TAXATION I – Reviewer (Atty. Bolivar Notes) • [Impt!
] TAXATION INCLUDES TWO ASPECTS
SEC. 1. Title of the Code. - This Code shall be known as the National Internal
Revenue Code of 1997. (took effect on Jan. 1, 1998)
• INTERNAL REVENUE TAX – refers to taxes imposed by the legislature
other than duties on imports and exports (external revenue tax).
• REVENUE – refers to all funds or income derived by the government,
whether from tax or any other source (such as borrowed funds, income
from proprietary functions, regulatory fees and proceeds from sale of
government properties)
• [Impt!] NATURE OF INTERNAL REVENUE LAWS
1. They are not political in nature
2. Tax laws are civil and not penal in nature although there are penalties
(such as imprisonment & fine) provided for their violations.
• [Mem!] TAXATION is the act of levying a tax, the process or means by
which the sovereign, through its lawmaking body, raises income to defray
the necessary expenses of government.
As a power, taxation refers to the inherent power of the State (only the
gov’t has the inherent power of taxation, LGUs have no inherent power of
taxation because their power to tax is granted by the Constitution [Sec. 5,
Art. 10] and by the statute or law [LGC of 1991, Book 2]) to demand
enforced contributions for public purpose or purposes.
Thus, the tem “taxation” may be used to refer to either the power to tax or
the act or process by which the power is exercised, or to both.
• [Mem!] RATIONALE OF TAXATION is that gov’t is a necessity and
without taxes, the gov’t would be paralyzed for lack of the motive power to
activate and operate it.
• [Mem!] NATURE OF POWER OF TAXATION
1. The power of taxation is inherent in sovereignty (national government)
2. It is essentially a legislative function
3. It is subject to constitutional and inherent limitations (due process of
law)
• [Impt!] INHERENT LIMITATIONS
1. Territoriality, which requires that the person or property taxed must be
subject to the jurisdiction of the taxing State
2. International Comity, under which the property of a foreign State may
not be taxed by another
3. Exemption of governmental agencies from taxation
4. Prohibition against the delegation of legislative power
5. The levy of tax must be for a public purpose
1
1. Levying or imposition (by enacting a tax law) of the tax which is a
legislative act
2. Collection of the tax levied which is essentially administrative in
character (executive dept  BIR)
The processes together constitute the taxation system.
• [Mem!] BASIC PRINCIPLES OF A SOUND TAX SYSTEM
1. Fiscal adequacy, which means that the sources of revenue should be
sufficient to meet the demands of public expenditures
2. Equality or theoretical justice, which means that the tax burden should
be proportionate to the taxpayer’s ability to pay – ability to pay
principle
3. Administrative feasibility, which means that the tax laws should be
capable of convenient, just and effective administration
• [Mem!] TAX means an enforced and apportioned contribution usually
monetary in form, levied by the lawmaking body on persons and property
subject to its jurisdiction for the precise purpose of supporting gov’tal
needs.
• [Mem!] ESSENTIAL CHARACTERISTICS OF TAX
1. Enforced contribution
2. Payable in the form of money
3. Levied by some rule of apportionment usually based on ability to pay
(secondarily on the basis of benefits received)
4. Levied on persons, property or business, acts, transactions, right or
privileges.
5. Levied by the State which has jurisdiction over the object taxed
6. Levied by the lawmaking body of the State
7. Levied for public purposes
• [Mem!] CLASSIFICATIONS OF TAXES
1. National Taxes or those imposed by the national gov’t under the
NIRC and other laws particularly Tariff and Customs Code
2. Local or Municipal Taxes or those which LGUs may impose under
the LGC
• Life Blood Doctrine states that taxes are the lifeblood of the gov’t and
their prompt and certain availability is an imperious need. The following
rules or principles or legal provisions are based on lifeblood doctrine:
1. Set-off or compensation is NOT allowed
2. Gov’t is NOT stopped by the mistakes or errors of its agents
3. Courts are NOT allowed to restrain the collection of taxes
4. Summary remedies of distraint and levy
5. Tax exemptions are strictly construed against the person claiming
exemption
6. The commissioner or internal revenue is NOT required by law to decide
disputed assessments
• TAX IS A LEGAL OBLIGATION!
• [VVIP!] Taxes not generally subject to set-off – general rule, based on
grounds of public policy, is well-settled that no set-off or compensation is
admissible against demands for taxes levied for general or local purposes.
o The government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off
• When set-off of taxes allowed – the exception to the general rule
regarding set-off is where both the claims of the government (local gov’t
unit) and the taxpayer against each other have already become due and
demandable as well as fully liquidated (ascertain; computer with finality)
While the general rule in our jurisdiction is not to allow the set-off of
excess taxes paid against other taxes payable to the gov’t, the
Commissioner of Internal Revenue may grant the credit of taxes
erroneously or illegally paid pursuant to Section 204 (C), second
paragraph.
• [VIP!] Errors of tax officials not binding on the government – errors
of tax officers or officials of the gov’t do not bind the gov’t or prejudice its
right to collect the taxes legally due from taxpayers. The gov’t is never
stopped by the mistakes or errors on the part of its agents.
• [Impt!] The errors of certain administrative officers should never be
allowed to jeopardize the gov’t’s financial position. Taxes are the lifeblood
of the nation through which the gov’t agencies continue to operate and
with which the State effects its functions for the welfare of its constituents
and so should be collected without unnecessary hindrance or delay.
• SOURCES OF TAX LAW
1. Legislation
2. Administrative regulations and rulings or opinions of tax officials
3. Judicial decisions
• APPLICATION OF TAX LAWS – the general rule is that tax laws are
• [VIP!] CONSTRUCTION OF TAX LAW
1. Deliberation of Congress. Tax statutes are to receive a reasonable
construction with a view to carrying out their purpose and intent
2. Where there is doubt – in every case of doubt, tax statues (such as
certain provision of the tax law enumerating who are taxable) are
construed strictly against the gov’t and liberally in favour of the
taxpayer. Taxes, being burdens, are not to be extended by implication
or presumed beyond what the statute expressly declares.
3. The rule of strict construction as against the gov’t is not applicable
where the language of the tax statute is plain and there is no doubt as
to the legislative intent
o Tax law or tax provision is interpreted strictly against the gov’t
and liberally in favour of the taxpayer while tax exemption law
2
or provision is interpreted strictly against the taxpayer or person
claiming the exemption and liberally in favour of the gov’t.
4. Where taxpayer claims tax exemption – neither does the rule
(that the law shall be applied strictly against the gov’t and liberally in
favor of the taxpayer) apply where the taxpayer claims exemption
from the tax. Tax exemption provisions are construed or interpreted
strictly not against the gov’t but against the one who asserts the claim
of exemption, strictly against the taxpayer and liberally in favour of
the taxing authority.
Taxation is a destructive power which interferes with the personal
and property rights of the people and takes from them a portion of
their property for the support of the gov’t. However, since taxes are
what we pay for civilized society or are the lifeblood of the nation, the
law frowns against exemptions from taxation. They extend only so far
as the language of the law warrants, and all doubts are resolved in
favour of taxation.
5. EXEMPTION (example is Sec. 30) is an immunity or privilege; it is
freedom from a charge or burden to which others are subjected.
EXCLUSION (example is Section 32B) is the removal of otherwise
taxable items from the reach of taxation such as exclusions from gross
income and allowable deductions (Section 34). Exclusion is thus also
an immunity or privilege which frees a taxpayer from a charge to
which others are subjected. Consequently, the rule that the tax
exemption should be applied in strictissimi juris (strictly) against the
taxpayer and liberally in favour of the gov’t applies equally to tax
exclusions.
Tax refunds are also in the nature of tax exemptions (except if the tax
refund is the result of excessive payment of tax by reason of error in
mathematical computation) and are, therefore, to be construed strictly
against the claimant who has the burden of proving the factual basis of
his claim for refund.
prospective in operation. The reason is that the nature and amt of the tax
could not be foreseen and understood by the taxpayer at the time the
transaction, which the law seeks to tax, was completed.
o While it is not favoured, a statute may nevertheless operate
retroactively, provided, it is clearly the legislative intent (it is
expressly stated in the effectivity clause of the law; such as the
law is made retroactive as provided in the effectivity clause of the
law)
o The application of our tax laws is subject to the provisions of tax
treaties (tax laws are subordinated by the tax treaties or tax
treaties are superior than tax laws) entered into by the Philippines
with foreign countries
 • Construction of the NIRC
1. A Special Law – the Code being a special law, prevails over a general
law like the Civil Code, in case of conflict in their provisions
2. A General Law – the Tax Code may be considered a general law with
respect to other laws. Thus, it has been ruled that Sec 291 did not
repeal the tax incentives provisions of RA 7279 (Urban Development
and Housing Act of 1992) and RA 6657 (Comprehensive Agrarian
Reform Act of 1997) which are special laws in relation to the Tax Code.
It is settled that a general law cannot repeal a special law by
implication for the legislature is presumed to know all the laws on the
subject
3. Decisions of American Courts – many provisions of our Tax Code
are basically of American origin hence, decisions of American courts
have persuasive effect
• The general rule is that where a local rule is patterned or copied from
that of another country, then the decisions of the courts in such
country construing the rule are entitled to great weight in interpreting
the local rule.
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau
of Internal Revenue shall be under the supervision and control of the Department of
Finance and its powers and duties shall comprehend the assessment and collection
of all national internal revenue taxes, fees, and charges, and the enforcement of all
forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the
ordinary courts. The Bureau shall give effect to and administer the supervisory and
police powers conferred to it by this Code or other laws.
SEC. 3. Chief Officials of the Bureau of Internal Revenue. - The Bureau of
Internal Revenue shall have a chief to be known as Commissioner of Internal
Revenue, hereinafter referred to as the Commissioner and four (4) assistant chiefs
to be known as Deputy Commissioners.
TITLE 1
ORGANIZATION AND FUNCTION OF THE BIR
[Impt!] SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases. - The power to interpret (is this not a violation of the Principle
of Separation of Powers? NO, because the interpretations of the commissioner even
if reviewed & upheld by the Sec. of Finance are not binding to the courts) the
provisions of this Code and other tax laws administered by the BIR shall be under
the exclusive and original jurisdiction of the Commissioner, subject to review by the
Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees
or other charges, penalties imposed in relation thereto, or other matters arising
under this Code or other laws or portions thereof administered by the Bureau of
3
Internal Revenue is vested in the Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals (NOT the Secretary of Finance).
• Under the NIRC, it is the Secretary of Finance who promulgates rules and
regulations to implement the provisions of the NIRC upon the
recommendation of the CIR. Under the Tariff and Customs Code, it is the
Commissioner of Customs who promulgates rules and regulations to
implement the provisions of the TCC (Tariff & Customs Code)
• Interpretation of the Laws
o The power of the Commissioner of Internal Revenue to interpret
tax laws administered by the BIR is exclusive and original but
subject to review by the Secretary of Finance. Their
interpretations, while entitled to great weight, are not judicially
binding
o Revenue Regulations – are issuances signed by the Secretary of
Finance upon the recommendation of the Commissioner that
specify, prescribe or define rules and regulations for the effective
enforcement of the provisions of the Tax Code and relevant laws.
• JURISDICTION OVER TAX CASES
The power to decide (decisions of the CIR involving disputed assessments,
refunds, etc. are NOT subject to review by the Secretary of Finance but are
appealable to the CTA) administratively tax cases involving disputed
assessments, etc. is vested as well in the Commissioner subject to the
exclusive appellate jurisdiction of the CTA.
• Rulings of first impression – these refer to the rulings, opinions and
interpretations of the CIR with respect to the provisions of the Tax Code
and other tax laws without established precedents and which are issued in
response to a specific request for ruling field by a taxpayer with the BIR.
SEC. 5. Power of the Commissioner to Obtain Information, and to Summon,
Examine, and Take Testimony of Persons. - In ascertaining the correctness of
any return (or report), or in making a return when none has been made, or in
determining the liability of any person for any internal revenue tax, or in collecting
any such liability, or in evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record, or other data which may be relevant or
material to such inquiry;
(B) To obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subject to audit or investigation, or from any
office or officer of the national and local governments, government agencies
and instrumentalities, including the Bangko Sentral ng Pilipinas and
government-owned or -controlled corporations, any information such as, but
not limited to, costs and volume of production, receipts or sales and gross
incomes of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional
operating headquarters of multinational companies, joint accounts,
associations, joint ventures of consortia and registered partnerships, and their
members;
 (C) To summon the person liable for tax or required to file a return, or any officer
or employee of such person, or any person having possession, custody, or
care of the books of accounts and other accounting records containing entries
relating to the business of the person liable for tax, or any other person, to
appear before the Commissioner or his duly authorized representative at a
time and place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry; and
(E) To cause revenue officers and employees to make a canvass from time to
time of any revenue district or region and inquire after and concerning all
persons therein who may be liable to pay any internal revenue tax, and all
persons owning or having the care, management or possession of any object
with respect to which a tax is imposed.
[Impt!] The provisions of the foregoing paragraphs especially A
notwithstanding, nothing in this Section shall be construed as granting the
Commissioner the authority to inquire into bank deposits other than as
provided for in Section 6(F) (such as in the case of a decedent to determine
his gross estate) of this Code.
• GENERAL RULE: Commissioner may not see/examine bank accounts
EXCEPTION: Section 6(F)
SEC. 6. Power of the Commissioner to Make assessments and Prescribe
additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Returns and Determination of Tax Due. - After a return has
been filed as required under the provisions of this Code, the Commissioner or
his duly authorized representative (such as Revenue District Officer or
Regional Revenue Director) may authorize (the BIR Examiner) the
examination of any taxpayer and the assessment of the correct amount of
tax: Provided, however; That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.
The tax or any deficiency tax so assessed shall be paid upon notice and
demand from the Commissioner or from his duly authorized representative.
Any return, statement of declaration filed in any office authorized to receive
the same shall not be withdrawn: Provided, That within three (3) years from
the date of such filing, the same may be modified, changed, or amended:
Provided, further, That no notice for audit or investigation of such return,
statement or declaration has in the meantime been actually served upon the
taxpayer.
(B) Failure to Submit Required Returns, Statements, Reports and other
Documents. - When a report required by law as a basis for the assessment of
any national internal revenue tax shall not be forthcoming within the time
fixed by laws or rules and regulations or when there is reason to believe that
4
any such report is false, incomplete or erroneous, the Commissioner shall
assess the proper tax on the best evidence obtainable.
[Impt!] In case a person fails to file a required return or other document at
the time prescribed by law, or willfully or otherwise files a false or fraudulent
return or other document, the Commissioner shall make or amend the return
from his own knowledge and from such information as he can obtain through
testimony or otherwise, which shall be prima facie correct and sufficient for all
legal purposes.
(C) Authority to Conduct Inventory-taking, surveillance and to Prescribe
Presumptive Gross Sales and Receipts. - The Commissioner may, at any time
during the taxable year, order inventory-taking of goods of any taxpayer as a
basis for determining his internal revenue tax liabilities, or may place the
business operations of any person, natural or juridical, under observation or
surveillance if there is reason to believe that such person is not declaring his
correct income, sales or receipts for internal revenue tax purposes. The
findings may be used as the basis for assessing the taxes for the other
months or quarters of the same or different taxable years and such
assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and invoices in
violation of the requirements of Sections 113 and 237 of this Code, or when
there is reason to believe that the books of accounts or other records do not
correctly reflect the declarations made or to be made in a return required to
be filed under the provisions of this Code, the Commissioner, after taking into
account the sales, receipts, income or other taxable base of other persons
engaged in similar businesses under similar situations or circumstances or
after considering other relevant information may prescribe a minimum
amount of such gross receipts, sales and taxable base, and such amount so
prescribed shall be prima facie correct for purposes of determining the internal
revenue tax liabilities of such person.
(D) [Impt!] Authority to Terminate Taxable Period. - When it shall come to
the knowledge of the Commissioner that (1) a taxpayer is retiring from
business subject to tax, or (2) is intending to leave the Philippines or to remove
his property therefrom or to hide or conceal his property, or (3) is performing
any act tending to obstruct the proceedings for the collection of the tax for the
past or current quarter or year or to render the same totally or partly
ineffective unless such proceedings are begun immediately, the Commissioner
shall declare the tax period of such taxpayer terminated at any time and shall
send the taxpayer a notice of such decision, together with a demand request
for the immediate payment of the tax for the period so declared terminated
and the tax for the preceding year or quarter, or such portion thereof as may
be unpaid, and said taxes shall be due and payable immediately and shall be
subject to all the penalties (surcharge and interest) hereafter prescribed,
unless (not subject to penalties) paid within the time fixed in the demand
made by the Commissioner.
(E) [Impt!] Authority of the Commissioner to Prescribe Real Property Values. -
The Commissioner is hereby authorized to divide the Philippines into different
zones or areas and shall, upon consultation with competent appraisers both
from the private and public sectors, determine the fair market value of real
 properties located in each zone or area. For purposes of computing any
internal revenue tax (1. Capital Gains Tax; 2. Regular Income Tax on Real
Estate Business; 3. VAT; 4. DST; 5. Estate Tax; 6. Donor’s Tax) the value of
the real property shall be, whichever is the higher of:
(1) the fair market value as determined by the Commissioner, or
(2) the fair market value as shown in the schedule of values of the
Provincial or and City Assessors.
(F) [VVIP!] Authority of the Commissioner to inquire into Bank Deposit Accounts.
- Notwithstanding any contrary provision of Republic Act No. 1405 (Bank
Secrecy Law), Republic Act No. 6426, otherwise known as the Foreign
Currency Deposit Act of the Philippines and other general or special laws
(Central Bank Act & General Banking Law of 2000), the Commissioner is
hereby authorized to inquire into the bank deposits of:
(1) a decedent to determine his gross estate; and
(2) any taxpayer who has filed an application for compromise of his tax
liability under Sec. 204 (A) (2) of this Code by reason of financial
incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of
his tax liabilities on his claim that his financial position demonstrates a clear
inability to pay the tax assessed, his application shall not be considered
unless and until he waives in writing his privilege under Republic Act No.
1405, Republic Act No. 6426, otherwise known as the Foreign Currency
Deposit Act of the Philippines, or under other general or special laws, and
such waiver shall constitute the authority of the Commissioner to inquire into
the bank deposits of the taxpayer.
(3) A specific taxpayer (such as person who has committed violation of
Anti-money Laundering Act or Law of a Foreign Country) or taxpayers
subject of a request for the supply of tax information from a foreign tax
authority (such as Internal Revenue Services of USA) pursuant to an
international convention or agreement on tax matters to which the
Philippines is a signatory or a party of: Provided, That the information
obtained from the banks and other financial institutions may be used by
the Bureau of Internal Revenue for tax assessment, verification, audit
and enforcement purposes.
In case of request from a foreign tax authority for tax information held
by banks and financial institutions, the exchange of information shall be
done in a secure manner to ensure confidentiality thereof under such
rules and regulations as may be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
The Commissioner shall provide the tax information obtained from banks
and financial institutions pursuant to a convention or agreement upon
request of the foreign tax authority when such requesting foreign tax
authority has provided the following information to demonstrate the
foreseeable relevance of the information to the request:
5
(i.) The identity of the person under examination or investigation;
(ii.) A statement of the information being sought including its nature
and the form in which the said foreign tax authority prefers to
receive the information from the Commissioner;
(iii.) The tax purpose for which the information is being sought;
(iv.) Grounds for believing that the information requested is held in the
Philippines or is in the possession or control of a person within the
jurisdiction of the Philippines;
(v.) To the extent known, the name and address of any person
believed to be in possession of the requested information;
(vi.) A Statement that the request is in conformity with the law and
administrative practices of the said foreign tax authority, such
that if the requested information was within the jurisdiction of the
said foreign tax authority then it would be able to obtain the
information under its law or in the normal course of administrative
practice and that it is conformity with a convention or
international agreement; and
(vii.) A statement that the requesting foreign tax authority has
exhausted all means available in its own territory to obtain the
information, except those that would give rise to disproportionate
difficulties.
The Commissioner shall forward the information as promptly as possible
to the requesting foreign tax authority. To ensure a prompt response, the
Commissioner shall confirm receipt of a request in writing to the
requesting tax authority and shall notify the latter of deficiencies in the
request, if any, within sixty (60) days from the receipt of the request.
If the Commissioner is unable to obtain and provide the information
within ninety (90) days from the receipt of the request, due to obstacles
encountered in furnishing the information or when the bank or financial
institution refuses to furnish the information, he shall immediately inform
the requesting tax authority of the same, explaining the nature of the
obstacles encountered or the reasons of refusal.
The term 'foreign tax authority', as used herein, shall refer to the tax
authority or tax administration of the requesting State under the tax
treaty or convention to which the Philippines is a signatory or a party of.
(G) Authority to Accredit and Register Tax Agents. - The Commissioner shall
accredit and register, based on their professional competence, integrity and
moral fitness, individuals and general professional partnerships and their
representatives who prepare and file tax returns, statements, reports,
protests, and other papers with or who appear before, the Bureau for
taxpayers. Within one hundred twenty (120) days from January 1, 1998, the
Commissioner shall create national and regional accreditation boards, the
members of which shall serve for three (3) years, and shall designate from
among the senior officials of the Bureau, one (1) chairman and two (2)
 members for each board, subject to such rules and regulations as the
Secretary of Finance shall promulgate upon the recommendation of the
Commissioner.
Individuals and general professional partnerships and their representatives
who are denied accreditation by the Commissioner and/or the national and
regional accreditation boards may appeal such denial to the Secretary of
Finance, who shall rule on the appeal within sixty (60) days from receipt of
such appeal. Failure of the Secretary of Finance to rule on the Appeal within
the prescribed period shall be deemed as approval of the application for
accreditation of the appellant.
(H) Authority of the Commissioner to Prescribe Additional Procedural or
Documentary Requirements. - The Commissioner may prescribe the manner
of compliance with any documentary or procedural requirement in connection
with the submission or preparation of financial statements accompanying the
tax returns.
• [Mem!] Assessment is a written notice to a taxpayer to the effect that the
amount stated therein is due as a tax, and containing a demand for the
payment thereof
• [VIP!] A distinction must be made between a proposed assessment
(preliminary assessment) and a formal or official assessment (final
assessment). The first notifies the taxpayer of the findings of the examiner
who recommends a deficiency assessment. The taxpayer is usually given
15 days [page 522, Vol. II] from notice within which to explain his side. If
the taxpayer fails to respond to the notice or proposed assessment, or his
explanation is not satisfactory to the Commissioner, then the BIR issues an
official statement.
• Jeopardy Assessment is a delinquency tax assessment made without the
benefit of complete or partial audit or investigation by an authorized
revenue officer – when it finds itself without enough time to conduct an
appropriate or thorough examination in view of the impending expiration of
the prescriptive period for assessment (3 years). It is issued only to comply
with the period of issuing a valid assessment.
• An assessment is not an action (filing a collection case in court) or
proceeding (distraint or levy; personal property is seized) for the collection
of taxes.
o It is merely a written notice to the effect that the amt stated
therein is due as a tax and a demand for the payment thereof. It
is only a preliminary step but essential to warrant of distraint or
levy, if this is feasible, and also to establish a cause for judicial
action. Without assessment, there is no obligation on the part of
the taxpayer, enforceable in an action, to pay.
o [VVIP!] Such assessment (formal or official or final [which is
disputable as compared to a prelim assessment where there is
only a need for a reply]) may be protested administratively by
filing a request (or Motion or Petition) for reconsideration or
reinvestigation or recomputation within 30 days from receipt of
6
the assessment. Within 60 days from filing of the protest, all
relevant supporting documents shall have been submitted (the
relevant supporting documents may be submitted together with
the protest or within 60 days from the filing of said protest, at the
option of the taxpayer); otherwise, the assessment shall become
final.
• All presumptions are in favour of the correctness of tax assessments:
1. In order to stand the test of judicial scrutiny, the assessment must be
based on actual facts
2. The good faith of tax assessors and the validity of their actions are
presumed. They will be presumed to have taken into consideration all
the facts to which their attention was called
3. The taxpayer shall be informed in writing (in the formal letter of
demand and assessment notice) of the law and the facts on which the
assessment is made; otherwise, the same shall be void.
• [Impt!] Even an assessment based on estimates is prima facie valid and
lawful where it does not appear to have been arrived at arbitrarily or
capriciously.
o The burden of proof is upon the complaining taxpayer to show
clearly that the assessment is erroneous in order to relieve himself
of it
o In the absence of accounting records, the taxpayers’ tax liability
may be determined by estimate under the “best evidence rule”
based on records of other taxpayers engaged in the same line of
business. Under this procedure, the gross profit and net profit
ratios of other taxpayers engaged in the same line of business
may be used in estimating the taxpayer’s gross profit from sales
and net taxable income.
o A tax assessment that has become final, executor and enforceable
for failure of the taxpayer to assail (or to protest or to contest) the
same as provided in Section 228 (within 30 days from receipt of
the Official or Final or Faormal Assessment Notice) can no longer
be contested
• The authority to make assessments of internal revenue taxes is vested in
the CIR
o The authority may be delegated to subordinate officers (such as
BIR examiners). An assessment (preliminary) made by a
subordinate officer has the same force and effect as that issued by
the Commissioner himself, if not reviewed or revised by the latter.
However, the Commissioner cannot delegate the power to make
final assessments (THIS IS WRONG! See Section 7 – not included
in the exceptions) to his subordinates as he himself is the only
one entrusted by law to make final assessments
o There must be a grant of authority before any revenue officer can
conduct an examination or issue an assessment. He cannot extend
his examination or assessment beyond the period covered by the
Letter of Authority (to be issued by the Revenue Regional
Director; to be shown as proof)
• [Impt!] Necessity of Assessment
1. Taxes are generally self-assessing because they do not need a letter of
demand or assessment notice. The taxpayer is supposed to know how
much he should pay as tax and when and where he should pay
2. Assessment is required:
a. In case of deficiency taxes for failure to file a return or for
filing a false or fraudulent return
b. When the tax period is terminated
3. [VVIP!] An assessment of a tax deficiency is not necessary to a
criminal prosecution for tax evasion (Sec. 222a). the crime is complete
when the violator has knowingly and wilfully filed a fraudulent return
with intent to evade and defeat the tax [Ungab v Cusi 97 SCRA 877,
1980 (Landmark Case); see, however, Annotation to Secs. 228 and
254 Fortune Tobaco Case] (The penalty for tax evasion is fine from
Php 30,000.00 to Php 100,000.00 and imprisonment from 2 to 4 yrs
and such penalty does not depend on the amt of tax deficiency)
4. There is no need for precise computation and formal assessment in
order for a criminal complaint to be filed in court against taxpayer.
Section 222(a) of the Tax Code provides that in the case of a false of
fraudulent return with intent to evade tax or a failure to file a return,
the tax may be assessed, or a proceeding in court (including criminal
action for tax evasion) for the collection of such tax may be begun
without assessment, at any time within 10 yrs after the discovery of
the falsity, fraud or omission. The perpetration of the crime is
grounded upon knowledge on the part of the taxpayer that he has
made an inaccurate return, and the gov’t’s failure to discover the error
and promptly to assess has no connection with the commission of the
crime
• [VVIP!] Reconsideration or Reinvestigation or Recomputation of
disputed assessment
1. A taxpayer’s letter asking for a reconsideration of the questioned
assessment cannot be considered as one disputing the assessment
where the taxpayer who asked for a period of 30 days within which to
submit a position paper failed to substantiate his claim that the
deficiency assessment was contrary to law by submitting said position
paper. Such a letter (the taxpayer must have filed a motion or petition
or request for reconsideration or reinvestigation or recomputation and
must have submitted the relevant supporting documents to
substantiate his allegation) is nothing but a mere scrap of paper
2. [Mem!] A decision on a request for reconsideration or reinvestigation is
not a condition precedent to the filing of an action for collection of
taxes already assessed. Nowhere in the Tax Code is the Commissioner
of Internal Revenue required to rule (or to decide) first on such a
request (Sec. 228, last paragraph). On the contrary, Section 218
withholds from ordinary courts (only the CTA has authority to enjoin
the collection of NIR taxes, in its appellate jurisdiction) the authority to
7
restrain the collection of any national internal revenue tax, fee or
charge
3. [VVIP!] Here, however, the taxpayer has disputed the tax assessment
at the opportune time (within 30 days from receipt of the Official or
Formal or Final Assessment notice), the Commissioner cannot ignore
the disputed assessment by immediately bringing an action to collect
(The implication is that the CIR must first decide the disputed
assessment before he can file a collection case in court which is NOT
correct because the law does not require him to decide or rule on
disputed assessments. Even if the taxpayer has disputed the
assessment the CIR may file a collection case before the MTC or RTC
or CTA, depending on the amt, without first deciding the protest and
the filing o the collection case is deemed a denial of the protest which
is appealable to the CTA. The appeal to the CTA must be filed within
30 days from receipt of summons from the court where the collection
case was filed and said court loses jurisdiction over the collection
case). Payment of taxes being admittedly a burden, taxpayers should
not be deprived of the remedy of appeal to the CTA, which right to
appeal runs only from the receipt of its decision.
4. A taxpayer’s right to contest assessments, particularly the right to
appeal to the CTA, may be waived or lost. The requirement for the
Commissioner to rule on disputed assessments (there is NO such
requirement under Section 228, last paragraph) before bringing an
action for collection is applicable only where the assessment was
actually disputed, adducing reasons in support thereto. Where the
taxpayer did not actually contest the assessment by stating the basis
thereof, the Commissioner need not rule on his request (Dayrit v Cruz,
1998 decision)
5. The filing of a civil suit for collection of the taxes due constitutes a final
denial of the taxpayer’s request for reconsideration of the tax
assessment (Adamson v CTA, 2009 decision)
• If pre-assessment notice is not responded to protested within the
prescribed period (15 days), the reviewing office shall then issue a letter of
demand and assessment notice (official or formal or final) to the taxpayer
• Authority to Cancel Assessment – the Authority to Cancel Assessment
(ATCA) shall be issued whenever an assessment is cancelled or when a
previously assessed deficiency tax is reduced as a result of a
reinvestigation or a reconsideration requested by the taxpayer
• Termination Letter – the approving officer shall issue a Termination
Letter to the taxpayer in the following cases:
1. Where the deficiency tax is paid immediately after investigation and
the review yields no discrepancy
2. Where the deficiency assessment is paid after issuance of the pre-
assessment notice but before issuance of final assessment notice
3. Where the deficiency assessment is paid within 30 days from issuance
of assessment notice (official or formal or final) and letter of demand

• Grounds for suspension or temporary closure of business
1. Failure to issue receipts or invoices by a VAT-registered or registerable
taxpayer
2. Failure to file VAT return
3. Understatement of taxable sales or receipts by 30% or more of the
correct amount
4. Failure to register
SEC. 7. Authority of the Commissioner to Delegate Power. - The
Commissioner may delegate the powers vested in him under the pertinent
provisions of this Code (Sections 4-6, Powers of Commissioner of Internal Revenue)
to any or such subordinate officials with the rank equivalent to a division chief or
higher, subject to such limitations and restrictions as may be imposed under rules
and regulations to be promulgated by the Secretary of finance, upon
recommendation of the Commissioner: Provided, however, That the following
powers of the Commissioner shall not be delegated: [Mem!]
(A) The power to recommend the promulgation of rules and regulations by the
Secretary of Finance;
(B) The power to issue rulings of first impression (no established precedent
yet) or to reverse, revoke or modify any existing ruling of the Bureau;
(C) The power to compromise (to reduce tax liability) or abate (to cancel
entirely tax liability) , under Sec. 204 (A) and (B) of this Code, any tax
liability: Provided, however, That assessments issued by the regional offices
involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or
less, and minor criminal violations, as may be determined by rules and
regulations to be promulgated by the Secretary of finance, upon
recommendation of the Commissioner, discovered by regional and district
officials, may be compromised by the a regional evaluation board which shall
be composed of the Regional Director as Chairman, the Assistant Regional
Director, the heads of the Legal, Assessment and Collection Divisions and the
Revenue District Officer having jurisdiction over the taxpayer, as members;
and
(D) The power to assign or reassign internal revenue officers to establishments
where articles subject to excise tax (such as Cigars and Cigarettes and Wines
and Liquors and Distilled Spirits) are produced or kept.
• Abatement, cancellation or compromise of tax liability – the power to
abate or cancel a tax liability or any portion is exercised exclusively by the
Commissioner (EXCEPT if the amt of the basic deficiency tax is Php
500,000.00 or less and minor criminal violations which can be
compromised by the regional evaluation board), Internal Revenue Officers
may only recommend.
8
SEC. 8. Duty of the Commissioner to Ensure the Provision and Distribution
of forms, Receipts, Certificates, and Appliances, and the Acknowledgment
of Payment of Taxes.-
(A) Provision and Distribution to Proper Officials. - It shall be the duty of the
Commissioner, among other things, to prescribe, provide, and distribute to
the proper officials the requisite licenses internal revenue stamps, labels all
other forms, certificates, bonds, records, invoices, books, receipts,
instruments, appliances and apparatus used in administering the laws falling
within the jurisdiction of the Bureau. For this purpose, internal revenue
stamps, strip stamps and labels shall be caused by the Commissioner to be
printed with adequate security features.
Internal revenue stamps, whether of a bar code or fusion design, shall be
firmly and conspicuously affixed on each pack of cigars and cigarettes subject
to excise tax in the manner and form as prescribed by the Commissioner,
upon approval of the Secretary of Finance.
(B) Receipts for Payment Made. - It shall be the duty of the Commissioner or his
duly authorized representative or an authorized agent bank to whom any
payment of any tax is made under the provision of this Code to acknowledge
the payment of such tax, expressing the amount paid and the particular
account for which such payment was made in a form and manner prescribed
therefor by the Commissioner.
SEC. 9. Internal Revenue Districts. - With the approval of the Secretary of
Finance, the Commissioner shall divide the Philippines into such number of revenue
districts as may form time to time be required for administrative purposes. Each of
these districts shall be under the supervision of a Revenue District Officer.
SEC. 10. Revenue Regional Director. - Under rules and regulations, policies and
standards formulated by the Commissioner, with the approval of the Secretary of
Finance, the Revenue Regional director shall, within the region and district offices
under his jurisdiction, among others:
(A) Implement laws, policies, plans, programs, rules and regulations of the
department or agencies in the regional area;
(B) Administer and enforce internal revenue laws, and rules and regulations,
including the assessment and collection of all internal revenue taxes, charges
and fees.
(C) [Impt!] [DO NOT READ!] Issue Letters of authority for the examination of
taxpayers within the region;
(D) Provide economical, efficient and effective service to the people in the area;
(E) Coordinate with regional offices or other departments, bureaus and agencies
in the area;
(F) Coordinate with local government units in the area;

(G) Exercise control and supervision over the officers and employees within the
region; and
(H) Perform such other functions as may be provided by law and as may be
delegated by the Commissioner.
• Subsection (C) which transfers the power to issue Letters of Authority for
the examination of taxpayers from the Revenue District Officer to the
Revenue Regional Director.
SEC. 11. Duties of Revenue District Officers and Other Internal Revenue
Officers. - It shall be the duty of every Revenue District Officer or other internal
revenue officers and employees to ensure that all laws, and rules and regulations
affecting national internal revenue are faithfully executed and complied with, and to
aid in the prevention, detection and punishment of frauds of delinquencies in
connection therewith.
It shall be the duty of every Revenue District Officer to examine the efficiency of all
officers and employees of the Bureau of Internal Revenue under his supervision,
and to report in writing to the Commissioner, through the Regional Director, any
neglect of duty, incompetency, delinquency, or malfeasance in office of any internal
revenue officer of which he may obtain knowledge, with a statement of all the facts
and any evidence sustaining each case.
SEC. 12. Agents and Deputies for Collection of National Internal Revenue
Taxes. - The following are hereby constituted agents of the Commissioner:
(A) The Commissioner of Customs and his subordinates with respect to the
collection of national internal revenue taxes on imported goods;
(B) The head of the appropriate government office and his subordinates with
respect to the collection of energy tax; and
(C) Banks duly accredited by the Commissioner with respect to receipt of
payments internal revenue taxes authorized to be made thru bank.
Any officer or employee of an authorized agent bank assigned to receive internal
revenue tax payments and transmit tax returns or documents to the Bureau of
Internal Revenue shall be subject to the same sanctions and penalties prescribed in
Sections 269 and 270 of this Code.
• The gov’t may not entrust the collection of unpaid or delinquent taxes
which is done by public officers in their official capacities, to private
collection agencies (except banks under Sec. 12 (c))
SEC. 13. Authority of a Revenue Offices. - subject to the rules and regulations
to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a Revenue Officer assigned to perform assessment functions in any
district may, pursuant to a Letter of Authority issued by the Revenue Regional
9
Director, examine taxpayers within the jurisdiction of the district in order to collect
the correct amount of tax, or to recommend the assessment of any deficiency tax
due in the same manner that the said acts could have been performed by the
Revenue Regional Director himself.
SEC. 14. Authority of Officers to Administer Oaths and Take Testimony. -
The Commissioner, Deputy Commissioners, Service Chiefs, Assistant Service Chiefs,
Revenue Regional Directors, Assistant Revenue Regional Directors, Chiefs and
Assistant Chiefs of Divisions, Revenue District Officers, special deputies of the
Commissioner, internal revenue officers and any other employee of the Bureau
thereunto especially deputized by the Commissioner shall have the power to
administer oaths and to take testimony in any official matter or investigation
conducted by them regarding matters within the jurisdiction of the Bureau.
[Impt!] SEC. 15. Authority of Internal Revenue Officers to Make Arrests and
Seizures. - The Commissioner, the Deputy Commissioners, the Revenue Regional
Directors, the Revenue District Officers and other internal revenue officers shall
have authority to make arrests and seizures for the violation of any penal law, rule
or regulation administered by the Bureau of Internal Revenue. Any person so
arrested shall be forthwith brought before a court, there to be dealt with according
to law.
• [VIP!] The previous issuance of a warrant of arrest or seizure by a court is
not required provided such arrest or and seizure is limited to violations of
any penal law or regulation administered by the BIR committed within the
view (Plain View Doctrine) of internal revenue officers or employees
• Revenue agents have no authority to search, without a warrant, a business
establishment for supposedly fraudulent records. But they are empowered
to seize said records, discovered in the course of their investigation,
pursuant to Section 15
SEC. 16. Assignment of Internal Revenue Officers Involved in Excise Tax
Functions to Establishments Where Articles subject to Excise Tax are
Produced or Kept. - The Commissioner shall employ, assign, or reassign internal
revenue officers involved in excise tax functions, as often as the exigencies of the
revenue service may require, to establishments or places where articles subject to
excise tax are produced or kept: Provided, That an internal revenue officer assigned
to any such establishment shall in no case stay in his assignment for more than two
(2) years, subject to rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
SEC. 17. Assignment of Internal Revenue Officers and Other Employees to
Other Duties. - The Commissioner may, subject to the provisions of Section 16
and the laws on civil service, as well as the rules and regulations to be prescribed
by the Secretary of Finance upon the recommendation of the Commissioner, assign
or reassign internal revenue officers and employees of the Bureau of Internal
Revenue, without change in their official rank and salary, to other or special duties
connected with the enforcement or administration of the revenue laws as the
exigencies of the service may require: Provided, That internal revenue officers
assigned to perform assessment or collection function shall not remain in the same
assignment for more than three (3) years; Provided, further, That assignment of
internal revenue officers and employees of the Bureau to special duties shall not (E) Excise taxes; (like wine and liquor)
exceed one (1) year. (F) Documentary stamp taxes; and
(G) Such other taxes as are or hereafter may be imposed and collected
SEC. 18. Reports of Violation of Laws. - When an internal revenue officer by the Bureau of Internal Revenue.
discovers evidence of a violation of this Code or of any law, rule or regulations
administered by the Bureau of Internal Revenue of such character as to warrant the • Custom duties, fees and other charges are governed by the Tariff and
institution of criminal proceedings, he shall immediately report the facts to the Customs Code. They are also national taxes BUT NOT internal revenue
Commissioner through his immediate superior, giving the name and address of the taxes
offender and the names of the witnesses if possible: Provided, That in urgent cases,
the Revenue Regional director or Revenue District Officer, as the case may be, may
send the report to the corresponding prosecuting officer in the latter case, a copy of • The provisions of any special or general law to the contrary
his report shall be sent to the Commissioner. notwithstanding, all tax and duty incentives granted to gov’t and private
entities are hereby withdraw EXCEPT:
SEC. 19. Contents of Commissioner's Annual Report. - The Annual Report of 1. Covered by the non-impairment clause of the Constitution
the Commissioner shall contain detailed statements of the collections of the Bureau 2. Conferred by effective international agreements
with specifications of the sources of revenue by type of tax, by manner of payment, 3. Enjoyed by enterprises registered with: (1) the Board of Investments;
by revenue region and by industry group and its disbursements by classes of
(2) Export Processing Zone Authority; (3) Philippine Veterans
expenditures.
Investment Development Corporation Industrial Authority
In case the actual collection exceeds or falls short of target as set in the annual 4. Copper Mining Industry
national budget by fifteen percent (15%) or more, the Commissioner shall explain 5. Conferred by the 3 Basic Codes: (1) Tariff and Customs Code; (2)
the reason for such excess or shortfall. NIRC and (3) LGC
6. Approved by the President upon the recommendation of the Fiscal
SEC. 20. Submission of Report and Pertinent Information by the Incentives Board
Commissioner
*They are still exempted from payment of the tax covered by the non-
impairment clause
(A) Submission of Pertinent Information to Congress. - The provision of Section
270 of this Code to the contrary notwithstanding, the Commissioner shall,
upon request of Congress and in aid of legislation, furnish its appropriate
Committee pertinent information including but not limited to: industry audits,
collection performance data, status reports in criminal actions initiated against
persons and taxpayer's returns: Provided, however, That any return or return
information which can be associated with, or otherwise identify, directly or
indirectly, a particular taxpayer shall be furnished the appropriate Committee
of Congress only when sitting in Executive Session Unless such taxpayer
otherwise consents in writing to such disclosure.

(B) Report to Oversight Committee. - The Commissioner shall, with reference to

Section 204 of this Code, submit to the Oversight Committee referred to in
Section 290 hereof, through the Chairmen of the Committee on Ways and
Means of the Senate and House of Representatives, a report on the exercise
of his powers pursuant to the said section, every six (6) months of each
calendar year.

[Mem!] SEC. 21. Sources of Revenue. - The following taxes, fees and charges are
deemed to be national internal revenue taxes:

(A) Income tax;

(B) Estate and donor's taxes;
(C) Value-added tax; (also a percentage tax [12%])
(D) Other (because VAT is also a percentage tax) percentage taxes;

10
 TITLE 2
[BAR!] TAX ON INCOME
Chapter 1 - Definitions
SEC. 22. Definitions - When used in this Title:
(A) The term "person" means an individual, a trust (is a relationship between a
person [trustor] and another person [trustee] whereby the property of the
former is conveyed or transferred to the latter with the obligation on the part
of the latter to give the former or another person [beneficiary] or BOTH a
periodic amt or annuity or pension for a certain period of time or during the
lifetime of the trustor or beneficiary or BOTH), estate or corporation
• (not included: general/professional partnership because it is not
taxable)
(B) The term "corporation" shall include partnerships (ordinary or business or
taxable partnership), no matter how created or organized, joint-stock
companies, joint accounts (agreement whereby two or more persons
combine their resources to undertake a particular project but there is no
agreement or intention to form or create a partnership) (cuentas en
participacion) (or joint venture), association, or insurance companies, but
does not include (GSP and Joint Venture undertaking construction projects
with the gov’t are NOT taxable entities) (1) general professional partnerships
and (2) a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a
service contract with the Government. "General professional partnerships"
are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging
in any trade or business.
(C) The term "domestic", when applied to a corporation, means created or
organized in the Philippines or under its laws. (Domestic Corporation is a
corporation created or organized under Phil laws)
(D) The term "foreign", when applied to a corporation, means a corporation which
is not domestic. (Foreign Corporation is a corporation organized, authorized or
existing under the laws of any foreign country, Sec. 28 (a))
(E) The term "nonresident citizen" means:
(1) A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an immigrant or for employment on a
permanent basis.
11
(3) 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.
(4) A citizen who has been previously considered as nonresident citizen and
who arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines shall likewise be treated as a
nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until
the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad or to
return to and reside in the Philippines as the case may be for purpose of
this Section.
(F) The term "resident alien" means an individual whose residence is within the
Philippines and who is not a citizen thereof.
(G) The term "nonresident alien" means an individual whose residence is not
within the Philippines and who is not a citizen thereof.
(H) The term "resident foreign corporation" applies to a foreign corporation
engaged in trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation
not engaged in trade or business within the Philippines.
(J) The term "fiduciary" means a guardian, trustee, executor, administrator,
receiver, conservator or any person acting in any fiduciary capacity for any
person.
(K) The term "withholding agent" means any person required to deduct and
withhold any tax under the provisions of Section 57.
(L) [Mem!] The term "shares of stock" shall include shares of stock of a
corporation, stock rights warrants and/or options to purchase shares of stock,
as well as units of participation in a partnership (ordinary or business or
taxable) (except general professional partnerships), joint stock companies,
joint accounts, joint ventures taxable as corporations, associations and
recreation or amusement clubs (such as golf, polo or similar clubs), and
mutual fund certificates.
(M) The term "shareholder" shall include holders of a share/s of stock, warrant/s
and/or option/s to purchase shares of stock of a corporation, as well as a
holder of a unit of participation in a partnership (except general professional
partnerships) in a joint stock company, a joint account, a taxable joint
venture, a member of an association, recreation or amusement club (such as
golf, polo or similar clubs) and a holder of a mutual fund certificate, a member
in an association, joint-stock company, or insurance company.
(N) The term "taxpayer" means any person subject to tax imposed by this Title.
(O) The terms "including" and "includes", when used in a definition contained in
this Title, shall not be deemed to exclude other things otherwise within the
meaning of the term defined.
(P) The term "taxable year" means the calendar year, or the fiscal year ending
during such calendar year, upon the basis of which the net income is
computed under this Title. 'Taxable year' includes, in the case of a return
made for a fractional part of a year under the provisions of this Title or under
rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the commissioner, the period for which such return is
made.
(Q) The term "fiscal year" means an accounting period of twelve (12) months
ending on the last day of any month other than December.
(R) The terms "paid or incurred" and 'paid or accrued' shall be construed
according to the method of accounting upon the basis of which the net income
is computed under this Title.
(S) The term "trade or business" includes the performance of the functions of a
public office.
(T) The term "securities" means shares of stock in a corporation and rights to
subscribe (stock rights) for or to receive such shares. The term includes
bonds, debentures, notes or certificates, or other evidence or indebtedness,
issued by any corporation, including those issued by a government or political
subdivision thereof, with interest coupons or in registered form.
(U) [Mem!] The term "dealer in securities" means a merchant of stocks or
securities, whether an individual, partnership or corporation, with an
established place of business, regularly engaged in the purchase of securities
and the resale thereof to customers; that is, one who, as a merchant, buys
securities and re-sells them to customers with a view to the gains and profits
that may be derived therefrom.
(V) The term "bank" means every banking institution, as defined in Section 2 of
Republic Act No. 337, as amended, otherwise known as the General banking
Act. A bank may either be a commercial bank, a thrift bank, a development
bank, a rural bank or specialized government bank.
(W) The term "non-bank financial intermediary" means a financial intermediary, as
defined in Section 2(D)(C) of Republic Act No. 337, as amended, otherwise
known as the General Banking Act, authorized by the Bangko Sentral ng
Pilipinas (BSP) to perform quasi-banking activities.
(X) The term "quasi-banking activities" means borrowing funds from twenty (20)
or more personal or corporate lenders at any one time, through the issuance,
endorsement, or acceptance of debt instruments of any kind other than
deposits for the borrower's own account, or through the issuance of
12
certificates of assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of relending or purchasing receivables
and other similar obligations: Provided, however, That commercial, industrial
and other non-financial companies, which borrow funds through any of these
means for the limited purpose of financing their own needs or the needs of
their agents or dealers, shall not be considered as performing quasi-banking
functions.
(Y) The term "deposit substitutes" shall mean an alternative from of obtaining
funds from the public (the term 'public' means borrowing from twenty (20) or
more individual or corporate lenders at any one time) other than deposits,
through the issuance, endorsement, or acceptance of debt instruments (such
as bonds) for the borrowers own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing their own needs
or the needs of their agent or dealer. These instruments may include, but
need not be limited to bankers' acceptances, promissory notes, repurchase
agreements, including reverse repurchase agreements entered into by and
between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent
bank, certificates of assignment or participation and similar instruments with
recourse: Provided, however, That debt instruments issued for interbank call
loans with maturity of not more than five (5) days to cover deficiency in
reserves against deposit liabilities, including those between or among banks
and quasi-banks, shall not be considered as deposit substitute debt
instruments.
(Z) The term "ordinary income" includes any gain from the sale or exchange of
property which is not a capital asset (ordinary asset) or property described in
Section 39(A)(1). Any gain from the sale or exchange of property which is
treated or considered, under other provisions of this Title, as 'ordinary income'
shall be treated as gain from the sale or exchange of property which is not a
capital asset as defined in Section 39(A)(1). The term 'ordinary loss'
includes any loss from the sale or exchange of property which is not a capital
asset. Any loss from the sale or exchange of property which is treated or
considered, under other provisions of this Title, as 'ordinary loss' shall be
treated as loss from the sale or exchange of property which is not a capital
asset.
(AA) The term "rank and file employees" shall mean all employees who are
holding neither managerial nor supervisory position as defined under
existing provisions of the Labor Code of the Philippines, as amended.
(BB) The term "mutual fund company" shall mean an open-end and close-end
investment company as defined under the Investment Company Act.
(CC) The term "trade, business or profession" shall not include performance of
services by the taxpayer as an employee.
(DD) The term "regional or area headquarters" shall mean a branch established in
the Philippines by multinational companies and which headquarters do not
earn or derive income from the Philippines and which act as supervisory,
communications and coordinating center for their affiliates, subsidiaries, or
branches in the Asia-Pacific Region and other foreign markets.

(EE) The term "regional operating headquarters" shall mean a branch established
in the Philippines by multinational companies which are engaged in any of
the following services: general administration and planning; business
planning and coordination; sourcing and procurement of raw materials and
components; corporate finance advisory services; marketing control and
sales promotion; training and personnel management; logistic services;
research and development services and product development; technical
support and maintenance; data processing and communications; and
business development.
(FF) The term "long-term deposit or investment certificates" shall refer to
certificate of time deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts
and other investments with a maturity period of not less than five (5) years,
the form of which shall be prescribed by the Bangko Sentral ng Pilipinas
(BSP) and issued by banks only (not by nonbank financial intermediaries and
finance companies) to individuals in denominations of Ten thousand pesos
(P10,000) and other denominations as may be prescribed by the BS.
(GG) The term 'statutory minimum wage' shall refer to rate fixed by the
Regional Tripartite Wage and Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE)
(HH) The term 'minimum wage earner' shall refer to a worker in the private
sector paid the statutory minimum wage, or to an employee in the public
sector with compensation income of not more than the statutory minimum
wage in the non-agricultural sector where he/she is assigned
• Co-ownerships (not a taxpayer) are not subject to tax as a corporation if
the activitie of the co-owners are limited to the reservation of the property
and the collection of the income therefrom in which case each co-owner is
taxed individually on his distributive share. Should the co-owners invest
the income of the co-ownership in any income producing properties, they
would be constituting themselves into a partnership which is consequently
subject to tax as a corporation.
• [Impt!] Partnerships – the essential elements of a contract of partnership
are 2, namely: (1) an agreement to contribute money, property or industry
to a common fund and (2) an intent to divide the profits among the
contracting parties.
o In a case, the petitioners bought 2 parcels of land in 1965. They
did not sell the same nor make any improvements thereon. In
1996, they bought another 3 parcels from one seller. It was only
in 1968 when they sold the 2 parcels, after which they did not
make any additional orr new purchase. The remaining 3 parcels
were sold by them in 1970.
It was held that there was no adequate basis to support the
proposition that they thereby formed an unregistered partnership.
13
The transactions were isolated. The sharing of profits in a common
property does not itself establish a partnership in the absence of a
clear intent to form the same. The character of habituality peculiar
to business transactions for the purpose of gain must be present.
o Partnerships (ordinary or business or taxable) (other than GPP),
whether registered or unregistered, are taxed as corporations
o A partnership of architects and engineers engaged in architectural,
engineering and other disciplines cannot be said to be a GPP as it
cannot be said as one with a commonality of purpose and
professional calling as contemplated by law. A firm made up of
different and distinct professionals, one that is capable of
providing integrated services in the varied disciplines in contrast
to a partnership of common profession, such as lawyers, doctors,
accountants, etc., is a full service firm (ordinary or business or
taxable partnership which is considered by law as corporations)
rather than a group of professionals practicing a common
profession.
• Joint ventures – if formed for the purpose mentioned in Section 22 (B),
they are not subject to the corporate income tax to enhance the
competitive capability of local contractors or operators against foreign
investors. Only the entities (or individuals) (co-ventures) composing such
joint ventures are separately subject thereto on their respective taxable
income.
Other Joint Ventures although not formally incorporated, are taxable as
ordinary corporations
o A joint venture formed for the purpose of undertaking shipping
services or the construction and development of a residential
condominium project falls within the purview of a corporation
subject to the 30% corporate income tax as contemplated in
Section 22(B), in relation to Section 27(A).
o [VIP!] The allocation of the condominium units and the issuance of
the corresponding Condominium Certificates of Title by the
Registry of Deeds to the joint venture partners or co-venturers
representing their respective shares or participating interests in
the project are not taxable events (because there are no sales
yet). The allocation is not subject to income tax because it is
merely a return of capital contribution. No income is realized from
the allocation. It is only upon the sale or disposition of the units to
3rd parties that the gain realized shall be subject to the regular
corporate income tax.
• [Impt!] Non-resident citizens
o A Filipino citizen who works in Hong Kong from Monday to Friday
and spends his weekends and a 6-week vacation leave in the
Philippines is considered a non-resident citizen. He is, not subject
(income from outside the Phils of non-resident citizens is not
 taxable in the Phils) to income tax on his income as overseas Chapter 2- GENERAL PRINCIPLES
contract worker. But a Filipina who constantly travels around the
world with her husband, a US citizen, on a tourist visa without any
Tax Payer Sources of Taxable Income
permanent residence anywhere is not a non-resident citizen (she
Sources WITHIN and WITHOUT
is a resident citizen, hence, her income from abroad, if any, is 1. Resident Citizen
taxable in the Phils) within the contemplation of Sections 22(E) the Phils
(1), (2) of the Tax Code. 2. Non-resident Citizen Sources WITHIN the Phils
3. Resident Alien Sources WITHIN the Phils
o For purposes of the income tax exemption, the time spent abroad 4. Non-resident Alien Sources WITHIN the Phils
by the overseas contract worker if not material. All that is required Sources WITHIN and WITHOUT
5. Domestic Corporation
is for the worker’s employment contract to pass through and be the Phils
registered with the POEA Resident Foreign
6. Sources WITHIN the Phils
Corporation
• [Impt!] Resident Alien – an alien may be considered a resident of the Non-resident Foreign
7. Sources WITHIN the Phils
Philippines for income tax purposes if: Corporation
1. He or she is not a mere transient or sojourner Depending on the STATUS of the
8. Estate or Trust
2. He or she is has no definite intention as to his or her stay DECEDENT or TRUSTOR
3. His or her purpose is of such a nature that an extended stay may be
necessary for its accomplishment and to that end the alien makes his
[Mem!] SEC. 23. General Principles of Income Taxation in the Philippines. - Except
or her home temporarily in the Philippines
when otherwise provided in this Code:
• [VIP!] Shares of Stock (it also includes units of participation or equity or
interest in an ordinary or business or taxable partnership) is expanded to (A) A citizen of the Philippines residing therein is taxable on all income
include units of participation in an unincorporated joint venture. derived from sources within and without the Philippines;

• Long term deposit or investments – they are exempt from income tax
as long as they comply with the requisites of a long term deposit or
investment certificate which are:
1. Maturity of not less than 5 years (maturity of 5 yrs or more)
2. In the form of savings, common or individual trust fund, deposit
substitutes, investment management accounts or other forms
prescribed by the BSP
3. Issued by banks only
4. Issued only to individual citizens (resident or non-resident) or resident
aliens or non-resident aliens engaged in trade or business within the
Philippines
5. In Php 10,000.00 denominations or other denominations prescribed by
the BSP
6. Not preterminated (the deposit is not withdrawn before the end of the
5th year) by the holder before the 5th year
o The withdrawal of the principal deposit/investment before the 5th
year will subject the entire earnings (interest) to a final WT
depending on the holding period of the instrument in accordance
with the period specified under Sections 24 (B,1) and 25 (A,2)
(B) A nonresident citizen is taxable only on income derived from sources within
the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income
derived from sources within the Philippines: Provided, That a seaman who is
a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract
worker; if the vessel is engaged both in coastwise and in international trade
the seaman is considered residential citizen
o OCWs and OFWs and Seaman are considered non-resident citizens
(D) An alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within
and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the
Philippines.

