
principle

b. Not Subject to Final Withholding Tax – those which are not subjected to final tax like
those which are earned abroad, prizes not exceeding P10,000, and interest from loans, trade
and accounts receivables and those which are earned outside the Philippines shall be
included in the computation of gross income.

4. Capital Gains

Capital gains arising from the sale of capital assets (real or personal assets) are taxable as
follows:
a. If REAL property not used in business, subject to capital gains tax of 6% of the
selling price, or FMV, or Zonal Value, whichever is the highest.
b. If shares of stocks not traded in the local stock exchange, subject to 5-10%
capital gains tax.
c. All other capital gains, which are not subject to CGT, are subject to normal tax (5-
32%), subject to the pertinent rules in property. (See discussions on Dealings in Property.)

IV. Exclusions from Gross Income

1. Holiday pay, Overtime pay, Night shift differential, and Hazard pay (HONsHa) earned
by MWE (non-taxable).
2. 13th Month Pay, productivity incentives, Christmas bonus and other bonuses and benefits
(de minimis) not exceeding PhP 82,000.
3. Gifts, bequests and devises (subject to transfer taxes) are not subject to income tax, but
income derived from the use of such gifts, bequests and devises are subject to income tax.
4. Income derived by foreign government
5. Income derived by the Philippine government or its political subdivisions.
6. De Minimis not exceeding their statutory limits.
7. Proceeds of life insurance paid to the heirs upon death of the insured or whoever the
beneficiary is (also not subject to estate tax if the beneficiary is the third person
irrevocably designated as heir; subject to estate tax if the beneficiary is the estate,
administrator or executor or if the designation to third persons is revocable).
8. Retirement benefits under RA 7641 (private benefit plan), provided:
a. The employee is at least 50 years old at the time of retirement;
b. The employee has rendered 10 years in the same company;
c. The employee availed it for the first time
d. Such private benefit plan is approved by the BIR.
6. Separation pay paid to the employee for causes beyond the control of said employee
(involuntary). If the cause of separation is voluntary, such payment shall be taxable.
7. Mandated contributions such as SSS, GSIS, PHIC and HDMF contributions and union
dues.
 8. Amounts received as a return of premiums paid.
9. Prizes and awards in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievement as well as awards in authorized sports competitions.
10. Gains from sale of bonds, debentures or other certificates of indebtedness with a maturity
of longer than five years.

V. Deductions from Gross Income (See discussions on Deductions.)

Note: Only those self-employed taxpayers or those having business may claim the following:
1. Optional Standard Deduction
2. Itemized Deductions

VI. Exemptions and Other Deductions

1. Personal Exemptions
a. Personal exemptions are only given to individuals whether RC, NRC, RA and
NRAETB (subject to reciprocity rule).
b. RC, NRC and RA may claim a basic personal exemption of PhP 50,000 regardless of
the status.
c. NRAETB can only claim basic personal exemption if there is a
reciprocity between Philippine laws and the laws of his country where he resides.
However, the BPE cannot exceed Php 50,000, but may be lower instead.
d. For incomes of the estates, the estate may claim only to the extent of P 20,000.

2. Additional Personal Exemptions

a. RC, NRC and RA may claim an additional personal exemption of Php 25,000 for every
qualified dependent CHILD, but not exceeding four children, PROVIDED that the child is:
i. Not more than 21 years old
ii. Living with the taxpayer
iii. Depending upon the taxpayer at least ½ plus 1 for his living.
iv. Legitimate, illegitimate or legally adopted
v. Unmarried and not gainfully employed
b. Provided that, the taxpayer may also claim an additional exemption even if the child reaches above
21 years old when such child is incapable of self-support because of mental defect.

c. Rules on determining the status of the taxpayer who claim personal exemptions:
1. Whether single, married, head of the family or legally separated, the taxpayer can
claim only to the maximum amount of P 50,000 basic personal exemption.
2. If the taxpayer should marry or should have additional dependents during the
taxable year, he may claim the corresponding exemption in full for such year.
3. If the taxpayer should die during the taxable year, his estate may claim his
corresponding exemptions (both personal and additional) as if he died at the end of
such year.
4. If the spouse or any of the qualified dependent should marry or become twenty-
one years old during the year, or should become gainfully employed, the taxpayer may
still claim the exemption as if the spouse or dependent died or as if such dependent
married, became twenty-one years old or became gainfully employed at the close of
such taxable year.

3. Premiums on Health and/or Hospitalization Insurance

 Aside from the allowable deductions and personal exemptions, an individual taxpayer may
also deduct from his gross income SSS, Philhealth, Pag-IBIG and PHHI contributions.
Provided, that in the case of PHHI, the total family income shall not exceed PhP 250,000 per
year and the total claimable amount shall not exceed PhP 2,400 per year.

VII. Computation of Income Tax Due

1. Resident Filipinos (RC) who are taxable globally may claim tax credit for taxes paid in
foreign countries, however, the amount to be credited shall be subject to limitations. The claim
must be made in the year the tax is paid.

VIII. Income Tax Return Filing and Payment of Income Tax

General Rule: All taxpayers must file an income tax return.

Exceptions:
1. Married Individuals (Sec. 51(D),Tax Code)
a. May compute for their taxes separately, but shall file a single return for a taxable
year;
b. If impracticable to file a single return, separate returns may be filed. The BIR will
consolidate the filed returns for purposes of verification for the taxable year.

