REVENUE REGULATIONS NO. 01-79 (Regulations governing the taxation of non-resident citizens) Who are considered as nonresident citizens.

² The term "non-resident citizen" means one who establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with the definite intention to reside therein and shall include any Filipino who leaves the country during the taxable year as: a. Immigrant ² one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa as such has been secured. b. Permanent employee ² one who leaves the Philippines to reside abroad for employment on a more or less permanent basis. c. Contract worker ² one who leaves the Philippines on account of a contract of employment which is renewed from time to time within or during the taxable year under such circumstances as to require him to be physically present abroad most of the time during the taxable year. To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside the Philippines for not less than 183 days during such taxable year. Any such Filipino shall be considered a non-resident citizen for such taxable year with respect to the income he derived from foreign sources from the date he actually departed from the Philippines. A Filipino citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside therein permanently shall also be considered a non-resident citizen for the taxable year in which he arrived in the Philippines with respect to his income derived from sources abroad until the date of his arrival. Proof of intention. ² A Filipino citizen who leaves the Philippines to reside abroad either as an immigrant or for permanent employment or a contract worker, shall submit to the Commissioner of Internal Revenue proof of his intention of leaving the Philippines to reside permanently abroad. A returning non-resident citizen, on the other hand, must present proof of his intention to return to and reside permanently in the Philippines. Such proof of intention shall be attached to his income tax return (BIR Form No. 1701C) and may consist of the following: a. In the case of an immigrant, photostat or xerox copy of his foreign visa. b. In the case of one leaving for permanent employment abroad, a certificate from his employer showing the nature and duration of his employment. c. In the case of a contract worker ² a. Certificate of the employer; or b. Copy of the contract of employment; or c. Other documentary evidence. d. In the case of a returning non-resident citizen ² a. Xerox copy of his passport bearing the stamp of Philippine immigration authorities showing that he is a returning resident as distinguished from a mere Balikbayan. b. Other documentary evidence. Computation of income and tax. ² A. On income derived from all sources outside the Philippines. ² 1. What to include as gross income. ² The gross income of a non-resident citizen derived from sources outside the Philippines includes all income enumerated under Section 29 of the National Internal Revenue Code, whether or not such income is exempted from income tax in the foreign country where it was derived. If the income is in foreign currency other than US dollars, it shall first be converted into US dollars at the average annual rate of exchange of the foreign currency and the US dollar for the year in which the income was earned. 2. Rate of tax. ² Beginning with the taxable year 1978, there shall be imposed on the adjusted gross income of non-resident citizen a tax computed as follows: 1% $60.00 plus 2% of excess over $6,000. $340.00 plus 3% of excess over $20,000.

On the amount not exceeding $6,000 On the amount exceeding $6,000 but not exceeding $20,000 On the amount exceeding $20,000 3.

4.

Computation of Adjusted Gross Income. ² The adjusted gross income is arrived at by deducting from the gross income the following: a. Personal exemption of $2,000 if the non-resident citizen is single or a married person legally separated from his or her spouse, or $4,000 if married or head of a family; b. The total amount of the national income tax actually paid to the national government of the foreign country of his residence. Head of Family. ² The term "head of family" is defined as "an unmarried man or woman with one or both parents, or one or more brothers or sisters, or one or more legitimate, recognized natural, or adopted children living with and dependent upon him or her for their chief support where such brothers, sisters, or children are not more than twenty-one years of age, unmarried and not gainfully

5.

employed or where such children are incapable of self-support because they are mentally or physically defective. Computation of tax. ² The computation of the tax due from a non-resident citizen on income derived abroad is illustrated as follows:

Mr. Juan de la Cruz, 35 years old, Filipino, married to Maria, with a dependent son, Jose and a resident of Los Angeles, California. For U.S. Federal Income Tax purposes, he filed a joint return containing the following data and claimed the optional standard deductions and used the optional tax tablets: Income: Wage, Salaries, Tips, Others $7,814.65 Dividends received from qualified U.S. domestic corporation ²$482.50 (less exclusion ----$200.00) 282.50 Interest Income on savings deposit 110.17 Income other than wages (Wife's prize in photo contest) 200.00 ²²²² TOTAL GROSS INCOME $8,407.32 LESS: Adjustment to income (moving expenses) 60.00 ²²²² Adjusted Gross Income $8,347.32 TAX DUE PER IRS TABLES Tax payments and credits Total Federal income taxwithheld Other payments (gasoline tax, etc.) ²²²² Total payments and credits ²²²² AMOUNT REFUNDABLE ====== $ 325.00 $484.30 32.67 $516.97 (191.97)

For Philippine income tax purposes, his income shall be computed as follows: Gross Income $8,407.32 ADD: Excluded dividend income taxable under Philippine Income Tax Law 200.00 ²²²² Total Gross Income $8,607.32 LESS: (a) Personal Exemption as married $4,000 (b) Foreign National Income Tax paid (Attach copy of Federal Income Tax Return and evidence of payment) 325 ²²² Total Deductions [add (a) & (b)] 4,325.00 ²²²² ADJUSTED GROSS INCOME SUBJECT TO TAX $4,282.32 ======= Tax Due: Adjusted Gross Income $4,282.32 At 1% rate (not over $6,000.00) x .01 ²²²² Amount payable $42.82 ²²²² On income derived from sources within the Philippines. ² The tax due on income derived by a non-resident citizen from sources within the Philippines shall be computed in the same manner as the income tax payable by resident citizens and resident aliens.

RR 5-01 (Sec. 2) Filing of Information Returns no longer required -- Non-resident citizens exempt from tax with respect to income derived from sources outside the Philippines in accordance with Section 23(B) and (C), in relation to Section 22 (E) and Section 51 (a)(2)(d) and (A)(3) of the Tax Code of 1997, but who are nevertheless mandated to file information returns pursuant to RMO 30-99 and RR 9-99 shall no longer be required to file the same on their income derived from sources outside the Philippines beginning taxable year 2001.

INCOME TAX; Overseas Contract Worker - Section 23(C) of the Tax Code of 1997 provides that an individual citizen of the Philippines who is working and deriving income from abroad as an overseas

contract worker is taxable only on income from sources within the Philippines. Corollary thereto, Section 22(E)(3) of the same Code provides that a citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sourced income for being a non-resident citizen or for being an overseas contract worker (CW). All employees whose services are rendered abroad for being seconded or assigned for at least 183 days may fall under the first category and are therefore exempt from payment of Philippine income tax. The phrase "most of the time" shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year. (Sec. (2)(c), Revenue Regulations No. 1-79) The same exemption applies to an overseas contract worker but as such worker, the time spent abroad is not material for tax exemption purposes. All that is required is for the worker's employment contract to pass through and be registered with the Philippine Overseas Employment Agency (POEA). (BIR Ruling No. 033-2000 dated September 05, 2000)

RR 2 (Secs 5 and 6) SECTION 5. Definition. ² A "non-resident alien individual" means an individual ² (a) Whose residence is not within the Philippines; and (b) Who is not a citizen of the Philippines. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. SECTION 6. Loss of residence by alien. ² An alien who has acquired residence in the Philippines retains his status as a resident until he abandons the same and actually departs from the Philippines. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Thus an alien who has acquired a residence in the Philippines is taxable as a resident for the remainder of his stay in the Philippines.

REVENUE REGULATIONS NO. 10-98 issued September 2, 1998 prescribes the regulations to implement RA No. 8424 relative to the imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore Banking Systems. Specifically, interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The depository bank will withhold and remit the tax. If a bank account is jointly in the name of a non-resident citizen, 50% of the interest income from such bank deposit will be treated as exempt while the other 50% will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable.

REVENUE REGULATIONS NO. 02-82 (Taxation of Sales of Shares of Stock Classified as Capital Assets.) Definition of Terms. ² For the purpose of these regulations, the following definitions of terms are hereby adopted: (a) "Stock classified as capital assets" shall mean all stocks and securities held by taxpayers other than dealers in securities. (b) "Dealer in securities" includes all persons who for their own account are engaged in the sale of stock, bonds, exchange, bullion, coined money, bank notes, promissory notes, or other securities as licensed by the Securities and Exchange Commission. Notwithstanding the foregoing, nothing in these regulations shall preclude the Commissioner of Internal Revenue from treating other taxpayers engaged in similar activities but not licensed by the Securities and Exchange Commission as a dealer in securities. (c) "Gross selling price" is the total amount of money or its equivalent which the purchaser pays the vendor to receive or get the goods. Persons Liable to the Tax. ² The following persons are liable to the tax provided for in Section 5 of these Regulations: (a) individual taxpayer, citizens or alien; (b) corporate taxpayer, domestic or foreign; (c) other taxpayers not falling under (a) or (b), such as estate, trust, trust funds and pension funds among others. Persons Not Liable to the Tax. ² The taxes imposed herein shall not apply to the following: (a) gains derived by dealers in securities; (b) gains on sale of shares of stock to the extent invested in new shares of stock in banks, non-bank financial intermediaries and corporations organized primarily to hold equities in banks, in accordance with Presidential Decree No. 1739 ; and

(c) all other gains which are specifically exempt from income tax under existing investment incentives and other special law. Imposition of the Tax. ² (a) Sales of shares of stock listed and traded through a local stock exchange. ² A tax of 1/4 of 1% shall be imposed on the gross selling price of the shares of stock sold, exchanged or transferred through the facilities of a stock exchange registered with the Securities and Exchange Commission. (b) Shares of stock not traded through a local stock exchange. ² Net capital gains derived during the taxable year from sales, exchanges, transfers or similar transaction shall be taxed as follows: Not over P100,000 10% Over P100,000 20% Determination of Tax Base. ² In determining the tax base, the following rules shall apply: (a) Determination of selling price. ² The selling price of the shares of stocks shall be the fair market value of the shares of stocks transferred or exchanged and not the fair market value of the property received in exchange. If the total consideration of the sale or disposition consists partly in cash or money and partly in kind, the selling price shall be the fair market value of the shares disposed. (1) In the case of shares traded through the stock exchange, "fair market value" shall consist of the actual selling price as shown in the sales confirmation issued by the member of the stock exchange through whom the sale was effected. (2) In the case of shares not traded through the stock exchange, but listed in one or more stock exchanges, the highest closing price on the day when the shares are sold, transferred or exchanged, shall be the "fair market value." When no sale is made in any stock exchange, the highest closing price on the day nearest to the day of sale, transfer or exchange of the shares shall be the fair market value. (3) In the case of sale, transfer or exchange of shares not listed in the stock exchange, the following rules shall be observed: (i) In general, the unlisted shares shall be valued at their book value nearest the valuation date. The book value of these unlisted shares of stock shall be prima facie considered as their fair market value. (ii) In case the shares are valued on a basis lower than their book values, a justification for the deviation from the book value, together with the evidences in support thereof, should be submitted. The following factors are considered relevant in the valuation of shares of stock of closed corporations. A) The nature of the business and the financial history of the enterprise, from the date of incorporation B) The economic outlook in general and the business condition and outcome of the specific industry in particular C) The financial condition of the business D) The earning capacity of the company E) The dividend paying capacity F) Goodwill G) Sales of stocks and size of the block of stock to be valued H) Market price of stocks of corporations engaged in the same or similar line of business to be valued I) Existence of corporate debts in favor of the family of the principal shareholder J) Restrictive agreements impairing the alienability of the stock K) Investments in business or property maintained at a deficit L) Dividend arrearages M) Voting rights of stockholders N) Difficulty in liquidating the assets If such lower fair market valuation is not clearly established and documented, the book value of the unlisted shares of stock shall be adopted. If there have been previous sales/exchanges of the unlisted shares of stock, the price at which these shares exchanged hands should be taken/considered as its fair market value/s. (b) Determination of cost. ² The cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 35 of the National Internal Revenue Code, as amended, and its implementing regulations applied in the following manner: (1) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax, transfer fees, etc. (2) If the stocks cannot be properly identified, then the cost to be assigned shall be computed on the basis of the first-in, first-out (FIFO) method. However (3) If books of accounts are maintained by the seller where every transaction of a particular stocks are recorded, then the moving average method shall be applied rather than the first-in, first-out, (FIFO) method. (4) In all cases, stock dividend received must be assigned a corresponding cost by allocating the original cost of acquisition to the total number of shares composed of the original shareholdings plus the number of shares of stocks received as stock dividend. (c) In determining the deductibility of capital losses, the following rules shall apply: (1) The provisions of Section 33 of the National Internal Revenue Code, as amended, and its implementing regulations on the non-deductibility of losses on wash sales. (2) The net capital losses sustained during the taxable year shall be allowed as a capital loss deductible in the same taxable year only. (3) The entire amount of capital gains and capital loss shall be considered without taking into account the period or duration during which the stocks were held by the seller up to disposition for purposes of computing net capital gains.

(d) Installment sales of shares of stock not listed and traded through any local stock exchange. ² In cases of gains arising from installment sales of shares of stocks, the provisions of Section 43 of the National Internal Revenue Code, as amended, and its implementing regulations shall apply. « If a taxpayer elects and is qualified to pay the capital gains tax on stock transaction on installments, the amount of the tax due on its installment payment shall be determined as follows: The net capital gains tax shall be computed on the basis of the entire amount of gain realized from the sale or disposition of shares of stock and the tax so computed may be paid in installments. The amount of the tax on each installment shall be the proportion of the tax so determined which bears to the total installment payment received over the total selling price or to the total contract price, in case of sale or mortgaged shares of stock or where the mortgage on such shares is assumed by the purchaser. For this purpose, installment received shall mean ² (i) On the date of sale or disposition. ² First payment received, including the excess of the mortgage, if any, assumed by the purchaser over the basis of the property sold. (ii) Succeeding installments. ² Installment payments actually received by seller. Effect of Non-payment of Tax. ² No sale, exchange, transfer or similar transaction intended to convey ownership of, or title to any share of stock shall be registered in the books of the corporation unless the receipt of payment of the tax herein imposed is filed with and recorded by the stock transfer agent or secretary of the corporation. It shall be duty of the aforesaid persons to inform the Bureau of Internal Revenue in case of non-payment of tax. Any stock transfer agent or secretary of the corporation who caused the registration in violation of the aforementioned requirement shall be punished by a fine of not more than P2,000.00 or by imprisonment for not more than six months, or both.

REVENUE REGULATIONS NO. 8-98 issued September 2, 1998 amends pertinent portions of Revenue Regulations Nos. 11-96 and 2-98 relative to the tax treatment of the sale, transfer or exchange of real property. Specifically, the Capital Gains Tax (CGT) Return will be filed by the seller within 30 days following each sale or disposition of real property. Payment of the CGT will be made to an Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located. Creditable withholding taxes, on the other hand, deducted and withheld by the withholding agent/buyer on the sale, transfer or exchange or real property classified as ordinary asset will be paid by the withholding agent/buyer upon filing of the return with the AAB located within the RDO having jurisdiction over the place where the property being transferred is located. Payment will have to be done within 10 days following the end of the month in which the transaction occurred, provided, however, that taxes withheld in December will be filed on or before January 25 of the following year.

REVENUE REGULATIONS NO. 13-99 issued September 14, 1999 prescribes the regulations for the exemption of a citizen or a resident alien individual from the payment of the 6% Capital Gains Tax on the sale, exchange or disposition of his principal residence. In order for a person to be exempted from the payment of the tax, he should submit, together with the required documents, a Sworn Declaration of his intent to avail of the tax exemption to the Revenue District Office having jurisdiction over the location of his principal residence within (30) days from the date of the sale, exchange or disposition of the principal residence. The proceeds from the sale, exchange or disposition of the principal residence must be fully utilized in acquiring or constructing the new principal residence within eighteen (18) calendar months from the date of the sale, exchange or disposition. In case the entire proceeds of the sale is not utilized for the purchase or construction of a new principal residence, the Capital Gains Tax will be computed based on the formula specified in the Regulations. If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-month reglementary period, his right of exemption from the Capital Gains Tax did not arise on the extent of the unutilized amount, in which event, the tax due thereon will immediately become due and demandable on the 31st day after the date of the sale, exchange or disposition of the principal residence. If the individual taxpayer's principal residence is disposed in exchange for a condominium unit, the disposition of the taxpayer's principal residence will not be subjected to the Capital Gains Tax herein prescribed, provided that the said condominium unit received in the exchange will be used by the taxpayer-transferor as his new principal residence.

REVENUE REGULATIONS NO. 14-2000 issued December 29, 2000 amends Sections 3(2), 3 and 6 of RR No. 13-99 relative to the sale, exchange or disposition by a natural person of his "principal residence". The residential address shown in the latest income tax return filed by the vendor/transferor immediately preceding the date of sale of said real property shall be treated, for purposes of these Regulations, as a conclusive presumption about his true residential address, the certification of the Barangay Chairman, or Building Administrator (in case of condominium unit), to the contrary notwithstanding, in accordance with the doctrine of admission against interest or the principle of estoppel.

commercial center dues and expenses would be shared by ALI and the API in the same proportion. accepting or transferring the real property wherever the document is made. a Joint Venture Agreement (JVA). RA 9504: Amended Sec22. 3(3) of the Regulations. to be known as 6750 Ayala Office Tower (Building) or such other name as the parties may subsequently adopt. exchanged or disposed by the aforesaid taxpayer. ALI and API now propose to enter into another agreement. common areas expenses. no transfer of title to the highest bidder can be effected yet until and after the lapse of the one-year period from the issuance of the said certificate of sale. (ALI) and Appleyard Properties. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to approve and issue the Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC) of the principal residence sold. and to use a common agent to handle contract negotiations. In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale. REVENUE REGULATIONS NO. in consideration of each of them acquiring the ownership of such numbers of specifically designated whole floors in the proportion of 60% (ALI) and 40% (API) respectively. that upon the expiration of the 48 year term of the MOA in year 2038. signed. Thus. shall be distributed to ALI and API in same proportion of 60%/40% as dividends. collected and paid by the person making. no Capital Gains Tax will be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. Where the right of redemption of the mortgagor exists. your client. 317-92 Gentlemen : This refers to your letter dated July 13. and the right to use the parking stalls and storage spaces in the same proportion of 60%/40%. 1999 further amends Revenue Memorandum Order No. Instead. that the principal objective of both ALI and API is to lease out to third party tenants the specific floors separately owned by them. the Capital Gains Tax on the foreclosure sale shall become due based on the bid price of the highest bidder. tenant relations. Ayala Land. each party will receive the rentals for the floors owned by it and shoulder its own expenses. real estate taxes. issuing. accounting of income and expenses. such as salaries of JV personnel and maintenance expenses. maintenance." . the JV will hold the rental receipts in a common pool and the net balance every quarter. that while there would be separate ownership of specifically designated whole floors. independently of the other. 6-92 relative to the payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital assets initiated by banks. that considering the present softness in the market. among others. "4. Inc. shall be responsible. that irrespective of who owns the floor or floors. Makati. "3. and the cancellation of the title and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the mortgagor will redeem or not the mortgaged property within one year from the issuance of the certificate of sale. the ownership of all the floors or portions of the building allocated to API shall automatically be transferred to ALI. 34(L) on Optional Standard Reduction. exchange or disposition of the taxpayer's principal residence is exempt from capital gains tax pursuant to Sec.335 square meters of the office tower. cdtai In connection therewith. Sec79(A) on Requirement of Withholding BIR RULING NO. but subject to compliance with the post-reporting requirements imposed under Sec. after deducting all expenses chargeable thereto. created a separately taxable joint venture. maintenance and insurance costs. Sec35(A) and (B) for Allowance of Personal Exemption for Individual Taxpayer (General and Dependents). 1992 stating that in June 1990. they believe that it would be to their mutual interest to pool together their respective floors in the Building for the purpose of leasing them under standard rental rate. adding definitions (GG) and (HH). Whether or not the Memorandum of Agreement entered into by and between ALI and API in 1990 providing for the construction of the office tower has. separate and distinct from ALI and API. additional working capital of the joint venture. if necessary. Inc. only a brief memorandum will be annotated at the back of the certificate of title. ALI and API will contribute money to a common fund for the initial and. that the JV will have a life of three years. of the net leasable floor area of 22. for the leasing of the Building floors or portions thereof owned by ALI and API. or portions of the Building that are leased out. Whether or not the distributions by the joint venture of the net income from its operations to ALI and API will be considered as dividend distributions taxable to ALI and API. 24 (D)(2) of the Tax Code. (API) entered into a Memorandum of Agreement (MOA) for the construction of an office building on that lot owned by ALI located along Ayala Avenue. but only upon the expiration of the one-year period of redemption. "2. that to carry out their common objectives. you now pose the following queries: "1. finance and insurance companies. and will be paid within thirty (30) days from the expiration of the said one-year redemption period. that under the JVA. Whether or not the rentals to be paid by the tenants of the Building to the joint venture during the term of the JVA are to be treated as income of the joint venture. ALI and API each contributed equal amounts to the construction costs of the office tower and 351 parking stalls. signing. and that upon its dissolution. the certificate of title of the mortgagor will not be cancelled yet even if the property had already been subjected to foreclosure sale. that pursuant to the terms of the MOA. that ALI will be appointed as manager of the joint venture and subject to the mutual control of ALI and API. The corresponding Documentary Stamp Tax will be levied. for the leasing of the Building floors or portions thereof separately owned by them will be considered as a corporation taxable as such. Said CAR or TCC shall state that the said sale. by itself. Whether or not the joint venture to be subsequently entered into by and between ALI and API. accepted or transferred where the property is situated in the Philippines. issued.The seller/transferor's compliance with the preliminary conditions for exemption from the 6% capital gains tax under Sec. 4-99 issued March 16. Sec24(A) on the Rate of Income Tax. In case of non-redemption.

knowledge. "(d) usually. this exemption does not extend to their other activities involving sale of goods and services. Section 4. 102 Phil. if upon investigation the same could not be substantiated then this ruling shall be considered null and avoid. 822. Culture and Sports or by the Commission on Higher Education. and . 069-90 dated May 9. that interest income derived by them from a depository bank under the expanded foreign currency deposit system shall be subject to 7 1/2% final withholding tax pursuant to Section 27(D)(1) in relation to Section 57(A). there is single business transaction rather than a general or continuous transaction" (Words and Phrases.In reply thereto. 1991). Vol. rental payment from their building/premises. they shall be subject to internal revenue taxes on income from trade. which income should be returned for taxation. the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions (Sec. Tax Code of 1997 and Non-stock. p. also as implemented by Revenue Regulations No. or any activity conducted for profit regardless of the disposition thereof (i. Moreover. Batangas Transportation et al. as implemented by Revenue Regulations No. Furthermore. "(b) profits must be shared among the parties. NON-STOCK. NON-PROFIT EDUCATIONAL INSTITUTIONS The exemption of non-stock. NON-PROFIT CORPORATIONS Organizations enumerated under Section 30 of the Tax Code of 1997 are exempt from the payment of income tax on income received by them as such organization. separate and distinct from ALI and API. 1982. are exempt from the 20% final tax and 7 ½% tax on interest income under the expanded foreign currency deposit system imposed under Section 27(D)(1) of the Tax Code of 1997. directly and exclusively for educational purposes (Paragraph 3. 23. Title II of the Tax Code of 1997. or if they makes income payments to individuals or corporations subject to the withholding tax provided for in Section 57 of the Tax Code of 1997. they shall on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: (a) Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 ½% tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)(1) of the Tax Code of 1997. 2-98. non-profit educational institutions refers to internal revenue taxes imposed by the National Government on all revenues and assets used actually. their interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangement. However. Furthermore. revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises. skill. Unlike non-stock. Finance Department Order No. the rentals to be received by the joint venture from the tenants in the Building are income to the joint venture. 76-2003 SUBJECT : Tax Exemptions of Non-Stock. directly and exclusively in pursuance of their purposes as an educational institution. However. the joint venture to be subsequently entered into by and between ALI and API. however. See also BIR Ruling Nos. This ruling is being issued on the basis of the foregoing facts as represented. subject to compliance with the conditions that as a tax-exempt educational institution. e. "(c) there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise. Pursuant to Section 109(m) of the Tax Code of 1997. However. a joint venture subject to tax under Section 24(a) of the Tax Code. I have the honor to inform you that to constitute a "joint venture" certain factors are essential: "(a) each party to the venture must make a contribution. 2-98. 92-88) i. non-profit corporations. 230) Likewise. rental payment from their building/premises). real or personal. both of the Tax Code of 1997. 2. a joint venture was created when two corporations while registered and operating separately were placed under one sole management which operated the business affairs of said companies as though constituted a single entity thereby obtaining substantial economy and profits in the operation (Collector vs. private educational institutions shall be exempt from value-added tax provided they are accredited as such either by the Department of Education. In addition. However. not necessarily of capital. material or money. It shall also be constituted as a withholding agent for the government if they acts as an employer and any of their employee receives compensation income subject to withholding tax under Section 79(A). as amended. 137-87 as amended by Finance Department Order No. as amended. business or other activity. NonProfit Educational Institutions under Paragraph 3. the distribution by the joint venture of its net income to ALI and API are in the nature of dividends which are not subject to tax under Section 24(e)(4) of the Tax Code. but by way of services. Article XIV of the Constitution). Article XIV of the Constitution. REVENUE MEMORANDUM CIRCULAR No. 020(b)-020-80-187-82 dated June 3. their interest income from currency bank deposits and yield from deposit substitute instruments used actually. NON-STOCK.e. for the leasing of the Building floors or portions thereof separately owned by them will create. Non-Profit Corporations Section 30. However. The Memorandum of Agreement entered into by and between ALI and API in 1990 providing for the construction of the aforementioned office tower has not by itself created a taxable joint venture. 24-000-00-115-86 dated July 17. 1986. Section 4. (b) Certification of actual utilization of the said income. 1990 and 254-91 dated November 26. and royalties derived from sources within the Philippines are subject to the 20% final withholding tax: provided. Chapter XIII. they are subject to the corresponding internal revenue taxes imposed under the Tax Code of 1997 on their income derived from any of their properties.