• [Impt!] (1)RESIDENT CITIZEN and (2)DOMESTIC CORPORATION are

taxable on all income derived from sources WITHIN and WITHOUT the
Philippines
(3)
o Estate or Trust where the decedent was or the trustor is a
resident citizen
14
• Exemption from income tax of non-resident citizens (their income • [VIP!] An alien individual, whether resident or non-resident, and a foreign
from outside the Phils): corporation, whether resident or non-resident, are taxable only on income
1. Income earned or derived from abroad by non-resident citizens, derived from sources within the Philippines. The taxability of income of an
overseas contract workers (OCWs) and Filipino seamen are now (Prior alien individual or a foreign corporation derived from Philippine sources is
to Jan. 1, 1998 income of NRC from sources without the Phils was subject to tax treaty (international agreement such as tax treaty to which
taxable in the Phils) exempt from income tax the Phils is a party is superior than our law, such as the NIRC) to which the
Philippines is a signatory
2. All employees (employed in the Phils) whose services are rendered
abroad for being assigned (by their Ers) for at least 183 days may • [Mem!] Income means all wealth (or property such as cash) which flows
fall under the first category (NRC) and are, therefore, exempt from into the taxpayer other than (or except) mere return of capital (even
payment of Philippine income tax. The phrase “most of the time” mere return of capital may be subject to income tax such as presumed
means that the said citizen shall have stayed abroad for at least 183 capital gain on sale of real property classified as capital asset located in the
days (need not be consecutive or continuous) in a taxable year Phils). An example of mere return of capital is the collection of loans
The same exemption applies to an overseas contract worker but as receivable. Income is received not only when it is actually handed to a
such worker, the time spent abroad is not material for tax exemption person but also when it is merely constructively received by him.
purposes. All that is required is for the worker’s employment contract
to pass through and be registered with the POEA.
o This is known as “The Principle or Doctrine of Constructive Receipt
of Income”
Examples:
Examples are:
1. Share of a partner in the net income after tax of a
 A, a resident citizen, is employed as supervising engineer in Corp.
business partnership not yet distributed to the partners
X, a domestic corportaion, engaged in construction business.
2. Dividend declared by a true corporation not yet received
Corp. X normally enters into construction contracts in the Middle
by the stockholders
East. In 2013, A was assigned by Corp. X in the Middle East to
3. Interest on the bank deposit not withdrawn by the
supervise the construction projects there and he spent 7 months
depositor
during that year.
Example:
The salaries of A during the period of 7 months, while he was in
the Middle East are not taxable in the Phils., because during that
 A and B are boyfriend and girlfriend, respectively. On July 1,
period, he is classified as NRC. His salaries, however, during the
2014, B celebrated her 27th birthday and A gave her in the
period of 5 months are taxable in the Philippines.
form of gift a Rolex watch worth Php 2M.
o Did B earn income when she received the watch
 B, an RC, went to Singapore on Sept. 27, 2013 to work in the
worth Php 2M?
country as an OFW. In 2013 he worked in Singapore only for a
ANS: YES, because income means all wealth
period of 3 months from Oct. 1 to Dec. 31, 2013. The salaries of B
which flows into the taxpayer other than
for said 3 months are not taxable in the Phils. although his stay in
mere return of capital.
Singapore is less than 183 days.
o Is B subject to income tax when she received the
watch worth Php 2M?
3. Regular employees of a domestic corporation sent abroad as “non-
ANS: NO, gift or donation is excluded from gross
resident citizens” for income tax purposes if their employment requires
income, hence, the gift or donation is not
them to stay abroad for most of the time (at least 183 days) during
subject to income tax (Sec 32 B (3))
the taxable year. The fact that their salaries and other benefits paid in
o Is the transaction (giving of watch to B) not subject
the Philippines is immaterial as the situs (place) of compensation
to any tax?
income is the place where the services are rendered
ANS: YES, the donation is subject to donor’s tax
but the one liable is A, the donor
• [Impt!] If an OCW or OFC has income/earnings from business activities or
properties within the Philippines, such earnings are subject to Philippine
• [Mem!] Income Tax – tax on all yearly profits arising from property,
income tax
professions, trades or businesses or a tax on a person’s income,
emoluments, profits and the like.
• An alien actually present in the Philippines who is not a mere transient or
sojourner is a resident of the Philippines for purposes of income tax
15
 Example:
 A engaged in merchandising business, purchased a residential
house and lot at a price of Php 3M. Six months later, A
sustained losses from his business and in order to infuse
additional capital to his business, he was forced to sell the
said residential houses and lot at a price of Php 2,800,000.00
although the FMV thereof is Php 3,500,000.00. A is subject to
capital gains tax of 6% of Php 3,500,000.00.
o Income tax is generally regarded as a privilege (or excise) tax and
not a tax on property (such as real property tax). It is really a tax
on the right or privilege to earn income by an individual or entity.
• [Mem!] For income to be taxable, requisites:
1. There must be gain or profit
2. The gain must be realized or received, actually or constructively
3. Gain must not be excluded by law (Section 32B) or treaty from
taxation
• Increase in value of property – a mere increase in the value of property
is not income but merely an unrealized (because the property is not yet
sold) increase in capital. Under the realization principle, no income is
derived by the owner from an increase in value of property until after the
actual sale or other disposition of the property in excess of its original cost
(if the property is ordinary asset because is the property is real property
classified as capital asset and is located in the Phils., the taxable amt is the
gross selling price or FMV as determined by the CIR or FMV appearing in
the schedule of values in the provincial or city assessor’s office, whichever
is highest).
The only exception is that even without sale or other disposition, if by
reason of appraisal, the cost basis of property is increased and the
resultant basis is used as the new tax base for purposes of computing the
allowable depreciation expense, the net difference between the original
cost basis and new basis due to appraisal is taxable under the economic-
benefit principle.
The same conclusion obtains as to loss. The mere decrease in the value of
property is not normally allowable as a deductible loss. To be allowable, the
loss must be realized.
• Constructive receipt doctrine – ordinarily, a cash-basis taxpayer (a
taxpayer who adopts the cash-basis method of accounting where he
records the income when cash is actually received and records expenses
when cash is paid) does not recognize income until it has actually been
received. Under the doctrine, an item of income must be included in gross
income if it is credited to the account of or set apart for the taxpayer, or
otherwise made available to the taxpayer, although not yet physically
received or placed to his actual possession. The doctrine prevents
taxpayers from manipulating the amount of their reportable gross income
by delaying the report of an item of doctrine.
16
• [VIP!] Tax Benefit Rule – as a rule, an item (e.g. bad debt) previously
deducted in 1 taxable year from gross income must be included as taxable
income in the year it is received. However, under the rule, the recovery or
refund of a prior deduction is excluded from income if the deduction did not
reduce the taxpayer’s liability.
Examples:
 (Debt - Php 50,000.00) A is engaged in merchandising business. On
March 1, 2013, A sold merchandise to B on account collectible on
June 1, 2013. On June 1, 2013 B failed to pay A because on that
day B was already bankrupt. During the year 2013 the taxable
income of A was Php 550,000.00 but because A was certain that B
can no longer pay his indebtedness of Php 50,000.00 A decided to
treat said indebtedness as bad debt and he deducted the Php
50,000.00 from the taxable income of Php 550,000.00 thereby
leaving Php 500,000.00 as net taxable income. Therefore, instead
of paying income tax in 2013 based on Php 550,000.00, A actually
paid income tax based on Php 500,000.00 which resulted to a lower
income tax.
On March 1, 2014 B miraculously paid A the Php 50,000.00 because
B won in lotto. The Php 50,000.00 received by A in 2014 is called
“Recovery of Account Previously Written Off” or “Bad Debt
Recovery” and A will report as part of his gross income in 2014 the
amount of Php 16,000.00.
If in 2013 A sustained a loss from his business and he still deducted
the Php 50,000.00 bad debt said deduction did not benefit A
because whether he deducted it or not he did not pay income tax in
2013, hence, no income tax benefit has been derived by A. When A
recovered the Php 50,000.00 in 2014 he will not report any income
from said recovery.
The income tax if the bad debt is not deducted is:
First Php 500,000.00 Php 125,000.00
Excess (Php 550,000.00 – Php 500,000.00 x 32%) 16,000.00
INCOME TAX Php 141,000.00
If the bad debt is deducted the taxable income is Php 500,000.00
ad the income tax is Php 125,000.00.
The income tax benefit derived by A in deducting the bad debt of
Php 50,000.00 is (Php 141,000.00 – Php 125,000.00) Php
16,000.00.
 The same facts above except that the bad debt recovery or
recovery of account previously written off in 2014 is Php 10,000.00
instead of Php 50,000.00, how much will A report as part of his
gross income in 2014?
 ANS: A will report as part of his gross income in 2014 the
actual amount recovered which is Php 10,000.00. In
other words, the amt to be reported as part of gross
income is the income tax benefit or actual amt recovered,
whichever is lower.
• [Impt!] Award of Damages
1. Actual Damages – the award is not subject to income tax since
actual damages constitute return of capital or investment, or a
substitution of money value for something permanently lost.
2. Moral and Exemplary Damages – such damages awarded on
account of personal physical injuries or sickness are excluded from
gross income under Section 32(B)(4). However, since there is no
provision which exempts from income tax moral and exemplary
damages arising from a breach of contract, they are subject to income
tax
3. Atty’s fees and costs – when awarded to the winning party-litigant,
they are not subject to income tax only to the extent of actual
expenses. Any amt in excess of the actual expenses shall be taxable
o Damages awarded constitute taxable income to the recipient
thereof in the year received only to the extent that such damages
constitute loss of anticipated profits or lost salaries and non-
taxable to the extent that the same represents a return of capital
or investment
Examples:
 A, an RC and a junior executive in a Corp., while he was crossing a
street was bumped from behind by an automobile owned and
driven by B. At that time, A was carrying a laptop computer which
he purchased from Manila at a cost of Php 20,000.00 to be
delivered to his buyer C at a selling price of Php 24,000.00. said
computer was totally destroyed by the accident and A was
hospitalized for a period of 2 months and by reason thereof, A was
not compensated by his employer for the said 2 months. The salary
of A is Php 40,000.00. The hospital bills of A amounted to Php
100,000.00. A demanded from B damages but the latter refused to
pay, hence, A filed a case in court for recovery of damages. The
court awarded in favour of A the ff:
1. Actual damages representing last salaries in the amt of
Php 80,000.00
2. Actual damages representing the hospital bills in the amt
of Php 100,000.00
3. Actual damages representing the selling price of the
computer in the amt of Php 24,000.00; and
4. Moral damages, on account of physical injuries in the amt
of Php 30,000.00
Of the above damages awarded to A, which of them are taxable and
which of them are not taxable?
17
ANS:
1. Actual damages representing lost salaries in the amt of
Php 80,000.00 are taxable, because damages awarded
which constitute lost salaries are taxable
2. Actual damages representing the hospital bills in the amt
of Php 100,000.00 are no taxable, because they
constitute return of capital
3. Actual damages representing the selling price of the
computer in the amt of Php 24,000.00, Php 20,000.00 of
which is not taxable, because it is a return of capital.
While, the anticipated profit of Php 4,000.00 is taxable
because damages which constitute loss of anticipated or
expected profit are taxable
4. Moral damages in the amt of Php 30,000.00 are not
taxable because damages awarded on account of physical
injuries are excluded from gross income, hence, they are
not taxable
• [Impt!] Income tax is self-asssessing or self-computed. Under the pay-as-
you-file system, the taxpayer himself, in the first instance, computes the
tax in the manner indicated in the return and pays the tax at the time of
filing the return.
Since the rates of tax are fixed by law, the role of the tax official is purely
to determine the accuracy of the taxpayer’s assessment of his tax liability
[SECTIONS 24 to 39 are IMPORTANT PROVISIONS!]
Chapter 3 – TAX ON INDIVIDUALS
[Impt!] [BAR!] SEC. 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen (resident & non-resident) and
Individual Resident Alien of the Philippines.
(1) An income tax is hereby imposed:
(a) [RESIDENT CITIZEN] On the taxable income (gross income –
allowable deductions as a rule) defined in Section 31 of this
Code, other than income subject to tax under Subsections (B),
(C) and (D) of this Section, derived for each taxable year from
all sources within and without the Philippines by every individual
citizen of the Philippines residing therein;
(b) [NON-RESIDENT CITIZEN] On the taxable income defined in
Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an
individual citizen of the Philippines who is residing outside of the
 Philippines including overseas contract workers referred to in  If the taxable income of A, an RC, is Php 1.2M, how much is the
Subsection(C) of Section 23 hereof; and income tax?

(c) [RESIDENT ALIEN] On the taxable income defined in Section
31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an
individual alien who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals (RC, NRC, NRA). - The
tax shall be computed in accordance with and at the rates established in
the following schedule:
Not over P10,000 5%
First Php 500,000.00 Php 125,000.00
Excess (Php 1.2M – Php 500,000.00 x 32%) 224,000.00
INCOME TAX Php 349,000.00
Provided, That minimum wage earners as defined in Section 22 (HH) of
this Code shall be exempt from the payment of income tax on their
taxable income: Provided, further, That the holiday pay, overtime
pay, night shift differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt from income tax even
if said additional benefits will exceed the minimum wage.

P500+10% of the excess over
Over P10,000 but not over P30,000
P10,000
P2,500+15% of the excess over
Over P30,000 but not over P70,000
P30,000
P8,500+20% of the excess over
Over P70,000 but not over P140,000
P70,000
For married individuals, the husband and wife, subject to the
provision of Section 51 (D) hereof, shall compute separately (but only 1
income tax return) their individual income tax based on their respective
total taxable income: Provided, That if any income cannot be definitely
attributed to or identified as income exclusively earned or realized by
either of the spouses, the same shall be divided equally between the
spouses for the purpose of determining their respective taxable income.

Over P140,000 but not over P22,500+25% of the excess over (B) [Impt!] Rate of Tax on Certain Passive Income.
P250,000 P140,000

Over P250,000 but not over P50,000+30% of the excess over (1) (1)Interests, (2)Royalties, (3)Prizes, and (4)Other Winnings. - A
P500,000 P250,000 final tax (tax on certain items of passive income which is withheld by
the payer and remitted to the BIR, hence, the passive income is no
P125,000+34% of the excess over longer included in the ITS of the recipient of the passive income) at the
Over P500,000
P500,000 in 1998. rate of twenty percent (20%) is hereby imposed upon the amount of
interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and
Examples: similar arrangements; royalties, except on books, as well as other
literary works and musical compositions, which shall be imposed a final
 If the taxable income of A, a resident citizen, is Php 100,000.00, tax of ten percent (10%); prizes (except prizes amounting to Ten
how much is the income tax? thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (A) of Section 24); and other winnings (except Philippine
First Php 70,000.00 Php 8,500.00 Charity Sweepstakes and Lotto winnings (exempt from income tax)),
Excess (Php 100,000.00 – Php 70,000.00 x 20%) 6,000.00 derived from sources within the Philippines (When is a passive income
INCOME TAX Php 14,000.00 considered derived from sources within the Phils? ANS: The passive
income is from sources within if the payer is a resident of the
Philippines): Provided, however, That interest income received by an
 If the taxable income of A, an RC, is Php 400,000.00, how much is individual taxpayer (RC or RA) (except a nonresident individual (exempt
the income tax? from income tax under Section 27D(3),2nd paragraph)) from a
depository bank under the expanded foreign currency deposit system
First Php 250,000.00 Php 50,000.00 shall be subject to a final income tax at the rate of seven and one-half
Excess (Php 400,000.00 – Php 250,000.00 x 30%) 45,000.00 percent (7 1/2%) of such interest income: Provided, further, That
INCOME TAX Php 95,000.00 interest income from long-term deposit (Philippine currency) or
investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the

18
 Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax (20% (b) Jan. 2, 2012 – the final tax is (Php 1M x 10% x 2 x
final tax) imposed under this Subsection: Provided, finally, That 20%) Php 40,000.00
should the holder of the certificate (depositor) pre-terminate the deposit (c) Jan. 2, 2013 – the final tax is (Php 1M x 10% x 3 x
or investment before the fifth (5th) year, a final tax shall be imposed on 12%) Php 36,000.00
the entire income and shall be deducted and withheld by the depository (d) Jan. 2, 2014 – the final tax is (Php 1M x 10% x 4 x
bank from the proceeds of the long-term deposit or investment 5%) Php 20,000.00
certificate based on the holding period remaining maturity thereof: (e) Jan. 2, 2015 – the entire interest income of Php
500,000.00 is exempt from income tax
Four (4) years to less than five (5) years - 5%;
(2) Cash and/or Property (5)Dividends - A final tax (Dividend is the
distribution by a corporation to its stockholders of the accumulated net
Three (3) years to less than (4) years - 12%; and
income after tax of the corporation in the form of case or property or
stock. The accumulated net income after tax of a corporation is entered
Less than three (3) years - 20% in the account called Unrestricted Retained Earnings and this URE is the
only source of dividends) at the following rates shall be imposed upon
o If the items of passive income are derived from outside the the cash and/or property dividends actually or constructively received
Philippines (Payer is not a resident) they are not subject to by an individual from a domestic corporation or from a joint stock
final tax but they are taxable under subsection A is the company, insurance or mutual fund companies and regional operating
recipient is a resident citizen. If the recipient is NRC or RA or headquarters of multinational companies, or on the share of an
NRA, the passive income is not taxable because he is taxable individual in the distributable net income after tax of a partnership
only on income from sources within the Philippines. (business or ordinary or taxable partnership which is considered by law
as corporation) (except a general professional partnership) of which he
Examples: is a partner, or on the share of an individual in the net income after tax
of an association, a joint account, or a joint venture or consortium
 A borrowed Php 1M from his brother B payable in 1 year at a taxable as a corporation of which he is a member or co-venturer:
minimal interest f 6% per annum. On due date A offered to pay B
the principal of Php 1M plus interest of Php 60,000.00 – final tax of Six percent (6%) beginning January 1, 1998;
Php 12,000.00 or a total of Php 1,048.00. B refused to accept the
Php 1,048,000.00 because according to him the interest of Php
Eight percent (8%) beginning January 1, 1999;
60,000.00 is not subject to final tax of 20%.
1. Who is correct?
ANS: B is correct, the Php 60,000.00 interest is not Ten percent (10%) beginning January 1, 2000.
subject to 20% final tax because said interest is not
from currency bank deposit rather it is from
Provided, however, That the tax on dividends shall apply only on income
personal loan. A will report as part of his gross
earned on or after January 1, 1998. Income forming part of retained
income the interest of Php 60,000.00 taxable under
earnings as of December 31, 1997 shall not, even if declared or
Section 24(A).
distributed on or after January 1, 1998, be subject to this tax.
2. Is the interest expense of A in the amt of Php 60,000.00 an
allowable deduction from the gross income of A? o DIVIDENDS
ANS: NO, if the interest expense is paid by the borrower 1. Received by RC, NRC or RA – 10% FT
to the lender who are members of a family, the 2. Received by NRA engaged – 20% FT (Section 25A,2)
interest, income is not an allowable deduction 3. Received by NRA not engaged – 25% FT (Section 25B)
under Sec. 34 B (2)b in relation to Section 36B 4. Received by DC – exempt (Section 27D,4)
5. Received by RFC – exempt (Section 28A,7d)
3. A, an RC, made a time deposit of Php 1M with Bank X at 6. Received by NRFC – 15% FT subject to certain
10% interest per annum on Jan. 2, 2010 for a period of 5 conditions (Section 28B,5b)
years. The deposit may be pre-terminated on or after Jan.
2, 2011. How much is the final tax if A withdraws the
deposit on:
(a) Jan. 2, 2011 – the final tax is (Php 1M x 10% x 20%)
Php 20,000.00
19
Example:
 Corp. A was organized on Jan. 2, 2011 with an Authorized
Capital Stock of 10,000 common shares with par value per
share of Php 10,000.00 or Php 100M. 5 years later the
corporation already sold 8,000 shares out of the 10,000
shares authorized. At this stage the number of issued shares
is 2,000 shares. If the corporation will declare stock dividend
it will distribute shares of stock to the stockholders, hence, if
the corporation will declare 10% stock dividend it will
distribute 1,000 shares to its stockholders. The number of
shares received by the stockholders is called stock dividend
which is not taxable because the stockholders did not receive
something of value because such dividend is referred to
sometimes as paper dividend.
o There is exception to the rule that stock dividend is not
taxable and this is when subsequent to the declaration
and distribution of the stock dividend the corporation
purchases from the stockholders the stock dividend
previously distributed. When the corporation pays the
stockholders the purchase price of the shares of stock the
corporation shall withhold the final tax of 10% and will
remit the same to the BIR.
 On Jan. 2, 2014, Corp. A, a DC purchased from Corp. B also a
DC, 1,000 common shares at a cost of Php 1,000 per share.
On Jan. 2, 2014, when the FMV of the common shares of
Corp. B was Php 1,200 per share Corp. A declared and
distributed as dividend the said 1,000 shares to its 10
stockholders at 100 shares per stockholder. The treasurer of
Corp. A surrendered for cancellation the certificate of stock
covering the said 1,000 shares to Corp. B and the latter
cancelled it and issued in lieu thereof 10 separate certificates
of stock in the names of the 10 stockholders of Corp. A.
Before actually distributing the 10 certificates of stock to the
10 stockholders of Corp. A the treasurer demanded the
payment of the final tax on dividend in the amt of (100
shares x Php 1,200.00 x 10%) Php 12,000.00 from each of
the 10 stockholders but the latter refused to pay contending
that stock dividend is not taxable. Who is or are correct?
(D) Capital Gains from Sale of Real Property. –
ANS: The treasurer is correct because what has been
declared and distributed as dividend is a property not
stock dividend. When a corporation purchases shares
of stock in another corporation the cost of Php 1M is
considered investment, more particularly,
investment in stock and investment in property.
Stock dividend comes from the unissued shares of
the declaring corporation which is not obtaining in
this case. Therefore, the dividend is subject to 10%
final tax.
20
(C) Capital Gains from Sale of Shares of Stock not Traded (if the shares of stock
are traded in stock exchange, the sale is subject to ½ of 1% percentage tax
on gross selling price or gross value in money) in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rates
prescribed below is hereby imposed upon the net capital gains realized during
the taxable year from the sale, barter, exchange or other disposition of shares
of stock in a domestic corporation, except shares sold, or disposed of through
the stock exchange.
Not over P100,000 5%
On any amount in excess of
10%
P100,000
[This provision does not apply to dealers in securities because as to
them the shares of stock are ordinary assets.
Example:
 E, an RC engaged in real estate business, had the following
sales of shares of stock in DC during the first quarter of 2014:
1) Jan. 15 – 1,000 shares costing Php 1M sold at Php
1.2M
2) Feb. 10 – 2,000 shares costing Php 800,000.00 sold at
Php 750,000.00
3) Mar. 21 – 500 shares costing Php 1.5M sold at Php
1,650,000.00
Compute the Capital Gains Tax
Jan. 15 sale (Php1.2M – Php 1M) Php 200,000.00
Feb. 10 sale (Php 750,00.00 – Php 800,000.00) (50,000.00)
Mar. 21 sale (Php 1,650,000.00 – Php 1.5M) 150,000.00
NET CAPITAL GAINS Php 300,000.00
1st Php 100,000.00 (Php 100,000.00 x 5%) Php 005,000.00
Excess over Php 100,000.00
(Php 300,000.00 – Php 100,000.00 x 10%) 20,000.00
CAPITAL GAINS TAX Php 25,000.00
[This provision does not apply to real estate dealers or real estate
brokers because as to them real properties are ordinary assets]
(1) In General. - The provisions of Section 39(B) notwithstanding, a final
tax of six percent (6%) based on the gross selling price or current fair
market value as determined in accordance with Section 6(E) (FMV
determined by the CIR or FMV appearing in the schedule of values of
the assessor’s office, whichever is higher) of this Code, whichever is
higher, is hereby imposed upon capital gains presumed (even if the
sale results to a loss said sale is subject to 6% CGT) to have been
 realized from the sale, exchange, or other disposition of real property (a) Tax under Section 24A:
located in the Philippines, classified as capital assets ((1)If the real FMV per Assessor’s Office Php 5,500,000.00
property is located in the Phils. but is not a Capital Asset, the sale is not LESS (4,500,000.00)
subject to 6% CGT but may be subject to VAT and income tax under GAIN Php 1,000,000.00
Sec. 24A; (2)If the real property is located outside the Phils., whether it
is Capital or Ordinary Asset, the sale is not subject to 6% CGT but is First Php 500,000.00 Php 125,000.00
subject to income tax under Sec. 24A if the seller is RC. If the seller is Excess
NRC or RA, the income or gain is not taxable because he is taxable only (Php 1M – Php 500,000.00 x 32%) 160,000.00
on income from within the Phils.), including pacto de retro sales and INCOME TAX Php 285,000.00
other forms of conditional sales, by individuals, including estates and
trusts: Provided, That the tax liability, if any (it is possible that there (b) Tax under Section 24D:
is no tax liability if the selling price is lower than the cost thereby
resulting to a loss if the seller chooses Sec. 24A), on gains from sales or (Php 5.5M x 6%) Php 330,000.00
other dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or controlled
I will advise C that he should treat the sale of his commercial lot
corporations shall be determined either under Section 24 (A) or under
under Section 24A because the tax is lower by (Php 330,000.00 –
this Subsection, at the option of the taxpayer.
Php 285,000.00) Php 45,000.00.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the
contrary notwithstanding, capital gains presumed to have been • Section 24(A) imposes progressive rates of income taxes on citizens
realized from the sale or disposition of their principal residence by (residents and non-residents) and resident aliens. The progressive scheme
natural persons, the proceeds of which is fully utilized in acquiring or of income taxation has been introduced in our tax system as a measure of
constructing a new principal residence within eighteen (18) calendar raising more revenues to meet adequately the increasing needs of the
months from the date of sale or disposition, shall be exempt from the gov’t and at the same time to correct inequalities in taxation by equitably
capital gains tax imposed under this Subsection: Provided, That the distributing the tax burden based upon the principle of ability to pay.
historical cost or adjusted basis of the real property sold or disposed
shall be carried over to the new principal residence built or acquired: • Individual income taxpayers
Provided, further, That the Commissioner shall have been duly 1. Citizens, either resident or non-resident
notified by the taxpayer within thirty (30) days from the date of sale or 2. Aliens, either resident or non-resident. Non-resident aliens may either
disposition through a prescribed return of his intention to avail of the be those engaged or those not so engaged
tax exemption herein mentioned: Provided, still further, That the said
tax exemption can only be availed of once every ten (10) years: • [Impt!] Taxation of Aliens
Provided, finally, that if there is no full utilization of the proceeds of 1. Resident Aliens are taxable as citizens of the Philippines, but only on
sale or disposition, the unutilized portion of the gain presumed to have income derived from sources within the Philippines.
been realized from the sale or disposition shall be subject to capital 2. Non-resident Aliens are likewise taxable only on income derived
gains tax. For this purpose, the gross selling price or fair market value from sources within the Philippines
at the time of sale, whichever is higher, shall be multiplied by a fraction a. Non-resident Aliens Engaged are subject to tax in the
which the unutilized amount bears to the gross selling price in order to same manner (the same rates of tax prescribed in Section
determine the taxable portion and the tax prescribed under paragraph 24A and same manner of computation [Gross Income –
(1) of this Subsection shall be imposed thereon. Allowable Deductions and Exemptions] except that they are
entitled only to personal exemption on a reciprocity basis but
Example: not entitled to additional exemption) as citizens and resident
aliens on taxable income received from Philippine sources.
 C, an RC and engaged in merchandising business, is the owner of a b. Non-resident Aliens Not Engaged are subject to a flat tax
vacant commercial lot with FMV as determined by the CIR of Php rate of 25% or 15% on their gross income (passive income;
5M and with FMV as shown in the schedule of value of the City NRA not engaged is not entitled to deduct allowable
Assessor of Php 5.5M. C purchased the said lot 1 year ago at Php deductions and exemptions because he is taxable at gross
4.5M. The said lot was purchased by the city gov’t of Naga at a income)
price of Php 5.2M.
• Income Tax System – present method of taxation under the Tax Code is
C seeks your legal advice as to his taxability of this sale, what will partly global and partly scheduler
be your advice?

21
 1. Global Treatment is a system where the tax treatment views
indifferently the tax base and generally treats in common all
categories of taxable income of the taxpayer. An example is an
individual whose income is from compensation and from business
which are taxable at the same rates under Sec. 24A.
2. Schedular Approach is a system employed where the income tax
treatment varies and is made to depend on the kind or category of
taxable income of the taxpayer. Examples are passive incomes where
the tax rates are different.
• Every employer making payment of compensation income shall deduct and
withhold a tax in an amt equal to the tax due on the employee’s (except
Minimum Wage Earners [Sec. 79A]) compensation income for the entire
year in accordance with Section 24A.
• Before, the former provision (Sec. 21a) allowed the separate computation
of the respective income taxes of husband and wife. Married individuals
had the option either to compute separately their individual income tax or
to consolidate their respective aggregate taxable income and deduct the
personal and additional exemptions.
o Now, husband and wife are treated as separate taxable units;
they have no more option to compute their income tax separately
or jointly. It is mandatory that they compute separately the tax
due on their respective incomes (but only 1 ITR).
o Each spouse is entitled to the personal exemption of Php
50,000.00 unless only one of the spouses is deriving taxable
income, in which case only said spouse shall be allowed to avail of
the Php 50,000.00 basic personal exemption.
o The husband is deemed the proper claimant of the additional
exemption in respect of any dependent children, unless he
explicitly waives his right in favour of his wife in the withholding
exemption certificate
o The respective aggregate taxable income of each shall be taxed at
the graduated rates of 5% up to the top marginal rate of 32% and
their total income tax payable is the sum of their individual
income tax determined separately. Both, however, should file only
1 consolidated return.
• Income tax formula for resident citizens
Gross income from all sources (within and/or outside the Philippines)
LESS: Allowable deductions (Section 34; Itemized [there should
documents] or Optional Standard Deduction [no need for supporting documents]
NET INCOME from all sources
LESS: Personal and additional exemptions
TAXABLE INCOME/TAX BASE
Multiplied by: Tax rate in Section 24A
Amount of income tax due
• From the tax due, deduct tax withheld or tax credit and add penalties such
as surcharge, interest, or compromise. Tax credits refer to amounts
allowed as deductions from the tax due in the form of withholding tax on
wages, on rents, and other creditable withholding taxes and foreign income
tax paid or accrued.
• [Impt!] Application of deductions and exemptions
1. If the income of the individual taxpayer is purely compensation income
arising from personal services rendered under an employer-employee
relationship, itemized deductions are not allowed other than premium
payments on health and/or hospitalization insurance (subject to
certain conditions) not can he avail of the 40% optional standard
deduction. Only personal and additional exemptions can be deducted
(and premium payments).
2. If his income is mixed, he is receiving a combination of compensation
and business/professional income, he shall first deduct the allowable
personal and additional exemptions from compensation income; only
the excess therefrom can be deducted from business/professional
income.
3. In the case of husband and wife, the husband shall be the proper
claimant of the exemptions (additional) unless he waives in favour of
the wife. The taxable income will be the sum of the compensation
income (after deducting personal and/or additional exemptions) and
the net income from business/profession.
• Income tax formula for non-resident citizens and resident aliens –
they are now (Prior to Jan. 1, 1998 non-resident citizens and resident
aliens were taxable on income from sources within and without the
Philippines just like resident citizens) taxed only on their income derived
from sources within the Philippines at the same rate as for resident citizens
except that the gross income is limited to those derived from Philippine
sources.
• Passive Incomes are subject to a separate and final tax at fixed rates
with a maximum of 20% and a minimum of 5%, such as: interest from
bank deposits, royalties, prizes, and other winnings earnings, dividends
and capital gains from sales of shares of stock in a domestic corporation
not traded in stock exchange and from sales of real property located in the
Phils. and classified as capital assets.
They are not (they are not included in the ITR of the taxpayer) added to
other income in the determination of ordinary income tax liability.
• [VIP!] Interest income from currency bank deposit, etc. arising from the
excess contributions to the company’s retirement plan is exempt from the
be supporting
20% final withholding tax. Section 60(B) specifically exempts employees’
trust (or pension trust or pension fund) from income tax.
• [VIP!] Final Tax on interest from any currency (Philippine or foreign) bank
deposit is 20% except:
(a) Final tax is 7½% if the interest income is received by an
individual taxpayer who is a resident (RC or RA), from a
depository bank under the Expanded Foreign Currency Deposit
System (ECFDs) (allowed by BSP to transact foreign currency
deposits). Any income of non-residents, whether individuals or
22
 corporations, from transactions with foreign currency deposit units
(FCDUs) (banks who accept foreign currency deposit) are exempt
from income tax.
(b) The interest income (on Phil. currency bank deposit) is exempt
from the final tax if derived from long-term deposit or investment
except that in case of pre-termination the income is subject to a
graduated tax of 5%/12%/20% based on the remaining maturity
thereof. However, as the law is worded, in case of pre-
termination, the shorter the remaining maturity, the higher the
tax rate. The tax rate should instead be lower.
(c) [VIP!] The graduated rates must be based not on the remaining
maturity but on the periods (holding period) that have elapsed
before pre-termination.
(d) When an investor places fund in a bank for a period of not less
than 5 years (or 5 years or more) in the form of common or
individual trust fund or individual management account, it is
already considered a long-term investment under Section
24(B)(1), the interest income of which is exempt from the 20%
final tax. The interest income of the trust (employees’ trust or
pension trust or pension fund) is exempt (Sec. 60B) regardless of
the term (even if less than 5 yrs) of the investment or maturity of
the instrument in which it is subsequently invested.
• Individual income on interest from a depository bank under the Expanded
Foreign Currency Deposit System (FCDS)
1. If the interest income is received by a non-resident (NRC or NRA), the
income is exempt from the 7.5% final income tax (see Rev. Regs. No.
10-98 [Section 27D,3,2nd paragraph])
2. Interest income which is actually or constructively received by a
resident citizen of the Phils. or by a resident alien from a foreign
currency bank deposit shall be subject to a final tax of 7.5%. The
depository bank shall withhold and remit the tax pursuant to Sections
57 and 58 of the Tax Code.
3. If a bank account is jointly in the name of a non-resident citizen such
as an overseas contract worker, or a Filipino seaman, and his spouse
or dependent who is a resident, 50% of the interest income from such
bank deposit shall be treated as exempt while the other 50% shall be
subject to a final tax of 7.5%
o This could not have been the legislative intent because co-
ownership here is more of a fiction than fact, the actual
depositor is the NRC and the joint account is merely for
23
convenience, hence, it is believed that the entire interest
income is exempt.
4. The tax on interest income from foreign currency deposit shall be
imposed unless the depositor who is a non-resident citizen or a non-
resident alien can present a documentary evidence that he is not a
resident of the Phils. Such evidence shall consist of the original or
certified copy of any of the following:
(a) an immigration visa issued by the foreign government in the
country where he is a resident of; or
(b) a certificate of residency which is issued by the Philippine
Embassy or Consulate in the foreign country of his residence;
or
(c) a certificate of the contract of employment of an overseas
contract worker which is duly registered with the Philippine
Overseas Employment Agency (POEA); or a Seaman's
Certificate, in the case of a Filipino seaman; or
(d) a certification from the Bureau of Immigration of the
Philippines that a non-resident alien is not a resident of the
Philippines; or
(e) a certification from the Department of Foreign Affairs (DFA) of
the Philippines that the individual is a regular member of the
diplomatic corps of a foreign government and is entitled to
income tax exemption under an international agreement to
which the Philippines is a signatory.
5. To be entitled to an exemption from the tax on interest income on
foreign currency deposit, the Foreign Currency Bank Account shall be
in the name of the non-resident individual or non-resident corporation.
Otherwise, the interest income therefrom shall be considered as
subject to the tax imposed.
• There is nothing which prohibits the holder of the certificates to pre-
terminate the deposit or of investment or withdraw the income earned
before the 5th year period. The withdrawal of the principal, however, would
subject the interest income to a final tax depending on the holding period
of the instrument as stated in said provisions.
• [Impt!] Royalties mean payments of any kind received as a consideration
for the use of, or the right to use, any copyright of literary, artistic or
scientific work including cinematograph films or tapes used for radio or
television broadcasting, any patent, trademark, design or model, plan,
secret formula or process or other like right or property (such as the right
to use the trade name of another company).
Royalties on books, literary works and musical compositions are subject to
a final tax of 10%; other royalties, 20%.
• Prizes amounting to more than P 10,000 and other winnings (except PCSO
and lotto winnings [exempt]) are subject to 20% final tax; if the prizes amt
to P 10,000 or less, they should be reported (as part of the gross income of
the recipient) as income subject to regular income tax under Section
24(A).
The 20% tax is imposed on the winner although the responsibilities for the
withholding of the tax are entrusted by law upon the payer/payor. The fact
that the raffle is a gov’t sponsored project does not constitute a valid
ground to exempt the individual recipient of the prize from the tax. There
is no provision in the Tax Code exempting the gov’t in general, from the
responsibilities of withholding the tax.
• [Impt!] Cash prizes won by local (how about non-resident foreign players –
subject to final tax of 25% under Sec. 25B) players/participants in gold
tournaments are not passive incomes inasmuch as participating in golf
tournaments is their profession and/or occupation. Such being the case,
the cash prizes of said local participants/players are subject to the rates
prescribed under Section 24A and not to 20% final tax.
• Dividends comprise any distribution, whether in cash or other property, in
the ordinary course of business, even though extraordinary in amt, made
by a domestic or resident foreign corporation to the stockholders out of its
earnings (unrestricted retained earnings) or profits.
1. Dividends paid in securities or other property (other than its own stock
[stock dividend] are income to the recipients to the amt of the FMV of
such property when received by individual stockholders)
2. Dividend income, cash and/or property, from a corporation, etc. and
share of an individual in a (business) partnership or an association
taxable as a corporation received by a citizen (resident or non-
resident) or resident alien are now taxable at 10%
3. The tax is 20% if the recipient of the dividend is a non-resident alien
engaged and 25% if not so engaged; domestic corporation – exempt;
RFC – exempt and NRFC – 15% final tax subject to certain conditions
4. Property dividends should be recorded in the books of the declaring
corporation and should be received by the stockholder at its FMV.
Thus, if property with an acquisition cost of P100,000 (book value) is
declared as property dividend and the market value at the time of
declaration is P200,000, the tax would be computed on P200,000.
• Sale of property dividend
a) The individual stockholder (if he is not engaged in real estate business
if the individual stockholder is also engaged in real estate business the
sale is not subject to CGT of 6% but subject to VAT of 12% and
subsequently to the regular income tax under Section 34A) selling the
real property dividend (the declaring corporation of which the
stockholder previously received the property dividend is engaged in
real estate business) shall be subject to the 6% CGT based on the GSP
24
or current FMV, as determined in accordance with Section 6(E) (FMV
as determined by the CIR or FMV appearing in the schedule of values
in the assessor’s office) whichever is higher.
b) If a stockholder who received shares of stock as property dividend
sells the shares, the stockholder shall be subjected t percentage tax at
½ of 1% based on the GSP or gross value in money f the shares of
stock if said shares of stock are listed and traded through a local stock
exchange
c) If the shares are not traded through a local stock exchange, then the
capital gain of the stockholder which is not over P 100,000.00, shall be
subject to final income tax at 5% and any amount in excess of
P100,000.00, at 10%. To arrive at the net capital gain, the cost of the
stock shall be determined in the manner as provided in Section 6 of
Revenue Regulations No. 2-82.
o If the sale is subject to CGT of 6% the taxable amt is GSP or
FMV or FMV whichever is highest and the cose thereof is not
deducted. If the sale is subject to VAT of 12% the amt
subject to VAT is the GSP or FMV or FMV whichever is highest
and the cost thereof is not deducted. The same sale will also
be subject to ordinary income tax under Section 24A and the
taxable amt is GSP or FMV or FMV whichever is highest minus
the cost thereof. If the sale is subject to VAT of 12% the
seller did not pay 2 taxes for the same sale because the VAT
of 12% as added to the GSP or FMX or FMV whichever is
highest and was actually paid by the buyer to be remitted by
the seller to the BIR. The only tax which is actually paid by
the seller is the ordinary income tax under Section 24A.
• Shares of stocks in the hands of the taxpayer, whether individual or
corporate except a dealer in securities are capital assets
1.
a) The capital gains tax which is a final tax, imposed upon the net
capital gains realized from the sale or exchange of shares of stock
not traded through a local stock exchange, is in lieu of the income
tax; hence, the capital gains shall not be included in the gross
income of the seller (or in his ITR) in computing his/its income tax
liability. In the absence of a realized net capital gains (capital losses
are ether equal to capital gains or capital losses exceed capital gains)
there is no tax liability.
b) What is being taxed is only the “net capital gains” not “capital gains”.
Hence, in determining the CGT due on the sale of the shares of stock,
prior capital gains/losses realized/incurred during the year are to be
taken into account. In other words, capital losses sustained during a
taxable year may be deducted from and to the extent of the capital
gains derived during the same taxable year
2. If the shares sold are listed and traded through the local stock
exchange or through initial public offering, the percentage tax (½ of
1% of gross selling price or gross value in money of the shares) shall
be imposed under Section 127. The tax is not deductible for income
 purposes. In such case, the gain realized is immaterial since the tax is
based on the GSP or transaction value (or gross value in money) of
the shares. The tax is known as stock transaction tax.
3. If the seller is a dealer in securities, the shares of stock are treated as
ordinary assets and, therefore, subject to the regular income tax. This
rule applies whether or not the shares sold and listed and traded
through a local stock exchange. The applicable tax rates depend on
whether or not the shares are so listed and traded as indicated above
is the seller is not a dealer in securities.
• [VVIP!] Capital gains from sales, etc. of real property classified as
capital assets located in the Philippines – Subsection (D, 1) applies only to
individual taxpayers who are not real estate dealers or brokers, including
estates and trusts. The final CGT is 6%. The corresponding provision on
capital gains from sale of on real property by a domestic corporation is
Section 27 (D, 5).
o The reckoning date for the payment of the CGT on the onerous
sale, exchange or other disposition (such as execution sale and
foreclosure sale) of real property located in the Phils. classified as
capital asset is 30 days from the date of notarization of the deed
of sale or transfer document.
o If the real property (ordinary asset) is other than capital asset, a
creditable withholding tax shall be imposed upon the withholding
agent/buyer.
o The transfer of title to real property from the trustee to the
beneficiary without monetary consideration under and by virtue of
the Deed of Acknowledgment of Implied Trust and Waiver of
Rights and Interest to Real Estate Properties is not subject to CGT
because there is in fact and in law no transfer of the beneficial
ownership since the naked ownership of the trustee and the
beneficial ownership of the beneficiary are consolidated in the
latter.
o The dissolution by the co-owners of the co-ownership by an
agreement to divide among the co-owners the properties of the
co-ownership is not subject to CGT. The transfer of title to the co-
owners is not a sale, barter, exchange or other disposition
contemplated by law subject to the imposition of the tax. The act
of partitioning a commonly owned property to each co-owner
should not be treated a taxable event as it is nothing more than
terminating the co-ownership by making each co-owner of specific
identifiable portion or unit of the property.
o Section 24 (D, 1) is comprehensive enough to cover not only
voluntary but also involuntary sales, like execution sale and
expropriation.
o Assignment of rights in real property is not subject to CGT
because the assignee merely steps into the shoes of the assignor
25
without acquiring a better right than the assignor. The ownership
shall remain with the seller (developer). However, the gain
realized by the assignor from the assignment is subject to income
tax and the deed of assignment, to DST.
o [Mem!] Transactions under RA No. 6657 (Comprehensive Agrarian
Reform Law) involving a transfer of ownership, whether from
natural or juridical persons, shall be exempt from taxes arising
from capital gains and the payment of registration fees, and all
other taxes and fees for the conveyance or transfer thereof.
o CGT paid on the sale of real property which was subsequently
rescinded (by reason of lesion) can be credited on the new deed of
sale involving the same property but the DST paid cannot be
credited to the new deed of sale, nor refunded considering that
there has been a valid sale although it was subsequently
rescinded.
o Only sale of real property classified as Capital Asset located in the
Phils. is subject to CGT. The sale of rights over real property
although classified as real property under the Civil Code is not
subject to CGT for the reason that the situs (or place) of these
rights follow their owner (Doctrine of Mobilia Sequuntor
Personam) who may not be located in the Philippines.
• [VIP!] Accordingly, since in a pacto de retro sale the owner-vendor
transfers his/her ownership of a realty to another for a consideration, the
gain (GSP or FMV or FMV whichever is highest) presumed to be realized by
the former in the said transaction shall be subject to CGT, which shall be
paid before registration of the deed of sale with right to repurchase with
the Register of Deeds.
On the other hand, if the owner-vendor exercises his/her right to
repurchase the property subject of a pacto de retro sale, the reconveyance
of said realty by the vendee a retro to the owner-vendor shall not be
subject to CGT, as the same is without any consideration and is made only
for the purpose of restoring the rights of the parties to the status quo.
• [VIP!] Corporations and partnerships are now subject to the final CGT
of 6% on the gain presumed to have been realized (GSP or FMV or FMV
whichever is highest) from the sale of land and/or buildings (machineries
and equipment are not included even if they are classified as real property)
which are not actually used (Capital Asset) in the business of the
corporation. If the property is actually used in business (Ordinary Asset),
the corporation is subject to the 30% corporate income tax based on the
gain or profit or income which is GSP or FMV or FMV whichever is highest
minus cost.
• [Impt!] Execution Sale – the payment of CGT and DST is not required in
the registration of a Sheriff’s Certificate of Sale (provisional) in the Office of
the Register of Deeds.
 The transfer of ownership of a property at an execution sale under Rule 39
of the Rules of Court is not perfected until the execution and delivery of the
sheriff’s final deed of sale after the expiration of the 1 year redemption
period. A certificate of sale (provisional) given to the purchaser at the time
the sale (Public Auction Sale) is made is different and distinct from the
final deed, which is delivered at the expiration of the period of redemption,
since the former is not intended to operate as an absolute transfer of the
property, but merely to identify the property, price paid, and the date
when the right of redemption expires. The registration of the certificate of
sale (provisional) is a mere ministerial act by which an instrument is
sought to be inscribed in the records of the Office of the Registry of Deeds
and annotated at the back of the certificate of title covering the land
subject of the instrument.
Therefore, the sale of the property at an execution sale under Rule 39 of
the Rules of Court and the corresponding registration of the certificate of
sale in the Office of the Registry of Deeds are not subject to the CGT and
DST.
o In Execution Sale and Foreclosure Sale the real property is subject
to CGT of 6% only if the debtor or mortgagor did not redeem the
real property. If the debtor or mortgagor redeemed the real
property within the redemption period the execution sale or
foreclosure sale is not subject to CGT of 6%.
• [Impt!] Foreclosure Sale – the CGT paid (because the redemption period
has already expired) in a foreclosure sale cannot be deducted from the CGT
on the sale of the property where the mortgagor failed to exercise his right
of redemption. There being no timely redemption, the reconveyance (the
mortgagor purchased the property from the buyer/mortgagee at
foreclosure sale after the expiration of the redemption period) of the
subject property from the buyer (usually the mortgagee) to the seller
(mortgagor) is another sale subject to CGT under Section 24(D)(1).
• [VIP!] Where right of redemption exists – where the right of redemption
exists, the certificate of title of the mortgagor shall not be cancelled yet
even if the property had already been subjected to foreclosure. Instead,
only a brief memorandum shall be annotated on the back of the certificate
of title. The cancellation of the title and the subsequent issuance of a new
title in favour of the purchaser/highest bidder, therefore, depend on
whether or not the mortgagor redeems the mortgaged property within 1
year from the issuance of the certificate of sale. Thus, no transfer of title to
the highest bidder can be effected until after the lapse of the 1 year period
from the issuance of the said certificate of sale.
o Accordingly, the taxes on the sale shall be due only after the lapse of
the 1 year redemption period. In a case, considering that the 1 year
period within which to redeem the property had lapsed, the CGT
26
should be paid and the CGT return filed within 30 days from the date
of the expiration o the 1 year redemption period.
o The sale of the property at an extrajudicial foreclosure (See Section
6, Act No. 3135 and Section 47, 2nd paragraph, RA 8791) which is
similar to an execution sale and the corresponding registration of the
certificate of sale (provisional). Section 28 of Rule 39 of the Rules of
Court allows the judgment obligor, or redemptioner, a period of 1 year
from the date of the registration of the certificate of sale (provisional)
to redeem the property from the purchaser.
o The CGT on a foreclosure sale is due within 30 days from the
expiration of the 1 year redemption period. The 1 year redemption
period of a mortgaged property cannot be extended by the mortgagee-
bank, finance or insurance companies nor by the parties in an extra-
judicial foreclosure.
• X acquired a real property in his capacity as the highest winning bidder in a
Sheriff’s Sale. Y purchased from X the said property. At the time of the
execution of the Deed of Sale, there was no Owner’s Duplicate of the TCT.
Y was not able to pay the CGT because the RDO required the TCT which
was destroyed in the Quezon City Hall fire. Moreover, the filing of various
cases in court led to the delay and the failure to pay the CGT on time.
The request for waiver of payment of penalty charges on the sale of said
real property was denied for lack of legal basis. Being the seller, X is the
party liable to pay the CGT. Y is not the proper party in interest.
• In case of non-redemption, the CGT on the foreclosure sale imposed under
Secs. 24(D)(1) and 27(D)(5) shall become due based on the bid price (or
FMV or FMV whichever is highest) but only within 30 days from the
expiration of the 1 year redemption period
In case the mortgagor exercises his right of redemption within 1 year from
the issuance of the certificate of sale, no CGT shall be imposed because no
capital gain has been derived by the mortgagor and no sale or transfer of
real property occurred. A certification to that effect or the deed of
redemption shall be filed with the Revenue District Office having
jurisdiction over the place where the property is located which certification
or deed shall likewise be filed with the Register of Deeds and a brief
memorandum thereof shall be made by the Register of Deeds on the
Certificate of Title of the mortgagor.
In case of non-redemption, a tax clearance certificate (TCL) or Certificate
Authorizing Registration (CAR) in favour of the purchaser/highest bidder
shall only be issued upon presentation of the capital gains and DSTs
returns duly validated by an authorized agent bank evidencing full payment
of the capital gains and documentary stamp taxes due on the sale of the
property classified as capital asset.
• [VIP!] Basis of the 6% CGT – the tax is based on the GSP or the FMV
(zonal value) as determined by the CIR or as shown in the schedule of
values in the Provincial or City Assessor, whichever is higher.
o An exception is provided in the case of the sale by an individual of
his principal residence
o In case of exchange, the 6% CGT payable by the transferor under
subsection (D) is based on the FMV of his property
o In case of expropriation by the gov’t, the actual consideration
(fixed by the court) may be used as basis in determining the CGT.
The “just compensation” paid by the gov’t to the owner of the
property is the equivalent for the value of the property at the time
of its taking. It is the fair and full equivalent for the loss sustained
by the transferor which is the measure of indemnity. Such being
the case, the amt approved by the court as fair compensation
must be used as the tax base for computing the gains derived out
of such transaction.
o The redemption of realty under a pacto de retro sale is not subject
to CGT only pacto de retro sale is subject.
o Where the purchaser is the gov’t or any of its political subdivisions
or agencies or a gov’t-owned or –controlled corporation, the
taxpayer (seller) has the option to have his tax liability
determined under Section 24(A) as ordinary income tax.
• A Senior Citizen who is a minimum wage earner or whose taxable income
during the year does not exceed his personal and additional exemptions,
will be exempt from income tax upon compliance with the following
requirements:
SEC 25. Tax on Nonresident Alien Individual. -
a) A Senior Citizen must first be qualified as such by the CIR or his
duly authorized representative
b) He must file a Sworn Statement on or before January 31 of every
year that his annual taxable income for the previous year does not
exceed the poverty level as determined by the NEDA thru the NSCB
c) If qualified, his name shall be recorded by the RDO in the Master
List of Tax-Exempt Senior Citizens for that particular year, which
the RDO is mandatorily required to keep.
However, a Senior Citizen who is a compensation income earner
deriving from only one employer an annual taxable income
exceeding the poverty level or the amt determined by the NEDA
thru the NSCB on a particular year, but whose income had been
subjected to the withholding tax on compensation, shall, although
not exempt from income tax, be entitled to the substituted filing of
income tax return
27
• [Impt!] The exemption of Senior Citizens from income tax granted in the
Act will not extend to all types of income earned during the taxable year.
Hence, he can still be liable for other taxes such as:
a) The 20% final tax on interest, royalties, prizes and other winnings
b) The 10% final tax in Section 24 (B,2) (Dividends [cash and
property]
c) Capital gains tax (5% and 10%) from sales of shares of stock in a
domestic corporation not traded in the stock exchange
d) 6% final tax on presumed capital gains from sale of real property
classified as capital asset located in the Phils. except gains
presumed to have been realized from the sale or disposition of
principal residence
• A benefactor refers to any person whether related or not to the senior
citizen who provides care or who gives any form of assistance to him/her,
and on whom the senior citizen is dependent on for primary care and
material support, as certified by the City or Municipal Social Welfare and
Development Officer
A Senior Citizen who is not gainfully employed, living with and dependent
upon his benefactor for chief support, although treated as dependent under
the Act, will not entitle the benefactor to claim the additional exemption of
P 25,000.00. The entitlement to claim the additional exemption per
dependent (not exceeding 4) is allowable only to individual taxpayers with
a qualified dependent child or children subject to the conditions set forth
under Section 35(B).
(A) Nonresident Alien Engaged in trade or Business Within the Philippines. –
(1) In General. - A nonresident alien individual engaged in trade or business
in the Philippines shall be subject to an income tax in the same manner
(same rates prescribed in Section 24A and same manner of computing
[Gross Income LESS allowable deductions LESS exemptions]) as an
individual citizen and a resident alien individual, on taxable income
received from all sources within the Philippines. A nonresident alien
individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during
any calendar year shall be deemed a 'nonresident alien doing business
in the Philippines'. Section 22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint
Stock Company, or Insurance or Mutual Fund Company or Regional
Operating Headquarter or Multinational Company, or Share in the
Distributable Net Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a Corporation or
Association., Interests, Royalties, Prizes, and Other Winnings. - Cash
 and/or property (1)dividends from a domestic corporation, or from a joint
stock company, or from an insurance or mutual fund company or from a
regional operating headquarter of multinational company, or the share
of a nonresident alien individual in the distributable net income after tax
of a partnership (except a general professional partnership) of which he
[Subsections C, D & E refer to special NRA not engaged because they enjoy
is a partner, or the share of a nonresident alien individual in the net
preferential tax rate of 15% instead of 25%]
income after tax of an association, a joint account, or a joint venture
taxable as a corporation of which he is a member or a co-venturer;
(2)
interests (whether from bank deposit or not); (3)royalties (in any
form); and (4)prizes (except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under Subsection (A)(1)
of Section 24) and (5)other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an final income
tax of twenty percent (20%) on the total amount thereof: Provided,
however, that royalties on books as well as other literary works, and
royalties on musical compositions shall be subject to a final tax of ten
percent (10%) on the total amount thereof: Provided, further, That
cinematographic films and similar works shall be subject to the tax
provided under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection:
Provided, finally, that should the holder of the certificate pre-terminate
Same as the deposit or investment before the fifth (5th) year, a final tax shall be
RC,
imposed on the entire income and shall be deducted and withheld by the
NRC and
RA depository bank from the proceeds of the long-term deposit or
investment certificate based on the remaining maturity (holding
period) thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of
shares of stock in domestic corporations not traded through the local
Same as RC, stock exchange, and real properties shall be subject to the tax
NRC and RA
prescribed under Subsections (C) and (D) of Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. - There shall be levied and collected and paid for each taxable
year upon the entire income (or gross income) received from all sources
within the Philippines by every nonresident alien individual not engaged in
NRC, RA and NRA
trade or business within the Philippines as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities, compensation,
Same as RC,
remuneration, emoluments, or other fixed or determinable annual or periodic
or casual gains, profits, and income, and capital gains, a tax equal to twenty-
engaged
five percent (25%) (final tax) of such income. Capital gains realized by a
nonresident alien individual not engaged in trade or business in the Philippines
28
from the sale of shares of stock in any domestic corporation and real property
shall be subject to the income tax prescribed under Subsections (C) and (D)
of Section 24.
(C) Alien Individual Employed by Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies. - There shall be levied,
and collected and paid for each taxable year upon the gross income received
by every alien individual employed by regional or area headquarters and
regional operating headquarters established in the Philippines by multinational
companies as salaries, wages, annuities, compensation, remuneration and
other emoluments, such as honoraria and allowances, from such regional or
area headquarters and regional operating headquarters, a (final) tax equal to
fifteen percent (15%) of such gross income: Provided, however, That the
same tax treatment shall apply to Filipinos employed and occupying the same
position as those of aliens employed by these multinational companies. For
purposes of this Chapter, the term 'multinational company' means a foreign
firm or entity engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied,
and collected and paid for each taxable year upon the gross income received
by every alien individual employed by offshore banking units established in
the Philippines as salaries, wages, annuities, compensation, remuneration and
other emoluments, such as honoraria and allowances, from such off-shore
banking units, a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos
employed and occupying the same positions as those of aliens employed by
these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor.
- An Alien individual who is a permanent resident of a foreign country but who
is employed and assigned in the Philippines by a foreign service contractor or
by a foreign service subcontractor engaged in petroleum operations in the
Philippines shall be liable to a tax of fifteen percent (15%) of the salaries,
wages, annuities, compensation, remuneration and other emoluments, such
as honoraria and allowances, received from such contractor or subcontractor:
Provided, however, That the same tax treatment shall apply to a Filipino
employed and occupying the same position as an alien employed by
petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien
employees referred to under Subsections (C), (D) and (E) hereof shall be subject
to the pertinent income tax, as the case may be, imposed under this Code.
• Non-resident alien individuals are divided into two classes:
1. Engaged in trade or business within the Phils.
2. NOT engaged in trade or business within the Phils.
 • Income tax formula for non-resident alien engaged
Gross income within the Philippines
LESS: Allowable itemized deductions (or 40% optional standard deduction)
NET INCOME
LESS: Personal exemption (if entitled) (or reciprocity basis)
TAXABLE INCOME/TAX BASE
Multiplied by: Tax rate in Section 24A
Amount of income tax due
o They are taxed in the same manner as non-resident citizens and
resident aliens only with respect to income from Philippine sources
o They are not entitled to additional exemption for dependents but
may be entitled to personal exemptions under certain conditions
o They are subject to the same rates of tax as citizens and resident
aliens on capital gains from sales of shares of stock in a domestic
corporation and real property classified as CA and located in the
Phils. and percentage tax in case the shares are listed and traded
through a local stock exchange
o Dividends, etc., received by a non-resident alien are subject to
20% final tax if the alien is engaged otherwise, he is taxable
under Subsection (B) at 25%
• Income tax formula for non-resident aliens not engaged
Gross income within the Philippines
Multiplied by: 25%
Amount of income tax due
1. As used in Subsection (B):
a. Income is fixed when it is to be paid in amts definitely
pre-determined
b. Determinable, whenever there is a basis of calculation by
which the amt to be paid may be ascertained
c. Annual or periodical, when it is paid from time to time,
whether or not at regular intervals
2. The income need not be paid annually if it is paid periodically
• Regular Filipino employees of an ROHQ who are assigned abroad for most
of the time during the taxable year qualify as non-resident citizens and are,
therefore, exempt from tax on compensation for services rendered abroad.
SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general
professional partnership (non-taxable entity) as such shall not be subject to the
income tax imposed under this Chapter. Persons engaging in business (“exercising
their common profession”) as partners in a general professional partnership shall be
liable for income tax only in their separate and individual capacities.
29
For purposes of computing the distributive share of the partners, the net income of
the partnership shall be computed in the same manner (gross income LESS
allowable deductions) as a corporation.
Each partner shall report as gross income (because from there the partner can
deduct personal and additional exemptions) his distributive share, actually or
constructively received, in the net income of the partnership.
• Partnerships are either “taxable (ordinary or business) partnerships” or
“exempt partnerships (GPP)”
• GPP whether registered or not are not subject to income tax and
consequently, exempt from withholding tax
Unlike an ordinary or business partnership which is treated as a corporation
for income tax purposes and, therefore, subject to corporate income tax of
30%, a GPP is not in itself an income taxpayer.
• The income tax is imposed on the partners themselves in their separate
and individual capacity on their separate and respective distributive shares
of the net income of the partnership computed (gross income LESS
allowable deductions) in the same manner as a corporation
1. They (GPP) are, however, required to file information returns for the
purpose of furnishing information as to share in the net gains or profits
which each partner shall include in his individual return mainly for
administration and data purposes
2. The distributive share of the individual partner in the net income of a
GPP, whether actually or constructively received, is subject to tax
under Section 24(A) to be reported as gross (the partner may deduct
therefrom personal and additional exemptions) income
• Taxation of business partnerships – A partnership whether registered
or not, other than a GPP, is considered for tax purposes a corporation and
the partners are considered stockholders
• The taxable income declared by a partnership for a taxable year is subject
to corporate income tax (30%) under Section 27 (A).
1. After deducting such tax imposed therein, such income shall be
deemed to have been actually or constructively received by the
partners (as dividend) in the same taxable year.
2. The share of an individual partner in a partnership subject to corporate
tax under Section 27(A) is subject to a final tax 10% (if the partner is
RC, NRC or RA); 20% (if the partner is NRA engaged); 25% (if the
partner is NRA not engaged)
o There is no inconsistency between a business partnership which is
necessarily engaged in business in the Phils and the partners thereof
 who are NRA not engaged in business in the Phils. because the
business partnership is a judicial person which is a separate and
distinct from the partners of the said partnership
Chapter 4 – TAX ON CORPORATIONS
Section 27. Rates of Income tax on Domestic Corporations. -
(A) In General. - Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines
by every corporation, as defined in Section 22(B) of this Code and taxable
under this Title as a corporation, organized in, or existing under the laws of
the Philippines: Provided, That effective January 1, 2009, the rate of income
tax shall be thirty percent (30%).
For purposes of this Section, the term 'gross income' derived from business
shall be equivalent to gross sales less sales returns, discounts and allowances
and 'cost of goods sold’ (or cost of sale). ‘Cost of goods sold' shall include all
business expenses directly incurred to produce the merchandise to bring them
to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include
the invoice cost of the goods sold, plus import duties, freight in transporting
the goods to the place where the goods are actually sold, including insurance
while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall
include all costs of production of finished goods, such as raw materials used,
direct labor and manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the factory or
warehouse.