2. Those who qualified under the substituted filing method (for purely compensation income
earners).
a. It is when the employer’s annual return (BIR Form 1604 CF – Annual Information
Return of Income Taxes Withheld on Compensation) may be considered as the substitute
income tax return of employee in as much as the information provided in his income tax
return (BIR Form 1700) would exactly the same information contained in the employer’s
annual return. [RMC No. 1-03].
b. BIR Form 2316 is a statement signed by both teh employee and the employer and
serves as the same purpose as if the BIR Form 1700 had been filed. This, however, is not
submitted or filed with the BIR if the employee is qualified for substituted filing.
c. Requirements:
i. The employee is a purely compensation income earner;
ii. The empolyee receives income only from one employer in the
Philippines during the calendar year;
iii. The amount of tax due from the employee at the end of year equals the
amount tax withheld by the employer;
iv. In case of married individuals, the employee’s spouse also complies with
all the three stated conditions above;
v. The employer files the annual information return (BIR Form 1604 CF);
and
vi. The employer issues BIR Form 2316 (Oct 2002 ENCS) version to each
employee.
d. NRAETB are expressly prohibited from using the substituted filing method [RMC
No. 01-03].
e. Individuals deriving income from two or more employees, concurrently or
successively at any time during the year are also disqualified from substituted filing
method [RMC No. 01-03].
 f. Individuals under the split-pay scheme (portion of the salary is paid outside the
Philippines) is also not allowed to substituted filing method.
3. Those whose sole income has been subjected to final withholding tax.

 The due date for filing the return (with no extension allowed)
a. On or before the 15th day of April each year covering income for the preceding taxable
year (Sec. 51 (CX1), Tax Code)
b. Extensions are not allowed, except in meritorious cases, as determined by the
Commissioner of the Bureau of Internal Revenue (Sec. 53, Tax Code)

 The modes of settling income tax liability may be:

a. Cash payment if the amount does not exceed P 10,000;
b. Bank Debit System
c. Cashier’s or manager’s check

 Penalties for failure to file the return, and/or pay the tax on time:
i. Civil Liabilities
a. Surcharge, amounting to 25% of the tax due; 50% in case of willful neglect to file a
return, or in case of filing a false or fraudulent return;
b. Interest at 20% per annum;
c. Compromise penalties for failure to file the return, and/or failure to pay the tax, at
an amount not exceeding P 50,000 [Sec. 255, Tax Code; RMO 19-2007]

ii. Criminal Liability

a. Violations of tax laws are generally punishable by a fine and/or imprisonment, which
depends on the act committed or omitted

Example:
The attempt to evade or defeat tax is punished, upon conviction, by a fine of not
less than P 30,000 but not exceeding P 100,000, and imprisonment of not less two (2)
years, but not more than four (4) years. Conviction or acquittal does not bar the filing of
civil suit for collection of taxes. [Sec. 254, Tax Code]

 Tax Returns forms

1. BIR Form 1700, for purely compensation income earners
2. BIR Form 1701, for business or mixed earners
 The fact than an individual’s name is signed to a filed return is a prima facie
evidence for all purposes that the return was actually signed by him.

 Attachments:
1. BIR Form 2316 – Certificate of Compensation Payment/ Tax Withheld for
Compensation Payment with or without Tax Withheld
2. BIR Form 2306 – Certificate of Final Income Tax Withheld
3. BIR Form 2307 – Certificate of Creditable Tax Withheld at Source

 Disclosure of Supplemental Income

1. Revenue Memorandum Circular (RMC) 9-2014 futher amends the forms under
RMC 40-2011 and making the disclosure of supplemental income OPTIONAL on
 the part of the taxpayer for the calendar year 2013 tax filing. However, for the
income tax filing covering and starting with calendar year 2014, the disclosures
required under the Supplemental Information portion of the said forms will be
MANDATORY. Thus, the taxpayers are advised to demand from their payors and properly
document their BIR Form No. 2307 and other pieces of evidence for final taxes withheld as
well as information on the other tax exempt income.
2. In any returns filed with the BIR, individual taxpayers are given the option to use either:
a. Their Community Tax Certificates (CTC)
b. Passport
c. Driver’s License

 Where to FILE?
1. The return shall be filed with:
a. An authorized agent bank (AAB);
b. Revenue District Officer;
c. Collection Agent; or
d. Duly authorized Treasurer of the City or municipality
2. Filing with the incorrect RDO renders the taxpayer liable for a penalty
3. RR 5-2015 dated March 17, 2015, amending RR 6-2014
a. Mandatory for taxpayers enumerated under RR 6-2014 to use eBIR forms and must
be filed online through the eBIR Forms System
b. Penalty of P1,000 will be imposed for each return not filed electronically
c. Liable for surcharge amounting to 25% of the tax due to be paid.

Deductions from gross income depends upon the taxpayer and his source of income.

GENERAL RULE:
A taxpayer seeking a deduction
 Must point to some specific provisions of the statute authorizing the deduction
 Must be able to prove that he is entitled to the deduction authorized or allowed

Optional Standard Deduction

1. Optional standard deduction of 40% may be claimed in lieu of the itemized deductions.
2. A taxpayer who opts to avail of this deduction need not submit the Account Information Form
(AIF)/ Financial Statements.
3. Individual taxpayers (RC, NRC, RA, taxable estates and trusts) who are engaged in business or
selling of service may claim OSD, except NRAETB and NRANETB. For individual taxpayers, the 40%
OSD is multiplied at his gross sales or gross receipts. For purposes of computing OSD for
individuals, gross sales/receipts shall mean after deducting sales discounts actually taken, sales returns
and sales allowances.
4. Corporate taxpayers (domestic and resident foreign), except non-resident foreign corporation, may
claim 40% OSD of its gross income (sales/receipts less cost of sales/service plus other income not
subjected to final tax).
5. The selection is not presumed; the taxpayer should signify his election to claim OSD and such would
be irrevocable for the taxable year in which the return is made.
Example of Erroneous Computation: 

1st Quarter 2nd Quarter 3rd Quarter Annual

 OSD Itemized Deduction OSD Itemized Deduction
Itemized Deduction OSD OSD Itemized Deduction

Example of Correct Computation: 

1st Quarter 2nd Quarter 3rd Quarter Annual

OSD OSD OSD OSD
Itemized Deduction Itemized Deduction Itemized Deduction Itemized Deduction

6. The failure to indicate the election to avail the OSD shall be considered as having availed of the
itemized deductions.