signed. an MCIT of 2% of the gross income as of the end of the taxable year is imposed upon any domestic corporations beginning the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations. 1998 prescribes the regulations to implement RA No. Finance Department Order No. the MCIT will apply on operations covered by the regular income tax system. issuing. 3. the Capital Gains Tax on the foreclosure sale shall become due based on the bid price of the highest bidder.(c) Board Resolution by the school administration on proposed projects (i. 1998 pursuant to the pertinent provisions of RA 8424. They are also required under Section 6(C) in relation to Section 237 of the same Code to issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for services rendered which are not directly related to the activities for which they are registered. 546. b. only a brief memorandum will be annotated at the back of the certificate of title. and the cancellation of the title and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the mortgagor will redeem or not the mortgaged property within one year from the issuance of the certificate of sale. 137-87). The MCIT will be imposed whenever such operation has zero or negative taxable income or whenever the amount of MCIT is greater than the normal income tax due from such operation. RR 2-82 (see page 3) RR 8-98 (see page 5) REVENUE REGULATIONS NO. 8424 relative to the imposition of the Minimum Corporate Income Tax (MCIT) on domestic corporations and resident foreign corporations.. "Offshore Banking Unit" hereinafter referred to as OBU. 1034 as implemented by Central Bank Circular No. 4-99 issued March 16. collected and paid by the person making. ² a. in order to monitor the activities being conducted by these institutions. books and the like) to be funded out of the money deposited in banks or placed in money markets. both institutions are subject to the payment of the annual registration fee of P500. subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines. as a separate accounting unit. construction and/or improvement of school buildings and facilities. provided. 6-92 relative to the payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital assets initiated by banks. on or before the 14th day of the fourth month following the end of its taxable year (Sec.D. In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale. shall mean a branch. 1034. RR 15-02 (See book) REVENUE REGULATIONS NO. As an educational institution. The Regulations will apply to domestic and resident foreign corporations on their aforementioned taxable income derived beginning January 1. signing. Instead. and will be paid within thirty (30) days from the expiration of the said one-year redemption period. the exemption does not cover withholding taxes. they are constituted as withholding agents for the government required to withhold the tax on compensation income of their employees. In case of non-redemption. In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system. accepting or transferring the real property wherever the document is made. "Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external sources and the utilization of such funds as provided in Presidential Decree No. accepted or transferred where the property is situated in the Philippines. 9-98 issued September 2. or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997. Finally.D. no Capital Gains Tax will be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. acquisition of equipment.e. Thus. it is mandatory that they should maintain their respective set of books of accounts as prescribed in Section 235 of the Tax Code of 1997. 1034 and 1035. Furthermore. however. to transact offshore banking business in the Philippines in accordance with the provisions of P. issued. no transfer of title to the highest bidder can be effected yet until and after the lapse of the one-year period from the issuance of the said certificate of sale. Where the right of redemption of the mortgagor exists. Specifically.00 as prescribed in Section 236(B) of the Tax Code of 1997. that corporations using the fiscal year accounting period and which are subject to MCIT on income derived pertaining to any month or months of the year 1998 will not be imposed with penalties for late payment of the tax. 10-76 (Regulations governing taxation of Offshore Banks and Foreign Currency Deposit Units of depository banks established under P. respectively) Definition of Terms. finance and insurance companies. but only upon the expiration of the one-year period of redemption. In both cases. the certificate of title of the mortgagor will not be cancelled yet even if the property had already been subjected to foreclosure sale. The corresponding Documentary Stamp Tax will be levied. REVENUE REGULATIONS NO. . 1999 further amends Revenue Memorandum Order No.

gross receipts tax. documentary and science stamp tax and profit remittance tax. there shall be allowed a reasonable amount of head office expenses in accordance with the ratio specified in sub-paragraph (2) above. ² There shall be levied. d. (b) In the case of onshore income. g. "Deposits" shall mean funds in foreign currencies which are accepted and held by an off-shore banking unit in the regular course of business. as implemented by Central Bank Circular No. Rates of income tax to be imposed. paragraph (a) above. compensations. extension office or any other unit of corporations or juridical persons organized under the laws of any foreign country operating in the Philippines. Manner of computation of net income. The FCDU authority shall be distinguished from the authority to accept foreign currency deposits under R. Income of foreign personnel. 2) the proportion of general administrative expenses based on the ratio of net offshore income which bears to the total net income after deducting only interest expenses mentioned in sub-paragraph (1) above. the gross interest income without the benefit of any deduction corresponding to the allocable onshore income. to be subject to the usual income tax payable by banks. Income realized by offshore banking units on transactions with local commercial banks including branches of foreign banks that may be authorized by the Central Bank of the Philippines to transact business with offshore banking units shall likewise be subject to the same tax. collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units in the Philippines as salaries. or (2) an individual who is not a citizen of the Philippines but is permanently residing therein. . which is authorized by the Central Bank of the Philippines to operate under the expanded foreign currency deposit system. shall be the amount remaining after deducting from the gross offshore income during the taxable year the following items: 1) the proportion of total interest expenses for the same period based on the ratio of offshore interest income which bears to the total gross interest income. Privileges of the offshore banking units. corporation or other juridical person not included in the above definition of "residents". "Non-resident" shall mean an individual.. which shall be in lieu of all other taxes such as. ² The offshore banking units shall be exempt from all forms of local licenses. as implemented by Central Bank Circular No. as amended. (c) Income not covered by paragraphs (a) and (b) above shall be subject to the usual corporate taxes imposed by the National Internal Revenue Code. (4) a branch. in accordance with the provisions of P.c. are as followers: (a) On offshore income. (b) In the case of gross onshore income as defined in Section 2(h) above. wages. "Gross onshore income" shall mean gross interest income arising from foreign currency loans and advances to and/or investments with residents made by Offshore Banking Units or expanded Foreign Currency Deposit Units. shall be the amount upon which the ten percent (10%) withholding income tax shall be computed. 547. ² The rates or income tax to be imposed. upon recommendation of the Monetary Board. fees. or (3) a corporation or other juridical person organized under the laws of the Philippines.. subsidiary. ² Any income of non-residents from transactions with either an offshore banking unit or with an expanded Foreign Currency Deposit Unit shall be exempt from any and all taxes. "Gross offshore income" shall mean all income arising from transactions allowed by the Central Bank of the Philippines conducted by and between ² 1) in the case of an offshore banking unit with another offshore banking unit or with an expanded Foreign Currency Deposit unit or with a non-resident.. 6426. ² (a) Net offshore income for purposes of Section 3. Income of non-resident.A. with or without interest. e. h. 343. the tax shall be ten percent (10%) thereof and shall be a final tax. . f. annuities.. The license fee paid by offshore banking units shall be allowed as a deduction in accordance with Section 4 of these regulations. 2) in the case of an expanded Foreign Currency Deposit Unit with another expanded Foreign Currency Deposit Unit or with an Offshore Banking Unit or with a non-resident. imposts or any other local taxes or burdens.D. commissions and other charges which are integral parts of the income from the above transactions. "Foreign Currency Deposit Unit" (FCDU) shall mean an accounting unit or department in a local bank or in an existing local branch of foreign banks. as amended. No. but not limited to privilege tax. with the obligation to return an equivalent amount to the owner thereof. affiliate. The aforesaid tax shall be deducted and withheld at source in the same manner and condition as that provided under Supplement "A" ² Withholding on Wages of Commonwealth Act No. remunerations and emoluments from such offshore banking units a tax equal to fifteen (15%) percent of such gross income. except net income from such transactions as may be specified by the Secretary of Finance. 1035. dues. 3) Likewise. 466. "Resident" shall mean ² (1) an individual citizen of the Philippines residing therein. there shall be imposed an income tax of five percent (5%) based on net offshore income as computed in Section 4. Such gross interest income shall include all fees.

which shall be collected and paid as provided in Section 57(A) of this Code. Gross onshore income shall mean gross interest income arising from foreign currency loans and advances to and/or investments with residents made by offshore banking units or expanded foreign currency deposit units." Section 5(b) is hereby amended to read as follows: "SEC. However. in relation to Section 54. dividend paid to a non-resident foreign corporation is subject to withholding tax at the rate of 35%. 9337. In reply thereto. 2. are subject to 15% preferential withholding tax pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997. Thus. as follows: "Generally. a Philippine domestic corporation whose shares of stock are traded and listed in the Philippine Stock Exchange (PSE). under the above-quoted Section 24(b)(5)(B) of the Tax Code. the tax shall be ten percent (10%) thereof and shall be a final tax. subject to the condition that the country in which the nonresident foreign corporation is domiciled. . Rates of Income Tax on Foreign Corporations. please be informed that Section 2 of R. is constituted as the withholding agent charged with the obligation of deducting. which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends. ² xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. RR 10-98 (see page 3) RA 9337. For onshore income ² In the case of onshore income realized by an offshore banking unit or by an expanded Foreign Currency Deposit Unit. a corporation organized and existing under the laws of the British Virgin Island (BVI). 2006 requesting for confirmation of your opinion that the cash dividends declared by SM Investment Corporation (SM Investments). 5(b). 10-76) Section 2(h) is hereby amended to read as follows: "SEC. In the case of foreign currency loan transactions. 2(h). or does not subject such dividend to taxation. to Asia Opportunities Limited (Asia Opportunities). of the National Internal Revenue Code. Section 28(A)(1) and (B)(1) and (5)(b) of the same Code. 28. Regardless. since the International Business Companies Ordinance of the Territory of the British Virgin Islands . if the country where the non-resident foreign corporation is domiciled allows a credit against the tax due from the non-resident corporation taxes deemed to have been paid in the Philippines in an amount equivalent to 20% of such dividend. xxx xxx xxx" This Office had already occasioned to rule on the matter.) No. therefore. 208-89 dated September 28. commissions and other charges which are integral parts of the charges imposed on foreign currency loan transactions are exempt from the tax herein imposed. 14-77 (Amending Revenue Regulations No.A. 9337 reads as follows: "SEC." Section 3(b) is hereby amended to read as follows: "SEC. commissions and other charges which are integral parts of the income from the above transactions. 2009.A. such gross interest income shall refer only to the stipulated interest and shall not include any and all fees. as amended by Republic Act (R. That effective January 1. are hereby further amended to read as follows: SEC. withholding and remitting to the Commissioner of Internal Revenue the income tax due thereon within the period prescribed by law with the appropriate return in accordance with existing revenue and Central Bank regulations. which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided. as amended. . when it said in BIR Ruling No. as amended. Any and all fees. ² xxx xxx xxx (b) Intercorporate Dividends. 3(b). amending « intercorporate dividends (NIRC 1997) BIR RULING [DA-145-07] Gentlemen : This refers to your letter dated December 27. of whether the accounting method of an OBU-creditor in cash or accrual basis. does not impose any tax on dividend received from foreign sources. then dividend paid to such non-resident foreign corporation are taxed only at the rate of 15%. which logically would include those received from Philippine . No. the credit against the tax due shall be equivalent to fifteen percent (15%). the income need not be included in the quarterly income tax return to be filed as required above as the payor-borrower under Section 53. ² xxx xxx xxx (B) Tax on Nonresident Foreign Corporation.REVENUE REGULATIONS NO. 1989. the withholding tax will be withheld and remitted only after the due date of payment of the interest incurred by an onshore borrower. In the case of gross onshore income as defined in Section 2(h) above. ² A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation. shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%).

as amended (now Section 28(B)(5)(b) of the Tax Code of 1997). but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed. and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. artistic or scientific work. then this ruling shall be considered null and void. including cinematographic films or films or tapes used for radio or television broadcasting. In reply. (a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered. "xxx xxx xxx" Based on the foregoing. 102-02 Gentlemen : This refers to your letter dated February 14. Energizer Philippines. Article 12 of the RP-Netherlands tax treaty provides: Article 12--ROYALTIES 1. This is the "most-favored nation"` clause found in Article 13(2)(b)(iii) of the RP-US tax treaty. It is represented that Eveready is a non-resident foreign corporation duly organized and existing under the laws of the United States of America with principal office at Trust Center. please be informed that Article 13 of the RP-US tax treaty reads as follows: Article 13--ROYALTIES (1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. commercial or scientific equipment. (ii) 15 percent of the gross amount of the royalties. Delaware. it will be disclosed that the facts are different. 2002. based on the net sales or net sale value of all the licensed products manufactured. that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines its evidenced by the Certificate of Non-Registration issued by the Securities and Exchange Commission dated February 20. any copyright of literary." as referring to the manner of payment or taxes and not to the subject matter of the tax which is royalties. secret formula or process. Hence. and that in consideration of the aforementioned rights granted to Energizer. Inc. In this connection. then said cash dividend . or disposition thereof. secret formula or process. and know-how relating to the manufacture. any patent. design or model. (Emphasis supplied) (3) The term "royalties" as used in this article means payments of any kind received as a consideration for the use of. However. use. or for information concerning industrial. such royalties may also be taxed in the State in which they arise. (Eveready) are subject to the preferential tax rate of fifteen percent (15%) pursuant to the "most favored nation" clause of the RP-US tax treaty in relation to the RP-Netherlands tax treaty. any patent. or right to use.A. or the right to use of. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. business information. 1999. trademark. as amended by R. The term "royalties" as used in this Article means any payment of any kind received as a consideration for the use of. 1994 whereby Eveready granted to Energizer the right to use its trademarks and patents. ITAD RULING NO. (Energizer). use and sale of licensed products.. (2) However. the Supreme Court interpreted the "most-favored-nation" clause. S. to Eveready Battery Company. 2. 1995 and was renewed for another 10 years ending on October 15. However. it must be noted that the royalties arising from the Philippines and paid to a resident of the Netherlands may also be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross amount of royalties in cases other than royalties paid by in enterprise registered in preferred areas of activities in the Philippines. Energizer shall pay Eveready a royalty of three percent (3%)." SUCH BEING THE CASE.corporations by foreign corporations domiciled therein. a Philippine domestic corporation are subject to the 15% preferential withholding tax rate imposed under Section 28(B)(5)(b) of the Tax Code of 1997. the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed an royalties of the same kind paid under similar circumstances to a resident of a third State. 1209 Orange Street. data. that Eveready and Energizer entered into a Renewal Agreement dated October 11. particularly the phrase "paid under similar circumstances. G. exchange or other disposition of any such right or property which are contingent on the productivity. or the right to use. . The term "royalties" also includes gains derived from the sale. that the said Agreement was duly registered with the then Technology Transfer Registry under Certificate of Registration No. 9337. City of Wilmington. This ruling is being issued on the basis of the foregoing facts as represented. Johnson and Son. "xxx xxx xxx" On the other hand. or for the use of. 2009. as amended. technical information. 127105 promulgated on June 25. trade mark.C. 1652 dated January 19. . No. In the case of Commissioner of Internal Revenue vs. the tax imposed by that other Contracting State shall not exceed ² (b) In the case of the Philippines. 2002 requesting confirmation of your opinion that the royalty payments by your client. and Court of Appeals. where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities. used. No. design or model. the least of: (i) 25 percent of the gross amount of the royalties. and (b) 15 per cent of the gross amount of the royalties in all other cases. that Energizer is a corporation duly organized and existing under Philippine laws. or for information concerning industrial. Inc. commercial or scientific experience. sold or assigned by Energizer during the term of the Agreement. this Office hereby confirms your opinion that the cash dividends received by Asia Opportunities from SM Investments. plan. or other like right or property.R. and engaged in preferred areas of activities in that State. Inc. if upon investigation. industrial. the "most-favored-nation" clause of the RP-US tax treaty must be interpreted not only in relation . commercial or scientific experience. and according to the laws of that State. is subject only to the preferential withholding tax rate of 15% imposed under then Section 25(B)(5)(B) of the Tax Code.

such purpose would not generally make the accumulated or undistributed earnings subject to the tax. Thus. Moreover. this Office is of the opinion and so holds that the royalty payments by Energizer to Eveready are subject to the preferential tax rate of 15% of the gross amount of royalties pursuant to the "most-favored-nation" provision of the RP-US tax treaty in relation to the RP-Netherlands tax treaty. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date. if duly validated. . (BIR Ruling No. Thus. Energizer shall also be responsible for the withholding of the value-added tax (VAT) at the rate of 10% of the contract amount by filing a separate return using BIR Form No. which. e. The license shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the nonresident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. or the direct correlation of anticipated needs to such accumulation of profits. Otherwise. if upon investigation it shall be disclosed that the facts are different. including reasonably anticipated needs. that is. then this ruling shall be considered null and void. a tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings. by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. the corporation should be able to prove an immediate need for the accumulation of the earnings and profits.An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is unreasonable if it is not necessary for the purpose of the business. b. Earnings reserved for building. in addition to other taxes imposed under Title II of the Tax Code of 1997. if there is a determination that a corporation has accumulated income beyond the reasonable needs of the business. This ruling is issued on the basis of the foregoing facts as represented. the term "reasonable needs of the business" are hereby construed to mean the immediate needs of the business. Section 4. Determination of Reasonable Needs of the Business. inclusive ofaccumulations taken from other years. ITAD-54-00 dated March 7." Accordingly. 2 . the allowable foreign tax credit on both treaties is the amount actually paid in the Philippines. and the penalty tax would apply. the shareholders would then be liable to income tax thereon. shows a similarity on the manner of payment of taxes. shall be sufficient evidence in claiming input tax credit. The rationale is that if the earnings and profits were distributed. Such being the case. particularly their provisions on the avoidance of double taxation. all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence. 2000) Moreover. considering all the circumstances of the case.2001 (Implementing the Provision on Improperly Accumulated Earnings Tax Under Section 29 of the Tax Code of 1997) Concept of Improperly Accumulated Earnings Tax (IAET). and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. In the case of subsidiaries of foreign corporations in the Philippines. d. these Regulations hereby adhere to the so-called "Immediacy Test" under American jurisprudence as adopted in this jurisdiction. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee. the 10% improperly accumulated earnings tax shall be imposed.102-1(b) of the implementing Revenue Regulation No. REVENUE REGULATIONS NO. and since Energizer is not registered and engaged in preferred areas of activities in the Philippines. such accumulation would be deemed to be not for the reasonable needs of the business. 7-95 provides that: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the license.to Article 12 of the RP-Netherlands tax treaty but also in connection with the provisions on the elimination of double taxation of both.Pursuant to Section 29 of the Code. c. f. plants or equipment acquisition as approved by the Board of Directors or equivalent body. there is imposed for each taxable year. 1600 ± Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. However. In either case. 1600. To determine the "reasonable needs" of the business in order to justify an accumulation of earnings. they would incur no tax in respect to the undistributed earnings and profits of the corporation. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution. Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement. if the failure to pay dividends is due to some other causes. For purposes of these Regulations. . . a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation. the above royalty payments by Energizer shall be subject to the 10% value-added tax (VAT) under Section 108(A)(1) and (3) of the Tax Code of 1997. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body. the following constitute accumulation of earnings for the reasonable needs of the business: a. Accordingly. such as the use of undistributed earnings and profits for the reasonable needs of the business. whereas if the distribution were not made to them. However. The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. A perusal of the RP-US and the RP-Netherlands tax treaties. Energizer shall be responsible for the withholding of income tax at the rate of 15% of the gross amount of royalties.

shall nevertheless be subject to tax on dividends imposed under the Tax Code of 1997 except in those instances where the recipient is not subject thereto. For purposes of this paragraph. if any. and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R. Provided. For purposes of this paragraph. . national or local. . ± An individual shall be considered as owning the stock owned. the dividends shall be deemed to have been paid out of the most recently accumulated profits or surplus and shall constitute a part of the annual income of the distributee for the year in which received pursuant to Section 73(C) of the Code. is an exception to the preceeding statement. the same being a resident foreign corporation. however. but stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. ancestors and lineal descendants. that where the dividends or portion of the said dividends declared forms part of the accumulated earnings as of December 31. Once the profit has been subjected to IAET.For corporations found subject to the tax. . the amount of net operating loss carry-over (NOLCO) deducted. and d. c. f.Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall. spouse. For purposes of these Regulations.The dividends must be declared and paid or issued not later than one year following the close of the taxable year. Stock Not Owned by Individuals. b. otherwise. Period for Payment of Dividend/Payment of IAET. The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly accumulated taxable income earned starting January 1. income tax paid/payable for the taxable year. income subject to final tax.A. Banks and other non-bank financial intermediaries. estate or trust shall be considered as being owned proportionately by its shareholders. 2. Notwithstanding the imposition of the IAET. 4. an option to acquire such an option and each one of a series of option shall be considered as an option to acquire such stock. insofar as such determination is based on stock ownership. however. partnership.Stock owned directly or indirectly by or for a corporation. that Improperly Accumulated Earnings Tax shall not apply to the following corporations: a. d. the µfamily of an individual¶ includes his brothers or sisters (whether by whole or half-blood). Determination of Purpose to Avoid Income Tax. . or by or for his partner. 7227. Provided. . the same shall no longer be subjected to IAET in later years even if not declared as dividend. by or for his family. Likewise. and g. b. that a branch of a foreign corporation is not covered by these Regulations. therefore. The resulting "Improperly Accumulated Taxable Income" is thereby multiplied by 10% to get the Improperly Accumulated Earnings Tax (IAET). income excluded from gross income. . or emanates from the accumulated income of a particular year and. 7916. Family and Partnership Ownership. profits which have been subjected to IAET.taxable joint ventures. e. when finally declared as dividends.The fact that a corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Insurance companies. Domestic corporations not falling under the aforesaid definition are. 1998 by domestic corporations as defined under the Tax Code and which are classified as closely-held corporations. such stock shall be considered as owned by such person. such fact must be supported by a duly executed Board Resolution to that effect. For purposes of determining whether the corporation is closely held corporation. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R. partners or beneficiaries. General professional partnerships. closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. be treated as actually owned by such person. the "Improperly Accumulated Taxable Income" for a particular year is first determined by adding to that year¶s taxable income the following: a. 1997. b.A. amount reserved for the reasonable needs of the business as defined in these Regulations emanating from the covered year¶s taxable income. the following rules shall be applied: 1. Option to Acquire Stocks. directly or indirectly. Tax Base of Improperly Accumulated Earnings Tax. should be paid within fifteen (15) days thereafter. Taxable partnerships. The taxable income as thus determined shall be reduced by the sum of: a. therefore. Provided. income exempt from tax. dividends actually or constructively paid/issued from the applicable year¶s taxable income. however.Coverage. Constructive Ownership as Actual Ownership. 3. c. Publicly-held corporations. the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business .If any person has an option to acquire stock. c. as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes. the IAET. for purposes of applying paragraph (1) or (2). Non. publicly-held corporations. For purposes of determining the source of earnings or profits declared or distributed from accumulated income for each taxable year.