[Read!] In the case of corporations adopting the fiscal-year accounting period, In the case of domestic corporation taxpayers engaged in the sale of service,
the taxable income shall be computed without regard to the specific date 'gross income' means gross receipts less sales returns, allowances and
when specific sales, purchases and other transactions occur. Their income and discounts. NO COST OF SALES
expenses for the fiscal year shall be deemed to have been earned and spent
equally for each month of the period. Example:
 A & B who share profits and losses equally and are RCs, are
The corporate income tax rate shall be applied on the amount computed by partners in AB partnership which is a GPP and whose income
multiplying the number of months covered by the new rate within the fiscal statement for the year ended Dec. 31, 2013 appears below:
year by the taxable income of the corporation for the period, divided by
twelve. Gross Income from Profession Php 1,200,000.00
LESS: Expenses, Losses, etc. (Sec. 34) 300,000.00
Provided, further, That the President, upon the recommendation of the NET INCOME Php 900,000.00
Secretary of Finance, may, effective January 1, 2000, allow corporations the
option to be taxed at fifteen percent (15%) of gross income as defined herein, a) Is AB partnership subject to income tax?
after the following conditions have been satisfied: ANS: NO, a GPP is NOT subject to income tax under
Section 26
(1) A tax effort ratio of twenty percent (20%) of Gross National Product
(GNP); b) Is AB partnership required to file a return?
(2) A ratio of forty percent (40%) of income tax collection to total tax ANS: YES, a GPP is required by law to file
revenues; information return
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial c) Is A taxable on his distributive share in the net income
Position (CPSFP) to GNP. of AB partnership?
ANS: YES, A should report as gross income or part
of his gross income his share in the net
The option to be taxed based on gross income shall be available only to firms income of AB partnership in the amt of (Php
whose ratio of cost of sales to gross sales or receipts from all sources does not
900,000.00 ÷ 2) Php 450,000.00 which
exceed fifty-five percent (55%).
shall be taxable under Section 24 A.

The election of the gross income tax option by the corporation shall be
irrevocable for three (3) consecutive taxable years during which the
corporation is qualified under the scheme.
30
 A & B, who share profits and losses equally, are partners in
AB partnership which is engaged in hotel business and whose
income statement for the year ended Dec. 31, 2013 appears
below:
 Gross Income from Profession Php 12,000,000.00 educational institution or hospital of its primary purpose or function. A
LESS: Expenses, Losses, ets. (Sec. 34) 8,000,000.00 'Proprietary educational institution' is any private school maintained and
NET INCOME before Income Tax Php 4,000,000.00 administered by private individuals or groups with an issued permit to operate
LESS: Income Tax (Php 4M x 30%) 1,200,000.00 from the Department of Education, Culture and Sports (DECS), or the
NET INCOME after Income Tax Php 2,800,000.00 Commission on Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in accordance
with existing laws and regulations.
a) Is AB partnership subject to income tax?
ANS: YES, a business partnership is taxable at 30%
o Non-stock, Non-profit educational institutions are exempt from all
as a corporation under Section 27
kinds of taxes, internal or external national or local (Article XIV,
Section 4, Constitution)
b) Is AB partnership required to file a return?
ANS: YES, a business partnership like a corporation
o If the school or hospital is a single proprietorship, the owner thereof
is required by la to file quarterly income tax
is taxable under Section 24A. If it is a partnership or corporation it is
returns
subject to corporate income tax of 10%. Proprietary hospital which is
a partnership or corporation is taxable at 30%.
c) Is A taxable on his distributive share in the net income
after tax of AB partnership?
Example:
ANS:
1. If A is RC or NRC or RA, he is taxable at 10%
 S Tuition Unrelated Total
final tax on dividend in the amount of (Php
2.8M ÷ 2 x 10%) Php 140,000.00 which is to
be withheld and paid by AB partnership to the Gross Income Php 20M Php 30M Php 50M
BIR LESS:
allowable deductions 12M 18M 30M
2. If A is NRA engaged, he is taxable at 20% TAXABLE INCOME Php 18M Php 12M Php 20M
final tax on dividend or in the amt of (Php
2.8M ÷ 2 x 20%) Php 280,000.00 to be The ratio of unrelated income to total income is (Php 30M ÷ Php
withheld and paid by AB partnership to the 50M) 60% which exceeds 50%, hence, the income tax is (Php
BIR 20M x 30%) Php 6M.

3. If A is NRA not engaged, he is taxable at 25%

(C) [Mem!] Government-owned or Controlled-Corporations, Agencies or
final tax on dividend or in the amt of (Php Instrumentalities. - The provisions of existing special or general laws to the
2.8M ÷ 2 x 25%) Php 350,000.00 to be
contrary notwithstanding, all corporations, agencies, or instrumentalities
withheld and pid by AB partnership to the BIR
owned or controlled by the Government, except the (1)Government Service
Insurance System (GSIS), the (2)Social Security System (SSS), the (3)
In either of the 3 cases above, A is taxable and AB
Philippine Health Insurance Corporation (PHIC), and the (4)Philippine Charity
partnership must withhold and pay the dividend tax to the Sweepstakes Office (PCSO), shall pay such rate of tax (30%) upon their
BIR even if the partnership did not distribute the net taxable income as are imposed by this Section upon corporations or
income after the tax of the partnership
associations engaged in a similar business, industry, or activity. (as amended
by RA 9337)
(B) [Mem!] [BAR!] Proprietary (or for profit) Educational Institutions and ((5)PDIC or Phil Deposit Insurance Corporation is also exempt from
Hospitals. - Proprietary educational institutions and hospitals which are
Income tax under RA9576)
nonprofit (no part of the income of which enures to the benefit of any
individual or group of individuals) shall pay a tax of ten percent (10%) on
(D) Rates of Tax on Certain Passive Incomes. –
their taxable income except those covered by Subsection (D) hereof:
Provided, that if the gross income from unrelated trade, business or other (1) Interest from Deposits and Yield or any other Monetary Benefit from
activity exceeds fifty percent (50%) of the total gross income derived by
Deposit Substitutes and from Trust Funds and Similar Arrangements,
such educational institutions or hospitals from all sources, the tax (30%) and Royalties. - A final tax at the rate of twenty percent (20%) is
prescribed in Subsection (A) hereof shall be imposed on the entire taxable
hereby imposed upon the amount of (1)interest on currency bank deposit
income. For purposes of this Subsection, the term 'unrelated trade, business and yield or any other monetary benefit from deposit substitutes and
or other activity' means any trade, business or other activity, the conduct of from trust funds and similar arrangements received by domestic
which is not substantially related to the exercise or performance by such
corporations, and (2)royalties, derived from sources within the
31
 Philippines (if the interest and royalties are derived from outside the
Phils., the same RPGI taxable at 30%): Provided, however, That
interest income derived by a domestic corporation (depositor of
foreign currency) from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7½%) (same as RC and RC) of
such interest income.
o Prizes and Other Winnings are not mentioned if the taxpayer is a
DC probably because a corporation does not participate in any
contest or it does not engage in gambling activities. In case a DC
receives a prize the same is not subject to final tax of 20% but it
is part of the gross income of the corporation taxable at 30%
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below shall be imposed
on net capital gains realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the stock
exchange:
[same as RC, NRC, RA, NRA engaged and NRA not engaged]
Not over P100,000 5%
Amount in excess of P100,000 10%
(3) (Domestic Corporation in a bank) Tax on Income Derived under the
Expanded Foreign Currency Deposit System. - Income (interest income
on foreign currency loans granted by the domestic corporation to the
borrowers) derived by a depository bank (domestic corporation which is
the lender bank) under the expanded foreign currency deposit system
from foreign currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency deposit system units
and other depository banks under the expanded foreign currency
deposit system shall be exempt from all taxes, except net income from
such transactions as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the regular
income tax payable by banks: Provided, however, That interest
income from foreign currency loans granted by such depository banks
under said expanded system to residents other than offshore banking
units in the Philippines or other depository banks under the expanded
system shall be subject to a final tax at the rate of ten percent (10%).
[Mem!] Any interest income of non-residents (depositors), whether
individuals or corporations, from transactions with depository banks
under the expanded system shall be exempt from income tax.
32
o Offshore banking unit is a branch, subsidiary or affiliate of a
foreign banking corporation which is duly authorized by BSP to
ttransact offshore banking business in the Phils.
(4) Intercorporate Dividends. - Dividends received by a domestic
corporation from another domestic corporation shall not be subject to
tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands
and/or Buildings. - A final tax of six percent (6%) is hereby imposed
on the gain presumed to have been realized on the sale, exchange or
disposition of lands and/or buildings located in the Phils. which are not
actually used in the business of a corporation and are treated as capital
assets, based on the gross selling price of fair market value as
determined in accordance with Section 6(E) of this Code, whichever is
higher, of such lands and/or buildings.
o If the lands and/or buildings are sold to the gov’t, the sale is
always subject to CGT of 6% and the Domestic Corporation has
no option to treat it as ordinary gain subject to 30% corporate
income tax.
o In Section 27D (1), the DC is the depositor of foreign currency
the interest income of which is subject to final tax of 7½%. In
Section 27D(3), 1st paragraph, the DC is a lender or depository
bank which grants foreign currency loans to borrowers the
interest income of which is either exempt or subject to final tax
of 10% instead of corporate income tax of 30%.
(E) Minimum Corporate Income Tax on Domestic Corporations. –
(1) Imposition of Tax. - A minimum corporate income tax of two percent
(2%) of the gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation (domestic) taxable under
this Title, beginning on the fourth taxable year immediately following
the year in which such corporation commenced its business operations,
when the minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year (Gross income LESS
allowable deductions x 30%).
(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum
corporate income tax over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited
against the normal income tax for the three (3) immediately succeeding
taxable years.
Example:
 Corporation C, a DC, was organized, commenced business
operations and registered with the BIR on Han. 2, 2006. For the
taxable year 2009, its gross income was Php 20M and the allowable
deductions were Php 19M. For the taxable year 22010, its gross
income was Php 25M and the allowable deductions were Php 20M.
 1. Compute the tax due of Corporation X in 2009. For a manufacturing concern, cost of 'goods manufactured and sold'
2. Compute the tax due of Corporation X in 2010. shall include all costs of production of finished goods, such as raw
materials used, direct labor and manufacturing overhead, freight cost,
Solution: insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.
1. 2009
Gross Income Php 20,000,000.00
In the case of taxpayers engaged in the sale of service, 'gross income'
LESS: allowable deductions 19,000,000.00
means gross receipts less sales returns, allowances, discounts and cost
TAXABLE INCOME Php 1,000,000.00
of services. 'Cost of services' shall mean all direct costs and expenses
necessarily incurred to provide the services required by the customers
Normal Income Tax (Php 1M x 30%) 300,000.00
and clients including (A) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service and (B) cost of
Minimum Corporate Income Tax
facilities directly utilized in providing the service such as depreciation or
(Php 20M x 2%) 400,000.00
rental of equipment used and cost of supplies: Provided, however, That
in the case of banks, 'cost of services' shall include interest expense.
TAX DUE 400,000.00

2. 2010 • Classification of corporations – corporations may be either domestic or

Gross Income Php 25,000,000.00
LESS: allowable deductions 20,000,000.00
TAXABLE INCOME Php 5,000,000.00
Normal Income Tax (Php 5M x 30%) 1,500,000.00
Minimum Corporate Income Tax
(Php 25M x 2%) 500,000.00
TAX DUE 1,400,000.00
(3) Relief from the Minimum Corporate Income Tax Under Certain
Conditions. - The Secretary of Finance is hereby authorized to suspend
the imposition of the minimum corporate income tax on any corporation
which suffers losses on account of prolonged labor dispute, or because
of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and
regulation that shall define the terms and conditions under which he
may suspend the imposition of the minimum corporate income tax in a
meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum
corporate income tax provided under Subsection (E) hereof, the term
'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce the merchandise to bring
them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include
the invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
foreign and the latter may either be resident foreign (engaged) or non-
resident foreign (not engaged).
• Corporation does not include a GPP and a joint venture or consortium
“formed for the purpose of undertaking construction projects under a
service contract with the Gov’t”
1. Partnerships (ordinary or business or taxable), except GPPs,
whether registered or unregisteres, are treated as corporations and
subject to tax as such in line with the separate juridical personality
doctrine. The partners are considered as stockholders and, therefore,
profits distributed to them actually or constructively by the partnership
are considered as dividends.
2. Section 27A excluding GPPs from the payment of corporate income tax
is not an exemption clause (examples of exemption clauses or
exemption provisions are Section 30 of the NIRC and ArticleXIV, Sec.
4, Constitution) but a classification clause, which must be construed
liberally in favour of the taxpayer. A classification statute is one which
specifies the persons or property subject to tax
• Any corporation, domestic or foreign not otherwise exempt (Section 20
and GSIS, SSS, PHIC and PCSO. PDIC is also exempt), is liable to tax.
o A DC is taxed on its income from sources within and outside the Phils.
but a foreign corporation is taxed only on its income from sources
within the Phils.
• The 20% final tax for prizes and winnings (payable by individuals) [Section
24 (B,1)] is not applicable to corporations since this is not included among
the income of a corporation subject to the 20% final tax under Section
27(D,1). However, in the hands of a corporate winner, the prize or winning
shall, instead, be subject to 30% corporate income tax under Section 27
(A) or Section 28 (A,1) in the case of a foreign corporation.

33
• Income tax formula for proprietary educational institutions and non-profit
hospitals:
o The new income tax rate of 10% is subject to certain conditions.
Section 27B introduces the predominance test otherwise, it will be
taxed at 30% on its entire taxable educational/non-educational or
hospital/non-hospital income
• [Mem!] All revenues (incomes or gains or profits) and assets of non-stock,
non-profit educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and duties.
• [Impt!] Government-owned or –controlled corporations – except
o A non-stock, non-profit educational institution is exempt from taxes,
10% tax on its income as an educational institution; 20% withholding
tax on its interest income on its savings and time deposits; customs
duties and VAT on its importation or purchase sale of books and other
educational materials and equipment to be actually, directly and
exclusively used for educational purpose.
• Compared to Section 24(B,1) on the taxation on interest, etc., Section 27D
o [VIP!] However, earnings realized from its passive investments (the
asset such as cash is no longer used A,D,E for educational purpose)
arising from deposit substitute instruments, money market
placements, treasury bills, etc. Not derived in pursuance of its purpose
as an educational institution, are subject to 20% final tax. But if the
earnings from such passive investments are to be used directly,
exclusively, and actually for its educational purpose or function, then
such earnings are exempt from the 20% withholding tax imposed by
Section 27D, pursuant to Section 4(3), Article XIV of the Constitution.
• [Impt!] The same is true with respect to capital gains realized from the
o [VIP!] Moreover, revenues derived from and assets used in the
operation of cafeterias/canteens, dormitories, hospitals 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. Accordingly, the tax exemption
does not include the canteen owned by the school operated by a
concessionaire (or lessee is the one taxable on income from the
canteen; the rent collected by the school is exempt provided it is ADE
used for educational purposes). The income from miscellaneous
school-related operations like car stickers is, likewise, exempt from
income tax.
o Revenues derived from and assets used in the operation of hospitals
are exempt from taxation, provided they are owned and operated by
the educational institution as an indispensable requirement in the
operation and maintenance of its medical school or college
• Royalties to be subject to 20% final tax, the royalties must be in the
o A non-stock, non-profit educational institution is exempt from tax on
all revenues derived in pursuance of its purpose as an educational
institution and used actually, directly, and exclusively for educational
purposes. The exemption contemplated refers to internal revenue
taxes and custom duties as well as local taxes under the LGC of 1991.
34
It shall, however, be subject to internal revenue taxes on income (BUT
if said income is ADE used for educational purposes the same is
exempt) from trade, business or other activity, the conduct of which is
not related to the exercise or performance by such educational
institution of its educational purpose or function.
o The educational institution must not only be a non-stock corporation.
There must be a showing that it is a non-profit corporation, which
means that no part of its income inures directly or indirectly to any
individual or member.
only (PDIC is also exempt from Income Tax under RA 9576) for the GSIS,
SSS, PHIC, and PCSO, all such corporations are taxable as privately-owned
corporations engaged in a similar business, industry, or activity. RA No.
9337 withdraws PAGCOR’s income tax exemption beginning Nov. 1, 2005,
when it removed it from the list of tax-exempt GOCC’s in Section 27C.
and 28(A,7,a) do not include prizes and other winnings (PGI [Part of Gross
Income]). Individuals, whether citizens or liens, resident or non-resident,
and corporations, whether domestic or foreign and in the latter case, if
received by DC or RFC taxable at 30%, whether resident or non-resident
are subject to the same rates of tax on capital gains (this is the only item
of income the provisions of which are equally applicable to all kinds of tax
payers) from sales of shares of stock (in a domestic corporation) not
traded through a local stock exchange.
sale or disposition of real property (located in Phils.) (lands and/or
buildings which are not actually used in the business of the corporation and
are treated as capital assets) by a DC, except that in the case of foreign
corporations, resident or non-resident, they are subject to the regular
corporate income tax of 30% based on gain (GSP or FMX or FMV whichever
is highest – cost).
o If the seller of the land and/or building which is located in the Phils.
and classified as Capital Asset is a DC the sale is subject to 6% CGT
based on GSP or FMV or FMV whichever is highest. If the seller is a
foreign corporation whether resident or non-resident, the sale is
subject to 30% corporate income tax based on gain (GSP or FMW or
FMW whichever is highest – cost).
nature of passive income.
1. Income derived by the taxpayer (DC) from the distribution of the
licensed computer systems to Philippine banks and the performance of
support services is income generated in the active pursuit and
performace of its primary purpose and the same is not passive income
 subject to the 20% final tax but to 30% corporate income tax subject
to 15% creditable withholding tax
2. Similarly, royalty payments by franchisees to a company (franchisor)
whose primary purpose is to engage in the busness of acquiring,
developing, managing, and utilizing franchises, licenses and other
intellectual property are not passive income but are in the nature of
active income from the active pursuit of its business. The payments
received by a taxpayer (franchisor) from the active conduct of trade or
business is considered ordinary business income subject to the regular
corporate income tax (30%).
• Interest Income is taxed at 20% final tax whether or not the bank
deposit is of Phil. currency. However, interest income derived by a
domestic corporation (depositor of foreign currency) from a depository
bank under the Expanded Foreign Currency Deposit System is subject to
7½% final tax, the same rate payable by an resident individual citizen and
resident alien the same rate of tax is payable by an RFC (Section 28A, 7a).
If the depositor of the foreign currency is NRC or NRA or NRFC the interest
income is exempt (Section 27D,3, 2nd paragraph).
o A DC is subject to a final tax of 10% on interest earned from deposits
and similar arrangements other than interest frm a depository bank
under the EFCDS which is subject to 7½% FT.
o Interests paid by the BSP on deposit of banks required to be
maintained as part of legal reserve are not subject to the final tax of
10% imposed under Section 27(D)
Although said reserves ordinarily take the form of deposits with the
BSP, they are not considered bank deposits.
o [VIP!] Corporations, unlike individuals, are not granted tax exemption
for long-term deposits
Interest income received or earned on long term deposits by:
1. RC, NRC, RA & NRA engaged - exempt
2. NRA not engaged - 25% FT
3. DC & RFC - 20% FT
4. NRFC - 30% FT
• Provincial, city, municipality and barangay gov’ts are liable for 20% final
tax on interest on their bank deposits because the tax exemption
privileges, including preferential tax treatment of all gov’t units, were
withdrawn by PD No. 1931 and EO No. 93.
• Under the EFCDS from foreign currency transactions with non-residents,
offshore banking units in the Philippines (see Section 27 [D,3,1st
paragraph]0, and local commercial banks, including authorized branches of
foreign banks and other depository banks under the system (see Section
27 [D,3,1st paragraph]), are now again “exempt from all taxes” interest
income from foreign currency loans granted by such depository bank to
residents other than OBUs or other depository banks under the EFCDS shall
be subject to final tax of 10% instead of 30%
35
[Mem!] Under the 2nd paragraph of Section27, Subsection (D,3), any
income is exempt from income tax if derived by non-residents (depositors
of foreign currency), whether individual or corporations, from transactions
with depository banks (or borrowers) under the expanded system
• Interest income actually or constructively received by a domestic
corporation or a resident foreign corporation (depositor) from a
foreign currency bank deposit shall be subject to a final tax at the rate of
7.5% based on the gross amt of such interest income.
• [Mem!] Intercorporate dividends are not subject to income tax (Section 27
[D,4]), withholding tax, or CGT.
o Dividends received by a DC from another DC or received by a DC from
an RFC is exempt from income tax; dividend received by a NRFC from
a DC is subject to final tax of 15% subject to certain conditions
• [VIP!] Capital gains tax on sale of lands and/or buildings – the final
CGT of 6% is imposed only if the land or building sold is not located in the
Phils. and is not treated as Capital Asset; otherwise (if the land and/or
building is an Ordinary asset), the gain is subject to the regular corporate
income tax (30%) as ordinary income and the GSP or FMX or FMV
whichever is the highest is subject to VAT of 12%.
• Filing returns and payment of capital gains tax
o Within 30 days following each sale of lands and/or building located in
the Phils. and are treated as Capital Assets, the Capital Gains Tax
Return shall be filed by the seller or the buyer and payment of taxes
made to an AAB (Authorized Agent Bank) located within the RDO
having jurisdiction over the place where the property being transferred
is located based on the GSP or FMV as determined in accordance with
Section 6E, whichever is higher.
• Pursuant to the “Comprehensive Agrarian Reform Law of 1988”,
transactions involving transfer of ownership, whether from natural or
juridical persons, are exempt from taxes and all other fees for the
conveyance thereof. Furthermore, all arrearages in real property taxes,
without penalty and interest, shall be deductible from the compensation to
which the owner may be entitled.
• Exemption of PEZA (Phil. Economic Zone Act) registered company – A
PEZA registered company is subject to the 5% preferential tax based on
gross income earned, and since the said 5% tax is in lieu of all national and
local taxes, it is exempt from income tax and consequently, from CWT
(Creditable Withholding Tax) pursuant to Section 2.57.5(B).
• Domestic corporations to which MCIT (Min. Corporate Income Tax)
does not apply – the MCIT shall apply only to DCs subject to the normal
corporate income tax. Accordingly, the minimum corporate income tax
shall not be imposed upon any of the following:

1. Domestic corporations operating as proprietary educational institutions
subject to tax at 10% on their taxable income
2. DCs engaged in hospital operations which are non-profit subject to tax
at 10% on their taxable income
3. DCs engaged in business as depository banks under the expanded
foreign currency deposit system, otherwise known as Foreign Currency
Deposit Units (FCDUs), on their income from foreign currency
[Numbers 3, 4 & 6b are Special Resident Foreign Corporations]
transactions with local commercial banks, including branches of foreign
banks, authorized by the BSP to transact business with foreign
currency deposit system units and other depository banks under the
foreign currency deposit system, including their interest income from
foreign currency loans granted to residents of the Philippines under the
expanded foreign currency deposit system, subject to final income tax
10% of such income.
4. Firms that are taxed under a special income tax regime such as those
in accordance with RA No. 7916 and No. 7227, the PEZA and the Bases
Conversion Development Act, respectively.
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. –
(1) In General. - Except as otherwise provided in this Code, a corporation
organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to
an income tax equivalent to thirty-five percent (35%) of the taxable
income derived in the preceding taxable year from all sources within the
Philippines: Provided, That effective January 1, 2009, the rate of income
tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting period,
the taxable income shall be computed without regard to the specific
date when sales, purchases and other transactions occur. Their income
and expenses for tbe fiscal year shall be deemed to have been earned
and spent equdly for each month of the period.
The corporate income tax rate shall be applied on the amount computed
by multiplying the number of months covered by the new rate within the
fiscal year by the taxable income of the corporation for the period,
divided by twelve.
36
Provided, however, That a resident foreign corporation shall be granted
the option to be taxed at fifteen percent (15%) on gross income under
the same conditions, as provided in Section 27(A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A
minimum corporate income tax of two percent (2%) of gross income, as
prescribed under Section 27(E) of this Code, shall be imposed, under
the same conditions, on a resident foreign, corporation taxable under,
paragraph (1) of this Subsection.
(3) International Carrier (The Resident Foreign Corporation). - An
international carrier doing business in the Philippines shall pay a tax
(with landing or docking rights within the Phils) of two and one-half
percent (2 1/2%) (NOT final tax) on its 'Gross Philippine Billings' as
defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers
to the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines in
a continuous (there is no transhipment although there may be
stopovers) and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or
point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline
(another international carrier not on another plane of the same
international carrier), only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to the
point of transshipment shall form part of Gross Philippine Billings.
(b) International Shipping. - 'Gross Philippine Billings' means
gross revenue whether for passenger, cargo or mail originating
from the Philippines up to final destination (whether there is
transhipment or not), regardless of the place of sale or payments
of the passage or freight documents.
(4) Offshore Banking Units. - The provisions of any law to the contrary
notwithstanding, interest income derived by offshore banking units
(resident foreign corporations or lender banks) authorized by the
Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions
with nonresidents, other offshore banking units in the Phils., local
commercial banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
with offshore banking units shall be exempt from all taxes except net
income from such transactions as may be specified by the Secretary of
Finance, upon recommendation of the Monetary Board which shall be
 subject to the regular income tax payable by banks: Provided,
however, That any interest income derived from foreign currency loans
granted to residents (such as resident citizen and resident alien), other
than offshore banking units or local commercial banks, including local
branches of foreign banks that may be authorized by the BSP to
transact business with offshore banking units, shall be subject only to a
final tax at the rate of ten percent (10%) instead of 30%.
Any income of non-residents (depositors of foreign currency), whether
individuals or corporations, from transactions with said offshore banking
units (resident foreign corporations/borrowers) shall be exempt from
income tax.
(5) [Mem!] Tax on Branch Profits Remittances. - any profit remitted by
a branch (resident foreign corporation) to its head office shall be subject
to a tax (this tax is an example of a direct double taxation which is valid
because there is no constitutional or legal prohibition on direct double
taxation) of fifteen percent (15%) (final tax) which shall be based on
the total profits applied (with the BSP) or earmarked for remittance
without any deduction for the tax component thereof (except those
activities which are registered with the Philippine Economic Zone
Authority). The tax shall be collected and paid in the same manner as
provided in Sections 57 and 58 of this Code: Provided, That interests,
dividends, rents, royalties, including renumeration for technical services,
salaries, wages, premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits, income and
capital gains received by a foreign corporation during each taxable year
from all sources within the Philippines shall not be treated as branch
profits (if remitted to the home office the same are not subject to 15%
BPRT) unless the same are effectively connected with the conduct of its
trade or business in the Philippines.
(6) Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. –
(a) Regional or area headquarters (A branch established in the
Phils. by a multinational companies which does not earn or derive
income in the Phils. but merely acts as supervisory,
communications and coordinating center for their affiliates,
subsidiaries or branches in the Asia Pacific Region and other
foreign markets) as defined in Section 22(DD) shall not be subject
to income tax.
(b) Regional operating headquarters as defined in Section 22(EE)
shall pay a tax of ten percent (10%) of their taxable income.
(7) Tax on Certain Passive Incomes Received by a Resident Foreign
Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit
from Deposit Substitutes, Trust Funds and Similar Arrangements
and Royalties. – (1)Interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements and (2)royalties derived
37
(the payor of the interest and royalty is a resident of the Phils.)
from sources within the Philippines shall be subject to a final
income tax at the rate of twenty percent (20%) of such interest
and royalties: Provided, however, That interest income derived
by a resident foreign corporation (depositor of foreign currency)
from a depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at the rate
of seven and one-half percent (7 1/2%) of such interest income.
o Prizes and other winnings from sources within the
Philippines derived by RFC, if any are part of gross income
taxable at 30%.
(b) Income Derived under the Expanded Foreign Currency
Deposit System. (In Section 28A4 the RFC is an OBU/Lender
bank whereas in Sec. 28A7b the RFC is FCDU/Lender Bank. The
only difference between the OBU and an FCU is that the former is
always a resident foreign corporation while the latter may be a DC
or RFC) - Income (Interest income of RFC/lender bank which
grants loans of foreign currency) derived by a depository bank
under the expanded foreign currency deposit system from foreign
currency transactions with nonresidents, offshore banking units in
the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency deposit
system units and other depository banks under the expanded
foreign currency deposit system shall be exempt from all taxes,
except net income from such transactions as may be specified by
the Secretary of Finance, upon recommendation by the Monetary
Board to be subject to the regular income tax payable by banks:
Provided, however, That interest income from foreign currency
loans granted by such depository banks under said expanded
system to residents other than depository banks under the
expanded system shall be subject to a final tax at the rate of ten
percent (10%) (instead of 30%). (as amended by RA No. 9294)
Any income of non-residents (depositors of foreign currency),
whether individuals or corporations, from transactions with
depository banks (RFCs/borrowers) under the expanded system
shall be exempt from income tax.
(c) [Same as other taxpayers] Capital Gains from Sale of Shares of
Stock Not Traded in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation
except shares sold or disposed of through the stock exchange:
Not over P100,000 ................................... 5%
On any amount in excess of P100,000 ....... 10%
 o Capital Gain from sale of Real Property located in the Phils.
classified as Capital Asset of RFC or NRFC is not provided for
by law probably because RFC or NRFC does not own said
property, hence, should it have said real property the sale
thereof is subject to 30% corporate income tax based on gain
and not 6% CGT.
(d) Intercorporate Dividends. - Dividends received by a resident
foreign corporation from a domestic corporation liable to tax under
this Code shall not be subject to tax under this Title.
(B) Tax on Nonresident Foreign Corporation. –
(1) In General. - Except as otherwise provided in this Code, a foreign
corporation not engaged in trade or business in the Philippines shall pay
a tax equal to thirty-five percent (35%) of the gross income received
during each taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and
capital gains, except capital gains subject to tax under subparagraph
5(c): Provided, That effective January 1, 2009, the rate of income tax
shall be thirty percent (30%).
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A
Special cinematographic film owner, lessor, or distributor shall pay a tax of
Non- twenty-five percent (25%) (FT) of its gross income from all sources
Resident within the Philippines.
Foreign
Corp.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine
Nationals. - A nonresident owner or lessor of vessels shall be subject to
a tax of four and one-half percent (4 1/2%) (FT) of gross rentals,
lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other
Equipment. - Rentals, charters and other fees derived by a nonresident
lessor of aircraft, machineries and other equipment shall be subject to a
tax of seven and one-half percent (7 1/2%) of gross rentals or fees.
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation.
– DCs in USA derived from foreign countries. If USA shall
(A) Interest on Foreign Loans. - A final withholding tax at the rate of
twenty percent (20%) is hereby imposed on the amount of
interest on foreign loans contracted on or after August 1, 1986;
(B) Intercorporate Dividends. - 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
38
corporation, which shall be collected and paid as provided in
Section 57(A) of this Code, subject to the condition that the
country in which the nonresident foreign corporation is domiciled,
shall allow a credit against the tax due from the nonresident
foreign corporation taxes deemed to have been paid in the
Philippines equivalent to (15%) twenty percent (20%), which
represents the difference between the regular income tax of
(30%) thirty-five percent (35%) and the fifteen percent (15%)
tax on dividends as provided in this subparagraph: Provided, That
effective January 1, 2009, the credit against the tax due shall be
equivalent to fifteen percent (15%), which represents the
difference between the regular income tax of thirty percent (30%)
and the fifteen percent (15%) tax on dividends;
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange.
- A final tax at the rates prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange:
Not over P100,000 .................................... 5%
On any amount in excess of P100,000............... 10%"
Example:
 Same as other taxpayers “Tax-Sparing Scheme” Proctor &
Gamble USA organized a DC in the Phils. known as Proctor &
Gamble Phils., Inc. (a domestic corporation) is Php 1B while
the allowable deductions amt to Php 800M, hence, the taxable
income is Php 200M. The corporate income tax of said DC is
Php 60M. The amt available for declaration for cash dividend
is Php 140M. Said DC declared as cash dividend the entire
Php 140M as cash dividend to be remitted to the home office
or mother corporation in USA. The said Php 140M to be
remitted to the USA is subject to divided tax of 15% or Php
21M, hence, the net amt remitted to the USA is Php 119M.
This 15% dividend tax is subject to the condition tjat USA
should grant a tax credit of 15% in favour of Proctor &
Gamble USA so that the amt of tax that will be collected by
the gov’t of USA is (Php 140M x 30% - Php 21M) Php 21M. In
other words, the amt of tax to be collected by USA must be
the same amt collected by the Phil. Gov’t. This is also true if
USA does not impose dividend tax on dividend received by
impose a dividend tax of 30% the Phils. will also impose
dividend tax of 30%.
• Income tax formula for resident foreign corporations
1. Resident foreign corporations are taxed in the same manner as
domestic corporations but only with respect to their Philippine source
income.
 Except Capital Gain on sale of land and/or building located in the Phils.
classified as Capital Asset:
1. Domestic Corporation - 6% FT based on GSP or FMV or FMV
whichever is highest
2. Resident Foreign Corporation - part of gross income taxable at
30% based on gain or profit or
income
(GSP or FMX or FMS whichever is highest)
• An international air carrier having flights origination from any port or point
in the Philippines, irrespective of the place where passage documents are
sold or issued, is subject to the Gross Philippine Billings Tax of 2½%
imposed under Subsection (A,3,a) unless subject to a different tax rate
under the applicable tax treaty to which the Philippines is a signatory.
• A domestic corporation (such as PAL) is not subject to the 2½% tax on
their gross Philippine billings imposed by Section 28 (A,3), but to the
regular corporate income tax (30%) under Section 27A.
o Which airline company is liable? The one which lifts the passengers or
the one that issues or sells the tickets? The airline company that lifts
the passengers.
• Revenue derived from interline transactions whereby an airline lifts
passengers whose tickets were issued by other carriers in the Phils. are
subject to the 2½% tax on gross Philippine billings.
• In case transhipment of passenger takes place outside the Philippines, only
the aliquot portion of the cost of the ticket corresponding to the leg flown
from the Phils. to the point of transhipment shall form part of the gross
Phil. billings although the flight originated from the Phils.
• Continuous and uninterrupted flight – it shall refer to a flight in the
carrier of the same airline company from the moment a passenger, excess
baggage, cargo and/or mail is lifted from the Philippines up to the point of
final destination of the passenger, excess baggage, cargo and/or mail. The
flight is not considered continuous and uninterrupted if transhipment of
passenger, excess baggage, cargo and/or mail takes place at any port
outside the Philippines on another aircraft belonging to a different airline
company.
• Foreign currency deposit unit shall refer to that unit of a local bank
(DC) or of a local branch of a foreign bank (RFC) authorized by the BSP to
engage in foreign currency-denominated transactions
39
• Offshore banking system shall refer to the conduct of banking
transactions in foreign currencies involving the receipt of funds principally
from external and internal sources and the utilization of such fund
• Offshore banking unit shall mean a branch (RFC) subsidiary or affiliate of
a foreign banking corporation which is duly authorized by the BSP to
transact offshore banking business in the Phils.
• [VIP!] Branch profits remittance tax – the remittance tax was conceived
in an attempt to equalize the income tax burden on foreign corporations
maintaining, on the one hand, local branch offices and organizing, on the
other hand, subsidiary domestic corporations where at least a majority of
all the latter’s shares are owned by such foreign corporations.
o The 15% profit remittance tax is in addition to the regular tax (of
30%) imposed under Subsection A of Section 28
o Under Subsection (A,5), it is now provided that the 15%
remittance tax “shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax
component thereof.”
o Non-resident foreign corporations are not subject to branch profit
remittance tax
• Tax on regional or area headquarters and regional operating headquarters
of multinational companies – the first, regional or area headquarters
(RHQs) are exempt from tax, regional operating headquarters
(ROHQs) are subject to income tax of 10% of their taxable income
o Multinational company – foreign company or group of foreign
companies with business establishment in 2 or more countries
o Regional or area headquarters – shall mean an office whose
purpose is to act as an administrative branch of a multinational
company engaged in international trade which principally serve as
a supervision, communications and coordination center for its
subsidiaries, branches or affiliates in the Asia Pacific Region and
other foreign markets and which does not earn or derive income
in the Philippines
o RAHQs which do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia
Pacific Region and other foreign markets are not subject to income
tax

o ROHQs are subject to a tax rate of 10% of their taxable income,
provided that any income derived from Philippine sources when
remitted to the parent company is subject to the 15% branch
profits remittance tax under Section 28 (A,5) of the Tax Code
• Interest from Philippine Currency bank deposits and royalties (are subject
to 20% FT), income derived under the expanded foreign currency deposit
system from foreign currency transactions is subjected to 7½% and net
capital gains from sale of shares of stock not traded in stock exchange are
taxed in the same manner and at the same rates (1st 100,000 – 5% FT;
excess – 10%) as in the case of a DC
Intercorporate dividends received from a DC are also exempt from income
tax
1) Interest & Royalties
a) DC & RFC – 20% FT
b) NRFC – 30% FT
2) Dividends
a) DC & RFC – exempt
b) NRFC – 15% FT subject to certain conditions
• Income tax formula for non-resident foreign corporations
o Generally, non-resident foreign corporations are taxed at the
same rate as domestic and resident foreign corporations except
that the tax is based on the gross income from Philippine sources
• [VVIP!] Tax on dividends received by a non-resident foreign corporation
from a DC – the tax on intercorporate dividends is reduced by 20%, from
(former) 35% to 15% FT subject to the condition mentioned
o the 15% tax on dividends is applicable where the recipient non-
resident foreign corporation is exempt from tax on dividends in its
home country
• [Impt!] Preferential 15% tax on Tax-Sparing Scheme – conditions
necessary for availment of the preferential 15% tax:
1. To show the actual amount credited by foreign gov’t against the
income tax due from the NRFC on the dividend received
2. To present the income tax return of its mother company for the year
when the dividends were received
3. To submit any authenticated document showing that the Foreign gov’t
credited 15% of the tax deemed paid in the Phils. on the foreign gov’t
did not impose any dividend tax at all.
• Distinctions as to the taxability of domestic and foreign corporations
1. As to sources of income
40
a.
DCs are taxed on sources of income from within and outside the
Phils
b. Foreign corporations, whether resident or non-resident, are
taxed only on income from sources within the Phils
2. As to kind of income subject to tax
a. Domestic and resident foreign corporations are taxed on their
net income inasmuch as they are allowed deductions
b. NRFCs are taxed on their gross income. They are not allowed
deductions.
SEC. 29. Imposition of Improperly Accumulated Earnings Tax. –
[The purpose of this tax, which is really a penalty tax, is to force the
corporation to declare dividends and for the gov’t to collect dividend ta]
(A) In General. - In addition to other taxes (such as income tax) imposed by this
Title, there is hereby imposed for each taxable year (until the corporation
declares dividend) on the improperly accumulated taxable income of each
corporation (ordinary/business/taxable partnership is not included because
the partnership therein are liable to pay dividend tax even if the net income
after tax of said partnership is not distributed to the partners under the
doctrine of constructive receipt of of income which doctrine does not apply to
a true corporation or corporation organized under BP68 or corporation created
by law such as GOCCs. In a true corporation the stockholders are not liable to
pay dividend unless the BOD of said corporation declares and distributes
dividend) described in Subsection B hereof, an improperly accumulated
earnings tax equal to ten percent (10%) of the improperly accumulated
taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax imposed in the
preceding Sub-Section shall apply to every corporation formed or
availed (holding corporation or investment corporation) for the purpose
of avoiding the income tax with respect to its shareholders or the
shareholders of any other corporation, by permitting earnings and
profits to accumulate instead of being divided or distributed.
(2) Exceptions. - The improperly accumulated earnings tax as provided for
under this Section shall not apply to:
a) Publicly-held corporations; or widely-held corporations
b) Banks and other nonbank financial intermediaries; and
c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax.
(1) Prima Facie Evidence. - the fact that any 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.

(2) Evidence Determinative of Purpose. - The fact that the earnings or
profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the purpose
to avoid the tax upon its shareholders or members unless the
corporation, by the clear preponderance of evidence, shall prove to the
contrary.
[(B) & (C) – the reason they are not subject to improperly accumulated
earnings tax is to encourage them to accumulate their
earnings or income in order to increase their reserves,
which is required by law.]
(D) Improperly Accumulated Taxable Income. - For purposes of this Section,
the term 'improperly accumulated taxable income' means taxable income
increased adjusted by:
(1) Income exempt from tax; such as Intercorporate dividend
(2) Income excluded from gross income; such as Life Insurance proceeds
(3) Income subject to final tax; and such as interest o currency bank
deposits
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year basis, the
accumulated earnings under tax shall not apply on improperly accumulated
income as of December 31, 1997. In the case of corporations adopting the
fiscal year accounting period, the improperly accumulated income not subject
to this tax, shall be reckoned, as of the end of the month comprising the
twelve (12)-month period of fiscal year 1997-1998.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term
'reasonable needs of the business' includes the reasonably anticipated needs
of the business.
• Corporations subject/not subject to the tax – The 10% improperly
accumulated earnings tax is imposed on every corporation, not specifically
excepted, which is formed or availed for the purpose of avoiding the
imposition of the individual income tax (on dividends) upon its stockholders
or the stockholders of any other corporation by permitting earnings or
profits to accumulate, instead of dividing or distributing them. Under Rev.
Regs. No. 2-2001, the tax is imposed on improperly accumulated taxable
income starting January 1, 1998 by DCs which are classified as closely-held
corporations (or close corporations or family corporations where the
number of stockholders does not exceed 20).
41
o [VIP!] The tax shall not apply to the 3 kinds of corporations
(1Publicly-held corporations, 2Banks, 3Insurance Companies)
enumerated in Section 29(B-2) and also to the following: taxable
partnerships, GPPs; non-taxable joint ventures; and enterprise
duly registered with the PEZA and enterprises registered pursuat
to the Bases Conversion and Development Act, 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, national or local.
• Foreign Corporations – they are not included among those exempted.
The tax is applicable to any foreign corporation, whether resident or non-
resident, with respect to any income derived from sources within the
Philippines.
• [VIP!] Closely-held/Publicly-held (or widely-held corporations)
Corporations – closely-held corporations are those corporations at
least 50% in value of 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. Domestic
corporations not falling under this definition are, therefore, publicly-held
corporations.
• Holding and investment companies
1. A corporation having practically no activities except holding property,
and collecting income therefrom or investing therein, holding
company
2. If the activities further include, or consist substantially of, buying and
selling stocks, securities, real estate, or other investment property so
that the income is derived not only from the investment yield but also
from profits upon market fluctuations, the corporation shall be
considered an investment company
[VIP!] SEC. 30. Exemptions from Tax on Corporations. - The following organizations
shall not be taxed under this Title in respect to income received by them as such:
[*An example of EXEMPTION PROVISION (strictly against person claiming
exemption; in favour of gov’t)]
(A) Labor, agricultural or horticultural organization not organized principally for
profit;
(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and non- without profit;
 o Under Section 8 of RA 8791 all banks in the Phils. must be stock
corporations
(C) A beneficiary society, order or association, operating fort he exclusive benefit
of the members such as a fraternal organization operating under the lodge
system, or mutual aid association or a nonstock corporation organized by
employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or association, or
nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its
members;
(E) Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or
inures to the benefit of any member, organizer, officer or any specific person;
• Exemption from taxation is the grant of immunity to particular persons
(F) Business league chamber of commerce, or board of trade, not organized for
profit and no part of the net income of which inures to the benefit of any
private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution; NOT included
under the
(I) Government educational institution; old law
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like
organization of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning
back to them the proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce finished by them;
[Mem!] Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing organizations (1)from
any of their properties, real or personal, or (2)from any of their activities
conducted for profit regardless of the disposition made of such income, shall
be subject to tax (30% corporate income tax) imposed under this Code. [This
2nd paragraph does not apply to Subsections H & I]
42
Example:
 Corp. A is a religious corporation and it has Phil. currency deposit
on Bank X amounting to Php 10M under savings account at an
annual interest rate of 10%. The annual interest income is (Php
10Mx 10%) Php 1M. This interest income is subject to final tax of
20% or Php 200,000.00, regardless of the disposition made of
the net interest income of Php 800,000.00 which means that
even if the Php 800,000.00 is actually, directly and exclusively
used for religious purposes
 The same facts above except that Corporation A is a charitable
institution, is the Php 1M interest income subject to final tax of
20%
ANS: YES, regardless of the disposition made of the net
interest income of Php 800,000.00 which means
that even if said amount is used actually, directly
and exclusively for charitable purposes
or corporations or to corporations or persons of a particular class from a
tax which persons and corporations generally within the same state or
taxing district are obliged to pay
o A tax exemption represents a loss of revenue to the State. For this
reason, tax exemptions are not favoured. They must be clearly
expressed and cannot be established by implications. Life-Blood
Doctrine
o Exemptions are held strictly against the taxpayer and if not
expressly mentioned in the law, must at least be within its
purview by clear legislative intent. The burden of proof rests upon
the party claiming exemption to prove that it is in fact covered by
the exemption being claimed
o [VVIP!] Neither (Liberal construction is applied) does the rule of
strict construction apply where the exemption is in favour of
(1)
government or any of its political subdivisions or
instrumentalities; (2)religious; (3)charitable and (4)educational
institutions
 These 4 are known as Traditional Exemptees the
provisions of which are liberally construed in their favour.
o There is no vested right in a tax exemption – especially when the
latest expression of legislative intent renders its continuance
doubtful. Being a mere statutory privilege, a tax exemption may
be modified or withdrawn at will by the granting authority. To
state otherwise is to limit the taxing power of the State which is
unlimited, plenary comprehensive and supreme.
 If an exemption law or provision is subsequently
repealed, those previously enjoying the exemption will
now be taxable and they cannot assert that their right
having been vested is violated.