Itemized Deductions (Ex InTaLoBa DepDep ChaRD PeT)

1. Ordinary and necessary business expenses, in general (STERO):

a. Salaries, wages, and other forms of compensation for personal services actually rendered,
including grossed up monetary value of the fringe benefits granted by the taxpayer-employer
to the employee, Provided, however, that such compensation is reasonable and the
corresponding withholding tax is properly withheld and remitted to the BIR for such
compensation.
b. Travel expenses incurred in connection to a business pursuit.
c. Entertainment, Amusement and Recreation (EAR) expense directly connected to the
development, management and operation of the trade or business or profession of the
taxpayer, subject to the following limit:
i. ½ % (0.005) of the net sales if the taxpayer is engaged in selling of goods; and
ii. 1% (0.01) of the net receipts if the taxpayer is engaged in selling of services.
d. Rent expense is deductible only when:
i. Accrual basis – incurred regardless when paid.
ii. Cash basis – incurred and paid
e. Other necessary business expenses incurred in connection to the business or trade or
profession.

2. Interests
a. There must be an indebtedness which pertains to the taxpayer.
b. The indebtedness must be connected to the business, trade or profession of the taxpayer.
c. There must be a legal (enforceable by law) liability to pay interest.
d. It must be paid or incurred during the taxable year.
e. It must be subjected to the following limit:
Interest expense, incurred or paid (depending whether accrual or cash basis)
xx
Less: total interest income subjected to final tax times 33% (xx)
Deductible interest expense xx

Exception: Interest expense on tax delinquency or deficiency, provided the tax is related to
trade or business or practice of profession, shall be 100% deductible.
 f. Interest related to acquisition of property used in trade or practice of profession may, at
the option of the taxpayer, be claimed as (1) outright expense or (2) capitalized and
claimed as depreciation.
g. Interest paid in advance through discount or otherwise shall be claimed as deduction in
the year the indebtedness is paid.
h. The following interests are non-deductible:
1. Interests paid to persons classified as related taxpayers
2. If the indebtedness is incurred to finance petroleum exploration
3. Interest on preferred stocks.

3. Taxes
a. Taxes paid or incurred within taxable year in connection with the taxpayer’s business,
trade or profession, shall be allowed as deduction.
b. The following taxes are not deductible:
1. Income tax
2. Income tax paid abroad, IF claimed as tax credit
3. Estate tax
4. Donor’s tax
5. Value-added tax
6. Special assessment

4. Losses
a. The following losses may be claimed as deduction:
1. Casualty losses
2. Net Operating Loss Carry-Over (NOLCO)
3. Capital losses – see discussions on Dealings in Property
4. Special losses
i. Losses from wash sales of stock or securities
ii. Wagering losses
iii. Abandonment losses
iv. Securities becoming worthless

b. Requisites:
1. The loss arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement;
2. The property lost is connected with the trade business or practice of profession;
3. Actually sustained during the taxable year;
4. Not compensated for by insurance or other forms of idemnity;
5. Incurred in trade, profession or business;
6. Reported with the BIR within forty-five days from the time of loss; and
7. Not claimed as deduction for estate tax purposes.

c. Net Operating Loss Carry-Over

1. Net operating loss means the excess of allowable deductions over gross income of the
business in a taxable year.
2. The net operating loss of the business or enterprise for any taxable year shall be
carried over as a deduction from gross income for the next three (3) consecutive
years immediately following the year of such loss.
 3. Provided, that at the time of incurring net loss, the taxpayer must not be exempted
from income tax.
4. Provided further, that there is no substantial change in the ownership of the business
or enterprise in that –
 Not less than seventy-five percent (75%) in the par value (nominal value) or
paid-up capital of outstanding issued shares, if the business is in the name of a
corporation, is held by or on behalf of the same persons; or
5. For mines other than oil and gas wells, net operating loss incurred in any of the first
ten (10) years of operation may be carried over for the next five (5) years after the
incurrence of such loss.
Notes to remember:
a. The following taxpayers are permitted to deduct NOLCO from their gross
income:
i. Individual taxpayers engaged in trade or business or in the exercise of
profession;
ii. Domestic and resident foreign corporation subject to normal income tax
(30%).
iii. Special corporation subject to preferential tax rates such as private
educational institutions, hospitals, and regional area headquarters
b. Any persons, natural or juridical, enjoying exemptions from income
tax pursuant to the provisions of the Tax Code and any special law shall not be entitled
to deduct NOLCO from gross income.

d. Losses from wash sales of stocks or securities

1. In case of any loss claimed to have been sustained from any sale or other disposition
of shares of stocks or securities shall not be deductible if:
 The seller is not a dealer in securities (shrinkage) – the loss should
be ACTUAL.
 Within a period of 30 days before the sale or 30 days after the sale, the seller
either:
1. Acquired (by purchase or exchange) stock or securities identical to the stock
or securities sold; or
2. Has entered into a contract or option to acquire stock or securities identical
to the stock or securities sold.
3. In case of wagering transactions, the loss shall be allowed only to the extent
of the gains from such transactions.

e. Abandonment losses
1. In the event a contract area where petroleum operations are taken is partially or
wholly abandoned, all accumulated exploration and development expenditures
pertaining thereto shall be allowed as deduction.
2. In case a producing well is subsequently abandoned, the unamortized costs thereif, as
well as the undepreciated costs of equipment directly used therein, shall be allowed as
deduction.
3. If the abandoned well is re-entered and production is resumed or equipment is
restored into service, the effects are:
 The amount previously claimed as deduction shall be recognized as income;
and
  Such amount shall also be capitalized and amortized or depreciated, as the case
may be.
5. Bad Debts
a. Requisites:
1. There must be an existing debt due to the taxpayer which must be valid and legally
demandable.
2. The same must be connected with the taxpayer’s trade, business or practice of
profession.
3. The same must not be sustained in a transaction between related taxpayers.
4. The same must be actually written off in the books of accounts of the taxpayer as of
the end of the taxable year.
5. The same must be actually ascertained to be worthless and uncollectible.
6. Accounts previously written off which are later recovered shall be taxable to
the extent of the amount which benefited the taxpayer, meaning the tax shield
which was availed and for which had benefited the taxpayer

b. Securities becoming worthless:

1. Securities are ascertained to be worthless;
2. The same is charged off within the taxable year;
3. It must be a capital asset.

