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TAXATION

General Principles

What is taxation? Taxation is the process or means by which the sovereign through
its law making body raises income to defray the necessary expenses of the
government. It is the act of levying tax.

From the definition itself, we can glean some of the inherent characteristic of tax.
1. It is an enforced contribution. Contributions mainly come from persons and
properties under the sovereign which has jurisdiction over such. The degree of
enforcement depends upon the tax system and the resources available to the tax
administration.
2. It is generally payable in money.
3. It is proportionate in character. Sec. 28(1) of the 1987 Philippine Constitution
provides that “The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.”
4. It is levied on persons, property, or the exercise of a right or privilege. From
such characteristic, we become aware of the different kind of taxes to whom tax is
being levied upon: personal, property and excise or privilege tax.
5. It is levied by the State, which has jurisdiction over the subject or object of
taxation.
6. It is legislative in character.
7. It is commonly required to be paid at regular periods or interval.

Tax is a proportionate enforced contribution levied by the government through its


law making body upon persons, property and privileges for the defrayment of
government expenses and public purpose.

Classification of taxes:

According to what to tax:


1. Personal – CTC or poll tax
2. Property – Real property tax
3. Excise taxes – Income tax

Tax can also be classified in some other… Review them

Sound tax system (FAT)

Also included in your Political Law

Basically our tax system in some degree allows a voluntary or self-assessment


method, such as the degree of enforcement is somehow reduced causing the tax
administration to become less efficient or effective. Power and water utilities on the
other hand strictly enforce measurement and does not allow self-assessment such
as a taxpayer is more inclined to pay the correct utility bill than the correct tax.

INCOME TAX:
Items of Gross Income (Sec. 32 NIRC)
Less:
1. Exempt activities of exempt corporation/entities (Sec. 30)
2. Exclusion from Gross Income (Sec. 32 (B))
Equals:
Items of taxable gross income
Less:
1. Allowable itemized deductions against business income/ capital gains or
other types of income (Sec. 34 (A) to (K))
2. 40% Optional Standard Deductions in lieu of itemized deductions
3. Premium payments on helath and/or hospitalization insurance (For
individual only Sec. 34 (M))
Equals:
Income after deductions
Less:
Personal exemptions (For individuals only Sec. 35 as amended)
Equals:
Taxable income (Sec. 31)
Multiply by:
1. For individual tax rates as per table, (Normal tax rate) normal rate from
5% to 32%. [Sec. (24)-(26)]
2. Corporate tax rate of 30% but not be lower than the Minimum Corporate
Income Tax (MCIT- 2% of Gross Income) { Sec. 27-29 [R.A. No. 9337]}

Tax Due

Section Taxable Persons Taxable Transactions Taxable


of the Base/Normal Tax
NIRC Rate
23 (A) a. Individual 1. Compensation, business or See taxable income
24 (A) resident citizen mixed including prizes table for individual.
(1)a,c amounting to P10,000 or less, Taxable income
and transfer of ownership of a (Normal Tax rate)-
software copyright (RMC 44- taxable within and
2005) without the
Philippines
22 (E) b. Non-resident Gross income from sources
citizen who: within the Philippines: Normal Tax Rate.
1. Establishes to 1. Interest derived from Taxable for income
the satisfaction of obligations of resident, derived within the
42 the CIR the fact of corporate or otherwise; Phil.
his physical 2. Dividends from sources Taxable income
presence abroad within the Philippines (Normal tax rate)-
with a definite a. From domestic taxable only on
intention to reside corporations income within the
therein; or b. From foreign Philippines
2. Leaves the Phil. corporation, if 50% or more of
During the taxable the gross income were derived
year to reside from sources within the Phil., if
abroad, either as less than 50%, then only the
immigrant or for amount which bears the same
employment on a ratio to such dividends as the
permanent basis; gross income derived from
or sources within the Philippines
3. Works and bears to its gross income from
derives income all sources.
from abroad 3. Services- Compensation for
whose labor or personal services
employment performed in the Phil
requires him to be 4. Rentals and Royalties- from
physically present property located in the Phil. Or
abroad most of the from any interest in such
time during the property, including:
taxable year; or a. The use of right or
4. Has been privilege to use in the Phil. any
previously copyright, patent, design or
considered as non- model plan, secret formula or
resident citizen process, goodwill, trademark,
and who arrives in tradebrand, or other property
the Phil. At any right
time during the b. The use of or the right to
taxable year to use in the Phil. any industrial,
reside commercial or scientific
permanently in the equipment;
Phil. Shall be c. The supply of scientific,
treated as non- technical, industrial or
resident citizen for commercial knowledge or
the taxable year in information;
which he arrives in d. The supply of any
the Phil. With assistance that is ancillary and
respect to his subsidiary to, and is furnished
income derived as a means of enabling the
from sources application or enjoyment of,
abroad until the any such property or right;
date of arrival; or e. The supply of services
5. Works and by a nonresident persons or his
derives income employee in connection with
from abroad as an the use of property or rights
overseas contract belonging to , or the
worker or is a installation or operation of any
seaman and a brand, machinery or other
member of the apparatus purchased from
complement of a such nonresident person;
vessel engaged f. Technical advise,
exclusively in assistance or services
international trade 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:
i. Motion picture films
ii. Films or video tapes
for use in connection with
television;
iii. 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 Phil. and;
6. Sale of personal property-
gains, profits and income from
the sale of personal property.
23(C) c. Resident alien Resident but not a citizen Taxable income
22 (F) derived within.
24 (A)(1)c d. Non-resident The term ‘non-resident alien’ Taxable income
alien engaged in means an individual whose derived within.
trade or business residence is not within the
22 (G) in the Phil (stayed Philippines and who is not a
22 (A) fro an aggregate citizen thereof.
period of more A person is an individual, a
22 (N) than 180 days trust, estate or corporation.
during any Taxpayer means a person
calendar year.) subject to tax imposed by the
NIRC.
Husband and wife (whether
citizen or alien) shall compute
(compute is different from file)
their individual income tax
separately based on their
individual taxable income. If
unidentifiable, divide equally.
25 (A) 1 Non residents Any income from transactions Exempt from
28 (A) 4 citizen and alien with offshore banking units income tax
(OBUs)
24 (B)(1) a. Individual 1. Interest from any currency 20% Final
resident citizen bank deposit and yield or any Withholding Tax
b. Nonresident other monetary benefit from (FWT) RR No. 2-98
RMC 44- citizen deposit substitutes and from Gross income
2005 c. Resident alien trust funds and similar derived within
d. Nonresident arrangements
alien engaged in 2. Royalties/Payments made
trade or business due to acquisition of copyright
in the Phil. right (RMC 44-2005)
3. Prizes (except Phil. Charity
Sweepstakes and Lotto
winnings)

Royalties on books as well as


other literary works and
musical compositions
Individual taxpayer Interest income from a 7.5% FWT
(except a depository bank under the Gross income
nonresident expanded foreign currency derived within
individual) deposit system RR No. 2-98
Interest income from long term Exempt from Sec.
deposit or investment in the 24 (B)(1)
form of savings, common or
individual trust funds, deposit
substitutes, investment
management accounts and
other investments evidenced
by certificates prescribed by
the Bangko Sentral ng Pilipinas
(BSP)
a. Individual If the holder of the certificate
resident citizen pre-terminate the deposit or Entire Gross
b. Nonresident investment before the 5th year, income derived
citizen FWT shall be imposed on the within
c. Resident lien entire income and shall be
d. Nonresident based on the remaining RR No. 2-98
alien engaged in maturity thereof:
trade or business
in the Phil. a. 4 years to less than 5 5% FWT
years 12% FWT
b. 3 years to less than 4 20% FWT
years
c. less than 3 years
24 (B)2 Citizen and a. Cash and/or Property 10% FWT
resident alien Dividends actually or Gross income
constructively received from a derived within
domestic corporation or from a (actually or
joint stock company insurance constructively
or mutual fund company and a received)
regional operating
headquarters of a multi-
national company
b. Share in the distributive
net income after tax of a
partnership (except a general
professional partnership)
c. Share in the net income
after tax of an association, a
joint account or a joint venture
25 (A)(2) Nonresident alien or consortium taxable as a
engaged in trade corporation
or business in the 20% FWT Gross
Phil. income within
RR No. 2-98
24 (C) Citizen and Sale or barter or exchange or 5% Final Tax on
resident alien other disposition of shares of Net capital gains
stock in a domestic corporation realized not over
(except shares sold or P100,000
disposed of through the stock 10% Final Tax on
exchange taxable under Sec. Net capital gains in
25 (A)(3) Non resident alien 127) excess of P100,000
25 (B)
RMC 73-2007 provides the
guidelines in the treatment of
block sale of shares of stock
disposed in the stock exchange
24 (D) Individuals Presumptive capital gain from 6% FWT on Gross
including estates the sale (including pacto de selling price or
and trusts retro and other forms of current fair market
conditional sales) exchange or value as
other disposition of real determined by the
Nonresident aliens property classified as capital CIR (RR Nos. 2-98,
asset 17-2003)

If sold to the government of 6%FWT on Gross


any of its political subdivisions selling price or
or agencies or to government current fair market
owned or controlled value as
corporations (GOCCs) determined by the
CIR or Normal Tax
at the option of the
taxpayer
Sale or disposition of the
principal residence the Exempt from FWT
proceeds of which is fully
utilized in acquiring or
constructing a new and
principal residence within 18
calendar months from the date
of sale or residence (See RR.
Nos. 13-99 and 14-2000, RMC
No. 45-2002)
Conditions of tax exemption:
1. Historical cost of adjusted
basis shall be carried over to
the new principal residence;
2. The CIR is notified of the
intention to avail such tax
exemption within 30 days from
the date of sale or disposition;
3. Any portion of the proceeds
not utilized shall be subjected
to final capital gains tax;
4. Tax exemption can be
availed of only once every 10
years.