The following are prima facie instances of accumulation of profits beyond the reasonable needs of a business and indicative of purpose to avoid income tax upon shareholders: a. (c) Tax and Duty Exemption on Imported Capital Equipment. The mere recognition of a future problem or the discussion of possible and alternative solutions is not sufficient. is ultimately traced to the individual shareholders of the parent company. Based on Section 4 of Revenue Regulations No. the net foreign exchange savings or earnings amount to at least US$500. Accordingly. registered expanding firms shall be entitled to an exemption from income taxes levied by the National Government proportionate to their expansion under such terms and conditions as the Board may determine.133 shares of common stock. Abbot-Phils. 2-2001. b. For the first five (5) years from registration a registered enterprise shall be allowed an additional deduction from the taxable income of fifty percent (50%) of the wages corresponding to the increment in the number of direct labor for skilled and unskilled workers if the project meets the prescribed ratio of capital equipment to number of workers set by the Board: Provided.000. (a) Income Tax Holiday. The ownership of a domestic corporation. Within five (5) years from the effectivity of this Code. That during the period within which this incentive is availed of by the expanding firm it shall not be entitled to additional deduction for incremental labor expense.shall be determinative of the purpose to avoid the tax upon its shareholders or members.Abbot-Phils. For purposes of these Regulations. In both instances. and collecting the income therefrom or investing the same. Abbot-US had 101 to 272 shareholders holding a combined 1. Definiteness of plan/s coupled with action/s taken towards its consummation are essential. Accumulation of earnings in excess of 100% of paid-up capital. registered firms shall not be entitled to any extension of this incentive. will be considered as being owned proportionately by Abbott-US shareholders. This is based on the representation that as of the year end 2000. the corporation may. (b) Additional Deduction for Labor Expense. the controlling intention of the taxpayer is that which is manifested at the time of accumulation.545.937. Subject to such guidelines as may be prescribed by the Board. IMPROPERLY ACCUMULATED EARNINGS TAX. 40. 025-2002 dated June 25. 2001 own an aggregate of 30. as a wholly-owned subsidiary of Abbot-US. utilization of indigenous raw materials at rates set by the Board. (2) For a period of three (3) years from commercial operation.00 annually during the first three (3) years of operation. the income tax exemption will be extended for another year in each of the following cases: i. for purposes of determining whether it is a closely-held corporation or a publicly-held corporation. not subsequently declared intentions which are merely the product of afterthought.. prove the contrary. does not fall under the definition of a closely-held corporation. Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business. iii. The preceding paragraph notwithstanding. (3) The provision of Article 7 (14) notwithstanding. Provided. All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment. the project meets the prescribed ratio of capital equipment to number of workers set by the Board.1% of AbbotUS issued as outstanding shares. by clear preponderance of evidence in its favor. (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms. new registered firms shall be fully exempt from income taxes levied by the National Government. importations of machinery and equipment and accompanying spare parts of new and expanding registered enterprise shall be exempt to the extent of one hundred percent (100%) of the customs duties and national internal revenue tax . publicly-held corporation . Incentives to Registered Enterprises. A speculative and indefinite purpose will not suffice. (BIR Ruling No. Investment in bonds and other long-term securities. Abbot-Phils. 2002) EO 226--Article 39. That this additional deduction shall be doubled if the activity is located in less developed areas as defined in Art. is considered a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax. not otherwise intended for the reasonable needs of the business as defined in these Regulations. and the twenty largest shareholders of Abbott-US as of September 30. ii. however. c. closely-held corporations are those corporations at least 50% in value if the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. the term "holding or investment company" shall refer to a corporation having practically no activities except holding property. In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the imposition of the improperly accumulated earnings tax. no registered pioneer firm may avail of this incentive for a period exceeding eight (8) years.

extendible for limited periods at the discretion of the Board: Provided. spare parts. or (cc) for purposes of replacement to improve and/or expand the operations of the registered enterprise.payable thereon: Provided. the position of president. whether national or local. . the Board may require international canvassing but if the total cost of the capital equipment or industrial plant exceeds US$5. raw materials and supplies. transferee. Foreign nationals under employment contract within the purview of this incentive. had these items been imported shall be given to the new and expanding registered enterprise which purchases machinery. A tax credit equivalent to one hundred percent (100%) of the value of the national internal revenue taxes and customs duties that would have been waived on the machinery. and exports of processed products by registered enterprises shall be simplied by the Bureau of Customs. That the importation of machinery and equipment and accompanying spare parts shall comply with the following conditions: (1) They are not manufactured domestically in sufficient quantity. as amended. machinery. Customs procedures for the importation of equipment. transfers or disposes of these machinery. equipment and spare parts. (e) Exemption from Contractor's Tax. a registered enterprise may employ foreign nationals in supervisory. unless prior approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof.000. of comparable quality and at reasonable prices. equipment and spare parts. equipment and spare parts Provided. transfer or disposition shall be allowed only upon prior Central Bank approval. equipment and spare part consigned to any registered enterprises shall not be subject to restrictions as to period of use of such machinery. or assignee shall be solidarily liable to pay twice the amount of the tax exemption given it. machinery and spare parts are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products. If the registered enterprise sells. If the registered enterprise sells. the provisions in the preceding paragraph for such disposition shall apply. Subject to the provisions of Section 29 of Commonwealth Act Number 613. The Board shall allow and approve the sale. (d) Tax Credit on Domestic Capital Equipment. equipment and spare parts from a domestic manufacturer: Provided. treasurer and general manager or their equivalents may be retained by foreign nationals beyond the period set forth herein. that such consigned equipment shall be for the exclusive use of the registered enterprise. (h) Employment of Foreign Nationals. (2) that the equipment would have qualified for tax and duty-free importation under paragraph (c) hereof. and (3) The approval of the Board was obtained by the registered enterprise for the importation of such machinery. the registered enterprise and the vendee. and (4) that the purchase is made within five (5) years from the date of effectivity of the Code. who are not excluded by Section 29 of Commonwealth Act Numbered 613. equipment and spare parts. If such equipment is sold. equipment and spare parts without prior approval of the Board within five (5) years from date of acquisition.000. that the appropriate re-export bond is posted unless the importation is otherwise covered under subsections (c) and (m) of this Article. The registered enterprise shall be exempt from the payment of contractor's tax. In granting the approval of the importations under this paragraph. unless prior approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof or the proportionate taxes and duties are paid on the specific equipment and machinery being permanently used for non-registered activities. (g) Unrestricted Use of Consigned Equipment. transfers or disposes of these machinery. further. technical or advisory positions for a period not exceeding five (5) years from its registration. Provided. That when the majority of the capital stock of a registered enterprise is owned by foreign investors. (2) They are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products. shall be permitted to enter and reside in the Philippines during the period of employment of such foreign nationals. their spouses and unmarried children under twenty-one (21) years of age. Outward remittance of foreign exchange covering the proceeds of such sale. transferred or otherwise disposed of by the registered enterprise the related provision of Article 39 (c) (3) shall apply. Provisions of existing laws notwithstanding. however. (bb) for reasons of proven technical obsolescence. as amended. (3) that the approval of the Board was obtained by the registered enterprise. (f) Simplification of Customs Procedure. transfer or disposition of the said items within the said period of five (5) years if made: (aa) to another registered enterprise or registered domestic producer enjoying similar incentives. the Board shall apply or adopt the provisions of Presidential Decree Numbered 1764 on International Competitive Bidding. That (1) That the said equipment.

however. Nothing herein shall be construed as to preclude the Board from setting a fixed percentage of export sales as the approximate tax credit for taxes and duties of raw materials based on an average or standard usage for such materials in the industry. impost and fee. Duty. The importation of breeding stocks and genetic materials within ten (10) years from the date of registration or commercial operation of the enterprise shall be exempt from all taxes and duties: Provided. Exemption from National and Local Taxes. and 4) that the purchase is made within ten (10) years from date of registration or commercial operation of the registered enterprise. otherwise known as the Omnibus Investment Code of 1987. Impost and Fee. Two percent (2%) which shall be directly remitted by the business establishments to the treasurer¶s office of the municipality or city where the enterprise is located.traditional export products shall be exempted of its nontraditional export products shall be exempted from any wharfage dues. RA 7916 (Secs. Three percent (3%) to the National Government. local and national. and any export tax. That all such spare parts and supplies shall be used only in the bonded manufacturing warehouse of the registered enterprise under such requirements as the Bureau of Customs may impose.A registered enterprise shall train Filipinos as understudies of foreign nationals in administrative. 2) that the breeding stocks and genetic materials are reasonably needed in the registered activity. The arm's length bargaining standard will be used as the ultimate test for determining the correct gross income and deductions between two or more enterprises under common control. or those provided under Book VI of Executive Order No. That such breeding stocks and genetic materials are (1) not locally available and/or obtainable locally in comparable quality and at reasonable prices. further. no taxes. exported directly or indirectly by the registered enterprise: Provided. 226. (m) Exemption from Taxes and Duties on Imported Spare Parts. 1) That said breeding stocks and generic materials would have qualified for tax and duty free importation under the preceding paragraph. Provided. . Provided. finally. A tax credit equivalent to one hundred percent (100%) of the value of national internal revenue taxes and customs duties that would have been waived on the breeding stocks and genetic materials had these items been imported shall be given to the registered enterprise which purchases breeding stocks and generic materials from a domestic producer: Provided. 1999 prescribes the policies and guidelines on the determination of taxable income on inter-company loans or advances pursuant to Section 50 of the Tax Code. In lieu thereof. that such spare parts and supplies are not locally available at reasonable prices. (j) Tax Credit on Domestic Breeding Stocks and Genetic Materials. (l) Access to Bonded Manufacturing/Trading Warehouse System. shall be imposed on business establishments operating within the ECOZONE. Applicable National and Local Taxes. duty. processing or production of its export products and forming part thereof. (k) Tax Credit for Taxes and Duties on Raw Materials. Importation of required supplies and spare parts for consigned equipment or those imported tax and duty free by a registered enterprise with a bonded manufacturing warehouse shall be exempt from customs duties and national internal revenue taxes payable thereon. 63-99 issued August 13. Registered export oriented enterprises shall have access to the utilization of the bonded warehousing system in all areas required by the project subject to such guidelines as may be issued by the Board upon prior consultation with the Bureau of Customs. Every registered enterprise shall enjoy a tax credit equivalent to the National Internal Revenue taxes and Customs duties paid on the supplies. five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: a.23-25) Fiscal Incentives. 66. Furthermore. Provided. 3) that the approval of the board has been obtained by the registered enterprise. ± Business establishments operating within the ECOZONES shall be entitled to the fiscal incentives as provided for under Presidential Decree No. as amended. that the taxes on the supplies. The provisions of law to the contrary notwithstanding. (2) reasonably needed in the registered activity. tax credits for exporters using local materials as Inputs shall enjoy the same benefits provided for in the Export Development Act of 1994. REVENUE MEMORANDUM ORDER NO. (n) Exemption from Wharfage Dues and any Export Tax. (i) Exemption on Breeding Stocks and Genetic Materials. and (3) approved by the Board.Except for real property taxes on land owned by developers. raw materials and semimanufactured products domestically purchased are indicated as a separate item in the sales invoice.. However. ± All persons and services establishments in the ECOZONE shall be subject to national and local taxes under the National Internal Revenue Code and the Local Government Code. the law creating the Export Processing Zone Authority. exports by a registered enterprise of its non. sufficient quantity and comparable quality. supervisory and technical skills and shall submit annual reports on such training to the Board. raw materials and semi-manufactured products used in the manufacture. That at least seventy percent (70%) of production is exported. b.

the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance. the income arising to the recipients of such stock is its market value at the time the dividend becomes payable. When receivable by corporations. so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease. even though the stock distributed was acquired through the transfer by the corporation declaring the dividends of property to the corporation the stock of which is distributed as a dividend. (b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each year of the lease an aliquot part thereof. Sale of stock received as dividends.) The amount of gain derived or loss sustained from the sale of such stock. setting aside the stock to be so distributed and notifying the stockholders of its action. and one which does. as a dividend. which gain or loss will be treated as arising from the sale or exchange of a capital asset. 1913. ² When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor. RR 2 (Secs. and a stock dividend where there either has been a change of corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest of the shareholders after the distribution is essentially different from his former interests. made by a domestic or resident foreign corporation. ² A stock dividend which represents the transfer of surplus to capital account is not subject to income tax. less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. Scrip dividends are subject to tax in the year in which the warrants are issued. A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stock holdings represented. see Section 84 of the Code).RR 2 (Sec. are subject to tax in his hands in the same manner another income.49) Improvements by lessees. the lessor receives additional income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. Where a corporation declares a dividend payable in a stock of another corporation. If the buildings or improvements destroyed were acquired prior to March 1. the cost of each share (or when acquired prior to March 1. does not constitute taxable income to a stockholder in such corporation. association. comprise any distribution whether in cash or other property. Although interest on certain Government bonds and other similar obligations is not taxable when received by a corporation. are income to the recipients to the amount of the full market value of such property when receivable by individual stockholders. received by a domestic or resident foreign corporation from a domestic corporation are taxable only to the extent of 25 per cent thereof in accordance with Section 24 of the Code. whether in cash or other property. If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated. are taxable to the extent that they constitute income from sources within the Philippines. 250-256) Dividends. A dividend paid in stock of another corporation is not a stock dividend. if the building or improvements are destroyed prior to the expiration of the lease. However a dividend in stock may constitute taxable income to the recipients thereof notwithstanding the fact that the officers or directors of the corporation (as defined in Section 84) choose to call such distribution as a stock dividend. upon amalgamation with the other funds of the corporation. in cash or other property received by an individual. or from the sale of the stack with respect to which it is issued. (a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease. is taxable to the same extent as other dividend. but gain may be derived or loss sustained by the stockholder. Dividends. the amount of such dividends includible for purposes of the tax on corporations are specified in Section 24 of the Code. and such buildings or improvements are not subject to removal by the lessee. (For definition of the different classes of corporations. or insurance company to the shareholders or members out of its earnings or profits accumulated since March 1. (See also Section 250 of these regulations). for the purpose of the law. A taxable distribution made by a corporation to individual stockholders or members shall be included is the gross income of the distributees when the cash of other property is unqualifiedly made subject to their demand. Dividends paid by the domestic corporation to a nonresident foreign corporation are taxable in full. The distinction between a stock dividend which does not. joint-stock company. Dividends received by a domestic corporation from a foreign corporation. No appreciation in value due to causes other than the premature termination of the lease shall be included. (See Section 34 of the Code. Dividends. in the ordinary course of business. 1913. Dividends paid in property. 1913. joint account (cuentas en participacion). Stock dividends. the same interest in the same corporation being represented after the distribution by more shares of precisely the same character. whether resident or nonresident. the fair market value as of . partnership. shall be determined in accordance with the following rules: (a) Where the stock issued as dividend is all or substantially the same character or preference as the stock upon which the stock dividend is paid. ² Dividends paid in securities or other property (other than its own stock). as provided in Section 37 (a) (2) (b) of the Code. such income loses its identity and when distributed to shareholders. constitute income taxable to the shareholder is the distinction between a stock dividend which works no change in the corporate entity. Conversely. whether individual or corporate. even though extraordinary in amount. in which the earnings of a corporation have been invested. ² Stock issued by a corporation. from the sale of such stock. ² Dividends. A stock dividend does not constitute income if the new shares confer no different rights or interests than did the old ² the new certificates plus the old representing the same proportionate interest in the net assets of the corporation as did the old. the lessor may at his option report the income therefrom upon either of the following bases. the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements.

Nevertheless. (b) Where the stock issued as a dividend is in whole or in part of a character or preference materially different from the stock upon which the stock dividend is paid. income to that amount is realized by the debtor as compensation for his services. is taxable to the extent recognized in Section 34(b) of the Code. the gain realized from the transaction by the stockholder. if a corporation. 37.such date) will be the quotient of the cost (or such fair market value) of the old shares of stock divided by the total number of the old and new shares. 256.50) Forgiveness of indebtedness. pursuant to Section 34(b) of the Tax Code. the cost (and when acquired prior to March 1. the amount received in redemption or cancellation of the stocks shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation since March 1. 83 (a). second. 1913. after the distribution of a stock dividend. 1913. In determining the source of a distribution. In reply. proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend. ² A true stock dividend is not subject to tax on its receipt in the hands of the recipient. in proportion. . the transaction has the effect of the payment of a dividend. as nearly as may be. Income Tax Regulations) shall be subject to income tax at the rates prescribed under Section 21(a) of the Tax Code. 37. Sec. any sale of the original stock. fourth. ² The cancellation and forgiveness of indebtedness may amount to a payment of income. 1987 stating that your company is a trading concern and at present it is in the process of liquidation. 1913. derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation (Sec. to a gift. the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. and the dividend stock issued with respect to such stock can not be identified as having been issued with respect to any particular lot of such stock. as amended by Executive Order No. old and new. or to a capital transaction. whether individual or corporate. however. and. only in the case where. an individual performs services for a creditor. to the earnings or profits of the taxable year. the fair market value as of such date) of the old shares of stock shall be divided between such old stock and the new stock. to the amount of the dividend chargeable to such stock. Sources of distribution. have been distributed. 1913. If. 1913. consideration should be given first. and to the extent that. the distribution made during the taxable year are not regarded as out of the earnings or profits of the taxable year and all the earnings or profits accumulated since February 28. not be determined. Declaration and subsequent redemption of a stock dividend. 322-87 Gentlemen : This refers to your letter dated July 23. BIR RULING NO. ² In all cases where a corporation (as defined in Section 84) distributes all of its property or assets in complete liquidation or dissolution. cda Moreover. If a corporation to which a stockholder is indebted forgives the debt. usually not to exceed one year from the time of such first distribution. ² For the purpose of income taxation every distribution made by a corporation is made out of earnings or profits to the extent thereof and from the most recently accumulated earnings or profits. a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt. and the cost (or when acquired prior to March 1. then any sale of such dividend stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock. will be charged to the earliest purchases of such stock. and that your individual stockholders will receive their liquidating dividends in excess of their investment. If the amount received by the stockholder in liquidation is less than the cost or other basis of the stock. at the time the new shares of stock are issued. to the respective value of each class of stock. if any. to sources other than earnings or profits only after the earnings or profits have been distributed. in consideration thereof cancels the debt. (d) Where the stock with respect to which a stock dividend is declared was purchased at different times and at different prices. they will thereby realize capital gain or loss. The gain. the loss in the transaction is deductible to the extent allowed in Section 34(c) of the Code. as amended by Executive Order No. for example. dependent upon the circumstances. who. If. to the earnings or profits accumulated since February 28. the term "complete liquidation" includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation under which the transfer of all the assets under liquidation is to be complete within a reasonable time from the date of the first distribution. and any sale of dividend stock issued with respect to such stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock. 1913) of the class to which such share belongs divided by the number of shares in that class. RR 2 (Sec. (c) Where the stock with respect to which a stock dividend is issued was purchased at different times and at different prices and the identity of the lots can. only 50% of the aforementioned capital gain is reportable for income tax purposes if the shares were held by the individual stockholders for more than twelve months and 100% of the capital gains if the shares were held for less than twelve months. Distribution in liquidation. For this purpose. I have the honor to inform you that since the individual stockholders of your company will receive upon its complete liquidation all its assets as liquidating dividends. to the amount of the stock dividend chargeable to such stock. the fair market value as of such date) of each share of stock will be the quotient of the cost (or such fair market value as of March 1.

) 1. 13-80 (Treatment of Tax Refunds and Tax Credits When Received. garnishment. duties. b. 535. EXECUTION. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. should be declared as part of the gross income of the taxpayer in the year of receipt of the refund or tax credit. for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated. c. b.A. REPUBLIC ACT No. Therefore. That in case of separation of an official or employee from the service of the employer due to death. the tax credits granted necessarily constitute taxable income of the enterprise. charges and fees due to the national government in connection with its operations. AS AMENDED. AND OTHER BENEFITS FROM THE COMPUTATION OF GROSS COMPENSATION INCOME FOR PURPOSES OF DETERMINING TAXABLE COMPENSATION INCOME. 6135 and P. In such cases. Special Tax Credits granted under R. 2. REPUBLIC ACT NO. stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials and employees. Estate and gift taxes. d. the term "reasonable private benefit plan" means a pension. and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for. Sales. any purpose other than for the exclusive benefit of the said officials and employees.A. Income. finally. 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. 5186. when refunded or credited. the retirement benefits received by officials and employees of private firms.D. ² Taxes previously claimed and allowed as deductions. compensating and specific taxes are paid on supplies and raw materials imported by a registered export producer. Energy tax.A. 6686 AND PRESIDENTIAL DECREE NO. the enterprise is given a tax credit for taxes withheld subject to certain conditions. Refunds/Tax Credits under Section 295 of the Tax Code. AS AMENDED) SECTION 1. R. f. ² These tax credits and their tax consequences are as follows: a. No. Sec. the following taxes. (Sec. A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the end of Section 28(b)(8) of the National Internal Revenue Code. a registered BOI and tourism enterprise assumes payment of taxes withheld and due from the foreign lender-remittee on interest payments on foreign loans.A. as amended. but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries). 8(c). OR ANY TAX WHATSOEVER. No. In some cases. 6135) The tax credits granted should form part of the gross income to the enterprise in the year of receipt of tax credit as said taxes paid are considered allowable deductions for income taxes purposes. are not declarable for income tax purposes inasmuch as they are not allowable as deductions: a. deductible from its gross income. but subsequently refunded or granted as tax credit pursuant to Section 295 of the Tax Code. "(i) Benefits received by officials and employees of the national and local governments pursuant to Republic Act No. 7833 (AN ACT TO EXCLUDE THE BENEFITS MANDATED PURSUANT TO REPUBLIC ACT NO. 535) Said taxes assumed by the registered enterprise represent necessary and ordinary expenses incurred by the enterprise. 851. 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. (Sec. P. hence. 4917 (AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES OF PRIVATE FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT. whether individual or corporate. further. or be diverted to. Stock transaction tax. Income tax imposed in Title III of the Tax Code. Taxes which are not allowable as deductions under the law. Said taxes are given as tax credit to be used in the payment of taxes. No. 5186.D. As used in this Act. 6686. LEVY. gratuity. However. AMENDING FOR THE PURPOSE SECTION 28(B)(8) OF THE NATIONAL INTERNAL REVENUE CODE. e. 7(f). . R. war-profit and excess profits taxes imposed by authority of a foreign country. or both. That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty years of age at the time of his retirement: Provided. wherein contributions are made by such employer or officials and employees. which shall read as follows: "(F) 13th month pay and other benefits. and g. 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: Provided.) Section 1. sickness or other physical disability or for any cause beyond the control of the said official or employee. That the benefits granted under this Act shall be availed of by an official or employee only once: Provided.REVENUE MEMORANDUM CIRCULAR NO. Any provision of law to the contrary notwithstanding. 7(a). R.

2. whether paid in cash or in kind. REVENUE REGULATIONS NO. g) "13th month pay" ² refers to the mandatory one month basic salary of an official or employee of the National Government." i) "Which shall be integrated in" ² shall mean "which shall be added to". the following definitions of words and phrases are hereby adopted: a) "Act" ² refers to Republic Act No. 7833.000. received the following 13th month pay and other benefits from his employer.000. and other Benefits from the Computation of Gross Compensation Income for the Purposes of Determining Taxable Compensation Income. Sec. and of private offices received after the 12th month pay beginning CY 1994. and of private offices received after the 12th month pay. agencies and instrumentalities. the withholding agents are hereby authorized not to deduct the withholding taxes in the immediately succeeding payroll periods corresponding to the amount previously withheld from the benefits. as amended. the total amount of tax exempt benefits shall not exceed Thirty Thousand Pesos (P30. such as.00) as maximum limit. private offices to their officials and employees. During CY 1994. 1. "A". For purposes of reimbursing the officials or employees who may have received the benefits covered by this Act before its effectivity. The exclusion herein provided shall cover benefits paid or accrued beginning January 1. gifts in cash or in kind and other similar benefits received by an official or employee for one calendar year in an amount not exceeding Twelve Thousand Pesos (P12. Christmas bonus given by. h) "Total benefits" ² refer to the sum of all the benefits received by an official or employee for one calendar year in accordance with the provisions of the "Act. 7933.000. upon the recommendation of the Commissioner of Internal Revenue.00 ²²²² P85. 1994 but shall be limited only to an amount not exceeding Twelve Thousand Pesos (P12. 02-95 (Implementing Republic Act No.000. unless specifically excluded under Secs. 851. 851. gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both Government and private offices in an amount not exceeding Twelve Thousand Pesos (12. and official of a private corporation. as Amended. 1986. as Amended) Definition of Terms. dated August 13.000).000.000.000." "Provided. however. loyalty award. therefore. including government-owned and -controlled corporations. f) "Taxable compensation income" ² means gross compensation income less personal and additional exemptions provided for under Sec. 1995. "(iii) Benefits received by officials and employees not covered by Presidential Decree No. including government-owned and -controlled corporations. That the exclusion shall only apply to the first Thirty thousand pesos (P30.00 ." Sec. as amended.000.00 Mid-year productivity bonus 10.000) which shall be integrated in the 13th month pay solely for purposes of this Act. such as: 13th month pay Other benefits: Christmas bonus P15. ILLUSTRATIONS: CASE NO. 851. the annual Christmas bonus given by private offices. An Act to Exclude the Benefits Mandated Pursuant to Republic Act No. 3. that when added to the 13th month pay. provided. Amending for the Purpose Section 28 (b) (8) of the National Internal Revenue Code. the following benefits shall be excluded from the gross compensation income. as amended by Memorandum Order No.000. exempt from the withholding tax on wages. 1994.00). mid-year productivity incentive bonus. ² For purposes of determining the taxable compensation income. c) "Gross compensation income" ² means all remunerations for services performed by an employee for his employer.00 55."(ii) Benefits received by employees pursuant to Presidential Decree No. Mr. 28. Benefits Exempted from Income Tax. and b) Other benefits. d) "Immediately succeeding payroll period" ² refers to the payroll period beginning January. as amended. The Secretary of Finance shall. viz: a) 13th month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the Government (whether national or local). 14th month pay. The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January 1.00 14th month pay 30. Local Government Units. and "(iv) Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve thousand pesos (P12.00) in the case of the "other benefits" contemplated under paragraph (b) above.000.00) for one (1) calendar year. however. e) "Other benefits" ² refer to all benefits other than the 13th month pay. such as. ² For purposes of these Regulations. promulgate the necessary rules and regulations for the effective implementation of the provision of this Act. b) "Exclusions" ² shall mean the total benefits which are not included in the computation of gross compensation income for purposes of determining taxable compensation income and are. 27 and 28 of the NIRC. 6686 and Presidential Decree No. productivity incentives bonus. 29 (l) of the NIRC.00 ²²²² TOTAL BENEFITS RECEIVED for CY 1994 P30.