6. Depreciation
a. Requisites:
1. The property subject to depreciation is used in the trade, business or practice or
profession.
2. The allowance for depreciation must be sustained by the person who owns or who has
a capital investment in the property.
3. The allowance for depreciation must be reasonable.
4. The allowance for depreciation should not exceed the cost of the property.
5. The schedule of the allowance must be attached to the return.

b. Depreciation Methods in General

1. Straight-line method
2. Declining-balance method – rate should not exceed twice the rate in the straightline
method
3. Sum-of-the-years digit method
4. Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner.

c. Properties used in PETROLEUM OPERATIONS

1. Properties directly related to production:
i. Straight-line method
ii. Declining balance method*
*Useful life to be used in either of the above methods, should be the shorter of the
property’s useful life or 10 years.

2. Properties not directly related to production

i. ONLY straight-line method is used.
ii. Useful life is always presumed to be 5 years.
 d. Properties used in MINING OPERATIONS
1. If expected life of the property is 10 years or less, normal rate of depreciation
(depreciate over the actual useful life).
2. If expected life is more than 10 years, depreciate over any number of
years between 5 and expected life.

e. In the case of a nonresident aliens engaged in trade or business or a resident foreign

corporation, depreciation shall be allowed only if the property is located in the
Philippines.
f. Allowance for obsolescence may be deducted in addition to the reasonable
allowance for the exhaustion, wear and tear.

7. Depletion
a. In case of oil and gas wells or mines, capital invested may be amortized using the cost-
depletion method, provided:
1. When allowance for depletion shall equal to capital invested, and no further allowance
shall be granted.
2. Afte production in commercial quantities has commenced, intangible exploration
and development drilling costs shall be treated as
i. If incurred for non-producing wells and/or
mines, deductible in the year incurred.
ii. If incurred for producing wells and/or mines:
 Deductible in full in the year paid or incurred; or
 Capitalized and amortized
b. In the case NRAETB or resident foreign corporation, depletion shall be allowed only if
the oil and gas wells or mines are located in the Philippines.

8. Charitable Contribution
1. Fully deductible contributions:
a. Donations to the Government of the Philippines or any of its agencies or political
subdivisions including fully owned government corporations, exlusively to be used in
undertaking priority activities in Education, Health, Youth, Sports Development,
Human Settlements, Science and Culture, and Economic Development.

b. Donations to foreign institutions or international organizations which are

fully deductible.

c. Donations to Accredited Non-Government organizations organized and

operated exclusively for Scientific, Research, Educational, Character
Building; Youth and Sports Development, Health, Social Welfare; Cultural,
Charitable purposes and a combination thereof, PROVIDED, that no part of
NET INCOME of which inures to the benefit of any private individual and not more
than 30% of such contributionsare utilized for administrative purposes.

2. Contributions subject to Limit

a. Donations to the Government of the Philippines or any of its agencies or political
subdivisions including fully owned government corporations, to be used in a non-
priority activities.
 b. For corporations, the limit is 5% of the taxable income from trade or practice of
profession before the deduction for charitable contributions.

c. For individuals, the limit is 10% of the taxable income from trade or practice of
profession before the deduction for charitable contributions.

9. Research and Development

If not chargeable to capital account. Outright Expense

If chargeable to capital account but not
chargeable to property subject to
depreciation or depletion
If chargeable to property subject to
depreciation or depletion.
At the option of the taxpayer:
OPTION 1 – Claim as outright expense
OPTION 2 – Amortize over 60 months
Capitalize

a. The following R&D expenditures are not deductible:

i. Any expenditure for the acquisition or improvement of land, or
the improvement of property to be used in connection with research and development
of a character which is subject to depreciation and depletion; and
ii. Any expenditure paid or incurred for the purpose of ascertaining
of any deposit of ore or other mineral including oil or gas.

10. Pension Trust

Actual contribution to the extent of pension xx
Amortization of Past Service Cost* xx
Total xx
Past Service Cost is the excess of actual contributions over the Normal Cost. It
shall be amortized over ten (10) years.

FRINGE BENEFITS- any good, service or other benefit furnished or granted by an employer, in cash
or in kind, in addition to basic salary to an individual employee.

Subject to FBT Not Subject to FBT

 Those given to managerial
or supervisory position*
 For purposes of determining
what a managerial position is,
the decision-making test may
apply.
 Those given to rank-and-
file employees
 Not subject to FBT, but
Those benefits given other than
those which do not exceed the
statutory threshold shall be
subject to tax under Normal
Income Tax (5%- 32%)

Examples:
a. Housing
b. Expense Accounts
c. Vehicle of any kind
d. Household personnel
Examples:
a. De Minimis, non-taxable if not
exceeding the limits, however,
any excess of de minimis over the
statutory limits is added to the

e. Interest
f. Membership fees
g. Expense for Foreign Travel
h. Holiday and vacation expenses
i. Educational assistance
j. Life or health insurance and
other non- life insurance premium in
excess of what the law allows
“Other Bonuses” category subject
to P 82,000 limit taxable under
Normal Tax
b. those which are required and
necessary to the
business of the employer
c. those which are for the
convenience or advantage of the
employer

 The employer is liable for

FBT regardless of whether he is
taxable or not since he is
considered to be the withholding
agent.