Under Revenue Audit


Memorandum Order (RAMO)
No. 1-2001 dated February 15,
2001, the valuation of
improvements for tax purposes
are determined as follows:

a. Total selling
price/consideration per deed of
sale xxx
- land and improvement
xxx
Value of improvement
xxx

The value of improvement


arrived at shall not be lower
than the fair market value
(FMV) appearing in the latest
tax declaration, covering said
improvement, at the time of
the aforesaid
transaction/transfer.

b. The FMV per latest


declaration at the time of sale
or disposition duly certified by
the City/Municipal Assessor
shall be used. No adjustments
shall be added on the said
value, provided that the tax
declaration bears the upgraded
FMV of the said property
pursuant to Sec. 219 of R.A.
No. 7160, otherwise known as
the “Local Government Code of
1991” and the last paragraph
of the Local Assessment
Regulations No. 1-92 dated
October 6,1992.

In case the Tax Declaration


being presented was issued
three (3) or more years prior to
the date of sale or disposition
of the real property, the
seller/transferor shall be
required to submit a
certification from the City/
Municipal Assessor whether or
not the same is still the latest
tax declaration covering the
said real property, otherwise,
the taxpayer shall secure its
latest tax declaration and shall
submit a copy thereof, duly
certified by the said Assessor.
RR No. 6- Nonresident alien Gross income from all sources 25% FWT on Gross
2001 engaged in trade within the Phil. derived by non- income
or business in the resident cinematographic film
Phil. owners, lessors or distributors.
The term ‘cinematographic
film’ includes motion picture
films, tapes, discs and other
such similar or related
products.
Sec. 33 Any employer, Fringe benefit furnished or 32% FWT on
(NIRC) whether an granted to the employee Grossed-up
individual or a (except rank and file Monetary Value of
corporation employees) by the employer Fringe Benefit
RR 4- (unless the fringe benefit I
2002 The tax imposed required by the nature of, or RR Nos. 2-98 and
under Sec. 33 of necessary to the trade, 3-98
the Tax Code shall business or profession of the
be treated as a employer, or when the fringe Fringe benefit
final income tax on benefit is for the convenience furnished to
the employee that of the employer). employees and
shall be withheld taxable under Sec.
and paid by the The term ‘fringe benefit’ 25 (B), (C), (D), and
employer. means any good, service or (E) shall be taxed
other benefit furnished or at the applicable
The grossed-up granted in cash or in kind by rates imposed
value of the fringe an employer to an individual thereat.
benefit shall be employee (except rank and file
determined by employees) such as but not
dividing the actual limited to the following:
monetary value of
the fringe benefit (1) Housing;
by the difference (2) Expense account;
between 100% (3) Vehicle of any kind;
and the applicable (4) Household personnel,
rates of income such as maid, driver and
tax under Sec. 25 others;
(B), (C), (D) and (5) Interest on loans at less
(E). than market rate to the
extent of the difference
The grossed up between the market rate
monetary value and actual rate granted;
shall be (6) Membership fees, dues
determined by and other expenses
dividing the actual borne by the employer
monetary value of for the employee in
the fringe benefit social and athletic clubs
by 68% effective or other similar
Jan. 1, 2000. organizations;
(7) Expenses for foreign
Any amount given travel;
by the employer (8) Housing and vacation
as benefits to its expenses;
employees, (9) Educational assistance
whether classified to the employee or his
as “de minimis” dependents;
benefits or fringe (10) Life or health
benefits, shall insurance or other non-
constitute as life insurance premiums
deductible or similar amounts in
expense upon excess of what the law
such employer. allows;

The exemption of any fringe


benefit from the fringe benefit
tax shall not be interpreted to
mean exemption from any
other income tax imposed
under the Tax Code or any
other existing law. Thus if the
fringe benefits is exempted
from the fringe benefits tax,
the same, may however, still
form part of the employee’s
gross compensation income
which is subject to income tax,
hence, likewise subject to a
withholding tax on
compensation income
payment.
The amount of the Fringe Benefits Not Taxable-
RR No. 8- “DE MINIMIS” (1) Fringe benefits which Not subject to
2000 conforming to the are exempted from tax income tax
ceiling herein under special laws;
RR No. prescribed shall (2) Contributions of the Not subject to
10-2008 not be considered employer for the withholding tax on
in determining the benefit of the compensation
Php30,000 ceiling employees to
of “Other Benefits” retirement, insurance,
provided under and hospitalization
Sec. 32 (B) (7) (e) benefits plans;
of the Tax Code. (3) Benefits given to the
Provided that, the rank and file
excess of the de employees whether
minimis benefits granted under a
over their collective bargaining
respective ceilings agreement or not; and
prescribed by RR (4) De minimis benefits as
No. 10-2008 shall defined in the rules
be considered as and regulations to be
part of “other promulgated by the
benefits” and the Sec. of Finance upon
employee recommendation of
receiving it will be the CIR.
subject to tax only (5) If the grant of fringe
on the excess over benefits to the
the Php30,000.00 employee is required
ceiling. Provided by the nature of, or
further, that necessary to the trade,
Minimum Wage business or professions
Earners receiving of the employer;
“other benefits” (6) If the grant of the
exceeding fringe benefit is for the
Php30,000 limit convenience of the
shall be taxable on employer
the excess
benefits, as well as The term ‘rank and file
on his salaries, employees’ shall mean
wages and employees who are holding
allowances, just neither managerial nor
like an employee supervisory position as defined
receiving under existing provisions of the
compensation Labor Code of the Philippines,
income beyond as amended (Sec. 22 (AA) of
the Statutory the Tax Code).
Minimum Wage. “DE MINIMIS’ benefits are not
considered as compensation
Under RR. No. 10- subject to income tax and
2000, amounts of consequently to withholding
“vacation tax if such facilities or
allowances” or sick privileges (such as
leave credits” entertainment, medical
which are paid to services, or so-called
an employee “courtesy” discounts on
constitute purchases) are relatively small
value and are offered or
Thus the salary of furnished by the employer
an employee on merely as means of promoting
vacation or on sick the health, goodwill,
leave that is paid contentment, or efficiency of
notwithstanding his employees.
his absence from
work constitutes The following shall be
taxable considered as “DE MINIMIS”
compensation. benefits not subject to income
tax hence not subject to
However, the withholding tax on
monetized value of compensation income of both
unutilized vacation managerial and rank and file
leave credits of 10 employees (RR No. 10-2008):
days or less which 1. Monetized unused vacation
are paid to private leave credits of private
employees not employees not exceeding 10
exceeding 10 days days during the year and the
during the year monetized value of leave
and the monetized credits paid to government
value of leave officials and employees;
credits paid to 2. Medical cash allowance to
government dependents of employees not
officials and exceeding Php750.00 per
employees shall semester or Php125 per
be subject to month;
income tax and 3. Rice subsidy of Php1,500 or
consequently to one (1) sack of 50 kg. rice per
withholding tax month amounting to not more
(RR No. 10-2000). than Php1,500.00;
4. Uniforms and clothing
allowance not exceeding
Php4,000.00 per annum;
5. Actual yearly medical
benefits not exceeding
Php10,000.00 per annum;
6. Laundry allowance not
exceeding Php300 per month;
7. Employee achievement
awards, e.g., for length of
service or safety achievement
which must be in the form of a
tangible personal property
other than cash or gift
certificate, with an annual
monetary value not exceeding
Php10,000.00 received by an
employee under an established
written plan which does not
discriminate in favor of highly
paid employees;
8. Gifts given during Christmas
and major anniversary
celebrations not exceeding
Php5,000.00 per employee per
annum;
9. Flowers, fruits, books or
similar items given to
employees under special
circumstances, e.g. on account
of illness, marriage, birth of a
baby, etc. and
10. Daily meal allowance for
overtime work not exceeding
25% of the basic minimum
wage.
Allowances and Other items not subject to Not subject to
benefits granted to income tax and income tax
members of the consequently to
AFP that are withholding tax (RR 8-
excluded from 2000):
gross income and 1. Representation and
therefore exempt transportation allowance
from income tax (RATA) granted to public
(RMC No. 23- officers and employees under
2001): the General Appropriations Act
a. Longevity Pay and the Personnel Economic
b. Mandatory Relief Allowance which
allowances- Cost essentially constitutes
of Living reimbursement for expenses
Allowances, incurred to the performance of
Personnel government personnel's official
Economic Relief duties shall not be subject to
Allowance, and income tax and consequently
Hazardous to withholding tax.
Allowance 2. Pursuant to E.O. 219 which
c. Collateral Pay- too effect on Jan. 1, 2000,
Specialist Pay, Additional Compensation
Combat Pay, Allowance (ACA) given to
Flying Pay, Air government personnel shall
Mechanics Pay, not be subject to withholding
Sea Duty Pay, tax pending its formal
Hazardous Duty integration into the basic pay.
Pay, Instructor’s Consequently and effective for
Duty Pay, the taxable year 2000, ACA
Parachutist’s Pay, shall be classified as part of
Hardship Pay; the "Other Benefits" under Sec.
d. Collateral 32 (B)(7)(e) of the Tax Code
Allowances- which are excluded from gross
Special Clothing compensation income provided
Allowance, Cold that the total amount of such
Winter’s Clothing benefits does not exceed
Allowance and Php30,000.00 (RR No. 8-2000).
Cold Weather 3. Any amount paid
Clothing specifically, either as advances
Maintenance or reimbursements for
Allowance, Winter traveling, representation and
Clothing other bona fide ordinary and
Allowance, Initial necessary expenses incurred
Enlistment and by the employee in the
Reenlist Allowance performance of his duties are
and Laundry not compensation subject to
Allowance withholding if the following
conditions are satisfied:
3.1 It is ordinary and necessary
traveling and representation or
entertainment expenses paid
or incurred by the employee in
the pursuit of the trade,
business or profession; and
3. 2 the employee is required
to account/liquidate for the
foregoing expenses in
accordance with the specific
requirements of substantiation
for each category or expenses
pursuant to Sec. 34 of the Tax
Code.