"A" shall only be exempted on his 13th month pay of P30.======== In this illustration.000.00) ²²²²² AMOUNT TO BE REFUNDED by (P5. In return. 7497.000. a government employee. Mr.000 22.675. ILLUSTRATIONS: 1. 1994 DEF.-June.000. ABC COMPANY Employee "A" (single) ²²²²²²²²² Salaries 13th month pay Other Benefits P78. and in the succeeding months thereafter until the amount refunded/credited by the employer is fully repaid.A.000.890. CASE NO. 1995 OR TO BE CREDITED against Taxes Withheld due from the Employee for Succeeding Month/s Beginning following Sample Computation No.. (Present Employer) Nov. received the following 13th month pay and other benefits.(bb) Employee with Successive Employment Within the Year. 6-82.00 ²²²²² Taxable Compensation P69.00 P12. Co.00 Less: Non-taxable Benefits: 13th month pay P12.000 Other benefits 10.00 12.00 Less: Tax Withheld (13. the employer is entitled to deduct the amount refunded/credited from the remittable amount of taxes withheld from compensation income in the current month in which refund/credit was made. ² The employer shall compute the refundable/creditable amount of taxes withheld on the exempt 13th month pay and other benefits of employees through the annualized computation prescribed in Section 71(8)(2)(b) of Revenue Regulations No. implementing R.00 only.00 plus "other benefits" of P12.000. The year-end adjustment computation resulted to a REFUND. On the other hand. (aa) Employee with Only One Employee During the Year. His "other benefits" amounting to P55.00) ABC CO. representing 13th month pay of P8.-Dec.00 Mr.00 ²²² ²²²² P78.000.000.00 10. Computation of Refundable/Creditable Taxes Withheld on the Exempt 13th Month Pay and Other Benefits. otherwise known as the "Final Withholding Tax on Compensation Income.00 ²²²²² Gross Compensation Income P100. 2. 4-93. No.000. Employee "B" (single) ²²²²²²²²² ABC Co.000.000. to Employee "A" ======== on or before JANUARY 25.00. "B".00 1.00 ²²²² ²²²² P21." (b) Refund/Credit to Employees of Excess Taxes Withheld.000.000. Mr.000. ² (a) In general.000 are subject to the withholding tax on wages.000. (Previous Employer) Jan.00 Personal Exemption Less: 9.00 Tax Due P7. 1994 .00 13. 1 (cc). such as: 13th month pay/Christmas bonus Other benefits: Productivity incentives bonus Cash gift TOTAL BENEFITS RECEIVED for CY 1994 ======== P8. ² Any excess in the taxes withheld resulting from the annualized computation shall be credited/refunded to the employees. as amended by RR No.000.000.785.000. "B" shall only be exempt on a total of P20.

P10.000.00 ABC Co.00) P1.089. 1995 Salaries/Allowances Taxable: P10.000 10.00 DEF Co.000 ²²² P13.66) AMOUNT TO BE REFUNDED BY DEF Co.00 P12.000. 3.00 TAX DUE TAX WITHHELD *Other Benefits ABC Co.000.000.000. P11.000. 1995 ²²²²² OR TO BE CREDITED against Taxes Withheld due from Employee for Succeeding Month/s beginning January 1995.00 ²²²² P101.00 (15.730.000. Amount of refund to be credited against taxes withheld due from Employee "B" [Based on Sample Computation No.00 ²²²²² P100.00 ²²²²² Non Taxable Benefits: 13th Month Pay P11.279.66 Less: Refund for CY 1994 due to Non-Taxability of Bonus and Other Benefits beginning Jan.00 ²²²²²²²²²²²²²²²²²²²²²²²²²²²²²² Tax Required to be Withheld for the month of January. (Please see Sample Computation No.000.00 ²²²²² Salaries 13th month pay Other Benefits P20.66) JANUARY 25.66) ²²²² Balance to be credited in succeeding month/s (P1.00 3.000.000 ADD: Income From Previous Employer 100.00 ²²²²² P31.000. to EMPLOYEE "B" on or before (P3.000 P12.965.Salaries/Allowances 13th Month Pay Other Benefits P78.359.000.66 ²²²²²²²²²²²²²²²²²²²²²²²²²²²²²² Computation of Taxes Withheld for the month of January.155.000.965.000. 8.00 8.000 ²²² LESS: Personal Exemption Taxable Compensation Income TAX DUE TAX WITHHELD ABC Co.66 30.000.035.00 9.00) February. 1995 ² P 3. 1995 (3. 3. 1995 Tax Required to be Withheld for the month of February Amount to be credited for February (1.730.66 .000.00 9.965.359.089. (cc) Crediting of Refundable Amounts Against Taxes Withheld Due From Employees For The Succeeding Month/s.244.00 Less: Personal Exemption LESS: Net Taxable Income 91. 1995 (Use Line 2 Col.000 P20.000 DEF Co.00 12.00 P11. 8 of the Withholding Tax Table): P1. 1 (bb) above) beginning January.00 10.000. 1 (cc). DEF Co.00 ²²²² P92.

00 Christmas Bonus 5.80/mo.00 ²²²² Taxable Compensation Income P59. e. For this purpose. The statement must be signed by both the employer or other authorized officer and the employee and shall contain a written declaration that it is made under the penalties of perjury. x 11 mos. the employer paying the highest wage/salary.32 ======= 2. provided that the refundable ITR for 1994 reflects the taxes withheld on his 13th month pay and other benefits.000 17. agency or instrumentality or government-owned or controlled corporation.00 Tax Due P3. the statement shall be signed by the duly designated officer or employee. the secondary employer/s shall furnish the main employer a certification as to the amount of the 13th month pay and other benefits received by the employee. x 12 mos.331.359. ² a) An employee separate from the service of his previous employer but is presently employed by another employer shall be refunded/credited the taxes withheld on his exempt 13th month pay and other benefits by his present employer. taxpayer/employee's TIN.00 Tax Withhold Jan. Concurrent Multiple Employments. the amount of tax due and the amount of tax withheld during the calendar year. ² An employee is employed by two or more employers at the same time during the taxable year shall be refunded/credited the taxes withheld on his 13th month pay and "other benefits" by his main employer.00 ²²²²² Total Gross Compensation Income P85.000. (b) An employee who has been separated from a previous employer but has no present employment shall claim his refund of excess tax withheld on his 13th month pay and other benefits by filing with the BIR a refundable income tax return for CY 1994. the sum of compensation paid (excluding the total non-taxable benefits).000.00 Less: Personal Exemption 9.34) ²²²² Amount to be Remitted for March on or before April 10.000/mo. 1995 P989.000.000 Other Benefits 12. an employee (single) of a private corporation.000.593.-Nov. employer's TIN. (4.00 Gift in kind 5.925.²²²² Balance of Amount to be Credited for the Month of March (P370. The year-end adjustment resulted to a COLLECTIBLE AMOUNT (instead of a refund). 6-82. 1994 P393.. received the following compensation.000. amount of exemptions claimed. The present employer shall compute the aforesaid excess withholding tax using the annualized computation set forth in Section 7I (B) (2) (b) of RR No. If the employer is the Government of the Philippines.000.. month pay and other benefits: Salaries/allowances P5.000.000.00 Less: 13th Month Pay P5.00 13th Month pay 5.00 Cash gift 10.80) ²²²²² Tax Collectible to be Withheld from P1. Refund/Credit of Taxes Withheld from employees Separated from Employment.000.. During CY 1994. its political subdivision.000.g. The Employee's Withholding Statement (W-2).66 Amount to be Credited for March (370.00 ²²² ²²²² Gross Compensation Income After Deducting Exclusions Under RA 7333 68. The said main employer shall determine the maximum allowable 13th month pay and "other benefits" received from both main and secondary employer/s in annualizing the taxable compensation income at year-end adjustment. 4-93. . ² The employer shall furnish each employee with the original and duplicate copies of BIR Form W-2 showing the name and address of the employer. as amended by RR No.34) March. 1995 Tax Required to be Withheld for the Month of March P1.20 December salary ========= Note: NO REFUND OF WITHHOLDING TAX FOR BONUS AND OTHER BENEFITS WOULD RESULT DUE TO UNDER WITHOLDING IN PREVIOUS MONTHS OF THE YEAR. P60. name and address of the employee.

an employee of a private corporation. REVENUE MEMORANDUM CIRCULAR NO. that the exclusions/exemptions from gross compensation income shall cover the 13th month pay and "other benefits" in the aggregate amount not exceeding P30. 7833 were taxable compensation income under Section 21(a) in relation to Section 72. 6-82. and d. Mr. "X". Benefits received by employees pursuant to P.00 ======== Under the amendment introduced by R.00 Mid-year productivity incentive bonus 5.00. Provided.000 Christmas bonus Plus: Other benefits: Gift in kind P 2.A.000.D. as well as by officials and employees of private corporations and entities.000.000. 851. However.000. No. Local Government Units and agencies. received by officials and employees of the National Government. 7833. 2.000. such as: 13th month pay P15. as amended. 6686. SALIENT FEATURES (of RA 7833) 1. is exempt from withholding tax on wages.00 Other benefits: Gift in kind 2.00 'other benefits" can be added to P 20. are exempt from income tax. as amended by R.000 --P18.00) received by National and Local Government officials and employees starting CY 1988 in accordance with R. Illustration: During CY 1994. The aforesaid "other benefits " as contemplated under Section 1 (F) (iv) of R. "B's" total 13th month pay from his previous and present employers. only P10. No. which amount shall be integrated in the 13th month pay. amending for the purpose Section 28 (b) (8) of the National Internal Revenue Code.A. No. Computation of whether the full amount of subject "other benefits".A. 1994. 36-94 (Publishing the full text of Republic Act No. benefits in excess of P30.000 . a.000.A. 7833 ² an Act excluding the benefits mandated pursuant to Republic Act No. since the total 13th month pay and 'other benefits' should not exceed P 30. if any. as amended by Presidential Memorandum Order No.000 received by the officials and employees paid or accrued beginning January 1. 6686 and Presidential Decree No.000.000 Mid-year productivity incentive bonus 5. the computation of the amount of the benefits which shall be excluded/exempted from the taxable compensation income and/or those subject to withholding tax on wages. as amended. Accordingly. 28 dated August 13. 1986 requiring all employers to pay all their rank-and-file employees a 13th month pay not later than December 24 of every year.D. including government-owned and controlled corporations. and other benefits from the computation of gross compensation income for purposes of determining taxable compensation income.000.000. Annual Christmas bonus equivalent to one (1) month basic salary and additional cash gift of One Thousand Pesos (P1. wherein sub-paragraph (F) has been inserted at the end thereof.000. Under sub-paragraph (F) of Section 28 (b) (8) of the NIRC. No.Footnotes .00 Christmas bonus 10. as contemplated under Section 1 (F) (iv) of RA 7833. c.00 shall be taxable and subject to the withholding tax only insofar as the amount in excess of P30. representing Mr.000. as amended.00 Additional cash gift 1. as amended by Revenue Regulations No.A. received the following 13th month pay and other benefits from his employer. the following benefits received by officials and employees of both public (national and local) and private offices. 4-93. shall be as follows: I. as amended. No.000 Additional cash gift 1.A. 7833 shall not exceed P12. No. P10.00. 851 .00) which shall be integrated in the 13th month pay solely for purposes of R. Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve Thousand Pesos (P12.000.000 --TOTAL 8.000. both of the NIRC. No. Benefits received by officials and employees not covered by P. Before the amendment of Section 28 (b) (8) of the National Internal Revenue Code (NIRC) by R.000. b. 851. subject to withholding tax under Revenue Regulations No. the 13th month pay and other benefits aforestated.000.00 _________ TOTAL P33. 7833 to Section 28(b)(8) of the NIRC. 7833. viz: (F) 13th month pay and other benefits. No. and consequently from the withholding tax on wages.The maximum allowable deduction for "Other Benefits" is P12.

000 for "other benefits" as contemplated under Sec. REVENUE REGULATIONS NO. 2-98.78. ² "(A) . in annualizing and computing the annual income and the tax due from their employees. for length of service or safety achievement. (b) Medical cash allowance to dependents of employees not exceeding P750.000 maximum exemption for "other benefits" as contemplated under Sec. (6)(b)(ii) and (7) of Revenue Regulations No. Said withheld amount should be refunded to the employees concerned. 8-2000) Section 2. (f) Laundry allowance not exceeding P300 per month. e. which must be in the form of a tangible personal property other than cash or gift certificate. 1995. and c. the following guidelines shall be followed: a. rice per month amounting to not more than P1. 1 (F) (iv) of R. b. 10-2000 issued December 29. 1 (F) (iv) of RA 7833 (please refer to Computation No. (c) Rice subsidy of P1.000 received by the officials and employees paid or accrued beginning January 1. Any excess in the tax withheld shall be refunded by the employer to the respective employees or credited against the tax required to be withheld from the compensation of the employees beginning January. 10-00 (Further Amendments to Revenue Regulations No. 1994. Computation of total benefits excluded/exempted from withholding tax on wages when the "other benefits" are integrated in the 13th month pay. Employers who have already given the 13th month pay and other benefits to their employees. (e) Actual yearly medical benefits not exceeding P10.A. 1(F)(iv) of RA 7833 (12. .000 which amount shall be integrated in the 13th month pay. which should otherwise be remitted by the employer-withholding agent on December 12.. 2. with an annual monetary value not exceeding P10. however.A.000. (g) Employees achievement awards. No. is hereby further amended to read as follows: "Sec. that the aforesaid "other benefits" as contemplated under Sec.A.00 per employee per semester or P125 per month. ² "xxx xxx xxx "The following shall be considered as "de minimis" benefits not subject to INCOME TAX AS WELL AS withholding tax on compensation income of both managerial and rank and file employees: (a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES.78. "xxx xxx xxx "(3) Facilities and privileges of relatively small value. 7833 (December 8. 2000 amends further RR Nos.. 1994) shall. Taxes withheld on the 13th month pay and other benefits given last November. No. 13th month pay P15.000 per annum. 7833 shall not exceed P12. provided. exclude the 13th month pay and other benefits.1(A)(3).Less: P12. as last amended by Revenue Regulations No.000 --TOTAL EXCLUSIONS/EXEMPTION FROM TAXABLE COMPENSATION INCOME P27.000 .000 per annum. The exemption/exclusion provided for under R. as Last Amended by Revenue Regulations No. (d) Uniform and clothing allowance not exceeding P3. 2-98 and 3-98. For purposes of reimbursing the officials and employees of the income taxes withheld and already remitted to the BIR.1. 1994. 2-98.. I above) 12. 82000. The employer shall then be allowed to credit and deduct from its subsequent remittances of taxes withheld on compensation income of their employees for the succeeding months. 7833 shall cover the 13th month pay and "other benefits" in the aggregate amount not exceeding P30.000 ====== 3. No.00. Withholding of Income Tax on Compensation Income. "(1) Compensation paid in kind.000 ====== II.00 or one (1) sack of 50-kg.000 Plus: Maximum allowable exemption/ exclusion of P12.000) --TAXABLE "OTHER BENEFITS" SUBJECT TO WITHHOLDING TAX ON WAGES P 6. ² . shall no longer be remitted to the BIR. . 3-98 and 8-98 with respect to the exemption of monetized leave credits of government officials and employees and the enumeration of "de minimis" benefits which are exempt from income tax on compensation and from fringe benefits tax. REVENUE REGULATIONS NO.000. and had withheld and remitted the tax due thereon prior to the approval of R.g.

birth of a baby.g...33 (C) of Revenue Regulations No.received by the employee under an established written plan which does not discriminate in favor of highly paid employees.000 received by the employee under an established written in which does not discriminate in favor of highly paid employees.00 per employee per semester or P125 per month. fruits. (h) Gifts given during Christmas and major anniversary celebrations not exceeding P5.000 per annum. 8424 Relative to the Special Treatment of Fringe Benefits) SPECIAL TREATMENT OF FRINGE BENEFITS .000 per annum. goodwill." "xxx xxx xxx Section 2. "(7) Vacation and sick leave allowances. e. 03-98 (Implementing Section 33 of the National Internal Revenue Code. fruits. (4) De minimis benefits as defined in these Regulations. the fringe benefits tax shall not be imposed on the following fringe benefits: (1) . or efficiency of his employees such as the following: (a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES. and (j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. etc... (i) Flowers.33. be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health. (g) Employees achievement awards.. Special Treatment of Fringe Benefits (A) Imposition of Fringe Benefits Tax ² xxx xxx xxx (B) Definition of Fringe Benefit ² xxx xxx xxx (C) Fringe Benefits Not Subject to Fringe Benefits Tax ² In general.000 per employee per annum. 2." "(iii) . Thus. (2) . Reasonable amounts of reimbursements/advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding. (5) .. 34 of the Code. The excess of ADVANCES MADE over ACTUAL EXPENSES shall constitute taxable income if such amount is not returned to the employer. or similar items given to employees under special circumstances.. (b) Medical cash allowance to dependents of employees not exceeding P750. xxx xxx xxx The term "DE MINIMIS" benefits which are exempt from the fringe benefits tax shall. marriage. (6) . is hereby further amended to read as follows: "Sec. (h) Gifts given during Christmas and major anniversary celebrations not exceeding P5. which must be in the form of a tangible personal property other than cash or gift certificate.. marriage. for length of service or safety achievement.. (i) Flowers. 8-2000. contentment.. However. as last amended by Revenue Regulations No. (e) Actual yearly medical benefits not exceeding P10.. books. or similar items given to employees under special circumstances. birth of a baby.000 per employee per annum.00 or one (1) sack of 50-kg. e. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation.000. and (j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.. (3) . (d) Uniform and clothing allowance not exceeding P3.00. on account of illness.. which IS paid notwithstanding his absence from work constitutes compensation. representation and other allowances ² "xxx xxx xxx "(b) ... (c) Rice subsidy of P1.. "(i) . (f) Laundry allowance not exceeding P300 per month... the salary of an employee on vacation or on sick leave.000. etc." REVENUE REGULATIONS NO.. rice per month amounting to not more than P1. 3-98. with an annual monetary value not exceeding P10. books. the monetized value of unutilized vacation leave credits of ten (10) days or less which ARE paid to PRIVATE employees during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX. "(ii) The employee is required to account/liquidate for the expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec." "xxx xxx xxx "(6) Fixed or variable transportation..g. on account of illness. in general.g. e.. as Amended by Republic Act No.

in cases where the fringe benefits entail joint benefits to the employer and employee. lay-off. the computation of the fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of the proportion or percentage of the benefit which is subject to the fringe benefit tax. business or profession of the employer. 8424 which stipulates that fringe benefits which are "required by the nature of. Taxation of fringe benefit received by employees in special economic zones ² Fringe benefits received by employees in special economic zones. 1998 shall not be covered by these Regulations. are also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above. Moreover. whether such employer is an individual. and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees. 1999 33% Effective January 1. Coverage ² These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory employees and not to the rank and file. or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe benefit tax. transfer. defines "managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire. The fringe benefit tax shall be imposed at the following rates: Effective January 1. recall. Fringe benefits which have been paid prior to January 1. assign or discipline employees. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. ² A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit. 2000 68% The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee.A.(A) Imposition of Fringe Benefits Tax ² A final withholding tax is hereby imposed on the grossed-up monetary value of fringe benefit furnished. regardless of whether the corporation is taxable or not. (3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee. Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company. in the interest of the employer. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%). 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code.e. or the government and its instrumentalities except when: (1) the fringe benefit is required by the nature of or necessary to the trade. the portion which shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are defined under these rules and regulations. less than 100 per cent) of the fringe benefit is subject to the fringe benefit tax is clearly stated in Section 33 (a) of R. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five per cent (85%). suspend. discharge. The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of the fringe benefit by the following percentages and in accordance with the following schedule: Effective January 1. professional partnership or a corporation. 2-98. The Labor Code of the Philippines. Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or business in the Philippines ² A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of the fringe benefit. 1998 34% Effective January 1. including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone. (2) If the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee. then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 2000 32% The tax imposed under Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real Property Values). the valuation of fringe benefits shall be as follows: (1) If the fringe benefit is granted in money. 33 of the Code shall be treated as a final income tax on the employee which shall be withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 1999 67% Effective January 1. . "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. Determination of the Amount Subject to the Fringe Benefit Tax ² In general. effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. granted or paid by the employer to the employee. (3) an alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines. "Supervisory employees" are those who. or (2) when the fringe benefit is for the convenience or advantage of the employer. or is directly paid for by the employer. then the value is the amount granted or paid for. (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines. except rank and file employees as defined in these Regulations. business or profession of the employer. these regulations do not cover those benefits properly forming part of compensation income subject to withholding tax on compensation in accordance with Revenue Regulations No. That the Tax Code allows for the cases where only a portion (i. The term. Unless otherwise provided in these regulations. as amended. or necessary to the trade. Thus. the value of the fringe benefit is equal to the depreciation value of the property. 1998 66% Effective January 1. pursuant to the provisions of this Section.

whichever is higher. in addition to basic salaries. cda The monetary value of the housing fringe benefit is equivalent to the following: MV = [5%(FMV or ZONAL VALUE] X 50% WHERE: MV = MONETARY VALUE FMV = FAIR MARKET VALUE (c) If the employer purchases a residential property on installment basis and allows his employee to use the same as his usual place of residence.Definition of Fringe Benefit ² In general. (3) Vehicle of any kind. (c) Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer. Philippine Navy and Philippine Air Force shall not be treated as taxable fringe benefit in accordance with the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible from the military camp so that they can be readily on call to meet the exigencies of their military service. the term "FRINGE BENEFIT" means any good. For this purpose. whichever is higher. The monetary value of the fringe benefit shall be the entire value of the benefit. (7) Expenses for foreign travel. the value of the benefit shall be the difference between the fair market value. such as maid. (b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits except only when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the said employee. the annual value of the benefit shall be five per cent (5%) of the acquisition cost. expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits. dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. (h Temporary housing for an employee who stays in a housing unit for three (3) months or less shall not be considered a taxable fringe benefit. (b) If the employer owns a residential property and the same is assigned for the use of his employee as his usual place of residence. (g) A housing unit which is situated inside or adjacent to the premises of a business or factory shall not be considered as a taxable fringe benefit. the guidelines for valuation of specific types of fringe benefits and the determination of the monetary value of the fringe benefits are give below. (6) Membership fees. except as otherwise provided under these regulations. the value of the benefit shall be the amount of rental paid thereon by the employer. as declared in the Real Property Tax Declaration Form. (d) If the employer purchases a residential property and transfers ownership thereof in the name of the employee. service. for purposes of this Section. and the cost to the employee. (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted. the value of the benefit shall be the employer's acquisition cost or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values). (8) Holiday and vacation expenses. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. driver and others. or zonal value as determined by the Commissioner pursuant to Sec. (e) If the employer purchases a residential property and transfers ownership thereof to his employee for the latter's residential use. at a price less than the employer's acquisition cost. A housing unit is considered adjacent to the premises of the business if it is located within the maximum of fifty (50) meters from the perimeter of the business premises. or other benefit furnished or granted by an employer in cash or in kind. except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee. (2) Expense account. the annual value of the benefit shall be five per cent (5%) of the market value of the land and improvement. but not limited to the following: (1) Housing. The monetary value of fringe benefit shall be fifty per cent (50%) of the value of the benefit. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. (4) Household personnel. as evidenced by the lease contract. . or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values). and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. 24 of the Code. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values). The monetary value of the fringe benefit shall be the entire value of the benefit. (f) Housing privilege of military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the Philippine Army. whichever is higher. cdasia (2) Expense account ² (a) In general. to an individual employee (except rank and file employee as defined in these regulations) such as. as declared in the Real Property Tax Declaration Form. The taxable value shall be the grossed-up monetary value of the fringe benefit. (d) Representation and transportation allowances which are fixed in amounts and are regular received by the employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same shall be considered as taxable compensation income subject to the tax imposed under Sec. (9) Educational assistance to the employee or his dependents. exclusive of interest. (1) Housing privilege ² (a) If the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee.

personal driver of the employee. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. However. (d) If the employer shoulders a portion of the amount of the purchase price of a motor vehicle the ownership of which is placed in the name of the employee. the value of the benefit shall be the acquisition cost of all the motor vehicles not normally used for sales. (b) If the employer provides the employee with cash for the purchase of a motor vehicle. unless the same was subjected to a withholding tax as compensation income under Revenue Regulations No. The monetary value of the fringe benefit shall be the entire value of the benefit. (b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with business meetings or conventions. inland travel expenses (such as expenses for food.) shall be treated as taxable fringe benefits. in general. etc. in social and athletic clubs or other similar organizations. Business conventions shall be evidenced by official invitations/communications from the host organization or entity abroad. the value of the benefits shall be the amount of cash received by the employee. (8) Holiday and vacation expenses ² Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe benefits. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. freight. (b) The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation. (g) The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as business use and not be subject to the fringe benefits tax. (4) Household expenses ² Expenses of the employee which are borne by the employer for household personnel. In this instance. garbage dues. shall not be subject to a fringe benefit tax. regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. or other similar personal expenses (like payment for homeowners association dues. (9) Educational assistance to the employee or his dependents ² (a) The cost of the educational assistance to the employee which are borne by the employer shall. shall be treated as taxable fringe benefits. the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee. ² These expenditures shall be treated as taxable fringe benefits of the employee in full. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. (c) If the employer purchases the car on installment basis. Otherwise.(3) Motor vehicle of any kind ² (a) If the employer purchases the motor vehicle in the name of the employee. and other expenses borne by the employer for his employee. The business meetings shall be evidenced by official communications from business associates abroad indicating the purpose of the meetings. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. delivery service and other non-personal used divided by five (5) years. the value of the benefit shall be the acquisition cost exclusive of interest. the value of the benefit shall be the amount shouldered by the employer. (5) Interest on loan at less than market rate (a) If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%). 2-98. The value of the benefit shall be measured based on the depreciation of a yacht at an estimated useful life of 20 years. freight. the ownership of which is placed in the name of the employee. service and other non-personal use. (7) Expenses for foreign travel ² (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit tax. (h) The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe benefit. such as salaries of household help. such interest foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe benefit. Cdpr (e) If the employer owns and maintains a fleet of motor vehicles for the use of the business and the employees. The monetary value of the motor vehicle fringe benefit is equivalent to the following: MV = [(A)/5] X 50% where: MV = Monetary value A = acquisition cost (f) If the employer leases and maintains a fleet of motor vehicles for the use of the business and the employees. beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300. (c) Travelling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee. delivery. the ownership of which is placed in the name of the employee.00 or less per day. However. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade. the entire cost of the ticket. the value of the benefit is the acquisition cost thereof. divided by five (5) years. business or . dues. (c) This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%) starting January 1. including cost of hotel accommodations and other expenses incident thereto shouldered by the employer. the value of the benefit shall be the amount of rental payments for motor vehicles not normally used for sales. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. 1998. prcd (6) Membership fees. be treated as taxable fringe benefit. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions.