 The grossed-up monetary

value shall be an expense
deductible on the part of the
employer, computed as follows:

32%- FBT since January 1, 2000

GMV= MV/68% (for RC, NRC, RA,
and NRAETB)
GMV= MV/75% (for NRANETB)
GMV= MV/85% (for employees in
RAH, ROH, OBUs)
– special taxpayers

 The fringe benefit tax shall

be 32%, 25% and 15%

Monetary Values
 If Cash, the face amount or value received.
 If Property, wherein the ownership is transferred to the employee,
the basis shall be the FMV, Zonal Value, or Assessed Value, whichever is the
HIGHEST.

 If ONLY USUFRUCT (use):

a. Personal Property, FV to be depreciated by 5 years then
divided by 2.
b. Real Property, ZV, AV, or FMV, whichever is the highest, to
be depreciated by 20 years then divided by 2.
 If Interest, MV is equal to interest forgone.
*Managerial Employee
 Those who are vested with powers or prerogatives to lay down and execute management policies
and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. (Labor Code
of The Philippines)

Supervisory Employee
 Those who, in the interest of the employer, effectively recommend such managerial actions if the
exercise of such authority is not merely routinary or clerical in nature but require use of independent
judgment. (Labor Code of The Philippines)

De Minimis Benefits

Whether rank-and-file or managerial/supervisory employee, the following de minimis benefits

shall be non-taxable:
1. Monetized unused vacation leave credits of private employees not exceeding 10 days
during the year;
2. Monetized value of vacation and sick leave credits paid to government officials and employees;
3. Medical cash allowance to dependents of employees not exceeding P750 per employee per
semester or P 125 per month;
4. Rice subsidy of P 1,500 or one (1) sack of 50-kg. rice per month amounting to not more than P
1,500;
5. Uniform and clothing allowance not exceeding P 5,000 per annum;
6. Actual yearly medical benefits not exceeding P 10,000 per annum;
7. Laundry allowance not exceeding P 300 per month;
8. Employees achievement awards which must be in the form of a tangible personal
property other than cash or gift certificate, with an annual monetary value not exceeding P
10,000 received by the employee under an established written plan which does not discriminate in
favor of highly paid employees;
9. Gifts given during Christmas and major anniversary celebrations not exceeding P 5,000
per employee per annum;
10. Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic
minimum wage.
11. All other benefits given by the employers which are not included in the above enumeration shall not
be considered as “de minimis” benefits, and hence, shall be subject to income tax as well as withholding
tax on compensation.

GENERAL FORMULA: Selling Price – Cost of Property = Gain or Loss

1. Where, Selling Price equals to the total consideration received or Fair Market Value or the
property in case disposed through exchange.

2. Where, Cost is equal to the acquisition cost if purchased or acquired on or after March 1, 1913;
 a. If acquired through inheritance, the cost is equal to the FMV on the date of
transfer;
b. If acquired through donation or gift, the cost is the same as if it would be in the
hands of the donor or the last preceding owner by whom it was not acquired by
gift, EXCEPT if such basis is greater than the FMV at the time of gift, then for purposes
of determining the LOSS, the basis shall be such FMV;
c. If acquired by less than full and adequate consideration, the basis is the money
or money’s worth paid.

Example:
(i) A sold his land to B for P 17.00. The land, costing P20.00, was inherited by A from
his father where by the time it was inherited, the FMV of such land amounted to P 15.00.
SP = P 17.00
Cost = P 15.00 (FMV at the time inherited)
Gain = P 2.00

(ii) Assume A acquired the land, costing to C P20.00, through gift from C, his
grandfather. At the time of gift, the FMV of such land is P21.00.
SP = P 17.00
Cost = P 20.00 (Cost to C)
Loss = P 3.00

(iii) Assume A acquired the land through gift from C, his grandfather. C also acquired
such land by donation from D. D acquired the land through purchase at P16.00. At the
time it was received by C from D, the land was valued at P20.00. At the time of donation
from C to A, the FMV of such land is P21.00.
SP= P17.00
Cost= P 16.00 (Cost to D who acquired the land through purchase)
Gain= P1.00

(iv) Assume A acquired the land through gift from C, his grandfather. C also acquired
such land by donation from D. D acquired the land through purchase at P21.00. At the
time it was received by C from D, the land was valued at P17.00. At the time of donation
from C to A, the FMV of such land is P19.00. A sold such land for P17.00 to B.
SP= P17.00
Cost= P21.00 (Cost to D who acquired the land through purchase)
Loss= P 4.00 (not to be recognized since it would only impose lesser tax)

SP= P17.00
Cost= P 19.00 (FMV at the time donated to A by C)
Loss= P 2.00 (Loss to be recognized, the lower amount)

(v) Assume A acquired the land through gift from C, his grandfather. C also acquired
such land by donation from D. D acquired the land through purchase at P19.00. At the
time it was received by C from D, the land was valued at P17.00. At the time of donation
from C to A, the FMV of such land is P23.00. A sold such land for P17.00 to B.
 SP= P17.00
Cost= P19.00 (Cost to D who acquired the land through purchase)
Loss= P 2.00 (Loss to be recognized, the lower amount)

SP= P17.00
Cost= P23.00 (FMV at the time donated to A by C)
Loss= P 6.00 (not to be recognized since it would only impose lesser tax)

(vi) A sold his car for P25.00 to B. The car was acquired 2 years ago from S, his
friend. The car was valued at P21.50 on the date of acquisition. However, A was able to
convince S to buy the car for only P16.00.
SP= P25.00
Cost= P16.00 (The amount paid by A to S)
Gain= P9.00