The excess of advances made


over actual expenses shall
constitute taxable income if
such amount is not returned to
the employer. Reasonable
amounts of
reimbursements/advances for
traveling and entertainment
expenses which are pre-
computed on a daily basis and
are paid to an employee while
he is on an assignment or duty
need not be subject to the
requirements of substantiation
and to withholding.

Exemption from tax of certain


benefits granted to members
of the Philippine National Police
(PNP) under RMC No. 12-97
a. Quarters allowance
b. B. Clothing allowance
c. Hazard pay
d. Longevity pay
e. Cost of living allowance

282 NIRC Reward 10% FWT (RR 2-98)

The amount of reward shall be equivalent to 10% of


the revenues, surcharges or fees recovered and/or
fine or penalty imposed and collected or one million
pesos (P1M) per case, whichever is lower.

In the case of the smuggled and confiscated goods,


the amount of reward shall be equivalent to 10% of
the market value of the confiscated goods or P1M
per case whichever is lower.

The following persons shall be entitled to the


reward:

1. Any person, except an internal revenue


official or employee or other public official or
employee or his relative within the sixth
degree of consanguinity who voluntarily gives
definite or sworn information not yet in the
possession of the BIR leading to the discovery
of fraud or violations of any of the provisions
of the Tax Code thereby resulting in the
recovery of revenues, surcharges and fees
and/or the imposition of any fine or penalty;
2. Informer where the offender has offered to
compromise the violation offer has been
accepted by the CIR and collected from the
offender; and
3. Persons instrumental in the discovery and
seizure of smuggled goods.
25 (B) Nonresident alien Interest, cash and/or property 25% FWT on Entire
25 (C) not engaged in dividends, rents, salaries, income derived
trade or business wages, premiums, annuities, within RR No. 2-98
within the Phil. compensation, remuneration,
emoluments, or other fixed or
determinable annual or period
or cash gains, profits and
income and capital gain,
except that capital gains from
the sale of shares of stock in
any domestic corporation and
real property shall be subject
to the income tax prescribed
under Sec. 24 (C) and (D) of
the NIRC 1997.
Alien individual Salaries, wages, annuities, 15%FWT on Gross
employed by compensation, remuneration income
Regional or Area and other emoluments, such as RR No. 2-98
Headquarters and honoraria and allowances RR No. 12-2001
Regional received from such regional or
Operating area headquarters
Headquarters of
Multinational The term ‘multinational
Companies company’ means a foreign firm
or entity engaged in
international trade with
affiliates or subsidiaries or
RR No. branch offices in the Asia 15%FWT on Gross
12-2001 Pacific region and other foreign income or Normal
Filipinos employed markets. tax rate on taxable
and occupying the income, at his
same positions of If the employer (Regional option
those aliens Operating
employed by the Headquarters/Regional Area
multinational Headquarters) is governed by
companies Book III of E.O. 226 as
amended by R.A. 8756.
25 (D) Alien individual Salaries, wages, annuities, 15% FWT on Gross
RR No. 6- employed by compensation, remuneration income
2001 Offshore Banking and other emoluments, such as
Units (OBUs) honoraria and allowances
Filipinos employed received from such offshore
and occupying the banking units
same position as
those aliens
employed by OBUs
25 (E) Alien individual Salaries, wages, annuities, 15%FWT on Gross
RR 6- who is a compensation, remuneration income
2001 permanent and other emoluments, such as RR 2-98
resident of a honoraria and allowances
foreign country received from such contractor
but employed and or subcontractor
assigned in the
Phil. by a foreign
service contractor
or by a foreign
service
subcontractor 15%FWT on Gross
RR No. 6- engaged in income
2001 petroleum
operations in the
Phil.

Filipinos employed
and occupying the
same position as 8%FWT in lieu of
RR No. 6- an alien employed Gross income from contracts any and all taxes,
2001 by petroleum by subcontractors from service national and local
service contractor contractors engaged in as imposed under
and subcontractor ‘petroleum operations’ as PD 1354
defined under PD 87 (also
Citizen, resident known as the “Oil Exploration
alien and and Development Act) in the
nonresident alien Phil.
engaged in trade
or business in the
Phil.
28 (A) (4) Non residents Any income from transaction Tax exempt on any
with OBUs income
26 General Computes net income in the Not subject to
Professional same manner as a corporation income tax
Partnership
24 (A)(1)c Partners in a Distributive share actually or 5%-32% normal tax
general constructively received in the on Gross income
professional net income of the partnership
partnership
27 (A) Corporations, Gross Income derived from Normal Tax Rate
including business shall be equivalent 34% - 1998
partnerships. No gross sales less sales returns 33% - 1999
matter how and allowances and cost of 32% (prior to
created or goods sold. Cost of goods sold effectivity of R.A.
organized, joint- shall include all business No. 9337)
R.A. No. stock companies, expenses directly incurred to 35% (RA No. 9337)
9337 joint accounts, produce the merchandise to 30% (effective Jan.
associations, or bring them to their present 1,2009)
insurance location and use. on taxable income
companies, For a trading or merchandising derived within and
excluding general concern, cost of goods sold without, except
professional shall include the invoice cost of income subject to
partnerships and a goods sold, plus import duties, Special Tax Rates)
joint venture or freight in transporting the
consortium formed goods to the place where the 15% on Gross
for the purpose of goods are actually sold, income
undertaking including insurance while the (The President
construction goods are in transit. upon the
projector engaging For a manufacturing concern, recommendation of
in petroleum, coal, cost of goods manufactured the Secretary of
and other energy and sold shall include all cost Finance may,
operations of production or finished goods effective Jan.
pursuant to an such as raw materials used, 1,2000 allows the
operating, or direct labor and manufacturing corporations whose
consortium overhead, freight cost, ratio of cost of
agreement under insurance premiums and other sales to gross sales
a service contract costs incurred to bring the raw or receipts from all
with the materials to the factory or sources does not
government. warehouse. exceed 55% at the
Gross income includes option to be taxed
payments received in based on its gross
consideration of a transfer of income
software copyright (RMC 44-
2005)

In the case of taxpayers


engaged in the sale of service,
gross income means gross
receipts less sales returns and
allowances and discounts.

Conditions to be satisfied for


the Optional 15% Tax on Gross
Income:
1. A tax effort ratio of 20%
of gross national product
(GNP);
2. A ratio of 40% of income
tax collection to total tax
revenues; and
3. A VAT tax effort of 4% of
GNP;
4. A 0.9% ratio of the
Consolidated Public
Sector Financial Position
(CPSFP) to GNP.
27 (B) Proprietary The term ‘unrelated trade, 10% on Taxable
educational business or other activity’ income except
institutions which means any trade, business or those subject to
are non-profit other activity, the conduct of special income tax
Hospitals which which is not substantially rates.
are non-profit related to the exercise or
RA 9337 performance by such
A ‘Proprietary educational institution or 35% on Entire
Educational hospital of its primary purpose Taxable income
Institution’ is any or function. If gross income (RA No. 9337)
private school form unrelated trade, business
maintained and or other activity exceeds 50%
administered by of the total gross income
private individuals derived by such educational
or groups with an institutions or hospitals form all
issued permit to sources, then entire taxable
operate from the income is subject to 35% tax
Department of rate.
Education or the 1. 34% effective January 1,
Commission on 1998;
Higher Education 2. 33% effective January 1,
(CHED) or the 1999;
Technical 3. 32% from Jan. 1 2000
Education and until the date prior to
30 (H) Skills Development the effectivity of RA No.
Authority (TESDA) 9337; Not subject to
as the case may 4. 35% (RA No. 9337); and income tax
be. 5. 30% effective Jan. 1,
2009.
30 (I) Non-stock and
nonprofit Not subject to
educational income tax
27 (C) institution (See Income received as such
RMC No. 76-2003) 35% on Taxable
income (RA No.
Government 9337)
educational
institution Income received as such

RA No. Government
9337 owned or Note: RA 8424 and RA 9337
controlled provide for the following
corporations, normal income tax rates:
agencies, or 1. 34% effective January 1,
instrumentalities 1998;
2. 33% effective January 1,
1999;
3. 32% from Jan. 1 2000
until the date prior to
the effectivity of RA No. Subject to its
9337; Respective
4. 35% (RA No. 9337); and Corporate Charter
5. 30% effective Jan. 1, or Special Law
Except 2009.
Government
Service Insurance Local water districts are
System (GSIS), the subject to income taxes
Social Security effective August 13, 1996
System (SSS), the (RMC 63-2003)
Philippine Health
Insurance Under RA No. 8424 which took
Corporation (PHIC) effect on Jan. 1, 1998, the Phil.
and the Phil Amusement and Gaming
Charity Corporation (PAGCOR) is
Sweepstakes exempt from income tax.
Office (PCSO) Under RA No. 9337, PAGCOR
is already subject to the
35% income tax rate.