(2) Contributions of the employer for the benefit of the employee to retirement. In this case. ========= In general. and (b) the cost of premiums borne by the employer for the group insurance of his employees. P3. XYZ Corporation shall take up the foregoing in its books of accounts. contentment. business or profession of the employer. marriage. (4) De minimis benefits as defined in these Regulations. (R. P10. However.000.732. as follows: Debit: Fringe Benefit Tax Expense P10.67 In this case.g. (7) Employee achievement awards. (5) If the grant of fringe benefits to the employee is required by the nature of. in general. insurance and hospitalization benefit plans. the XYZ Corporation shall not further claim deduction for allowing its Assistant VicePresident the use of its residential property since the cost for the use thereof has already been recovered as deduction from its gross income under "Depreciation Expense".00) is lesser than its fair market value as determined by the Commissioner (i. except the following: (a) contributions of the employer for the benefit of the employee.00 divided by 15 years divided by 12 months) P16. or similar contributions arising from the provisions of any other existing law. (b) The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company. Fringe Benefits Not Subject to Fringe Benefits Tax ² In general. the excess amount (i.g. or (6) If the grant of the fringe benefit is for the convenience of the employer. under this illustration. since the fringe benefit tax in the amount of P10.profession. (4) Uniforms given to employees by the employer .00) shall be amortized throughout the remaining estimated useful life of the residential property used in computing the said employer's depreciation expense and allowed as a deduction from the said employer's gross income as fringe benefit expense. . assumed and paid by XYZ corporation has not as yet been recovered by way of deduction from gross income.000. (9) Company picnics and sports tournaments in the Philippines and are participated exclusively by employees . (6) Laundry allowance of P150 per month . (5) Medical benefits given to the employees by the employer . the same shall be allowed as a deduction from its gross income. etc.A. however.666. books or similar items given to employees under special circumstances.32.000. No.32 Credit: Cash/Fringe Benefit Tax Payable P10. if the remaining estimated useful life thereof during the year 1998 is fifteen (15) years. goodwill. which must be in the form of a tangible personal property other than cash or gift certificate. dctai (8) Christmas and major anniversary celebrations for employees and their guests . whether granted under a collective bargaining agreement or not. (2) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month . cda (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows ² The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit.000. No. and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon.000. the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business.000. 8282. The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall. birth of a baby. such as under the Social Security System (SSS). 8291 ). e. The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall not be interpreted to mean exemption from any other income tax imposed under the Code except if the same is likewise expressly exempt from any other income tax imposed under the Code or under any other existing law. However.A. as amended ) or under the Government Service Insurance System (GSIS) (R. Thus. if the fringe benefit is exempted from the fringe benefits tax. (3) Rice subsidy of P350 per month granted by an employer to his employees . or efficiency of his employees such as the following: (1) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year .000. its monthly amortization shall be computed as follows: Monthly amortization (P3. pursuant to the provisions of existing law.000.e. and (10) Flowers. on account of illness. e. XYZ Corporation shall take up the foregoing in its books of accounts as follows: . (3) Benefits given to the rank and file. for length of service or safety achievement.00).732. still form part of the employee's gross compensation income which is subject to income tax.732. hence. if the cost of the aforesaid condominium unit subject to depreciation allowance (example: its acquisition cost is only P7. or necessary to the trade.e. with an annual monetary value not exceeding one-half (1/2) month of the basic salary of the employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees . the fringe benefits tax shall not be imposed on the following fringe benefits: (1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law. likewise subject to a withholding tax on compensation income payment. fruits. Thus.32 To record fringe benefit tax expense for the residential property furnished to employees. be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health. the same may.

and Section 2. (e) ACTUAL YEARLY MEDICAL BENEFITS NOT EXCEEDING P10. (g) EMPLOYEES ACHIEVEMENT AWARDS." THE AMOUNT OF "DE MINIMIS' BENEFITS CONFORMING TO THE CEILING HEREIN PRESCRIBED SHALL NOT BE CONSIDERED IN DETERMINING THE P30.Debit: Fringe benefit expense P16.. MARRIAGE. (A)(7). (i) FLOWERS. FURTHER.32 Credit: Income constructively realized P16. (c) RICE SUBSIDY OF P1.G.1(A)(1). with Respect to "De Minimis" Benefits. ² Ordinarily. ² . FOR LENGTH OF SERVICE OR SAFETY ACHIEVEMENT. (d) UNIFORMS AND CLOTHING ALLOWANCE NOT EXCEEDING P3. WHICH MUST BE IN THE FORM OF A TANGIBLE PERSONAL PROPERTY OTHER THAN CASH OR GIFT CERTIFICATE. THAT ANY AMOUNT GIVEN BY THE EMPLOYER AS BENEFITS TO ITS EMPLOYEES.78. goodwill. "(4) .000 PER ANNUM. E. medical services. ² "(A) .666. Likewise amended is the enumeration of the items of de-minimis benefits which are exempt from fringe benefits tax as appearing under Sec. Amendments. (A)(6).G. THAT REPRESENTATION AND TRANSPORTATION ALLOWANCE (RATA) GRANTED TO PUBLIC OFFICERS AND EMPLOYEES UNDER THE GENERAL APPROPRIATIONS ACT AND THE PERSONNEL ECONOMIC RELIEF ALLOWANCE (PERA) WHICH ESSENTIALLY CONSTITUTE REIMBURSEMENT FOR EXPENSES INCURRED IN THE PERFORMANCE OF GOVERNMENT PERSONNEL'S OFFICIAL DUTIES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO . FRUITS. "(6) Fixed or variable transportation.. SHALL CONSTITUTE AS DEDUCTIBLE EXPENSE UPON SUCH EMPLOYER. RICE PER MONTH AMOUNTING TO NOT MORE THAN P1. 3-98. (A)(3). (f) LAUNDRY ALLOWANCE NOT EXCEEDING P300 PER MONTH. ON ACCOUNT OF ILLNESS.000. otherwise known as "de minimis benefits. ETC. Additional Compensation Allowance (ACA). (A)(3). 2. or efficiency of his employees. PROVIDED. "(1) Compensation paid in kind. (5) .00 RECEIVED BY THE EMPLOYEE UNDER AN ESTABLISHED WRITTEN PLAN WHICH DOES NOT DISCRIMINATE IN FAVOR OF HIGHLY PAID EMPLOYEES.00 PER EMPLOYEE PER SEMESTER OR P125 PER MONTH. (h) GIFTS GIVEN DURING CHRISTMAS AND MAJOR ANNIVERSARY CELEBRATIONS NOT EXCEEDING P5.000 PER ANNUM. is compensation subject to withholding..00 CEILING.. PROVIDED. or so-called "courtesy discounts" on purchases). "(3) Facilities and privileges of relatively small value. and (B)(11)(b) of Revenue Regulations No. (A)(6).. fixed or variable transportation. . 08-00 (Amending Sections 2. (A)(7).67 Credit: Cash/Fringe benefit tax payable P10. BIRTH OF A BABY. REVENUE REGULATIONS NO. representation and other allowances.732. HOWEVER. BOOKS.67 Debit: Fringe benefit tax P10.000. 2-98.000 CEILING OF "OTHER BENEFITS" PROVIDED UNDER SECTION 32(B)(7)(e) OF THE CODE. in addition to the regular compensation fixed for his position or office. 3-98. are not considered as compensation subject to INCOME TAX AND CONSEQUENTLY TO withholding tax. . (b) MEDICAL CASH ALLOWANCE TO DEPENDENTS OF EMPLOYEES NOT EXCEEDING P750.33(C) of Revenue Regulations No.000 PER EMPLOYEE PER ANNUM. E.33(C) of Revenue Regulations No.. ² "(a) IN GENERAL.00. 2.000.00 OR ONE (1) SACK OF 50-KG. facilities and privileges (such as entertainment. if such facilities are offered or furnished by the employer merely as means of promoting the health. WHETHER CLASSIFIED AS DE MINIMIS BENEFITS OR FRINGE BENEFITS. "THE FOLLOWING SHALL BE CONSIDERED AS "DE MINIMIS" BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION INCOME OF BOTH MANAGERIAL AND RANK AND FILE EMPLOYEES: (a) MONETIZED UNUSED VACATION LEAVE CREDITS OF EMPLOYEES NOT EXCEEDING TEN (10) DAYS DURING THE YEAR .. (B)(11)(b) and(B)(13) are hereby amended to read as follows: "Sec. 2. the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Commissioner.78.1(A)(1). IF THE EMPLOYER PAYS MORE THAN THE CEILING PRESCRIBED BY THESE REGULATIONS.. THE EXCESS SHALL BE TAXABLE TO THE EMPLOYEE RECEIVING THE BENEFITS ONLY IF SUCH EXCESS IS BEYOND THE P30." furnished or offered by an employer to his employees. ''Where compensation is paid in property other than money. OR SIMILAR ITEMS GIVEN TO EMPLOYEES UNDER SPECIAL CIRCUMSTANCES. AND (j) DAILY MEAL ALLOWANCE FOR OVERTIME WORK NOT EXCEEDING TWENTY FIVE PERCENT (25%) OF THE BASIC MINIMUM WAGE.1. contentment. HOWEVER. as Amended .000.78.32 To record fringe benefit and fringe benefit tax expenses and income constructively realized from the use of companyowned residential property furnished to employees.732. representation and other allowances which are received by a public officer or employee of a private entity. WITH AN ANNUAL MONETARY VALUE NOT EXCEEDING P10. to the withholding tax. Withholding of Income Tax on Compensation Income. ² Sec.666. Representation and Transportation Allowance (RATA) and Personal Economic Relief Allowance (PERA)) Amended to further clarify certain benefits/privileges received by the employees which are not considered as items of income and therefore not subject to income tax and consequently.

birth of a baby. GOVERNMENT FINANCIAL INSTITUTIONS (GFIs) AND LOCAL GOVERNMENT UNITS (LGUs) "The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that total amount shall not exceed thirty thousand pesos (P30. "xxx xxx xxx "(3) Facilities and privileges of relatively small value. "(b) Any amount paid specifically.." "(12) . PROVIDED FURTHER.00 per employee per semester or P125 per month.000 per annum.." REVENUE REGULATIONS NO. which must be in the form of a tangible personal property other than cash or gift certificate. and (j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. ² "(a) .WITHHOLDING TAX. the effect on the same of the inflation rate at the end of the taxable year.1(A)(3). among others. Withholding of Income Tax on Compensation Income.g. ² "xxx xxx xxx "The following shall be considered as "de minimis" benefits not subject to INCOME TAX AS WELL AS withholding tax on compensation income of both managerial and rank and file employees: (a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES.000 per annum. CONSEQUENTLY. The following income payments are exempted from the requirement of withholding tax on compensation: "xxx xxx xxx "(11) Thirteenth (13th) month pay and other benefits. (h) Gifts given during Christmas and major anniversary celebrations not exceeding P5. ADDITIONAL COMPENSATION ALLOWANCE (ACA) GIVEN TO GOVERNMENT PERSONNEL SHALL NOT BE SUBJECT TO WITHHOLDING TAX PENDING ITS FORMAL INTEGRATION INTO THE BASIC PAY. with an annual monetary value not exceeding P10. books. fruits.000. 2000. for length of service or safety achievement. GOVERNMENT-OWNED AND/OR CONTROLLED CORPORATIONS (GOCCs). 219 WHICH TOOK EFFECT ON JANUARY 1. 82000. (f) Laundry allowance not exceeding P300 per month. after considering.000. productivity incentives. (c) Rice subsidy of P1.00 or one (1) sack of 50-kg. " "xxx xxx xxx "(B) Exemptions from withholding tax on compensation. (6)(b)(ii) and (7) of Revenue Regulations No. "(b) Other benefits such as Christmas bonus.00. . "(1) Compensation paid in kind.00) which may be increased through rules and regulations issued by the Secretary of Finance. e. upon recommendation of the Commissioner.. rice per month amounting to not more than P1. ." "xxx xxx xxx "(6) Fixed or variable transportation. representation and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding. e. AND EFFECTIVE FOR THE TAXABLE YEAR 2000. and "(ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. INCLUDING THE ADDITIONAL COMPENSATION ALLOWANCE ("ACA") GRANTED AND PAID TO ALL OFFICIALS AND EMPLOYEES OF THE NATIONAL GOVERNMENT AGENCIES (NGAs) INCLUDING STATE UNIVERSITIES AND COLLEGES (SUCs).. 34 of the Code. either as advances or reimbursements for traveling.O. ² . (b) Medical cash allowance to dependents of employees not exceeding P750. business or profession. "(13) FACILITIES AND PRIVILEGES OF RELATIVELY SMALL VALUE OR 'DE MINIMIS' BENEFITS AS DEFINED UNDER THESE REGULATIONS. 2-98. or similar items given to employees under special circumstances. THAT PURSUANT TO E. if the following conditions are satisfied: "(i) It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade.g...1.00.. representation and other allowances ² "xxx xxx xxx . ² "(A) . 2. (e) Actual yearly medical benefits not exceeding P10. is hereby further amended to read as follows: "Sec.. (g) Employees achievement awards.000 per employee per annum. gift in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. etc.78. 10-00 Section 2.000.. (i) Flowers.000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees.78.000. as last amended by Revenue Regulations No. (d) Uniform and clothing allowance not exceeding P3. ACA SHALL BE CLASSIFIED AS PART OF THE "OTHER BENEFITS" UNDER SECTION 32(B)(7)(e) OF THE CODE WHICH ARE EXCLUDED FROM GROSS COMPENSATION INCOME PROVIDED THE TOTAL AMOUNT OF SUCH BENEFITS DOES NOT EXCEED P30. on account of illness. marriage. loyalty award. Reasonable amounts of reimbursements/advances for traveling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer.

the following are the requisites for the deductibility of interest expense from gross income: a) there must be an indebtedness.. is hereby further amended to read as follows: "Sec. 2." "xxx xxx xxx" REVENUE REGULATIONS NO.. c) the indebtedness must be that of the taxpayer. 13-2000 issued December 29. e) the interest expense must have been paid or incurred during the taxable year. (b) Medical cash allowance to dependents of employees not exceeding P750. 2000 implements the provisions of Section 34(B) of the Tax Code of 1997 relative to the requirements for the deductibility of interest expense from the gross income of a corporation or an individual engaged in trade. e..00. 3-98. The excess of ADVANCES MADE over ACTUAL EXPENSES shall constitute taxable income if such amount is not returned to the employer. i) the interest must not be incurred to finance petroleum operations. goodwill. g) the interest must be legally due. 82000. the fringe benefits tax shall not be imposed on the following fringe benefits: (1) . xxx xxx xxx The term "DE MINIMIS" benefits which are exempt from the fringe benefits tax shall. (c) Rice subsidy of P1.. or efficiency of his employees such as the following: (a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES. fruits. (g) Employees achievement awards." "(iii) . books. etc. (6) .. which must be in the form of a tangible personal property other than cash or gift certificate. the salary of an employee on vacation or on sick leave. or similar items given to employees under special circumstances... "(ii) The employee is required to account/liquidate for the expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. as last amended by Revenue Regulations No.g.. marriage. (i) Flowers. and (j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. (f) Laundry allowance not exceeding P300 per month.. h) the interest payment arrangement must not be between related taxpayers.. Section 2.000 per employee per annum. d) the indebtedness must be connected with the taxpayer's trade. business or exercise of profession. contentment.00 or one (1) sack of 50-kg.. rice per month amounting to not more than P1. the monetized value of unutilized vacation leave credits of ten (10) days or less which ARE paid to PRIVATE employees during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX. (4) De minimis benefits as defined in these Regulations. (5) .000. (d) Uniform and clothing allowance not exceeding P3. b) there should be an interest expense paid or incurred upon such indebtedness. subject to certain limitations.. business or exercise of profession." "xxx xxx xxx SECTION 2.. on account of illness. "(7) Vacation and sick leave allowances.000 per annum..g.00 per employee per semester or P125 per month. which IS paid notwithstanding his absence from work constitutes compensation. the same was not treated as a capital expenditure .. Reasonable amounts of reimbursements/advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of substantiation and to withholding. In general.."(b) . Thus. business or in the practice of profession.. e. (3) . Special Treatment of Fringe Benefits (A) Imposition of Fringe Benefits Tax ² xxx xxx xxx (B) Definition of Fringe Benefit ² xxx xxx xxx (C) Fringe Benefits Not Subject to Fringe Benefits Tax ² In general. 34 of the Code.000.000 per annum. for length of service or safety achievement. in general.000 received by the employee under an established written in which does not discriminate in favor of highly paid employees. and j) in case of interest incurred to acquire property used in trade. (h) Gifts given during Christmas and major anniversary celebrations not exceeding P5. be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health.33.. "(i) . f) the interest must have been stipulated in writing. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. (2) .33 (C) of Revenue Regulations No. with an annual monetary value not exceeding P10. However. birth of a baby. (e) Actual yearly medical benefits not exceeding P10..

there is an interest expense incurred on one side and an interest income earned on the other side.800 ²²²² 76. It includes the amount paid for the borrower's use of money during the term of the loan. business or exercise of a profession from an existing indebtedness shall be reduced by an amount equal to the following percentages of the interest income earned which had been subjected to final withholding tax depending on the year when the interest income was earned. viz: (a) There must be an indebtedness. viz: Forty-one percent (41%) beginning January 1. Rules on the Deductibility of Interest Expense. both of the Tax Code of 1997 . and (j) In case of interest incurred to acquire property used in trade. ² In general. 13-00 (Implementing Section 34(B) of the Tax Code of 1997 on the Requirements for Deductibility of Interest Expense from the Gross Income of a Taxpayer.000. (f) The interest must have been stipulated in writing. (h) The interest payment arrangement must not be between related taxpayers as mandated in Sec. (i) The interest must not be incurred to finance petroleum operations. and Thirty-eight percent (38%) beginning January 1. Illustration: Supposing on January 15. Its interest expense on the loan obtained from XYZ Financing Corporation during the same year amounted to P150. ² The amount of interest expense paid or incurred by a taxpayer in connection with his trade.000. the taxable income and the income tax due of Company A shall be computed as follows: 1998 Net income before interest expense Less: Interest expense Less: 41% of interest income from deposit (41% x P180. who has a deposit account with BCD Bank. business or exercise of profession shall be allowed as a deduction from the taxpayer's gross income. Under this illustration.000) Deductible interest expense Taxable income P1. This rule shall be observed irrespective of the currency the loan was contracted and/or in whatever currency the investments or deposits were made. the same was not treated as a capital expenditure. ² Pursuant to the provisions of Section 244 of the Tax Code of 1997. 34(B)(2)(b).000 had been withheld. Thirty-nine percent (39%) beginning January 1. as well as for his detention of money after the due date for its repayment. (b) Limitation. ² (a) General Rule. the following are the requisites for the deductibility of interest expense from gross income. during the taxable year. whether natural or juridical. This limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date when the interest bearing loan and the date when the investment was made for as long as. the interest income it derived from the said deposit with BCD Bank amounted to P180. 1998. (g) The interest must be legally due. these Regulations are hereby promulgated to implement the provisions of Section 34(B) of the same Code on the requirements for deductibility of interest expense from the gross income of a corporation or an individual engaged in trade. ² In general. Requisites for Deductibility of Interest Expense.000. business or in the practice of profession. 36(B). ² For purposes of these Regulations.800 ²²²² P314. business or exercise of profession. 1999. (c) The indebtedness must be that of the taxpayer. engaged in trade. obtained a loan from XYZ Financing Corporation in connection with the operation of its business. 1998. Definition of Terms.000 73. For the year 1998. the following words and phrases shall have the following meanings. the amount of interest expense paid or incurred within a taxable year on indebtedness in connection with the taxpayer's trade. viz: (a) Interest ² shall refer to the payment for the use or forbearance or detention of money. Company A. Assume that Company A's net income for the year 1998 before the deduction of the interest expense amounted to P1. (b) Taxpayer ² shall refer to a person.REVENUE REGULATIONS NO. business or exercise of profession. which interest income had been subjected to final withholding tax.000. 2000 and thereafter. in relation to Sec.000 P150.) Scope.000 on which a final tax of P36.200 ²²²² P923. (e) The interest expense must have been paid or incurred during the taxable year. except one earning compensation income arising from personal services rendered under an employeremployee relationship. (b) There should be an interest expense paid or incurred upon such indebtedness. the deductible interest expense. regardless of the name it is called or denominated. subject to certain limitations. business or in the exercise of profession. (d) The indebtedness must be connected with the taxpayer's trade.092 Income tax due for taxable year 1998 (34%) .

However. even if the interest expense is paid in advance but the indebtedness is payable in periodic amortization. to arrive at the taxable income subject to income tax under Sections 24(A). Assuming that on January 1.======== (c) Interest on Unpaid Taxes. Cruz. d. amusement and recreation expense claimed by individual taxpayers engaged in business or in the practice of their profession and of domestic or resident foreign corporations. 1998.000 from XYZ Bank for use in his business operations. Thus. the provisions of Sec. b.000. as amended by P. business or exercise of a profession may be allowed as a deduction in full in the year when incurred. 87 . payable in advance. So that if the said debtor has fully paid his loan as of the end of the taxable year 1999. 28(A)(1). directly and indirectly.000. by or for such individual. ² At the option of the taxpayer. or (vi) Between a fiduciary of a trust and a beneficiary of such trust. such interest expense paid in advance shall only be allowed as deduction in the year when he has fully paid his liability. or (v) Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust. amusement and recreation expenses of the following taxpayers: a. 27(A). including taxable estates and trusts. 1998. Terms: Payable in two (2) years at 15% interest per annum. a self-employed individual.D. 36 (A)(2) and (3) of the Tax Code of 1997 to the contrary notwithstanding.000 shall only be allowed as deduction from his gross income in the taxable year 1999. In general. or (ii) Between an individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned. 10-02 (Implementing the Provisions of Section 34(A)(1)(a)(iv) of the Tax Code of 1997. 8 . For purposes of this paragraph. consistently employs the cash-basis accounting method in keeping his books of accounts. the deduction should be taken as of a different period. viz: (i) Between members of a family. net of interest paid in advance in the amount of P300. Authorizing the Imposition of a Ceiling on "Entertainment. he contracted a loan of P1. or (iv) Between the grantor and a fiduciary of any trust. Amusement and Recreational Expenses") To provide a ceiling on the amount of entertainment. ² No interest expense shall be allowed as deduction from gross income in any of the following cases: (1) If within the taxable year. 4(b) hereof to the contrary notwithstanding. he received from the bank the proceeds of his loan in the sum of P700. spouse. No. Individuals engaged in the practice of profession. unless in order to clearly reflect the income. such interest expense incurred or paid shall not be diminished by the percentage of interest income earned which had been subjected to final withholding tax. c. 28(A)(6)(b) and Section 61. or may be treated as a capital expenditure for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure. ² Provisions of Sec. his interest expense paid in advance on January 1. the amount of interest expense which corresponds to the amount of the principal amortized or paid during the respective years 1998 and 1999 shall be allowed as deduction in such respective taxable years. .D. otherwise known as "The Oil Exploration and Development Act of 1972. the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood). The non-deductible interest expense herein referred to pertains to interest or other consideration paid or incurred by a Service Contractor engaged in the discovery and production of indigenous petroleum in the Philippines in respect of the financing of its petroleum operations. That such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided. 25(A)(1) . (3) If the indebtedness on which the interest expense is paid is incurred to finance petroleum exploration in the Philippines. an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided. including its members. (B) and (C) . the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. 36(B) of the Tax Code of 1997." (e) Optional treatment of interest expense on capital expenditure. a self-employed individual is allowed to deduct from his gross income the entire amount of interest expense actually paid during the taxable year. General professional partnerships. interest expense on a capital expenditure incurred to acquire property used in trade. ancestors and lineal descendants. the interest expense shall be taken for the taxable year in which "paid or incurred" or "paid or accrued" depending upon the method of accounting upon the basis of which the net income is computed. Thus. CTSHDI (d) Other cases where interest expense is not deductible from gross income. ² These regulations shall cover entertainment. pursuant to Section 23 of P. Illustration: Mr. directly or indirectly. interest incurred or paid by the taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction heretofore mentioned. REVENUE REGULATIONS NO. Resident foreign corporations. On January 1. further. e. Individuals engaged in business. (2) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Sec. On the other hand. Domestic corporations. No. That if the indebtedness is payable in periodic amortization. 1998 in the amount of P300. by or for the same individual. if the interest expense is paid in advance and the accounting method used by the self-employed individual is the cash-basis accounting method. 26 .000. or (iii) Between two corporations more than fifty percent (50%) in value of the outstanding stock of each of which is owned. Coverage.