Properties are classified into:

Ordinary Assets Capital Assets
a. Inventories, stocks in trade held a. Other than those enumerated as
by dealers, other property or in ordinary assets
kind included in inventory of the
taxpayer (e.g. work in process inventory b. All properties not used in business
and finished goods inventory, stocks)
c. investment whether or not connected
b. Property held for sale to customers with taxpayers trade are capital assets (e.g.
in the ordinary course of business (real investment in equity securities and
estate developer) investment in subsidiary)

c. Properties used in business which d. Residential house and lot

is subject to
depreciation or amortization (factory, e. Family car
office building, patents)
f. Receivables arising from sale of
d. Real property used in business (land inventory
which the factory stands) Subject to CGT Subject to Normal
Tax
a. Sale of stocks a. Other than those
NOTE: not listed and listed as
1. Gains and losses derived from sale or not traded in Major Capital Assets
exchange of these properties local stock (stocks not traded and
are ORDINARY exchange (5%- 10% listed, and real
GAINS and LOSSES which are included of capital gains) properties subject to
in determining ordinary income subject to b. Sale of real 6% CGT), all other
tax. capital capital gains are
properties NOT subject to normal tax
used in (added in the gross
business (6% CGT income)
based on FMV or
 2. Gains/Losses shall be part of SP, whichever is
GROSS INCOME of such seller (as higher).
other income) subject to Normal Tax. c. NO HOLDING b. HOLDING
PERIOD since the PERIOD is
capital gains tax is applicable ONLY to
a final tax on the individual taxpayers
date of sale. c. NO
d. GAINS or HOLDING period for
LOSSES are no corporations.
longer reportable d. Gains are
since the sale was reportable in full
already subjected subject to holding
to final CGT. period clause.
e. Losses are
reportable only to
the extent of
CAPITAL GAINS.

NOTE: ALL ordinary gains are ADDED to the GROSS INCOME and all ordinary losses
are deducted from the gross income, ordinary gains and/or capital gains. HOWEVER, capital losses
are ONLY deducted from CAPITAL GAINS. No capital losses exceeding capital gains may be
deducted from ordinary gains nor gross income.

Selling price means net selling price: (SP or FMV) – Expenses of sale or exchange

HOLDING PERIOD is applicable ONLY to individual taxpayers.

1. Capital assets held for not exceeding 12 months, the taxable gain or deductible loss is 50%
of such gain or loss.
2. Capital assets held for more than 12 months, capital gains taxable in full, however, in
case of capital loss deductible in full, but limited only to the extent of capital gains.
3. In case of net capital loss, such loss shall be carried over to the succeeding year.

Net Capital Loss Carry-Over (NCLCO)

u The net capital loss of one year may be carried over to the succeeding year, but not exceeding
the taxable income of the year when such net capital loss was sustained.
Example:
Mr. N, a citizen of the Philippines, single had the following data:
2010 2011
Net income from business P 80,000 P 90,000
Interest from notes of clients 4,000 2,000
Capital gain on shares of foreign
corporation held for 3 years 50,000
Capital gains on jewelry held for 10 months 70,000
Capital loss on bonds, held for 4 months 120,000

Solution:
2010 2011
 Net Income from Business P 80,000 P 90,000
Interest income 4,000 2,000
Ordinary net income 84,000 92,000

Capital Gain (50%) P 25,000

Capital Gain (100%) P70,000
Capital Loss (100%) (120,000)
Net Capital Loss ( 95,000)
NCLCO (34,000)
Net Capital Gain 36,000
Total 128,000
Less: Basic personal exemption (50,000) (50,000)
Taxable Income 34,000 78,000

u Corporate taxpayers are not subject to holding period, thus cannot carry-over its net
capital loss.

INSTALLMENT REPORTING

When a deferred payment is of sale of an ordinary asset, or of a capital asset which is not subject to
capital gain tax, the gross profit or gain from the sale may be reported on the installment method, IF
such sale is by:
a. One who is a dealer in personal property regularly selling on installments; or
b. One who makes a casual sale or disposition of personal property (other than inventory) for a selling
price in excess of one thousand pesos (P1,000.00) and with initial payments not exceeding 25% of the
selling price; or
c. One who makes a sale of real property, with initial payments not exceeding 25% of the selling price.

Without Mortgage With Mortgage but no With Mortgage in excess

Excess over
over the Cost the Cost
IP= DP + Payments IP= DP + Payments received IP= DP + Payments received this
received this year this year year
plus Excess of Mortgage over the
Cost
IP ÷ SP = 25% or less IP ÷ SP = 25% or less IP ÷ SP = 25% or less (allowed for
(allowed for Installment (allowed for Installment IR)
Reporting) Reporting)

GP ÷ CP x total collections GP ÷ CP x total collections = GP ÷ CP x total collections =

= Income Realized Income Realized Income Realized

IP= Initial payments,

payments of the buyer to
seller, whatever form (cash,
properties, cancellation of
 indebtedness, etc.) which is
received during the year. It
is not similar to down
payment.
DP= Downpayment In this case, the contract In this case, the contract price is
price is equal to selling price equal to the selling price minus
minus mortgage assumed by mortgage assumed by the buyer
the buyer. plus excess of mortgage over
cost.
SP= Selling price
GP= Gross Profit
CP= Contract Price

In this case, the selling

price is the contract price.

CAPITAL GAIN TAX EXEMPTION: Requirements

a. The capital asset sold was a principal residence;
b. The taxpayer is a citizen of the Philippines or resident alien;
c. The proceeds of the sale was invested in acquiring a new principal residence;
d. Notice to make such utilization was given to the BIR within 30 days from the date of sale;
e. Utilization of the proceeds of the sale was made within eighteen (18) months from the date of sale;
f. A cash deposit is made with an accredited bank for an amount equal to the capital gain tax, and
answerable for the capital gain tax should the conditions for the exemption be not satisfied;
g. The exemption shall be availed of once only every ten years.