27 (D)(1) Domestic Interest on currency bank 20%FWT


corporations deposit and yield or any other
monetary benefit from deposit
substitutes and from trust
funds and similar
arrangements 20%FWT on Gross
income derived
Royalties/Payments due to within
acquisition of software RR 2-98
copyright rights (RMC 44-2005)
7 ½%FWT on Gross
Interest income from a income derived
depository bank under the within
expanded foreign currency RR 2-98
deposit system
27 (D)(2) Domestic Sale, exchange or other 5% Final Tax on
corporation disposition of shares of stock in Net Capital Gains
a domestic corporation except Not over
shares sold or disposed P100,000.00
through the stock exchange 10% Final Tax on
Net Capital Gains
Over P100,000.00
27 (D)(3) Depository bank Interest income from foreign 10%FWT on Gross
under the currency loans granted by such income derived
expanded foreign depository banks under the within
currency deposit expanded foreign currency RR 2-98
system deposit systems to residents R.A. 9337
other than offshore banking
units in the Phil. or other
depository banks under the
expanded system (RMC No. 14-
R.A. 9337 2002)
Exempt (RA No.
Income from foreign 9337)
currency transactions with
nonresidents, offshore
banking units in the Phil.,
local commercial banks
including branches of
foreign banks that may be
authorized by the BSP to
transact business with
foreign currency deposit
system units and other
depository banks under the Normal tax rates
expanded foreign currency imposed on
deposit systems shall be banks on Net
exempt from all taxes, income as
except net income from specified by the
such transactions as may Sec. of Finance
be specified by the Sec. of
Finance upon the
Nonresidents recommendation by the
whether Monetary Board which shall
individuals or be subject to the regular
corporations income tax payable by the Exempt on any
banks (Previously subject income
to 10%FWT prior to R.A.
No. 9337)

Any income from transactions


with depository banks under
the expanded system
27 (D)(4) Domestic Dividends received from Dividends received
corporations another domestic corporation are exempt
27 (D)(5) Domestic Gain presumed to have been 6%FWT on Gross
corporations realized on the sale, exchange selling price or FMV
or disposition of lands and/or as determined by
buildings which are not the CIR, whichever
actually used in the business of is higher
a corporation and are treated RR No. 2-98
as capital assets RR No. 17-2003
27 (E) Domestic Imposed on a corporation 2% MCIT on Gross
RR 9- corporations beginning on the 4th taxable Income derived
1998 The Sec. of year immediately following the within
RR4-2003 Finance is year in which such corporation
RR12- authorized to commenced its businessAny excess of the
2007 suspend the operations, when the minimum MCIT over the
imposition of the income tax is greater than the normal income tax
MCIT on any tax computed under Sec. 27 shall be carried
corporation which (A) NIRC. forward and
suffers losses on credited against
account of Gross income is defined under the normal income
prolonged labor Sec. 27 (A) except taxpayers tax for the 3
dispute, or engaged in the sale of services immediate
because of force of which gross income means succeeding taxable
majeure or gross receipts less sales years
because of returns, allowances, discounts,
legitimate and cost of services. Cost of
business reverses services shall mean all direct
costs and expenses necessarily
incurred to provide the
services required by the
customers including-
a. salaries and employee
benefits of personnel,
consultants and specialists
directly rendering the service
and
b. cost of facilities directly
utilized in providing the service
such as depreciation or rental
of equipment used and cost of
supplies.
In the case of banks, cost of
services shall include interest
expense.
29 Domestic and The improperly accumulated 10% on Improperly
resident foreign earnings tax shall apply to accumulated
corporation. – the every corporation formed or taxable income
fact that any availed for the purpose of
corporation is a avoiding the income tax with
mere holding respect to its shareholders or
company or the shareholders of any other
investment corporation by permitting
company shall be earnings and profits to
prima facie accumulate instead of being
evidence of a divided or distributed (RR No.
purpose to avoid 2-2001). The fact that earnings
the tax upon its or profits of a corporation are
shareholders or permitted to accumulate
members. It shall beyond the reasonable needs
not apply to – of the business shall be
a. Publicly held determinative of the purpose
corporations to avoid the tax upon its
b. Banks and other shareholders or members
non bank financial unless the corporation, by the
intermediaries; clear preponderance of
and evidence, shall prove to the
c. Insurance contrary. “Reasonable needs of
corporations the business” includes the
reasonably anticipated needs
of the business. The term
improperly accumulated
taxable income means taxable
income adjusted by:
1. Income exempt form
tax;
2. Income excluded from
gross income;
3. Income subject to final
tax; and
4. The amount of net
operating loss carry over
deducted;
And reduced by the sum of:
a. Dividends actually or
constructively paid; and
b. Income tax paid for the
taxable year.
RR No. 6- Domestic and Gross income derived from 8%FWT on Gross
2001 Resident Foreign contracts by subcontractors income derived
Corporation from service contractors form such
engaged in ‘petroleum contracts in lieu of
operations’ as defined under any and all taxes,
PD 87 (also known as the ‘Oil national and local
Exploration and Development as imposed under
Act’) in the Philippines. PD 1354
28 (A)(1) Resident foreign Gross income as defined under 35% on Taxable
corporation Sec. 27 (A) income derived
engaged in trade Note: R.A. 8424 and R.A. 9337 within (RA No.
or business within provides for the following 9337)
the Phil. normal income tax rates:
1. 34% effective January 1, Optional:
1998; 15% on Gross
2. 33% effective January 1, Income derived
1999; within under
3. 32% from Jan. 1 2000 certain conditions
until the date prior to (Sec. 27 (A) NIRC)
the effectivity of RA No.
9337;
4. 35% (RA No. 9337); and
5. 30% effective Jan. 1,
2009.
28 (A)(2) Resident foreign Gross income as defined under 2%MCIT based on
corporation Sec. 27 (E) Gross income
engaged in trade derived within
or business within
the Phil.
28 (A)(3) International International Air Carrier – Gross 2 ½ % on Gross
carrier Phil. Billings refers to the Phil. Billings
RR 15- amount of gross revenue
2002 derived from carriage of
persons, excess baggage,
cargo, and mail originating
from the Phil. in a continuous
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 Phil.
Billings if the passenger boards
a plane in a port or point in the
Phil. Provided, further, that for
a flight which originated form
the Phil., but transshipment of
passengers takes place at any
port outside the Phil., on
another airline, only the aliquot
portion of the cost of the ticket
corresponding to the leg flown
from the Phil. to the point of
transshipment shall form part
of Gross Phil. Billings.
International shipping – Gross
Phil. Billings means gross
revenue whether for
passenger, cargo or mail
originating from the Phil. up to
final destination, regardless of
the place of sale or payments
of the passage or freight
documents.
28 (A)(4) Offshore banking Interest income derived from 10%FWT on
units (OBUs) foreign currency loans granted Interest income
to residents other than OBUs RR 2-98
or local commercial banks, RA 9337
including local branches of
foreign banks authorized by
the BSP to transact business
with OBUs Exempt
RA No. Income from foreign (RA No. 9337)
9337 currency transactions with
nonresidents, other than
OBUs, local commercial
banks, including branches
of foreign banks authorized
by the BSP to transact
business with OBUs shall
be exempt except net
income from transaction as
Nonresidents, may be specified by the Exempt from
whether individual Sec. of Finance which shall income tax
or corporations be subject to the regular
income tax payable by the
banks

Any income from transactions


with OBUs
28 (A)(5) Branch Any profit remitted by a branch 15%FWT on total
to its head office, except profits applied or
activities which are registered earmarked for
with the Phil. Economic Zone remittance without
Authority (PEZA), provided that any deduction for
interests, dividends, rents, the tax component
royalties, including thereof
remuneration 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 from all
sources within the Phil. shall
not be treated as branch
profits unless the same are
effectively connected with the
conduct of its trade or business
in the Philippines.
28 (A)(6) a. Regional or area ‘Regional or area Not subject to
(a) headquarters headquarters’ shall mean a income tax
branch established in the Phil.
by multinational companies
and which headquarters do not
earn or derive income form the
Phil. and which act as
supervisory, communications
and coordinating enter for their
affiliates, subsidiaries, or
branches in the Asia-Pacific
b. Regional Region and other foreign 10% on Taxable
operating markets. income
headquarters
Regional Operating
The term ‘regional Headquarters are engaged in
operating any of the following services:
headquarter’ shall general administration and
mean branch planning; business planning
established in the and coordination; sourcing and
Phil. by procurement of raw materials
multinational and components; corporate
companies. financial advisory services;
marketing control and sales,
promotion; training and
personnel management;
logistics services; research and
development services and
product development;
technical support and
maintenance; data processing
communication and business
development.
28 (A)(7) a. Resident foreign a. Interest on currency bank 20%FWT on Gross
(a) corporation deposit and yield or any other income derived
monetary benefit from deposit within
substitutes and from trust RR 2-98
funds and similar
arrangements and royalties
derived from all sources within
the Phil.
7 ½% on Interest
b. Interest income from a income derived
depository bank under the within
b. Depository bank expanded foreign currency RR 2-98
28 (A)(7) under the deposit system
(b) expanded foreign 10%FWT on
currency deposit Interest income from foreign Interest income
system currency loans granted to RR 2-98
residents other than offshore
banking units in the Phil. or
other depository banks under
RA No. the expanded system Exempt
9337 RA 9337
Income from foreign
currency transactions with
nonresidents, offshore
banking units in the Phil.,
local commercial banks
including branches of Normal tax rates
foreign banks that may be on Net income as
authorized by the BSP to specified by the
transact business with Sec. of Finance
foreign currency deposit imposed on
system units and other banks
depository banks under the
expanded foreign currency
deposit systems shall be
exempt from all taxes,
except net income from
such transactions as may
be specified by the Sec. of
Non residents Finance upon the
recommendation by the
Monetary Board which shall
be subject to the regular Exempt
income tax payable by the
banks. Note: Under RA
8424, this item of income is
subject to 10% FWT, prior
to the effectivity of RA
9337.