• Exemption of corporations or associations from tax
o The tax exemption of a non-stock corporation under Section 30
covers only income tax for which it is directly liable. The
exemption of corporations or associations from tax does not
extend to the shareholders or members. An exemption from
taxation is a personal privilege
o The income derived by a charitable organization from any of its
charitable operations is exempt from income tax but the rentals
(because they are not income of the charitable organization as
such and this is true even if said rentals are ADE used for
charitable purposes) derived from the leasing of its building are
subject to income tax
o Condominium dues (they do not pertain or belong to the CC)
received from the unit owners, which are merely held in trust and
which are used by the Condominium Corporation (CC) solely for
administrative expenses, utilities, and maintenance of the
common areas for the benefit of the unit owners and from which
the CC could not realize any gain or profit are not subject to
income and consequently to withholding tax
o Under the constitution, “no law granting any tax exemption shall
be passed without the concurrence of a majority of all (not merely
majority of those present with quorum) the members of the
Congress.”
• Any cemetery corporation chartered (or incorporated exclusively for the
benefit of its members) solely for burial purposes and not permitted by its
charter to engage in any business not necessarily incident to that purpose,
is exempt from income tax, provided that no part of its net earnings inures
to the benefit of any private shareholder or individual.
A cemetery company having a capital stock represented by shares or which
is operated for profit or for the benefit of persons other than its members,
does not come within the exempted class. (Section 30)
• [VVIP!] A religious, charitable, scientific, athletic or cultural corporation or
corporation for the rehabilitation of veterans is exempt from tax in its
income (other than income of whatever kind and character from its
properties, real or personal) if such corporation meets two tests: (a) it
must be non-stock and organized and operated for one or more of the
specified purposes; and (b) no part of its net income or asset shall belong
to or inure to the benefit of any member, etc.
1. The income of such corporation which is considered as income from
All of them their properties, real or personal, generally consists of income from
are taxable
except
corporate dividends, rentals received from their properties, interests
dividends received from capital loaned to other persons, income from agricultural
received lands owned by such corporations, profits from the sale of property,
from a DC real or personal, and other similar income
43
2. Income not derived from their properties, real or personal, are
exempt. In the case of a religious corporation, income from the
conduct of strictly religious activities, such as fees received for
administering baptismal, solemnizing marriages, attending burials,
holding masses, and other like income, is exempt. In this case of an
educational corporation, income from the holding of an educational fair
or exhibit is exempt
However, if such exempt income is invested by the corporation,
the income from such investment, as interest from the capital where
the capital has been loaned or dividends (exempt) on stock where the
capital has been invested in shares of stock will constitute taxable
income.
Donations and other similar contributions received by such
corporation from other persons are exempt (Section 32, B-3)
3. [VVIP!] The gain to be realized by a non-stock and non-profit religious
corporation from the sale of real property is exempt from income tax
This is
inconsistent and consequently, from the expanded withholding tax, where the
with the proceeds of such sale would be used exclusively in the purchase of
the 2nd another property in the pursuance of the religious purpose (but the
par. Of
Section law says “regardless of the disposition made of such income”) for
30; in which the corporation was organized – the purchase of a property with
Short, a building thereon for the use of its member or for the redevelopment
This
Ruling is and general improvement of its remaining property, as such proceeds
WRONG, are not income from the productive use of the property (the law does
As usual. not use these words). A taxpayer’s isolated sale of property, with the
proceeds used for the furtherance of the purposes for which it was
organized is a single transaction of incidental character and does not
constitute engaging in business.
(Last sentence)  this statement is CORRECT but it does not
mean that the income is exempt because No. 1 of the 2nd
paragraph of Section 30 does not require that the income must be
derived from business
• Educational corporations
1. Paragraph 3, Section 4, Article XIV of the Constitution categorically
exempts from taxes and duties all revenues and assets of non-stock,
non-profit educational institutions, which are actually, directly and
exclusively used for educational purposes. The exemption is limited to
a non-stock, non-profit educational institution only.
2. As a non-stock, non-profit government educational institution, U.P.
falls squarely within the purview of the above constitutional provision;
hence, it is eligible to avail of the tax exemption granted thereat with
respect to its revenues derived in pursuance of its educational purpose
and when such revenues are actually, directly and exclusively used
therefor. Conversely, the revenue or income from trade, business or
other activity, the conduct of which is not related to the exercise or
performance by such educational institutions of their educational
 purposes or functions shall be subject to internal revenue taxes when
the same (revenue or income from trade, business or other activity) is
(when the revenue or income from trade, business or other activity
[not for educational purposes] is used ADE for educational purposes
the revenue or income is exempt from income tax) not actually,
directly or exclusively used for the intended purpose.
3. The tax exemption granted to a non-stock, nonprofit educational
institution under Section 30(H) covers only income taxes for which it is
directly liable. Such exemption does nor cover indirect taxes such as
VAT (such as VAT on the NSNPEI’s local purchases of school
equipment and supplies but if the NSNPEI imports school equipment
and supplies it is exempt from VAT on importation because it is a
direct tax to the importer) which may be passed on to buyers of goods
or services.
• The last paragraph is a “catch-all provision” applicable to all income tax
exempt organizations, etc. Thus, even corporations granted exemptions
from tax pursuant to Section 30 can still be subject to income tax under
this provision except Paragraphs H & I.
o Interest income earned by a religious corporation on its bank
deposits is subject to income tax of 20% or 7½% regardless of
the disposition made of such income. The bank deposits of tax-
exempt corporations enumerated in Section 30 are, in effect,
personal property of said corporations.
o It has been ruled, however, that the excess of the selling price
over the original cost of the land and the church building sold by
the non-stock, non-profit religious corporation is exempt from
the ordinary corporate income tax, where the net proceeds from
the sale would be used exclusively for the purchase of a new
church site and the construction thereon of a church building
(THIS IS NOT CORRECT! Because the law says “regardless of the
disposition made of such income”). Secretary of Justice (he has
NO authority to interpret the provisions of the NIRC because it is
the CIR who has the exclusive and original jurisdiction to interpret
the provisions of the NIRC subject to review by the Secretary of
Finance [Section 4])
• In the case of the income of whatever kinds and character of the foregoing
organizations from any of its properties, real or personal, which apparently
is the basis of the above ruling subjecting the gains in question to income
tax, the opinion of the Secretary of Justice states that the same refers only
to the income realized “from the productive use (THIS IS NOT CORRECT!
Because these words are not mentioned in the provision, even the courts
are prohibited from putting words unto the mouth of the legislature
because it will result to judicial legislation which is a violation of the
Principle of Separation of Powers) of their real and personal properties”
e.g. rents, dividends or interests.
• [VIP!] While the income received by the organizations enumerated in
Section 30 is, as a rule, exempted from the payment of tax “in respect to
44
income derived by them as such”, the exemption does not apply to income
derived “from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such
income except Paragraphs H & I.
The law does not make any distinction. The rental income is taxable
regardless of whence (from where or from what source) such income is
derived and how it is used or disposed of.
• The tax exemption created in Article VI, Section 28, paragraph 3 of the
Constitution covers property taxes only (Real Property Tax)
• [VIP!] Non-stock, Non-profit educational institutions – to be granted
the exemption under Article XIV, Section 4, paragraph 3 of the
Constitution, an entity must prove with substantial evidence that: (1) it
falls under the classification of non-stock, non-profit educational institution
(the Capital of the Corporation or institution is not in the form of shares
and stock and the income or profit of such institution does not inure to the
benefit of any member of such institution) and (2) the income it seeks to
be exempted from taxation is used actually, directly and exclusively for
educational purposes.
Chapter 5 – COMPUTATION OF TAXABLE INCOME
SEC. 31. Taxable Income Defined. - The term taxable income means the
pertinent items of gross income (Section 32) specified in this Code, less the
deductions (Section 34) and/or personal and additional exemptions (Section 35), if
any, authorized for such types of income by this Code or other special laws.
• Taxable income may be classified into passive income (subject to final tax),
compensation income, and non-compensation or business income
• [Mem!] Income means all wealth which flows into the taxpayer other
than as a mere return of capital (even mere return of capital may
constitute taxable income such as sale of real property located in the Phils.
and classified as Capital Asset
o [INCREASE IN VALUE OF REAL PROEPRTY] The difference between
the assessed value of a property and the actual cost of such
property does not constitute taxable income unless there has
been a sale or exchange of such property in which case, the gain,
if any, constitutes taxable income.
Chapter 6 – COMPUTATION OF GROSS INCOME
[VIP!] SEC. 32. Gross Income. -
(A) General Definition. - Except (Subsection B) as when otherwise provided in
this Title, gross income means all income derived from whatever (legal or
illegal) source, including (but not limited to) (there are items of gross
 income which are not included in Section 32A such as informer’s reward and
damges awarded for loss of expected profit) the following items:
(1) Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items (such as
bonuses);
(2) Gross income derived from the conduct of trade or business or the
exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general
professional partnership.
o Is the partner’s distributive share in the net income of an ordinary or
business or taxable partnership included in Section 32A? ANS: YES,
under dividends or #7.
[BAR!] [MEM!] (B) Exclusions from Gross Income. - The following items shall
not be included in gross income and shall be exempt from taxation under this
title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the insured, whether in a single sum
or otherwise, but if such amounts are held by the insurer under an
agreement to pay interest thereon, the interest (not subject to 20% FT but
PGI) payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium (such as CSLVI or
Cash Surrender Value of Life Insurance). - The amount received by the
insured, as a return of premiums paid by him under life insurance (return
45
of premiums on property insurance is taxable if the premium paid was
previously deducted from gross income under the tax benefit rule or
“economic benefit principle”), endowment, or annuity contracts, either
during the term or at the maturity of the term mentioned in the contract or
upon surrender of the contract.
(3) Gifts, Bequests, and Devises. _ The value of property acquired by gift
(or donation), bequest (or legacy), devise, or descent (legitime or intestate
share or simply inheritance): Provided, however, That income from such
property, as well as gift, bequest, devise or descent of income from any
property, in cases of transfers of divided interest, shall be included in gross
income.
(4) Compensation for Injuries or Sickness. - amounts received, through
Accident or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any
damages received (damages awarded for lost salaries and loss of expected
profit are taxable), whether by suit or agreement, on account of such
injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent
required by any treaty obligation binding upon the Government of the
Philippines.
[VIP!] [BAR!] (6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 (Labor
Code) and those received by officials and employees of private firms,
whether individual or corporate, 1 in accordance with a reasonable
private benefit plan (or pension plan) maintained by the employer:
Provided, That the 2 retiring official or employee has been in the
service of the same employer for at least ten (10) years and is 3 not
less than fifty (50) years of age at the time of his retirement:
Provided, further, That the benefits granted under this subparagraph
shall be 4 availed of by an official or employee only once. For purposes
of this Subsection, the term 'reasonable private benefit plan'
means a pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all of his officials
or employees, wherein contributions (or capital or principal or corpus
or pension fund or pension trust) are made by such employer for the
officials or employees, or both, for the purpose of distributing to such
officials and employees the earnings (or interest) and principal of
the fund thus accumulated, and wherein its is provided in said plan
that at no time shall any part of the corpus or income of the fund be
used for, or be diverted to, any purpose other than for the exclusive
benefit of the said officials and employees.
Separation (b) Any amount received by an official or employee or by his heirs
Pay on from the employer as a consequence of separation of such official or
account of employee from the service of the employer because of death sickness
resignation
is taxable
 or other physical disability or for any cause beyond the control (such
as retrenchment or closure of business of the employer) of the said
official or employee.
(c) The provisions of any existing law to the contrary notwithstanding,
social security benefits, retirement gratuities, pensions and other
similar benefits received by resident or nonresident citizens of the
Philippines or aliens who come to reside permanently in the Philippines
from foreign government agencies and other institutions, private or
public.
(d) Payments of benefits due or to become due to any person residing
in the Philippines under the laws of the United States administered by
the United States Veterans Administration.
(e) Benefits (such as monthly pension) received from or enjoyed under
the Social Security System in accordance with the provisions of
Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government officials and
employees.
(7) Miscellaneous Items. -
(a) Income Derived by Foreign Government. - Income derived from
investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the
Philippines by (i) 1 foreign governments, (ii) 2 financing institutions
owned, controlled, or enjoying refinancing from foreign governments,
and (iii) 3 international or regional financial institutions (such as ADB
[Asian Development Bank], IMF [International Monetary Fund] and
World Bank) established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. -
Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the
Philippines or to any political subdivision thereof.
(c) Prizes and Awards. - Prizes (such as Nobel Peace Prize) and
awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to
enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
46
(d) Prizes and Awards in sports Competition. - All prizes and awards
granted to athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned
by their national sports associations.
o Amounts received by professional athletes such as PBA
players, Professional Boxers and Billiard Players from
professional tournaments are taxable as income from
profession. But prizes received by them in international
competitions such as Olympics, Asian Games and South East
Asian Games are exempt.
(e) 13th Month Pay and Other Benefits. - Gross benefits received
by officials and employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph shall not
exceed Thirty thousand pesos (P30,000) (there is a pending bill
increasing this amount to Php 78,000.00) which shall cover:
(i) Benefits received by officials and employees of the national
and local government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order No. 28,
dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by
Presidential decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas
bonus: Provided, further, That the ceiling of Thirty thousand
pesos (P30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the
same of the inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS,
Medicare and Pag-ibig contributions, and union dues of individuals.
o There items are deducted from monthly salary to determine
Gross Compensation Income, hence, the taxable
compensation income is reduced.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of
Indebtedness. - Gains realized from the same or exchange or
retirement of bonds, debentures or other certificate of indebtedness
with a maturity of more than five (5) years.
 Example:
 A is a resident citizen, purchased a Php 10M face-value
bond from Corp X on January 2, 2008 with maturity
period of 10 years, hence, the bond will mature on
January 2, 2018. Corp X is required to pay A an annual
interest of 8%. The annual interest of (Php10M x 8%)
Php 800,000.00 is part of the gross income of A taxable
under Section 24A.
Assuming that A sold the bond to B on January 2, 2014
at a price of Php 10,500,000.00 the gain of Php
500,000.00 realized by A is NOT taxable.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized
by the investor upon redemption of shares of stock in a mutual fund
company as defined in Section 22 (BB) of this Code
• Interest upon the obligations of the Government of the Republic of the
Philippines or any political subdivisions thereof, interest income received by
bond holders from government bonds was formerly excluded from gross
income but is now taxable as follows:
• Compensation Income is income arising out of Er-Ee relationship.
1. RC, NRC & RA - PGI taxable at 5% - 32%
2. NRA engaged - 20% FT
3. NRA not engaged - 25% FT
4. DC & RFC - PGI taxable at 30%
5. NRFC - 30% FT
NOTE: if the above government bonds qualify as deposit substitutes the
interest income in Nos. 1 & 4 is subject to 20% FT.
Informer’s reward is now subject to 10% FT under Section 282.
Interest incomes (taxable at 7½% FT or exempt) under the expanded
foreign currency deposit system (EFCDS) are consequently no longer
excluded from gross income.
• [Impt!] Gross income consists of all the gains, profits, and income of a
taxpayer during a taxable year of whatever kind and in whatever form
derived from any source, whether legal or illegal, except items of gross
income subject to final tax and income exempt from taxation (exclusions
[Section 32b]) under the law.
The definition of gross income in Subsection (A) is broad enough to include
all passive income subject to specific tax rates or final taxes. However,
since there passive incomes are already subject to different rates and
taxed finally at source (the tax was already deducted by the payer or the
source of income), they are no longer included in the computation of gross
income to determine taxable income.
The phrase “all income derived” from whatever source covers all other
forms of income not falling under any of the items of income enumerated
in Subsection (B). Thus, income derived from expropriation of one’s
47
property (except if covered by CARL [Comprehensive Agrarian Reform
Law]) and from gambling is taxable.
o The law’s definition of gross income is rather broad so the courts
have established the realization principle that for income to be
recognized for tax purposes, it must be realized or earned.
Therefore, mere increase in the value of property would not be
taxed as income until the property is sold in excess of its original
cost (except if the property sold is Real Property located in the
Philippines classified as Capital Asset).
o Economic Benefit Concept income may include the receipt of
any item that confers economic benefit regardless of whether any
cash or property was directly received (e.g. fair rental value of
house offered free by the employer; fair market value of property
received in exchange of services rendered).
o Recovery of Capital Doctrine the proceeds from the sale or
other disposition of property are reduced by the basis or adjusted
basis of the property to determine gross income. Thus, income is
not taxed until the capital or cost invested is recovered.
Compensation income includes all remuneration for service performed by
an employee for his employer whether paid in cash or in kind.
o Thus, wages, salaries, emoluments and honoraria, bonuses,
allowances (such as transportation, representation, entertainment
and the like), fringe benefits (monetary and non-monetary fees,
including director’s fees, whether or not an Er-Ee relationship
exists), taxable pensions and retirement pay, and other income of
a similar nature constitute compensation income.
o Examples of other income of a similar nature are: proceeds from
profit-sharing (given to officers or employees of a corporation or
partnership as part of their compensation), allowances for costs-
of-living, housing, children, medical, grocery, etc., overtime pay,
accumulated sick and vacation leaves, terminal leave pay,
commissions, 13th month pay, emergency pay, hazard pay, bonus,
rice, and clothing allowances, commissions on sales or on
insurance premiums, etc., and other benefits paid to an employee,
in cash or in kind. The name by which the compensation is
designated is immaterial. All of such income must be included in
the computation of the gross compensation income.
o [Impt!] The premium payments made by a corporation on a life
insurance policy covering the life of a key officer, the beneficiary
being the immediate family of the keyman, constitutes additional
salary or compensation to the key officer under Section 32(A), #1
taxable under Section 24(A).
 o Every form of compensation for personal services is taxable,
regardless of how it is earned, by whom it is paid, the label by
which it is designated, the basis upon which it is determined, or
the form by which it is received. Accordingly, “love gifts” received
by pastors from their pastoral ministry are considered
compensation income subject to income tax.
o Medium of payment
 If services are paid for in a medium other than money,
the fair market value of the thing taken in payment is the
amount to be included as compensation subject to
withholding.
 [BAR!] [Mem!] If a person receives as remuneration for
services rendered a salary and in addition thereto, free
living quarters and/or meals, the value to such person of
the quarters and/or meals so furnished shall be added to
the remuneration otherwise paid for the purpose of
determining the amount of compensation subject to
withholding.
 If, however, free living quarters and/or meals are
furnished to an employee for the convenience of the
employer (such as when the purpose why the employee
or officer is furnished free living quarters and/or meals is
in order for him to be on call 24/7), the value thereof
need not be included as compensation subject to
withholding.
o Tips or gratuities – if paid directly to an employee by a
customer of an employer, and not accounted (or not reported and
remitted) by the employee to the employer, they are taxable as
compensation income but are not subject to withholding.
o Transportation and other expenses – amounts received by an
employee, either as advances or reimbursement for
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 in the
business of the employer are not compensation. However, if the
reimbursement exceeds the actual expenses, the excess if not
returned to the employer constitutes taxable income.
o Vacation and sick leave allowances – they constitute
compensation income. Thus, the salary of an employee on
vacation, or on sick leave, paid notwithstanding his absence from
work, constitutes compensation.
• Tax treatment of director’s fees – director’s fees are subject to tax on
wages. The said tax treatment applies whenever it is established that the
48
director and the corporation has an employer-employee relationship (i.e.
President of a corporation sitting as a member of the Board of Directors)
o However, if these fees are paid t a director who is not an
employee of the corporation paying such fee (i.e. whose duties
are confined to the attendance of and participation in the
meetings of the board of directors), such fees are not treated as
compensation income because of the absence of employer-
employee relationship, but rather, the same should squarely fall
under Section 32(A)(2) under the caption “Gross income derived
from the conduct of trade or business or exercise of a profession”.
• Improvements made by lessee on leased premises
o A building constructed or improvements made by the lessee on
the leased premises are taxable (to the lessor) only if the same
are made pursuant to an agreement with the lessor and the same
are not subject to removal by the lessee. The lessor has an option
to 1report as income, at the time when such buildings or
improvements are completed, the fair market value (normally the
cost of building/improvement) of the same, or to 2spread over the
life of the lease the estimated depreciated value of such buildings
or improvements at the termination of the lease and to report as
income for the year of the lease an aliquot part thereof.
Example:
 A leased to B his industrial lot for 20 years at Php 2,000,000.00
rental per annum. A & B agreed that the latter will construct a
factory building on the said lot and after the expiration of the
lease the factory building will be owned by A. The cost of the
factory building is Php 50,000,000.00 ad the estimate use life of
said building is 50 years.
A has the option either to report as income the Php
50,000,000.00 in the year of completion of the said building or
to spread over the life of the lease the estimated depreciated
value of the building at the termination of the lease which is
[Php 50,000,000 – (Php 50,000,000 ÷ 50 years x 20 years)] Php
30,000,000.00, estimated depreciated value, which he will report
as income within the period of 20 years at (Php 30,000,000 ÷ 20
years) Php 1,500,000.00.
• All interest income is subject to tax including interest on government
securities except where the recipient of such interest is exempt (such as
NSNPEI, GSIS, SSS, PHIC and PCSO; there are interest incomes which are
exempt if received by particular tax payers such as interest from
depository banks under the EFCDS received by non-residents; interests
received by foreign governments; interests on CTD of Philippines currency
received by RC, NRC, RA and NRA engaged; And interest received by
Employees’ trust fund)
• [VIP!] Taxable income from business or profession
The taxable income (amount multiplies by the tax rate to arrive at the tax
due) may refer to:
1. Net income arrived at after subtracting the allowable deductions of the
individual taxpayer, including personal exemption or both personal and
additional exemptions, as in the case of:
a. A resident citizen as to income from all sources
b. A non-resident citizen and resident alien as to income from
sources within
2. Net income within the Philippines arrived at after subtracting the
allowable deductions of the individual taxpayer, including personal
exemption, as in the case of a non-resident alien (is not allowed
additional exemptions by law) engaged in trade or business in the
Philippines when he is allowed, under certain conditions (his country
grants personal exemption to Filipinos not residing but engaged in
trade or business in said country and the amount of personal
exemption is that provided in Section 35 (Php 50,000) or the amount
granted in said country, whichever is lower), personal exemption; or
3. Net income arrived at after subtracting the allowable deductions of the
taxpayer, without personal and additional exemptions, as in the case
of:
a. A non-resident alien engaged in trade or business in the
Philippines (when he is not allowed personal exemption
[because his country does not grant personal exemption to
Filipinos not residing but engaged in business in said
country]) as to income from within the Philippines
b. A domestic corporation as to income from all sources
c. A resident foreign corporation as to income from within the
Philippines; or
4. Gross income without deductions, as in the case of:
a. Non-resident alien not engaged in trade or business in the
Philippines as to income received within the Philippines
b. A non-resident foreign corporation as to income received
within the Philippines
• Taxable income from employment – in the case of a citizen (resident or
non-resident although ordinarily only resident citizens have compensation
income in the Philippines) or resident alien with compensation income only
within the Philippines, the taxable income is the gross compensation
income less the personal and additional exemptions. No other deductions
are allowed except premium payments on health and/or hospitalization
insurance.
49
The only items that can be deducted from Gross Compensation Income
are:
1. Premium Payments
2. Personal Exemptions
3. Additional Exemptions, if any
• Exclusions refer to items of income received or earned but are not taxable
as income because exempt by law or by treaty due to social, economic,
equity, and other considerations. Such tax-free income is not to be
included in the tax return.
The exclusion of income should not be confused with the reduction of gross
income by the application of allowable deductions. While exclusions are
simply not taken into account in determining gross income, deductions are
subtracted from gross income to arrive at taxable income.
o [Impt!] Compensation for personal injuries or sickness is
compensatory as it adds nothing to the individual, hence, not
taxable. But compensation for damages is taxable if it represents
payment for loss of expected profits and/or lost salaries.
• [VVIP!] Private retirement trust plan (or reasonable private benefit
plan)
1. There are 3 parties in an employees’ trust which has qualified as a
reasonable private retirement trust plan under Subsection (B, 6, a),
namely: the 1trustor-employer, 2the trustee of the fund and the
3
beneficiary or employee-members.
2. The trust fund (or pension fund or pension trust) while the trustee is
exempt from income tax on income from investment of said fund,
except, of course on interest income and continues to be so exempt
when paid or distributed to the employee-members upon retirement.
Conversely, if such earnings are paid or distributed to the employee-
members withdrawing their personal contributions to the fund before
their retirement date or age, the same are taxable to them (the
earnings and contributions of the Er are taxable but the contributions
of the Ee are not taxable being mere return of capital) in the year in
which so paid or distributed, such distribution having been effected
before their retirement from the employer-company
**De Leon opines that when the trust fund is used by the trustee
to purchase shares of stock or bonds in corporations the dividend
income or the interest income received by the trustee from said
corporations is exempt from income tax which is CORRECT. BUT if the
trust fund is deposited by the trustee in a bank that interest income is
subject to income tax which is WRONG (See Page 649, Annotation #2
in relation to Section 60,B).
 Example:
 In 1988, when A was 20 years old he was employed by
Corporation X and in 2013 when A was 45 years old he
retired. His personal contributions to the pension fund during
the period of 25 years amount to Php 300,000.00 and
Corporation X’s counterpart is also Php 300,000.00. The
interest income for 25 years on the Php 600,000.00 amounts
to Php 900,000.00. Upon retirement A received from the
trustee Php 1,500,000.00. The personal contributions of A of
Php 300,000 are not taxable being mere return of capital
while the remaining Php 1,200,000.00 is taxable because it
was received by A before his retirement age, hence, this will
not qualify as retirement benefit.
3. Employees’ contributions together with the earnings thereof can be
returned to the employees if for any reason (such as resignation of the
Ee or closure of business of the Er) their retirement plan is terminated.
Any and all amounts which represent a return of personal
contributions are not subject to income tax but the earnings are
subject to income tax and are taxable to the employee-recipient to the
extent of the entire amount thereof in the year in which paid or
distributed at the rates prescribed by Section 24(A)
4. One of the under Subsection (B,6,a), as implemented by Rev. Regs.
No. 1-68, as amended, in order to avail of the exemption with respect
to retirement benefits is that the retiring official or employee shall not
have previously availed of the privilege under a retirement benefit plan
of “the same or another employer,” which means that the retiring
official or employee must not have previously received retirement
benefits from the same or another employer who has a qualified
retirement plan under said subsection. Benefits received from the
GSIS are not from “the same or another employer.” (BIR Ruling No.
125-98, September 4, 1998)
5. In a retirement plan under RA No. 4917, the employer, or officials and
employees or both, contribute to a atrust fund for the purpose of
distributing to such officials and employees or their beneficiaries, the
corpus and income accumulated by the trust in accordance with the
plan.
The total benefits which the employees shall receive consisting of their
personal contributions, counterpart contributions of the employer and
the income of the Fund to which the employees are entitled, shall be
exempt from income tax if they are distributed only upon retirement
6. Subsection (B, 6, a) of Section 32 of the Tax Code makes no mention
of exemption from income tax of the earnings or income of the
retirement plan trust fund (or employees’ trust fund or employees’
pension fund or employees’ pension trust). Exemption from income tax
of the earnings derived from investments of the employees’ retirement
fund is governed by Section 60 (B) which specifically exempts
employee’s trust from income tax. Under said section, income of the
50
trust fund from its investments is exempt from income tax except,
however, the interest income from bank deposits of the trust fund
which is subject to the 20% final tax (THIS IS WRONG AGAIN!!!)
It has been ruled, however, that since the final tax and the withholding
thereof are embraced within the title on “Income Tax,” it follows that
such trust must be deemed exempt thereon; otherwise, the exemption
becomes meaningless. Accordingly, the interest income from currency
bank deposits is exempt from income tax.
7. The portion of the retirement fund determined to be in excess of
actuarially determined amount to cover the benefits of all the
employees may be reverted (or returned) to the
participating/contributing companies without terminating the fund.
However, said companies should declare as income the said excess
amount and pay the corresponding income tax thereon as prescribed
under Section 27 (A).
The retirement benefits to be received by private sector employees
under Section 32(B)(6)(a) are exempt from income tax provided their
employers maintain a qualified retirement benefit plan duly approved
by the BIR.
• Although this is mere return of capital it is taxable because
contributions to pension fund by the employer are allowable
deduction, hence, if returned they are taxable under the “Tax
Benefit Rule” or “Economic Benefit Rule”
8. The sale of a parcel of land by the investment manager (trustee of
the pension fund) of a qualified reasonable retirement benefit plan
established for the exclusive benefit of all the employees of a bank and
the corpus (or contributions or capital or principal) or income of the
fund is not used for or diverted to purposes other than for exclusive
benefit of the members and their beneficiaries is exempt from CGT.
• Priests cannot be regarded as employees – to qualify as a “reasonable
private benefit plan” under Section 32(B)(6)(a) of the Tax Code, the
retirement plan must be maintained by an employer for the benefit of
employees. Thus, any retirement benefits received by officials and
employees in accordance with a reasonable private benefit plan maintained
by the employer shall be excluded from gross income, and shall be exempt
from income tax and withholding tax.
In general, the relationship of the employer and employee exists (1) when
there is compensation; (2) when the person for whom services are
performed has the right to control and direct the individual who performs
the services, not only on the result to be accomplished by the work but
also on the details and means by which the result is accomplished; and (3)
when the person for whom services are performed has the right to dismiss
the individual performing the service.
Priests (their income is income from the practice of profession) cannot be
regarded employees since two essential requirements are absent. There
 are (a) control over the payment of compensation and (b) right to dismiss
the priests. The fact that the corporation sole actually directs or controls
the manner in which the services should be performed will not alter the
fact that the priests are not employees of the corporation sole.
• Separation from the service – the phrase “for any cause beyond the
control of said official or employee” connotes involuntariness on the part of
the official or employee. The separation from the service must not be
asked for or initiated by him. It must not be of his own making or choice.
Thus, the separation benefits of an employee whose service with a
company was terminated “on the ground of insubordination” are subject to
income tax.
o The laying-off of officials or employees as a result of a
reorganization, redundancy, or change in ownership falls within
the purview of said phrase. The separation gratuity as well as
loyalty cash gifts granted by a corporation to its laid off officials
and employees as a result of its reorganization or change in
ownership are exempt from income tax.
o Previous rulings hold that the money value of terminal leave
credits granted to said officials and employees are subject to
income tax. The tax exemption does not include the commutation
or employer’s payment for salary and cash equivalent of
accumulated vacation and sick leaves, if any. Likewise, amounts
granted to officials and employees who voluntarily resigned from
the service before the reorganization are subject to income tax.
Subsequent rulings hold that separation and/or retirement
benefits received by employees for health reasons as well as cash
equivalent of accumulated vacation and sick leave credits are
exempt from income tax.
o Backwages (not considered Separation Pay) of Php 1,760,000.00
plus 10% as attorney’s fees awarded to an employee of Colgate-
Palmolive Phils. for illegal dismissal are considered as
compensation for services rendered and, as such, they form part
of gross income pursuant to Subsection (A,1). Therefore, the
backwages for a period not to exceed 3 years as mandated by the
Labor Arbiter and affirmed by the NLRC and the Supreme Court,
reckoned from the date of dismissal are subject to income tax. On
the other hand, under Subsection (B,6,b), any amount received as
a consequence of separation due to any cause beyond the control
of the official or employee if exempt from taxes regardless of age
or length of service.
o Subsection (B,6,b) requires the presence of 2 conditions in order
that the employee benefits may be granted tax exemption. (a) the
employee is separated from the service of the employer due to
death, sickness or other physical disability or for any cause
beyond the control of the said official or employee; and (b)
51
employer pays benefits to the official or employee or his heirs as a
consequence of such separation.
• [Impt!] Unused sick and vacation leave credits – separation benefits
received by an official or employee, regardless of age or length of service,
separated from service due to death, sickness, or other physical disability
or for causes beyond his or her control, shall be exempt from taxes.
However, the payment of employees’ 13th month pay and other benefits in
excess of the Php 30,000.00 threshold, plus their salaries are subject to
income tax. On the other hand, the commutation and payment of unused
sick leave and vacation leave credits are not subject to income tax.
• Terminal leave pay (is in the nature of retirement benefit, hence, is
exempt from income tax) received by a government official or employee is
not subject to tax. The rationale behind the exemption has been explained
as follows:
“… commutation of leave credits more commonly known as
terminal leave, is applied for by an officer or employee who
retires, resigns, or is separated from the service through no
fault of his own. In the exercise of sound personnel policy, the
Government encourages unused leaves to be accumulated.
The government recognizes that for most public servants,
retirement pay is always less than generous if not meager
and scrimpy. Terminal leave payments are given not only at
the same time but also for the same policy considerations
governing retirement benefits”
They represent the cash value of an employee’s accumulated leave. In fine,
not being part of the gross salary or income of a government official or
employee for services rendered but a retirement benefit given to an officer
or employee who had already severed his connection with the government,
terminal leave pay is not subject to income tax.
• GSIS and Pag-ibig contributions – they are excluded from gross income
of the taxpayer and, thus, exempt from income tax.
o GSIS, SSS, Medicare and Pag-ibig contributions, and union dues
of individual employees are exempted from the requirement of
withholding tax on compensation; hence, the basic salary to be
subjected to withholding tax on compensation should be net of the
said deductions.
• Cash dividend received by a financial institution owned or controlled by a
foreign government from investments in Philippine corporations are exempt
from final withholding tax on dividends.
• Prizes and awards in sports competition – the national sports
association shall refer only to those sports associations duly accredited by
the Philippines Olympic Committee (POC). Hence, if the sports association
 which organized and sanctioned a sports event is not duly accredited by
the POC, the exemption granted by the subsection does not apply. Example:

• Benefits received by officials and employees:  On Jan. 2, 2004 A purchased a Php 10M face value bond
from Corp. X with a maturity period of 10 years. The bond
o Christmas bonus, etc. – under Subsection (B,7,e), there is no provides that Corp. X will pay the bond holder 8% interest
more limits as long as the total exclusion (benefits) shall not per annum. On Jan. 2, 2010 A sold the bond to B for Php
exceed Php 30,000.00 which ceiling may be increased by the 9.5M. On Jan. 2, 2014 the bond was surrendered by B to
Secretary of Finance upon recommendation of the Commissioner Copr. X for retirement and Corp. X paid B the face value of
of Internal Revenue. the bond of Php 10M. B realized a gain from retirement of
bond in the amount of Php 500,000.00 which is exempt
o 13th month pay – if the taxpayer gets a Christmas bonus of Php from income tax.
12,000.00 and 13th month pay of Php 25,000.00 or a total of Php
37,000.00, the excess Php 7,000.00 is subject to withholding tax. o BIR Ruling exempts the income or earning from such long-term
instruments from paying the 20% final (this alone is WRONG
because this is NOT an interest from Philippine Currency Bank
• [VVIP!] Gains (NOT taxable) from sale, etc. of bonds, debentures or other
Deposit but interest from Long Term Bond except if the Long Term
certificates of indebtedness with maturity of more than 5 years.
Instrument or Bond qualifiers as deposit substitute) tax on
interest income. “Since the law speaks of the exclusion from gross
o In connection with the controversial issuance by the government
income of all gains derived from lone-term investments, it follows
of the so-called “PEACE Bonds”, the BIR made the following
that embraced thereunder are income, yield, or interest, which are
ruling: “At the time of issuance or origination of the PEACE bonds,
all synonymous with gains.” The exemption is given by law,
there is no borrowing from the public, since the bonds are being
according to the BIR, “as an incentive to encourage cash savings
issued only to one entity, that is, RCBC. It has been the practice
in such securities and to develop the capital market for these
of the BSP to issue debt instruments and certificates only to banks
investments.”
and/or financial institutions. The required issuance to more than
20 individual or corporate lenders in order that the transaction be
The Department of Finance nullified this ruling holding that the
considered a borrowing from the ‘public’ is not present in the
exemption refers only to gains arising from the sale, exchange or
instant case. At any one time covers only the origination or
retirement of bonds, debentures and other certificates of
original issuance of the bonds regardless or whether sale or
indebtedness but not to interest income which has always been
trading is made in the secondary market. Thus, in the case of
subject to tax.
PEACE Bonds, the determining factor in ascertaining whether such
bonds are ‘deposit substitutes’ is the fact of their original issuance
The Court of Tax Appeals has held that only the gain from the
to a single entity, RCBC. Under these circumstances, it is clear
sale, as distinguished from interest, of bonds, debentures or other
that the bonds are issued to a single entity, whether such entity
certificates of indebtedness with maturity of more than 5 years
be RCBC, CODE-NGO or RCC Capital. In this regard, a
shall be exempt from income tax; hence, interest income earned
representation or warranty should be made to the effect that the
from investments in long term fixed rate government treasury
bonds are acquired upon their original issuance by the original
notes are subject to 20% withholding tax.
purchaser thereof, for and on its own behalf, or on behalf of a
single purchaser only, and in the latter case, that the purchaser is
o Gain – the term, however, does not include “interest” which is
acquiring such bonds for its own account and not for the account
subject to income (either 20% FT or PGI) tax.
of other entities
The idea is still to treat bonds, etc. as “deposit substitutes” but
In this particular case, the term ‘gain’ in Section 32(B)(7)(g)
exclude the interest income (this could have been the idea or
refers to the gain, if any, from secondary trading (sale by the
intent of the lawmaker which was unfortunately not expressed in
original bond holder to a third person), which is the difference
words and the law as well as the latest jurisprudence does not
between the selling price of the bonds in the secondary market
exclude interest income from income tax) from gross income if
and the price at which such bonds were purchased by the seller.
they have maturities of more than 5 years.
The term ‘gain’ likewise includes the gain (that is, the difference
between the proceeds from the retirement of the bonds and the
Since the law exempts interest on long term deposits and similar
price at which such last holder acquired the bonds) realized by the
investments from the final withholding tax, there seems to be no
last holder of the bonds when such bonds are surrendered for
reason why interest income on long-term securities should be
retirement upon their maturity.
subject to tax if the intent of the law were to support capital
52
 market development. The exemption of interest income on long-
term securities would level the playing field between the deposit
market and the securities or bond market. A legislative definition
or clarification of “gains” in Section 32(B,7,g) is needed.
SEC. 33. Special Treatment of Fringe Benefit.-
• [Impt!] Any gain derived from the redemption of units (shares of stock) of
a mutual fund company from gross income for income tax purposes and is
exempt from CGT pursuant to Section 32(B)(7)(h). Under said section,
gains realized by the investor upon redemption of shares of stock in a
mutual fund company are excluded from gross income for income tax
purposes. “Mutual Fund Company” – an open-end and close-end
investment company as defined under the Investment Company Act (ICA).
• [VIP!] The term “gain,” as used in Section 32(B)(7)(g) does not include
interest. Gains from sale or exchange or retirement of bonds, debentures,
or other certificates of indebtedness fall within the general category of
“gains derived from dealings in property” under Section 32(A)(3), while
interest from bonds, debentures or other certificates of indebtedness falls
within the category of “interests” under Section 32(A)(4). Said gains and
interests are separate and distinct from each other. Only gains realized
from the sale or exchange or retirement of bonds, debentures or other
certificates of indebtedness with a maturity of more than 5 years are
excluded from gross income.
The fact that Congress used the term “gains from sale” in the said section,
knowing fully well the reference to interest under Sections 24, 25, 26, 27,
and 28, shows that it did not intend to exempt such interest.
• Other examples of exclusions from income tax under special laws:
o Income of the Export Development Corporation of the Philippines
(PD 1074), Technology Resource Center (PD 1097) and Philippine
Institute for Development Studies (PD 1201)
o Income derived by domestic corporations and partnerships and
landowners from the instalment sales of houses to their
employees and workers as well as to low income groups in
housing projects, or income derived from rentals thereof (PDs 745
and 217)
o Prizes received by winners in charity horse race sweepstakes from
the PCSO (RA 1169) and lotto winnings (Sec. 24 [B,1], 25 [A,2])
o Income from bonds and securities for sale in the international
market (PD 81)
o Bonds and other instruments of indebtedness which the Export
Processing Zone Authority (EPZA) is authorized to issue (PD 66)
o See PD 66, 85, 87, 175, 218, 246, 265, 485, 535, 564, 667 and
764
53
Note: EO 93 (Dec. 17, 1986) withdraws, subject to certain exceptions, the
duty and tax incentives previously granted to government and private
entities.
(A) Imposition of Tax. - A final tax of thirty-four percent (34%) effective
January 1, 1998; thirty-three percent (33%) effective January 1, 1999;
and thirty-two percent (32%) effective January 1, 2000 and thereafter, is
hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (managerial or supervisor) (except
rank and file employees as defined herein) by the employer, whether an
individual or a corporation (unless (not taxable) 1the fringe benefit is
required by the nature of, or necessary to the trade, business or profession
of the employer, or 2when the fringe benefit is for the convenience or
advantage of the employer). The tax herein imposed is payable by the
employer which tax shall be paid in the same manner as provided for under
Section 57 (A) of this Code. The grossed-up monetary value of the fringe
benefit shall be determined by dividing the actual monetary value of the
fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-
seven percent (67%) effective January 1, 1999; and sixty-eight percent
(68%) effective January 1, 2000 and thereafter: Provided, however, That
fringe benefit furnished to employees and taxable under Subsections (B),
(C), (D) and (E) of Section 25 shall be taxed at the applicable rates
imposed thereat: Provided, further, That the grossed -Up value of the
fringe benefit shall be determined by dividing the actual monetary value of
the fringe benefit by the difference between one hundred percent (100%)
and the applicable rates of income tax under Subsections (B), (C), (D), and
(E) of Section 25.
(B) Fringe Benefit defined. - For purposes of this Section, the term 'fringe
benefit' means any good merchandise, service or other benefit (such as
property rights and privileges) furnished or granted in cash or in kind by an
employer to an individual employee (except rank and file employees as
defined herein) such as, but not limited to, the following:
(1) Housing;
(2) Expense account; (reimbursable expenses or refundable expenses
for local travel)
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted
charged;
(6) Membership fees, dues and other expenses borne by the employer
for the employee in social and athletic clubs or other similar
organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not
taxable under this Section:
(1) Fringe benefits which are authorized and exempted from tax under
special laws;
(2) Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not; and
(4) De minimis (relatively small) benefits as defined in the rules and
regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
[De minimis non curiae lex – the law does not care for or take
notice of very small or trifling or trivial or insignificant matter.]
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, such rules and regulations as are
necessary to carry out efficiently and fairly the provisions of this Section,
taking into account the peculiar nature and special need of the trade,
business or profession of the employer.
• Taxability of fringe benefits
o The FBT is imposed by Subsection (A) on the grossed-up
monetary value of fringe benefit given to employees, except rank
and file employees. If the fringe benefit given is necessary to the
trade, business or profession of the employer, or for the
convenience or advantage of the employer, then it is not subject
to the FBT,
o It has been administratively ruled that meal coupons worth Php
330.00 a month given by a bank need not be concluded as
compensation subject to withholding since they are given for the
convenience of the employer. Likewise, the subsidized cost of 1
sack of rice a month need not be included as compensation
subject to withholding.
However, uniforms of employees at an average of Php 2,000.00
for females and Php 1,000.00 for males once every 2 years; and
the medical cash allowance for dependents of Php 1,500.00 per
annum are considered compensation income subject to
withholding. Note: they may be considered now of relatively small
value with the increase in wages and rise in prices of basic
commodities.
o De Minimis Benefit which is exempt from the FBT shall, in
general, be limited to facilities or privileges (such as
entertainment, Christmas party and other cases similar thereto,
54
medical and dental services; or the so-called courtesy discount on
purchases) furnished or offered by an employer to his employees,
provided such facilities or privileges are of relatively small value
and are offered or furnished by the employer merely as a means
of promoting the health, goodwill, contentment, or efficiency of his
employees.
• Basis – it is imposed on the grossed-up monetary value (GMV) of the
fringe benefit furnished or granted to a managerial or supervisory
employee.
• [Impt!] The GMV of the fringe benefit granted or furnished the employee
on which the final tax is paid is now deductible on the part of the employer
falling under the (ordinary and necessary business) expense category,
pursuant to Section 34(A,1,a,i).
The FBT is actually due from the employee (because he is the income
recipient) but paid by the employer for and on behalf of the employee. The
tax is additional cost to the employer. When the employer pays the FBT on
behalf of the employee, the tax becomes an additional benefit of the
employee subject thereto. Thus, the need to gross up the monetary value
of the fringe benefit received in computing the FBT due thereon.
The employer may be an individual, professional partnership, or a
corporation, regardless of whether the corporation is taxable or not, or the
government and its instrumentalities.
• Subsection (C) says that fringe benefits given to the rank and file
employees “are not taxable under this Section.” This means that they are
taxable (this could not have been the legislative intent because this clearly
violates the constitutional provision that taxation must be equitable) as
compensation income of the employees subject to withholding from the
employee’s salary and to the graduated tax rates under Section 24(A). On
the other hand, since the tax on fringe benefit granted to managerial and
supervisory employees is paid by the employer, they get the fringe benefit
in full. This difference in treatment may be viewed as anti-poor.
The GMV of the fringe benefit is determined by dividing the monetary value
of the fringe benefit by 68%.
• Expense account – the following shall be treated as taxable fringe
benefits:
o Personal expenses incurred by an employee but are paid by his
employer;
o Personal expenses paid for by an employee but reimbursed by an
employer;
 The expenses in letters (a) and (b) shall be treated as fringe benefits
except when the expenditures are duly receipted for and in the name of
the employer and the expenditures do not partake of the nature of a
personal expense attributable to the employee.
• De Minimis Benefits – these benefits which are exempt from the fringe
benefit tax and compensation income tax and are, therefore, not subject to
withholding tax as well, shall, in general, 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, contentment or efficiency of his
employees
o The following shall be considered as de minimis benefits not
subject to income tax as well as withholding tax on compensation
income to both managerial and rank and file employees
 Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year
 Monetized value of vacation and sick leave credits paid to
government officials and employees
 Medical cash allowance to dependents of employees not
exceeding Php 750.00 per semester or Php 125.00 per
month
 Rice subsidy of Php 1,500.00 or 1 sack of 50 kg. rice per
month amounting to not more than Php 1,500.00
 Uniform and clothing allowance not exceeding Php
4,000.00 per annum.
 Actual medical assistance
 Laundry allowance not exceeding Php 300.00 per month
 Employee achievement awards
 Gifts given during Christmas and major anniversary
celebrations not exceeding Php 3,000.00 per employee
per annum
 Daily meal allowance for overtime work and
right/graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis
• The amount of taxable fringe benefit (or GMV) and the fringe benefits
tax (the FBT is not an allowable deduction because it is already included in
or is a component of the taxable fringe benefit or grossed-up monetary
value, hence, if the TFB or GMV and FBT are allowed deductions there will
be duplication of allowable deduction) shall constitute allowable deductions
from gross income of the employer.
Chapter 7 – ALLOWABLE DEDUCTIONS
[NRA not engaged and Non-Resident Foreign Corporation are not included because
they are taxable at gross income]
SEC. 34. Deductions from Gross Income. - Except (if the only income of the
individual taxpayer is from compensation the only allowable deduction is Subsection
M) for taxpayers earning compensation income arising from personal services
55
rendered under an employer-employee relationship where no deductions shall be
allowed under this Section other than under Subsection (M) (premiums payments
on health and/or hospitalization insurance) hereof, in computing taxable income
subject to income tax under Sections 24(A) (RC, NRC and RA); 25(A) (NRA
engaged); 26 (GPP); 27(A) (DC), (B) (proprietary educational institution and non-
profit hospital) and (C) (GOCC); and 28(A)(1) (RFC), there shall be allowed the
following deductions from gross income:
(A) Expenses. –
(1) Ordinary and Necessary Trade, Business or Professional Expenses.
(a) In General. - There shall be allowed as deduction from gross
income all the ordinary and necessary expenses paid or
incurred (or accrued expenses not yet paid at the end of the
tax period, EXAMPLE: A is leasing a commercial building at an
annual rent of Php 240,000.00. Per agreement with the lessor
the Php 240,000.00 shall be payable semi-annually every July
2 and January 2 of the following year. Hence, the Php
240,000.00 rent in 2014 shall be payable on July 2, 2014 in
the amount of Php 120,000.00 and on January 2, 2015 in the
amount of Php 120,000.00. The Php 120,000.00 paid on July
2, 2014 is an expense paid while the Php 120,000.00 payable
on January 2, 2015 is an expense incurred or accrued as of
December 31, 2014. The allowable deduction is Php
240,000.00) during the taxable year in carrying on or which
are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of
a profession, including:
(i) A reasonable allowance for salaries, wages, and other
forms of compensation (such as allowances, bonuses,
honoraria, etc.) for personal services actually rendered,
including the grossed- up monetary value of fringe
benefit furnished or granted by the employer to the
employee: Provided, That the final tax on the fringe
benefit imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and
abroad, while away from home in the pursuit of trade,
business or profession;
(iii) A reasonable allowance for rentals and/or other
payments which are required as a condition for the
continued use or possession, for purposes of the trade,
business or profession, of property to which the
taxpayer has not taken or is not taking title or in which
he has no equity other than that of a lessee, user or
possessor;
(iv) A reasonable allowance for entertainment, amusement
and recreation expenses during the taxable year, that
are directly connected to the development,
 management and operation of the trade, business or
profession of the taxpayer, or that are directly related
to or in furtherance of the conduct of his or its trade,
business or exercise of a profession not to exceed such
ceilings as the Secretary of Finance may, by rules and
regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as
the special circumstances, nature and character of the
industry, trade, business, or profession of the taxpayer:
Provided, That any expense incurred for
entertainment, amusement or recreation that is
contrary to law, morals, public policy or public order
shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction from gross
income shall be allowed under Subsection (A) hereof unless
the taxpayer shall substantiate with sufficient evidence, such
as official receipts or other adequate records: (i) the amount
of the expense being deducted, and (ii) the direct connection
or relation of the expense being deducted to the
development, management, operation and/or conduct of the
trade, business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction
from gross income shall be allowed under Subsection (A)
hereof for any payment made, directly or indirectly, to an
official or employee of the national government, or to an
official or employee of any local government unit, or to an
official or employee of a government-owned or-controlled
corporation, or to an official or employee or representative of
a foreign government, or to a private corporation, general
professional partnership, or a similar entity, if the payment
constitutes a bribe or kickback (rebate).
(2) Expenses Allowable to Private Proprietary Educational Institutions. -
In addition to the expenses allowable as deductions under this
Chapter, a private proprietary educational institution; referred to
under Section 27(B) of this Code, may at its option elect either: (a)
to deduct expenditures otherwise considered as capital outlays of
depreciable assets (such as construction cost of school building and
acquisition cost of school equipment) incurred during the taxable
year for the expansion of school facilities, or (b) to deduct
allowance for depreciation thereof under Subsection (F) hereof.
Example:
University X, a Proprietary Educational Institution constructed a school
building at a cost of Php 50M which was completed on December 31,
2013. The estimated life of the building is 50 years without scrap
value. The university can either deduct the said Php 50M from its gross
income in 2013 or depreciate the building at Php 1M per annum
beginning 2014 up to 2063.
56
(B) Interest. –
(1) In General. - The amount of interest paid or incurred within a
taxable year on indebtedness in connection with the taxpayer's
profession, trade or business shall be allowed as deduction from
gross income: Provided, however, That the taxpayer's otherwise
allowable deduction for interest expense shall be reduced by forty-
two percent (42%) of the interest income subjected to final tax:
Provided, That effective January 1, 2009, the percentage shall be
thirty-three percent (33%).
(2) [Mem!] Exceptions. - No deduction shall be allowed in respect of
interest under the succeeding subparagraphs:
(a) If within the taxable year 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, That such interest shall be allowed a deduction in
the year the indebtedness is paid: Provided, further, That if the
indebtedness is payable in periodic amortizations, 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;
[Cash-Basis of Accounting means that income is recognized or
recorded when cash is received while expenses are recognized
or recorded when paid. Hence, cash basis accounting does not
record accrued income or accrued expenses]
(b) [BAR!] If both the taxpayer (debtor) and the person (creditor)
to whom the payment has been made or is to be made are
persons specified under Section 36 (B) (such as members of a
family [brothers & sisters, spouses, ancestors and
descendants] and between individual and corporation more
than 50% of the outstanding capital stock of the latter is
owned by the former); or
Example:
 A borrowed from B Php 1M on July 1, 2013 at an interest
of 10% per annum or Php 100,000.00. The loan is payable
on June 30, 2014 but the interest of Php 100,000.00 was
deducted in advance by the lender/creditor. The interest
expense from July 1, 2013 to December 31, 2013 in the
amount of Php 50,000.00 is not an allowable deduction in
2013 if A is using Cash Basis of Accounting. The interest
expense of Php 100,000.00 is deductible in 2014 when the
indebtedness is paid. If A is using the Accrual Method of
Accounting he will report interest expense of Php
50,000.00 in 2013 and Php 50,000.00 in 2014.
 (c) If the indebtedness is incurred to finance petroleum
exploration.
(3) Optional Treatment of Interest Expense. - At the option of the
taxpayer, interest incurred to acquire property used in trade
business or exercise of a profession may be allowed as a deduction
or treated as a capital expenditure (the interest paid is added to the
cost of the property acquired and said property together with the
interest is depreciated over the life of said property).
[The interest expense paid by the taxpayer-debtor to the creditor is
not an allowable deduction but the interest income received by the
creditor/lender is taxable as PGI under Section 24A if he is RC, NRC
or RA]
Example:
 A purchased a machinery at a cost of Php 10M but he
borrowed said Php 10M with an interest of Php 1M.
1. A may deduct as interest expense the Php 1M; or
2. The Php 1M interest shall be added to the cost of the
machinery of Php 10M or a total of Php 11M. If the
life of the machinery if 10 years A will deduct a
depreciation of (Php 11M ÷ 10) Php 1.1 M for a
period of 10 years
(C) Taxes.-
(1) In General. - Taxes (such as VAT, other percentage taxes excise
taxes, documentary stamp tax, customs duties, local taxes, real
property tax and community tax) paid or incurred within the
taxable year in connection with the taxpayer's profession, trade or
business, shall be allowed as deduction, except:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but
this deduction shall be allowed in the case of a taxpayer
(resident citizen or domestic corporation) who does not signify
in his return his desire to have to any extent the benefits of
paragraph (3) of this Subsection (Income tax paid in foreign
country is not allowable deduction except if the taxpayer does
not signify in his/its return that he shall treat said income tax
as tax credit. If the taxpayer signifies in his/its return that he
shall treat the income tax paid in foreign country as tax credit
then said income tax is not an allowable deduction from his
gross income in the Philippines as well as from outside the
Philippines. If the taxpayer will treat said income tax as tax
credit, he/it shall deduct it from the income tax due in the
Philippines to arrive at the income tax still due in the
Philippines. Therefore, the tax credit is deducted from income
tax) (relating to credits for taxes of foreign countries);
57
(c) Estate and donor's taxes; and
(d) Taxes (special levy or special assessment under LGC of 1991)
assessed against local benefits of a kind tending to increase the
value of the property assessed.
Provided, That taxes allowed under this Subsection, when
refunded or credited, shall be included as part of gross income in
the year of receipt to the extent of the income tax benefit of said
deduction.
[ Example – “to the extent of the income benefit…”
Taxes paid by Corp. A, a DC, in 2013 amounted to Php 1M, which
amount was deducted from the gross income of Corp. A in 2013.
The income tax benefit of this deduction is (Php 1M x 30%) Php
300,000.00.
(a) If the tax refund in 2014 is Php 200,000.00, the
corporation will report as PGI Php 200,000.00
(b) If the tax refund in 2014 is Php 400,000.00, the
corporation will report as PGI Php 300,000.00. In other
words, what is to be reported as PGI is the amount of tax
refund or the income tax benefit whichever is lower ]
(2) Limitations on Deductions. - In the case of a nonresident alien
individual engaged in trade or business in the Philippines and a
resident foreign corporation, the deductions for taxes provided in
paragraph (1) of this Subsection (C) shall be allowed only if and to
the extent that they are connected with income from sources within
the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer
signifies in his return his desire to have the benefits of this
paragraph, the tax (income tax on the taxable income of the
taxpayer from sources within and without the Philippines) imposed
by this Title shall be credited with (or reduced by):
(a) Citizen (resident) and Domestic Corporation. - In the case of a
citizen (resident) of the Philippines and of a domestic
corporation, the amount of income taxes paid or incurred
during the taxable year to any foreign country; and
(b) Partnerships (GPP whose partner/s are resident citizens) and
Estates (the trustor thereof is a Resident Citizen). - In the
case of any such individual (Resident Citizen) who is a member
of a general professional partnership or a beneficiary of an
estate or trust, his proportionate share of such taxes of the
general professional partnership or the estate or trust paid or
incurred during the taxable year to a foreign country, if his
distributive share of the income of such partnership or trust is
reported for taxation under this Title.
 An alien (Resident or Non-Resident) individual non-resident
citizen and a foreign corporation (Resident or Non-Resident)
shall not be allowed the credits against the tax (income tax
payable in the Philippines or income from sources within the
Philippines) for the taxes paid in foreign countries (because
their income outside the Philippines is not taxable in the
Philippines) allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this
Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred
to any foreign country shall not exceed the same proportion of
the tax against which such credit is taken, which the taxpayer's
taxable income from sources within such country under this
Title bears to his entire taxable income for the same taxable
year; and
Example:
 The following information pertains to Corp A, a DC, for the
calendar year 2013:
Taxable Income
Germany Php 2,000,000.00
Philippines 8,000,000.00
TOTAL Php 10,000,000.00
Philippine Income Tax (Php 10M x 30%) 3,000,000.00
Income Tax Paid
Germany Php 800,000.00
������� �������������� ������
Tax Credit Limit = Phil Income Tax ×
������� ���������� �������
�
= Php 3,000,000.00 ×
��
= Php 600,000.00
Tax Credit (lower between increase tax paid in foreign
country and tax credit limit) Php 600,000.00
Income Tax still due or payable in the Philippines is (Php 3M –
Php 600,000.00) Php 2,400,000.00
NOTE: If Corporation A does not signify in its return that it will
treat the income tax paid in Germany as tax credit, it
can deduct from its gross income said income tax paid
in Germany of Php 800,000.00
(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which
the taxpayer's taxable income from sources without the
Philippines taxable under this Title bears to his entire taxable
income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes
when paid differ from the amounts claimed as credits by the
58
taxpayer, or if any tax paid is refunded in whole or in part, the
taxpayer shall notify the Commissioner; who shall redetermine the
amount of the tax for the year or years affected, and the amount of
tax due upon such redetermination, if any, shall be paid by the
taxpayer upon notice and demand by the Commissioner, or the
amount of tax overpaid, if any, shall be credited or refunded to the
taxpayer. In the case of such a tax incurred but not paid, the
Commissioner as a condition precedent to the allowance of this
credit may require the taxpayer to give a bond with sureties
satisfactory to and to be approved by the Commissioner in such
sum as he may require, conditioned upon the payment by the
taxpayer of any amount of tax found due upon any such
redetermination. The bond herein prescribed shall contain such
further conditions as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection
(C)(3) of this Section may, at the option of the taxpayer and
irrespective of the method of accounting employed in keeping his
books, be taken in the year which the taxes of the foreign country
were incurred, subject, however, to the conditions prescribed in
Subsection (C)(5) of this Section. If the taxpayer elects to take
such credits in the year in which the taxes of the foreign country
accrued, the credits for all subsequent years shall be taken upon
the same basis and no portion of any such taxes shall be allowed as
a deduction in the same or any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection (C)(3)
hereof shall be allowed only if the taxpayer establishes to the
satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the
Philippines;
(b) The amount of income derived from each country, the tax paid
or incurred to which is claimed as a credit under said
paragraph, such amount to be determined under rules and
regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and
computation of such credits.
(D) Losses. –
(1) In General. - Losses (ordinary) actually sustained during the
taxable year and not compensated for by insurance or other forms
of indemnity shall be allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if
the loss (or destruction) arises from fires, storms, shipwreck,
or other casualties, or from robbery, theft or embezzlement.
 The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules and
regulations prescribing, among other things, the time and manner
by which the taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or embezzlement during the
taxable year: Provided, however, That the time limit (90 days
from discovery under R.R. No. 12-77) to be so prescribed in the
rules and regulations shall not be less than thirty (30) days nor
more than ninety (90) days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if
at the time of the filing of the return, such loss has been
claimed as a deduction for estate tax purposes in the estate tax
return.
(2) Proof of Loss. - In the case of a nonresident alien individual or
foreign corporation, the losses deductible shall be those actually
sustained during the year incurred in business, trade or exercise of
a profession conducted within the Philippines, when such losses are
not compensated for by insurance or other forms of indemnity. The
secretary of Finance, upon recommendation of the Commissioner, is
hereby authorized to promulgate rules and regulations prescribing,
among other things, the time and manner by which the taxpayer
shall submit a declaration of loss sustained from casualty or from
robbery, theft or embezzlement during the taxable year: Provided,
That the time to be so prescribed in the rules and regulations shall
not be less than thirty (30) days nor more than ninety (90) days
from the date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss; and
(3) Net Operating Loss Carry-Over. - The net operating loss of the
business or enterprise for any taxable year immediately preceding
the current taxable year, which had not been previously offset as
deduction from gross income shall be carried over as a deduction
from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided, however,
That any net loss incurred in a taxable year during which the
taxpayer was exempt from income tax shall not be allowed as a
deduction under this Subsection: Provided, further, That a net
operating loss carry-over shall be allowed only if there has been no
substantial change in the ownership of the business or enterprise in
that –
(i) Not less than seventy-five percent (75%) in nominal value of
outstanding issued shares., if the business is in the name of a
corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital
of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons.
59
For purposes of this subsection, the term [Mem!] “net operating
loss” shall mean the excess of allowable deduction over gross
income of the business in a taxable year. Provided, That for mines
other than oil and gas wells, a net operating loss without the
benefit of incentives provided for under Executive Order No. 226, as
amended, otherwise known as the Omnibus Investments Code of
1987, 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. The entire
amount of the loss shall be carried over to the first of the five (5)
taxable years following the loss, and any portion of such loss which
exceeds, the taxable income of such first year shall be deducted in
like manner form the taxable income of the next remaining four (4)
years.
(4) [VVIP!] Capital Losses. –
(a) Limitation. - Loss from sales or Exchanges of capital assets
(except real property located in the Philippines classified as
Capital Asset because the sale thereof will never result to
Capital loss since what is taxable is the GSP or FMV or FMV,
whichever is highest which is the presumed capital gain) shall
be allowed only to the extent of the gains from such sales or
exchanges. This means that if the Capital losses amount to Php
1M while the capital gains amount to Php 800,000.00, the net
capital loss of Php 200,000.00 cannot be deducted from the
gross income of the taxpayer from trades business provided in
Section 39.
(b) Securities Becoming worthless. - If securities (such as shares
of stock or bonds or profession. On the other hand, if the
Capital Gains amount to Php 1M while the capital losses
amount to Php 800,000.00 the net capital gain of Php
200,000.00 shall be added to the gross income of the taxpayer
from trade, business or profession) as defined in Section 22 (T)
become worthless (the issuing corporation is already insolvent
or bankrupt) during the taxable year and are capital assets
(the taxpayer or holder is not a dealer in securities), the loss
resulting therefrom shall, for purposes of this Title, be
considered as a loss from the sale or exchange, on the last day
of such taxable year, of capital assets.
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash
sales' of stock or other securities are not deductible at all as
provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall b
allowed only to the extent of the gains from such transactions.
(7) Abandonment Losses. –
(a) In the event a contract area where petroleum operations are
undertaken is partially or wholly abandoned, all accumulated
 exploration and development expenditures pertaining thereto
shall be allowed as a deduction: Provided, That accumulated
expenditures incurred in that area prior to January 1, 1979
shall be allowed as a deduction only from any income derived
from the same contract area. In all cases, notices of
abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the
unamortized costs thereof, as well as the undepreciated costs
of equipment directly used therein , shall be allowed as a
deduction in the year such well, equipment or facility is
abandoned by the contractor: Provided, That if such abandoned
well is re-entered and production is resumed, or if such
equipment or facility is restored into service, the said costs
shall be included as part of gross income in the year of
resumption or restoration and shall be amortized or
depreciated, as the case may be.
(E) Bad Debts (or uncollectible accounts).-
(1) In General. - Debts due to the taxpayer actually ascertained to be
worthless (the debtor can no longer pay) and charged off
(removed from the accounting records of the taxpayer) within the
taxable year except those not connected with profession, trade or
business and those sustained in a transaction entered into between
parties mentioned under Section 36 (B) of this Code: Provided,
That recovery of bad debts previously allowed as deduction in the
preceding years shall be included as part of the gross income in the
year of recovery to the extent of the income tax benefit of said
deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section
22 (T), are ascertained to be worthless and charged off within the
taxable year and are capital assets, the loss resulting therefrom
shall, in the case of a taxpayer other than a bank or trust company
incorporated under the laws of the Philippines a substantial part of
whose business is the receipt of deposits, for the purpose of this
Title, be considered as a loss from (deductible as capital loss not as
bed debts) the sale or exchange, on the last day of such taxable
year, of capital assets.
(3) Wagering Loss – Net wagering loss by the taxpayer from his income
from trade, business or profession.
(F) Depreciation (this term includes amortization of intangible assets). –
(1) General Rule. - There shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in the
trade or business. In the case of property held by one person for
life with remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant. In the case of
60
property held in trust, the allowable deduction shall be apportioned
between the income beneficiaries and the trustees in accordance
with the pertinent provisions of the instrument creating the trust, or
in the absence of such provisions, on the basis of the trust income
allowable to each.
[Fixed assets such as building, machinery and equipment are
subject to depreciation. Intangible assets such as patent, franchise
and copyright are subject to authorization. Wasting assets such as
mining property are subject to depletion. Depreciation and
amortization are covered by Subsection F while depletion is covered
by Subsection G.]
Example:
The taxpayer purchased a machinery at a cost of Php12M.
The estimated scrap or residual value of the machinery of
Php2M, while the estimated useful life of said machinery is
10 years.
Compute the annual depreciation of the machinery.
Solution:
Annual depreciation is cost MINUS scrap value divided
by useful life or Php 12M – Php 2M ÷ 10 or Php 1M.
(2) Use of Certain Methods and Rates. - The term 'reasonable
allowance' as used in the preceding paragraph shall include, but not
limited to, an allowance computed in accordance with rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the following
methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the
rate which would have been used had the annual allowance
been computed under the method described in Subsection (F)
(1);
(c) The sum-of-the-years-digit method; and
(d) Any other method (such as working hours or production
method) which may be prescribed by the Secretary of Finance
upon recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. -
Where under rules and regulations prescribed by the Secretary of
Finance upon recommendation of the Commissioner, the taxpayer
and the Commissioner have entered into an agreement in writing
specifically dealing with the useful life and rate of depreciation of
any property, the rate so agreed upon shall be binding on both the
 taxpayer and the national Government in the absence of facts and
circumstances not taken into consideration during the adoption of
such agreement. The responsibility of establishing the existence of
such facts and circumstances shall rest with the party initiating the
modification. Any change in the agreed rate and useful life of the
depreciable property as specified in the agreement shall not be
effective for taxable years prior to the taxable year in which notice
in writing by certified mail or registered mail is served by the party
initiating such change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted such
useful life and depreciation rate for any depreciable and claimed the
depreciation expenses as deduction from his gross income, without
any written objection on the part of the Commissioner or his duly
authorized representatives, the aforesaid useful life and
depreciation rate so adopted by the taxpayer for the aforesaid
depreciable asset shall be considered binding for purposes of this
Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An
allowance for depreciation in respect of all properties directly
related to production of petroleum initially placed in service in a
taxable year shall be allowed under the straight-line or declining-
balance method of depreciation at the option of the service
contractor.
However, if the service contractor initially elects the declining-
balance method, it may at any subsequent date, shift to the
straight-line method.
The useful life of properties used in or related to production of
petroleum shall be ten (10) years of such shorter life as may be
permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be
depreciated under the straight-line method on the basis of an
estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an
allowance for depreciation in respect of all properties used in mining
operations other than petroleum operations, shall be computed as
follows:
(a) At the normal rate of depreciation if the expected life is ten
(10) years or less; or
(b) Depreciated over any number of years between five (5) years
and the expected life if the latter is more than ten (10) years,
and the depreciation thereon allowed as deduction from taxable
income: Provided, That the contractor notifies the
Commissioner at the beginning of the depreciation period which
depreciation rate allowed by this Section will be used.
61
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or
Business or Resident Foreign Corporations. - In the case of a
nonresident alien individual engaged in trade or business or
resident foreign corporation, a reasonable allowance for the
deterioration of Property arising out of its use or employment or its
non-use in the business trade or profession shall be permitted only
when such property is located in the Philippines.
(G) Depletion of Oil and Gas Wells and Mines (known as Wasting Assets). –
(1) In General. - In the case of oil and gas wells or mines, a reasonable
allowance for depletion or amortization computed in accordance
with the cost-depletion method (or Production Method) shall be
granted (or allowed as deduction) under rules and regulations to
be prescribed by the Secretary of finance, upon recommendation of
the Commissioner. Provided, That when the allowance for depletion
shall equal the capital invested no further allowance shall be
granted: Provided, further, That after production in commercial
quantities has commenced, certain intangible exploration and
development drilling costs: (a) shall be deductible in the year
incurred if such expenditures are incurred for non-producing wells
and/or mines, or (b) shall be deductible in full in the year paid or
incurred or at the election of the taxpayer, may be capitalized and
amortized if such expenditures incurred are for producing wells
and/or mines in the same contract area.
Example: (of PRODUCTION METHOD)
The cost of mining property is Php 5B. the estimated
content of the mine is 10,000 tons, this means that the
depletion rate per ton is (Php 5B ÷ 10,000) Php
500,000.00. If during the first year of the mining
operation, 2,000 tons were extracted, the depletion for
that year is (Php 500,000.00 x 2,000) Php
1,000,000,000.00.
“Intangible costs in petroleum operations” refers to any cost
incurred in petroleum operations which in itself has no salvage
value and which is incidental to and necessary for the drilling of
wells and preparation of wells for the production of petroleum:
Provided, That said costs shall not pertain to the acquisition or
improvement of property of a character subject to the allowance for
depreciation except that the allowances for depreciation on such
property shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses
allowed as a deduction in computing taxable income during the year
shall not be taken into consideration in computing the adjusted cost
basis for the purpose of computing allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In
computing taxable income from mining operations, the taxpayer
may at his option, deduct exploration and development
expenditures accumulated as cost or adjusted basis for cost
 depletion as of date of prospecting, as well as exploration and
development expenditures paid or incurred during the taxable year:
Provided, That the amount deductible for exploration and
development expenditures shall not exceed twenty-five percent
(25%) of the net income from mining operations computed without
the benefit of any tax incentives under existing laws. The actual
exploration and development expenditures minus twenty-five
percent (25%) of the net income from mining shall be carried
forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the exploration and
development expenditures is irrevocable and shall be binding in
succeeding taxable years.
“Net income from mining operations”, as used in this Subsection,
shall mean gross income from operations less 'allowable deductions'
which are necessary or related to mining operations. “Allowable
deductions” shall include mining, milling and marketing expenses,
and depreciation of properties directly used in the mining
operations. This paragraph shall not apply to expenditures for the
acquisition or improvement of property of a character which is
subject to the allowance for depreciation.
In no case shall this paragraph apply with respect to amounts paid
or incurred for the exploration and development of oil and gas.
The term “exploration expenditures” means expenditures paid or
incurred for the purpose of ascertaining the existence, location,
extent or quality of any deposit of ore or other mineral, and paid or
incurred before the beginning of the development stage of the mine
or deposit.
The term “development expenditures” means expenditures paid or
incurred during the development stage of the mine or other natural
deposits. The development stage of a mine or other natural deposit
shall begin at the time when deposits of ore or other minerals are
shown to exist in sufficient commercial quantity and quality and
shall end upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a
Nonresident Alien individual or Foreign Corporation. - In the case of
a nonresident alien individual engaged in trade or business in the
Philippines or a resident foreign corporation, allowance for depletion
of oil and gas wells or mines under paragraph (1) of this Subsection
shall be authorized only in respect to oil and gas wells or mines
located within the Philippines.
(H) Charitable and Other Contributions. –
(1) In General. - Contributions or gifts actually paid or made (the
contribution is property other than money) within the taxable year
1
to, or for the use of the Government of the Philippines or any of its
agencies or any political subdivision thereof exclusively for public
62
purposes, or 2to accredited domestic corporation or associations
organized and operated exclusively for religious, charitable,
scientific, youth and sports development, cultural or educational
purposes or for the rehabilitation of veterans, or to 3social welfare
institutions, or 4to non-government organizations, in accordance
with rules and regulations promulgated by the Secretary of finance,
upon recommendation of the Commissioner, no part of the net
income of which inures to the benefit of any private stockholder or
individual in an amount not in excess of ten percent (10%) in the
case of an individual, and five percent (5%) in the case of a
corporation, of the taxpayer's taxable income derived from trade,
business or profession as computed without the benefit of this and
the following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the
provisions of the preceding subparagraph, donations to the
following institutions or entities shall be deductible in full:
(a) Donations to the Government. - Donations to the Government
of the Philippines or to any of its agencies or political
subdivisions, including fully-owned government corporations,
exclusively to finance, to provide for, or to be used in
undertaking priority activities in education, health, youth and
sports development, human settlements, science and culture,
and in economic development according to a National Priority
Plan determined by the National Economic and Development
Authority (NEDA), In consultation with appropriate government
agencies, including its regional development councils and
private philantrophic persons and institutions: Provided, That
any donation which is made to the Government or to any of its
agencies or political subdivisions not in accordance with the
said annual priority plan shall be subject to the limitations
prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International
Organizations. - donations to foreign institutions or
international organizations which are fully deductible in
pursuance of or in compliance with agreements, treaties, or
commitments entered into by the Government of the
Philippines and the foreign institutions or international
organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. - the
term “nongovernment organization” means a non profit
domestic corporation:
(1) Organized and operated exclusively for scientific, research,
educational, character-building and youth and sports
development, health, social welfare, cultural or charitable
purposes, or a combination thereof, no part of the net
income of which inures to the benefit of any private
individual;
 (2) Which, not later than the 15th day of the third month after
the close of the accredited nongovernment organizations
taxable year in which contributions are received, makes
utilization directly for the active conduct of the activities
constituting the purpose or function for which it is
organized and operated, unless an extended period is
granted by the Secretary of Finance in accordance with the
rules and regulations to be promulgated, upon
recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an
annual basis, conform with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, but in no case to
exceed thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution, would be
distributed to another nonprofit domestic corporation
organized for similar purpose or purposes, or to the state
for public purpose, or would be distributed by a court to
another organization to be used in such manner as in the
judgment of said court shall best accomplish the general
purpose for which the dissolved organization was
organized.
Subject to such terms and conditions as may be prescribed by the
Secretary of Finance, the term “utilization” means:
(i) Any amount in cash or in kind (including administrative
expenses) paid or utilized to accomplish one or more purposes
for which the accredited nongovernment organization was
created or organized.
(ii) Any amount paid to acquire an asset used (or held for use)
directly in carrying out one or more purposes for which the
accredited nongovernment organization was created or
organized.
An amount set aside for a specific project which comes within one or
more purposes of the accredited nongovernment organization may be
treated as a utilization, but only if at the time such amount is set aside,
the accredited nongovernment organization has established to the
satisfaction of the Commissioner that the amount will be paid for the
specific project within a period to be prescribed in rules and regulations
to be promulgated by the Secretary of Finance, upon recommendation
of the Commissioner, but not to exceed five (5) years, and the project is
one which can be better accomplished by setting aside such amount
than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property
other than money shall be based on the acquisition cost of said
property or the book value or carrying value if the property is
depreciable property.
63
(4) Proof of Deductions. - Contributions or gifts shall be allowable as
deductions only if verified under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of
the Commissioner.
(I) Research and Development.-
[The taxpayer may, at his option, treat the research and development
expenditures either:
1. As outright expense to be included in ordinary and necessary expenses
under Subsection A in the year paid
2. As deferred expense to be amortized over a period of not less than 5
years as research and development under this subsection]
(1) In General. - a taxpayer may treat research or development
expenditures which are paid or incurred by him during the taxable
year in connection with his trade, business or profession as ordinary
and necessary expenses which are not chargeable to capital
account. The expenditures so treated shall be allowed as deduction
during the taxable year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. -
At the election of the taxpayer and in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the following research and
development expenditures may be treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his trade,
business or profession;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeable to capital account but not chargeable to property of
a character which is subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed
as deduction ratably distributed over a period of not less than sixty (60)
months as may be elected by the taxpayer (beginning with the month in
which the taxpayer first realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for any
taxable year beginning after the effectivity of this Code, but only if
made not later than the time prescribed by law for filing the return for
such taxable year. The method so elected, and the period selected by
the taxpayer, shall be adhered to in computing taxable income for the
taxable year for which the election is made and for all subsequent
taxable years unless with the approval of the Commissioner, a change
to a different method is authorized with respect to a part or all of such
expenditures. The election shall not apply to any expenditure paid or
 incurred during any taxable year for which the taxpayer makes the
election.
(3) Limitations on deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or
for the improvement of property to be used in connection with
research and development of a character which is subject to
depreciation and depletion; and
(b) Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral, including oil or gas.
(J) [BAR!] Pension Trusts (Pension Fund or Employees’ Pension Fund). - An
employer establishing or maintaining a pension trust to provide for the
payment of reasonable pensions to his employees shall be allowed as a
deduction (in addition to the contributions to such trust during the taxable
year to cover the pension liability accruing during the year, allowed as a
deduction under Subsection (A) (1) of this Section ) a reasonable amount
transferred or paid into such trust during the taxable year in excess of such
contributions, but only if such amount: (1) has not theretofore (previously)
been allowed as a deduction, and (2) is apportioned in equal parts over a
period of ten (10) consecutive years beginning with the year in which the
transfer or payment is made.
Example:
(40%) of its gross income as defined in Section 32 of this Code. Unless
the taxpayer signifies in his/its return his/its intention to elect the optional
standard deduction, he/its shall be considered as having availed
himself/itself of the deductions allowed in the preceding Subsections. Such
election when made in the return shall be irrevocable for the taxable year
for which the return is made: Provided, That an individual or corporation
who is entitled to and claimed for the optional standard shall not be
required to submit with his/its tax return such financial statements
otherwise required under this Code: Provided, further, That except when
the Commissioner otherwise permits, the said individual shall keep such
records pertaining to his gross sales or gross receipts, or the said
corporation shall keep such records pertaining to his its gross income as
defined in Section 32 of this Code during the taxable year, as may be
required by the rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
Example:
1. Are all domestic and resident foreign corporations
allowed to avail of the 40% OSD?
ANS: NO, proprietary educational institutions, non-profit
hospitals, GOCCs, International Carriers, OBUs and
Regional Operating Headquarters of Multinational
companies are not allowed to avail of the OSD.
2. The following is a partial income statement of a taxpayer
for 2013:

On January 2, 2014, Corp. A established a pension trust Gross Sales Php 10,150,000.00
and deposited with a trustee Php 20M as initial pension LESS: sales discounts, returns & allowances 150,000.00
fund. The pension plan requires the corporation to deposit NET sales Php 10,000,000.00
Php 1M per annum beginning January 2, 2011. The annual LESS: Cost of Sales 7,000,000.00
contribution of Php 1M is an allowable deduction as Gross Profit or Gross Income Php 3,000,000.00
ordinary and necessary expense, while the amount of
annual amortization of (Php 20M ÷ 10 years) Php 2M, is an a. Compute the income tax if the taxpayer is a DC
allowable deduction as pension trust under this subsection
from 2011 to 2020. Gross Sales Php 3,000,000.00
LESS: OSD (Php 3M x 40%) 1,200,000.00
(K) Additional Requirements for Deductibility of Certain Payments. - Any Php 1,800,000.00
amount paid or payable which is otherwise deductible from, or taken into 30%
account in computing gross income or for which depreciation or Income Tax Php 540,000.00
amortization may be allowed under this Section, shall be allowed as a
deduction only if it is shown that the tax required to be deducted and b. Compute the income tax if the taxpayer is an RC,
withheld therefrom has been paid to the Bureau of Internal Revenue in married and with 4 qualified dependent children
accordance with this Section 58 and 81 of this Code.
Gross Sales Php 10,150,000.00
(L) Optional Standard Deduction. - In lieu of the deductions allowed under the LESS: OSD (Php 10,150,000.00 x 40%) 4,060,000.00
preceding Subsections (A to J), an individual subject to tax under Section Net Income Php 6,090,000.00
24 (RC, NRC and RA), other than a nonresident alien, may elect a standard LESS: Personal and additional expenses 150,000.00
deduction in an amount not exceeding forty percent (40%) of his gross Taxable Income Php 5,940,000.00
sales or gross receipts, as the case may be. In the case of a corporation First Php 500,000.00 125,000.00
subject to tax under Sections 27(A) (DC) and 28(A)(1) (RFC), it may Excess (Php 5,440,000.00 x 32%) 1,740,800.00
elect a standard deduction in an amount not exceeding forty percent Income Tax Php 1,865,800.00
64
(M) Premium Payments on Health and/or Hospitalization Insurance of an
Individual Taxpayer. - The amount of premiums not to exceed Two
thousand four hundred pesos (P2,400) per family or Two hundred pesos
(P200) a month paid during the taxable year for health and/or
hospitalization insurance taken by the taxpayer for himself, including his
family, shall be allowed as a deduction from his gross income: Provided,
That said family has a gross income of not more than Two hundred fifty
thousand pesos (P250,000) for the taxable year: Provided, finally, That
in the case of married taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction.
Notwithstanding the provision of the preceding Subsections, The Secretary
of Finance, upon recommendation of the Commissioner, after a public
hearing shall have been held for this purpose, may prescribe by rules and
regulations, limitations or ceilings for any of the itemized deductions under
Subsections (A) to (J) of this Section: Provided, That for purposes of
determining such ceilings or limitations, the Secretary of Finance shall
consider the following factors: (1) adequacy of the prescribed limits on the
actual expenditure requirements of each particular industry; and (2)effects
of inflation on expenditure levels: Provided, further, That no ceilings shall
further be imposed on items of expense already subject to ceilings under
present law.
A tax deduction may also refer to the subtraction from gross income the
amount so allowed by law.
GENERAL
• Deductions from business income
o Only business-connected expenses are deductible from income
derived from trade or business or the practice of s profession or
simply, business income. The only exceptions are charitable and
other contributions (GPP, Estate, Trust, NRA not engaged and
NRFC are not allowed to deduct charitable and other
contributions) which are allowed to be deducted by corporations
and business partnerships and by individuals and premium
payments for health and/or hospitalization insurance by an
individual although such contributions or payments are non-
business in nature.
o As a rule, if a taxpayer does not, within any year, deduct all his
authorized allowable deductions, he cannot deduct them from the
income of the next succeeding year.
o Section 34 covers all deductions in arriving at taxable business
income of corporations, partnerships and individuals. There is no
• Deductions from compensation income – the deductions of items
more distinction
specified in Section 34 are not allowed with respect to compensation
Exceptions:
income arising from personal services rendered under an employee-
employer relationship.
1. OSD:
Individual – 40% of Gross Sales or Receipts
Corporation – 40% of Gross Income
65
2. Charitable & Other Contributions:
Individual – 10%;
Corporation – 5%
3. Premium Payments and/or Hospitalization Insurance
– allowed only to individual tax payers
between corporations and individuals with respect to deductions
from gross income from business. Gross compensation income of
an individual is taxable without deductions except premium
payments and personal and additional exemptions.
o Deductions from income tax purposes partake in the nature of tax
exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed. It is not incumbent
upon the taxing authority to prove that the amount of items being
claimed is unreasonable. The burden of proof to establish the
validity of claimed deductions is on the taxpayer. They cannot be
extended by mere implication or inference.
o Tax Credit – refers to an amount that is subtracted directly from
one’s total tax liability, an allowance against the tax itself, or a
deduction from what is owed; It reduces the tax due.
Tax Deduction – reduces the income that is subject to tax to
arrive at taxable income
o The itemized deductions enumerated in the Tax Code may be
claimed by individuals (engaged in business or practice of
profession) and corporate taxpayers except that only premium
payments and personal and additional exemptions may be claimed
by individuals taxpayers whose income is derived solely from
compensation
o In lieu of the deductions allowed under Subsections A to J, an
individual taxpayer, other than a non-resident alien (whether
engaged in business or not) may elect an optional standard
deduction (OSD) in an amount not exceeding 40% of gross sales
or gross receipts. In addition to the OSD, he is also allowed to
deduct premium payments on health and/or hospitalization
insurance subject to certain conditions, under Subsection (M) and
personal and additional exemptions
o Only premium payments and personal and additional exemptions
are deductible from compensation income
 o Individual taxpayers engaged in business or practice of profession
may also avail of OSD and still claim deduction for premium
payments
• The partner’s distributive share of the net income of a GPP is subject to tax
determined in accordance with the schedule prescribed in Section 24(A).
He shall report such distributive share, actually or constructively received,
as gross income in his income tax return.
EXPENSES
• [Impt!] Requisites of Deductibility of Business Expense:
1. Ordinary and necessary expenses
2. Paid or incurred during the taxable year in carrying on or directly
attributable to operation and/or conduct of the trade, business or
Not
exercise of a profession deductible
3. Reasonable in amount at all
4. Supported by adequate proof
5. Not against law, morals, public policy, or public order
• “Ordinary” and “necessary” – it has been said that to be deductible,
expenses “must be incurred by a taxpayer in doing the ordinary and
necessary things his business requires to be done to make it function as
such” and must be necessary in the ordinary course of its conduct.
o Capital expenditures (such as extraordinary repairs of building,
machinery and equipment which are added to the cost of such
building, machinery and equipment to be depreciated using the
remaining life of said assets) are not “ordinary and necessary” Because •
expenses they are
taxable on
o Bonus given to corporate officers as their share of the profit income
from w/in
realized from the sale of corporate property could not be
considered as a selling expense nor be deemed reasonable and and w/o
the Phils
necessary business expense as to make it deductible for tax
purposes even if the sale could be considered as a transaction for
Because
carrying on the trade or business of the corporation, there being they are •
no evidence of any service actually rendered by the corporate taxable on
officers which could be the basis of grant to them of a bonus. income
only from
• When expense ordinary – it has the connotation of normal, usual or w/in the
customary Phils.
• When expense necessary – “necessary” means “appropriate” and
“helpful” in the development of the taxpayer’s business
• Representation expenses fall under the category of business expenses
which are allowable deductions from gross income, if they meet the
conditions prescribed by law
66
INTEREST
• Requisites of Deductibility of Interest:
1. Taxpayer must have an indebtedness
2. Interest must have been paid or incurred during the taxable year in
connection with the trade, business or exercise of profession
3. Interest must have been stipulated in writing
4. Interest must be legally due indebtedness has not yet prescribed
TAXES
• Taxes means taxes proper (or basic) and, therefore, no deductions are
allowed for amounts representing:
1. Interest (not deductible as tax but is deductible as interest in
Subsection B) by reason of late payment of tax
2. Surcharge
3. Penalties (such as compromise penalty) or fines incident to
delinquency
• [Impt!] Business taxes such as VAT, other percentage taxes, excise taxes,
documentary stamp taxes, customs duties, etc. (such as local taxes, real
property taxes and community taxes), are deductible. The electric energy
consumption tax is now allowed as a deduction
• Tax Credit – it refers to the taxpayer’s right to deduct from the income
tax due in the Philippines the amount of tax the taxpayer has paid to a
foreign country, subject to limitations.
Those entitled to tax credit
1. Resident citizens
2. Domestic corporations
3. Members (resident citizens) of professional partnerships
4. Beneficiaries of estates and trusts (decedent was or trustor is a
resident citizen)
Those not entitled
1. Non-resident citizens
2. Resident and non-resident aliens
3. Resident and non-resident foreign corporations
LOSSES
• Requisites of Deductibility of Losses:
1. Be that of a taxpayer
2. Actually sustained and charged off within the taxable year
3. Been incurred in trade, business, or profession
4. [BAR!] [VIP!] Evidenced (such as final decision of the court denying
the claim of the insured/taxpayer from the insurer in case of loss of
property insured caused by natural disaster such as fine) by a closed
and completed transaction
5. Not have been compensated for by insurance or other forms of
indemnity

• Casualty losses – any loss arising from fires, storms or other casualty,
and from robbery, theft or embezzlement, is generally allowable as
deduction under Subsection (D) for the taxable year in which the loss is
sustained
• The tax code limits the time for the taxpayer to declare casualty losses.
The taxpayer is required to file declaration of loss within 90 days after the
date of the discovery (no longer occurrence) of casualty or robbery, theft,
or embezzlement containing the required information and prove the
elements of the loss claimed
• Neither can there be a partial writing off of a loss or bad debt. For such
losses or bad debts must be ascertained to be so and written off during the
taxable year; therefore, losses or bad debts are deductible in full or not at
all, in the absence of any express provision in the Tax Code authorizing
partial deductions
• Net operating loss carry-over – exists when the allowable deductions
exceed the gross income of the business in a taxable year
o It is now allowed to be carried over and deducted from gross
income for the next 3 consecutive taxable years (if the loss was
totally deducted during the next taxable year nothing can be
deducted during the 2 following years of successive years)
immediately following the year of such loss
• Securities becoming worthless (the issuing corporation became
insolvent or bankrupt) – the loss sustained by the holder of the securities,
which are capital assets to him (he is not a dealer in securities), is to be
treated as a capital loss as if incurred from a sale or exchange transaction.
The mere strinkage (or decline) in value of securities is not deductible
• When securities become worthless, there is strictly no sale or exchange but
the law deems the loss anyway to be “a loss from sale or exchange of
capital assets”
• Capital losses are allowed to be deducted only to the extent of capital
gains, i.e., gains derived from the sale or exchange of capital assets, and
not from any other income of the taxpayer.
• Wagering losses (deductible only from wagering gains) should be
deemed to apply only to individuals unless it can be said that corporations
can legally gamble
BAD DEBTS
• Requisites of Deductibility of Bad Debts:
1. Must be an existing indebtedness due to the taxpayer which must be
valid and legally demandable (has not yet prescribed)
2. Must be actually ascertained to be worthless or uncollectible as of the
end of the taxable year
67
3. Must be actually charged off from the books of accounts of the
taxpayer as of the end of the taxable year
4. Must have arisen in connection with the trade, business or profession
of the taxpayer
5. Must not be sustained in a transaction entered into between related
parties (such as members of family) enumerated under Section 36(B)
Bad debt is a debt due to a taxpayer arising from a loan of money or sale
of goods or rendition of service proved by the taxpayer to be worthless or
uncollectible
Bad debts sustained in a transaction entered into between related
taxpayers mentioned in Section 36(B) are not deductible. The bad debts
must be written off in full or not at all. A partial charging-off is not allowed.
• Tax benefit rule or doctrine – 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.
o Receipt of realized taxable income – if, in the year the
taxpayer claimed deduction of bad debts written-off, he realized a
reduction of the income tax due from him on account of the said
deduction, his subsequent recovery thereof from his debtor shall
be treated as a receipt of realized taxable income
o Mere recovery or return of capital – conversely, 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.e., where the result of his
business operation was a net loss even without deduction of the
bad debts written-off), then his subsequent recovery thereof shall
be treated as a mere recovery or a return of capital; hence, not
treated as receipt of realized taxable income
DEPRECIATION
• Depreciation is the reduction in the service value of property used in
profession, business, or trade resulting from exhaustion, wear and tear and
obsolescence. The term is also applies to amortizations of the value of
intangible assets the use of which in the trade or business is definitely
limited in duration
• Requisites of Deductibility of Depreciation
1. Reasonable
2. For the exhaustion, wear and tear of property used in the trade or
business
3. Charged off during the taxable year
• Straight line or fixed percentage method – the total depreciable value
or cost-scrap value is spread in equal annual amounts over the useful life
of the asset, i.e., the basis (such as cost) of the property less the scrap or
salvage value is divided by its estimated useful life
 DEPLETION
• Depletion is the exhaustion of natural resources like mines and oil and gas
wells as a result of production or severance (or extraction) from such
mines or wells
CHARITABLE AND OTHER CONTRIBUTIONS
• Requisites of Deductibility of Charitable and Other Contributions
1. Actually paid or made to any of those specified in the Tax Code
2. Made within the taxable year
3. Not more than 10% of the individual taxpayer’s and 5% of the
corporate taxpayer’s taxable income to be computed without including
the contribution
4. Supported by adequate proof
• The amount of any charitable contribution of property other than money
shall be based on the acquisition cost (or carrying value or book value) of
the property, not its current market value
RESEARCH AND DEVELOPMENT
• A taxpayer may treat research and development expenditures as ordinary
and necessary expenses deductible from gross income during the taxable
year under Subsection (A). At the election of the taxpayer, the
expenditures may be treated as deferred expenses which shall be allowed
as a deduction as research and development ratably (or equally)
distributed in computing taxable income. The expenses may be deferred
over a period of not less 60 months or 5 years beginning with the month in
which the taxpayer first realizes benefit from such expenditures
PENSION TRUSTS
• Payments to employees’ pension trusts which are deductible are:
1. Allowable deduction as Ordinary & Necessary Expense – amounts
contributed by the employer during the taxable year to cover the
pension liability accruing during the year
2. Allowable deduction as Pension Trust – 1/10 of the reasonable amount
paid by the employer to cover pension liability applicable to the year
prior to the taxable year, or so paid to place the trust in a sound
financial basis
• Requisites of Deductibility of Pension Trusts:
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. –
1. Employer must have established a pension or retirement plan
2. Pension plan must be reasonable and actuarially sound
3. Must be funded by the employer
4. Amount contributed must no longer be subject to his control or
disposition
5. Amount has not been allowed before as a deduction
6. Amount if apportioned in equal parts over a period of 10 consecutive
years beginning with the year in which the transfer or payment is
made
68
OPTIONAL STANDARD DEDUCTION
• The following may be allowed to claim OSD in lieu of the itemized
deductions
INDIVIDUALS
1. Resident citizens
2. Non-resident citizens
3. Resident alien
4. Taxable estate and trust
CORPORATIONS
1. Domestic corporation
2. Resident foreign corporation
NOT ALLOWABLE DEDUCTION; ADDITIONAL REQUIREMENT
• Withholding of creditable income taxes – Section 57(B) authorizes the
Secretary of Finance to require withholding of creditable income taxes from
certain income payments. Subsection (K) requires proof of such
withholding and payment to the BIR as an additional condition for
deductibility of such income payments (income on the part of the recipient
but expense on the part of the taxpayer) from gross income of the payor
The purpose is to insure the collection of the income tax on these
payments which constitute income to the recipients thereof and, therefore,
includible in their gross income. Thus, when one engaged in trade or
business makes payments that are deductible from his gross income for
tax purposes, it is not enough that he proves that such payments have
been made. He must also show proof that he withheld the tax and remitted
it to the BIR before he can deduct the same as business expense
• Premium payments
1. For health and/or hospitalization
2. Premium does not exceed Php 2,400.00 per family or Php 200.00 a
month during the taxable year
3. Insurance taken by the taxpayer for himself including his family
4. Family has a gross income of not more than Php 250,000.00
If all the requisites are present, only the spouse claiming the additional
exemption for dependents is entitled to this deduction
(A) In General. - For purposes of determining the tax provided in Section 24
(A) (RC, NRC & RA) of this Title, there shall be allowed a basic personal
exemption amounting to Fifty thousand pesos (P50,000) for each
individual taxpayer:
In the case of married individuals where only one of the spouses is deriving
gross income, only such spouse shall be allowed the personal exemption.

(B) Additional Exemption for Dependents. - There shall be allowed an
additional exemption of Twenty-Five thousand pesos (P25,000) for
each dependent not exceeding four (4).
The additional exemption for dependent shall be claimed by only one of the
spouses in the case of married individuals.
In the case of legally separated spouses (if they are separated in fact
apply the immediately preceding paragraph), additional exemptions may
be claimed only by the spouse who has custody of the child or children:
Provided, That the total amount of additional exemptions that may be
claimed by both shall not exceed the maximum additional exemptions
herein allowed.
For purposes of this Subsection, a 'dependent' means a legitimate,
illegitimate or legally adopted child 1chiefly dependent upon and living with
the taxpayer if such dependent is 2not more than twenty-one (21) years of
age, 3unmarried and 4not gainfully employed or if such dependent,
regardless of age, is incapable of self-support because of mental or
physical defect.
[Under the NIRC, only married individuals with qualified dependent child or
children and legally separated spouses with custody of their qualified
dependent child or children are entitled to additional exemption. Hence,
single individuals, widow and widower with qualified dependent child or
children are not entitled to additional exemption. Single individual, widow
or widower may be entitled to additional exemption under Special Laws
such as Single Parent Law]
(C) Change of Status. - If the taxpayer marries or should have additional
dependent(s) as defined above during the taxable year, the taxpayer may
claim the corresponding additional exemption, as the case may be, in full
(exemption may be availed of in full or not at all because partial exemption
is not allowed) for such year.
Example:
In 2013, A married, had 2 qualified dependent children. On Dec.
31, 2014, the wife of A gave birth to twin babies. In 2014 A shall
be entitled to additional exemption for qualified dependent
children of Php 100,000.00 because under the law if the
taxpayer should have additional dependents during the taxable
year he may claim the additional exemption in full for such year.
Hence, having additional dependent child or children is deemed
Death of the
to have taken place at the beginning of the year.
taxpayer or of
his dependent
child or the If the taxpayer dies during the taxable year, his estate may still claim the
latter’s
personal and additional exemptions for himself and his dependent(s) as if
disqualification
is deemed to he died at the close of such year.
have taken
place at the end
of the year,
If the spouse or any of the dependents dies or if any of such dependents
hence, the marries, becomes twenty-one (21) years old or becomes gainfully
taxpayer is still employed during the taxable year, the taxpayer may still claim the same
entitled to full
exemption
exemptions as if the spouse or any of the dependents died, or as if such
dependents married, became twenty-one (21) years old or became
gainfully employed at the close of such year.
[Death of a qualified dependent child is deemed to have taken place at the
beginning of the year]
Example:
The taxpayer is married and has 4 qualified dependent children.
On March 31, 2014 the taxpayer died. The taxpayer or his estate
will file 2 income tax returns the first will cover the period from
Jan. 1 to March 31, 2014 and he is entitled to personal
exemption of Php 50,000.00 and additional exemption of Php
100,000.00. The 2nd return will cover the period from April 1 –
Dec. 31, 2014, if his estate consists of income producing
properties, and his estate shall be entitled to personal exemption
of Php 20,000.00 (Section 62).
(D) Personal Exemption Allowable to Nonresident Alien Individual. - A
nonresident alien individual engaged in trade, business or in the
exercise of a profession in the Philippines shall be entitled to a personal
exemption in the amount equal to the exemptions allowed in the income
tax law in the country of which he is a subject - or citizen, to citizens of the
Philippines not residing in such country, not to exceed the amount fixed in
this Section as exemption for citizens or resident of the Philippines:
Provided, That said nonresident alien should file a true and accurate return
of the total income received by him from all sources in the Philippines, as
required by this Title.
[The personal exemption of NRA engaged is Php 50,000.00 or the amount
of exemption granted to non-resident Filipinos engaged in business in that
country whichever is lower]
• Persons entitled to personal and additional exemptions
1. Resident citizens
2. Non-resident citizens
3. Resident aliens
[Suppose the country of the resident alien does not grant
exemptions to resident Filipinos therein, is the former entitled to
exemptions in the Phils.? ANS: YES, there is no reciprocity
provision in the NIRC regarding resident aliens]
4. Non-resident aliens engaged in trade or business in the Philippines
(only personal exemption)
[Suppose the country of the NRA engaged grants both personal
and additional exemptions to non-resident Filipinos engaged in
business in that country, will the NRA engaged be also entitled to
both personal and additional exemptions in the Phils.? ANS: NO,
the NRA engaged is entitled only to personal exemption because
there is no reciprocity provision regarding additional exemption]
69
 Under Subsection (D), the amount of (basic) personal exemption allowable
to non-resident alien individuals is that allowed by the income tax law of
his country or Php 50,000.00, whichever is lower
• Husband and wife – they are treated as separate taxable persons
o Where both spouses derive taxable income, each is allowed to
claim the Php 50,000.00 personal exemption for married
individuals
o The additional exemption for dependents shall be claimed by only
one of the spouses in the case of married individuals. Since the
law makes no qualification as to gender, i.e., whether the husband
or the wife, then it is up to the spouses to decide who between
them should avail of the additional exemptions, except as
provided below when both are employer and receive
compensation income
o When a husband and wife each are recipients of wages, the
additional exemptions for qualified independent children shall be
claimed by the husband who is deemed the head of the family
unless he explicitly waives his right in favour of his wife in the
withholding exemption certificate
o In case of legally separated spouses, the additional exemptions
may be claimed only by the spouse who has custody of the child
or children
• Chief support means principal or main support. It is more than ½ of the
support required by the dependent
• Status of a taxpayer
o [VIP!] In case of change of status (by birth of additional
dependents) during the taxable year, the taxpayer may claim the
corresponding additional exemptions in full of such year
o If the effect of such change of status (by reason of death,
marriage, or attainment of the age of majority, or gainful
employment by any dependent) is to reduce the amount of such
exemptions, the taxpayer (or his estate) may still claim the same
exemptions for such year
Apportionment of personal and additional exemptions is not allowed
SEC. 36. Items not Deductible.-
(A) General Rule. - In computing net income, no deduction shall in any case be
allowed in respect to –
(1) Personal, living or family expenses;
70
[These expenses are not connected with trade, business or
profession]
(2) Any amount paid out for new buildings (private educational
institutions are allowed) or for permanent improvements, or
betterments made to increase the value of any property or estate;
[Capital Expenditures – charged to assets, not to expenses]
This Subsection shall not apply to intangible drilling and
development costs incurred in petroleum operations which are
deductible under Subsection (G) (1) of Section 34 of this Code.
(3) Any amount expended (extraordinary repairs which are also
considered capital expenditures) in restoring property or in making
good the exhaustion thereof for which an allowance is or has been
made; or
(4) [BAR!] Premiums (if the officer or employee dies the taxpayer or
employer receives the proceeds of the policy which are exempt
from income tax) paid on any life insurance policy covering the life
of any officer or employee, or of any person financially interested in
any trade or business carried on by the taxpayer, individual or
corporate, when the taxpayer (employer) is directly or indirectly a
beneficiary (if the beneficiary is the estate or the family of the
officer or employee, the premiums are allowable deduction on the
part of the taxpayer/employer as ordinary and necessary expense)
under such policy.
(B) [BAR!] [VIP!] Losses from Sales or Exchanges of Property. - In computing
net income, no deductions shall in any case be allowed in respect of losses
(but gains are taxable) from sales or exchanges of property (does not
apply to real property located in the Phils. classified as Capital Asset
because the sale thereof will never result to a loss because such sale is
always subject to 6% CGT based on GSP or FMV or FMV whichever is
highest) directly or indirectly –
(1) Between members of a family. For purposes of this paragraph, the
family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or indirectly, by or
for such individual; or
Example:
On Jan. 2, 2005 X bought 60% of the Capital Stock of Corp. A
for Php 50M. On Jan. 2, 2014 Corp. A was dissolved and X
received properties from the former worth Php 40M by way of
liquidation.
 1. If X is a dealer in securities, the loss of Php 10M is an
allowable deduction under Sec. (34)(D)(1)(a)
2. If X is not a dealer in securities, the capital loss of Php
10M is deductible from his capital gains, if any.
(3) Except in the case of distributions in liquidation, between two
corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for
the same individual if either one of such corporations, with respect
to the taxable year of the corporation preceding the date of the sale
of exchange was under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;
(4) Between the grantor (or trustor) and a fiduciary (or trustee)of any
trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor with
respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
SEC. 38. Losses from Wash Sales of Stock or Securities. –
• Capital Expenditures – expenditures that result in obtaining benefits of a
permanents nature such as lands, buildings and machineries
• Life insurance premiums – where a corporation takes out insurance on
the life of a key officer, designating as beneficiary thereby the family of the
insured, the premiums paid can be claimed by the corporation as a
deductible business expense from its gross income as long as the members
of the key officer’s family are not so situated or so related with the
corporation as would make it an indirect beneficiary of the proceeds of the
insurance
• The purpose behind Subsection (B,1) is the prevention of simulated or
“sham” sales or exchanges by persons who are members of a family to
avoid payment of income tax. It is immaterial whether the transactions are
bona fide or not. the losses therefrom are not deductible but the gains
realized are taxable
SEC. 37. Special Provisions Regarding Income and Deductions of Insurance
Companies, Whether Domestic or Foreign. –
(A) Special Deduction Allowed to Insurance Companies. - In the case of
insurance companies, whether domestic or foreign (resident) doing
business in the Philippines, the net additions, if any, required by law to be
made within the year to reserve funds and the sums (face amounts of
policies paid by the insurance company to policy holders in case of death of
the person insured or destruction of property insured) other than dividends
paid within the year on policy and annuity contracts may be deducted from
their gross income: Provided, however, That the released reserve be
treated as income for in the year of release.
71
(B) Mutual Insurance Companies. - In the case of mutual fire and mutual
employers' liability and mutual workmen's compensation and mutual
casualty insurance companies requiring their members to make premium
deposits to provide for losses and expenses, said companies shall not
return as income any portion of the premium deposits returned to their
policyholders, but shall return as taxable income all income received by
them from all other sources plus such portion of the premium deposits as
are retained by the companies for purposes other than the payment of
losses and expenses and reinsurance reserves.
(C) Mutual Marine Insurance Companies. - Mutual marine insurance companies
shall include in their return of gross income, gross premiums collected and
received by them less amounts paid to policyholders on account of
premiums previously paid by them and interest paid upon those amounts
between the ascertainment and payment thereof.
(D) Assessment Insurance Companies. - Assessment insurance companies,
whether domestic or foreign, may deduct from their gross income the
actual deposit of sums with the officers of the Government of the
Philippines pursuant to law, as additions to guarantee or reserve funds.
(A) In the case of any loss claimed to have been sustained from any sale or
other disposition of shares of stock or other securities where it appears
that within a period beginning thirty (30) days before the date of such sale
or disposition and ending thirty (30) days after such date, the taxpayer has
acquired (by purchase or by exchange upon which the entire amount of
gain or loss was recognized by law), or has entered into a contact or option
so to acquire, substantially identical stock or other securities, then no
deduction for the loss shall be allowed under Section 34 unless the claim
is made by a dealer in stock or securities and with respect to a transaction
made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or
option to acquire) is less than the amount of stock or securities sold or
otherwise disposed of, then the particular shares of stock or securities, the
loss form the sale or other disposition of which is not deductible, shall be
determined under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or
option to acquire which) resulted in the non-deductibility of the loss, shall
be determined under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
• [Mem!] Wash Sales is a sale or other disposition of shares of stock or
other securities where substantially identical securities are purchased (if
within a period of 61 days there are 2 or more sales there is no wash sale
even is 1 or some or all of them resulted in losses) within a 61-day period,
beginning 30 days before the sale and ending 30 days after the sale which
 resulted in a loss. If the sale resulted in a gain the transaction is plain and
simple sale not a wash sale
• Gains from sales are taxable but losses therefrom are non-deductible
subject to the exception provided in Subsection (A) in the case of dealer in
stock or securities
o 8/10/2011 – purchase of 100 shares for Php 2,000.00; 8/25/2011
– purchase of 50 shares for Php 1,500.00; and 9/22/2011 – sale
of 100 shares purchased on 8/10/2011 for Php 1,800.00, the non-
deductible loss is Php 200.00
[It is not necessary in wash sale that the stock sold must have at
least 30 days before. What is important is that there is a purchase
or acquisition of stock at least 30 days before or at least 30 days
after the sale]
o 8/15/2011 – purchase of 100 shares for Php 2,000.00; 9/20/2011
– sale of the 100 shares for Php 1,500.00; and 9/22/2011 – sale
of 100 shares for Php 1,900.00, the non-deductible loss is Php
500.00
• Substantially identical means that the stock or other securities are the
same or are similar on their important features (e.g., bonds which differ
only as to interest rates). Common stock and preferred stock, voting stock
and non-voting stock, etc. are not substantially identical
[BAR!] SEC. 39. Capital Gains and Losses. –
(A) Definitions. - As used in this Title –
(1) Capital Assets. - the term 'capital assets' means property held by
the taxpayer (whether or not connected with his trade or business
[examples of Capital Assets: (1) connected with trade/business
receivables and investments (2) not connected with trade/business
– residential house and lot, home appliances, pieces of jewelry and
cars used for personal purposes]), but does not include 1stock in
trade (such as merchandise of trading business and finished goods
of manufacturing business) of the taxpayer or other property (such
as raw materials, work in process and factory supplies of a
manufacturing business) of a kind which would properly be included
in the inventory of the taxpayer if on hand at the close of the
taxable year, or 2property (such as subdivision lots of real estate
dealer and securities of a dealer in securities) held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or
business, or 3property (such as building, machineries, equipment,
furniture and fixtures, patent, franchise and copyright) used in the
trade or business, of a character which is subject to the allowance
for depreciation provided in Subsection (F) of Section 34; or 4real
property (such as land and wasting assets of a mining company)
used in trade or business of the taxpayer. [Nos. 1-4 are ordinary
assets]
72
(2) Net Capital Gain. - The term 'net capital gain' means the excess of
the gains from sales or exchanges of capital assets over the losses
from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of
the losses from sales or exchanges of capital assets over the gains
from such sales or exchanges.
(B) Percentage Taken into Account. [This is known as the “Holding Period
Rule” which does not apply if the Capital Asset is share of stock in a
domestic corporation or real property located in the Philippines] – In the
case of a taxpayer (individual or estate or trust), other than a
corporation, only the following percentages of the gain or loss recognized
upon the sale or exchange of a capital asset shall be taken into account in
computing net capital gain, net capital loss, and net income:
(1) One hundred percent (100%) if the capital asset has been held for
not more than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more
than twelve (12) months;
(C) Limitation on Capital Losses. - Losses (this means that the net capital loss
cannot be deducted from the taxable income from trade, business or
profession of the taxpayer but net capital gain is added thereto) from sales
or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges. If a bank or trust company
incorporated under the laws of the Philippines, a substantial part of whose
business is the receipt of deposits, sells any bond, debenture, note, or
certificate or other evidence of indebtedness issued by any corporation
(including one issued by a government or political subdivision thereof),
with interest coupons or in registered form, any loss resulting from such
sale shall not be subject to the foregoing limitation (because a bank or
trust company is considered by law as dealer in securities, hence, the net
capital loss is deductible from income from trade or business of such bank
or trust company) and shall not be included in determining the applicability
of such limitation to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a
corporation, sustains in any taxable year a net capital loss, such loss (in
an amount not in excess of the net income for such year) shall be treated
in the succeeding taxable year as a loss from the sale or exchange of a
capital asset held (100%) for not more than twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received
by the holder upon the retirement of bonds, debentures, notes or
certificates or other evidences of indebtedness issued by any corporation
(including those issued by a government or political subdivision thereof)
with interest coupons or in registered form, shall be considered as amounts
received in exchange therefor (retirement of bonds is considered by law as
sale or exchange of said bonds although actually there is no sale or
exchange).

Example:
A. A, a resident citizen, purchased a Php 5M face value bond in Corp.
A on Jan. 2, 2004 with maturity of 10 years. On Jan. 2, 2009, A
sold the said bond to B at Php 4.8M. On Jan. 2, 2014, B
surrendered he said bond to Corp. A for Retirement and the latter
paid B the face value of Php 5M. This retirement is considered by
law as sale or exchange of the bond. Is the Capital Gain of Php
200,000.00 realized by B upon redemption taxable?
ANS: NO, if the maturity period of the bond is more than 5 years,
the gain realized on retirement is excluded from Gross
Income under Section 32(B,7,g)
B. The same facts in A except that A sold the bond to B on Jan. 2,
2009 at a price of Php 5.2M, is the loss sustained by B on Jan. 2,
2014 upon retirement of the bond a deductible loss?
ANS: YES, said loss is deductible from Capital Gains, if any, of B
in 2014.
(F) Gains or losses from Short Sales, Etc. - For purposes of this Title –
(1) Gains or losses from short sales of property shall be considered as
gains or losses from sales or exchanges of capital assets (if the
seller is NOT a dealer in securities) ; and
Example:
A offered to sell his piece of land to B at a price of Php 5M but
on that date, B has no money to buy the said land. A and B
agreed that the latter is given a period of 60 days within
which to produce the Php 5M and in the event that B can
produce said amount the deed of sale shall be executed. By
reason of the Option Period of 60 days granted by A to B the
latter paid the former Php 100,000.00 as Option Money.
B paid to produce the Php 5M, hence, to him by A in which
case he lost the Php 100,000.00
In this case A realized a Capital Gain of Php 100,000.00 while
B sustained a Capital Loss of Php 100,000.00
(2) Gains or losses attributable to the failure to exercise privileges or
options to buy or sell property shall be considered as capital gains
or losses.
Example:
A, a dealer in securities, is expecting that 60 days from now, the
market price of the shares of stock of Corp. X will decline at 10%,
more or less. The current market price or quoted price of said
shares is Php 1,000.00 per share and he offered to sell 1,000
shares to his client B at a price of Php 1,000.00 per share on
condition that A will deliver the shares of stock to B on Dec. 11,
73
2014. B accepted the offer of A and agreed to buy 1,000 shares at
Php 1,000.00 per share and today B paid A Php 1M. On Dec. 11,
2014 the expectation of A materialized and on that date the
market or quoted price of the shares of stock was Php 900.00 per
share and A purchased 1,000 shares from the stock market at Php
900,000.00. And he delivered the certificate of stock to B on said
day.
The above transaction resulted to an ordinary gain on the part of
A in the amount of Php 100,000.00.
Example:
A. X, a resident citizen who operates a grocery business, had the
following Capital Assets transactions in 2013:
1. Investment in bonds with maturity period of 5 years acquired
in 2011 at a cost of Php 500,000.00 was sold at Php
460,000.00
2. Jewelry acquired on March 1, 2013 at a cost of Php
750,000.00 was sold at Php 800,000.00 on Dec. 25, 2013
3. Car used by his family acquired on July 1, 2013 at a cost of
Php 560,000.00 was sold at Php 450,000.00 on Dec. 31, 2013
4. Shares of stock in a resident foreign corporation acquired in
2011 at a cost of Php 1M were sold at Php 1.2M
Compute the Net Capital Gain or Net Capital Loss
Solution:
Sale of investment in bonds (P460k-P500k x 50%) (Php 20,000.00)
Sale of Jewellery (P800k-750k x 100%) 50,000.00
Sale of car (P450k-P560k x 100%) (110,000.00)
Sale of shares of stock (P1.2M-P1M x 50%) 100,000.00
NET CAPITAL GAIN Php 20,000.00
The Php 20,000.00 net Capital Gain is to be added to the taxable
income from business of X in 2013.
B. The same facts in (A) except that the Car was sold at Php
350,000.00 instead of Php 450,000.00 and that the taxable
income of X from his business in 2013 was Php 50,000.00.
Compute the Net Capital Gain or Net Capital Loss
Solution:
Sale of investment in bonds (P460k-P500k x 50%) (Php 20,000.00)
Sale of Jewellery (P800k-750k x 100%) 50,000.00
Sale of car (P350k-P560k x 100%) (210,000.00)
Sale of shares of stock (P1.2M-P1M x 50%) 100,000.00
NET CAPITAL LOSS (Php 80,000.00)
 The net capital loss of Php 80,000.00 is not deductible from the
taxable income of X in 2013 but may be carried over in 2014 as a
short-term capital loss (100%) deductible from Capital Gains in
2014 if any. The amount which can be carried over as short-term
capital loss in 2014 is the Net Capital Loss in 2013 or the taxable
income in 2013 whichever is lower, hence, the net capital loss
carried over is Php 50,000.00
NOTE: If X’s capital asset transactions in 2013 include Sale of
Shares of Stock in a domestic corporation not traded in Stock
Exchange and Sale of Real Property located in the Philippines
classified as Capital Asset they are not included in the
computation of Net Capital Gain or Net Capital Loss because they
are subject to final tax.
In other words sale of shares of stock in a domestic corporation
not traded in stock exchange and sale of real property located in
the Philippines classified as Capital Assets are not covered by
Section 39.
• [Mem!] Capital Assets include all property held by the taxpayer whether
or not connected with trade or business but not including those
enumerated in Subsection (A,1) as ordinary assets. The law defines the
term by exclusion or exceptions. In other words, if an asset does not fall
into one of these exceptions, then it is a capital asset
o If the taxpayer sells or exchanges any of the properties
enumerated, any gain or loss relative thereto is an ordinary gain
or loss; the gain or loss from the sale or exchange of all other
properties of the taxpayer is a capital gain or a capital loss
 Subdivision lots are considered ordinary assets since they
are properties held primarily for sale to customers in the
ordinary course of trade or business, under Subsection
(A)
 Properties which have remained vacant and idle since
acquisition for the past 3 years and have been recorded
in the books of the corporation as an investments on real
estate, do not fall under any of the assets enumerated
under Subsection (A)(1) and are properly classified as
capital assets; hence, their sale is subject to the 6%
CGT. Property not actually used in trade or business of
the taxpayer, or is not held for lease or sale to customers
is a capital asset
 Real and other properties owned or acquired by a bank
usually through foreclosures, other than those used for
banking purposes held in the investment portfolio,
acquired in settlement of loans and/or for other reasons,
most of which were acquired through foreclosure of
collaterals of client borrowers who were unable to pay
74
their loans with the bank should be treated as “ordinary
assets” (these fall under Section 39 (A,1) “other property
of a kind which would properly be included in the
inventory of the taxpayer”) of the bank and, therefore,
the sale thereof will not be subject to CGT imposed under
Section 27 (D,5)
 The expropriation of property classified as a capital asset
is subject to CGT except Expropriation under the CARL
and DST based on the amount of just compensation
pursuant to Rev. Memo. Cir. No. 41-91 and Section 196,
respectively
o Short-term capital assets (100%) are those which have been
held by the taxpayer for 12 months or less
o Long-term capital assets (50%) are those which have been
held by the taxpayer for more than 12 months
• An equity investment (investment in the form of shares of stock) is a
capital, not ordinary, asset of the investor the sale or exchange of which
results in either a capital gain or a capital loss. Thus, shares of stock, like
other securities defined in the Tax Code would be an ordinary asset only to
a dealer in securities or a person engaged in the purchase and sale of, or
an active trader in securities.
• In order that capital gain or loss may be recognized, the requisites are:
o Transaction must involve property classified as capital asset
o Transaction must be a sale or exchange or one considered as
equivalent to a sale or exchange
• In the case of individual taxpayers, the following are the rules on the
recognition of capital gains or losses from the disposition of personal
property classified as capital asset:
o Percentages (100% (short-term, 12 months or less) or 50%(long-
term, more than 12 months)) of gain or loss to be taken into
account
o Capital losses shall be deducted only to the extent of the capital
gains
o Ordinary losses are deductible from ordinary gains but net capital
loss cannot be deducted from ordinary gain or income
o “Net capital loss carry-over” is allowed during the subsequent year
only
[VIP!] NOTE: Capital gains derived by individuals from the sale or other
disposition of real property located in the Philippines and classified as
Capital Asset is subject to the final tax on capital gains (6% of gross selling
price or fair market value under Section 24D (the holding period rule does
not apply))
• In the case of corporate taxpayers, the “net capital loss carry-over” is not
applicable. There is no holding period. Capital gains and losses are
recognized to the extent of 100% regardless of the holding period

• The following are considered as sales or exchanges of capital assets:
o Retirement of bonds
o Short sales of property
o Failure to exercise privilege or option to buy or sell
o Securities becoming worthless
o Distribution in liquidation of corporations
• A short sale is a transaction in which the seller sells securities which he
does not currently own and, therefore, cannot himself supply the securities
for delivery, in expectation of the decline in their price
o The seller in this case is a mere speculator. To complete the
transaction, the seller must borrow the property (this is true ONLY
if the buyer does not agree that the delivery will be in the future).
For tax purposes, a short sale does not give rise to profit or loss
until the delivery to the lender of the securities acquired by the
taxpayer to cover the sale. In other words, the determination of
the gain or loss to be recognized would not be made until the
borrowed property is repaid. Should the price of the securities go
up, he incurs a loss; otherwise, he makes a gain.
o Gain or loss on short sales is always a short-term capital gain or
loss.
• An option is property which is in the hands of a taxpayer who does not
deal in options may be considered a capital asset. Thus, where a
corporation leased from another certain properties with option to buy
them, which option was later assigned to a third corporation, the gain
derived from the sale or assignment of the option by the first corporation is
a capital gain.
• [BAR!] [VVIP!] Guidelines in determining whether a particular real property
is a capital asset or ordinary asset
1. Taxpayers engaged in the real estate business
a. Real estate dealer – it shall refer to any person engaged in
the business of buying and selling or exchanging real
properties on his own account as a principal and holding
himself out as a full or part-time dealer in real estate.
All real properties acquired by the real estate dealer shall be
considered as ordinary assets
b. Real estate developer – it shall refer to any person
engaged in the business of developing real properties into
subdivisions, or building houses on subdivided lots, or
constructing residential or commercial units, townhouses and
other similar units for his own account and offering them for
sale or lease
c. Real estate lessor – it shall refer to any person engaged in
the business of leasing or renting real properties on his own
75
account as a principal and holding himself out as lessor of real
properties being rented out or offered for rent
All real properties of the real estate lessor, whether land
and/or improvements, which are for lease/rent or being
offered for lease/rent, or otherwise for use or being used in
the trade or business shall likewise be considered as ordinary
assets
A property purchased for future use in the business, even though his
purpose is later thwarted by circumstances beyond the taxpayer’s
control, does not lose its character as an ordinary asset. Nor does a
mere discontinuance of the active use of the property change its
character previously established as a business property or ordinary
asset
2. Taxpayer not engaged in the real estate business – In case of a
taxpayer not engaged in the real estate business but is engaged in
other business, real properties whether land, building, or other
improvements, which are used or being used or have been previously
used in the trade or business of the taxpayer shall be considered as
ordinary assets. These include buildings and/or improvements subject
to depreciation and lands used in the trade or business of the taxpayer
3. In the case of a taxpayer who changed its real estate business to a
non-real estate business, or who amended its Articles of Incorporation
from a real estate business to a non-real estate business, such as a
holding company, manufacturing company, trading company, etc., the
change of business or amendment of the primary purpose of the
business shall not result in the re-classification of real property held by
it from ordinary asset to capital asset
4. In the case of subsequent non-operation by taxpayers originally
registered to be engaged in the real estate business, all real properties
originally acquired by it shall continue to be treated as ordinary assets
5. Real properties formerly forming part of the stock in trade of a
taxpayer engaged in the real estate business, or formerly being used
in the trade or business of a taxpayer engaged or not engaged in the
real estate business, which were later on abandoned and became idle,
shall continue to be treated as ordinary assets.
6. Real properties classified as capital or ordinary asset in the hands of
the seller/transferor may change their character in the hands of the
buyer/transferee. Classification of such property in the hands of the
buyer/transferee shall be determined in accordance with the following
rules:
a. Real property transferred through succession or donation to
the heir or done who is not engaged in the real estate
business with respect to the real property inherited or
donated, and who does not subsequently use such property in
 trade or business, shall be considered as a capital asset in the
hands of their heir or done
b. Real property received as dividend by the stockholders who
are not engaged in the real estate business and who do not
subsequently use such real property in trade or business shall
be treated as capital assets in the hands of the recipients
even if the corporation which declared the real property
dividend is engaged in real estate business
7. In the case of involuntary transfers of real properties, including
expropriation or foreclosure sale, the involuntariness of such sale shall
have no effect on the classification of such real property in the hands
of the involuntary seller, either as capital asset or ordinary asset, as
the case may be
• [VVIP!]
1. In the case of individual citizens (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or business
in the Philippines
a. Capital gains presumed to have been realized from the sale,
exchange of real property located in the Philippines, classified
as capital assets, shall be subject to the 6% CGT based on
the gross selling price or fair market value as determined in
accordance with Section 6(E), whichever is higher
b. The sale of real property located in the Philippines, classified
as ordinary assets, shall be subject to ordinary income tax
imposed under Section 24(A)(1)(c) (seller is RC, NRC or RA)
or 25(A)(1) (seller is non-resident alien engaged), as the case
may be, based on net taxable income (GSP or FMV or FMV,
whichever is highest MINUS cost or other basis)
2. In the case of non-resident aliens not engaged in trade or business in
the Philippines – Capital gains presumed to have been realized by non-
resident aliens not engaged in trade or business in the Philippines on
the sale of real property located in the Philippines classified as Capital
Asset shall be subject to 6% CGT imposed under Section 25(B), in
relation to Section 24(D)(1), based on the GSP or FMV as determined
in accordance with Section 6(E), whichever is higher
3. In the case of domestic corporations
a. Capital gains presumed to have been realized from the sale of
lands and/or buildings located in the Philippines, which are
classified as capital assets, shall be subject to a CGT of 6%
based on the GSP or FMV as determined in accordance with
Section 6(E), whichever is higher, of such land and/or
building
b. The sale of land/or building classified as ordinary asset and
other real property such as machinery and equipment also
76
classified as ordinary asset, regardless of the classification
thereof, all of which are located in the Philippines, shall be
subject to ordinary income tax (30%) under Section 27(A) of
the Tax Code
c. Sale of real property, other than land and building, classified
as Capital Asset shall be included in determining Net Capital
Gain or Net Capital Loss
4. In case of resident foreign corporations – real property located in
the Philippines, regardless of classification, sold by a resident foreign
corporation shall be subject to the ordinary income tax (30%) under
Section 28(A)(1)
5. In the case of non-resident foreign corporation – the gain fro the
sale or real property located in the Philippines regardless of
classification by a non-resident foreign corporation shall be subject to
final tax at the rate of 30%
6. [VIP!] Gain realized from the sale or real property not located in the
Philippines, regardless of classification, by resident citizens, or
domestic corporations shall be subject to the ordinary income tax
imposed on Section 24(A)(1) (seller is Resident Citizen), or Section
27(A) (seller is Domestic Corporation) or (E), as the case may be.
Such income/gain shall be exempt (because these tax payers are
taxable only on income from sources within the Philippines) in the case
of non-resident citizens, alien individuals whether Resident or Non-
resident and foreign corporations whether Resident or Non-resident
• In the case of foreclosed real property, the tax is due if it is not redeemed
within the redemption of 1 year period. No CGT is due in case of
redemption because there is no sale or conveyance of property.
• The conversion of common shares of a corporation to redeemable preferred
shares will not be subject to CGT, since the holders merely change the
form of their shareholdings, and they do not realize any gain or economic
benefit therefrom
• Real property acquired through dacion en pago in payment of a debtor’s
loan obligation does not result in the acquisition of an ordinary asset;
hence, the sale thereof is subject to the 6% CGT
• Land which has remained vacant, idle, unproductive and unimproved since
its acquisition is a capital asset even in the hands of a real estate company.
As such, the sale thereof is subject to the 6% final CGT and DST.
• Real property, which had been previously leased but has become and been
abandoned and idle for 4 years now, can be considered a capital asset, the
sale of which will be subject to 6% CGT
• Real properties transferred by a taxpayer engaged in real estate business
to a taxpayer who is not engaged in real estate business and who will not
 use said properties in the ordinary course of its trade or business are
considered capital assets in the hands of the transferee
• Real properties classified as ordinary assets for being used in business by a
taxpayer who is not engaged in real estate business are automatically
converted into capital assets, upon showing proof that the same have not
been used in business for more than 2 years prior to the consummation of
the transaction involving said properties. As such, the sale thereof is
subject to CGT but not to the 12% VAT
donation) or the last preceding owner (there are at least 2
donations) by whom it was not acquired by gift, except that if such
basis is greater than the fair market value of the property at the
time of the gift then, for the purpose of determining loss, the basis
shall be such fair market value; or
[For the purpose of determining the gain, the basis shall be the
same as if it would be in the hands of the donor who did not acquire
it by gift]

• Sale of factory, building, machinery, and equipment originally intended for Example:
use in business but not used because of the taxpayer’s failure to A. In 2003, A purchased a Rolex Watch at a cost of Php 500,000.00.
commence business operations is subject to the CGT because the In 2011, when the FMV of the watch was Php 700,000.00, A
properties are considered capital asset donated the watch to B. In 2013, B sold the watch to C for Php
800,000.00. How much is the Capital Gain or Capital Loss?
• [Impt!] The sale of real property located in the Phils. classified as CA by a
Solution:
company through auction sale/public bidding is subject to CGT based on
Selling Price Php 800,000.00
the highest or winning bid price even if the zonal valuation of the real
LESS: Basis 500,000.00
property is higher than the winning bid price. Such sale is among the
Capital Gain Php 300,000.00
exceptions to the use of the zonal valuation as the tax base in computing
the CGT
B. In 1997, A purchased from Corporation X, a domestic corporation,
shares of stock not traded in stock exchange at a cost of Php 1M.
SEC. 40. Determination of Amount and Recognition of Gain or Loss. – In 2002, A donated said shares of stock to B when their FMV as
Php 2M. In 2010, B donated said shares of stock to C when their
(A) Computation of Gain or Loss. - The gain from the sale or other disposition FMV was Php 3.5M. In 2013, C sold said shares to D for Php
of property shall be the excess of the amount realized therefrom (selling 4,000,000.00. How much is the Capital Gain or Capital Loss?
price) over the basis (such as cost) or adjusted basis (such as cost
increased by capital expenditures and decreased by depreciation) for Solution:
determining gain, and the loss shall be the excess of the basis or adjusted Selling Price Php 4,000,000.00
basis for determining loss over the amount realized. The amount realized LESS: Basis 1,000,000.00
from the sale or other disposition of property shall be the sum of money Capital Gain Php 3,000,000.00
received plus (if payment is partly in money and partly in kind) the fair
market value of the property (other than money) received; C. In 2009, A purchased a car at a cost of Php 500,000.00. In 2010,
when the FMV of said car was Php 350,000.00, A donated it to B.
[Not applicable to capital gain on sale of real property located in the In 2013, B sold the car to C for Php 250,000.00. How much is the
Philippines classified as capital asset because what is taxable is the GSP or Capital Gain or Capital Loss?
FMV or FMV, whichever is highest, therefore cost and other basis is
irrelevant, except if the taxpayer opted to treat the sale under Section Solution:
24A] Selling Price Php 250,000.00
LESS: Basis 350,000.00
(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - Capital Loss Php 100,000.00
The basis of property shall be –
D. In 2009, A purchased from Corp. X, a domestic corporation,
(1) The cost thereof in the case of property acquired on or after March shares of stock not traded in stock exchange at a cost of Php 2M.
1, 1913, if such property was acquired by purchase; or In 2020, A donated said shares of stock to B when their FMV was
Php 1.8M. In 2013, B sold said shares of stock to C for Php 2.2M.
(2) The fair market price or value as of the date (of death of the How much is the Capital Gain or Capital Loss?
predecessor) of acquisition, if the same was acquired by
inheritance; or Solution:
Selling Price Php 2,200,000.00
(3) If the property was acquired by gift (or donation), the basis shall LESS: Basis 2,000,000.00
be the same as if it would be in the hands of the donor (only one Capital Gain Php 200,000.00
77
 (3) Exchange Not Solely in Kind. –
(4) If the property was acquired for less than an adequate
consideration in money or money's worth, the basis of such (a) If, in connection with an exchange described in the above
property is the amount paid by the transferee (who is now the exceptions, an individual, a shareholder, a security holder or a
seller) for the property; or corporation receives not only stock or securities permitted to
be received without the recognition of gain or loss, but also
Example: money and/or property, the gain, if any, but not the loss, shall
A piece of land owned and used by A in his business with FMV of Php be recognized but in an amount not in excess of the sum of the
2M was sold by A to his son B for Php 500,000.00 which the latter money and fair market value of such other property received:
likewise used in his business. 3 years later, B sold said land to C for Provided, That as to the shareholder, if the money and/or other
Php 3M which is the same as its FMVs. How much is the ordinary gain property received has the effect of a distribution of a taxable
of B? dividend, there shall be taxed as dividend to the shareholder an
amount of the gain recognized not in excess of his
Solution: proportionate share of the undistributed earnings and profits of
Selling Price Php 3,000,000.00 the corporation; the remainder, if any, of the gain recognized
LESS: Basis 500,000.00 shall be treated as a capital gain.
Ordinary Gain Php 2,500,000.00
(b) If, in connection with the exchange described in the above
(5) The basis as defined in paragraph (C)(5) of this Section, if the exceptions, the transferor corporation receives not only stock
property was acquired in a transaction where gain or loss is not permitted to be received without the recognition of gain or loss
recognized under paragraph (C)(2) of this Section. but also money and/or other property, then (i) if the
corporation receiving such money and/or other property
(C) Exchange of Property. – distributes it in pursuance of the plan of merger or
consolidation, no gain to the corporation shall be recognized
(1) General Rule. - Except as herein provided, upon the sale or from the exchange, but (ii) if the corporation receiving such
exchange of property, the entire amount of the gain or loss, as the other property and/or money does not distribute it in
case may be, shall be recognized. pursuance of the plan of merger or consolidation, the gain, if
any, but not the loss to the corporation shall be recognized but
(2) Exception. - No gain or loss shall be recognized if in pursuance of in an amount not in excess of the sum of such money and the
a plan of merger or consolidation – fair market value of such other property so received, which is
not distributed.
(a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is a (4) Assumption of Liability. –
party to the merger or consolidation; or
(a) If the taxpayer, in connection with the exchanges described in
(b) A shareholder exchanges stock in a corporation, which is a the foregoing exceptions, receives stock or securities which
party to the merger or consolidation, solely for the stock of would be permitted to be received without the recognition of
another corporation also a party to the merger or the gain if it were the sole consideration, and as part of the
consolidation; or consideration, another party to the exchange assumes a
liability of the taxpayer, or acquires from the taxpayer
(c) A security holder (such as bond holder) of a corporation, property, subject to a liability, then such assumption or
which is a party to the merger or consolidation, exchanges his acquisition shall not be treated as money and/or other
securities in such corporation, solely for stock or securities in property, and shall not prevent the exchange from being within
such corporation, a party to the merger or consolidation. the exceptions.