 If the entire proceeds of the sale is invested, the entire capital gain is exempt. The cost
basis of the new principal residence will be the basis of the old residence.

 If only a portion of the proceeds of the sale is invested in the new residence,
Exemption on Capital gain tax:
Proceeds of the sale not invested x what should have been
Entire proceeds of the sale the tax (CGT)
Basis of the new principal Residence:
Proceeds of the sale invested x Basis of the old Residence
Entire proceeds of the sale

 If the amount invested is in excess of the proceeds of the sale, the capital gain is exempt
and the basis for the new principal residence is equal to the basis of the old residence plus
the additional investment ( New Residence = Old residence + additional capital investment)

I. Pro-Forma Computation
For CORPORATIONS, including business partnerships, domestic corporations,
resident foreign corporations, joint ventures, and associations, except non-resident
foreign corporations (which is taxable at gross income):
 Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Incomes, not subjected to final tax xx
Capital Gains, not subjected to CGT xx
Total Gross Income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
Net Operating Loss Carry-Over (NOLCO) (xx)
Taxable Income xx
*NCLCO is not applicable since the holding period is also not applicable.

II. Overview

The term ‘corporation’ includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participacion), associations, or
insurance companies, but does not include general professional partnerships (GPPs)
and joint venture or consortium formed for the purpose of undertaking construction
porjects or engaging in petroleum operation, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract with the
Government.

III. Classes of Corporate Taxpayer

1. Domestic corporations are taxed on worldwide income, at 30% of the taxable income.
2. Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of
the taxable income.
3. Non- Resident foreign corporations are taxed on incomes from the Philippines only, at 30%
of the gross income.
Note:
a. GPPs are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.

IV. Components of Gross Income

1. Business and/or Professional Income
2. Passive Income
3. Capital Gains

 The components of gross income for individuals are also the same in the case of corporate
taxpayers. (See discussions on Gross Income for individuals, Lecture 2)

V. Deductions from Gross Income

1. Optional Standard Deduction
2. Itemized Deductions
(See discussions on Deductions and Dealing in Property.)

VI. Corporate Tax

1. Gross Income Tax (GIT)
It is an optional income tax given to corporate earners equivalent to 15% of its gross income
instead of the 30% net income tax.
 Only domestic corporations and resident foreign corporations may avail such GIT.
 Requirements:
a. A tax ratio of 20% of Gross National Products
b. A ratio of 40% income tax collection of total tax revenues
c. A VAT tax effort of 4% of GNP
d. A 0.9% ratio of consolidated public sector financial position to GNP
e. Available only to firms whose ratio of cost of sales to gross sales or receipts from all
sources is 55%.
f. The election shall be irrevocable for three (3) consecutive year
g. Recommendation from the Secretary of Finance
h. Subject to approval of the Office of the President

2. Normal Corporate Income Tax (NCIT)

Period Corporate
Income Tax
Rate
January 1 to October 31, 2005 32%
November 1, 2005 to December 31, 35%
2008
January 1, 2009 and onwards 30%

3. Minimum Corporate Income Tax (MCIT)

The following are liable to MCIT beginning the 4th taxable year in which such corporation
commenced its business operations:
a. Domestic Corporations
b. Resident foreign corporations

 The 2% of gross income is imposed whenever a company:

a. Has no taxable inocome; or
b. Has taxable income but the amount of MCIT is greater than the NCIT (30%)
 Excess MCIT can be carried forwards for 3 succeeding years and credited againts the
normal corporate income tax only when the NCIT is greater than MCIT
 MCIT can be claimed as a credit against the MCIT itself or against any other losses
The following are exempt from MCIT (these are special corporations):
a. Domestic corporations operating as proprietary (private) educational institutions subject
to tax at 10% on their taxable income;
b. Domestic corporations engaged in hospital operations which are nonprofit subject to tax
at 10% on their taxable income;
c. Domestic corporations engaged in business as depository banks under the expanded
foreign currency deposit system on their income from foreign currency transactions which
has been subjected to final tax at 10%;
d. Resident foreign corporations engaged in business as “international carrier” subject to
tax at 2 ½% of their Gross Philippine Billings;
e. Resident foreign corporations engaged in busines as Offshore Banking Units (OBUs) on
their income from foreign currency transactions which has been subjected to a final income
tax at 10% of such income;
 f. Resident foreign corporations engaged in business as regional area headquarters subject
to tax at 10% of their taxable income; and
g. Firms that are taxed under a special income tax system

 The computation and payment of MCIT, shall likewise apply at the time of filing the
quarterly corporate income tax.
 In the computation of the tax due for the taxable quarter, if the quarterly MCIT is higher
than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the
time of filing the quarterly corporate income tax return shall be the MCIT.

VII. Improperly Accumulated Earnings Tax

It is a tax imposed on improper accumulation of earnings. “Improperly accumulated
earnings (IAE)” are the profits of a corporation that are permitted to accumulate instead of being
distributed by a corporation to its shareholders for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of another corporation.

 The rate of 10% of the Improperly Accumulated Taxable Income, computed as follows:
Taxable Income for the Year xx
Add:
Income exempt from tax xx
Income excluded from gross income xx
Income subject to final tax, net xx
NOLCO xx
Less:
Income tax paid for the taxable year (xx)
Dividends actually or constructively paid/issued
from the applicable year’s taxable income (xx)
Amount reserved for the reasonable needs (xx)
Tax Base for IAET xx

Note: Earnings for the reasonable needs are enumerated as follows [Revenue Regulation
No. 2-2001]:
1. Allowance for the increase in the accumulation of earnings up to 100% of the paid-
up capital of the corporation as of the balance sheet date, inclusive of accumulation
taken from other years;
2. Earnings reserved for definite corporate expansion or projects as approved by the
board;
3. Earnings reserved for building, plants or equipment acquisition as approved by
the board;
4. Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
5. Earnings required by law or applicable regulations to be retained by the
corporation;
6. In case of subsidiaries of foreign corporations in the Philippines, all undistributed
earnings intended or reserved investments within the Philippines as can be proven by
corporate records.