qualify as items of deduction under Section 34 of the Tax Code of 1997. The term "Entertainment Facilities" shall refer to (1) a yacht. kickback or other similar payment. business or exercise of profession. the term "Entertainment. Ceiling on Entertainment. Requisites of Deductibility of "Entertainment.e. subject to conditions for deductibility stated therein. representation expenses shall not refer to fixed representation allowances that are subject to withholding tax on wages pursuant to appropriate revenue regulations. Expenses for bonafide business meeting of stockholders. The term "Guests" shall mean persons or entities with which the taxpayer has direct business relations. but in no case shall such deduction exceed 0. and f. e.50 percent (%) of net sales (i. seminars. amusement and recreation expense shall in all cases be determined based on an apportionment formula taking into consideration the percentage of the net sales/net revenue to the total net sales/net revenue. gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties. d. the taxpayer should maintain receipts and adequate records that indicate the (a) amount of expense (b) date and place of expense (c) purpose of expense (d) professional or business relationship of expense (e) name of person and company entertained with contact details. ² The following expenses are not considered entertainment.e. partners or directors. a guest or guests at a dining place.. providing amusement and recreation to. Expenses for charitable or fund raising events. 3-98 and amendments thereto. The official receipts. For purposes of proving that said expense is a representation expense and not fringe benefits. officers. partners. However. Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee relationship. Expenses for events organized for promotion. c. conferences. A yacht shall be considered an entertainment facility under these Regulations if its use is in fact not restricted to specified officers or employees or positions in such a manner as to make the same a fringe benefit for purposes of imposing the fringe benefits tax. amusement and recreation expense paid or incurred within the taxable year by the taxpayer. Apportionment Formula: Net sales/net revenue . or item of real or personal property must be owned or form part of the taxpayer's trade. sporting event. The term shall not include employees. there shall be a presumption that such expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can prove that these are actually representation expenses. as defined in Section 2 of these Regulations. Amusement. sports club. place of amusement. and (2) any similar item of real or personal property used by the taxpayer primarily for the entertainment. ² The following are the requisites for deductibility of entertainment. if it constitutes a bribe. or general professional partnership (GPP). or meeting with. or rented by such taxpayer. concert. golf. marketing and advertising including concerts. amusement. or a similar entity. country club. in entertaining. Other expenses of a similar nature. b. Notwithstanding the foregoing. It must not have been paid. as described below. business or exercise of a profession. or invoices. management and operation of the trade.. and similar events or places. It must not be contrary to law. c. Expenses for attending or sponsoring an employee to a business league or professional organization meeting. business or profession of the taxpayer. a. stockholders. It must be paid or incurred during the taxable year. or of a foreign government. For purposes of these Regulations. gross revenue less discounts) for taxpayers engaged in sale of services. amusement and recreation expenses as defined under Section 2 hereof. such yacht. b. d. or (ii) directly related to or in furtherance of the conduct of his or its trade. or any other similar club where the employee or officer of the taxpayer is the registered member and the expenses incurred in relation thereto are paid for by the taxpayer.Definition of Terms. or 1. In the case particularly of a country. or to a private individual. to an official or employee of the national government. It must be duly substantiated by adequate proof. or corporation. such items of exclusions may. or trustees of the taxpayer. conventions. play. theater. The appropriate amount of withholding tax. or of any government-owned or controlled corporation (GOCC). e. amusement and recreation expense as defined above subject to the ceiling prescribed under Section 5 of these Regulations: a. morals. Amusement and Recreation Expense". It must be: (i) directly connected to the development. vacation home or condominium. the allowable entertainment. directors.00 percent (%) of net revenue (i. Exclusions. ² For purposes of these Regulations. or bills or statements of accounts should be in the name of the taxpayer claiming the deduction. including exercise of profession and use or lease of properties. amusement and recreation expense. ² There shall be allowed a deduction from gross income for entertainment. such as but not limited to. but which in no case shall exceed the maximum percentage ceiling provided in these Regulations. clients/customers or prospective clients/customers. The term "Representation Expenses" shall refer to expenses incurred by a taxpayer in connection with the conduct of his trade. To be considered an entertainment facility. business or profession. for which the taxpayer claims a depreciation or rental expense. f. vacation home or condominium. public policy or public order. or recreation of guests or employees. workshops. directly or indirectly. if the taxpayer is deriving income from both sale of goods/properties and services. and Recreation Expense. pursuant to Revenue Regulations 2-98 . if applicable. nonetheless. should have been withheld therefrom and paid to the Bureau of Internal Revenue. or any local government unit. and other similar events. Amusement and Recreation Expenses" includes representation expenses and/or depreciation or rental expense relating to entertainment facilities. in an amount equivalent to the actual entertainment. good customs.

000 Sale of Services(P100. However.²±²²²²²²±²²²² x Actual Expense Total Net sales and net revenue Illustration: ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of P200. although as a general rule.000) x P3. . which interest income had been subjected to final withholding tax. ERA Corporation can only claim a total of P2. The said reduction shall be equal to the following percentages of the interest income earned depending on the year when the interest income was earned.000 x 1%) In the above illustration.000 x 0. and PNB. has not engaged in a tax arbitrage scheme.000/P300. for as long as.000/P300. the amount shifted shall be disallowed in its totality. This limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date of the interest-bearing loan and the date when the investment was made. the claimed expense shall be subject to verification and audit for purposes of determining its deductibility as well as compliance with the substantiation requirements as provided in these Regulations. therefore. 1998. viz: Forty-one percent (41%) beginning January 1. Based on the foregoing representations and documents submitted.000 **Maximum Percentage Ceiling Sale of Goods (P200. Thirty-nine percent (39%) beginning January 1.50%) Sale of Services (P100. that as a result of the Codal provision. during the taxable year. you are of the understanding that the said provision was introduced to mitigate the effects of the so-called tax arbitrage scheme where taxpayers save approximately 14% on taxes by placing their excess funds in government securities and pay only a 20% tax on the interest derived therefrom instead of the 34% corporate tax that will be imposed had such excess been used for other income-generating activities not subject to final tax. without prejudice to such penalties as may be imposed by the Tax Code of 1997. 1995 executed between the National Government. 2000 and thereafter. 1998 stating that with reference to Section 34(B) of the Tax Reform Act of 1997 disallowing as a deduction a portion of Bank's interest expense representing 41% of interest income subjected to final tax.000 and P100. the said interest expense. Notwithstanding the ceiling imposed on such expense. In reply. business or exercise of profession shall be allowed as a deduction from his gross income. The actual entertainment. the amount of interest expense paid or incurred by a taxpayer within a taxable year on indebtedness in connection with his trade. if after verification a taxpayer is found to have shifted the amount of the entertainment. shall be reduced if the taxpayer has derived certain interest income which had been subjected to final withholding tax. that the 12-year treasury bonds were given by the Government as payment for its liabilities to PNB as embodied in the Memorandum of Agreement (MOA) dated August 14. 006-00 Gentlemen : This refers to your letter dated November 6. as represented by the Department of Finance. please be informed that pursuant to Section 34(B) of the Tax Code of 1997.000. however.000 as entertainment.000) x P3. 1999.000 respectively. amusement and recreation expense. BIR RULING NO. amusement and recreation expense to any other expense in order to avoid being subjected to the ceiling herein prescribed. taxpayers will no longer enjoy the tax benefit/savings that otherwise may be derived from the tax arbitrage. there is an interest expense incurred on one side and an interest income earned on the other side. you are now requesting for a ruling that interest income derived by PNB from the treasury bonds be excluded in the determination of the interest expense not allowable as deduction from gross income. amusement and recreation expense for the second semester of 2002 totaled to P3. and Thirty-eight percent (38%) beginning January 1. *Apportionment Formula Sale of Goods (P200. and that PNB.

A mere disappearance of property is not enough. Evidence to support these items should be furnished. the taxpayer must prove by credible evidence all the elements of the loss. REVENUE REGULATIONS NO. depreciation allowed or allowable if any. Embezzlement is the fraudulent appropriation of another's property by a person to whom it has been entrusted or into whose hands it has lawfully come. (c) Robbery. Failure to report theft or robbery to the police may be a factor against the taxpayer. Photographs showing the condition and value of the property after it was repaired. vouchers. the mere filing of a declaration of loss does not automatically entitle the taxpayer to deduct the alleged loss from gross income. Photographs taken after the casualty which show the extent of damage will be helpful in establishing the condition and value of the property after it was damaged. ² Within forty-five days after the date of the occurrence of casualty or robbery. (b) A description of the damaged property and its location. among other things. and from robbery. restored or replaced may also be helpful. such as the actual nature and occurrence of the event and amount of the loss. (b) Proof of the elements of the loss claimed. since the valuation of the property is of extreme importance in determining the amount of loss sustained. receipts and other evidence of cost. The term "casualty" is the complete or partial destruction of property resulting from an identifiable event of a sudden. ² Photographs of the property as it existed before it was damaged will be helpful in showing the condition and value of the property prior to the casualty. nor is a mere error or shortage in accounts. some sudden invasion by hostile agency. . Furthermore. It denotes accident. for income tax purposes. ² To support the deduction for losses arising from robbery. The taxpayer should therefore file a declaration of loss and should be prepared to support and substantiate the information reported in the said declaration with evidence which he should gather immediately or as soon as possible after the occurrence of the casualty or event causing the loss. if available. however. or embezzlement. ² The declaration of loss. the amount of the loss. Nature of deductible losses. robbery. ² (a) In general. The taxpayer bears the burden of proof. ² 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. being one of the essential requirements of substantiation of a claim for a loss deduction. the following information: (a) The nature of the event giving rise to the loss and the time of its occurrence. theft. unexpected. theft or embezzlement) Pursuant to the provisions of Section 326 in relation to Section 4 of the National Internal Revenue Code of 1977. receipted bills for improvements. or depreciated cost in the case of property used in business. is subject to verification and does not constitute sufficient proof of the loss that will justify its deductibility for income tax purposes. and excludes progressive deterioration through steadily operating cause. but shall not exceed an amount equal to the cost or other adjusted basis of the property. these regulations are hereby promulgated to govern the manner of reporting losses arising from casualty. theft or embezzlement. the taxpayer should be prepared to come forward with documentary proofs. to submit the said declaration of loss within the period prescribed in these regulations will result in the disallowance of the casualty loss claimed in the taxpayer's income tax return. robbery. Determination of amount deductible. your request that your interest income derived from the said treasury bonds be excluded in the determination of the interest expense not allowable as deduction from gross income is hereby denied pursuant to Section 34(B) of the Tax Code of 1997. Therefore. value of property before and after the event. rather than misplaced or lost. theft or embezzlement. theft or embezzlement losses. and no deduction will be allowed unless he shows the property was stolen. cost of repair. and the proper year of the deduction. theft or embezzlement. theft or embezzlement. Proof of loss. theft is the criminal appropriation of another's property to the use of the taker. ² (a) In general. a mere report of alleged theft or robbery to the police authorities is not a conclusive proof of the loss arising therefrom.Accordingly. upon audit of his income tax return and the declaration of loss. is allowable as a deduction under Section 30(d) for the taxable year in which the loss is sustained. reduced by any insurance or other compensation received. Declaration of loss. ² The taxpayer bears the burden of proving and substantiating his claim for deduction for losses allowed under Section 30(d) and should comply with the following substantiation requirements: (a) A declaration of loss which must be filed with the Commissioner of Internal Revenue or his deputies within a certain period prescribed in these regulations after the occurrence of the casualty. and pictures and competent appraisals of the property before and after the casualty. ² Any loss arising from fires. Generally. or unusual nature. such as cancelled checks. (d) Amount of insurance or other compensation received or receivable. The foregoing evidence should be kept by the taxpayer as part of his tax records and be made available to a revenue examiner. On the other hand. 12-77 (Substantiation requirement for losses arising from casualty. Examples are purchase contracts and deeds. Requirements of substantiation. a taxpayer who sustained loss therefrom and who intends to claim the loss as a deduction for the taxable year in which the loss was sustained shall file a sworn declaration of loss with the nearest Revenue District Officer. The failure. (c) The items needed to compute the loss such as cost or other basis of the property. (b) Casualty loss. The sworn declaration of loss shall contain. robbery. storms or other casualty.

This appraisal must recognize the effects of any general market decline affecting undamaged.000.000 . To illustrate: Assume: Acquisition cost Accumulated depreciation ±±±±±±±± Net book value P100.000 Less: Amount recovered through insurance 2. (ii) The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that (1) the repairs are necessary to restore the property to its condition immediately before the casualty. (2) the amount spent for such repairs is not excessive.000 P10. ² In case of losses arising from total destruction of property used in business (ordinary asset) the net book value (cost less accumulated depreciation) immediately preceding the casualty should be used as the basis in claiming losses.000.000.000 ±±±±±±± Amount of loss suffered P5. The excess over the net book value immediately before the casualty should be capitalized subject to depreciation over the remaining useful life of the property. also to be reduced by any amount of insurance or compensation received.00 ======= (ii) Property used in business: (A) Total destruction.00 Less: Insurance received 3.500 ±±±±±±± AMOUNT DEDUCTIBLE P2. To illustrate: Assume that ² Acquisition cost of property Accumulated depreciation Insurance recovered P10.000) or adjusted basis of property actually destroyed (P18.00 ±±±±±±±±± Difference P5. than the net book value of the property as a whole immediately before the casualty.00 The casualty loss is computed as follows: Value of property before casualty P15.500 ====== (B) Partial destruction.00 10. ² (i) The fair market value of the property immediately before and immediately after the casualty for purposes of determining the amount of casualty loss deductible under this section shall be ascertained by an impartial but competent appraisal.000.000.500 Amount deductible is computed as follows: Acquisition cost P10.000 5.000.000 Less: Accumulated depreciation 5.000.(b) Method of valuation. as well as damaged property. and (4) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty.000 2.00 ======== Loss to be taken into account for purposes of Section 30(d): lesser amount of property actually destroyed (P5. The application of this section may be illustrated by the following examples: (i) Property not used in business: Cost or adjusted basis Value of property before casualty Value of property after casualty Insurance recovered P18.000.000) P5.000. (3) the repairs do not cover more than the damage suffered. (c) Examples.00 Value of property after casualty 10.000. the replacement cost to restore the property back to its normal operating condition should be used for purposes of computing deductible losses.000 90. but in no case shall the deductible loss be more. ² In case of losses arising from partial damages of property used in business.00 3. which may occur simultaneously with the casualty in order that any deduction under this section shall be limited to actual loss resulting from damage to property.00 15.00 ±±±±±±±± AMOUNT OF LOSS DEDUCTIBLE P2.

000 P10.000 the brooch was stolen. Example: In 1969. there exist a claim for reimbursement with respect to which there is a reasonable prospect of recovery. A controversy develops with the insurance company over its liability in respect of the loss.000 as shown hereunder: Net book value before casualty Add: Excess of replacement cost over book value New cost basis ====== Yearly depreciation ² P20. the following rules shall apply: (a) Loss of livestock. (b) Other farm losses.000 ±±±±±±± P15. in 1976.000 (iii) Farm losses.000 20.000 in insurance proceeds to cover the loss from theft.000.000 10. would be P20.000 ±±±±±±±± In the above example. However. On November 30. Whether a reasonable prospect of recovery exist with respect to a claim for a reimbursement of a loss is a question of fact to be determined upon an examination of all facts and . ² The loss sustained in the death of livestock shall be allowed as a deduction to the extent of the acquisition cost only if no inventories are taken into account in determining the income from the business of farming. to the extent such losses are reflected in the inventory on hand at the close of the taxable year.000. theft and embezzlement loss shall be determined consistently with the manner prescribed in the preceding section for determining the amount of casualty loss allowable as a deduction. The controversy is settled in March. Determination of amount deductible ² robbery.000 ±±±±±±± Excess of replacement cost to be capitalized P10. computed as follows: Value of property immediately before theft Less: Value of property immediately after theft Loss to be taken into account (P35. This section does not apply to losses reflected in the inventories of the taxpayer. no deduction shall be allowed for losses sustained during the taxable year upon livestock or other products. the cost of the preparation and planting or stocking up to the time of the disaster shall be deductible loss in the year in which it is incurred. theft and embezzlement losses.======= Estimated remaining useful life 5 years Replacement cost of damaged portion P20. B purchases for personal use a diamond brooch costing P40. ² If a casualty occurs which may result in a loss and. In applying the provisions of the preceding section for this purpose. in the year of such casualty or event.000 at the time of theft) Less: Insurance received in 1977 Deduction allowable for 1977 ====== P35. coconut and other agricultural plantations.000 ±±±±±±± 5 years = P4. No deduction for loss is allowable for 1975 or 1976. the new cost basis subject to depreciation charges over the remaining useful life of the property which is five (5) years. B has a reasonable prospect of recovery of the fair market value of the brooch from the insurance company. The brooch was fully insured against theft.000 but not to exceed adjusted basis of P40.000 ±±±±±±± P20.000 ====== Consequently. the fair market value of the property immediately after the theft shall be considered to be zero. If inventories are taken into account in determining the income from the trade or business of farming.000 Year of deduction. fishponds and other farms and its value is completely destroyed by the overflow or seepage of water from natural causes. but the amount of the deduction allowable for the taxable year 1977 is P15. no portion of the loss with respect to which reimbursement may be received is sustained until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. ² The amount deductible in respect of robbery.000 which is equal to the net book value of the whole property: Net book value P10.000 -0±±±±±±± P35. ² Where ground is prepared and planted or stocked as in case of sugar. 1977.000 Replacement cost 20. 1975 at which time it has a fair market value of P35. whether purchased for resale or produced on the farm. the loss deductible for tax purposes would be limited to P10. at which time B receives P20. by farmers. orchards. ² In the case of losses sustained.

2.5 Paid Up Capital of the Corporation ² The term "Paid Up Capital of the Corporation" shall refer to the total amount paid by stockholders for their subscriptions in the shares of stock of the corporation. the shareholders of the transferor/assignor. . When a taxpayer claims that the taxable year in which a loss is sustained is fixed by his abandonment of the claim for reimbursement. first-out" basis. 2. that an individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of the NOLCO: Provided. 3.3 Unless otherwise provided in these Regulations.. or the transferor (in case of other business combinations) gains control of at least 75% or more in nominal value of the outstanding issued shares or paid up capital of the transferee/assignee (in case the transferee/assignee is a corporation) or 75% or more interest in the business of the transferee/assignee (in case the transferee/assignee is other than a corporation). premium on capital). such as. The 75% equity. notwithstanding subsections 2. the term "allowable deductions" shall mean the aforesaid OSD plus deduction of premium payments on health and/or hospitalization insurance as provided under Section 34(M) of the Code. 3. whether directly or indirectly. 3. including any amount paid over and above the par value or stated value of the share of stock (e. the transfer or assignment thereof through a merger. 2. NOLCO of the taxpayer shall not be transferred or assigned to another person. by a settlement of the claim.3 Net Operating Loss ² The term Net Operating Loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year. that the three-year reglementary period shall continue to run notwithstanding the fact that the aforesaid individual availed of the 10% optional standard deduction during the said period. but excluding NOLCO and any item of incentive deduction allowable under any special law that does not actually involve cash outlay: Provided. he must be able to produce objective evidence of his having abandoned the claim. In case the transfer or assignment of the taxpayer's net operating losses arises from the said taxpayer's merger. but not limited to. however. 2.6 The three-year reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation paid its income tax under the "Minimum Corporate Income Tax" computation. is held by or on behalf of the same persons. All exempt income and other items of income subject to final tax shall not form part of the gross income. that.1 Gross Income ² Except as otherwise provided in these Regulations.8 The net operating loss incurred by a taxpayer in the year in which a substantial change in ownership in such taxpayer occurs shall not be affected by such change in ownership. these Regulations are hereby promulgated to govern the deduction from gross income of the Net Operating Loss Carry-Over (NOLCO) pursuant to Section 34 (D) (3) of the Code General Principles and Policies. the allowance for deduction of NOLCO shall be limited only to net operating losses accumulated beginning January 1. 2. if applicable.4. ownership or interest rule prescribed in these Regulations shall only apply to a transfer or assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation or business combination with another person. Definition of Terms. For this purpose.2 Allowable Deductions ² The term "Allowable Deductions" means the items of deduction enumerated under Section 34(A) to (J) and Section 34(M) .g.7 NOLCO shall be availed of on a "first-in. or a domestic or resident foreign corporation may be allowed to claim deduction of his/its corresponding NOLCO: Provided. This rule shall also apply in the case of a merger where the taxpayer is the surviving entity. 2. or by an abandonment of the claim. ² 2. ² For purposes of these Regulations. 14-01 (Implementing Section 34(D)(3) of the National Internal Revenue Code of 1997 Relative to the Allowance of Net Operating Loss Carry-Over (NOLCO) as a Deduction from Gross Income.) Scope.1 For purposes of these Regulations. as a result of the said merger. the transferee or assignee shall not be entitled to claim the same as deduction from gross income unless.2 In general. in lieu of the deductions enumerated under Section 34(A) to (K) . 3. the taxpayers shall maintain complete and accurate records of the paid-up capital of the shareholders. for example. Whether or not such reimbursement will be received may be ascertained with reasonable certainty. consolidation or combination. 1998.4 NOLCO shall also be allowed if there has been no substantial change in the ownership of the business or enterprise in that not less than 75% in nominal value of outstanding issued shares or not less than 75% of the paid up capital of the corporation. the term "Gross Income" means the pertinent items of income referred to in Section 32(A) of the Tax Code of 1997 which are required to be declared in the taxpayer's Income Tax Return for purposes of computing his taxable income as defined in Section 31 of the same Code. in the case of an individual entitled to claim the Optional Standard Deduction (OSD) under Section 34(L) . consolidation or any form of business combination of such taxpayer with another person.circumstances. the words and phrases herein provided shall mean as follows: 3. REVENUE REGULATIONS NO. 2. if the business is in the name of the corporation.5 Unless otherwise provided in these Regulations. further. including the special deductions allowed to insurance companies under Section 37 of the Code. NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who sustained and accumulated the net operating losses regardless of the change in its ownership.4 Nominal Value of Outstanding Issued Shares ² The term "Nominal Value of Outstanding Issued Shares " shall refer to the par value (in case of par value shares of stock) or stated value (in case of no par value shares of stock) of shares of stock issued to the stockholders of the corporation. consolidation or combination with another person. such as the execution of a release.3 and 2. by an adjudication of the claim. ² Pursuant to the provisions of Section 244 of the National Internal Revenue Code of 1997 (hereinafter referred to as the Code). an individual (including estate or trust) engaged in trade or business or in the exercise of profession.

Held: Z Corporation's NOLCO should be retained and transferred to Y Corporation. the term "Consolidation" shall refer to a situation when two or more corporations are extinguished. liabilities. that any provision of these Regulations notwithstanding. 4. admits a partner in his business for the purpose of forming a copartnership. Its accumulated net operating losses incurred or sustained during the period of such Income Tax Holiday shall not qualify for purposes of the NOLCO. and by the same process a new one is created. and domestic and resident foreign corporations subject to the normal income tax (e.4 An enterprise registered under R.8 Substantial Change in the Ownership of the Business or Enterprise ² The term "Substantial Change in the Ownership of the Business or Enterprise" shall refer to a change in the ownership of the business or enterprise as a result of or arising from its merger or consolidation or combination with another person in the manner as provided in subsection 2.A. as amended. franchises and powers of the former. Its accumulated net operating losses incurred or sustained during the period of its said registered operation shall not qualify for purposes of the NOLCO.1 Offshore Banking Unit (OBU) of a foreign banking corporation. Illustration: Facts: P Corporation owns Q Corporation that has NOLCO. "75% or more in nominal value". 3. otherwise known as the Bases Conversion and Development Act of 1992. pursuant to R. Z Corporation has NOLCO. 2. and Foreign Currency Deposit Unit (FCDU) of a domestic or foreign banking corporation.7 Taxable Year ² The term "Taxable Year" means the calendar year. and regional operating headquarters) on their taxable income as defined in Section 3 of these Regulations shall be entitled to deduct from his/its gross income for the current year his/its accumulated net operating losses for the immediately preceding three (3) consecutive taxable years: Provided. ownership. Held: Q Corporation's NOLCO is retained because Q Corporation's shares are held "by" R Corporation "on behalf of" P Corporation. Illustration: Facts: X Corporation owns 100% of Y Corporation. After the merger. and the absorbed corporation ceasing to exist as a separate juridical person. manufacturers and traders) or preferential tax rates under the Code (e. or any such business combination which. Any reference in these Regulations to the "75% equity. organized as a sole proprietorship. gains or retains 75% or more interest after such merger or consolidation or combination. Z Corporation is merged into Y Corporation. Notwithstanding the above. No. in effect. The term "Fiscal Year" means an accounting period of twelve (12) months ending on the last day of any month other than December. P Corporation transfers Q Corporation's shares to R Corporation in exchange for 100% of R Corporation shares. X Corporation already indirectly owned Z Corporation. 4.12 By or on Behalf of the Same Persons ² The term "By or on Behalf of the Same Persons" shall refer to the maintenance of ownership despite change as when: 1. Prior to the merger. in determining whether there is actual change in ownership in the above-mentioned and similar cases..g. with respect to its PEZA-registered business activity.5 Foreign corporations engaged in international shipping or air carriage business in the Philippines. No. in the case of a return made for a fractional part of a year. of Z Corporation. 4.4 of these Regulations. Taxpayers Entitled to Deduct NOLCO from Gross Income.3 An enterprise registered with the Philippine Economic Zone Authority (PEZA). Z Corporation's shares were held "by" Y Corporation "on behalf of" X Corporation. is similar or synonymous thereto. however. the original owner.g. the following shall not be entitled to claim deduction of NOLCO: 4. 3. the period for which such return is made.A.6 Taxable Income ² The term "Taxable Income" means the excess amount of the pertinent items of gross income over the allowable deductions and/or personal and additional exemptions.. or vice versa. having the combined capital. private educational institutions. "75% or more interest". upon the basis of which the net income is computed under Title II of the Code. e. Any change in ownership as a result of or arising thereunder shall not be treated as a substantial change for as long as the stockholders of the party thereto. Provided. 4.. SBMA-registered enterprises.10 Consolidation ² For purposes of these Regulations.e. No actual change in ownership is involved in case the transfer involves change from direct ownership to indirect ownership. 3. 7227 . duly authorized as such by the Bangko Sentral ng Pilipinas (BSP). 3. the term "Merger" shall refer to the absorption of a corporation by another corporation. Taxable year includes. taking over the assets and assuming the liabilities of the said extinguished corporations. the latter retaining its own name and identity and acquiring the assets..2 An enterprise registered with the Board of Investments (BOI) with respect to its BOI-registered activity enjoying the Income Tax Holiday incentive. if any. No actual change in ownership is involved as in the case of merger of the subsidiary into the parent company. franchises and powers of all its constituents.11 Combination ² For purposes of these Regulations. or interest rule". hospitals. with respect to its registered business activity. Y Corporation owns 100%. authorized under the Code or under any special law. 7916 . or the fiscal year ending during such calendar year. each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit. the term "Combination" shall refer to a situation when an owner of a business. ² Any individual (including estates and trusts) engaged in trade or business or in the exercise of his profession. X now directly owns Z Corporation [absorbed corporation] which continues to exist in Y Corporation.3.9 Merger ² For purposes of these Regulations. i.g. 1998 shall not qualify for purposes of the NOLCO. 3. or the unification of two or more corporations into a single new corporation. and . that net operating losses incurred or sustained prior to January 1. and other similar terms shall be construed within the context of this definition. Its accumulated net operating losses incurred or sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO. 3. to whom the net operating loss is attributable. further.