[BAR!] No gain or loss shall also be recognized if property is (b) If the amount of the liabilities assumed plus the amount of the
transferred to a corporation by a person in exchange for stock or liabilities to which the property is subject exceed the total of
unit of participation in such a corporation of which as a result of the adjusted basis of the property transferred pursuant to such
such exchange said person, alone or together with others, not exchange, then such excess shall be considered as a gain from
exceeding four (4) persons, gains control of said corporation: the sale or exchange of a capital asset or of property which is
Provided, That stocks issued for services shall not be considered as not a capital asset, as the case may be.
issued in return for property.
(5) Basis –
78
 (d) The Secretary of Finance, upon recommendation of the
(a) The basis of the stock or securities received by the transferor Commissioner, is hereby authorized to issue rules and
upon the exchange specified in the above exception shall be regulations for the purpose 'substantially all' and for the proper
the same as the basis of the property, stock or securities implementation of this Section.
exchanged, decreased by (1) the money received, and (2) the
fair market value of the other property received, and increased
• The gain or loss may be computed with the use of the following formula:
by (a) the amount treated as dividend of the shareholder and
Selling price of the property
(b) the amount of any gain that was recognized on the
LESS: Basis_____________
exchange: Provided, That the property received as 'boot' shall
Gain (or loss) from sale
have as basis its fair market value: Provided, further, That if as
part of the consideration to the transferor, the transferee of
The “adjusted basis” of the property disposed of is its original cost adjusted
property assumes a liability of the transferor or acquires form
to the date of its disposition the adjustment may consist of adding capital
the latter property subject to a liability, such assumption or
expenditures (e.g. improvements) made to the property and deducting
acquisition (in the amount of the liability) shall, for purposes of
capital recoveries (e.g. depreciation)
this paragraph, be treated as money received by the transferor
on the exchange: Provided, finally, That if the transferor
• [VIP!] Basis of the property – it depends primarily on the manner in
receives several kinds of stock or securities, the Commissioner
which the taxpayer acquired the property
is hereby authorized to allocate the basis among the several
classes of stocks or securities.
1. Property acquired by purchase – its cost, the purchase price plus
expense of acquisition (such as transportation, insurance and handling
(b) The basis of the property transferred in the hands of the
cost)
transferee shall be the same as it would be in the hands of the
transferor increased by the amount of the gain recognized to
2. Property acquired by inheritance – its fair market price or value as
the transferor on the transfer.
of the date of acquisition (date of death of the previous owner) of the
same
(6) Definitions. –
3. Property acquired by gift or donation – the basis to the transferee
(a) The term 'securities' means bonds and debentures but not
(who is not the transferor) shall be the same as if it would be in the
'notes" of whatever class or duration.
hands of the donor or last preceding owner who acquired it not by gift,
but if such basis is greater than the FMV of the property at the same
(b) The term 'merger' or 'consolidation', when used in this Section,
time of donation, then for the purpose of determining loss, the basis
shall be understood to mean: (i) the ordinary merger or
shall be such value
consolidation, or (ii) the acquisition by one corporation of all or
substantially all the properties of another corporation solely for
4. Property acquired for less than an adequate consideration – the
stock: Provided, That for a transaction to be regarded as a
basis is the amount paid by the transferee (who is not the transferor)
merger or consolidation within the purview of this Section, it
for the property
must be undertaken for a bona fide business purpose and not
solely for the purpose of escaping the burden of taxation:
Provided, further, That in determining whether a bona fide • The gain or loss in an exchange of property is measured by the difference
between the fair market value of the property received and the cost or
business purpose exists, each and every step of the transaction
basis of the property given in exchange
shall be considered and the whole transaction or series of
transaction shall be treated as a single unit: Provided, finally ,
• Illustration for Subsection (C, 2, a and b)
That in determining whether the property transferred
constitutes a substantial portion of the property of the
transferor, the term 'property' shall be taken to include the X Corporation transfers all its assets and liabilities to Y Corporation in
cash assets of the transferor. exchange for the latter’s shares of stock; Y shares are issued to X
stockholders solely in exchange for their stock-holdings in X. As a result, Y
(c) The term 'control', when used in this Section, shall mean becomes the surviving corporation and X ceases to exist or is dissolved
ownership of stocks in a corporation possessing at least fifty-
one percent (51%) of the total voting power of all classes of This reorganization is a merger within the contemplation of Subsection
stocks entitled to vote. (C,2). Accordingly, the transfer by X of all its assets and liabilities to Y
solely in exchange for the latter’s shares shall not give rise to the

79
 recognition of gain or loss. No gain or loss shall be recognized by X upon
the distribution of Y shares to X stockholders in complete liquidation of
their stock, and by X stockholders upon the exchange of their stocks solely
for Y stocks
• Illustration for second paragraph in Subsection (C, 2, c)
A and B assigned or conveyed to X Corporation real properties in payment
for the stocks of X; after the exchange, and as a result of such exchange, A
and B gained control (or further control) of X. Accordingly, no gain or loss
shall be recognized by both transferors (A and B) and the transferee (X)
SEC. 41. Inventories. - Whenever in the judgment of the Commissioner, the use of
inventories is necessary in order to determine clearly the income of any taxpayer
(engaged in merchandising business or manufacturing or sale of real properties
such as real estate developer), inventories shall be taken by such taxpayer upon
such basis as the Secretary of Finance, upon recommendation of the Commissioner,
may, by rules and regulations, prescribe as conforming as nearly as may be to the
best accounting practice in the trade or business and as most clearly reflecting the
income.
If a taxpayer, after having complied with the terms and conditions prescribed by the
Commissioner, uses a particular method of valuing its inventory for any taxable
year, then such method shall be used in all subsequent taxable years (Principle of
Consistency) unless:
(i.) with the approval of the Commissioner, a change to a different method is
authorized; or
(ii.) the Commissioner finds that the nature of the stock on hand (e.g., its
scarcity, liquidity, marketability and price movements) is such that
inventory gains should be considered realized for tax purposes and,
therefore, it is necessary to modify the valuation method for purposes of
ascertaining the income, profits, or loss in a move realistic manner:
Provided, however, That the Commissioner shall not exercise his authority
to require a change in inventory method more often than once every three
(3 years: Provided, further, That any change in an inventory valuation
method must be subject to approval by the Secretary of Finance.
• [Mem!] Inventory is an itemized list of goods or merchandise on hand
(not yet sold) at the end of the tax period or accounting period in a
business containing a designation or description of each specific article with
its valuation
• Requirements which each inventory must meet
1. It must conform as nearly as possible to the best accounting practice
in the trade or business; and
2. It must clearly reflect the income
80
• The bases of valuation which are commonly used in business concerns and
are acceptable for purposes of the income tax law are:
1. Cost price
2. Cost or market price, whichever is lower
The present law and the implementing regulations permit a taxpayer to use
any method of inventory valuation, provided it conforms as nearly as
possible to the best accounting practice in the trade or business and it
must clearly reflect income. It is recognized that inventory rules can not be
uniform but must give effect to trade customs which come within the scope
of the best accounting practice in the particular trade or business
Example:
A, who is engaged in merchandising business, has 1,000 units of
merchandise at a cost of Php 1,000.00 per unit as of Jan. 1, 2013. During
the year 2013 A purchased 12,000 units at Php 1,050.00 per unit. During
2013 A was able to sell 12,000 units, hence, his inventory as of Dec. 31,
2013 is 1,000 units. How much is the inventory as of Dec. 31, 2013?
a. If A is using the cost method of valuing his inventory the amount of
his inventory as of Dec. 31, 2013 is (1,000 x Php1,050.00) Php
1,050,000.00
b. If A is using cost or market whichever is lower and the current
market price of the merchandise as of Dec. 31, 2013 is Php1,030.00
per unit his inventory as of Dec. 31, 2013 is (1,000 x Php1,030.00)
Php 1,030,000.00. Under the cost or market whichever is lower
method the value of the inventory is the cost or current market price,
whichever is lower.
SEC. 42. Income from Sources Within the Philippines.- [Sometimes called Situs of
Taxation]
(A) Gross Income From Sources Within the Philippines. - The following items
of gross income shall be treated as gross income from sources within the
Philippines:
(1) Interests. - Interests derived from sources within (such as interest
income from bank deposits in the Philippines) the Philippines, and
interests on bonds, notes or other interest-bearing obligation of
residents (if the person paying the interest is a resident of the
Philippines the interest income of the recipient is from sources
within the Philippines regardless of place where the instrument is
located, place where the transaction took place or place where the
payment is made), corporate or otherwise;
(2) Dividends. - The amount received as dividends:
(a) From a domestic corporation; and
(b) From a foreign corporation (resident), unless less than fifty
percent (50%) of the gross income of such foreign corporation
 for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such
part of such period as the corporation has been in existence)
was derived from sources within the Philippines as determined
under the provisions of this Section; but only in an amount
which bears the same ratio to such dividends as the gross
income of the corporation for such period derived from sources
within the Philippines bears to its gross income from all
sources.
Example:
1. Corp. X, a resident foreign corporation, declared cash
dividend on Jan. 30, 2013 out of its earnings in 2010. A, one
of the stockholders of Corp. X who is a resident alien,
received from said corporation cash dividend of Php
500,000.00. For the years 2010, 2011 and 2012 the gross
income of said corporation follows:
Philippines Php 6,000,000,000.00
Other Countries 4,000,000,000.00
WORLD GROSS INCOME Php 10,000,000,000.00
If the gross income of the RFC in the Philippines is 50% or
more of the WGI, the entire dividend received by a
stockholder is from within the Philippines, hence, there is no
apportionment. Therefore, the entire Php 500,000.00 cash
dividend received by A is from sources within the Philippines
and is taxable under Section 24(A) and not FT of 10% under
Section 24(B,2). Because the final tax of 10% on dividends
is applicable only to dividends from a DC.
2. The same facts in #1 except that the gross income in the
Philippines is Php 4B while the gross income in other
countries is Php 6B.
If the gross income of the RFC in the Philippines is less than
50% of the WGI, the dividend received by a stockholder
shall be apportioned partly within and partly without the
Philippines in proportion to the gross income of the RFC
from within and from without the Philippines. Therefore, out
of the Php 500,000.00 cash dividend received by A only
(Php 4B ÷ Php 10B) 40% or Php 200,000.00 is from sources
within the Philippines and is taxable under Section 24(A) not
final tax of 10%. 60% of the Php 500,000.00 or Php
300,000.00 is from sources without the Philippines and is
not taxable in the Philippines because a resident alien is
taxable only on income from sources within the Philippines.
3. The same facts in #2 except that A is an RC, apportionment
is not necessary because A is taxable on his income from all
sources, hence, the Php 500,000.00 is taxable under Section
24(A) and not final tax of 10%.
81
(3) Service. - Compensation for labor or personal services performed
in the Philippines;
[If the services are performed partly within and partly outside the
Philippines and there is no accurate allocation, the allocation of the
compensation income shall be on the basis of number of days]
(4) Rentals and Royalties. (The source of rent income is from within
the Philippines if the property rented is located in the Philippines.
The source of royalty income is from within the Philippines if the
right or privilege is exercised in the Philippines such as in case of
royalty on patented invention the manufacturing or production
activity is done in the Philippines) - Rentals and royalties (the right
or privilege is exercised in the Philippines) from property located in
the Philippines or from any interest in such property, including
rentals or royalties for –
(a) The use of or the right or privilege to use in the Philippines any
copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like
property or right;
(b) The use of, or the right to use in the Philippines any industrial,
commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial
knowledge or information;
(d) The supply of any assistance that is ancillary and subsidiary to,
and is furnished as a means of enabling the application or
enjoyment of, any such property or right as is mentioned in
paragraph (a), any such equipment as is mentioned in
paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee
in connection with the use of property or rights belonging to, or
the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection
with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or
scheme; and
(g) The use of or the right to use:
(h) Motion picture films;
(i) Films or video tapes for use in connection with
television; and
(ii) Tapes for use in connection with radio broadcasting.

(5) Sale of Real Property. - gains, profits and income from the sale of
real property located in the Philippines; and
(6) Sale of Personal Property. - gains; profits and income from the
sale of personal property, as determined in Subsection (E) of this
Section.
(B) [Read!] Taxable Income From Sources Within the Philippines. –
(1) General Rule. - From the items of gross income specified in
Subsection (A) of this Section, there shall be deducted the
expenses, losses and other deductions properly allocated thereto
and a ratable part of expenses, interests, losses and other
deductions effectively connected with the business or trade
conducted exclusively within the Philippines which cannot definitely
be allocated to some items or class of gross income: Provided, That
such items of deductions shall be allowed only if fully substantiated
by all the information necessary for its calculation. The remainder,
if any, shall be treated in full as taxable income from sources within
the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall
be allowed from the item of gross income specified in subsection
(A) unless indebtedness was actually incurred to provide funds for
use in connection with the conduct or operation of trade or business
in the Philippines.
(C) [Impt!] Gross Income From Sources Without the Philippines. - The
following items of gross income shall be treated as income from sources
without the Philippines:
(1) Interests (if the person paying the interest is a non-resident, the
interest income of the recipient is from sources outside the
Philippines regardless of place where the instrument is located,
place where the transaction took place or place where the payment
is made) other than those derived from sources within the
Philippines as provided in paragraph (1) of Subsection (A) of this
Section;
(2) Dividends (if the gross income of the RFC in the Philippines is less
than 50% of the WGI portion of the dividend received by a
stockholder is from sources without or outside the Philippines. If the
dividend received by a stockholder is from a non-resident foreign
corporation the entire dividend is from sources outside the
Philippines) other than those derived from sources within the
Philippines as provided in paragraph (2) of Subsection (A) of this
Section;
(3) Compensation for labor or personal services performed
without the Philippines;
82
(4) Rentals or royalties from property located without the Philippines
or from any interest in such property including rentals or royalties
for the use of or for the privilege of using without the Philippines,
patents, copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like properties; and
(5) Gains, profits and income from the sale of real property located
without the Philippines.
(D) Taxable Income From Sources Without the Philippines. - From the items of
gross income specified in Subsection (C) of this Section there shall be
deducted the expenses, losses, and other deductions properly apportioned
or allocated thereto and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some items or classes of
gross income. The remainder, if any, shall be treated in full as taxable
income from sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without the
Philippines.- Items of gross income, expenses, losses and deductions,
other than those specified in Subsections (A) and (C) of this Section, shall
be allocated or apportioned to sources within or without the Philippines,
under the rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner. Where items of gross income
are separately allocated to sources within the Philippines, there shall be
deducted (for the purpose of computing the taxable income therefrom) the
expenses, losses and other deductions properly apportioned or allocated
thereto and a ratable part of other expenses, losses or other deductions
which cannot definitely be allocated to some items or classes of gross
income. The remainder, if any, shall be included in full as taxable income
from sources within the Philippines. In the case of gross income derived
from sources partly within and partly without the Philippines, the taxable
income may first be computed by deducting the expenses, losses or other
deductions apportioned or allocated thereto and a ratable part of any
expense, loss or other deduction which cannot definitely be allocated to
some items or classes of gross income; and the portion of such taxable
income attributable to sources within the Philippines may be determined by
processes or formulas of general apportionment prescribed by the
Secretary of Finance. Gains, profits and income from the sale of
personal property produced (or manufactured) (in whole or in part) by the
taxpayer within the Philippines and sold without the Philippines, or
produced (or manufactured) (in whole or in part) by the taxpayer without
the Philippines and sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without the Philippines.
[50% of the gain or profit or income is from within and 50% thereof is
from without]
Gains, profits and income derived from the purchase of personal
property within the Philippines and its sale without the Philippines, or from
the purchase of personal property without the Philippines and its sale
within the Philippines shall be treated as derived entirely from sources
within the country in which sold: Provided, however, That gain from the
sale of shares of stock in a domestic corporation shall be treated as derived
 entirely form sources within the Philippines regardless of where the said
shares are sold. The transfer by a nonresident alien or a foreign
corporation to anyone of any share of stock issued by a domestic
corporation shall not be effected or made in its book unless: (1) the
transferor has filed with the Commissioner a bond conditioned upon the
future payment by him of any income tax that may be due on the gains
derived from such transfer, or (2) the Commissioner has certified that the
taxes, if any, imposed in this Title and due on the gain realized from such
sale or transfer have been paid. It shall be the duty of the transferor and
the corporation the shares of which are sold or transferred, to advise the
transferee of this requirement.
(F) Definitions. - As used in this Section the words 'sale' or 'sold' include
'exchange' or 'exchanged'; and the word 'produced' includes 'created',
'fabricated,' 'manufactured', 'extracted,' 'processed', 'cured' or 'aged.'
• Classification of income as to source – as to source, income under the
Tax Code is classified into income which is derived:
1. In full from sources within the Philippines
2. In full from sources outside the Philippines
3. Partly from sources within and partly from outside the Philippines
a. Dividend received from RFC if the GI in the Philippines of the
said RFC is less than 50% of its WGI
b. Compensation for labor or personal services performed partly
within and partly without the Philippines
c. Gain from sale of personal property produced or
manufactured by the taxpayer within the Philippines and sold
without the Philippines OR produced or manufactured by the
taxpayer without the Philippines and sold within the
Philippines
• Test of the taxability of an income – the test is the “source” or situs or
place of the activities or property which produce the income and in the
case of an income derived from labor (services) the factor which
determines the sources of the income is not the residence of the payor or
payer, or the place where the contract for the services is entered into, or
the palce of payment but the place where the labor or service is actually
rendered or performed.
o Gains or profit derived from the sale of shares of stock of a
domestic corporation, even if consummated abroad, should be
deemed as income from Philippine sources.
• [Impt!] The residence of the obligor (or debtor or payor) who pays the
interest rather than the physical location of the securities, bonds or notes
or the place of payment is the determining factor of the source of interest
income. Accordingly, if the obligor is a resident of the Philippines, the
interest payment paid by him can have no other source than within the
Philippines
83
• The determination of the source of income is important in view of the
following:
1. Resident citizens, domestic corporations and estate or trust where the
decedent was or the trustor is a resident citizen are taxable upon
income derived from all sources
2. Non-resident citizens are taxed only on their income from sources
within the Philippines
3. Aliens and foreign corporations, whether resident and non-resident,
are liable to pay income tax only on their income from sources within
the Philippines
• Formulas
a. Resident Foreign Corporation
���������� ����� ������
× 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝐼𝑛𝑐𝑜𝑚𝑒 𝑤𝑖𝑡ℎ𝑖𝑛 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝑠𝑜𝑢𝑟𝑐𝑒𝑠
����� ����� ������
b. Personal service or labor
��.�� ���� ����� ���
��������� �� ��� �����
× 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 = 𝐼𝑛𝑐𝑜𝑚𝑒 𝑤𝑖𝑡ℎ𝑖𝑛 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝑠𝑜𝑢𝑟𝑐𝑒𝑠
����� ��.�� ���� �����
��� ���������
c. Income tax formula for dividends from outside the Philippines
������� ����� ������ Dividend income from source
× 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑖𝑛𝑐𝑜𝑚𝑒 =
����� ����� ������ outside the Philippines
Chapter 8 – Accounting Periods and Methods of Accounting
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of
the taxpayer's annual accounting period (fiscal year or calendar year, as the case
may be) in accordance with the method of accounting (such as Accrual Method,
Cash Method, Hybrid Method, Percentage of Completion Method, Installment
Method, etc.) regularly employed in keeping the books of such taxpayer, but if no
such method of accounting has been so employed, or if the method employed does
not clearly reflect the income, the computation shall be made in accordance with
such method as in the opinion of the Commissioner clearly reflects the income. If
the taxpayer's annual accounting period is other than a fiscal year, as defined in
Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep
books, or if the taxpayer is an individual, estate or trust or GPP the taxable income
shall be computed on the basis of the calendar year.
[Only corporations and business or taxable or ordinary partnerships are allowed to
adopt fiscal year accounting period]
• There is no uniform method of accounting prescribed for all taxpayers. The
law contemplates that each taxpayer shall adopt such forms and systems
of accounting as are in his judgment best suited to his purpose
• [Impt!] In general, any method of accounting may be employed, provided
that it correctly reflects the income of the taxpayer for each taxable year
• Principal accounting methods
1. Cash receipts and disbursements method or cash basis – income
earned by the taxpayer is not included in gross income until cash is
received and expenses are not deducted until paid within the taxable
year
This method of accounting is generally used by taxpayers who do not
keep regular books of accounts. Under this method, income is realized
upon receipt of cash
2. Accrual basis – income is included in gross income when earned,
whether cash is received or not, and expenses are allowed as
deductions when incurred although not yet paid
3. Hybrid method – the taxpayer reports his income and expenses by
employing the combination of cash and accrual methods
• Special accounting methods
1. Crop year basis which is applicable only to farmers engaged in the
production of crops which takes more than a year from the time of
planting to the process of gathering and disposal
2. Percentage of completion basis – in the case of long-term contract
([VIP!] NOTE: Contractors are no longer allowed to adopt the
completion of contract basis)
3. Income over the term of the lease basis and income in the year of
completion basis in the case of leasehold improvements
4. Deferred payment basis and instalments basis in the case of deferred
payments sales
• Income constructively received – income which is credited to the
account of or set apart for a taxpayer and which may be drawn upon him
at any time without any substantial limitation or condition upon which
payment is to be made is subject to tax for the year during the income was
credited or set apart, although not yet received or reduced to actual
possession
Doctrine of constructive receipt of income is designed to prevent the
exclusion from taxable income of items, the actual receipt of which could,
at the option of a taxpayer on the cash basis, be deferred or indefinitely
postponed (Purpose of the Doctrine)
84
Example:
A is a stockholder in Corp. X and on April 2, 2014, the latter declared
cash dividend payable on July 1, 2014. The cash dividend allotted to A is
Php 1M. This Php 1M is taxable to A even if he did not withdraw cash
dividend from Corp. X on July 1, 2014. In fact, the cash dividend is
subject to final tax of 10% to be deducted from the Php 1M by the Corp.
to be remitted to the BIR.
SEC. 44. Period in which Items of Gross Income Included. - The amount of all items
of gross income shall be included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting permitted under
Section 43, any such amounts are to be properly accounted for as of a different
period. In the case of the death of a taxpayer, there shall be included in computing
taxable income for the taxable period in which falls the date of his death, amounts
accrued up to the date of his death if not otherwise properly includible in respect of
such period or a prior period.
SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided
for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid
or incurred', dependent upon the method of accounting the basis of which the net
income is computed, unless in order to clearly reflect the income, the deductions
should be taken as of a different period. In the case of the death of a taxpayer,
there shall be allowed as deductions for the taxable period in which falls the date of
his death, amounts accrued up to the date of his death if not otherwise properly
allowable in respect of such period or a prior period.
• [VIP!] Returns to be filed in case of death of an individual – in case
an individual dies, the following tax returns shall be filed:
1. An income tax return covering the income and deductions of the
decedent from January 1 to the date of his death shall be filed.
Although the period covered by the return consists of less than 12
months, such period shall be considered as a “taxable year” pursuant
to Section 22 (P)
2. If the settlement of the estate of the decedent is the object of judicial
testimony or intestate proceedings
o An income tax return for the estate as a taxable person shall
be filed by the fiduciary (such as executor or administrator)
administrator. The estate’s income tax return (the taxpayer is
the estate and is entitled to an exemption of Php 20,000.00
[Section 62]) shall cover the income and deductions of the
estate for the period from the date immediately following the
death of the decedent to the end of the taxable year.
Thereafter, annually a return for the estate shall be filed until
the estate is terminated (or partitioned among the heirs)
3. In the case of an estate of the decedent, the settlement of which is not
the object of judicial testamentary or intestate proceedings, the
income of the properties left by the decedent is taxable directly to the
heirs or beneficiaries. Each heir or beneficiary must include in his
 income tax return, his distributive share of the taxable income of the
estate or co-ownership
The personal and additional exemptions prescribed in Section 35 shall
be allowed in full for the decedent and for the heirs/beneficiaries. The
estate is likewise entitled to the exemption prescribed in Section 62.
The taxpayer here is the deceased individual, hence, he is entitled to
personal exemption of Php 50,000.00 and additional exemption of Php
25,000.00 per QDc, not exceeding 4, and this is true even if the taxpayer
died, for example, on Jan. 31, Feb. 28, March 31, etc., because death of a
taxpayer is deemed to occur at the end of the year (Sec. 35, C). Exemption
may be availed of in full or not at all, because there is no partial
exemption.
SEC. 46. Change of Accounting Period. If a taxpayer (corporation), other than an
individual, estate, trust and GPP, changes his its accounting period from fiscal year
to calendar year, from calendar year to fiscal year, or from one fiscal year to
another, the net income shall, with the approval of the Commissioner, be computed
on the basis of such new accounting period, subject to the provisions of Section 47.
• [Impt!] An individual, estate, trust and GPP cannot change his accounting
period from the calendar year to the fiscal year. He or it is only allowed to
use the calendar year. A corporation and a partnership (ordinary or
business or taxable) have the option to choose between the calendar year
and the fiscal year
[Read!] SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12)
Months.
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a
taxpayer, other than an individual, with the approval of the Commissioner,
changes the basis of computing net income from fiscal year to calendar
year, a separate final or adjustment return shall be made for the period
between the close of the last fiscal year for which return was made and the
following December 31. If the change is from calendar year to fiscal year, a
separate final or adjustment return shall be made for the period between
the close of the last calendar year for which return was made and the date
designated as the close of the fiscal year. If the change is from one fiscal
year to another fiscal year, a separate final or adjustment return shall be
made for the period between the close of the former fiscal year and the
date designated as the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or
adjustment return is made under Subsection (A) on account of a change in
the accounting period, and in all other cases where a separate final or
adjustment return is required or permitted by rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, to be made for a fractional part of a year, then the income
shall be computed on the basis of the period for which separate final or
adjustment return is made.
85
• Kinds of accounting period – the accounting period may be either:
1. Calendar year – 12-month period, beginning January 1 and ending
December 31 of every year
2. Fiscal year – any 12-month period, ending on the last day of any
month other than December
• The following returns may be filed for a period of less than 12 months:
1. Final return of a decedent from Jan. 1 to the date of death
2. The return of a decedent’s estate in the year of death beginning 1 day
after death to Dec. 31
3. Returns for short periods in case of change of accounting period
4. Return of a taxpayer whose taxable period is terminated such as when
the taxpayer cases to engage in business
5. Return of a corporation contemplating dissolution or retirement
6. Return of a newly organized corporation
• [VIP!] The calendar year shall be the basis of computing the net income
when the taxpayer does not keep books of accounts or has no annual
accounting period. By provision of law, individuals and estates and trusts
and GPPs must be on a calendar year basis
The “taxpayer” mentioned in Section 46 and 47 refers to a corporation
since only corporations are permitted to choose the fiscal year or calendar
year as basis of computing income. The term “corporation” includes
partnerships (ordinary or business or taxable) except general professional
partnerships. Section 43, however, does not prohibit professional
partnerships from adopting a fiscal year basis of accounting
[THIS IS WRONG! Because GPP cannot use or adopt Fiscal Year because
the individual partners are required to report in their respective ITRs their
distributive share in the net income of the GPP. Since individuals
composing the GPP are required to adopt Calendar Year necessarily GPP
must also adopt Calendar Year]
[VIP!] SEC. 48. Accounting for Long-term Contracts. - Income from long-term
contracts shall be reported for tax purposes in the manner as provided in this
Section. As used herein, the term “long-term contracts” means building,
installation or construction contracts covering a period in excess of one (1) year.
Persons whose gross income is derived in whole or in part from such contracts shall
report such income upon the basis of percentage of completion (Completed Contract
Method or basis is no longer allowed beginning January 1, 1998). The return should
be accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work performed
under contract. There should be deducted from such gross income all expenditures
made during the taxable year on account of the contract, account being taken of the
material and supplies on hand at the beginning and end of the taxable period for
use in connection with the work under the contract but not yet so applied. If upon
completion of a contract, it is found that the taxable net income arising thereunder
has not been clearly reflected for any year or years, the Commissioner may permit
or require an amended return.
 • Before (January 1, 1998), the taxpayer was given the option to choose pesos (P1,000), or (2) of a sale or other disposition of real property
between the percentage of completion and the completed-contract method (Ordinary Asset), if in either case the initial payments do not exceed
twenty-five percent (25%) (if initial payments exceed 25% of selling price,
• Beginning January 1, 1998, income from long-term contracts is required to the gross income must be reported on accrual basis or in the year of sale)
be reported using this method (Percentage of Completion Method) only (RA of the selling price, the income may, under the rules and regulations
9224) prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, be returned or reported on the basis and in the manner
Example: above prescribed in this Section. As used in this Section, the term “initial
A entered into a construction contract with B whereby A will construct payments” means the payments received in cash or property other than
the commercial building of B at a contract price of Php 20M. The evidences of indebtedness of the purchaser during the taxable period in
estimated cost to construct this building is Php 14M, hence, the which the sale or other disposition is made.
estimated gross income of A from this contract is Php 6M. the
construction began in 2011 and was completed in 2013 with the (C) Sales of Real Property Considered as Capital Asset by Individuals. - An
following cost incurred: individual who sells or disposes of real property located in the Philippines,
considered as capital asset, and is otherwise qualified to report the gain
2011 - Php 7,000,000.00 therefrom under Subsection (B) may pay the capital gains tax (but the
2012 - Php 4,200,000.00 entire presumed capital gain (GSP or FMV or FMV, whichever is highest)
2013 - Php 2,800,000.00 must be reported in the year of sale; 6%) in installments under rules and
Php 14,000,000.00 regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
The formula to compute the gross income is
������ ���� �������� (D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the
𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑔𝑟𝑜𝑠𝑠 𝑖𝑛𝑐𝑜𝑚𝑒 × benefits of Subsection (A) elects for any taxable year to report his taxable
��������� ����
��� �� income on the installment basis, then in computing his income for the year
Therefore, the gross income in 2011 is (Php 6M × ) Php 3M. The
��� ��� of change or any subsequent year, amounts actually received during any
��� ��.��
gross income in 2012 is [(Php 6M × ) – Php 3M] Php 1.5M. The such year on account of sales or other dispositions of property made in any
��� ���
��� ��� prior year shall not be excluded.
gross income in 2013 is [(Php 6M × ) – Php 4.8M] Php 1.2M.
��� ���

Example:
NOTE: Under the completed contract method, which is no longer
allowed by law, A will not report any income in 2011 and 2012 and the
entire gross income of Php 6M will be reported in the year of completion
or in 2013.
SEC. 49. Installment Basis. –
(A) Sales of Dealers in Personal Property. - Under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells (the sale is in the ordinary
course of his business) or otherwise disposes of personal property on the
installment plan may (the taxpayer may at his option report his gross
income on accrual basis (in the year of sale) or on installment basis) return
or report as income therefrom in any taxable year that proportion of the
installment payments actually received in that year, which the gross profit
realized or to be realized when payment is completed, bears to the total
contract price.
• Initial payments – it covers any downpayment made, and includes all
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a
casual sale (not in the ordinary course of business) or other casual
disposition of personal property (capital asset) (other than 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), for a price exceeding One thousand
A is engaged in car dealership and he sold a car to B at an installment price
of Php 1M and its cost is Php 700,000.00, hence, the estimated gross
income is Php 300,000.00. The car was sold on January 2, 2011 with a
downpayment of Php 280,000.00 and the balance of Php 720,000.00 is
payable on installment at Php 20,000.00 per month for 3 years. The first
installment is due on Jan. 31, 2011 and the other monthly installments are
due at the end of each succeeding months. The gross profit rate is gross
profit income ÷ gross selling price (Php 300,000.00 ÷ Php 1M) or 30%. The
gross income to be realized annually is equal to the total amounts collected
× gross profit rate. Therefore, the gross income in 2011 is (Php 20,000.00
× 12 + Php 280,000.00 × 30%) Php 156,000.00. The gross income in 2012
is (Php 20,000.00 × 12 × 30%) Php 72,000.00. The gross income in 2013
is (Php 20,000.00 × 12 × 30%) Php 72,000.00.
NOTE: Under the accrual basis the gross income of Php 300,000.00 shall
be reported by A in the year of sale or in 2011.
payments actually or constructively received during the year of sale. The
aggregate of all such payments determines whether or not the limit which
the law has set (25% of selling price) has been exceeded

86
 • Assume that on October 15, 2011, an individual sold for P100,000 a real
property with an adjusted basis of P60,000 under the following terms:
P10,000 upon execution of sale; the balance of P90,000 in 18 equal
monthly installments of P5,000 each beginning November 15, 2011
The taxpayer qualifies to pay the capital gains tax on installment because
the initial payment consisting of the amount of P10,000 he received upon
the sale and the amount he expects or is scheduled to receive – P5,000 on
November 15, 2011 and P5,000 on December 15, 2011, or a total of
P20,000 during the year of sale do not exceed 25% of the selling price
SEC. 50. Allocation of Income and Deductions. - In the case of two or more
organizations, trades or businesses (whether or not incorporated and whether or
not organized in the Philippines) owned or controlled directly or indirectly by the
same interests, the Commissioner is authorized to distribute, apportion or allocate
gross income or deductions between or among such organization, trade or business,
if he determined that such distribution, apportionment or allocation is necessary in
order to prevent evasion of taxes or clearly to reflect the income of any such
organization, trade or business.
Chapter 9 – Returns and Payment of Tax
[VIP!] SEC. 51. Individual Return. –
(A) Requirements. –
(1) Except as provided in paragraph (2) of this Subsection, the
following individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines on his income
from sources within and without the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his
income from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines on his income from
sources within.
[NRA not engaged is NOT required to file ITR because his
income in the Philippines is subject to final tax]
(2) The following individuals shall not be required to file an income tax
return;
(a) An individual whose gross income does not exceed his total
personal and additional exemptions for dependents under
Section 35: Provided, That a citizen of the Philippines and any
87
alien individual engaged in business or practice of profession
within the Philippine shall file an income tax return, regardless
of the amount of gross income (even if the same is less than
the total exemptions);
(b) An individual with respect to pure compensation income, as
defined in Section 32 (A)(1), derived from sources within the
Philippines, the income tax on which has been correctly
withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation
concurrently from two or more employers at any time during
the taxable year shall file an income tax return even if the
income taxes have been correctly withheld.
(c) An individual (such as NRA not engaged) whose sole income
(passive) has been subjected to final withholding tax pursuant
to Section 57(A) of this Code; and
(d) A minimum wage earner as defined in Section 22(HH) of this
Code or an individual who is exempt from income tax pursuant
to the provisions of this Code and other laws (such as Senior
Citizen’s Law), general or special.
(3) The foregoing notwithstanding, any individual not required to file an
income tax return may nevertheless be required to file an
information return pursuant to rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the
Commissioner.
(4) The income tax return shall be filed in duplicate by the following
persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources
within the Philippines;
(c) A resident alien - on his income derived from sources within
the Philippines; and
(d) A nonresident alien engaged in trade or business in the
Philippines - on his income derived from sources within the
Philippines.
(B) Where to File. - Except in cases where the Commissioner otherwise
permits, the return shall be filed with an authorized agent bank, Revenue
District Officer, Collection Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal residence or principal place
of business in the Philippines, or if there be no legal residence or place of
business in the Philippines, with the Office of the Commissioner.
(C) When to File. –
 (1) The return of any individual specified above shall be filed on or
before the fifteenth (15th) day of April of each year covering
income for the preceding taxable year (Calendar year).
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock in a domestic
corporation not traded thru a local stock exchange as
prescribed under Section 24(c) shall file a return within thirty
(30) days after each transaction and a final consolidated
return on or before April 15 of each year covering all stock
transactions of the preceding taxable year; and
(b) From the sale or disposition of real property (located in the
Philippines classified as Capital Asset) under Section 24(D)
shall file a return within thirty (30) days following each sale or
other disposition. [Consolidated return is NOT required]
(D) Husband and Wife. - Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely (or solely) from
compensation (if both of them derive income purely or solely from
compensation they are NOT required to file an ITR), shall file a return for
the taxable year to include the income of both spouses, but where it is
impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by
the Bureau for purposes of verification for the taxable year.
(E) Return of Parent to Include Income of Children. - The income of unmarried
minors derived from property received from a living parent (How about if
the income of the minor is derived from exercise of his profession or trade
or business, will his income be included in the ITR of his parent? ANS: NO,
this will require a separate a separate ITR under subsection F) shall be
included in the return of the parent, except (this will require a separate
ITR under subsection F) (1) when the donor's tax has been paid (if the
donor’s tax has not yet been paid the income of the minor shall be included
in the ITR of the parent) on such property, or (2) when the transfer of
such property is exempt from donor's tax (the value of the property
donated is Php 100,000.00 or less).
(F) Persons Under Disability (such as minor). - If the taxpayer is unable to
make his own return, the return may be made by his duly authorized agent
or representative or by the guardian or other person charged with the care
of his person or property, the principal and his representative or guardian
assuming the responsibility of making the return and incurring penalties
provided for erroneous, false or fraudulent returns.
(G) Signature Presumed Correct. - The fact that an individual's name is signed
to a filed return shall be prima facie evidence for all purposes that the
return was actually signed by him.
• Income tax return is a sworn statement or declaration, including
attachments thereto, designed to be part of said return, in which the
88
taxpayer discloses the nature and extent of his tax liability by formally
making a report of his income and allowable deductions for the taxable
year in the prescribed income tax form
• In substituted filing of income tax return of employees receiving
compensation income from only 1 employer, the employer’s annual
information return (or Alpha List) filed will be considered as the
“substituted” ITR of the employee inasmuch as the information he provided
the BIR in his own ITR would exactly be the same information contained in
the employer’s annual information return
• Individuals earning compensation income – individuals earning pure
compensation income derived from sources within the Philippines, the
income tax on which has already been correctly withheld pursuant to
Section 79 are no longer required to file the annual income tax return
The following individuals, however, are still required to file income tax
return:
o Those deriving compensation concurrently from 2 or more
employers at any time during the taxable year
o Those, whether citizens, residents, or non-resident aliens, who did
not derive income purely from compensation
o Those on whose pure compensation the income tax has not been
withheld or has been incorrectly withheld
The tax exemption granted under RA No. 7432 to senior citizens with
income below P60,000 per annum, applies only to income derived from
compensation. Hence, interest income from bank deposit does not fall
under such exemption
SEC. 52. Corporation Returns. –
(A) Requirements. - Every corporation (1. Domestic Corporation; 2) Ordinary
or Business or Taxable Partnership; 3) Resident Foreign Corporation)
subject to the tax herein imposed, except (NRFC is subject to Final Tax,
hence, it is not required to file ITR) foreign corporations not engaged in
trade or business in the Philippines, shall render, in duplicate, a true and
accurate quarterly income tax return (3 ITRs) and final or adjustment
return in accordance with the provisions of Chapter XII of this Title. The
return shall be filed by the president, vice-president or other principal
officer, and shall be sworn to by such officer and by the treasurer or
assistant treasurer.
(B) Taxable Year of Corporation. - A corporation (including ordinary, business
or taxable partnership but excluding GPP) may employ either calendar year
or fiscal year as a basis for filing its annual income tax return: Provided,
That the corporation shall not change the accounting period employed
 without prior approval from the Commissioner in accordance with the
provisions of Section 47 of this Code.
(C) [Read!] Return of Corporation Contemplating Dissolution or Reorganization.
- Every corporation shall, within thirty (30) days after the adoption by the
corporation of a resolution or plan for its dissolution, or for the liquidation
of the whole or any part of its capital stock, including a corporation which
has been notified of possible involuntary dissolution by the Securities and
Exchange Commission, or for its reorganization, render a correct return to
the Commissioner, verified under oath, setting forth the terms of such
resolution or plan and such other information as the Secretary of Finance,
upon recommendation of the commissioner, shall, by rules and regulations,
prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by
the Securities and Exchange Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner,
secure a certificate of tax clearance from the Bureau of Internal Revenue
which certificate shall be submitted to the Securities and Exchange
Commission.
(D) [VIP!] Return on Capital Gains Realized from Sale of Shares of Stock not
Traded in the Local Stock Exchange. - Every corporation deriving capital
gains from the sale or exchange of shares of stock in a domestic
corporation not traded thru a local stock exchange as prescribed under
Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall
file a return within thirty (30) days after each transaction and a final
consolidated return of all transactions during the taxable year on or before
the fifteenth (15th) day of the fourth (4th) month following the close of the
taxable year.
[In the case of Capital Gain from sale of land and/or building shall file a
return within 30 days following its sale but consolidated return is NOT a
required period [Section 51,C,2,b, by analogy])
[Read!] SEC. 53. Extension of Time to File Returns. - The Commissioner may, in
meritorious cases, grant a reasonable extension of time for filing returns of income
(or final and adjustment returns in case of corporations), subject to the provisions
of Section 56 of this Code.
[Read!] SEC. 54. Returns of Receivers, Trustees in Bankruptcy or Assignees. - In
cases wherein receivers, trustees in bankruptcy or assignees are operating the
property or business of a corporation, subject to the tax imposed by this Title, such
receivers, trustees or assignees shall make returns of net income as and for such
corporation, in the same manner and form as such organization is hereinbefore
required to make returns, and any tax due on the income as returned by receivers,
trustees or assignees shall be assessed and collected in the same manner as if
assessed directly against the organizations of whose businesses or properties they
have custody or control.
SEC. 55. Returns of General Professional Partnerships. - Every general professional
partnership shall file on or before April 15 of the following year, in duplicate, a
89
return (information return) of its income, except income exempt under Section 32
(B) (exclusions from gross income) of this Title, setting forth the items of gross
income and of deductions allowed by this Title, and the names, Taxpayer
Identification Numbers (TIN), addresses and shares of each of the partners.
• Corporations subject to income tax are required to file quarterly income tax
returns and a final or adjustment return
• Bank with a foreign currency deposit unit (FCDU) – it must file 2
income tax returns for the same taxable year covering the 2 different types
of income, namely the FCDU income and the regular banking unit (RBU)
income
• Electronic Filing and Payment System (EFPS) is an alternative mode
of filing returns and payment of taxes which deviates from the conventional
manual process of encoding paper bound tax returns filed which is highly
susceptible to human errors and intervention. The system allows the
taxpayers to directly encode, submit their tax returns and pay their taxes
due online over the internet through the BIR website, thereby reducing the
government’s administrative and operational costs in interacting with
taxpayers and collecting taxes
• There is no statute or regulation that prohibits the use of foreign currency
in financial statements of Philippine taxpayers. The prohibition against the
use of foreign currency has been lifted with the repeal of RA No. 529 or the
“Uniform Currency Act”
• Functional currency is a currency of the primary economic environment
in which the reporting entity operates, that is, the currency of the
environment in which an entity primarily generates and expends cash
• Foreign currency is a currency which is other than the functional currency
of the qualified entity
• Prescriptive period for claiming a refund – it is the Final Adjustment
Return, in which amounts of the gross receipts and deductions have been
audited and adjusted, which is reflective of the results of the operations of
a business enterprise (domestic corporation and resident foreign
corporation). It is only when the return, covering the whole year, is filed
that the taxpayer will be able to ascertain whether a tax is still due or a
refund can be claimed based on the adjusted and audited figures. Hence,
at the earliest, the 2-year prescriptive period for claiming a refund
commences to run on the date of filing of the adjusted final tax return
• General professional partnerships – as such, they are not subject to
income tax. It is the partners who are liable for income tax in their
separate and individual capacities. The partner shall report as gross income
his distributive (or computed) share, actually and constructively received in
the net income of the partnership
SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation.
(A) Payment of Tax. –
(1) In General. - The total amount of tax imposed by this Title shall be
paid by the person subject thereto at the time the return is filed
(pay as you file basis or pay as you file system). In the case of
tramp vessels, the shipping agents and/or the husbanding agents,
and in their absence, the captains thereof are required to file the
return herein provided and pay the tax due thereon before their
departure. Upon failure of the said agents or captains to file the
return and pay the tax, the Bureau of Customs is hereby authorized
to hold the vessel and prevent its departure until proof of payment
of the tax is presented or a sufficient bond is filed to answer for the
tax due.
(2) Installment of Payment. - When the tax due is in excess of Two
thousand pesos (P2,000), the taxpayer (individual or estate or
trust) other than a corporation may elect to pay the tax in two (2)
equal installments in which case, the first installment shall be paid
at the time the return is filed and the second installment, on or
before July 15 following the close of the calendar year. If any
installment is not paid on or before the date fixed for its payment,
the whole amount of the tax unpaid becomes due and payable,
together with the delinquency penalties.
(3) [Read!] Payment of Capital Gains Tax. - The total amount of tax
imposed and prescribed under Section 24 (c), 24(D), 27(E)(2),
28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return
prescribed therefor is filed by the person liable thereto: Provided,
That if the seller submits proof of his intention to avail himself of
the benefit of exemption of capital gains under existing special
laws, no such payments shall be required : Provided, further, That
in case of failure to qualify for exemption under such special laws
and implementing rules and regulations, the tax due on the gains
realized from the original transaction shall immediately become due
and payable, subject to the penalties prescribed under applicable
provisions of this Code: Provided, finally, That if the seller, having
paid the tax, submits such proof of intent within six (6) months
from the registration of the document transferring the real
property, he shall be entitled to a refund of such tax upon
verification of his compliance with the requirements for such
exemption.
In case the taxpayer elects and is qualified to report the gain by
installments under Section 49 of this Code, the tax due from each
installment payment shall be paid within (30) days from the receipt of
such payments.
[Impt!] No registration of any document transferring real property shall
be effected by the Register of Deeds unless the Commissioner or his
duly authorized representative has certified (the BIR issues certificate
90
authorizing registration) that such transfer has been reported, and the
tax herein imposed, if any, has been paid.
(B) Assessment and Payment of Deficiency Tax. - After the return is filed, the
Commissioner shall examine it and assess the correct amount of the tax.
The tax or deficiency income tax so discovered shall be paid upon notice
(formal or final or official assessment notice) and demand from the
Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title, the term
'deficiency' means:
(1) The amount by which the tax imposed by this Title exceeds the
amount shown as the tax by the taxpayer upon his return; but the
amount so shown on the return shall be increased by the amounts
previously assessed (or collected without assessment) as a
deficiency, and decreased by the amount previously abated,
credited, returned or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this return,
or if no return is made by the taxpayer, then the amount by which
the tax exceeds the amounts previously assessed (or collected
without assessment) as a deficiency; but such amounts previously
assessed or collected without assessment shall first be decreased
by the amounts previously abated, credited returned or otherwise
repaid in respect of such tax.
• Pay as you file system – the total amount of income tax due shall be
paid at the time the return is filed. The “date prescribed for the payment of
the tax” is the date prescribed for the filing of the return
• [VIP!] Time and place of payment of tax from sales, exchanges, or
transfers of real property
o Capital gains tax (6%) – within 30 days following each sale of
lands and/or buildings which are classified as capital assets
located in the Philippines, the CGT Return shall be filed by the
seller or the buyer with, and payment of taxes mode 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
[VIP!] SEC. 57. Withholding of Tax at Source. –
[Items of Passive Income subject to final tax are no longer included in the ITR of
the recipient of income]
(A) Withholding of Final Tax on Certain Passive Incomes. - Subject to
rules and regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed by
Sections 24(B)(1) (interests, royalties, prizes and other winnings of RC,
 NRC and RA), 24(B)(2) (dividends from DC), 24(C) (CGT on Sale of
Shares of Stock in a DC not traded in stock exchange), 24(D)(1) (CGT on
Sale of Real Property classified as CA and located in the Philippines);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(1), 27(D)(2),
27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a),
28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation and/or person individual and
paid in the same manner (EXCEPT Capital Gains Tax on sale of shares of
stock in a DC not traded in stock exchange and CGT on sale of Real
Property classified as CA and located in the Philippines where the return is
filed and the tax paid or remitted within 30 days from sale or transaction
and not quarterly) and subject to the same conditions as provided in
Section 58 (quarterly) of this Code.
(B) Withholding of Creditable Tax at Source. - The Secretary of Finance
may, upon the recommendation of the Commissioner, require the
withholding of a tax on the items of income (such as salaries, rents,
contract prices, etc.) payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons individuals as provided for by
law, at the rate of not less than one percent (1%) but not more than
thirty-two percent (32%) thereof, which shall be credited against the
income tax liability (or income tax) of the taxpayer for the taxable year.
[The recipient of income will include in his ITR the income received and
after computing the tax due he will deduct the tax withheld by the payer as
tax credit]
(C) Tax-free Covenant Bonds. - In any case where bonds, mortgages, deeds of
trust or other similar obligations of domestic or resident foreign
corporations, contain a contract or provisions by which the obligor agrees
to pay any portion of the tax imposed in this Title upon the obligee or to
reimburse the obligee for any portion of the tax or to pay the interest
without deduction for any tax which the obligor may be required or
permitted to pay thereon or to retain therefrom under any law of the
Philippines, or any state or country, the obligor shall deduct bonds,
mortgages, deeds of trust or other obligations, whether the interest or
other payments are payable annually or at shorter or longer periods, and
whether the bonds, securities or obligations had been or will be issued or
marketed, and the interest or other payment thereon paid, within or
without the Philippines, if the interest or other payment is payable to a
nonresident alien or to a citizen or resident of the Philippines.
• Withholding tax on income obviously and necessarily implies that the
amount of the tax withheld comes from the income earned by the taxpayer
• A withholding tax on income is not a new kind of tax but simply a manner
or system by which income taxes may be collected when the income is paid
or received. It is in the nature of advance tax payment by a taxpayer on
the annual tax which may be accrue at the end of the taxable year
91
• The system was devised for three primary reasons; first, to provide the
taxpayer a convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can otherwise be lost
or substantially reduced through failure to file the corresponding returns;
and third, to improve the government’s cash flow
This results in administrative savings, prompt and efficient collection of
taxes, prevention of delinquencies and reduction of governmental effort to
collect taxes through more complicated means and remedies.
• [BAR!] “All events test” – Under the accrual basis or method of accounting,
income is reportable when all the events have occurred that fix the
taxpayer’s right to receive the income, and the amount can be determined
with reasonable accuracy. Thus, it is right to receive income, and not the
actual receipt of cash, that determines when to include the amount in gross
income. The following are the requisites of this method (accrual) :
1. Right to receive the amount must be valid, unconditional and
enforceable, i.e., not contingent upon future time
2. Amount must be reasonably susceptible of accurate estimate
3. There must be a reasonable expectation that the amount will be paid
in due course
• [Impt!] The tax withheld at source may be either a final or creditable tax
1. Final withholding tax – under the final withholding tax (FWT)
system, the amount of income tax withheld by the withholding agent
(Payer-corporation or Payer-individual) is constituted as a full and final
payment of the income tax due from the payee on the said income
(recipient of income such as bank depositor in the case of interest
income, stockholder in the case of dividend and patentee in the case of
royalty). The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold
the tax or in case of under withholding, the deficiency tax shall be
collected from the payor/withholding agent. The payee is not required
to file an income tax return for the particular income
[If the withholding agent does not withhold or fails to withhold, he is
directly and personally liable to the BIR not only of the tax supposed to
be withheld but including the penalties such as surcharge and
interests]
2. Creditable withholding tax – Under the creditable withholding tax
(CWT) system, taxes (such as income tax of contractors, lessors of
property, consultants, employees, etc.) withheld on certain income
payments are intended to equal or at least approximate the tax due
from the payee on said income. The income recipient is still required to
file an income tax return, as prescribed in Sections 51 and 52, to
report the income and/or pay the difference between the tax withheld
and the tax due on the income. Taxes withheld on income payments
covered by the expanded withholding tax and compensation income
are creditable in nature
 • Claim for tax credit or refund – the person entitled to claim a tax refund
is the taxpayer but in case the taxpayer does not file a claim for refund The taxes deducted and withheld by the withholding agent shall be held as
(the withholding agent is the proper party in interest to file a written claim a special fund in trust for the government until paid (or remitted) to the
for refund with the CIR [Proctor & Gamble Phils, Inc and Wander Phils, Inc. collecting officers.
Case]), the withholding agent may file the claim
The return for final (on passive income) withholding tax shall be filed and
• Comparison the payment made within twenty-five (25) days from the close of each
calendar quarter, while the return for creditable withholding taxes (such
FWT CWT as tax withheld on compensation income, rent income, contractor’s income,
 The amount of income tax  Taxes withheld on certain etc.) shall be filed and the payment made not later than the last day of the
withheld by the withholding income payments are intended month following the close of the quarter during which withholding was
agent is constituted as a full to equal or at least approximate made: Provided, That the Commissioner may, with the approval of the
and final payment of the the tax due of the payee on said Secretary of Finance, may require these withholding agents to pay (or
income tax due from the payee income remit) or deposit the taxes deducted or withheld at more frequent intervals
on the said income when necessary to protect the interest of the government.
 The liability for payment of the  Payee of income is required to
tax rests primarily on the payor report the income and/or pay (B) Statement of Income Payments Made and Taxes Withheld. - Every
as a withholding agent the difference between the tax withholding agent required to deduct and withhold taxes under Section 57
withheld and the tax due on the shall furnish each recipient, in respect to his or its receipts during the
income. The payee also has the calendar quarter or year, a written statement showing the income or other
right to ask for a refund if the payments made by the withholding agent during such quarter or year, and
tax withheld is more than the the amount of the tax deducted and withheld therefrom, simultaneously
tax due upon payment at the request of the payee, but not late than the twentieth
 The payee is not required to file  The income recipient is still (20th) day following the close of the quarter in the case of corporate
an income tax return for the required to file an income tax payee, or not later than March 1 of the following year in the case of
particular income return, as prescribed in Sections individual payee for creditable withholding taxes. For final withholding
51 and 52 taxes, the statement should be given to the payee on or before January 31
of the succeeding year.
• [VIP!] The withholding agent is directly and independently liable for the
(C) Annual Information Return. - Every withholding agent required to
correct amount of the tax that should be withheld from the dividend
deduct and withhold taxes under Section 57 shall submit to the
remittance. He is subject to and liable for deficiency assessments,
Commissioner an annual information return containing the list (Alpha List)
surcharges and penalties should the amount of the tax withheld be finally
of payees and income payments, amount of taxes withheld from each
found to be less than the amount that should have been withheld under the
payee and such other pertinent information as may be required by the
law
Commissioner. In the case of final withholding taxes (such as final tax on
passive income), the return shall be filed on or before January 31 of the
• Withholding in case of doubt – in case of doubt, a withholding agent
succeeding year, and for creditable withholding taxes, not later than March
may always protect himself by withholding the tax due, and promptly
1 of the year following the year for which the annual report is being
causing a query to be addressed to the CIR for the determination whether
submitted. This return, if made and filed in accordance with the rules and
or not the income paid to an individual is not subject to withholding. In
regulations approved by the Secretary of Finance, upon recommendation of
case the CIR decides that the income paid to an individual is not subject to
the Commissioner, shall be sufficient compliance with the requirements of
withholding, the withholding agent may thereupon remit (should be
Section 68 of this Title in respect to the income payments.
refund) the amount of tax withheld.
The Commissioner may, by rules and regulations, grant to any withholding
SEC. 58. Returns and Payment of Taxes Withheld at Source. – agent a reasonable extension of time to furnish and submit the return
required in this Subsection.
(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted
and withheld under Section 57 by withholding agents shall be covered by a (D) Income of Recipient. - Income upon which any creditable tax is required to
return and paid (or remitted) to, except in cases where the Commissioner be withheld at source under Section 57 shall be included in the return of its
otherwise permits, an authorized Treasurer of the city or municipality recipient but the excess of the amount of tax so withheld over the tax due
where the withholding agent has his legal residence or principal place of on his return shall be refunded to him subject to the provisions of Section
business, or where the withholding agent is a corporation, where the 204; if the income tax collected at source is less than the tax due on his
principal office is located.
92
 return, the difference shall be paid in accordance with the provisions of
Section 56.
All taxes withheld pursuant to the provisions of this Code and its
implementing rules and regulations are hereby considered trust funds and
shall be maintained in a separate account and not commingled with any
other funds of the withholding agent.
(E) [Impt!] Registration with Register of Deeds. - No registration of any
document (such as deed of sale) transferring real property shall be effected
by the Register of Deeds unless the Commissioner or his duly authorized
representative has certified (the BIR has issued a certificate authorizing
registration) that such transfer has been reported, and the capital gains or
creditable withholding tax, if any, has been paid: Provided, however, That
the information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, shall be annotated by the Register of Deeds in the Transfer
Certificate of Title or Condominium Certificate of Title: Provided, further,
That in cases of transfer of property to a corporation, pursuant to a
merger, consolidation or reorganization, and where the law allows deferred
recognition of income in accordance with Section 40, the information as
may be required by rules and regulations to be prescribed by the Secretary
of Finance, upon recommendation of the Commissioner, shall be annotated
by the Register of Deeds at the back of the Transfer Certificate of Title or
Condominium Certificate of Title of the real property involved: Provided,
finally, That any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code.
• [VIP!] Party entitled to refund in case of overpayment – The
withholding agent cannot claim for refund of the overpaid taxes; the
claimant should be the taxpayer, being the real party in interest. Here, the
Decision rendered by 2 different
divisions of the Supreme Court
withholding agent is a wholly-owned (DC) subsidiary of the non-resident
foreign corporation (mother corporation which is Proctor & Gamble USA).
In another case rendered on the same date, the SC ruled that the
withholding agent, a DC which is also a wholly-owned subsidiary of the
non-resident foreign corporation, is the proper entity which should claim
for refund or credit of overpaid withholding tax on dividends paid or
remitted to the mother corporation for the reason that “it became a
withholding agent of the government not by choice but by compulsion” and
it “may be assessed for deficiency withholding tax plus penalties consisting
of surcharge and interest.”
In Comm. vs Proctor and Game Phil. Mfg. Corp (204 SCRA 377, Dec. 2,
1991) (appealed decision), the SC ruled that the private respondent, a
wholly-owned subsidiary of a non-resident foreign corporation, was a
“taxpayer” within the meaning of Section 204 (see Section 22[N]), and was
impliedly authorized to file the claim for refund and the suit to recover such
claim. If the withholding agent is the agent both of the government and of
the taxpayer, his authority may reasonably include the authority to file a
claim for refund
93
SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed
under this Title upon gains, profits, and income not falling under the foregoing and
not returned and paid by virtue of the foregoing or as otherwise provided by law
shall be assessed by personal return under rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the Commissioner. The intent
and purpose of the Title is that all gains, profits and income of a taxable class, as
defined in this Title, shall be charged and assessed with the corresponding tax
prescribed by this Title, and said tax shall be paid by the owners of such gains,
profits and income, or the proper person having the receipt, custody, control or
disposal of the same. For purposes of this Title, ownership of such gains, profits and
income or liability to pay the tax shall be determined as of the year for which a
return is required to be rendered.
Chapter 10 – Estates and Trusts
[For income tax purposes, estates and trusts are considered taxpayers separate
from the beneficiaries thereof]
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - The tax (income tax) imposed by this Title upon
individuals shall apply to the income of estates or of any kind of property
held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or
Taxable to the unascertained person or persons with contingent interests, and
estate or trust income accumulated or held for future distribution under the terms
of the will or trust;
(2) Income which is to be distributed currently by the fiduciary
Taxable to the (trustee) to the beneficiaries, and income collected by a guardian
beneficiary
of an infant which is to be held or distributed as the court may
direct;
Taxable partly (3) Income received by estates of deceased persons during the period
to the estate of administration or settlement of the estate; and
or trust and
partly to the
beneficiary (4) Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
(B) [Mem!] [BAR!] Exception. - The tax imposed by this Title shall not apply
(the income of Ees’ trust fund or pension fund or pension trust is exempt
from income tax) to employee's trust which forms part of a pension, stock
bonus or profit-sharing plan of an employer for the benefit of some or all of
his employees (1) if contributions are made to the trust by such employer,
or employees, or both for the purpose of distributing to such employees
the earnings (such as interest and dividend) and principal (or contributions
or corpus or capital) of the fund accumulated by the trust in accordance
with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus (or principal or capital or
contributions) or income to be (or earnings) (within the taxable year or
 thereafter) used for, or diverted to, purposes other than for the exclusive (A) There shall be allowed as a deduction in addition to the allowable
benefit of his employees the pension fund and the income thereof are deductions under Section 34 in computing the taxable income of the estate
within the absolute control of the trustee and the employer cannot under or trust the amount of the income of the estate or trust for the taxable
any circumstances use said fund other than for the exclusive benefit of his year which is to be distributed currently by the fiduciary to the
Such as when employees: Provided, That any amount actually distributed to any beneficiaries, and the amount of the income collected by a guardian of an
the employee
resigns before employee or distributee shall be taxable to him in the year in which so infant which is to be held or distributed as the court may direct, but the
retirement age distributed to the extent that it exceeds the amount contributed by such amount so allowed as a deduction shall be included in computing the
but not when employee or distributee. taxable income of the beneficiaries, whether distributed to them or not.
he retires
because in the Any amount allowed as a deduction under this Subsection shall not be
latter case, allowed as a deduction under Subsection (B) of this Section in the same or
Example:
such receipt any succeeding taxable year.
will constitute X was an employee of Corporation A and after 20 years with the
retirement corporation, X resigned. His total contributions to the pension fund is
benefit which (B) In the case of income received by estates of deceased persons during the
Php 240,000.00 while Corporation A’s counterpart is also Php
is exempt period of administration or settlement of the estate, and in the case of
from income 240,000.00. The accumulated earnings in the form of interest and
income which, in the discretion of the fiduciary, may be either distributed
tax under dividend of the Php 480,000.00 amount to Php 220,000.00. Upon
Section to the beneficiary or accumulated, there shall be allowed as an additional
resignation, X received Php 700,000.00 from the trustee.
32(B,6,a) deduction in computing the taxable income of the estate or trust the
amount of the income of the estate or trust for its taxable year, which is
How much, if any, is the taxable income of X?
properly paid or credited during such year to any legatee, heir or
beneficiary but the amount so allowed as a deduction shall be included in
ANS: The taxable income of X is the amount received in excess of his
computing the taxable income of the legatee, heir or beneficiary.
contribution to the fund or (Php 700,000.00 – Php 240,000.00)
Php 460,000.00. The Php 240,000.00 representing his
(C) In the case of a trust administered in a foreign country, the deductions
contribution to the fund is NOT taxable because it is mere return
mentioned in Subsections (A) and (B) of this Section shall not be allowed:
of capital)
Provided, That the amount of any income included in the return of said
trust shall not be included in computing the income of the beneficiaries.
(C) Computation and Payment. –
Example:
(1) In General. - The tax shall be computed upon the taxable income
A conveyed his commercial properties to B under a trust agreement for
(gross income LESS allowable deductions under Section 34 and
a period of 10 years from January 1, 2013 to December 31, 2022. The
exemption of Php 20,000.00) of the estate or trust (other than
trust instrument or deed of trust provides, among others, that out of the
employees’ trust) and shall be paid by the fiduciary (or executor or
net income after tax of the trust B shall deliver to C, the beneficiary,
administrator in the case of estate or trustee in the case of trust),
Php 1M per annum. The gross income of the trust in 2013 is Php 5M
except (income of such trust is taxable to the grantor or trustor) as
while the allowable deductions amount to Php 2M.
provided in Section 63 (relating to revocable trusts) and Section 64
(relating to income for the benefit of the grantor).
Compute the taxable income of the trust.
(2) Consolidation of Income of Two or More Trusts. - Where, in the case
ANS:
of 1two or more trusts, the creator (or grantor or trustor) of the
Gross Income Php 5,000,000.00
trust in each instance is the same person, and (2 trusts of the
LESS: allowable deductions Php 2M
same creator or grantor or trustor BUT with different beneficiaries –
amount distributed to C 1M 3,000,000.00
individual ITRs not consolidated ITR) 2the beneficiary in each
NET INCOME Php 2,000,000.00
instance is the same, the taxable income of all the trusts shall be
LESS: exemption 20,000.00
consolidated and the tax provided in this Section computed on such
TAXABLE INCOME Php 1,980,000.00
consolidated income, and such proportion of said tax shall be
assessed and collected from each trustee which the taxable income
NOTE: The Php 1M given to C by the trustee is included in computing
of the trust administered by him bears to the consolidated income
his (C) taxable income in 2013.
of the several trusts.