Any income from transactions


with depository banks under
the expanded system
28 (A)(7) Resident foreign Net capital gains from sale,5% Final Tax on
(c) corporation barter or exchange or other Net Capital Gains
disposition of shares of stock in
Not over
a domestic corporation except
P100,000.00
shares sold or disposed of 10% Final Tax on
through the stock exchange Net Capital Gains
Over P100,000.00
28 (A)(7) Resident foreign Inter-corporate dividends from Exempt
(d) corporation a domestic corporation

Nonresident Gross income such as interest,


foreign corporation dividends, rents, royalties,
not engaged in salaries, premiums (except
trade or business reinsurance premiums),
in the Phil. annuities, emoluments or other
fixed or determinable annual, 35% FWT on Gross
periodic or casual gains subject income derived
to Sec. 28 (B)(5)(c). Note: RA within
8424 and RA 9337 provide for (RA No. 9337)
the following normal income
tax rates:
1. 34% effective January 1,
1998;
2. 33% effective January 1,
1999;
3. 32% from Jan. 1 2000
RA 9337 until the date prior to
the effectivity of RA No.
9337;
4. 35% (RA No. 9337); and
5. 30% effective Jan. 1,
2009.
28 (B)(2) Nonresident Gross income 25%FWT on Gross
cinematographic income derived
film owner, lessor within
or distributor RR 2-98
28 (B)(3) Nonresident owner Gross rentals, lease or charter 4 ½% FWT on
or lessor of vessels
fees from leases or charters to Gross income
chartered by Phil.Filipino citizens or derived within
nationals corporations, as approved by RR 2-98
the Maritime Industry Authority
28 (B)(4) Nonresident owner Rentals, charters and other 7 ½%FWT on Gross
or lessor of fees derived within the Phil. income derived
aircraft, within
machineries and RR 2-98
other equipment
28 (B)(5) Nonresident Interest income derived within 20%FWT on
RR 2-98 foreign corporation the Phil. on foreign loans Interest income
contracted on or after August
1, 1986
28 (B)(5) Foreign Inter-corporate dividends 15%FWT on Cash
(b) nonresident subject to the following and/or Property
corporation conditions under RA 9337: dividends received
1. The country in which the from a domestic
nonresident foreign corporation
RA 9337 corporation is domiciled shall RR 2-98
allow credit against the tax due
form the nonresident foreign
corporation taxed deemed to
have been paid in the Phil.
equivalent to 20% (previously
17%) which represents the
difference between the normal
income tax of 35% (previously
32%) on corporations and the
15% tax on dividends provided
that effective Jan. 1, 2009, the
credit against the tax shall be
equivalent to 15%; or
2. The foreign country does not
impose any income tax on
dividends received from a
domestic corporations (See RR
no. 2-98).
28 (B)(5) Nonresident Net capital gains from sale, 5% Final Tax on
(c) foreign corporation barter or exchange or other Net Capital Gains
disposition of shares of stock in Not over
a domestic corporation except P100,000.00
shares sold or disposed of 10% Final Tax on
through the local stock Net Capital Gains
exchange Over P100,000.00

Sec. 30 of the NIRC of 1997 provides that the following organizations shall not be
subject to income tax with respect to income received by them as such (RMC No.
37-2007):
a. Labor, agricultural or horticultural organization not organized
principally for profit;
b. Mutual savings bank not having a capital stock and cooperative bank
without capital stock organized and operated for mutual purposes and
without profit;
c. A beneficiary society, order, association, operating for the exclusive
benefit of the members
d. Cemetery company owned operated for the benefit of members;
e. Non-stock corporation or association 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 inure to the benefit of any member, organizer, officer or
any specific person;
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 stockholder or individual;
g. Civic league or organization not organized for profit but exclusively for
the promotion of social welfare;
h. A non-stock and non-profit educational institution;
i. Government educational institution;
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 form members
for the sole purpose of meeting its expenses; and
k. Farmers’, fruit growers’ or like association organized and operated as
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.
The income of whatever kind and character of the above mentioned organizations
form any of their properties, real or personal, or from any of the disposition made of
such income shall be subject to income tax.

Other laws relevant to taxation and its elated BIR issuances also provide for the
income tax exemption/preferential tax treatment of certain entities and
transactions, such as:

1. The tax incentives of cooperatives (RA No. 6938 “Cooperative Code of the
Philippines.” Cooperatives are exempt from income tax, VAT, 3% percentage
tax, donor’s tax, excise tax, and documentary tax subject to certain
conditions (RR Nos. 20-2001 and 14-2007)
2. RA No. 9178 “Barangay Micro Business Enterrprises (BMBEs) Act of 2002” its
income tax exemption is provided in RMC No. 40-2004 which published D.O.
No. 17-04 of the DOF. RMC No. 52-2004 prescribes the format of the sworn
affidavit for submission upon registration. But its income not arising from its
operations shall be subject to income tax.
3. RR No. 4-2006 as amended by RR No. 1-2007 implements the tax privileges
provisions of RA No. 9257, otherwise known as the “Expanded Senior Citizens
Act of 2003”. A senior citizen shall refer to any resident Filipino citizen aged
60 years old and above. Senior citizens are exempt from the payment of
individual income tax provided that their annual taxable income does not
exceed the poverty level as determined by the NEDA for the corresponding
taxable year. Senior citizens are also entitled to the 20% discount on their
purchase of goods and services as follows:
a. In fare for domestic air and sea travel for the exclusive use or
enjoyment of senior citizens;
b. From all establishments relative to the utilization of services in hotels
and similar lodging establishments, restaurants and recreation centers,
and purchase of medicines in all establishments for the exclusive use
or enjoyment of senior citizens, including funeral and burial services
for the death of senior citizens;
c. On admission fees charged by theaters, cinema houses and concert
halls, circuses, carnivals and other similar places of culture, leisure,
and amusement for the exclusive use or enjoyment of senior citizens;
d. On medical and dental services, professional fees of attending doctors,
and diagnostic and laboratory fees such as but not limited to x-rays,
computerized tomography scans and blood tests in all private hospitals
and medical facilities in accordance with rules and regulations to be
issued by the department of Health, in coordination with the Philippine
Health Insurance Corporation; and
e. In public railways, skyways and bus fare for the exclusive use and
enjoyment of senior citizens.

4. RR No. 10-2006 and RR No. 5-2007 provides for the guidelines and conditions
for the tax treatment of securities borrowing and lending (SBL) transactions.
The lender of the shares of stock/securities listed in the PSE and Phil. and
Exchange Corp. shall be exempt form the capital gains tax. The borrowing
and lending transactions shall not be subject to the stock transaction tax
under Sec. 27 (B)(5)(c) of the Tax Code and the Documentary Stamp Tax
under Sec. 176 of the same Code.
5. RMC No. 44-2006 publishes RA No. 9343, an Act amending RA no. 9182,
otherwise known as the Special Purpose Vehicle (SPV) Act of 2002. The law
provides that SPV transactions shall be exempt from capital gains tax,
creditable withholding income taxes, VAT, gross receipts tax under Title V
and Documentary Stamp Taxes subject to certain conditions.
6. RMC No. 27-2007 publishes the full text of RA No. 9400 entitled “An Act
Amending Republic Act No. 7227, as Amended, Otherwise known as the
Bases Conversion and Development Act of 1992”
7. RMC No. 29-2007 publishes the full text of Republic Act No. 9399 entitled “An
Act Declaring a One-Time Amnesty on Certain and Duty Liabilities, Inclusive
of Fees, Fines, Penalties, Interests and Other Additions Thereto, Incurred by
Certain Business Enterprises Operating Within the Special Economic Zones
and Freeports.”
8. RMC No. 36-2007 circularizes the full text of Executive Order No. 619, an
Order creating and designating Special Economic Zones pursuant to republic
Act (RA) No. 7916, as amended by RA No. 8784, in relation to RA No. 7227, as
amended by RA No. 9400, inside the Clark Freeport Zone (RMC 50-2007).

RMC No. 37-2007 dated May 30, 2007 provides for the delegation of authority to
sign rulings granting and/or confirming tax exemptions, tax incentives as well as
tax treaty relief through the ruling process.