 Applicability:
 a. Shall apply to every corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or shareholders of any other corporation, by
permitting earnings and profits to accumulate instead of being divided or distributed. These
are:
i. Domestic corporations
ii. Closely-held corporations

 Exceptions:
a. Publicly-held corporations
b. Banks and other non-banks financial intermediaries
c. Insurance companies
d. Taxable (business) partnerships (deemed to have actually or constructively received the
taxable income under Sec. 73D)
e. General professional partnerships
f. Non-taxable joint ventures
g. Enterprises duly registered with the Philippine Economic Zone Authority under R.A.
7916 and enterprises registered pursuant to the Bases, Conversion and Development Act of
1992 under R.A. 7227

VIII. Income Tax Return Filing and Payment of Income Tax

Income Tax Return (BIR Form) Deadline for Filing and Payment
Annual Income Tax Return – Corporate On or before the 15th day of the 4th month
(BIR Form 1702) of the following the close of the taxable
year
Annual Income Tax Return – Self- On or before the 15th day of the 4th month
Employed Individual (BIR Form 1701) of the following the close of the taxable
year
Quarterly Income Tax Return (BIR Form Within 60 days after the end of each first 3
1702Q) quarters of the taxable year

IX. BIR Issuances and Court Decisions Related to Income Tax

1. Valuation of Contributions or Gifts Actually Paid or Made in Computing Taxable

Income
 Revenue Memorandum Circular (RMC) No. 86-2014 dated December 5, 2014
- This circular is issued to clarify the valuation of contributions or gifts actually paid or
made in computing taxable income as part of the substantiation requirement under
Revenue Regulations No. 13-98:
Information Required in Certificate  Actual receipt by the accredited
of Donation (BIR Form No. 2322) NSNP/ NGO of the donation or
contribution
 Date of the receipt of donation, and
 Amount of donation
a. Amount of donation or
contribution –if cash
b. Acquisition cost – if real or
personal property
 Allowable income tax deduction (on Net book value of the property donated as
the part of the donor) reflected in the financial statements of the
donor.

2. Requirements for Deductibility of Certain Income Tax Payments

 Revenue Regulation No. 12- 2013 dated July 12, 2013
- Requirements for deductibility: Any income payment which is otherwise
deductible under the Code shall be allowed as a deduction from the payor’s gross income
only if it is shown that the income tax required to be withheld has been paid to the Bureau
in accordance with Sections 57 and 58 of the Code.
- No deduction will also be allowed notwithstanding payments of withholding tax at the
time of audit investigation or reinvestigation/reconsideration in cases where no
withholding of tax was made in accordance with Sections 57 and 58 of the Code.

3. Validity of Principal and Supplementary Receipts/Invoices

 Revenue Regulations No. 18- 2012 dated October 22, 2012
- All taxapyers are mandated by the BIR to make new sets of ORs and Sales invoices
wuth special security marking features printed by BIR – Accredited printers only.
- All ORs and Sales invoices shall be valid only until full usage of the approved serial
numbers or five years from its issuance whichever comes first.
- This should be effective starting January 18, 2013

4. Taxability of Associations Dues, Membership Fees Received by Condominium

Corporations
 Revenue Memorandum Circular (RMC) No. 65-2012 dated October 31, 2012
- Amounts paid in as dues or fees by members or tenants of a condominium corporation
form part of the gross income of such corporation subject to income tax. This is because
the condominium corporation furnishes its members and tenants with benefits,
advantages, and privileges in return for such payments.
- For tax purposes, the following constitute income tax payment or compensation which
are subject to income tax:
a. Association dues
b. Membership fees
c. Other assessments/charges
- The previous interpretation that the assessment dues are funds which are merely held
in trust by a condominium corporation lacks legal basis and is hereby abandoned.

Note: The same rule applies to homeowner’s association per RMC No. 9-
2013 dated January 9, 2013

5. Rules on Deductibility of Depreciation Expenses on Vehicles

 Revenue Regulation No. 12 – 2012 dated October 12, 2012
- Limitations on deductions:
a. Only one (1) vehicle for land transportation is allowed for the use of an official
or employee, the value of which should not exceed P2.4 million
b. No depreciation shall be allowed for yachts, helicopters, airplanes and/or
aircrafts, and land vehicles which exceed the said threshold.
 c. All related maintenance expenses on account of a non-depreciable
vehicle for taxation purposes are also disallowed in its entirety.
d. Loss to be incurred from sale of non-depreciable vehicle shall not be allowed as
deduction from gross income [Revenue Memorandum Circular (RMC) No. 2 -2013
dated December 8, 2012]

- Exception:
a. Unless the taxpayer’s mainline of business is transport operations or lease of
transportation equipment and the vehicles purchased are used in the said operations.
- This regulation shall take effect immediately. (Published in October 17, 2012)

6. Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure,
Recreation and Other Non-Profit Purposes
 Revenue Memorandum Circular (RMC) No. 35 – 2012 dated August 3, 2012
- Clubs which are organized and operated exclusively for pleasure, recreation and other
non-profit purposes are subject to income tax under the Tax Code, as amended.
- Background:
The provision in the NIRC of 1977 which granted income tax exemption to such
recreational clubs were omitted in the current of tax exempt corporations under
NIRC of 1997, as amended.

HENCE, the income of recreational clubs from whatever source, including but not
limited to membership fees, assessment dues, rental income, and service fees are
subject to income tax.