[VVIP!] SEC. 61. Taxable Income. - The taxable income of the estate or trust SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax
shall be computed in the same manner and on the same basis as in the case of an provided for in this Title, there shall be allowed an exemption of Twenty thousand
individual, except that: pesos (P20,000) from the income of the estate or trust.

94
SEC. 63. Revocable trusts. - Where at any time the power to revest (power to get
back the principal or capital or corpus) in the grantor title to any part of the corpus
of the trust is vested (1) in the grantor either alone or in conjunction with any
person not having a substantial adverse interest in the disposition of such part of
the corpus or the income therefrom, or (2) in any person not having a substantial
adverse interest in the disposition of such part of the corpus or the income
therefrom, the income of such part (that will revert to the grantor) of the trust
shall be included in computing the taxable income of the grantor.
SEC. 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust (1) is, or in the discretion of the
grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be held or accumulated for
future distribution to the grantor, or (2) may, or in the discretion of the
grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the grantor, or (3)
is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income
may be applied to the payment of premiums upon policies of insurance on
the life of the grantor, such part of the income of the trust shall be included
in computing the taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor' means in
the discretion of the grantor, either alone or in conjunction with any person
not having a substantial adverse interest in the disposition of the part of
the income in question.
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators,
receivers, conservators and all persons individuals or corporations, acting in any
fiduciary capacity, shall render, in duplicate, a return of the income of the person,
trust or estate for whom or which they act, and be subject to all the provisions of
this Title, which apply to individuals in case such person, estate or trust has a gross
income of Twenty thousand pesos (P20,000) or over during the taxable year. Such
fiduciary or person filing the return for him or it, shall take oath that he has
sufficient knowledge of the affairs of such person, trust or estate to enable him to
make such return and that the same is, to the best of his knowledge and belief, true
and correct, and be subject to all the provisions of this Title which apply to
individuals: Provided, That a return made by or for one or two or more joint
fiduciaries filed in the province where such fiduciaries reside; under such rules and
regulations as the Secretary of Finance, upon recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance with the
requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees,
executors, administrators and other fiduciaries are indemnified against the claims or
demands of every beneficiary for all payments of taxes which they shall be required
to make under the provisions of this Title, and they shall have credit for the amount
of such payments against the beneficiary or principal in any accounting which they
make as such trustees or other fiduciaries.
95
• Definition of terms
o Estate refers to all property, rights and obligations of a person
which are not extinguished by his death and also those which
have accrued thereto since the opening of succession
o Trust is an arrangement created by will or by an agreement
under which title to property is passed to another for conversation
or investment with the income therefrom and ultimately the
corpus (principal) to be distributed in accordance with the
directions of the creator (or grantor or trustor) as expressed in the
governing instrument
o Fiduciary means a guardian, trustee, executor, administrator,
receiver, conservator, or any person acting in any fiduciary
capacity for any person
o Employee’s trust is a trust maintained by an employer to
provide retirement, pension, or other benefits to its employees. It
is a separate entity established for the exclusive benefit of the
employees
• [Impt!] The items of gross income of estates and trusts are the same items
of gross income of individuals as provided in Section 32(A) of the Tax Code
and shall include the income enumerated in Section 60(A,1-4). In other
words, estates and trusts (except employees’ trust) are considered as
individuals taxable as a separate taxpayer except revocable trusts
(Section 63) the income of which shall be included in computing the
taxable income of the grantor
• [Impt!] Income of an estate or trust may be taxable
1. To the estate or trust
2. To the beneficiary
3. Partly to the estate or trust and partly to the beneficiary, depending
upon the disposition of the income under the will or deed of trust
4. To the fiduciary or beneficiary, depending upon the amounts which are
properly paid or credited to the beneficiary
5. To the grantor
• [VVIP!] Income tax exemption of employees’ trusts – the exemption
of employees’ trust which forms part of a pension, etc. was conceived in
order to encourage the formation of pension trust systems for the benefit
of labourers and employees outside the Social Security Act
o The tax exemption privilege of employees’ trusts, as distinguished
from any other kind of property held in trust, springs from Section
60(B). Employees’ trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age, retirement, death, sickness,
or disability. It provides security against certain hazards to which
members of the Plan may be exposed. It is an independent and
 additional source of protection for the working group established
for their exclusive benefit and for no other purpose
It is evident that tax-exemption is likewise to be enjoyed by the
income of the pension trust (usually from interests on bank
deposits and dividends from corporations); otherwise, taxation of
those earnings would result in a diminution of accumulated
income and reduce whatever the trust beneficiaries would receive
out of the trust fund. Accordingly, interest income derived by a
private benefit plan from its investments in money market
placements, bank deposits, deposit substitutes, trust funds,
purchase of treasury bills and other similar investments is exempt
from income tax and consequently, from the 20% withholding tax
o [Mem!] The interest income derived by the retirement plan from
its depository bank under the expanded foreign currency deposit
system is exempt from the 7.5% final tax imposed under Section
24(B)(1)
Chapter 11 – Other Income Tax Requirements
SEC. 67. Collection of Foreign Payments. - All persons, corporations, duly registered
general co-partnerships (companias colectivas) undertaking for profit or otherwise
the collection of foreign payments of interests or dividends by means of coupons,
checks or bills of exchange shall obtain a license from the Commissioner, and shall
be subject to such rules and regulations enabling the government to obtain the
information required under this Title, as the Secretary of Finance, upon
recommendation of the Commissioner, shall prescribe.
SEC. 68. Information at Source as to Income Payments. - all persons, corporations
or duly registered co- partnerships (companias colectivas), in whatever capacity
acting, including lessees or mortgagors of real or personal property, trustees, acting
in any trust capacity, executors, administrators, receivers, conservators and
employees making payment to another person, corporation or duly registered
general co-partnership (compania colectiva), of interests, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments or other fixed or
determinable gains, profits and income, other than payment described in Section
69, in any taxable year, or in the case of such payments made by the Government
of the Philippines, the officers or employees of the Government having information
as to such payments and required to make returns in regard thereto, are authorized
and required to render a true and accurate return to the Commissioner, under such
rules and regulations, and in such form and manner as may be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, setting forth the
amount of such gains, profits and income and the name and address of the recipient
of such payments: Provided, That such returns shall be required, in the case of
payments of interest upon bonds and mortgages or deeds of trust or other similar
obligations of corporations, and in the case of collections of items, not payable in
the Philippines, of interest upon the bonds of foreign countries and interest from the
bonds and dividends from the stock of foreign corporations by persons, corporations
or duly registered general co-partnerships (companias colectivas), undertaking as a
96
matter of business or for profit or otherwise the collection of foreign payments of
such interests or dividends by means of coupons or bills of exchange.
SEC. 69. Return of Information of Brokers. - Every person, corporation or duly
registered general co-partnership (compania colectiva), doing business as a broker
in any exchange or board or other similar place of business, shall, when required by
the Commissioner, render a correct return duly verified under oath under such rules
and regulations as the Secretary of Finance, upon recommendation of the
Commissioner, may prescribe, showing the names of customers for whom such
person, corporation or duly registered general co-partnership (compania colectiva)
has transacted any business, with such details as to the profits, losses or other
information which the Commissioner, may require as to each of such customers as
will enable the Commissioner to determine whether all income tax due on profits or
gains of such customers has been paid.
SEC. 70. Returns of Foreign Corporations. –
(A) Requirements. - Under rules and regulations prescribed by the Secretary of
finance, upon the recommendation of the Commissioner, any attorney,
accountant, fiduciary, bank, trust company, financial institution or other
person, who aids, assists, counsels or advises in, o with respect to; the
formation, organization or reorganization of any foreign corporation, shall,
within thirty (30) days thereafter, file with the Commissioner a return.
(B) Form and Contents of Return. - Such return shall be in such form and shall
set forth; under oath, in respect of each such corporation, to the full extent
of the information within the possession or knowledge or under the control
of the person required to file the return, such information as the Secretary
of Finance, upon recommendation of the Commissioner, shall prescribe by
rules and regulations as necessary for carrying out the provisions of this
Title. Nothing in this Section shall be construed to require the divulging of
privileged communications between attorney and client.
SEC. 71. Disposition of Income Tax Returns, Publication of Lists of Taxpayers and
Filers. - After the assessment shall have been made, as provided in this Title, the
returns, together with any corrections thereof which may have been made by the
Commissioner, shall be filed in the Office of the Commissioner and shall constitute
public records and be open to inspection as such upon the order of the President of
the Philippines, under rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
The Commissioner may, in each year, cause to be prepared and published in any
newspaper the lists containing the names and addresses of persons who have filed
income tax returns.
SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an
assessment is made in case of any list, statement or return, which in the opinion of
the Commissioner was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be recovered by any
suit, unless it is proved that the said list, statement or return was not false nor
fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.

[Impt!] SEC. 73. Distribution of dividends or Assets by Corporations. -
(A) Definition of Dividends. - The term 'dividends' (cash or property dividend;
• [Impt!] The basic principle for the taxation of distributions in liquidation is
taxable as dividend either 10% or 20% or 25% or 15%) when used in this
Title means any distribution made by a corporation to its shareholders out
of its earnings (Unrestricted Retained Earnings – this term means the
accumulated net income after the tax of the corporation which is in the
custody or is retained by the corporation and not set aside or restricted for
any particular purpose) or profits and payable to its shareholders, whether
in money or in other property.
Where a corporation distributes all of its assets (or liquidating dividend)
in complete liquidation or dissolution, the gain realized or loss sustained by
the stockholder, whether individual or corporate, is a taxable income (the
liquidation dividend is taxable not as dividend but as capital gain) or a
deductible loss, as the case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of surplus
(Unrestricted Retained Earnings – this term means the accumulated net
income after the tax of the corporation which is in the custody or is
retained by the corporation and not set aside or restricted for any
particular purpose) to capital account shall not be subject to tax. However,
if a corporation cancels or redeems stock issued as a dividend at such time
and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of
a taxable dividend, the amount so distributed in redemption or cancellation
of the stock shall be considered as taxable income to the extent that it
represents a distribution of earnings or profits.
Example:
X is one of the stockholders in Corporation A. 20 years ago, X purchased
shares of stock from said corporation at a cost of Php 10M. Today,
Corporation A was dissolved and liquidated and after having paid all the
corporate creditors, the corporation distributed all its remaining assets
to the stockholders and X received a property with FMV of Php 12M. X
realized a gain of Php 2M which is taxable as capital gain under Section
24A and not as dividend under Section 24 (B,2).
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated
Profits. - Any distribution made to the shareholders or members of a
corporation shall be deemed to have been made form 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.
(D) [Mem!] Net Income of a Partnership (ordinary or business or taxable)
Deemed Constructively Received by Partners. - The taxable income
declared (in its ITR) by a partnership for a taxable year which is subject to
tax under Section 27 (A) (30%) of this Code, after deducting the corporate
income tax imposed therein, shall be deemed to have been actually or
constructively received by the partners in the same taxable year and shall
97
be taxed (as dividend) to them in their individual capacity, whether
actually distributed or not.
that they are treated as a sale or exchange rather than as ordinary
dividends (cash or property) even thought the liquidating distributions
include earnings and profits. The stocks owned by the stockholders are the
property disposed of and the liquidating distributions whether out of
earnings or profits or other source are regarded as the proceeds of the sale
o The difference between the amount received (liquidating
dividend) from the corporation in complete liquidation of
dissolution and the cost of the shares (investment cost)
surrendered is taxable income (as capital gain) or deductible loss,
as the case may be
o In case the liquidating dividends consist of real property, its
current FMV has to be determined. The gain, if any, derived by the
stockholders consisting of the difference between the FMV of the
liquidating dividends and the adjusted cost to the stockholders of
their respective shareholdings in the corporation shall be subject
to ordinary income tax (Section 24A) at the rates prescribed for
individuals and corporations
o A corporation in complete liquidation transfers its remaining
assets
 The transfer is not considered a sale of these assets. The
corporation in liquidation does not realize any gain or loss
in a partial or complete liquidation. Since the conveyance
is without any valuable consideration, the liquidating
corporation is not subject to corporate income tax, CGT
not to VAT, or DST under Section 189. It is not subject to
VAT since it is not made in the course of trade or
business
 The receipt, however, of the liquidating dividends by the
stockholder, is a taxable gain or deductible loss, if it
results in a gain or loss, respectively. The liquidating gain
or loss is the difference between the FMV of the
properties received and the stockholder’s cost basis of
the shares. The amounts distributed in the liquidation of
a corporation are treated as payments for the shares held
by the stockholder. The liquidating gain is treated as a
gain from the sale or exchange of shares subject to the
ordinary income tax rate(s) imposed on individuals or
corporations, and not to the 5%/10% CGT rate
Example:
X is a stockholder in Corp. A and when the latter was liquidated, X
received from the corporation liquidating dividend in the form of a piece
 of land with FMV of Php 14M. The shares of stock of X which he
purchased from Corp. A 10 years ago costs Php 10M.
How much is the capital gain of X?
ANS: The capital gain realized by X is the difference between the FMV
of the land and the cost of his shares of stock or (Php 14M – Php
10M x 50%) Php 2M. The difference between the FMV of the land
and the Cost of the shares of stock is multiplied by 50% because
the holding period of the Capital Asset is more than 1 year. The
Php 2M is taxable under Section 24A if X is either RC, or NRC or
RA.
If X subsequently sells the land he received from Corp. A as
liquidating dividend, the sale shall be subject to 6% CGT if X is not
a real estate dealer or broker, because if he is, the sale is subejct
to VAT of 12%
• [VIP!] Tax treatment of stock dividend – A stock dividend is:
1. Not taxable, if the new shares confer no different rights or interest
than did the old – the new certificated plus the old, representing the
same proportionate interest in the net assets of the corporation as did
the old
2. Taxable, if it gives the shareholder a greater proportional interest in
the corporation after its distribution. Thus, if the 50% stock dividend is
payable in stock or cash, the stock dividend received by stockholders
who chose to be paid in stock instead of cash would be taxable and the
other stockholders opted to be paid in cash. If all the stockholders
opted to be paid in stock, the stock dividend is not taxable
Examples:
1. The authorized capital stock of Corp. A is 1,000,000 shares at Php
100.00 par value per share. During the first 5 years of Corp. A’s
operations it has issued 500,000 shares to its 5 stockholders as
follows:
A - 100,000 shares
B - 100,000 shares
C - 100,000 shares
D - 100,000 shares
E - 100,000 shares
500,000 shares
At the beginning of its 6th year when its unrestricted retained
earnings has a balance of Php 20M it declared 100,000 shares as
stock dividend and distributed them to each stockholder at 20,000
shares. The equity of each stockholder before the issuance of stock
dividend is (100,000 ÷ 500,000) 20% and the equity of each
stockholder after the issuance of stock dividend is (120,000 ÷
600,000) 20%
98
2. The same facts in #1 except that only A and B opted to receive
stock dividend while C, D and E opted to receive cash dividend. The
stock dividend received by A and B is taxable and the cash dividend
received by C, D and E is likewise taxable.
A and B received 20,000 shares as stock dividend, hence, their
equity in the corporation has increased from 20% to (120,000 ÷
540,000) 22.22%
• Section 73(B) lays down the general rule known as the “proportionate
test”. The general rule states that: “A stock dividend representing the
transfer surplus to the capital account shall not be subject to tax.” Strictly
speaking, stock dividends represent capital and do not constitute income to
its recipient. So that the mere issuance thereof is not yet subject to income
tax as they are nothing but an “enrichment through increase in value of
capital investment.”
• [VIP!] Intercorporate dividends or dividends received by a domestic
corporation or by a resident foreign corporation from a domestic
corporation shall not be subject to income tax; but if the recipient is a non-
resident foreign corporation, a final withholding tax at the rate of 15%
(tax sparing scheme) is imposed subject the condition that the country in
which the corporation is domiciled allows a tax credit against the taxes
deemed to have been in the Philippines
• [VIP!] Property dividends – dividends in the form of real property are
exempt from the 6% CGT on the part of the corporation which declared
and distributed the property dividend but it is taxable on the part of the
stockholder/recipient at 10% or 20% or 25% final tax to be withheld by
the corporation by requiring the stockholder/recipient to pay in cash the
dividend tax beore the deed of conveyance is executed by the corporation.
However, a certificate authorizing transfer of real property without
payment of the capital gains tax of 6% shall be secured from the RDO of
the Revenue District where the property is located before said property is
transferred in the name of the stockholder but the RDO will require proof of
payment of dividend tax
• [Impt!] Sale of property or shares received as dividends
1. Sale of real property received as dividends is taxed at 6% (if the
stockholder/recipient/seller is NOT a real estate dealer because if he
is, the sale is subject to 12% VAT and ordinary income tax under
Section 24A) based on the GSP or the current FMV, as determined in
accordance with Section 6(E), whichever is higher
2. Sale of shares of stock received as property or stock dividend is
subject to percentage tax at ½ of 1% based on the GSP or gross value
in money if the shares are listed and traded through a local stock
exchange; otherwise, the net capital gain which is not over Php
100,000.00 is subject to income tax of 5% and any amount in excess
of Php 100,000.00, at 10%
 • Shares of partners in net income of partnership (ordinary or business
or taxable) – the taxable income declared by a partnership after deducting
the 30% corporate income tax is deemed to have been actually or
constructively received by the partners in the same year although not
actually distributed to them
Chapter 12 – Quarterly Corporate Income Tax
Annual Declaration and Quarterly Payments of Income Taxes
SEC. 74. Declaration of Income Tax for Individuals. -
(A) In General. - Except as otherwise provided in this Section, every individual
subject to income tax under Sections 24 and 25(A) of this Title, who is
receiving self-employment income, whether it constitutes the sole source
of his income or in combination with salaries, wages and other fixed or
determinable income, shall make and file a declaration of his estimated
income for the current taxable year on or before April 15 of the same
taxable year. In general, self-employment income consists of the earnings
derived by the individual from the practice of profession or conduct of trade
or business carried on by him as a sole proprietor or by a partnership of
which he is a member. Nonresident Filipino citizens, with respect to income
from without the Philippines, and nonresident aliens not engaged in trade
or business in the Philippines, are not required to render a declaration of
estimated income tax. The declaration shall contain such pertinent
information as the Secretary of Finance, upon recommendation of the
Commissioner, may, by rules and regulations prescribe. An individual may
make amendments of a declaration filed during the taxable year under the
rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(B) Return and Payment of Estimated Income Tax by Individuals. - The amount
of estimated income as defined in Subsection (C) with respect to which a
declaration is required under Subsection (A) shall be paid in four (4)
installments. The first installment shall be paid at the time of the
declaration and the second and third shall be paid on August 15 and
November 15 of the current year, respectively. The fourth installment shall
be paid on or before April 15 of the following calendar year when the final
adjusted income tax return is due to be filed.
(C) Definition of Estimated Tax. - In the case of an individual, the term
'estimated tax' means the amount which the individual declared as income
tax in his final adjusted and annual income tax return for the preceding
taxable year minus the sum of the credits allowed under this Title against
the said tax. If, during the current taxable year, the taxpayer reasonable
expects to pay a bigger income tax, he shall file an amended declaration
during any interval of installment payment dates.
[Impt!] SEC. 75. Declaration of Quarterly Corporate Income Tax. - Every
corporation ([1] Domestic; [2] Ordinary or Business or Taxable Partnership; [3]
Resident Foreign Corporation) shall file in duplicate a quarterly (3 quarters)
99
summary declaration of its gross income and deductions on a cumulative basis for
the preceding quarter or quarters upon which the income tax, as provided in Title II
of this Code, shall be levied, collected and paid. The tax so computed shall be
decreased by the amount of tax previously paid or assessed during the preceding
quarters and shall be paid not later than sixty (60) days from the close of each of
the first three (3) quarters of the taxable year, whether calendar or fiscal year.
SEC. 76. Final Adjustment Return. - Every corporation ([1] Domestic; [2]
Ordinary or Business or Taxable Partnership; [3] Resident Foreign Corporation)
liable to tax under Section 27 shall file a final adjustment (the 4th ITR) return
covering the total taxable income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments (3 quarters) made during the said taxable year
is not equal to the total tax due on the entire taxable income of that year, the
corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess (of payments for the 3 quarters over the tax due for
the whole year and this will happen only if the corporation sustained or
suffered a loss during the last quarter) as tax credit; or
(C) Be credited or refunded with the excess amount paid (the corporation must
file a written claim for tax credit or tax refund with the CIR within 2 years
from the filing of the final adjustment return), as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its final
adjustment return may be carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once
the option to carry-over and apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding taxable years has been made,
such option shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be allowed
therefor.
SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax.
(A) Place of Filing. -Except as the Commissioner other wise permits, the
quarterly income tax declaration required in Section 75 and the final
adjustment return required I Section 76 shall be filed with the authorized
agent banks or Revenue District Officer or Collection Agent or duly
authorized Treasurer of the city or municipality having jurisdiction over the
location of the principal office of the corporation filing the return or place
where its main books of accounts and other data from which the return is
prepared are kept.
(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration
shall be filed within sixty (60) days following the close of each of the first
three (3) quarters of the taxable year. The final adjustment return shall be
filed on or before the fifteenth (15th) day of April of the following year if on
a Calendar year basis, or on or before the fifteenth (15th) day of the fourth
(4th) month following the close of the fiscal year if on a fiscal year basis
example: if the fiscal year of the corporation starts April 1 it will end on
 March 31 of the following year and the final adjustment return shall be filed (B) [Read!] Payroll Period. - The term 'payroll period' means a period for which
on or before July 15, as the case may be. payment of wages is ordinarily made to the employee by his employer, and
the term 'miscellaneous payroll period' means a payroll period other than,
(C) Time of Payment of the Income Tax. - The income tax due on the corporate a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual,
quarterly returns and the final adjustment income tax returns computed in or annual period.
accordance with Sections 75 and 76 shall be paid at the time the
declaration or return is filed in a manner prescribed by the Commissioner. (C) Employee. - The term 'employee' refers to any individual who is the
recipient of wages and includes an officer, employee or elected official of
the Government of the Philippines or any political subdivision, agency or
• Under Section 76, the corporation, in case of excess tax payments, has the
instrumentality thereof. The term 'employee' also includes an officer of a
option to file claims for refund or tax credit. The amendment by RA No.
corporation.
8424 gives the taxpayer also the option to carry-over and apply the excess
quarterly income tax against the income tax due for the taxable quarters of
(D) Employer. - The term 'employer' means the person for whom an individual
the succeeding taxable years. Such option when exercised shall be
performs or performed any service, of whatever nature, as the employee of
considered irrevocable for the whole amount of the excess income tax for
such person, except that:
that taxable period and no cash refund or tax credit may be availed of
(1) If the person for whom the individual performs or performed any
• The 2 year prescriptive period (to claim tax refund or tax credit) provided
service does not have control of the payment of the wages for such
in Section 229 should be counted from the filing of the Adjustment Return
services, the term 'employer' (except for the purpose of
or Annual Income Tax Return and final payment of income tax, if any
Subsection(A) means the person having control of the payment of
such wages; and
Chapter 13 – Withholding on Wages
(2) In the case of a person paying wages on behalf of a nonresident alien
individual, foreign partnership or foreign corporation not engaged in
SEC. 78. Definitions. - As used in this Chapter:
trade or business within the Philippines, the term 'employer' (except
for the purpose of Subsection(A) means such person.
(A) Wages. - The term 'wages' means all remuneration (other than fees paid
to a public official) for services performed by an employee for his
SEC. 79. Income Tax Collected at Source.-
employer, including the cash value of all remuneration paid in any medium
other than cash, except that such term shall not include remuneration
(A) Requirement of Withholding. – Except in the case of a minimum wage
paid:
earner (exempt from income tax) as defined in Section 22(HH) of this
Code, every employer making payment of wages shall deduct and withhold
(1) For agricultural labor paid entirely in products of the farm where the
upon such wages a tax determined in accordance with the rules and
Withholding is labor is performed, or
regulations to be prescribed by the Secretary of Finance, upon
not required
but the recommendation of the Commissioner.
recipient of
(2) For domestic service in a private home, or
the wage or (B) Tax Paid by Recipient. - If the employer, in violation of the provisions of
salary may or (3) For casual labor not in the course of the employer's trade or
may not be this Chapter, fails to deduct and withhold the tax as required under this
business, or
subject to Chapter, and thereafter the tax against which such tax may be credited is
income tax paid by the employee, the tax so required to be deducted and withheld
(4) For services by a citizen or resident of the Philippines for a foreign
shall not be collected from the employer; but this Subsection shall in no
government or an international organization.
case relieve the employer from liability for any penalty or addition to the
tax otherwise applicable in respect of such failure to deduct and withhold.
[Read!] If the remuneration paid by an employer to an employee for
services performed during one-half (1/2) or more of any payroll period of
(C) Refunds or Credits. –
not more than thirty-one (31) consecutive days constitutes wages, all the
remuneration paid by such employer to such employee for such period
(1) Employer. - When there has been an overpayment of tax under this
shall be deemed to be wages; but if the remuneration paid by an employer
Section, refund or credit shall be made to the employer only to the
to an employee for services performed during more than one -half (1/2) of
extent that the amount of such overpayment was not deducted and
any such payroll period does not constitute wages, then none of the
withheld hereunder by the employer (this means that the Er assumed
remuneration paid by such employer to such employee for such period
the income tax of the employee).
shall be deemed to be wages.

100
 (2) Employees. -The amount deducted and withheld under this Chapter
during any calendar year shall be allowed as a credit to the recipient
of such income against the tax imposed under Section 24(A) of this
Title. Refunds and credits in cases of excessive withholding shall be
granted under rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall
be returned (or refunded) or credited within three (3) months from the
fifteenth (15th) day of April. Refunds or credits made after such time shall
earn interest at the rate of six percent (6%) per annum, starting after the
lapse of the three-month period to the date the refund of credit is made.
Refunds shall be made upon warrants (treasury warrants or government
checks) drawn by the Commissioner or by his duly authorized
representative without the necessity of counter-signature by the Chairman,
Commission on Audit or the latter's duly authorized representative as an
exception to the requirement prescribed by Section 49, Chapter 8, Subtitle
B, Title 1 of Book V of Executive Order No. 292, otherwise known as the
Administrative Code of 1987.
(D) Personal Exemptions. –
(1) In General. - Unless otherwise provided by this Chapter, the personal
and additional exemptions applicable under this Chapter shall be
determined in accordance with the main provisions of this Title.
(2) Exemption Certificate. –
(a) When to File. - On or before the date of commencement of
employment with an employer, the employee shall furnish the
employer with a signed withholding exemption certificate
relating to the personal and additional exemptions to which he
is entitled.
(b) Change of Status. - In case of change of status of an employee
as a result of which he would be entitled to a lesser (one of
the qualified dependent children becomes disqualified such as
by marriage or reaching the age of 21 or becoming gainfully
employed, but the lesser exemption will not be in the year of
disqualification but in the succeeding year because
disqualification of a dependent child is deemed to occur at the
end of the year) or greater (birth of a child during the year)
amount of exemption, the employee shall, within ten (10) days
from such change, file with the employer a new withholding
exemption certificate reflecting the change.
(c) Use of Certificates. - The certificates filed hereunder shall be
used by the employer in the determination of the amount of
taxes to be withheld.
(d) Failure to Furnish Certificate. - Where an employee, in violation
of this Chapter, either fails or refuses to file a withholding
101
exemption certificate, the employer shall withhold the taxes
prescribed under the schedule for zero exemption (for QDC
[qualified dependent children]) of the withholding tax table
determined pursuant to Subsection (A) hereof.
(E) Withholding on Basis of Average Wages. - The Commissioner may, under
rules and regulations promulgated by the Secretary of Finance, authorize
employers to:
(1) estimate the wages which will be paid to an employee in any quarter
of the calendar year;
(2) determine the amount to be deducted and withheld upon each
payment of wages to such employee during such quarter as if the
appropriate average of the wages so estimated constituted the actual
wages paid; and
(3) deduct and withhold upon any payment of wages to such employee
during ;such quarter such amount as may be required to be deducted
and withheld during such quarter without regard to this Subsection.
(F) [Impt!] Husband and Wife. - When a husband and wife each are recipients
of wages, whether from the same or from different employers, taxes to be
withheld shall be determined on the following bases:
(1) The husband shall be deemed the head of the family and proper
claimant of the additional exemption in respect to any dependent
children, unless he explicitly waives his right in favor of his wife in
the withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the wife in accordance
with the schedule for zero exemption of the withholding tax table
prescribed in Subsection (D)(2)(d) hereof.
(G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged
in trade or business in the Philippines shall be subject to the provisions of
this Chapter.
(H) Year-end Adjustment. - On or before the end of the calendar year but prior
to the payment of the compensation for the last payroll period (Dec. 16 to
Dec. 31), the employer shall determine the tax due from each employee on
taxable compensation income for the entire taxable year in accordance
with Section 24(A). The difference between the tax due from the employee
for the entire year and the sum of taxes withheld from January to
November or Dec. 15 shall either be withheld from his salary in December
of the current calendar year or refunded (by the Er to the employee, this is
the reason why the BIR does not refund to the Ee) to the employee not
later than January 25 of the succeeding year.
• The withholding tax on wages is not applicable and effective abroad and
does not apply to foreign-sourced income or wages of non-resident citizen
contract workers because the provisions of the NIRC do not apply to
 foreign employers or the Philippines has no jurisdiction over foreign
employers. It applies only to wages or income derived from sources within
the Philippines
• Requisites of withholding tax on wages
1. Employer-employee relationship
2. Payment (actual or constructive) of wages for services rendered
3. Payroll Period
• Casual labor includes labor which is occasional, incidental or irregular
• The emergency allowance received by an employee forms part of his gross
compensation income and, hence, subject to income tax. Accordingly, it is
subject to withholding tax
• Loyalty Cash Award
Since loyalty cash award is similar to a bonus, which means a sum of
money over and above the usual current or stipulated wages/salaries of
officials and employees, it is considered as remuneration for services
performed by the officials/employees for the employer; hence, taxable
income subject to withholding tax
• [VIP!] Terminal Leave Pay (it is in the nature of retirement benefit) –
such pay received by a government official or employee is not subject to
income tax
[VIP!] SEC. 80. Liability for Tax. –
(A) Employer. - The employer shall be liable (or responsible) for the
withholding and remittance of the correct amount of tax required to be
deducted and withheld under this Chapter. If the employer fails to withhold
and remit the correct amount of tax as required to be withheld under the
provision of this Chapter, such tax shall be collected from the employer
together with the penalties or additions to the tax otherwise applicable in
respect to such failure to withhold and remit.
(B) Employee. - Where an employee 1fails or refuses to file the withholding
exemption certificate or 2willfully supplies false or inaccurate information
thereunder, the tax otherwise required to be withheld (this is applicable
only to #2 such as when the employee states that he has 4 QDC when in
truth he only has 2 because in #1 it will result to excess taxes withheld
since the employee will fall under 0-exemption for QDC) by the employer
shall be collected from him (employee) including penalties or additions to
the tax from the due date of remittance until the date of payment. On the
other hand, excess taxes withheld made by the employer due to:
(1) failure or refusal to file the withholding exemption certificate; or
(2) false and inaccurate information shall not be refunded (such as when
the employee declared that he has 2 QDC instead of 4) to the
employee but shall be forfeited in favor of the Government.
102
SEC. 81. Filing of Return and Payment of Taxes Withheld. - [Read!] Except as the
Commissioner otherwise permits, taxes deducted and withheld by the employer on
wages of employees shall be covered by a return and paid to an authorized agent
bank; Collection Agent, or the duly authorized Treasurer of the city or municipality
where the employer has his legal residence or principal place of business, or in case
the employer is a corporation, where the principal office is located.
The return (withholding tax return [filed by Er]) shall be filed and the payment
made within twenty-five (25) days from the close of each calendar quarter:
Provided, however, That the Commissioner may, with the approval of the
Secretary of Finance, require the employers to pay or deposit the taxes deducted
and withheld at more frequent intervals (under the present rules and regulations Ers
are required to withhold tax on wages monthly and the return must be filed and the
tax must be paid within 10 days after the end of each month except December
where the return must be filed and the tax must be paid on or before January 25),
in cases where such requirement is deemed necessary to protect the interest of the
Government.
The taxes deducted and withheld by employers shall be held in a special fund in
trust for the Government until the same are paid to the said collecting officers.
SEC. 82. Return and Payment in Case of Government Employees. - If the employer
is the Government of the Philippines or any political subdivision, agency or
instrumentality thereof, the return of the amount deducted and withheld upon any
wage shall be made by the officer or employee (such as the treasurer) having
control of the payment of such wage, or by any officer or employee duly designated
for the purpose (such as accountant).
SEC. 83. Statements and Returns. -
(A) [Read!] Requirements. - Every employer required to deduct and withhold a
tax shall furnish to each such employee in respect of his employment
during the calendar year, on or before January thirty-first (31st) of the
succeeding year, or if his employment is terminated before the close of
such calendar year, on the same day of which the last payment of wages is
made, a written statement confirming the wages paid by the employer to
such employee during the calendar year, and the amount of tax deducted
and withheld under this Chapter in respect of such wages. The statement
required to be furnished by this Section in respect of any wage shall
contain such other information, and shall be furnished at such other time
and in such form as the Secretary of Finance, upon the recommendation of
the Commissioner, may, by rules and regulation, prescribe.
(B) [Impt!] Annual Information Returns. - Every employer required to
deduct and withhold the taxes in respect of the wages of his employees
shall, on or before January thirty-first (31st) of the succeeding year,
submit to the Commissioner an annual information return (Alpha List)
containing a list of employees, the total amount of compensation income of
each employee, the total amount of taxes withheld therefrom during the
year, accompanied by copies of the statement referred to in the preceding
paragraph, and such other information as may be deemed necessary. This
return, if made and filed in accordance with rules and regulations
 promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, shall be sufficient compliance with the requirements of
Section 68 of this Title in respect of such wages.

(C) Extension of time. - The Commissioner, under such rules and regulations
as may be promulgated by the Secretary of Finance, may grant to any
employer a reasonable extension of time to furnish and submit the
statements and returns required under this Section.

• Taxes deducted and withheld on compensation income shall be remitted

within 10 days after the end of each calendar month with the filing of the
appropriate return. However, taxes withheld from the last compensation
payment for the calendar year (December) shall be remitted on or before
the 25th of January of the succeeding year

• RATA is not taxable

• Like RATA, personnel economic relief assistance (PERA) is not taxable;

hence, not subject to withholding tax

• The cash equivalent of vacation leave credits and accumulated leave

credits given to company’s employees by reason of compulsory retirement
or termination of employment for cause beyond the control of the said
employees are not subject to income tax and, consequently, to withholding
tax

[Happens if there is a CBA in private companies]

103
 TITLE 3 • In the schedule, the Php 200,000.00 exemption is already deducted where
the value of the (taxable) net estate is more than Php 200,000.00 but not
[BAR!] ESTATE AND DONOR’S TAXES
more than Php 500,000.00. Hence, it should not be deducted anymore.

Chapter 1 – Estate Tax SEC. 85. Gross Estate. - The value of the gross estate of the decedent shall be
determined by including the value (Fair Market Value) at the time of his death
SEC. 84. Rates of Estate Tax. There shall be levied, assessed, collected and paid
(even if the property is received or is to accrue after the death of the decedent such
upon the transfer of the net estate as determined in accordance with Sections 85
as proceeds of life insurance and death benefits, said property is included in the
and 86 of every decedent (Filipino citizen or alien), whether resident or
gross estate) of all property, real or personal, tangible or intangible, wherever
nonresident of the Philippines, a tax based on the value (FMV at the time of death)
situated: Provided, however, that in the case of a nonresident alien decedent who
of such net estate, as computed in accordance with the following schedule:
at the time of his death was not a citizen of the Philippines, only that part of the
entire gross estate which is situated in the Philippines shall be included in his
If the net estate is:
taxable estate.
wherever situated:
But Not The Tax shall Of the Excess Classification of decedents
Over Plus
Over be Over – Location of property to be included in gross estate
1. Resident Citizen - wherever situated
P 200,000 Exempt 2. Non-resident Citizen - wherever situated
3. Resident Alien - wherever situated
P 200,000 550,000 0 5% P 200,000 4. Non-resident Citizen - only property located in the Philippines

500,000 2,000,000 P 15,000 8% 500,000 (A) Decedent's Interest (Equity or claim). - To the extent of the interest
therein of the decedent at the time of his death;
2,000,000 5,000,000 135,000 11% 2,000,000
[VIP!] [Section 85A refers to properties absolutely and exclusively owned
5,000,000 10,000,000 465,000 15% 5,000,000 by the decedent at the time of his death]

10,000,000 And Over 1,215,000 20% 10,000,000 [Impt!] [Section 85A refers to properties absolutely and exclusively owned
by the decedent at the time of his death including equities or claims or
interests in properties such as share in a partnership where he is a co-
owner, naked ownership in a property the usufruct of which belongs to
Example: another, usufruct in property the naked ownership belongs to another
If the net estate is Php 8M the estate tax is: person, and absolute community properties or conjugal properties of the
decedent and his surviving spouse]
First Php 5M Php 465,000.00
EXCESS (Php 8M – Php 5M x 15%) 450,000.00 (B) Transfer in Contemplation of Death. - To the extent of any interest
ESTATE TAX Php 915,000.00 therein of which the decedent has at any time (during his lifetime) made a
transfer, by trust or otherwise (by donation), in contemplation of or
• [Impt!] Taxes upon the gratuitous disposition of property are known as intended to take effect in possession or enjoyment at or after death, or of
transfer taxes. Under the Tax Code, they are the estate tax, donor’s tax. which he has at any time made a transfer, by trust or otherwise, under
They are excise (or privilege) taxes which he has retained for his life or for any period which does not in fact
end before his death (1) the possession or enjoyment of, or the right to the
• [Mem!] Estate tax is the tax on the right to transmit property at death income from the property, or (2) the right, either alone or in conjunction
and on certain transfers by the decedent during his lifetime which are with any person, to designate the person who shall possess or enjoy the
made by the law the equivalent of testamentary dispositions property or the income therefrom; except in case of a bonafide sale for an
adequate and full consideration in money or money's worth.
• Php 200,000.00 (deduction after the net estate of decedent) should not be
included in computing the estate tax because the amounts under the Example:
column “the tax shall be” in Section 84 were arrived at after deducting the A consulted his doctor on Jan. 2, 2013 and the findings revealed that
Php 200,000.00 exemption A’s life will probably last for not more than 6 months immediately
thereafter, A donated his farmland to B because of fear of his