1 Time of Determination of Substantial Change in the Ownership of the Business. (b) When Substantial Change Occurs ² A substantial change in ownership of the business occurs if. that NOLCO may be claimed as deduction only within a period of three (3) consecutive taxable years immediately following the year the net operating loss was sustained or incurred. and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining (4) four years. in Case of Corporation Using the Fiscal Year Accounting Period ² In general.A. or consolidation or combination with another person. otherwise known as the Omnibus Investments Code of 1987. the allowable NOLCO for the succeeding fiscal years shall be determined. pursuant to the provisions of the Code or any special law. or any PEZA-registered enterprise enjoying preferential tax treatment or income tax holiday pursuant to R.2 When Change Occurs ² A change in the ownership of the business occurs when the person who sustained net operating losses enters into a merger. and as a result of or arising from the said merger or consolidation). gains control of at least 75% or more in nominal value of the outstanding issued shares or paid-up capital of the transferee-assignee (in case the transferee-assignee is a corporation) or 75% or more interest in the business of the transferee-assignee (in case the transferee-assignee is other than a corporation). any BOI-registered enterprise enjoying income tax holiday pursuant to E.. however. 5. No. and/or 2000-2001 xxx 6. otherwise known as the Bases Conversion and Development Act of 1992. 7916.A. as a result of the transaction referred to in subsection 5. or the transferor.g. as amended. Entitlement to Net Operating Loss Carry-Over. show its NOLCO deduction. the stockholders of the transferor or the transferor. 1998 may be claimed as a NOLCO deduction. Provided. otherwise known as the Omnibus Investments Code of 1987. further. In order that compliance with this three-year statutory requisite may be effectively monitored.1 In General ² In general. in case of other business combinations. thereby resulting to the transfer or conveyance of the said net operating losses. such change shall be determined based on the ownership of the outstanding shares of stock issued or based on paid-up capital as of the end of the taxable year.2 (a) hereof. of months in 1998 ²²²²²²²²²²² 12 mos. as a . See Section 4 of these Regulations for further discussion). (a) When No Substantial Change Occurs ² No substantial change in ownership of the business occurs if. In the case of a corporation using a fiscal year accounting period as of the said dates whose result of operations for the fiscal year 1997-1998 shows a net operating loss. natural or juridical.6 In general. as amended. enjoying exemption from income tax. only net operating losses incurred beginning January 1. or Partly Exempt from Income Tax. in its income tax return. Determined as of the End of the Taxable Year ² The substantial change in the ownership of the business or enterprise shall be determined as of the end of the taxable year when NOLCO is to be claimed as deduction. 6. gains control of the aforesaid transferee-assignee only to the extent of less than 75%.g. Its accumulated net operating losses incurred or sustained during the said period shall not qualify for purposes of the NOLCO. that if per the taxpayer's final annual adjustment income tax return. with respect to its operation during the period for which the aforesaid exemption is applicable. only net operating losses incurred by a qualified taxpayer for the period beginning January 1.4 Quarterly and Annual Availment of NOLCO ² NOLCO shall be allowed as deduction in computing the taxpayer's income taxes per quarter and annual final adjustment income tax returns: Provided. covering FY 97-98 xxx NOLCO to be carried over to FYs 1998-1999. as amended.O. that the entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss. the entire operations for the year resulted to a net operating loss. or enjoying preferential tax treatment pursuant to the provisions of special laws. such net operating loss may be claimed as NOLCO deduction in the immediately succeeding taxable year: Provided. as a result of the said merger or consolidation or combination. 226. a corporation with a BOI-registered activity enjoying income tax holiday. incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. or Enjoying Preferential Tax Treatment Under Special Laws ² Net operating loss or losses incurred by any person who is exempt from income tax. or consolidation. that for mines other than oil and gas wells. the stockholders of the transferor. any person. Whether or not substantial change in ownership occurred shall be determined on the basis of any change in the ownership of interest in the said business or enterprise arising from or incident to its merger. as follows: NOLCO for the entire fiscal year (1997-1998) xxx Multiplied by the ratio of: No. to another person. 5..² 6. No. a net operating loss without the benefit of incentives provided for under Executive Order No. No. 1999-2000.2 Transitory Apportionment of NOLCO. in the case of merger or consolidation of two or more corporations. or combination with another person (e. 6. 7227.g. further. 226. any person enjoying preferential tax treatment pursuant to R.4. shall not be allowed a NOLCO deduction (e.3 Where Taxpayer is Exempt. however.. Provided. and other unregistered business activities not enjoying any BOI incentive) the net operating loss or losses sustained or incurred by the said BOI-enterprise from its registered activities shall not be allowed as NOLCO deduction from its gross income derived from the unregistered business activities. the taxpayer shall. in case of other business combinations. at all times. In case any of the aforementioned persons is engaged in both registered and unregistered business activities under any of the aforesaid laws (e. Determination of Substantial Change in the Ownership of the Business. in the course of the said merger or consolidation or combination. 1998 may be carried over to the next three (3) immediately succeeding taxable years following the year of such loss for purposes of the NOLCO deduction.

(Surrey and Warren. 1.679. (par. Thus. It is represented that PMI is a corporation established and organized under Philippine laws. the gain. Fifth Editions) No taxation event has as yet been consummated prior to the remittance of the scheduled amortization. the taxable year in which the net operating loss was sustained or incurred. pursuant to Sections 27 or 28 of the Code.e. the gain. Limited (Noritake) and Toyota Tsusho Corporation (Toyota) in the aggregate amounts of US $7. a ruling confirming your opinion that the foreign exchange loss incurred by PMI is a deductible loss in 1990. 6261) The loss is deductible only for . Jur. that in 1989. to be allowable the loss must be realized. drafts of the amended agreements were submitted to the Central Bank for pre-approval.17 and US $3. 144-85 Gentlemen : This refers to your letter dated July 1. 1989. a severance of the gain from the original capital invested in the property. 6261) The loss is deductible only for the year it is actually sustained. to be allowable the loss must be realized. The annual decrease in the value of property is not normally allowable as a loss. BIR RULING NO. such corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any taxable year. respectively. 1976 closed transaction is a taxable event which has been consummated (p. so that recoupment is reasonably impossible. that you are of the opinion that in the case of your client. 6. Provided. in detail. Presentation of NOLCO in Tax Return and Unused NOLCO in the Income Statement.636. 422-4) When foreign currency acquired in connection with a transaction in the regular course of business is disposed of ordinary gain or loss results from the fluctuations. 231 Black Law's Dictionary. The annual decline in the value of property is not normally allowable as a deduction. the resultant loss on conversion of US dollar denominated loans to peso is more than a shrinkage in value of money. Vol.27. that is. (Surre Warren. like under deduction of "losses. Hence. hence. that thereafter. 422-4) When foreign currency acquired in connection with a transaction in the regular course of business is disposed ordinary gain or loss results from the fluctuations. Vol. however. The same conclusion obtains as to losses.5 NOLCO in Relation to the Minimum Corporate Income Tax (MCIT) ² In general.e. that in June 1990. the parties submitted to the Central Bank the signed agreements. It is sustained during the year in which the loss occurs as evidenced by the completed transaction and as fixed by identifiable occurring in that year. the Central Bank advised your office on their findings and comments on the said drafts which were considered and incorporated in the final amended agreements. BIR RULING NO. whenever the amount of the MCIT is greater than the normal income tax due (computed with the benefit of NOLCO. the loss is no longer susceptible to change. 6570. and that having been fixed and determinable. The increase in value. that is. In reply. that it has existing US dollar loans from Noritake Company. if applicable. Federal Income Taxation (1950). computed based on gross income. In reply thereto. your request for confirmation of your aforesaid opinion is hereby denied considering that foreign exchange losses sustained as a result of conversion or devaluation of the peso vis-a-vis the foreign currency or US dollar and vice versa but which remittance of scheduled amortization consisting of principal and interests payment on a foreign loan has not actually been made are not deductible from gross income for income tax purposes. after which. the loss became final and irrevocable. that in December 1989." in general.. 206-90 Gentlemen : This refers to your letter dated June 25. domestic and resident foreign corporations subject to the normal income tax rate are liable to the 2% MCIT. The increase in value i.separate item of deduction. pp. it could fairly be stated that such has been sustained in a closed and completed transaction. 1. Federal Income Taxation (1950. The same conclusion obtains as to losses.671. In no case may NOLCO be claimed.. I have the honor to inform you that annual increase in value of an asset is not taxable income because such increase has not yet been realized. Porcelana Mariwasa. par. could only be taxed when a disposition of the property occurred which was of such a nature as to constitute a realization of such gain. Failure to comply with this requirement will disqualify the taxpayer from claiming the NOLCO. par. (PMI). 1990 requesting in behalf of your client. 1990. that the approval by the Central Bank and the signing by the parties of the agreements covering the said conversion established the loss. The losses arose from matured but unremitted principal repayments on loans affected by the debt restructuring program in the Philippines. as a part of the taxpayer's other itemized deductions. ² The NOLCO shall be separately shown in the taxpayer's income tax return (also shown in the Reconciliation Section of the Tax Return) while the Unused NOLCO shall be presented in the Notes to the Financial Statements showing. Hence. that on January 29. (Prentice-Hall Federal Taxes. the parties agreed to convert the said dollar denominated loans into pesos at the exchange rate prevailing on June 30. 1985 requesting a ruling as to whether foreign exchange losses which have accrued by reason of devaluation are deductible for income tax purposes. could only be taxed when a disposition of the property occurred which was of such a nature as to constitute a realization of such gain. Accordingly. a severance of the gain from the original capital invested in the property. both agreements were approved by the Central Bank subject to the submission of a copy each of the signed agreements incorporating the conversion. 34 Am. and any amount thereof claimed as NOLCO deduction within three (3) consecutive years immediately following the year of such loss. Inc.054. (Pr Hall Federal Taxes. i. pp. please be informed that the annual increase in value of an asset is not taxable income because such increase has not yet been realized. that 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. 2d. if any).

the amount whereof is insignificant and the collection of which through court action may be more costly to the taxpayer. ² In general. A mere recording in the taxpayer's books of account of estimated uncollectible accounts does not constitute a write-off of the said receivable. 1976) A closed transaction is a taxable event which has been consummated. 05-99 (Implementing Section 34(E) of the Tax Code of 1997 on the Requirements for Deductibility of Bad Debts from Gross Income) Definition of Terms. In no case may any bad debt deduction be allowed unless the facts pertaining to the money or property lent and its cancellation or write-off from the taxpayer's accounting records. may be written-off as bad debts even without conclusive evidence that the taxpayer's receivable from a debtor has definitely become worthless. "Actually charged off from the taxpayers books of accounts" ² This phrase means that the amount of money lent by the taxpayer (in the course of his business. If. Creditors do not have to wait until some turn of the wheel of fortune may bring their debtors into affluence. The determination of worthlessness in a given case must depend upon the particular facts and the circumstances of the case. but which remittance of scheduled amortization consisting of principal and interests payments on a foreign loan has not actually been made are not deductible from gross income for income tax purposes. or the assigning of the case for 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 bad debts. have been complied with by the taxpayer. . hence. the hope was shattered or appeared to have been unfounded. ² For purposes of these regulations. notes or certificates. The creditor may offer evidence to show some expectation that the debt would have been paid in the intervening years. he may not be unduly pessimistic. if any. The term includes bonds. The taxpayer may strike a middle course between pessimism and optimism and determine debts to be worthless in the exercise of sound business judgment based upon as complete information as is reasonably ascertainable. with interest coupons or in registered form. d. 6570. "Securities" ² shall mean shares of stock in a corporation and rights to subscribe for or to receive such shares. arising from money lent or from uncollectible amounts of income from goods sold or services rendered. 231 Black's Law Dictionary. the creditor would be entitled to defer the deduction on the ground that there was no genuine ascertainment of worthlessness. While a mere hope probably will not justify postponement of the deduction. in whole or in part. accounts receivable. ² General Rule. of amounts due the taxpayer by others. The Commissioner of Internal Revenue will consider all pertinent evidence. that the said receivable has been cancelled and written-off from the said taxpayer's books of account. Accordingly. viz: a. 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. 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. a showing of those facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. trade or profession) to his debtor had been recorded in his books of account as a receivable has actually become worthless as of the end of the taxable year. REVENUE REGULATIONS NO. the requisites for deductibility of bad debts are: (1) There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable. for example. "Actually ascertained to be worthless" ² In general. b. (par. It is sustained during the year in which the loss occurs as evidenced by closed and completed transaction and as fixed by identifiable events occurring in that year.. and that subsequently. Requisites for Valid Deduction of Bad Debts From Gross Income. 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. Thus. The taxpayer need not have perfect discernment. the following words and phrases shall have the following meaning. (3) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. US dollar. (p. Thus. Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment.g. and (5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. 36(B) of the Tax Code of 1997 . debentures. shall not be a valid basis for its deduction as a bad debt expense. Fifth Edition) No taxable event has as yet been consummated prior to the remittance of the scheduled amortization. "Bad debts" ² shall refer to those debts resulting from the worthlessness or uncollectibility. (2) The same must be connected with the taxpayer's trade. (4) The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year. c. he must ascertain and be able to demonstrate with reasonable degree of certainty the uncollectibility of the debt.the year it is actually sustained. securing the debt and the financial condition of the debtor in determining whether a debt is worthless. the creditor could show that during the years he attempted to collect the debt. business or practice of profession. 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. a debt is not worthless simply because it is of doubtful value or difficult to collect. or other evidence of indebtedness. issued by any corporation. including the value of the collateral. Before a taxpayer may charge off and deduct a debt. after having been determined that the same has actually become worthless. 34 Am Jur 2d. including those issued by a government or political subdivision thereof. 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. foreign exchange losses sustained as a result of devaluation of the peso vis-a-vis the foreign currency e. Good faith does not require that the taxpayer be an "incorrigible optimist" but on the other hand.

some taxpayers have vigorously protested the literal application of the said provision in the audit and investigation of their income tax liabilities. in lieu of requisite No. Guidelines For Applying Section 30(1). be tantamount to the imposition of additional 25% or 35% "surcharge" (equivalent to the normal corporate tax rates). The obvious purpose of this provision is to compel compliance with the requirements of Sections 54 and 93. however. provides: "(1) Additional requirement for deductibility of certain payments.1 Section 30 (1) of the National Internal Revenue Code. REVENUE MEMORANDUM ORDER NO.1/1 No withholding of creditable or final tax was made but the payee reported the income and the withholding agent/taxpayer pays during the original audit and investigation the surcharges. 3. 135 .3 In order to minimize audit controversies and to achieve uniformity in implementing the aforequoted provision of Section 30(1). are adequate to compel taxpayers/withholding agents to comply with the requirements of the withholding tax law and regulations. 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. The Rationale of Section 30(1) 2.1 An amount claimed as deduction on which a tax is supposed to have been withheld under Sections 54 and 93 shall be allowed if in the course of his audit and/or investigation. has to prove through clear and convincing evidence that the securities are in fact worthless. in case of corporations. 1. as amended by Batas Pambansa Blg. is not true in the case of banks or trust companies incorporated under the laws of the Philippines. a substantial part of whose business is the receipt of deposits.Exception: In the case of banks. allowance or disallowance of a deduction falling under the said paragraph of Section 30 shall be determined in accordance with the following guidelines.Any amount paid or payable which is otherwise deductible from. Batas Pambansa Blg. outright disallowance of deductions representing income payment for mere failure to withhold and remit will in effect. The bank though should still comply with requisites Nos. then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital. ² 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. Conversely. ² If securities. Tax Benefit Rule. . Sections 54 and 93 of this Code. 2. shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this section. shall ascertain the worthlessness and uncollectibility of the bad debts and it shall approve the writing off of the said indebtedness from the banks' books of accounts at the end of the taxable year. 1-4 as enumerated above before it can avail of the benefit of deduction. Securities Becoming Worthless. the loss resulting therefrom shall be considered as a loss from the sale or exchange of capital asset made on the last day of such taxable year.2 The abovequoted provisions of the Tax Code is frequently cited by Revenue Examiners in their reports of investigation to justify disallowances of certain expense and other itemized deductions for which the taxpayer is obliged to make a withholding under Sections 54 and 93 of the Code and implementing regulations.) Background 1. 1979 expanded the scope of the items of deductions subject to the requirement by including amounts taken into account in computing gross income for which depreciation or amortization may be allowed. this Revenue Memorandum Order is hereby issued to prescribe guidelines that shall be observed by revenue officers for allowing or disallowing items of deductions referred to in the said Section. or taken into account in computing gross income for which depreciation or amortization may be allowed under this section and Section 29 .1/2 No withholding of creditable or final tax was made and the recipient-payee failed to report the income on due date thereof.3 In order to minimize the onerous effect of literal application of Section 30(1). 125 which was approved September 7. 1978 added Section 30(1) to the Code (originally as paragraph (m) of Section 30) as an additional requirement for deductibility of itemized deductions representing income payments which are subject to withholding. however. 5 above. thru its Monetary Board. his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. 38-83 (Guidelines for Allowance of Deductions for Certain Income Payments Under Section 30 (1) of the Tax Code. interest and penalties incident to the failure to withhold the tax.2 Considering that the existing ad valorem (surcharges and interests). inclusive of surcharges. held as capital asset. interest and penalties incident to his failure to withhold. but the withholding agent pays during the original audit and investigation the amount supposed to have been withheld. if the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i. . 2. 2(b) hereof. as well as the specific penalties (fine and imprisonment). he realized a reduction of the income tax due from him on account of the said deduction.1 PD 1351 which became effective April 17. The taxpayer. Since the amounts otherwise deductible are substantial. however. the Bangko Sentral ng Pilipinas (BSP). as defined under Sec. where the result of his business operation was a net loss even without deduction of the bad debts written-off).e. the examiner discovers that: 3. Example: If in the year the taxpayer claimed deduction of bad debts written-off. " 1. hence. are ascertained to be worthless and charged off within the taxable year. not treated as receipt of realized taxable income. Also. 3. This rule.

Amounts to be assessed and paid under an agreement between bondholders or shareholders of a corporation. between two corporations more than 50 per cent in value of the outstanding stock of each of which is owned. ² Personal. are ordinarily capital expenditures. ancestors. by or for such individual. Capital expenditures. ² Any amounts paid for premiums on any life insurance policy covering the life of an officer or employee or of any person financially interested in the business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy are not deductible. are chargeable against the "corpus" of the estate and are not allowable deductions. such portion of the rent as is properly attributable to such office is deductible. the family of an individual shall include only his brothers and sisters (whether by the whole or half blood). inclusive of surcharges. ² No deduction is allowed in respect of losses from sales or exchanges of property. Alimony. Premiums paid for life insurance by the insured are not deductible. (Section 32 of the Code) SECTION 132.1/3 The withholding agent erroneously underwithheld the tax but pays during the original audit and investigation the difference in the amount supposed to have been withheld. whether said to be in consideration of services or otherwise." ² The law provides that the term "capital assets" shall be held to mean property held by the taxpayer (whether or not connected with his trade or business). to be used in a reorganization of the corporation. Expenses of the administration of an estate. and family expenses. interest and penalties. or callers in connection with his professional work (his place of business being elsewhere). between an individual and a corporation more than fifty per centum in value of the outstanding stock of which is owned. Commissions paid in selling securities are an offset against the selling price. no refund or credit arising from such re-allowance of a previously disallowed deduction shall be granted. of a character which is subject to the allowance for depreciation provided in subsection (f) of Section 30 of the Code. spouse. In the case of a corporation. Where the father is legally entitled to the services of his minor children. However. SECTION 121. or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. a taxpayer may charge such items against income in the year in which they are incurred. under the law applicable to such taxable year. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing the value of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its net income. he uses part of the house for his office. used in the trade or business. but incidentally receives his clients. Commissions paid in purchasing securities are a part of the cost of such securities. The term "capital asset" includes all classes of property not specifically excluded by Section 30(a). but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year. If however. a personal holding company or a foreign personal holding company. and lineal descendants. The amount expended for architect's services is part of the cost of the building. and an allowance paid under a separation agreement are not deductible from gross income. and executor's commissions. The exclusion from the term "capital assets" of property used in the trade or business of a taxpayer of a character which is subject to the allowance for depreciation provided in Section 30(f) of the Code is limited to property . but where such expenditures are limited to purely incidental expenses. Premiums on life insurance of employees. interest and penalties incident to such error. In the case of a professional man who rents a property for residential purposes. Losses from sales or exchanges of property. which remain the property of the person making the payments. directly or indirectly. attorney's fees. (e) Between the fiduciary of a trust and the fiduciary of another trust. patients. (d) Between a grantor and a fiduciary of any trust. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible. no part of the rent is deductible as a business expense. such as incorporation fees. living. living. SECTION 119. are investments of capital. The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense.3.2 Items of deductions disallowed due to non-compliance with Section 30 (1). if either one of such corporations with respect to the taxable year of the corporation preceding the date of the sale or exchange was. expenses for organization. ² No deduction from gross income may be made for any amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of the taxpayer's property. or property. (b) Except in the case of distributions in liquidation. Amounts expended for securing a copyright and plates. are investments of capital and not deductible for any purpose in return of income. are not allowable deductions in his return of income. SECTION 120. (c) Except in the case of distributions in liquidation. by or for the same individual. any allowances which he gives them. Personal. SECTION 122. the deficiency income tax assessment for which had been issued before the effectivity of this Revenue Memorandum Order may be allowed upon payment not later than May 15. but such payments may be added to the cost of its stock in the subsidiary. As used in Section 31. if the same person is a grantor with respect to each trust. or (f) Between a fiduciary of a trust and a beneficiary of such trust. attorney's fees and accountants' charges. such as court costs. 3. Definition of "capital assets. or for any amount expended in restoring property or in making good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is or has been made. and family expenses are not deductible. directly or indirectly ² (a) Between members of a family. 1984 of the withholding tax required and supposed to have been withheld and/or surcharges. directly or indirectly.