Situs of Items of Income

a. Income from capital – the place where the capital is invested or employed
b. Income from labor or personal services – the place where the labor or
personal services are rendered
c. Gain on sale of property :
Sale – gains, profits and income from sale of personal property produced
within and sold outside the Phil., or produced outside and sold within shall be
treated as derived partly from sources within and partly from sources without
the Phil.
Purchase – gains, profits and income derived from personal property within
and its sale without the Phil. or from sources without and its sale in the Phil. 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 domestic
corporation shall be treated as derived solely from within regardless of where
the said shares were sold.
d. Gain on sale of real property – the place where the property is located

EXCLUSIONS FROM GROSS INCOME


Sec. 32 (B) of the Tax Code

1. Life insurance – proceeds of which upon death of the insured, whether lump
sum or otherwise, but if such amounts are held by the insurer under the
agreement to pay interest thereon, the interest payments shall be included in
gross income;
2. Amounts received by insured as return of premium – under life insurance,
endowment, or annuity contracts, either during the term or at the maturity of
the term in the contract or upon the surrender of the contract;
3. The value of gifts, bequests and devises or descent: 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 dividend interest, shall be
included in gross income;
4. Compensation for injuries or sickness – plus damages received
5. income exempt under treaty;
6. retirement benefits, pensions, gratuities, etc. subject to certain conditions –
a. retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual
or corporate, in accordance with a reasonable private benefit plan
maintained by the employer: Provided that the retiring official or
employee has been in the service of the same employer for at least 10
years and is not less than 50 years of age at the time of his retirement:
Provided further that the benefits granted shall be availed of by an
official or employee only once. 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 are made by such employer for
the officials or employees, or both, for the purpose of distributing to
such officials and employees the earnings and principal of the fund
thus accumulated, and wherein it 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 (See RR Nos. 1-83 and 11-2001);
b. Any amount received by an official or employee or by his heirs form
the employer as a consequence because of separation or such
employee or official from the service of the employer because of
death, sickness and other physical disability or for any cause beyond
the control of the said official or employee (RMC No. 48-2004);
c. Benefits received from SSS and GSIS; and
d. 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 Phil. from
foreign government agencies and other institutions, private or public
including the United States Veterans Administration.
7. Miscellaneous items –
a. Income derived by foreign government
b. Income derived by the government or its political subdivisions from
any public utility or from the exercise of any essential government
functions;
c. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement
but only if:
1. The recipient was selected without any action on his part to enter
the contest or proceeding;
2. the recipient is not required to render substantial future services as
a condition to receiving the prize or award;
d. Prizes and awards in sports competition;
e. 13th month pay and other benefits not exceeding Php30,000.00 or as
determined by existing rules and regulations –
i. Benefits received by officials and employees of the
national and local government pursuant to RA No. 6686
which was approved on December 14, 1988 authorizing
the grant of an annual Christmas bonus starting calendar
year 1998;
ii. Benefits received by employees pursuant to Presidential
Decree (PD) No. 851 as mended by Memorandum Order
no. 28 dated August 13, 1986 requiring all employers to
pay their employees, receiving a basic salary of not more
than Php1,000.00 a month, regardless of the nature of
their employment, a 13th month pay not later than
December 24 of every year. As amended by
Memorandum Order No. 28 on August 13, 1986, all
employees have been required to pay all their rank and
file employees a 13th month pay not later than December
24 of every year;
iii. Benefits received by officials and employees not covered
by PD No. 851 as amended by Memorandum Order No. 28
dated August 13, 1986 including the benefits under RR
Nos. 3-98, 8-2000 and 10-2000.
f. GSIS, SSS, Medicare and other contributions;
g. Gains from the sale of bonds debentures or other Certificate of
Indebtedness with a maturity of more than 5 years;
h. Gains from redemption of shares in mutual fund company as defined in
Sec. 22 (BB) of the Tax Code

The guidelines in the tax-free exchange of property for shares under Sec. 40 (C)(2)
of the Tax Code of 1997, as amended are provided for in RR No. 18-2001 and
Revenue Memorandum Order (RMO) 32-2001.

TAX SHIELD ON ALLOWABLE DEDUCTIONS

Sec. 34 (A)(1) of the Tax Code provides that there shall be allowed as a
deduction from gross income all the –
1. ordinary and necessary expenses;
2. paid or incurred during the taxable year;
3. 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:
a. A reasonable allowance for salaries, wages and other forms of
compensation for personal services actually rendered, including the
grossed-up monetary value of fringe benefits furnished or granted by
the employer to the employee: Provided, that the fringe benefit final
tax has been paid;
b. A reasonable allowance for travel expenses here and abroad (RR No,
15-2002)
c. A reasonable allowance for rentals;
d. A reasonable allowance for entertainment, amusement and recreation
expenses not to exceed such ceilings prescribed in existing rules and
regulations.

Substantiation Requirements - no deductions from gross income shall be allowed


unless the taxpayer shall substantiate with sufficient evidence, such as official
receipts or other adequate records:
a. the amount of the expense being deducted;
b. 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. compliance with existing withholding tax regulations (Sec. 34 K of the Tax
Code, as amended).

If the taxpayer decides to claim incremental allowable deduction after an initial


determination of the taxable income then any such incremental deduction has a
corresponding Tax Shield which is equivalent to the amount of tax otherwise
payable if no such incremental allowable deduction is claimed. The cash outlay
therefore of such incremental allowable deduction is reduced by the amount of tax
shield.

ILLUSTRATION

Before Training After Training Variance (Tax


Expense Shield)
Net Income before Php 50M Php 50M
training
Training expense 1M
Net income before 50M 49M Php 1M
income tax
30% tax due 15M 14.7M Php .3M

Sec. 34 of the NIRC of 1997, as amended, provides for the following deductions
subject to certain conditions:

Expenses

1. Ordinary and Necessary Trade, Business or Professional Expenses


2. Expenses allowable to private Educational Institutions – in addition:
(a) deduct expenditures otherwise considered as capital outlays or
depreciable assets for the expansion of school facilities; or
(b) deduct allowance for depreciation thereof

Bribes, Kickbacks and Other Similar Payments – no deduction from gross income
shall be allowed 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 employee of a government-owned corp. or to an
official or employee or representative of a foreign government, or to private
corporation, general professional partnership, or similar entity if the payment
constitutes a bribe or kickback.

ALLOWABLE ITEMIZED DEDCUTIONS

1. business expenses
2. Entertainment, Amusement and Recreational Expenses
3. interest
4. taxes
5. losses
6. bad debts
7. depreciation
8. depletion
9. charitable and other contribution
10.research and development
11.contribution to pension trust
12.other deductions subject to withholding tax

Private entities that employ persons with disability (PWDs) either as a regular
employee, apprentice or learner shall be entitled to an additional deduction, from
their gross income equivalent to 25% of the total amount paid as salaries and
wages to PWDs.

Furthermore, entities that improve or modify their physical facilities in order to


provide reasonable accommodation, for disabled persons shall also be entitled to an
additional deduction from their net taxable income, equivalent to 50% of the direct
costs of the improvements or modifications. However, this incentive does not apply
to improvement or modification of facilities under Batas Pambansa Bilang 344.
These incentives are provided for in RR 8-93 pursuant to RA No. 7277 otherwise
known as the “Magna Carta for Disabled Persons”.

RR No. 4-2006, amending RR No. 2-94 provides that establishments granting sales
discounts to senior citizens are entitled to deduct the said discount from gross
income subject to certain conditions. Furthermore, private establishments
employing senior citizens shall be entitled to additional deduction from their gross
income equivalent to 15% of the total amount paid as salaries and wages to senior
citizens subject o provision of Sec. 34 of the Tax Code and its implementing rules
and regulations and that certain conditions are met.

ENTERTAINMENT, AMUSEMENT and RECREATION (EAR) Expense

These are expenses incurred in connection with the conduct of his trade, business
or exercise in profession, in entertaining, providing amusement and recreation to,
or meeting with, a guest or guests at a dining place, place of amusement, country
club, theater, play, sporting event and similar events or places.

It does not refer to fixed representation allowances that are subject to withholding
tax on wages pursuant to appropriate revenue regulations.

Entertainment facilities may include a yacht, vacation home or condominium and


any similar item of real or personal property used by the taxpayer primarily for the
entertainment, amusement, or recreation of guests or employees. To be considered
an entertainment facility, it must be owned or form part of the taxpayer’s trade,
business or profession, or rented by such taxpayer, for which the taxpayer claims a
depreciation or rental expense.

EAR expenses include depreciation and rental expense relating to facilities intended
for entertainment.

Under RR No. 10-2002, the allowed deduction from gross income: actual amount of
EAR expenses paid or incurred within the taxable year or 0.50% of net sales for
taxpayer engaged in sale of goods or properties; or 1% for taxpayers engaged in
sale of services, including exercise of profession and use or lease of properties,
whichever is lower. However, if taxpayer is deriving income from both sale of
goods/properties and services, the allowable deduction shall be determined based
on an apportionment formula taking into consideration the % of net sales/net
revenue to the total net sales/net revenue but in no case shall not exceed the
minimum percentage ceiling provided in the regulations.
Illustration of EAR expenses : Actual Expense – Php30,000.00
Net sales/Net EAR based on Maximum % Allowable EAR
revenue apportionment Ceiling of EAR Expense (lower)
formula
Sale of Goods Php 20,000.00 Php 10,000.00 Php 10,000.00
Php 2,000,000.00 (0.5%)
Sale of Services 10,000.00 10,000.00 10,000.00
Php 1,000,000.00 (1%)
Total Sales 30,000.00 20,000.00 20,000.00
Php 3,000,000.00

INTEREST

As amended by RA No. 9337 (Effective November 1, 2005), the Tax Code provides
that the taxpayer’s otherwise allowable deduction as interest expense shall be
reduced by 42% (previously 38% prior to RA No. 9337) of the interest income
subjected to final tax: Provided, that effective Jan. 1, 2009 the percentage
shall be 33%).

the 33% limitation is approximately equal to 10% divided by 30% Corporate Tax
Rate, the 10% being the difference between the 30% Corporate Tax rate and the
20% Final Withholding Tax rate on interest income form bank deposits.