104
 impending death but he retained for himself the possession and
enjoyment of the said farmland until his death.
On Jan. 28, 2014, A died.
The farmland is part of the gross estate of A which is called transfer in
contemplation of death
(C) Revocable Transfer. –
(1) To the extent of any interest therein, of which the decedent has at
any time made a transfer (except in case of a bona fide sale for an
adequate and full consideration in money or money's worth) by trust
or otherwise, where the enjoyment thereof was subject at the date of
his death to any change through the exercise of a power (in whatever
capacity exerciseable) by the decedent alone or by the decedent in
conjunction with any other person (without regard to when or from
what source the decedent acquired such power), to alter, amend,
revoke, or terminate, or where any such power is relinquished in
contemplation of the decedent's death.
(2) For the purpose of this Subsection, the power to alter, amend or
revoke shall be considered to exist on the date of the decedent's
death even though the exercise of the power is subject to a precedent
giving of notice or even though the alteration, amendment or
revocation takes effect only on the expiration of a stated period after
the exercise of the power, whether or not on or before the date of the
decedent's death notice has been given or the power has been
exercised. In such cases, proper adjustment shall be made
representing the interests which would have been excluded from the
power if the decedent had lived, and for such purpose if the notice
has not been given or the power has not been exercised on or before
the date of his death, such notice shall be considered to have been
given, or the power exercised, on the date of his death.
Example:
Dec. 24, 2010
To A:
I hereby donate to you my apartment lot and building and you may
take possession and administer the same as well as to receive the
rentals therefrom. However, should you prove unfit or unworthy as
beneficiary/donee, I shall revoke this donation.
Sgd B
On Jan. 28, 2014, B died.
The apartment lot and building are part of the gross estate of B, which
is called revocable transfer
[The gross estate of the decedent consist of his exclusive properties and
the absolute community properties or conjugal properties of the decedent
105
and his surviving spouse, but ultimately, the net share of the surviving
spouse is deducted from the gross estate]
(D) Property Passing Under General Power of Appointment. - To the
extent of any property passing under a general power of appointment
exercised by the decedent: (1) by will, or (2) by deed executed in
contemplation of, or intended to take effect in possession or enjoyment at,
or after his death, or (3) by deed under which he has retained for his life or
any period not ascertainable without reference to his death or for any
period which does not in fact end before his death (a) the possession or
enjoyment of, or the right to the income from, the property, or (b) the
right, either alone or in conjunction with any person, to designate the
persons who shall possess or enjoy the property or the income therefrom;
except in case of a bona fide sale for an adequate and full consideration in
money or money's worth.
Example:
(There must be 2 decedents)
Jan. 2, 2010
To B:
I am donating to you my commercial lot and building and you are
hereby authorized to designate any person of your choice to be the
ultimate donee/beneficiary of said property. In the meantime, you may
enjoy the ownership of said property.
Sgd A
On Jan. 2, 2014, A died.
The commercial lot and building are NOT part of the gross estate of A
because the transfer made to B is neither a transfer in contemplation of
death nor a revocable transfer
Jan. 12, 2014
To C:
I hereby deisgnate you as the ultimate donee/beneficiary of the
commercial lot and building which were previously donated to me by A
and you may take possession and enjoyment of said property after my
death.
Sgd B
On Nov. 30, 2014, B died.
The commercial lot and building are part of the gross estate of B
(E) [BAR!] Proceeds of Life Insurance. - To the extent of the amount
receivable by the estate of the deceased, his executor, or administrator, as
insurance under policies taken out by the decedent upon his own life,
irrespective of whether or not the insured retained the power of revocation,
or to the extent of the amount receivable by any beneficiary designated in
 the policy of insurance, except when it is expressly stipulated that the
designation of the beneficiary is irrevocable.
Example:
When is the proceeds of the life insurance part of the GE of the decedent?
ANS:
1. Beneficiary designated is the estate, executor or adminitrator,
whether the designation is revocable or irrevocable
2. Beneficiary designated is other than the estate, executor or
administrator, such as spouse and/or children of the decedent, if
the designation is revocable
When is the proceeds of life insurance NOT part of the GE of the
decedent?
ANS: If the beneficiary designated is other than the estate or
administrator or executor, such as spouse and/or children of the
decedent and the designation is irrevocable
(F) Prior Interests. - Except as otherwise specifically provided therein,
Subsections (B), (C) and (E) of this Section shall apply to the transfers,
trusts, estates, interests, rights, powers and relinquishment of powers, as
severally enumerated and described therein, whether made, created,
arising, existing, exercised or relinquished before or after the effectivity of
this Code.
(G) Transfers of Insufficient Consideration. - If any one of the transfers,
trusts, interests, rights or powers enumerated and described in
Subsections (B), (C) and (D) of this Section is made, created, exercised or
relinquished for a consideration in money or money's worth, but is not a
bona fide sale for an adequate and full consideration in money or money's
worth, there shall be included in the gross estate only the excess of the fair
market value, at the time of death, of the property otherwise to be
included on account of such transaction, over the value of the
consideration received therefor by the decedent.
Example:
In 2009, when the FMV of the land of A was Php 4M, he sold it to B for
Php 2M. When A died in 2014, its FMV was Php 5M. How much will be
included in the gross estate of A?
ANS: To be included in the gross estate of A is the FMV of the land at
the time of his death which is Php 5M MINUS the consideration
received which is Php 2M or Php 3M.
Section 85 B, C, D and G refer to properties already transferred by the
decedent to other persons during his lifetime and therefore, no longer his
at the time of his death, but are considered by law as part of and should be
included in his gross estate.
106
(H) Capital of the Surviving Spouse. - The capital exclusive property (share of
the surviving spouse in the community properties or conjugal properties is
included in the gross estate of the decedent/spouse but the net share in
the community properties or conjugal properties is deducted) of the
surviving spouse of a decedent shall not, for the purpose of this Chapter,
be deemed a part of his or her gross estate.
• [Impt!] Transfer Inter Vivos – the gross estate of a decedent for
purposes of the estate tax may exceed the actual value of his assets at the
time of his death as it includes the value of transfers of property or interest
in property made by him during his lifetime which partake of the nature of
testamentary dispositions. These transfers inter vivos may be grouped as
follows:
Section 1. Transfers in contemplation of death
85(A)
2. Transfers with retention or reservation of certain rights
3. Revocable transfers
4. Transfers of property arising under a general power of appointment
5. Transfers for insufficient consideration
The purpose of the law is to reach such transfers and thus prevent the
avoidance of the estate tax
• [Impt!] Transfers in contemplation of death – the words mean that it is
the thought of death, as a controlling motive, which induces the disposition
of the property for the purpose of avoiding the tax (estate)
• Circumstances taken into account – the following are examples of
circumstances which may be taken into consideration (by the BIR) in
determining whether the transfer was made in contemplation of death:
1. Age and state of health of the decedent at the time of the gift (or
transfer), especially where he was aware of a serious illness
2. Length of time between the gift and the date of death. A short interval
suggests the conclusion that the thought of death was in the
decedent’s mind, and a long interval suggests the opposite
3. Concurrent making of a will or making a will within a short time after
the transfer
• Power of appointment – it refers to a right to designate the person or
persons who shall enjoy or possess certain property (the ultimate or
second donee/s) from the estate of a prior decedent
1. It is general when it authorizes the donee (first donee) (decedent
[present or second donee]) to appoint any person he pleases,
including himself (the first donee may execute an affidavit of self-
adjudication), thus having as full dominion over the property as
though he owned it
 2. It is special when he can appoint only among a restricted or
designated class or persons other than himself
If it is general, a power makes the appointed property for most purposes a
part of the donee’s (first donee) property. Property which passes under a
special power of appointment is not includible in the gross estate of the
first donee/second decedent
• [BAR!] Life insurance proceeds – the designation of a beneficiary in a
life insurance policy is presumed to be revocable; hence, the insurance
proceeds are includible in the gross estate of the insured upon his death,
even if he failed to exercise his right to revoke the designation. Said
proceeds are, therefore, subject to estate tax whoever is beneficiary
whether the estate, executor or administrator of the decedent or the
beneficiary is other than the estate, executor or administrator of the
decedent, such as spouse or children
They are not considered as part of the decedent’s estate, and therefore,
not subject to estate tax only when it is expressly stipulated in the policy
that such designation is irrevocable and the beneficiary is other than the
estate, his executor or administrators
SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this
Chapter, the value of the net estate shall be determined:
(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case
of a citizen (resident or non-resident) or resident (alien) of the Philippines,
by deducting from the value of the gross estate -
(1) Expenses, Losses, Indebtedness, and taxes. - Such amounts –
The cash or
(a) For actual funeral expenses or in an amount equal to five
amounts
disbursed must percent (5%) of the gross estate, whichever is lower, but in
be included in no case to exceed Two hundred thousand pesos (P200,000);
the gross
estate; hence, if
these expenses [Actual funeral expenses or 5% of gross estate or Php
are paid by a 200,000.00, whichever is lowest]
relative the
same are not
deductible (b) For judicial expenses of the testamentary or intestate
proceedings;
Examples:
1. The actual funeral expenses amount to Php 1M while the
gross estate is Php 10M. How much is the allowable
deduction as funeral expenses?
ANS: The actual funeral expenses amount to Php 1M,
5% of the gross estate is (Php 10M x 5%) Php
500,000.00 while the maximum is Php 200,000.00,
therefore, the allowable deduction is Php 200,000.00
which is the lowest among the 3 amounts
107
2. The actual funeral expenses amount to Php 500,000.00
while the gross estate is Php 3M. How much is the
allowable deduction as funeral expenses?
ANS: The actual funeral expenses amount to Php
500,000.00, 5% of the gross estate is (Php 3M x 5%0
Php 150,000.00 while the maximum amount if Php
200,000.00. Therefore, the allowable deduction is Php
150,000.00 which is the lowest among the 3 amounts.
(c) For claims (or payables or liabilities of the decedent) against
the estate: Provided, That at the time the indebtedness was
incurred the debt instrument (such as promissory note) was
duly notarized and, if the loan was contracted within three (3)
years before the death of the decedent, the administrator or
executor shall submit a statement showing the disposition of
the proceeds of the loan;
[The purpose of the law is to prevent claims against the estate
which are fictitious]
(d) For claims of the deceased against insolvent persons (or
receivables which are uncollectible or simple bad debts) where
the value of decedent's interest therein is included in the value
of the gross estate; and
[In order that bad debts may be deducted the receivables
must be included in the gross estate]
(e) For unpaid mortgages upon, or any indebtedness in respect to,
property (such as unpaid balance of property purchased by the
decedent) where the value of decedent's interest therein,
undiminished by such mortgage or indebtedness, is included in
the value of the gross estate, but not including any 1income
tax upon income received after the death of the decedent, or
2
property taxes not accrued before his death, or any 3estate
tax. The deduction herein allowed in the case of claims against
the estate, unpaid mortgages or any indebtedness shall, when
founded upon a promise or agreement, be limited to the extent
that they were contracted bona fide and for an adequate and
full consideration in money or money's worth. 4There shall also
be deducted losses incurred during the settlement (the
property which was damaged or lost was still existing at the
time of death, hence, included in the gross estate) of the
estate arising from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement, when
1
such losses are not compensated for by insurance or
otherwise, and if 2at the time of the filing of the return (estate
tax return) such losses have not been claimed as a deduction
for the income tax purposes in an income tax return, and
provided that 3such losses were incurred not later than the last
day for the payment of the estate tax (6 months from
 decedent’s death as a rule) as prescribed in Subsection (A) of
Section 91.
[Income tax that accrued before death and real property taxes
that accrued before death of the decedent are allowable
deductions but estate tax is always NOT deducible]
(2) [BAR!] [VVIP!] Property Previously Taxed (or Vanishing
Deduction). - An amount equal to the value specified below of 1any
property forming a part of the gross estate 2situated in the Philippines
of any person who died (previous or prior decedent) 3within five (5)
years prior to the death of the decedent (present), or transferred to
the decedent by gift within five (5) years prior to his (decedent)
death, 4where such property can be identified as having been
received by the decedent from the donor by gift, or from such prior
decedent by gift, bequest, devise or inheritance (or legitime), or
which can be identified as having been acquired in exchange for
property so received:
Whichever is lower
One hundred percent (100%) of the value, if the prior decedent died
within one (1) year prior to the death of the present decedent, or if To be included in
the property was transferred to him (present decedent) by gift within the gross estate of
the present
the same period prior to his (present decedent) death; decedent is the
FMV of the
Eighty percent (80%) of the value, if the prior decedent died more property at the
time of his death.
than one (1) year but not more than two (2) years prior to the death For purposes of
of the present decedent, or if the property was transferred to him by computing the
gift within the same period prior to his death; vanishing
deduction the
amount to be
Sixty percent (60%) of the value, if the prior decedent died more shown as PPT is
than two (2) years but not more than three (3) years prior to the the FMV at the
time of the death
death of the present decedent, or if the property was transferred to of the prior
him by gift within the same period prior to his death; decedent or the
FMV at the time of
the death of the
Forty percent (40%) of the value, if the prior decedent died more present decedent,
than three (3) years but not more than four (4) years prior to the whichever is lower
death of the present decedent, or if the property was transferred to
him by gift within the same period prior to his death;
Twenty percent (20%) of the value, if the prior decedent died more
than four (4) years but not more than five (5) years prior to the
death of the present decedent, or if the property was transferred to
him by gift within the same period prior to his death;
Example:
On June 1, 2012 the father of A died and the latter received as
inheritance a parcel of land with FMV of Php 8M. On said date the
land was mortgaged with a bank and A paid the mortgage
indebtedness together with the interest thereon on March 31,
2013 in the amount of Php 2M. The estate tax on the properties
left by A’s father was paid by his executor on Dec. 18, 2012 the (3) Transfers for Public Use. - The amount of all the bequests,
gross estate of A at the time of his death on Dec. 10, 2014 is Php
50M which includes the said parcel of land with FMV of Php 9M as
108
of Dec. 10, 2014. The expenses, losses, indebtedness and taxes
pertaining to A’s estate amount to Php 7M and the will of A
provides that a parcel of land with FMV of Php 3M be devised to
the government of Naga City exclusively for public purposes.
Compute the vanishing deduction from the gross estate of A
SOLUTION:
Value of PPT Php 8M
LESS: Mortgage indebtedness paid by A 2M
Initial basis Php 6M
LESS: Second deduction (Php 6M ÷ Php 50M × Php 10M) 1.2 M
Final Basis Php 4.8 M
Rate of Deduction 60%
Vanishing Deduction or PPT Php 2,880,000.00
These This deductions shall be allowed only where a 5donor's tax or
estate tax imposed under this Title was finally determined and paid
by or on behalf of such donor, or the estate of such prior decedent,
as the case may be, and 6only in the amount finally determined as
the value of such property in determining the value of the gift, or the
gross estate of such prior decedent, and only to the extent that the
value of such property is included in the present decedent's gross
estate, and 7only if in determining the value of the estate of the prior
decedent, no deduction was allowable under paragraph (2) in respect
of the property or properties given in exchange therefor. Where a
deduction was allowed of any mortgage or other lien in determining
the donor's tax, or the estate tax of the prior decedent, which was
paid in whole or in part prior to the decedent's death, then the
deduction allowable under said Subsection shall be reduced by the
amount so paid. Such deduction allowable shall be reduced by an
amount which bears the same ratio to the amounts allowed as
deductions under paragraphs (1) and (3) of this Subsection as the
amount otherwise deductible under said paragraph (2) bears to the
value of the decedent's estate. Where the property referred to
consists of two or more items, the aggregate value of such items
shall be used for the purpose of computing the deduction.
[Vanishing deduction can only be availed of once]
Example:
A died in 2008 and he left a parcel of land to his son B. B died in
2011 and the estate of B claimed vanishing deduction with respect
to the property inherited by B from A. In 2014 C, who inherited
from his father B the property which B inherited from A, died. The
estate of C can no longer claim Vanishing deduction with respect
to the property he inherited from B who in turn inherited the
property from A
legacies, devises or transfers to or for the use of the Government of
 the Republic of the Philippines, or any political subdivision thereof, for
exclusively public purposes.
[The property given by the decedent to the gov’t must be included in
his gross estate]
[The transfer made by the decedent to the gov’t must either be in his
will or a separate document or instrument but in the latter’s case the
document or instrument must conform to the formalities of a will]
(4) The Family Home. - An amount equivalent to the current fair
market value of the decedent's family home: Provided, however,
That if the said current fair market value exceeds One million pesos
(P1,000,000), the excess shall be subject to estate tax. As a sine qua
non condition for the exemption or deduction, said family home must
have been the decedent's family home as certified by the barangay
captain of the locality.
Examples:
1. If the current FMV of the family home is Php 2M, the amount
to be shown as part of the gross estate is Php 2M and as part
of the allowable deductions Php 1M.
2. If the current FMV of the family home is Php 800,000.00, the
amount to be shown as part of the gross estate is Php
800,000.00 and as part of allowable deductions Php
800,000.00.
(5) Standard Deduction (in addition to not in lieu of the itemized
deductions). - An amount equivalent to One million pesos
(P1,000,000).
(6) Medical Expenses. - Medical Expenses incurred (suppose the
medical expenses had already been paid at the time of the decedent’s
death and therefore the amount could have no longer be included in
his gross estate, is the amount deductible? ANS: It is believed that
the answer is YES) by the decedent within one (1) year prior to his
death which shall be duly substantiated with receipts: Provided,
That in no case shall the deductible medical expenses exceed Five
Hundred Thousand Pesos (P500,000). Actual medical expenses or Php
500,000.00, whichever is lower
(7) Amount Received by Heirs Under Republic Act No. 4917. - Any
amount received by the heirs from the decedent - employee as a
consequence of the death of the decedent-employee in accordance
with Republic Act No. 4917: Provided, That such amount is included
in the gross estate of the decedent.
(8) Net share of the surviving spouse in the Community Properties
or Conjugal Properties (Section 86C). (Community properties or
conjugal properties MINUS allowable deductions chargeable to the
community properties or conjugal properties = net community
109
properties or net conjugal properties DIVIDE by 2 = net share of the
surviving spouse)
(B) Deductions Allowed to Nonresident Estates Alien Decedents. - In the
case of a nonresident (not deductible are: (1) family home, (2) standard
deduction, (3) medical expenses, (4) death benefits) not a citizen of the
Philippines, by deducting from the value of that part of his gross estate
which at the time of his death is situated in the Philippines:
(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of
the deductions specified in paragraph (1) of Subsection (A) of this
Section which the value of such part (the gross estate situated in
the Philippines) bears to the value of his entire gross estate wherever
situated;
[If the gross estate located in the Phils. of the non-resident alien
decedent is Php 10M while his entire or world gross estate is Php 50M
and the total expenses, losses, indebtedness and taxes is Php 8M the
allowable deduction is (Php 10M ÷ Php 50M x Php 8M) Php 1.6M]
(2) Property Previously Taxed (or Vanishing Deduction). - An amount
equal to the value specified below of any property forming part of the
gross estate situated in the Philippines of any person who died within
five (5) years prior to the death of the decedent, or transferred to the
decedent by gift within five (5) years prior to his death, where such
property can be identified as having been received by the decedent
from the donor by gift, or from such prior decedent by gift, bequest,
devise or inheritance, or which can be identified as having been
acquired in exchange for property so received:
One hundred percent (100%) of the value if the prior decedent died
within one (1) year prior to the death of the decedent, or if the
property was transferred to him by gift, within the same period prior
to his death;
Eighty percent (80%) of the value, if the prior decedent died more
than one (1) year but not more than two (2) years prior to the death
of the decedent, or if the property was transferred to him by gift
within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more
than two (2) years but not more than three (3) years prior to the
death of the decedent, or if the property was transferred to him by
gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died more
than three (3) years but not more than four (4) years prior to the
death of the decedent, or if the property was transferred to him by
gift within the same period prior to his death; and
Twenty percent (20%) of the value, if the prior decedent died more
than four (4) years but not more than five (5) years prior to the
 death of the decedent, or if the property was transferred to him by
gift within the same period prior to his death.
These deductions shall be allowed only where a donor's tax, or estate
tax imposed under this Title is finally determined and paid by or on
behalf of such donor, or the estate of such prior decedent, as the
case may be, and only in the amount finally determined as the value
of such property in determining the value of the gift, or the gross
estate of such prior decedent, and only to the extent that the value of
such property is included in that part of the decedent's gross estate
which at the time of his death is situated in the Philippines; and only
if, in determining the value of the net estate of the prior decedent, no
deduction is allowable under paragraph (2) of Subsection (B) of this
Section, in respect of the property or properties given in exchange
therefore. Where a deduction was allowed of any mortgage or other
lien in determining the donor's tax, or the estate tax of the prior
decedent, which was paid in whole or in part prior to the decedent's
death, then the deduction allowable under said paragraph shall be
reduced by the amount so paid. Such deduction allowable shall be
reduced by an amount which bears the same ratio to the amounts
allowed as deductions under paragraphs (1) and (3) of this
Subsection as the amount otherwise deductible under paragraph (2)
bears to the value of that part of the decedent's gross estate which at
the time of his death is situated in the Philippines. Where the
property referred to consists of two (2) or more items, the aggregate
value of such items shall be used for the purpose of computing the
deduction.
(3) Transfers for Public Use. - The amount of all bequests, legacies,
devises or transfers to or for the use of the Government of the
Republic of the Philippines or any political subdivision thereof, for
exclusively public purposes.
(C) Share in the Absolute Community Property or Conjugal Property. - the net
share of the surviving spouse in the absolute community property or
conjugal partnership property as diminished by the obligations properly
chargeable to such property shall, for the purpose of this Section, be
deducted from the net gross estate of the decedent.
(D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a
nonresident not a citizen of the Philippines, unless the executor,
administrator, or anyone of the heirs, as the case may be, includes in the
return required to be filed under Section 90 the value at the time of his
death of that part of the gross estate of the nonresident not situated in the
Philippines.
(E) Tax Credit for Estate Taxes paid to a Foreign Country. –
[Not deductible from the estate tax of a non-resident alien decedent]
(1) In General. - The tax imposed by this Title shall be credited with the
amounts of any estate tax imposed by the authority of a foreign
country.
110
(2) Limitations on Credit. - The amount of the credit taken under this
Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax
against which such credit is taken, which the decedent's net
estate situated within such country taxable under this Title
bears to his entire net estate; and
(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which
the decedent's net estate situated outside the Philippines
taxable under this Title bears to his entire net estate.
• Section 86 gives the items that are deductible from the gross estate. The
ordinary deductions are those mentioned in Subsection (A,1), and the
special deductions, those enumerated in Subsection (A, 2-8)
• [Impt!] Expenses incurred after the interment, such as for prayers,
masses, entertainment, or the like are not deductible. Any portion of the
funeral and burial expenses borne or defrayed by relatives and friends of
the deceased are not deductible
• Actual funeral expenses shall mean those which are actually incurred in
connection with the interment or burial of the deceased. The expenses
must be duly supported by receipts or invoices or other evidence to show
that they were actually incurred.
• Judicial expenses – deduction for judicial expenses is allowed only if the
settlement of the estate of the decedent has been the object of
testamentary or intestate proceedings. In case the estate is settled
extrajudicially, a reasonable amount for legal fees and accounting
expenses may be allowed.
o Judicial expenses – all expenses “essential to the collection of
the assets, payment of debts or the distribution of the property to
the persons entitled to it
In other words, the expenses must be essential to the proper
settlement of the estate. Expenditures incurred for the individual
benefit of the heirs, devisees or legatees are not deductible
o In short, the deductible items are expenses incurred during the
settlement of the estate but not beyond the last day prescribed by
law, or the extension thereof, for the filing of the estate tax
return. Judicial expenses may exclude:
 Fees of executor or administrator
 Attorney’s fees
 Court fees
 Accountant’s fees
 Appraiser’s fees
  Clerk hire
 Costs of preserving and distributing the estate
 Costs of storing or maintaining property of the estate and
 Brokerage fees for selling property of the estate
• [Impt!] Claims against the decedent’s estate – the word “claims” is
generally construed to mean debts or demands of a pecuniary nature which
could have been enforced against the deceased in his lifetime and could
have been reduced to simply money judgments.
1. In order that such claims may be deducted, the following requisites
must concur: (Requisites)
a. The debt or claim instrument was duly notarized
b. Indebtedness was contracted by the decedent in good faith
and for an adequate and full consideration in money or
money’s worth
c. Existing at the time of the death of the decedent and
reasonably certain in amount
d. Valid and legally enforceable obligation of the decedent
e. Must not have been condoned by the creditor and the action
to enforce its collection has not prescribed
2. In case the loan was contracted within 3 years before the death of the
decedent, the administrator or executor is required to submit a
statement showing the disposition of the proceeds of the loan
• Claims (or Bad Debts) of the decedent against insolvent persons – To
avail of this deduction, it is essential that:
1. Amount thereof has been initially included as part of his gross estate
2. Incapacity of the debtors to pay their obligations is proven
• Unpaid mortgage indebtedness of a decedent – in order that they may
be deducted, the following requisties must be present:
1. Fair market value (at the time of death of the decedent) of the
mortgaged property without deducting the mortgage indebtedness has
been initially included as part of the gross estate
2. The mortgage indebtedness was contracted in good faith and for an
adequate and full consideration
• [VIP!] Unpaid taxes – taxes owed by the decedent and unpaid, being
obligations in favour of the gov’t, are also deductible as a claim against the
estate but income taxes upon income received after the death of the
decedent, or property taxes not accrued before his death, or any estate
tax are not because they are chargeable to (or deductible from) the income
of the estate except Estate Tax (Section 34C, #1C)
[Impt!] [Unpaid income tax on income earned before the death and unpaid
real property tax that accrued before the death are deductible as claims
against the estate. Estate tax on the property left by the decedent is
always not deductible]
111
• Casualty Losses – include all losses incurred during the settlement of the
estate arising from fires, storms, shipwreck or other casualties, or from
robbery, theft or embezzlement.
In order that they may be allowed as deduction, the following requisites
must be present:
1. Loss arising from any of the causes given above
2. Loss is not compensated for by insurance or otherwise
3. Loss has not been claimed as a deduction for income tax purposes
4. Loss was incurred after death but not later than the last day for the
payment of the estate tax
5. Value of the property lost must have been included in the gross estate
• [Mem!] Vanishing Deduction – it operates (the reason why it is an
allowable deduction) to ease the harshness of successive taxation of the
same property within a relative short period of time (up to 5 years)
occasioned by the untimely death of the transferee after the receipt of the
property from the prior decedent or donor.
[or Property Previously Taxes refers to the property acquired by the
decedent within 5 years prior to his death either by succession or donation
from a prior decedent or from a donor]
[Mem!] The following conditions (or requisites) must be present so that
the claim for vanishing deduction may be allowed:
1. Prior decedent must have died or the donation must have been made
within 5 years before the present decedent’s death
2. Property subject to the vanishing deduction must be the same
property inherited or donated from the prior decedent or donor
3. Vanishing deduction is based on the value of the property at the time
of the donation or death of the prior decedent or at the time of the
death of the present decedent, whichever is lower
4. Donor’s tax or estate tax due on the donation or estate of the prior
decedent must have been paid
5. Can be availed of only once
The value of PPT is in the amount as finally determined for the purpose of
the prior estate tax or the value of such property in present decedent’s
gross estate, whichever is lower. If there is no mortgage debt paid, the
value of PPT would be the initial basis. If the PPT was received as gift and
not as inheritance, the date of the gift determines the applicable rate or
percentage of deduction
• Transfers for public use (the property transferred must be included in
the gross estate of the decedent) – the Tax Code allows the deduction from
the gross estate, the amount of all devises, legacies, or transfers, to or for
the use of the government or any political subdivision thereof for

exclusively public purposes. The transfer must be testamentary in
character (because devises and legacies are effective only if the decedent
left a valid and probated will, there can be no devises and legacies if the
decedent died intestate) or by way of donation mortis causa (this is also
testamentary in character because the “donation” must conform with the
formalities of a will) executed by the decedent before his death
• Family Home – from the value of the gross estate shall also be deducted
the current FMV of the decedent’s family home. The limit is Php 1M. Any
amount in excess thereof is subject to estate tax. To avail of the deduction,
the said family home must have been the decedent’s family home as
certified by the barangay captain to the locality
Conditions (or requisites) for the allowance of family home as a deduction
from gross estate are the following:
1. Family home must be the actual residential home of the decedent and
his family home at the time of his death, as certified by the barangay
captain of the locality where the family home is situated
2. Total value (FMV at the time of death of the decedent) of the family
home must be included as part of the gross estate of a person who
died
• Standard Deduction, medical expenses and death benefits
o Standard deduction of Php 1M may be availed of in addition to
itemized deductions, including deduction for family home with an
FMV not exceeding Php 1M
o Medical expenses (e.g. hospital bills, costs of medicine, doctor’s
fees, etc.) must be (a) incurred whether paid or unpaid, by the
decedent within 1 year prior to his death and (b) duly
substantiated by receipts and such other documents in support
thereof. The amount deductible is limited to the actual amount
incurred but not exceeding Php 500,000.00
o Retirement benefits received by employees of private firms in
accordance with a reasonable benefit plan maintained by the
employer are exempt from all taxes, provided that the retiring
employee has been in the service of the same employer for at
least 10 years and is not less than 50 years of age at the time of
his retirement. The amount must have been received by the heirs
of the decedent-employee as a consequence of the latter’s death
and included in the gross estate of the decedent
• Net share of surviving spouse (1/2 of the absolute community
properties or conjugal properties, as the case may be, after deducting the
allowable deductions chargeable against them)
• The deduction allowed to non-resident estates (non-resident alien
decedents) may be expressed in the following formula:
112
����.����� ������
× Deductions claimed = Allowable deduction
������ �� ����� ����� ������
• [VIP!] Share in the conjugal (or community) property – under
Subsection (C), where the decedent was married
1. Community or Conjugal property shall first be determined
2. All obligations properly chargeable to it shall be deducted therefrom
3. From the balance (net community properties or not conjugal estate),
the net share (1/2 thereof) of the surviving spouse shall be deducted
from the net estate of the decedent for purposes of imposing the
estate tax
The special deductions are not taken into account in determining the
net community properties or net conjugal estate. The ordinary
deductions properly chargeable to the community or conjugal estate
are not to be deducted from the separate property of the deceased
spouse
SEC. 87. Exemption of Certain Acquisitions and Transmissions. - The following
shall not be taxed (or not included in the gross estate of the decedent):
(A) The merger of usufruct in the owner of the naked title;
(B) The transmission or delivery of the inheritance or legacy or devise by the
fiduciary heir or legatee or devise to the fideicommissary;
(C) The transmission from the first heir, legatee or devise or donee in favor of
another beneficiary, in accordance with the desire of the predecessor; and
(D) All bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions, no part of the net income of which insures to the
benefit of any individual: Provided, however, That not more than thirty
percent (30%) of the said bequests, devises, legacies or transfers shall be
used by such institutions for administration purposes.
[The decedent must have made a will giving a real property or personal
property to a social welfare or cultural or charitable institution, this
property is not included in the gross estate of the decedent]
If the devise or legacy is given in favour of educational or religious
institution the property is subject to estate tax which means that the
devise or legacy shall be included in the gross estate of the decedent and is
not an allowable deduction unlike a legacy or devise in favour of the
government for exclusive public purposes
In order that the devise or legacy will not be subject to estate tax the
property should rather be donated by the decedent prior to his death to the
 educational or religious institutions because donation to said institutions is
exempt from donor’s tax under Section 101
Examples:
A. In 2010, A donated the usufruct of his farmland in favour of B while the
naked ownership thereof was donated by A to C. In 2013 B died and as
a consequence thereof the usufruct was merged with the naked title to
C.
The usufruct is NOT subject to estate tax and therefore excluded from
the gross estate of B.
B. In his will A gave to C a devise in the form of a farmland. Considering
that C was still a minor at that time the devise was given to B, the
father of C, as trustee or fiduciary. When C, the fideicommissary,
attained the age of majority B died.
The devise is excluded from the gross estate of B because it is a
transmission or delivery of a devise by a fiduciary heir (B) to a
fideicommissary (C)
C. A donated her diamond ring to her daughter B on the condition that B
cannot dispose of it except to give it to C, daughter of B and
granddaughter of A, by way of a legacy. 2 years later B died.
The diamond ring is excluded from the gross estate of B because it is a
transmission from a donee (B) in favour of another beneficiary (C) in
accordance with the desire of the predecessor (A)
• The above specific exemptions are not taken into account (the properties
are not included in the gross estate of the decedent) in the computation of
the gross estate
• The exemption in (A) to (C) is premised on the fact that in all the transfers
mentioned, there is really 1 transmission of property, i.e., from the
previous testator or donor - to the owner of the naked title, or to the
fideicommissary, or to the second beneficiary, as the case may be. Hence,
the exemption from the tax because the property was previously subject
thereto
SEC. 88. Determination of the Value of the Estate. -
(A) Usufruct. - To determine the value of the right of usufruct, use or
habitation, as well as that of annuity, there shall be taken into account the
probable life of the beneficiary in accordance with the latest Basic Standard
Mortality Table, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
(B) Properties other than usufruct. - The estate shall be appraised at its fair
market value as of the time of death. However, the appraised value of real
property as of the time of death shall be, whichever is higher of –
113
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of values fixed by the
Provincial and or City Assessors.
Example:
A donated the usufruct of his property in favour of B for a period of 20 years
and that should B die before the expiration of 20 years the usufruct shall be
enjoyed by the heirs of B until the expiration of 20 years. The net income
derived by B from the property is Php 2M per annum. At the end of 15 years
B died. When B died the usufruct was not extinguished conformably with the
provision in the deed of usufruct
The gross estate of B shall include the usufruct valued at (Php 2M x 5) Php
10M
• Valuation estate – the properties comprising the gross estate shall be
valued based on their market value as of the time of death. Accordingly,
any income from, or increase in the value of the properties left by the
decedent after his death, will not form part of his gross estate, but should
be attributed to the undistributed shares (estate as an income taxpayer)
among the heirs
o In the case of shares of stocks, the FMV shall depend on whether
the shares are listed or unlisted in the stock exchanges:
 Unlisted common shares are valued based on their book
value while unlisted preferred shares are valued at par
value. In determining the book value of common shares,
appraisal surplus shall not be considered as well as the
value assigned to preferred shares, if there are any
 For shares which are listed in the stock exchanges, the
FMV shall be the arithmetic mean between the highest
and lowest quotation at a date nearest the date of death,
if none is available on the date of death itself
 If there have been previous bona fide sales/exchanges of
such shares, the price at which such shares exchanged
hands should be taken or considered as their FMV
 The shares of stock of a corporation which had been
found insolvent and presently under liquidation may be
given a zero valuation for estate tax purposes. In other
words, should the said shares later on appreciate in value
and are subsequently sold or disposed of, for tax
purposes, their cost basis shall be zero
o If there was no zonal valuation of real property at the time of the
decedent’s death, the value of the property for estate tax
purposes shall be based on it assessed value or market value as
indicated in the tax declaration, whichever is higher
SEC. 89. Notice of Death to be Filed. - In all cases of transfers (properties of the
decedent transferred to his heirs upon his death) subject to tax imposed herein, or
where, though exempt from tax, the gross value of the estate exceeds Twenty
thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as
the case may be, within two (2) months after the decedent's death, or within a like
period after qualifying as such executor or administrator, shall give a written notice
thereof to the Commissioner.
SEC. 90. Estate Tax Returns. -
(A) Requirements. - In all cases of transfers subject to the tax imposed herein,
or where, though exempt from tax, the gross value of the estate exceeds
Two hundred thousand pesos (P200,000), or regardless of the gross value
of the estate, where the said estate consists of registered or registrable
property such as real property, motor vehicle, shares of stock or other
similar property for which a clearance from the Bureau of Internal Revenue
is required as a condition precedent for the transfer of ownership thereof in
the name of the transferee, the executor, or the administrator, or any of
the legal heirs, as the case may be, shall file a return (estate tax return)
under oath in duplicate, setting forth:
(1) The value of the gross estate of the decedent at the time of his
death, or in case of a nonresident, not a citizen of the Philippines, of
that part of his gross estate situated in the Philippines;
(2) The deductions allowed from gross estate in determining the estate
as defined in Section 86; and
(3) Such part of such information as may at the time be ascertainable
and such supplemental data as may be necessary to establish the
correct taxes.
Provided, however, That estate tax returns showing a gross value
exceeding Two million pesos (P2,000,000) shall be supported with a
statement duly certified to by a Certified Public Accountant containing
the following:
(a) Itemized assets of the decedent with their corresponding gross
value at the time of his death, or in the case of a nonresident,
not a citizen of the Philippines, of that part of his gross estate
situated in the Philippines;
(b) Itemized deductions from gross estate allowed in Section 86;
and
(c) The amount of tax due whether paid or still due and
outstanding.
(B) Time for filing. - For the purpose of determining the estate tax provided for
in Section 84 of this Code, the estate tax return required under the
preceding Subsection (A) shall be filed within six (6) months from the
decedent's death.
114
A certified copy of the schedule of partition and the order of the court
approving the same shall be furnished the Commissioner within thirty (30)
after the promulgation of such order.
(C) Extension of Time. - The Commissioner shall have authority to grant, in
meritorious cases, a reasonable extension not exceeding thirty (30) days
for filing the return.
(D) Place of Filing. - Except in cases where the Commissioner otherwise
permits, the return required under Subsection (A) shall be filed with an
authorized agent bank, or Revenue District Officer, Collection Officer, or
duly authorized Treasurer of the city or municipality in which the decedent
was domiciled at the time of his death or if there be no legal residence in
the Philippines, with the Office of the Commissioner.
• The BIR agent may grant the request for an extension of 30 days (from
the expiration of 6 months from decedent’s death) within which to file the
estate tax return, but the estate shall be liable to the corresponding
interest (20% per annum; no surcharge provided the estate tax is paid
during the extended period) that have accrued thereon up to the time of
the filing of the return and the payment of the estate tax
• The application for the extension of time to file the estate tax return must
be filed with the RDO where the estate is required to secure its TIN and file
the tax returns of the estate
• [Impt!] Place of filing the return and payment of the tax
o In case of a resident decedent, the administrator or executor shall
register the estate of the decedent and secure a new TIN therefor
from the RDO where the decedent was domiciled at the time of his
death and shall file the estate tax return and pay the
corresponding estate tax with the Accredited Agent Bank (AAB),
RDO, Collection Officer or duly authorized Treasurer of the city or
municipality where the decedent was domiciled at the time of his
death
o In case of non-resident decedent, whether non-resident citizen or
non-resident alien, with executor or administrator in the
Philippines, the estate tax return shall be filed with and the TIN for
the estate shall be secured from the RDO where such executor or
administrator is registered:
 In case the executor or administrator is not registered,
the estate tax return shall be filed with and the TIN of the
estate shall be secured from the RDO having jurisdiction
over the executor or administrator’s legal residence
 Nonetheless, in case the non-resident decedent does not
have an executor or administrator in the Philippines, the
estate tax return shall be filed with and the TIN for the
estate shall be secured from the Office of the
Commissioner
SEC. 91. Payment of Tax. -
(A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at
the time the return is filed (within 6 months from decedent’s death OR
within 30 days from the extenstion granted by the commissioner) by the
executor, administrator or the heirs.
(B) Extension of Time. - When the Commissioner or his duly authorized
representative finds that the payment on the due date of the estate tax or
of any part thereof would impose undue hardship upon the estate or any of
the heirs, he (commissioner) may extend the time for payment of such tax
or any part thereof not to exceed five (5) years, in case the estate is
settled through the courts, or two (2) years in case the estate is settled
extrajudicially. In such case, the amount in respect of which the extension
is granted shall be paid on or before the date of the expiration of the period
of the extension, and the running of the Statute of Limitations (prescriptive
period to assess) for assessment as provided in Section 203 (3 years from
filing of the ETR) of this Code shall be suspended for the period of any such
extension.
Where the taxes are assessed by reason of negligence, intentional
disregard of rules and regulations, or fraud on the part of the taxpayer, no
extension will be granted by the Commissioner.
If an extension for payment is granted, the Commissioner may require the
executor, or administrator, or beneficiary, as the case may be, to furnish a
bond in such amount, not exceeding double the amount of the tax and with
such sureties as the Commissioner deems necessary, conditioned upon the
payment of the said tax in accordance with the terms of the extension.
(C) Liability for Payment - The estate tax imposed by Section 84 shall be paid
by the executor or administrator before delivery to any beneficiary (or heir)
of his distributive share of the estate. Such beneficiary shall to the extent
of his distributive share of the estate, be subsidiarily liable for the payment
of such portion of the estate tax as his distributive share bears to the value
of the total net estate.
For the purpose of this Chapter, the term 'executor' or 'administrator'
means the executor or administrator of the decedent, or if there is no
executor or administrator appointed, qualified, and acting within the
Philippines, then any person in actual or constructive possession of any
property of the decedent.
Example:
The estate tax due is Php 3M. The ETR should have been filed on Jan. 2,
2015 but a request for extension of time to file the return was granted by
the Commissioner for 30 days. The ETR was filed on Feb. 1, 2015 but a
request for extension of time for payment was granted by the Commissioner
for 2 years. The estates tax was paid on Jan. 31, 2017. How much is the
interest?
115
ANS:
1. Interest for 30 days on extension for filing the ETR is (Php 3M x 20% ÷
12) Php 50,000.00
2. Interest on 2 years extension of the time for payment (Php 3M x 20% x
2) Php 1.2M
Therefore, the total interest is Php 1,250,000.00
• The grant of extension to pay the estate tax rests on the discretion of the
Commissioner. The estate shall be liable to the corresponding interest
(20% per annum) that have accrued up to the time of filing the return and
payment of the estate tax due but not to surcharge
o The application for extension of time to file the return and to pay
the estate tax shall be filed with the RDO where the estate is
required to secure its TIN and file the estate tax return. This
application shall be approved by the Commissioner or his duly
authorized representative
o An heir’s request for a 2-year extension (reckoned from the
expiration of the normal 6-month period from the decedent’s
death) within which to file the estate tax return (should not
exceed 30 days) cannot be granted, but a 2-year extension within
which to pay the estate tax can be granted if the request is based
on justifiable reasons. No surcharge and penalties will be imposed
on the estate tax. However, the estate shall be liable for the
corresponding interest that has accrued thereon from the
expiration of the 6-month period from decedent’s death up to the
time of actual payment of the estate tax
• Section 203 limits the period of assessment of a tax within 3 years from
the filing of a return, and prohibits, where there is no assessment, the
commencement of a judicial action to collect tax after the expiration of the
3-year period
• An estate tax can be collected from the heirs even after the distribution of
the properties of the decedent. An heir is liable for the assessment as an
heir and as a holder-transferee of property belonging to the
estate/taxpayer
o As an heir, he is individually answerable for the part of the tax
proportionate to the share he received from the inheritance. His
liability, however, cannot exceed the amount of his share
o As a holder of property belonging to the estate, he is liable for the
tax up to the amount of the property in his possession
• [Impt!] The executor or administrator of an estate has the primary
obligation to pay the estate tax but the heir or beneficiary has subsidiary
liability for the payment of that portion of the estate which his distributive
share bears to the value of the total net estate. The extent of his liability,
however, shall in no case exceed the value of his share in the inheritance

[Read!] SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If
the executor or administrator makes a written application to the Commissioner for
determination of the amount of the estate tax and discharge from personal liability
therefore, the Commissioner (as soon as possible, and in any event within one (1)
year after the making of such application, or if the application is made before the
return is filed, then within one (1) year after the return is filed, but not after the
expiration of the period prescribed for the assessment of the tax in Section 203
shall not notify the executor or administrator of the amount of the tax. The executor
or administrator, upon payment of the amount of which he is notified, shall be
discharged from personal liability for any deficiency in the tax thereafter found to be
due and shall be entitled to a receipt or writing showing such discharge.
[Read!] SEC. 93. Definition of Deficiency. - As used in this Chapter, the term
'deficiency' means:
a) The amount by which the tax imposed by this Chapter exceeds the amount
shown as the tax by the executor, administrator or any of the heirs upon
his return; but the amounts so shown on the return shall first be increased
by the amounts previously assessed (or collected without assessment) as a
deficiency and decreased by the amount previously abated, refunded or
otherwise repaid in respect of such tax; or
b) If no amount is shown as the tax by the executor, administrator or any of
the heirs upon his return, or if no return is made by the executor,
administrator, or any heir, then the amount by which the tax exceeds the
amounts previously assessed (or collected without assessment) as a
deficiency; but such amounts previously assessed or collected without
assessment shall first be decreased by the amounts previously abated,
refunded or otherwise repaid in respect of such tax.
[Impt!] SEC. 94. Payment before Delivery by Executor or Administrator. - No judge
shall authorize the executor or judicial administrator to deliver a distributive share
to any party interested in the estate unless a certification (Tax Clearance
Certificate or Certificate Authorizing Registration) from the Commissioner that the
estate tax has been paid is shown.
SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not
register in the Registry of Property any document transferring real property or real
rights therein or any chattel mortgage, by way of gifts inter vivos (donation) or
mortis causa (or devise), legacy or inheritance, unless a certification (Tax
Clearance Certificate or Certificate Authorizing Registration) from the Commissioner
that the tax fixed in this Title and actually due thereon had been paid is show, and
they shall immediately notify the Commissioner, Regional Director, Revenue District
Officer, or Revenue Collection Officer or Treasurer of the city or municipality where
their offices are located, of the non payment of the tax discovered by them. Any
lawyer, notary public, or any government officer who, by reason of his official
duties, intervenes in the preparation or acknowledgment of documents regarding
partition or disposal of donation intervivos or mortis causa, legacy or inheritance,
shall have the duty of furnishing the Commissioner, Regional Director, Revenue
District Officer or Revenue Collection Officer of the place where he may have his
principal office, with copies of such documents and any information whatsoever
which may facilitate the collection of the aforementioned tax. Neither shall a debtor
116
of the deceased pay his debts to the heirs, legatee, executor or administrator of his
creditor, unless the certification of the Commissioner that the tax fixed in this
Chapter had been paid is shown; but he may pay the executor or judicial
administrator without said certification if the credit is included in the inventory of
the estate of the deceased.
SEC. 96. Restitution of Tax Upon Satisfaction of Outstanding Obligations. - If after
the payment of the estate tax, new obligations of the decedent shall appear, and
the persons (executor or administrator or heir) interested shall have satisfied them
by order of the court, they shall have a right to the restitution of the proportional
part of the tax paid.
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. -
There shall not be transferred to any new owner i on the books of any corporation,
sociedad anonima, partnership, business, or industry organized or established in the
Philippines any share, obligation, bond or right by way of gift inter vivos or mortis
causa, legacy or inheritance, unless a certification from the Commissioner that the
taxes fixed in this Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person, who maintained a bank deposit
account alone, or jointly with another, it shall not allow any withdrawal from the
said deposit account, unless the Commissioner has certified that the taxes imposed
thereon by this Title have been paid: Provided, however, That the administrator
of the estate or any one (1) of the heirs of the decedent may, upon authorization by
the Commissioner, withdraw an amount not exceeding Twenty thousand pesos
(P20,000) without the said certification. For this purpose, all withdrawal slips shall
contain a statement to the effect that all of the joint depositors are still living at the
time of withdrawal by any one of the joint depositors and such statement shall be
under oath by the said depositors.
• Under Section 94, mere official receipt (what is required by law is tax
clearance certificate) of payment is not sufficient to authorize the delivery
of the distributive share to any party interested in the estate
• In order that a taxpayer may claim the benefits of Section 96, it is
necessary for him to show the following:
o Obligations of the deceased not known at or before the time of the
payment of the tax
o Obligations have been judicially recognized as proper claims
against the estate of the deceased
o Court ordered them paid
o Have been actually paid
o A written claim for a fund must be filed with the CIR within 2
years from payment
• Claim for taxes by the BIR, whether assessed before or after the death of
the deceased, can be collected from the heirs even after the distribution of
 the properties of the decedent. The heirs shall be liable therefor in
proportion to their share in the inheritance
[The liability of the heirs is NOT principal but only subsidiary and such
liability is not solidary but merely joint]
• Tax Clearance Certificate (before it is Certificate Authorizing
Registration)
o Upon the filing of the estate tax return and full payment of the
estate tax due on the transmission of the estate of a decedent,
the RDO of the revenue district where the decedent was
previously registered shall issue the tax clearance certificate
(formerly certificate authorizing registration) identifying the
specific properties it covers. The certificate shall be issued by the
RDO of the revenue district where the decedent was domiciled or
registered at the time of his death regardless of the location of his
properties
o If the estate of the decedent is not registered, the
executor/administrator or any of the heirs shall register the estate
of the decedent with the RDO in the place of residence of the
decedent at the time of his death, and the Tax Clearance
Certificate shall be issued by the Revenue District Officer of said
district office
o In case the decedent is a non-resident citizen or non-resident
alien at the time of his death, the resident executor/administrator
or heir shall register the estate with the RDO where said
executor/administrator or heir is registered, in which case, upon
filing the estate tax return and payment of the estate tax due, the
Tax Clearance Certificate shall be issued by the RDO of the said
district office
Chapter 2 – Donor’s Tax
Classification of Donor - location of property donated
1. Resident Citizen - wherever situated
2. Non-resident Citizen - wherever situated
3. Resident Alien - wherever situated
4. Non-resident Alien - only property situated in the Philippines
5. Domestic Corporation - wherever situated
6. Foreign Corporation - only property situated in the Philippines
SEC. 98. Imposition of Tax. -
(A) There shall be levied, assessed, collected and paid upon the transfer by
any person (natural or juridical), resident or nonresident, of the property
by gift, a tax, computed as provided in Section 99.
117
(B) The tax shall apply whether the transfer is in trust or otherwise, whether
the gift is direct or indirect, and whether the property is real or personal,
tangible or intangible.
• [Mem!] Gift or donation is a voluntary transfer of property from one
person to another without any consideration or compensation therefor
• Donor’s tax is imposed on donations inter vivos or those made between
living persons to take effect during the lifetime of the donor. Donations
mortis causa (in reality these are devises and legacies) or those which
are to take effect upon the death of the donor and, therefore, partake of
the nature of testamentary dispositions, are subject to estate tax
• [Mem!] Requisites of a donation – for purposes of the donor’s tax
1. Capacity of the donor
2. Donative Intent (or pure liberality)
3. Delivery, whether actual or constructive
[It does not make a contract of donation a real contract because
donation is either consensual or formal or solemn contract]
4. [Impt!] Acceptance of the gift by the donee
• Completed gift – the donor’s tax shall not apply unless there is a
completed gift
o Transfer of property by gift is perfected from the moment the
donor knows of the acceptance by the donee. It is completed by
the delivery, either actually or constructively, of the donated
property to the donee. Thus, the law in force at the time of the
completion of the donation shall govern the imposition of the
donor’s tax
o A gift that is incomplete because of reserved powers, becomes
complete when either: (a) donor renounces the power; or (b) his
right to exercise the reserved power ceases because of the
happening of some event or contingency or the fulfilment of some
condition
• [VIP!] Renunciation by an heir
o Renunciation by the surviving spouse of his/her share in the
conjugal partnership or absolute community after the dissolution
of the marriage in favour of the heirs of the deceased spouse or
any other person/s is subject to donor’s tax
o General renunciation (without specifying to whom the share of
the renouncing heir will go or be given) by an heir, including the
surviving spouse, of his/her share in the hereditary estate left by
the decedent is not subject to donor’s tax, unless (subject to
donor’s tax) specifically and categorically done in favour of
identified heir/s to the exclusion or disadvantage of the other co-
heirs in the hereditary estate
 o In general renunciation, there is no donation since the renouncer • Political contributions – for internal revenue purposes, political
has never become the owner of the property/share renounced. If contributions in the Philippines are considered taxable gift rather than
the renunciation by an heir or heirs is made in favour of one or taxable income
more heirs but not all the other heirs, the act of renunciation
(subject to donor’s tax) is, in effect, an act of disposition SEC. 99. Rates of Tax Payable by Donor. -
inasmuch as the benefits thereof are not enjoyed by everybody
but only by one or more heirs (A) In General. - The tax for each calendar year shall be computed on the basis
of the total net gifts (on accumulated basis) made during the calendar year
o As a rule, when a person renounces/repudiates his/her part of the in accordance with the following schedule:
inheritance, the right of accretion takes place (without ear-
marking) and the same is added or incorporated to the share of If the net total gifts is:
the co-heirs, co-devisees, or co-legatees. The share of the heir
Of the
making renunciation/waiver shall accrue to his/her co-heirs in the The Tax
Over But Not Over Plus Excess
same proportion they inherit pursuant to Articles 1018 and 1019 shall be
Over
of the Civil Code. There is no donation of property which had
never become the renouncer’s
P 100,000 Exempt
• Forgiveness of indebtedness – the cancellation and forgiveness of P 100,000 200,000 0 2% P100,000
indebtedness may amount to a receipt of income, to a gift, or to a capital
transaction, depending upon the circumstances 200,000 500,000 2,000 4% 200,000

o If, an individual performs services for a creditor, who, in 500,000 1,000,000 14,000 6% 500,000
consideration thereof cancels the debt, income to that amount is
realized by the debtor as compensation for his services (*subject 1,000,000 3,000,000 44,000 8% 1,000,000
to income tax)
3,000,000 5,000,000 204,000 10% 3,000,000
o If, however, a creditor merely desires to benefit a debtor and
without any consideration therefor cancels the debt, the amount 5,000,000 10,000,000 404,000 12% 5,000,000
of the debt is a gift from the creditor to the debtor and need not
be included in the latter’s gross income (*subject to donor’s tax) 10,000,000 1,004,000 15% 10,000,000

o If a corporation to which a stockholder is indebted forgives the

(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or
debt, the transaction has the effect of the payment of dividend
beneficiary is stranger, the tax payable by the donor shall be thirty percent
(*subject to dividend tax)
(30%) of the net gifts. For the purpose of this tax, a 'stranger,' is a
person who is not a:
• Contribution to a employees’ retirement plan – No donor’s tax can be
imposed even if the transfer is without consideration because the
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor
contribution of the company to the fund is in compliance with its legal
and lineal descendant; or
obligation to contribute therein. Since there is no act of liberality, there is
no donation to speak of and hence, no donor’s tax can be imposed
(2) Relative by consanguinity in the collateral line within the fourth
degree (up to first cousin) of relationship.
• Payment by surety of principal obligation – the payment by the surety
of the principal obligation shall not be considered transfer of property by
(C) Any contribution in cash or in kind to any candidate, political party or
gift because the surety has the right to be indemnified by the borrower or
coalition of parties for campaign purposes shall be governed by the Election
principal debtor
Code, as amended.
• Donation between spouses during marriage – Under Article 87 of the
• There are NO allowable deductions in donor’s tax and the exemption of Php
Family Code, every donation (not subject to donor’s tax) between the
100,000.00 is already deducted in arriving “the tax shall be” in Section 99
spouses during the marriage is void except moderate gifts (if the value is
Php 100,000.00 or less, the moderate gift is exempted from Donor’s Tax. If
• In the schedule, the Php 100,000.00 exemption is already deducted where
the moderate gift is in excess of Php 100,000.00 the excess is subject to
the value of the gift is Php 200,000.00 or above. Thus, if the net gift is Php
Donor’s Tax) which the spouses may give each other on the occasion of
any family rejoicing
118
 120,000.00, the donor’s tax due is Php 400.00; if Php 220,000.00, the
donor’s tax due is Php 2,800.00
• Computation of donor’s tax on a cumulative basis – the donor’s tax
shall be computed on the basis of the total gifts made during the calendar
year
• Donation to strangers
o Subsection (B) does not exclude the application of the Php
100,000.00 exemption in case of donation to a stranger. The
exemption is granted to the donor, and, therefore, if he is
entitled to it, it should make no difference whether or not the
donation is to a stranger
o Under Subsection (B), an “in-law,” whether father, mother,
brother, sister, son or daughter is treated as a stranger for
he/she cannot qualify under either No. (1) or (2)
o A legally adopted child (lineal descendant) shall not be
considered a stranger. Donations made between business
organizations and those made between a business organization
and an individual shall be considered as a donation made to a
stranger
• Donation of community or conjugal property – husband and wife are
considered as separate and distinct taxpayers for purposes of the donor’s
tax. However, if what was donated is a conjugal or community property
and only the husband signed the deed of donation, there is only one donor
for donor’s tax purposes, without prejudice to the right of the wife to
question the validity of the donation without her consent pursuant to the
pertinent provisions of the Civil Code and the Family Code
[VIP!] SEC. 100. Transfer for Less Than Adequate and full Consideration. - Where
property, other than real property referred to in Section 24(D) (if the property is
real property located in the Philippines and is classified as Capital Asset the sale is
subject to CGT of 6% or FMVs whichever is higher and the difference between such
FMV and selling price is not subject to Donor’s Tax), is transferred for less than an
adequate and full consideration in money or money's worth, then the amount by
which the fair market value of the property exceeded the value of the consideration
shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and
shall be included in computing the amount of gifts made during the calendar year.
Example:
A is the owner of a residential lot with FMV as determined by the
Commissioner of Php 2M and FMV appearing in the schedule of values in the
Assessor’s Office of Php 1.8M. A sold said lot to his brother B at a price of
Php 500,000.00. The sale is subject to CGT of 6% of Php 2M or Php
120,000.00. The difference between the higher FMV of Php 2M and the
selling price of Php 500,000.00 or Php 1.5M is not subject to donor’s tax
• Transfer of property for less than its value – the transfer constitutes a
gift and is subject to donor’s tax, although there is no donative intent
119
o Where the consideration is fictitious, the entire value of the
property transferred shall be subject to donor’s tax. Consideration
may be monetary or non-monetary (e.g. services) or may include
both
o The only transfers excluded from Donor’s Tax are those made
bona fide in the ordinary course of business, at arm’s length, and
free from any donative intent, even if the consideration is
inadequate on account, for example, of bad bargain
Example:
A is engaged in Real Estate Business and he sold a subdivision lot with an
FMV of Php 3M to his friend B for Php 1M. The difference between the FMV
of Php 3M over the selling price of Php 1M or Php 2M is a gift and is subject
to donor’s tax of 30%
• Where there is neither a sale, exchange or donation
o The transfer of stocks in a corporation organized as a mutual
benefit association, to its members, which transfer is merely a
conversion of the owner-member contributions to shares of stock
is not subject to CGT or Donor’s Tax because it is neither a sale,
exchange nor donation
o The transfer of community or conjugal properties in favour of the
children pursuant to a court order arising from the declaration of
nullity of marriage of the parents is not subject to donor’s tax
since there is no donative intent on the part of the spouses,
because the transfer is only in compliance with the court order.
Neither is the transfer subject to CGT and DST as the transfer is
considered a delivery of presumptive legitime (this is NOT subject
to estate tax because the parents are still alive) under Article 50
of the Family Code
[Mem!] SEC. 101. Exemption of Certain Gifts. - The following gifts or donations
shall be exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident ([1] RC; [2] RA; [3] NRC; [4] DC;
[5] RFC; Nos. 4 and 5 do not apply to A1). –
(1) Dowries or gifts made on account of marriage and before its
celebration or within one year thereafter by parents to each of their
legitimate, recognized natural illegitimate, or adopted children to the
extent of the first Ten thousand pesos (P10,000):
[Wedding gift made by parents to a legitimate child in the form of
cash amounting to Php 110,000.00 is exempt from donor’s tax
[Sections 99A and 101,A,1]
(2) Gifts made to or for the use of the National Government or any entity
created by any of its agencies which is not conducted for profit, or to
any political subdivision of the said Government; and
 (3) Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited
nongovernment organization, trust or philanthrophic organization or
research institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such
donee for administration purposes. For the purpose of the exemption,
a 'non-profit educational and/or charitable corporation, institution,
accredited nongovernment organization, trust or philanthrophic
organization and/or research institution or organization' is a school,
college or university and/or charitable corporation, accredited
nongovernment organization, trust or philanthrophic organization
and/or research institution or organization, incorporated as a
nonstock entity, paying no dividends, governed by trustees who
receive no compensation, and devoting all its income, whether
students' fees or gifts, donation, subsidies or other forms of
philanthrophy, to the accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation.
(B) In the Case of Gifts Made by a Nonresident not a Citizen of the
Philippines.
(1) [NRA] Gifts made to or for the use of the National Government or any
Same as in A
Nos. 2 and 3
entity created by any of its agencies which is not conducted for profit,
or to any political subdivision of the said Government.
(2) [NRFC] Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, foundation, trust or
philanthrophic organization or research institution or organization:
Provided, however, That not more than thirty percent (30% of said
gifts shall be used by such donee for administration purposes.
(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. –
(1) In General. - The tax imposed by this Title upon a donor who was is a
citizen (Resident or Non-resident) or a resident (Resident Alien and
Domestic Corporation) at the time of donation shall be credited with
the amount of any donor's tax of any character and description
imposed by the authority of a foreign country.
[The tax credit does not apply to Non-resident Alien and Foreign
Corporations, whether resident or non-resident, because their
donations of property located outside the Philippines are NOT subject
to donor’s tax in the Philippines]
(2) Limitations on Credit. - The amount of the credit taken under this
Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax
against which such credit is taken, which the net gifts situated
within such country taxable under this Title bears to his entire
net gifts; and
120
(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which
the donor's net gifts situated outside the Philippines taxable
under this title bears to his entire net gifts.
• Donation of open space by subdivision developer – Donation of open
space reserved for parks and playgrounds by subdivision developer/owner
to homeowners’ association is subject to donor’s tax because it is not
covered by the exemption privileges provided under Section 101(A)(2)
• Donation to trustee for benefit of beneficiary – where a gift is made
to a trustee for the benefit of one or more beneficiaries, the beneficiaries
and not the trustee, are the donees of the gifts
• Donations to disable persons – RA No. 7277, is special law which grants
tax incentives to foreign donor/s on donation, bequest, subsidy or financial
aid made to government agencies engaged in the rehabilitation of disable
persons and organizations of disable persons
• Gifts/donations extended to a non-stock, non-profit organization duly
registered with the SEC and the DOST as an accredited science foundation
are exempt from the payment of donor’s tax pursuant to Section 101(A,3).
However, if the donated equipment would come from abroad, the
importation thereof shall be subject to 10% (now 12%) VAT based on the
total value used by the Bureau of Customs in determining tariff and
customs duties, excise taxes, etc., pursuant to Section 87
[Impt!] SEC. 102. Valuation of Gifts Made in Property. - If the gift is made in
property other than cash, the fair market value thereof at the time of the gift shall
be considered the amount of the gift. In case of real property, the provisions of
Section 88(B) shall apply to the valuation thereof.
• In gift taxation, the properties are valued at the time the gift is made. If
the gift is in money, then the amount thereof is the valuation
• The FMV of the real property as determined by the CIR or the FMV as
shown in the schedule of values fixed by the Provincial or City Assessor,
whichever is higher, at the time of the gift, shall be considered as the
amount of the gift
SEC. 103. Filing of Return and Payment of Tax. -
(A) Requirements. - any individual person or donor who makes any transfer by
gift (except those which, under Section 101, are exempt from the tax
provided for in this Chapter) shall, for the purpose of the said tax, make a
return under oath in duplicate. The return (donor’s tax return) shall set
forth:
(1) Each gift made during the calendar year which is to be included in
computing net total gifts;
(2) The deductions (there are NO deductions in donor’s tax) claimed
and allowable;
 exceeds the amounts previously assessed, (or collected without assessment) as a
(3) Any previous net gifts (already included in No. 1) made during the deficiency, but such amounts previously assessed, or collected without assessment,
same calendar year; shall first be decreased by the amount previously abated, refunded or otherwise
repaid in respect of such tax.
(4) [2] The name of the donee; and

(5) [3] Such further information as may be required by rules and

regulations made pursuant to law.

(B) Time and Place of Filing and Payment. - The return of the donor
required in this Section shall be filed within thirty (30) days after the date
the gift is made and the tax due thereon shall be paid at the time of filing.
Except in cases where the Commissioner otherwise permits, the return
shall be filed and the tax paid to an authorized agent bank, the Revenue
District Officer, Revenue Collection Officer or duly authorized Treasurer of
the city or municipality where the donor was domiciled at the time of the
transfer, or if there be no legal residence in the Philippines, with the Office
of the Commissioner. In the case of gifts made by a nonresident, the
return may be filed with the Philippine Embassy or Consulate in the country
where he is domiciled at the time of the transfer, or directly with the Office
of the Commissioner.

SEC. 104. Definitions. - For purposes of this Title, the terms 'gross estate' and
'gifts' include real and personal property, whether tangible or intangible, or mixed,
wherever situated: Provided, however, That where the decedent or donor was or
is a nonresident alien at the time of his death or donation, as the case may be, his
real and personal property so transferred but which are situated outside the
Philippines shall not be included as part of his 'gross estate' or 'gross gifts':
Provided, further, That franchise which must be exercised in the Philippines; shares,
obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws; shares, obligations or
bonds by any foreign corporation eighty-five percent (85%) of the business of which
is located in the Philippines; shares, obligations or bonds issued by any foreign
corporation if such shares, obligations or bonds have acquired a business situs in
the Philippines; shares or rights in any partnership, business or industry established
in the Philippines, shall be considered as situated in the Philippines: Provided, still
further, that no tax shall be collected under this Title in respect of intangible
personal property: (a) if the decedent at the time of his death or the donor at the
time of the donation was a citizen and resident of a foreign country which at the
time of his death or donation did not impose a transfer tax of any character, in
respect of intangible personal property of citizens of the Philippines not residing in
that foreign country, or (b) if the laws of the foreign country of which the decedent
or donor was a citizen and resident at the time of his death or donation allows a
similar exemption from transfer or death taxes of every character or description in
respect of intangible personal property owned by citizens of the Philippines not
residing in that foreign country.

The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter
exceeds the amount shown as the tax by the donor upon his return; but the amount
so shown on the return shall first be increased by the amount previously assessed
(or Collected without assessment) as a deficiency, and decreased by the amounts
previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no
amount is shown as the tax by the donor, then the amount by which the tax
121