) In any case proper adjustment must be made in computing gain or loss from the exchange or sale of property for any depreciation or depletion sustained and allowable as deduction in computing net income. The nature and extent of the sales and the circumstances under which they were made should be considered. when its fair market value as of that date is in excess of its cost. or failure to keep records. 1913.A. if so. R. or in the case of property which should be included in the inventory. the limitations of Section 34(b) and (c) apply (such limitation may be inapplicable to a dealer in real estate. (See Illustration II.000 Fair Market Value Mar. Id. 1913 P10. 1. when its fair market value as of that date is in excess of its cost. not deducible.000 Excess of fair market value over amount realized. Prices received at forced sales or for small lots of property may be and often are no real indication of the value of the amount of property in question. No gain or loss is recognized in the case of property sold or exchanged (a) at more than cost but less than its fair market value as of March 1. 1913. What the fair market value of property was as of March 1. But in the case of property acquired before March 1. but. 1913 (See Illustration III. its latest inventory value. when its fair market value as of that date is lower than its cost the deductible loss is the excess of such fair market value over the amount realized therefor. the basis is the cost of such property.000 Sale Price P40. 1913 not taxable.used by the taxpayer in the trade or business at the time of the sale or exchange. not because land is subject to a depreciation allowance). SECTION 137. Basis for determining gain or loss from sale of property. ² To avoid complexity no adjustment has been made in these examples for depreciation or depletion. and sold or disposed of at more than cost but at less than its fair market value as of that date. Loss attributable to the period prior to March 1. Id. ILLUSTRATION II Cost P20.. If the taxpayer can not determine the cost of securities purchased prior to March 1. (Real property used in taxpayer's trade or business is no longer capital asset per Am. No gain or loss is recognized in the case of property acquired before March 1.. 82.000 Taxable gain P4. ILLUSTRATION I Cost P20. 1913. Id. destruction. 1913. In the case of property acquired before March 1.). or (b) at less than cost but at more than its fair market value as of March 1. Illustrations of the computation of gain or loss from the sale or exchange of property acquired prior to March 1. the deductible loss is the excess of such fair market value over the amount realized therefor. 1913. the value of the securities at the date of approximate date of acquisition may be used in determining the cost basis for purposes of computing the gain or loss from the sale of the securities. For instance. In the case of property acquired before March 1. To such gain or loss allocable to the land. 1913. Gains or losses from the sale or exchange of property used in the trade or business of the taxpayer of a character which is subject to the allowance for depreciation provided in Section 30(f) of the Code.000 Excess of amount realized over fair market value as of March 1. the amount of depreciation previously charged off by the taxpayer shall be deemed to be true depreciation sustained unless shown by clear and convincing evidence to be incorrect. will not be subject to the percentage provisions of Section 34(b) and losses from such transactions will not be subject to the limitation of losses provided in Section 30(c). is a question of fact to be established by evidence which will reasonably and adequately make it appear. 1913. the taxable gain is the excess of the amount realized therefor over such fair market value. no general rule can be stated for determining the cost value of such securities. when its fair market value as of that date is lower than its cost. Also in the case of property acquired before March 1.) SECTION 136. 1. Each case must be considered separately upon its own facts. 1913 P30. 1913. When the date or approximate date of acquisition is unknown. because of the loss. it is because he holds the land primarily for sale to customers in the ordinary course of his trade or business. ² For the purpose of ascertaining the gain or loss from the sale or exchange of property. Section 137 of these regulations).000 Sale Price P6. 1913. Id. sales from time to time of a small number of shares of stock is little indication of the value of a large or controlling interest in the corporation.). 1913. the gain to be included in gross income is the excess of the amount realized therefor over such fair market value. as distinguished from depreciable improvements upon the land. It has no application to gains or losses arising from the sale of real property used in the trade or business to the extent that such gain or loss is allocable to the land. (See illustration I.000 Fair Market Value Mar. (See Illustration IV. Gain attributed to the period prior to March 1. Id. 1913.000 Taxable gain P10. ILLUSTRATION III .

or inheritance. In the case of property acquired by gift. 1. In the case of property acquired by bequest.000 P60. Reason: A loss on whole transaction. or creation of a trust. 1913.000 P30.000 P6. 1913 P20.000 Reason: Loss on whole transaction. devise. and sold or disposed of at less than cost but at more than its fair market value as of that date. or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after death. the basis shall be the selling price and the fair market value of the property at the time the gift was made.000 Reason: Gain on whole transaction. ILLUSTRATION V Fair Market Value Mar. or inheritance. and (b) that has a market value. Sale of property acquired by devise. ² In computing the gain or loss from the sale or other disposition of property acquired by devise. or inheritance" as used herein includes (a) such property interests as the taxpayer has received as the result of a transfer.000 Taxable gain No taxable gain or deductible loss.1913. 1913.000 P10. 1939.000 Taxable gain No taxable gain or deductible loss. devise or inheritance. prior to March 1. the taxable gain or deductible loss from the sale or other disposition thereof shall be computed in accordance with sections 136 and 137 of these regulations. In the case of gifts made on or after July 1. the gain to be included in gross income is the excess of the selling price over the cost. 1913. bequests. SECTION 138. 1913. Sale of property acquired by gift. Where the fair market value as of March 1. 1913.000 Taxable gain P20. 1.000 Cost Sale Price P40.000 Cost Sale Price P10. Cost SECTION 139. 1913. bequest. is equal to or greater than the cost and the selling price is less than the cost.000 Cost Sale Price P40. 1. 1913 P20. ILLUSTRATION VI Fair Market Value Sale Price Taxable gain Mar.000 P10. The requirement that the property received in exchange must be "essentially different from the property disposed of" implies . Where the cost is equal to or greater than the fair market value as of March 1. 1913. or its fair market value as of March 1. and the selling price exceeds the cost. the basis shall be the fair market price or value of such property at the time of the death of the decedent. all of which is attributable to period subsequent to March 1. and (b) such property interest as the taxpayer has received as the result of the exercise by a person of a general power of appointment (1) by will. 1. The term "property acquired by bequest. No gain or loss is recognized in the case of property acquired before March 1. the value taken as a basis for gift tax purposes shall be considered as the fair market value in computing gain or loss from the sale or other disposition of the property. its value as appraised for the purpose of the inheritance tax shall be deemed to be its fair market value when acquired. or inheritance. if acquired prior thereto. all of which is attributable to period subsequent to March 1. Only actual loss sustained deductible. 1913. Reason: A gain on whole transaction.Fair Market Value Mar. ILLUSTRATION IV Fair Market Value Mar. ² In computing the gain or loss from the sale or other disposition of property acquired by gift. in contemplation of or intended to take effect in possession or enjoyment at or after death. ² Gain or loss arising from the acquisition and subsequent disposition of property is realized only when as the result of a transaction between the owner and another person the property is converted into other property (a) that is essentially different from the property disposed of. bequest. Exchange of property. 1913 P20. the deductible loss is the amount by which the cost exceeds the selling price.000 P10. which gain is attributed to period prior to March 1. devise. 1913 P20. determined in accordance with the next two preceding sections. which loss is attributable to period prior to March 1. DaIACS SECTION 140.

Basis of stock or securities acquired in "wash sales". by the difference. . If the property exchanged was acquired prior to March 1. the basis of the old share (P100) increased by P10. of the property exchange. 1913. No loss from the sale is recognized under Section 33 of the Code. 1-86 dated April 25.00. However. 1-86 makes no recognition of such factors as the nature of item traded. 1913. 1940. if such interest in the partnership was acquired prior to March 1. 1-86 and to cover taxation of Philippine branches and liaison offices of MNEs engaged in soliciting orders. 1940. If the partnership distributes its assets in kind and not in cash. Evidence as to the assets and liabilities of a corporation and as to its earnings may furnish definite indications of the market value of its stock. ² When a partner retires from a duly registered copartnership. or the partnership is dissolved. 1940. both having reasonable knowledge of the facts. on which the income tax has been paid. construction and other activities. Therefore. if a taxpayer owning ten shares of stock exchanges his stock certificate for a voting trust certificate. It is not. SECTION 141. SECTION 142. services contracts. RR 18-01 (See book) RMR 1-02 (See book) REVENUE AUDIT MEMORANDUM ORDER NO. for P80. what can be obtained for the property when the owner is under peculiar compulsion to sell or the purchaser to buy. both the cost as hereinbefore provided and the amount of such interest as of date. as the case may be. Service Contracts. the partner realizes gain or suffers loss according to the market value of the property received in liquidation. trading. between the price at which the stock or securities was acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of. to a partnership. however. 1940. The term "market value" means the fair value of the property in money as between one who wishes to purchase and one who wishes to sell. 01-95 (Audit Guidelines and Procedures on the Proper Determination of the Income Tax Liability of Philippine Branches and Liaison Offices of Multi-National Enterprises (MNEs) Engaged in Soliciting Orders. the facts as to such change or reorganization should be fully set forth in the next return of income. increased or decreased. which he sold January 15. Determination of gain or loss from the exchange of property. the basis of the old share (P100) decreased by P10. the excess of the price at which the old share was sold (P80) over the price at which the new share was acquired (P70). he realizes a gain or loss measured by the difference between the price received for his interest and the cost to him of his interest in the partnership including in such cost the amount of his share in any undistributed partnership net income earned since he became a partner on which the income tax has been paid. Readjustment of interest in a registered copartnership. The application of this rule may be illustrated by the following examples: EXAMPLE (1): A purchased a share of common stock of the X Corporation for P100 in 1936. he purchased a share of common stock of the same corporation for P90. ² In the sale or other disposition of stocks or securities the acquisition of which (or the contract or option to acquire which) resulted in the non deductibility of the loss from the sale or other disposition of substantially identical stock or securities the basis shall be the basis of the substantially identical stock so sold or disposed of. or any existing partnership is reorganized. SECTION 143.00. 1986 imposes income tax on the gross income generated from constructive trading and commission income derived from brokering activities of Philippines branches of MNEs engaged in trading activities. which he sold January 15. On January 1. Purchaser. Whereas RAMO No. plus the amount of the shares in any undistributed partnership net income earned since March 1. this Order is issued to revise RAMO No.that there must be a change in substance and not merely a change in form. Whenever a new partner is admitted. for P80. if any. ² The amount of income derived or loss sustained from an exchange of property is the difference between the market value at the time of the exchange of the property received in exchange and the original cost. the risk involved and participation of the local branch. nor is it a purely speculative value which an owner could not reasonably expect to obtain for the property although he might possibly be fortunate enough to do so. will trade. that is. no income is realized. he purchased a share of common stock of the same corporation for P70. On February 1.) I. Trading. that is. 1913. By way of illustration. "Market value" is the price at which a seller willing to sell at a fair price and a buyer willing to buy at a fair price. shall be ascertained and the taxable gain derived or the deductible loss sustained shall be computed as provided in Sections 136 and 137 of these regulations. Rationale Whereas Revenue Audit Memorandum Order (RAMO) No. Whereas the implementation of RAMO No. in order that the Commissioner of Internal Revenue may determine whether any gain or loss has been realized by any partner. purchases. 1-86 makes use of much approximations and estimates. or other basis. EXAMPLE (2): A purchased a share of common stock of the X corporation for P100 in 1936. see Sections 136 and 137 of these regulations. excess of the price at which the new share was acquired (P90) over the price at which the old share was sold (P80). (See Section 131 of these regulations). The basis of the new share is P90. The basis of the new share is P110. Construction and Other Activities in the Philippines. No loss from the sale is recognized under Section 33 of the Code.

Operating Income does not include non-operating and extraordinary items like interest expense. IV. (d) W/W Sales shall consist of domestic. V. Coverage a) This Order shall pay only to Philippine branches and liaison of Japanese trading firms which are members of the Sogo Shoshas and registered with the Japanese Chamber of Commerce and Industry (JCCI). III. including branch profit remittance. 3. service contracts. . 1986 which provides for the procedures for tax audit of Philippine branches or foreign corporation.With this Order. construction and other activities of the Philippine branches and liaison offices of MNEs will be ascertained using the following formula. this Order addresses taxation of construction and other activities by the same Philippine branches and liaison offices of MNEs as separate undertakings. directors and officers of the Philippine branch or liaison office and the Home Office. all branches and liaison offices and shall include the amount of indent transactions from which commissions are generated. c) the business activity of the MNE and how it relates to the activity of the local branch or liaison office and other branches or more than 50% owned or controlled subsidiaries dealing with the local company 2. b) Address the issue on the proper determination of the income tax liability of Philippine branches and liaison offices of MNEs pursuant to Section 43 of the National Internal Revenue Code (NIRC) wherein the Commissioner of Internal Revenue (CIR) is authorized to distribute. the content of this Order will apply only to income tax liabilities of Philippine branches and liaison offices of MNEs and will not affect the withholding. (e) Attribution rate shall mean a rate of 75% to be applied against formula. These shall also include imported materials and equipment of construction projects undertaken in the Philippines. Ascertain the mathematical accuracy and completeness of the income tax return. export. and also all other foreign trading companies similarly situated as determined by the Commissioner of Internal Revenue. financial statements and supporting schedules filed by the taxpayer. (c) Sales to the Philippines shall be defined as the aggregated amount of exports and offshore transactions to the Philippines by the Head Office. trading. d) Prescribed the minimum procedure required in the audit of the income tax liability of Philippine branches and liaison offices of MNEs. In implementing the above formula. Guidelines 1. no offsetting of losses from one line of business to the detriment of the other line of business shall be allowed. For solicitation and trading activities {(Worldwide Operating Sales to the Philippines attribution tax)} {( Income X Worldwide Sales X rate X rate )} For construction and other activities plus {(Net Income from construction and other activities X tax rate )} 2. c) Provide guidelines on implementation of policies on the proper determination of the income tax liability of Philippine branches and liaison offices of MNEs. II. b) the ownership. constructions and other activities becomes more practical. exchange profit/loss capital gains/losses or other income/loss not related not related to operation. purchases. In the application of the formula. extent of control. (h) Net income on all other activities shall consist of income such as branches and liaison offices of MNEs are engaged in. taxation of Philippine branches and liaison offices of MNEs engaged in soliciting orders. apportion or allocate gross income or deduction among organizations in order to clearly reflect the income of any such organization. the following terms shall be construed to mean as follows: (a) Worldwide (W/W) shall include head office accounts and those of branches located in difference countries but shall exclude subsidiary accounts. The Philippine income tax due from soliciting orders. import and offshore transactions which include nor only principal transactions but also indent transactions from which commissions are generated. trading. 1-86 dated April 25. but shall exclude local service income from construction projects or onshore income from local construction. Procedures 1. (b) W/W Operating Income shall include the Gross Income minus Selling General & Administrative expenses. other branches or more than 50% owned or controlled subsidiaries located outside the Philippines dealing with the local branch. (g) Net income on construction shall consist of local service income from construction projects income from construction projects less the costs associated with local construction projects including the cost of locally purchased materials equipment. At the same time. the Home Office. Objectives This Order is issued to: a) Amend and supersede RAMO No. (f) The tax rate to be applied shall be in accordance with Section 25(a) of the NIRC which is 35%. net of costs and expenses associated with such income. service contracts. purchaser. and business tax obligations of the same Philippine branches and liaison offices of MNEs which shall be subject to the provisions of the National Internal Revenue Code (NIRC). This would mean that the tax due from each line of business shall be computed independently from the other line of business. b) Furthermore. Request documents containing information on the nature of business transactions of the taxpayer as follows: a) the structure of the Philippine branch or liaison office. relationship. if any. easy and equitable.

5. At the end of the taxable period. NIRC). and in progressive prosecution of. purchases. Verify that only the supply of local/civil works (onshore portion) is included in computation of profit/loss on local construction project. service contracts opening offices. 5455). Request for a summary of Sales to the Philippines duly certified by an independent public accountant and authenticated by the Philippine Embassy or Consulate situated within the country where the Home Office of the MNE is located. the parties involved. Supply of Machinery and Equipment (Sometimes referred to as the "offshore portion") xx b. INC. The total contract price includes: a. like any other businesses. Segregate the income from exempt transactions from that of taxable transactions. or the exercise of some of the functions normally incident to. Review all Contracts and analyze the nature of the Contracts. Determine if costs and expenses corresponded only to the service portion of the project referred to in 11 above.2 Some branches engage in business in the Philippines by soliciting orders from local importers and relays this information to its head office abroad. 14. Determine the total contract price and composition of the project.A. For construction activities 8. The head office in turn solicits prospective exporters for a compensation. vs. For solicitation/trading activities 4. whether completed contract or the percentage of completion.1 Some branches of foreign corporations engage in business in the Philippines by soliciting orders from local importers. 2. are required by law to account for their business operations in accordance with generally accepted accounting practices (SEC. and contemplate to that extent the performance of acts or works. however. Request for presentation of copies of pertinent sales invoices. 1984). Legal Consequences 2. any other act or acts that imply a continuity of commercial dealings or arrangements. 11. whether called 'liaison' offices or branches. the total contract price. cda 1.2 These branch offices. 13. The branch in turn reports its purported share for income tax purposes but does not pay the commercial broker's tax thereon purportedly because the compensation was received from its head office and purportedly because the branch cannot be legally considered a commercial broker in relation to its head office since the branch and its head office possess only a single legal personality (PHILIPP BROTHERS OCEANIC. and check the correctness of take up in the books of accounts. the branch office simply reports for income tax purposes its purported share of the income generated from sales but the allocation of this purported share is left entirely at the discretion of its head office. These branches are called "liaison offices or branches. 5455 as business acts. COMMISSIONER OF INTERNAL REVENUE. CTA Case No. Supply of Labor/Civil Works (Sometimes referred to as the "onshore portion") xx ²² Total Contract Price xx ==== 12. March 8. 3140. Require the submission of financial statements exclusive for transactions dealing with construction and all other activities and have a certified public accountant render an opinion as to its fairness and conformity with accepted accounting standards.A. Obtain a copy of the Worldwide Financial Statement duly certified by an independent public accountant of the country which issues the financial statements and authenticated by the Philippine Embassy or Consulate situated within the country where the Home Office of the MNE is located. considered under generally accepted accounting practices as a . "'Doing business' shall include soliciting orders. freight and insurance coverages and other documents to verify Sales to the Philippines. 9. allocation of the compensation is left at the discretion of the head office ² the revenue service also left at the mercy of these multi-national companies. Again. The revenue service is completely at the mercy of multi-national companies. 10. . in this second situation.1 The foregoing scope of activities of these branch offices is considered under R. The Sales to the Philippine shall include the offshore portion of the local construction projects which includes the supply of machinery and equipment. commercial gain or of the purpose and object of the business organization." Sales made from such solicitations are not reported by these branches as their own sales purportedly because the branch office merely relays to its head office abroad purchase orders from local importers and it is purportedly its head office that actually consummates the sales. Verify correctness of Worldwide Operating Income and the Worldwide Sales figures against the financial statements obtained in 4 above. . Ensure that only expenses related to the activities above are included in the determination of the net income. At the end of the taxable period. 1 (1). bills of lading. Be aware of charging of income and expenses by mere book entries using the branch/home office account. if applicable. Determine method of accounting. the terms and conditions. Thus. on a test sampling basis. R. 38. 7. 6. . the head office allocates a certain portion of the compensation to its branch in the Philippines. a branch office although not possessing a separate and distinct juridical personality is. Verify that all income from other activities are included as part of the gross income 16. the payment and other pertinent information. 01-86 (Procedure for Tax Audit of Philippine Branches of Foreign Corporations) Background 1. For all other activities 15." (SEC. REVENUE AUDIT MEMORANDUM ORDER NO.3.

a separate business unit and should be "supplied by the home office with cash and merchandise and such other assets as may be needed" (Advance Accounting by Simons and Karrenbrock. .1 For constructive trading by branch office (a) Determine gross sales generated from branch's constructive trading (from solicitations made by the branch). tax laws. Commentaries and Jurisprudence on the Commercial Laws of the Philippines by Agbayani. 889-890." (FLETCHER. 293 US 465. . Under this paragraph. confusion of affairs . (ii) its share from compensation as allocated by its home office shall be subject to commercial broker gross receipts tax." (LIDDEL & CO. and (iv) pay income tax on its share of the compensation. is 20% and the gross constructive sales amounts to P1. the import taxes. Smith.000. Corporate fiction may be inquired upon where there is "inadequacy of capital .). 20. Vol. cited in Philipp Brothers Oceanic. . Under this paragraph. (e) Require the branch to reconcile computations of its constructive sales in the Philippines. 417-422). In this second type of operation: (i) the branch shall be considered "a commercial broker" or indentor. . and (iii) report for income tax purposes its net income therefrom. Vol. are not entrusted with the physical possession of the principal's goods when engaged to buy or sell. 596-599. 4th ed. Illustration: Assume that the gross profit ratio. v. . (ii) the branch shall record and report the gross selling price of commodities sold thru its home office.000 (d) Check from the records of the Bureau of Customs all shipments coming from the branch's home office during the taxable year in determining the branch's constructive sales in the Philippines. . Accordingly. courts will disregard the corporation or its entity.2 For broker activity by branch office (a) Verify veracity of the amount of compensation allocated to the branch by its home office.. based on worldwide statement of cost of sales. p. . p. relays the information to its home office. Higgins v.distinct character. 308 US 406 L. In this type of operation: (i) Sales purportedly consummated abroad by the home office shall be treated as sales constructively consummated in the Philippines and made by the branch office. the home office solicits prospective sellers abroad and eventually receives compensation for services rendered. Where a corporation is a dummy.1 The Philippine branch solicits purchase orders from local buyers. . they ought not to sell in their own names. . v." (ibid). ". . Generally accepted accounting practices also dictate that income and expenses of the branch shall be segregated from those of the home office in order to clearly reflect their respective operating results (ibid).000. Gross income therefrom shall be computed as follows: Gross sales P1. 1984). Rorhlick. relays the information to its home office abroad. Helvering. 1940. Hence. cdasia 2. and (ii) statement of cost of sales re worldwide operation of the entire corporation during the taxable year. Commentaries and Jurisprudence on the Commercial Laws of the Philippines by Agbayani. income therefrom shall be considered income from sources within the Philippines. 314." (8 Am. . ". have no implied authority to receive payment. . June 30. hence. 3. duties and charges have already been paid by the local buyers. . CTA Case No. They act as negotiators in bringing other persons together to bargain. ed. Inc. the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fiction.3 The doctrine on corporate fiction is not absolute ² the veil of corporate fiction may be legally pierced should it be used to subvert just application of laws. . the same shall not anymore be chargeable against the branch. 170-171. The Commissioner of Internal Revenue. L-9687. 21). This has been applied to violations of . 4. To allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of our tax laws. Where the corporate form or organization is adopted or a corporate entity is asserted in an endeavor to evade a statute or to modify its intent.. 3140. ed. cited in p. . Audit Procedure 4. generally. sales purportedly made directly by its home office shall be considered no more than merely a constructive supplying of the merchandise to its branch which eventually constructively sells the same to Philippine buyers. COLLECTOR OF INTERNAL REVENUE. these transactions are treated sales constructively consummated by the branch office in accordance with generally accepted accounting practices required under Section 38 of the Tax Code since the branch solicitations are actually trading acts. (b) Require the Philippine branch to submit duly authenticated (i) income statement.. March 8. 3.2 The branch solicits purchase orders from local buyers. citing Gregory v. is unreal or a sham and serves no business purposes and is intended only as a blind. and have no special property therein or lien thereon. Jur. Branch Operation and Consequences 3. 1970 ed. . the home office is obligated to supply its branch with merchandise in pursuing its trading business in the Philippines. (iii) the branch shall provide itself with the corresponding fixed tax as a commercial broker. the branch office shall be considered a commercial broker since its activities is well within the ambit of the term "broker".. (c) Extract the gross income generated from such constructive sales by applying against the gross constructive sales the gross profit rate shown in the cost of sale statement referred to in paragraph (b) (ii) above. 1970 ed. those who are engaged for others in the negotiation of contracts relative to property with the custody of which they have no concern. 202). and direct intervention in management causing inequitable results (Ballantine. and the home office purportedly directly makes the sale. Brokers are ". 3. . L. (iv) Since under this situation. . 1961.000. ".000 Gross income therefrom (20% G/P rate) P200.

an organization and functional chart of the home office and local branch should be secured. . . Withholding of Income Tax on Compensation. (c) Require the branch to pay the corresponding fixed tax as a commercial broker. " casia 1. . .1 Functional analysis ² At the start of investigation there should be a detailed examination of the functions performed both by the Home Office and the Local Branch.4 In implementing the above provision of the National Internal Revenue Code. this Revenue Audit Memorandum is issued. 2.(b) Require submission of sworn declaration from home office on the correctness of the allocated share of the branch office and cross check this declaration in connection with the branch records re extent of solicitations undertaken in the Philippines during the tax year.2 These deductions are difficult to verify because substantial amounts thereof are incurred in the head office or elsewhere and the corresponding supporting documents and books of accounts are not accessible to local taxing authorities. c. the functions themselves must be analyzed.Added Tax and Other Percentage Taxes. 2-98 issued May 17. 2.1998. For this purpose.3 As to the deductions which cannot be definitely allocated. b. Section 37(b) provides that from the gross income from sources within the Philippines ". Withholding of Creditable Value.1 In computing net income from sources within the Philippines. Background 1. and yet no adjustments are made on the allocation. (b) Is the same amount of Home Office expenses being allocated world-wide? In all instances. 1. 04-86 (Audit Guidelines in the Allocation of Home Office Overhead Expenses Under Section 37(b) of the National Internal Revenue Code. equipment and processes are needed? 2.32 Basis of pro-ration ² (a) Determine if the basis and method of pro-ration are being applied consistently from year to year. losses and other deductions properly allocated thereto and a ratable part of any expenses. or any other scheme of over-allocating costs to the Philippine branch.3 Heretofore only an audit certificate is presented to substantiate the deductions incurred abroad which are allocated and pro-rated to Philippine source gross income. be on the lookout for: a. 2. the claimed deduction properly allocable can now be determined by applying the tests of (a) relevance (necessary) to the local branch and (b) reasonable (ordinary) charges keeping always in mind the arm's length principle in transactions between related parties. Could anyone else perform these functions? How difficult are they? What skill. 1998. REVENUE REGULATIONS NO. Take note of deductions which are directly allocable to income earned outside the Philippines. based on its total share from compensation derived for services rendered in the Philippines.12 After having listed the functions performed by each entity. Charges applicable to newly opened foreign branches but are being claimed as deductions by the Philippine branch. 1998 prescribes the regulations to implement Republic Act (RA) No. together with an explanation of the nature of each expense. . and (e) Determine also the branch income tax obligation for the said income which is being considered income from sources within the Philippines. interests and losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot be definitely allocated to some items or class of gross income .) In order to avoid delay and conflict in the determination of Philippine sources taxable net income of foreign taxpayers for purposes of Philippine income tax. REVENUE AUDIT MEMORANDUM ORDER NO. the following are required: 2.11 The functions should be determined and then listed. Functions are being performed for some branches but not for others. 1. there shall be deducted the expenses.2 On the basis of the functional analysis. Said Regulations will take effect on compensation income paid beginning January 1. No penalties for noncompliance with the new features of the Tax Code will apply until May 15. Audit Procedure 2. there is a need for adequate and satisfactory proof and explanations in order that the claimed deductions of the foreign taxpayer may be allowed for income tax purposes. (d) Require the branch to pay the corresponding commercial broker's gross receipts tax. Who does what? What is required to do it? Who needs whom for what? 2.31 Breakdown or Schedule of Home or Foreign Office expenses being pro-rated. 8424 relative to the Withholding on Income subject to the Expanded Withholding Tax and Final Withholding Tax.

Sign up to vote on this title
UsefulNot useful