Interest incurred or paid by the taxpayer on all unpaid business related taxes shall
be fully deductible form gross income and shall not be subject to the limitation on
deduction. Thus, such interest expense incurred or paid shall not be diminished by
the percentage of interest income earned which had been subjected to FWT.

No deduction shall be allowed in respect of interest under the succeeding


subparagraphs:
1. If within the taxable year an individual taxpayer reporting income on the cash
basis incurs indebtedness on which a interest is paid in advance through
discount or otherwise: Provided, that such interest shall be allowed as 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;
2. if both the taxpayer and the person to whom the payment has been made or
is to be made are persons specified under Sec. 36 (B) of the tax Code, as
amended; or
3. If the indebtedness is incurred to finance petroleum exploration.

Illustration:
Borrower A secures a Php100,000.00 loan from a bank with an annual interest of
10%. He maintains Php100,000.00 time deposit in the same bank and earns an
annual interest of 5%.

Compute:
a. Allowable deduction for interest under RA No. 9337
b. Tax shield if taxpayer is a corporation or individual
c. Net taxes after tax shield due to the government as a result of the borrowing

Interest expense = Php 10,000.00 ( 100,000.00 x 10%)


Interest income = Php 5,000.00 (100,000.00 x 5%)
30% corp. tax on creditor’s income (bank) = Php 3,000.00 (10,000 x 30%)
20% FWT on interest income (borrower’s deposit/income) = Php 1,000.00 (5,000.00
x 20%)
33% interest income limitation = Php 1,650.00 (5000.00 x 33%)
Interest expense by taxpayer (depositor) = Php (10,000.00)
Less: interest income limitation (33%) = 1650.00
a). Allowable Interest Deduction 8,350.00
b). Tax shield: 2,505.00 (8,350.00 x 30%)

Income taxes after tax shield:


Due from the Creditor (bank) Php 3,000.00
20% FWT from borrower (depositor) 1,000.00
4,000.00
Less tax shield: 2,505.00
c). Net taxes due to the gov’t. after tax shield 1,495.00

TAXES

Taxes are part of allowable deductions except:


1. Income tax’
2. Income tax imposed by authority of any foreign country;
3. Estate and Donor’s tax
4. Taxes assessed against local benefits of a kind tending to increase the value
of the property assessed;
5. Tax on sale, barter, exchange of shares of stock listed and traded through the
local stock exchange or through initial public offering (Sec. 127 (D) of the Tax
Code.)

As a rule, withholding taxes are not deductible taxes. However, the only withholding
tax that is deductible from gross income is the fringe benefit tax under certain
conditions.

Tax deduction is allowed to non-resident alien individual engaged in trade or


business in the Phil. and resident foreign corp. only if and to the extent that such
taxes are connected from sources within the Phil.

Taxes if subsequently refunded or credited, shall form part of gross income in the
year of receipt.
An alien individual and a foreign corp. shall not be allowed the credits against the
tax for the taxes of foreign countries allowed in Sec. 34 (C)(3) of the tax Code.

Tax credit is creditable from the tax due itself, while tax deduction is deducted from
the gross income to arrive at the taxable income.

LOSSES
Losses actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity, subject to the following conditions:
a. If incurred in trade, profession or business;
b. Of property connected with the trade, business or profession, if the loss
arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement ;
c. Taxpayer submits a declaration of loss sustained form casualty or from
robbery, theft or embezzlement during the taxable year within the time limit
prescribed in the regulations which shall not be less than 30 days nor more
than 90 days from the date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss; and
d. The loss must not be claimed as deductions for the estate tax purposes.

Losses include:
1. Ordinary Losses
a. losses incurred in the conduct of trade, profession or business
b. losses incurred in any transaction entered into for profit, though not
connected with trade or business
c. losses incurred on properties connected with trade or business, if the loss
arises from casualties or from robbery, theft or embezzlement

2. Net Operating Loss Carry-Over (NOLCO) subject to certain conditions – the term
‘net operating loss’ shall mean the excess of allowable deduction over gross income
of the business in a taxable year. 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 form gross income for the next three (3) consecutive
taxable years immediately following the year of such loss. A NOLCO shall be allowed
only if there has been no substantial change in the ownership of the business or
enterprise in that -
a. Not less than 75% in nominal value of outstanding issued shares, id the
business is the name of a corporation is held by or on behalf of the same persons;
or
b. Not less than 75% of the paid up capital of the corp., if the business is in
the name of the corp., is held by or on behalf of the same persons (RR No. 14-2001)
3. Capital losses, including net capital loss carry over but only to the extent of the
capital gains and subject to certain conditions:
a. On real properties considered as capital asset – not deductible;
b. On shares of stock – not deductible up to the extent of capital gain (except
shares sold or disposed through the stock exchange which are taxable under Sec.
127 of the Tax Code);
c. On other properties – deductible up to the extent of capital gains. In
computing net capital gain or loss and taxable income, the following percentage
shall be taken into account:
100% if capital asset has been held for not more than 12 months
50% if capital asset has been held for more than 12 months
This only applies to individual taxpayer. Corporation takes into account 100%
whether the holding period is less or more than 12 months.
e. Losses from short sales – Short sale is a transaction in which the seller sells
securities that he does not own, and therefore he cannot supply the
securities for delivery, in expectation of the decline of their price. The seller
in this case, is a mere speculator for his purpose being to postpone delivery
until such time when he hopes to purchase the securities at a price lower
than that received on his sale and thereby make a profit. But id the price of
the securities go up, he incurs a loss; and
f. Securities becoming worthless – Sec. 39 (A)(1) of the Tax Code provides for
the term ‘capital asset’ means property held by the taxpayer (whether or not
connected with his business) but does not include stock in trade of the
taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer or property held primarily for sale to customers in
the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation
provided in subsection (F) of Sec. 34 of the Tax Code; or real property used in
trade or business of the taxpayer.
4. Losses on wash sales of stock or securities – any loss claimed to have been
sustained from any sale or other disposition of shares of stock where it appears that
within a period beginning 30 days before the date of such sale or disposition and 30
days after such date, the taxpayer has acquired (by purchase or exchange upon
which the entire amount of gain or loss was recognized by law), or has entered into
a contract or option to acquire, substantially identical stock, then no deductions for
the loss shall be allowed under Sec. 38 of the Tax Code unless the claim is made by
a dealer on securities and with respect to a transaction made b\un the ordinary
course of the business of such dealer.
5. Wagering losses – shall be allowed only to the extent of the gains from such
transactions.
6. Abandonment losses – losses allowed in relation to abandonment of petroleum
operations while on exploration, development or production stage.

ACTUAL BAD DEBTS (RR Nos. 5-1999 and 25-2002)


Debts due to taxpayer actually ascertained to be worthless and charged off 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 Sec.
36 (B) of the Tax 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.

DEPRECIATION
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 a non-resident alien individual engaged in trade or business or
resident foreign corporation, a reasonable allowance for 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 Phil.

DEPLETION OF OIL AND GAS WELLS AND MINES


A reasonable allowance for depletion or amortization computed in accordance with
the cost-depletion method shall be granted under the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the CIR; Provided
that when the allowance for depletion shall equal the capital invested, no further
allowance shall be granted.

CHARITABLE AND OTHER CONTRIBUTIONS (RR No. 13-1998, RMC Nos. 88-2007 and
14-2008) –
1. Not to exceed the following rates of the taxpayer’s taxable income derived
from trade, business or profession as computed without the benefit of such
deduction.
a. 10% in the case of an individual
b. 5% in the case of a corporation
2. Contributions deductible in full:
a. Donations to the government – national, local, including fully owned
corporations, exclusively to finance, to provide for use 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: Provided that any donation not
in accordance with the said annual priority plan shall be subject to the
limitations prescribed in Sec. 34 (H)(1) of the Tax Code.
b. Donations to certain foreign institutions or international organization –
deductible in full in compliance with agreements, treaties, or
commitments entered into by the Gov’t. of the Phil. and the foreign
institutions o by international organizations or in pursuance of special
laws; and
c. Donations to accredited non-government organizations – ‘non-
government organization’ means a nonprofit 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 3rd month after the close of
the accredited non-government 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, or within a period prescribed in
the existing rules and regulations;
3. the level of administrative expense of which shall, on an annual
basis, conform with the existing rules and regulations but in no case
to exceed 30% of the total expenses; and
4. the assets of which, in the event of dissolution, would be distributed
to another nonprofit domestic corp. organized for similar purpose/s,
or to the state for public purpose, or would be distributed by a court
to another organization to be used in such manner and judgment of
said court shall best accomplish the general purpose for which the
dissolved organization was organized.

RR No. 10-2003 provides for the tax incentives of RA 8525 otherwise known as the
“Adopt-a-School Act of 1998.”

RESEARCH AND DEVELOPMENT


At the option of the taxpayer, the taxpayer may treat research or development
expenditures that are paid or incurred by him during the taxable year in connection
with his trade, business or profession as ordinary and necessary expenses if these
are not charged to a capital account or deferred expense account subject to
depreciation or amortization.

PENSION TRUSTS
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) 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 therefore been allowed as a deduction, and
2. is apportioned in equal parts over a period of 10 consecutive years beginning
with the year in which the transfer or payment is made.

PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE OF AN


INDIVIDUAL TAXPAYER (Sec. 34 (M) of the Tax Code, provides tha the amount of
premiums, not to exceed Php2,400.00 per family or Php200.00 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 form his gross
income: Provided, that said family has a gross income of not more than
Php250,000.00 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 his deduction.

40% OF THE GROSS SALES/RECEIPTS OR GROSS INCOME (OPTIONAL STANDARD


DEDUCTIONS)
In lieu of the deductions allowed under Sec. 34 (A) to (J) of the Tax Code, as
amended by RA No. 9504, an individual subject to tax under Sec. 24 of the Tax
Code, other than a non-resident alien, may elect a standard deduction in an amount
not exceeding 40% of his gross sales or receipts, as the case may be. In the case of
a corporation subject to tax under Sec. 27 (A) and 28 (A)(1), it may elect a standard
deduction in an amount not exceeding 40% of its gross income as defined in Sec. 32
of the same Code. Unless the taxpayer signifies in his return his intention to elect
himself of the itemized allowable deductions. An individual who required to submit
with his tax return such F/S otherwise required: Provided, further that except when
the CIR otherwise permits, the said individual shall keep such records pertaining to
his gross income during the taxable year, as may be required by the rules and
regulations promulgated by the Secretary of Finance upon the recommendation of
the Commissioner (RR 16-2008).
Prior to the effectivity of RA No. 9504 of 2008, only an individual subject to tax
under Sec. 24 of the Tax Code, as amended, other than a non-resident alien, may
elect the optional Standard Deduction in an amount not exceeding 10% of his gross
income.

ALLOWABLE OF PERSONAL EXEMPTIONS

Sec. 35 of the NIRC of 1997, as amended by RA No. 9504, provides for Allowance of
Personal Exemption for Individual Taxpayers as follows:
A. In general – for purposes of determining the tax provided in Sec. 24 (A) of the Tax
Code, there shall be allowed a basic personal exemption amounting to Php
50,000.00 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.
RR No. 4-2006, amending RR 2-94, provides that a benefactor of a senior
citizen shall be considered as head of the family with a basic personal exemption
equivalent to Php50,000.00 (previously Php25,000.00 prior to the effectivity of RA
No. 9504) and shall be allowed to avail himself/herself of that status subject to
certain conditions under RA No. 9257 “Expanded Senior Citizens Act of 2003”. The
benefactor of a senior citizen shall not, however, be entitled to claim additional
exemption of Php25,000.00 (Php 8,000.00 prior to the effectivity of RA No. 9504)
per dependednt (not exceeding 4) allowable to a married individual or head of
family with qualified dependent child/children. A benefactor shall refer to any
person, whether related to the senior citizen or not, who takes care of him/her as a
dependent.
Prior to the effectivity of RA no. 9504, the basic personal exemption were as
follows:
For single individual or married individual
judicially decreed as legally separated
with no qualified dependents Php 20,000.00
For head of the family 25,000.00
For each married individual 32,000.00

B. Additional exemption for dependents – there shall be allowed an additional


exemption of Php 25,000.00 for each dependent not exceeding 4. Prior to the
effectivity of RA No. 9504, the allowable additional exemption was Php8,000.00 for
each dependent.
In the case of legally of separated spouses, 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.
A “dependent” means a legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such dependent is not more than 21
years of age, unmarried and not gainfully employed or if such dependent,
regardless of age, is incapable of self-support because of mental or physical defect.
RR No. 10-2008 provides that an individual receiving a combination of compensatin
and business/professional income shall first deduct the allowable personal and
additional exemptions from compensation income, only the excess therefrom can
be deducted from business or professional income. In the case of husband and wife,
the husband shall be the proper claimant of the additional exemption unless he
waives it in favor of his wife.

ITEMS NOT DEDUCTIBLE

Sec. 36 (B) of the Tax Code, provides that in computing net income, no deduction
shall in any case be allowed in respect of losses from sales or exchanges pf
property directly or indirectly –
1. Between members of a family. 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 a
corp. more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by or for such individual; or
3. except in the case of distributions in liquidation, between two corp. more
than 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 corp. with
respect to the taxable year of the corp. preceding the date of the sale or
exchange was, under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company; or
4. between the grantor and a fiduciary of any trust; or
5. between the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; and
6. between a fiduciary of a trust and beneficiary of such trust.

ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

As a general rule, the taxable income shall be computed upon the basis of the
taxpayer’s annual accounting period (fiscal or calendar year, as the case may be) in
accordance with the method of accounting 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 CIR clearly reflects
the income.

RR No. 6-2006 allowed the use of the functional currency, other than the Phil. peso
for financial reporting and recording purposes. However, the income tax return and
all the other tax returns shall be filed in Phil. peso currency. When a taxpayer is
qualified to use the functional currency shall be submitted to the BIR. For purposes
of the annual income tax return, the taxpayer, however, shall submit together with
the duly audited F/S in qualified functional currency a supplementary schedule
showing the quarterly amounts of functional currency income and expenses with
translations to Phil. pesos.

RETURN OF PARENT TO INCLUDE INCOME OF CHILDREN


Sec. 51 (E) of the NIRC of 1997, as amended, provides that the income of unmarried
minors derived from property received from a living parent shall be included in the
return of the parent, except:
1. when the donor’s tax has been paid on such property; or
2. when the transfer of such property is exempt from donor’s tax

MARGINAL INCOME EARNERS


RR. No. 11-2000 provides that “Marginal Income Earners” shall refer to individuals
not otherwise deriving compensation as an employee under employer-employee
relationship but who are self-employed and deriving gross receipts not exceeding
Php100,000.00 during any 12-month calendar period. “Marginal Income Earners”
shall be entitled to the following privileges and maximum tax compliance
requirements:

(A) Compliance to Registration Bookkeeping Rules -

1. Exemption from the payment of registration fee as prescribed under Sec. 236
(B) of the Tax Code, as amended, upon registration with the BIR after
submission of minimum basic documentary requirements;
2. issuance of TIN with TIN card;
3. exemption from compliance with the issuance of registered receipts or
sales/commercial invoices;
4. exemption from the requirements of maintenance of books of accounts; and
5. exemption from attaching F/S or Account Info. Form to the filed ITR.

(B) Tax Return of Marginal Income Earners

Marginal income earners are required to file the Annual Income Tax Return (Form
No. 1700*) reflecting income from whatever source. They may or may not be
subjected to any income tax depending upon the existence of net taxable income.
(BIR Form 1700 is for an individual earning purely compensation income. BIR Form
1701 is for a self-employed individual.)
However, if the marginal income earner is a registered BMBE, than the marginal
income earner/BMBE is exempt from income tax and shall file only the Annual Info.
Return (RMC No. 40-2004).

INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURNS

Sec. 51 (A)(2) of the Tax Code, as amended by RA No. 9504, provides that every
individual earning taxable income shall file an ITR except for the following
individuals who shall not be required to file an ITR:
a. Individual whose gross income does not exceed his total personal and
additional exemptions for dependents under Sec. 35 of the same Code.
Provided, that the citizen of the Phil. and any alien individual engaged in
business or practice of profession within the Phil. shall file an income tax
return, regardless of the amount of gross income;
b. An individual with respect to pure compensation income as defined in Sec. 32
(A)(1) of the Tax Code, as amended, derived from sources within the Phil., the
income tax on which has been correctly withheld under the provisions of Sec.
79 of the same 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.
c. An individual whose sole income has been subjected to final withtholding tax
pursuant to Sec. 57 (A) of the Tax Code, as amended; and
d. A minimum wage earner or an individual who is exempt from income tax
pursuant to the provisions o f the Tax Code and other laws, general or
special.

The term minimum wage earner (MWE) shall refer to a worker in the private sector
who is 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.
The term ‘statutory minimum wage’ shall refer to the 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).
Every corp. subject to income tax, except foreign corp. not engaged in trade or
business in the Phil., shall render, in duplicate a true and accurate quarterly income
tax return and final or adjustment return. The return shall be field by the president,
vice-president or other principal officer and shall be sworn to by such officer and by
the treasurer or assistant treasurer. An entity not required to file info. Return
pursuant to rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the CIR.

PLACE/DUE DATE OF FILING

Sec. 51 of the Tax Code, as amended, provides that except in cases where the CIR
otherwise permits, the ITR shall be filed with an authorized agent bank (AAB),
Revenue District Officer (RDO), 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 Phil. or if there be no legal residence or place of business in the
Phil., with the office of the CIR.
The deadlines in the filing of tax returns and payment of taxes for the different
types of income tax, including creditable withholding tax and FWT are found in the
instruction (back portion) of each return applicable to the tax type to be declared.

SUBSTITUTED FILING OF ITR OF EMPLOYEES


RR No. 3-2002 as amended by RR No. 19-2002 provides that an employee receiving
purely compensation income from only one employer for one taxable year whose
tax due is equal to tax withheld and an individual-payee whose compensation
income is subject to FWT shall no longer file an income tax return since BIR Form
No. 1604 –CF shall be considered as a substituted return filed by the employer. BIR
Form No. 2316 duly certified by both employee and employer shall serve the same
purpose as if a BIR Form No. 1700 had been filed, such as proof of financial capacity
for purposes of loan, credit, or other application or for the purpose of availing tax
credit in the employees home country and for other purposes with various
government agencies. This may also be used for purposes of securing travel tax
exemption, when necessary. (RR No. 3-2003 and RMC No. 1-2003)
The employer-withholding agent (W/A) and employees are required to retain copies
of the duly signed BIR Form No. 2316 for a period of 3 years required under the Tax
Code.