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NATIONAL INTERNAL REVENUE CODE OF 1997
 Revenue generation has undoubtedly been a major consideration in
the passage of the Tax Code.
Powers and duties of the BIR
 The powers and duties of the BIR shall comprehend:
1. The assessment and collection of all national internal revenue
taxes, fees and charges;
2. The enforcement of all forfeitures, penalties and fines connected
therewith;
3. The execution of judgments in all cases decided in its favor by
the CTA and the ordinary courts; and
4. Effecting and administering the supervisory and police powers
conferred to it by the Tax Code and other laws.
 The power of taxation is sometimes called also the power to destroy.
Therefore, it should be exercised with caution to minimize injury to
the proprietary rights of a taxpayer. It must be exercised fairly,
equally, and uniformly, lest the tax collectors kill the hen that lays the
golden egg. And, in order to maintain the general public’s trust and
confidence in the Government, this power must be used unjustly and
not treacherously.
 The term “all national internal revenue taxes, fees, and charges, is
used in the Tax Code in a broad sense as encompassing all
government revenues collectible by the CIR.
 As applied to taxation, revenue is the product or fruit of taxation.
 The BIR shall be under the supervision and control of the DOF.
Chief Officials of the BIR
 The chief officials are the following:
1. Commissioner of Internal Revenue, who shall act as the chief;
and
2. Four deputy commissioners, who shall each act as his
assistants, and who shall each be the head of the following
groups, viz:
a. Legal and enforcement group
b. Operations group
c. Information systems group
d. Resource management group
 The offices of the chief officials of the BIR are all located in the
National Office, the functions of which are confined to the national
policy formulation and program planning for efficient and effective
implementation of internal revenue laws and regulations, including
other special tax laws, and the general direction, guidance, and
control of the entire operations of the Bureau.
Power of the Commissioner to interpret tax laws and decide tax cases
1. The CIR shall have the exclusive and original jurisdiction to
interpret the provisions of the Tax Code and other special tax
laws, subject to review by the SOF.
2. The CIR shall also have the power to decide the following tax
cases but subject to the exclusive appellate jurisdiction of the
CTA:
a. Disputed assessments,
b. Refunds of internal revenue taxes, fees or other charges;
c. The penalties imposed in relation thereto, or
d. Other matters arising under the Tax Code, other tax laws or
portions thereof administered by the BIR.
 In the exercise of his jurisdiction to interpret the provisions of the Tax
Code, the CIR shall have the exclusive and original jurisdiction to
recommend to the SOF the promulgation of Revenue Regulations,
the issuance of BIR rulings and other revenue issuances:
1. Revenue Regulations (RRs) – These are issuances signed by
the SOF, upon recommendation of the CIR, that specify,
prescribe or define rules and regulations for the effective
enforcement of the provisions of the NIRC and related statutes.
2. BIR Rulings – these are official positions of the CIR to queries
raised by taxpayers and other stakeholders relative to
clarification and interpretation of tax laws. BIR rulings may in the
form of BIR Rulings issued by the Law Division, VAT rulings
issued by the VAT Review Committee and ITAD Rulings issued
by the International Tax Affairs Division (ITAD).
- They are administrative interpretations of the tax laws as
applied and implemented by the BIR. They can be relied
upon by taxpayers and are valid until otherwise determined
by the courts or modified or revoked by a subsequent ruling
or opinion. They are accorded great weight and respect,
but not binding on the courts.
3. Revenue Memorandum Circulars (RMCs) – These are
issuances that publish pertinent and applicable portions, as well
as amplifications of laws, rules, regulations and precedents
issued by the BIR and other agencies/offices.
- These are considered as administrative rulings (in the
sense of more specific and less general interpretations of
tax laws) which are issued from time to time by the CIR.
4. Revenue Memorandum Order (RMOs) – these are issuances
that provide directives or instructions; prescribe guidelines; and
outline processes, operations, activities, workflows, methods,
and procedures necessary in the implementation of stated
policies, goals, objectives, plans and programs of the Bureau in
all areas of operations, except auditing.
5. Revenue Audit Memorandum Orders (RAMOs) – These are
revenue memorandum orders issued specifically stating the
audit programs of the BIR for a particular taxable year.
6. Revenue Memorandum Rulings (RMRs) – These are rulings,
opinions, and interpretations of the CIR with respect to the
provisions of the Tax Code and other tax laws, as applied to a
specific set of facts, with or without established precedents, and
which the CIR may issue from time to time for the purpose of
providing taxpayers guidance on the tax consequences in
specific situations. BIR rulings, therefore, cannot contravene
duly issued RMRs; otherwise, the Rulings are null and void ab
initio.
7. Revenue Bulletins (RBs) – These are periodic issuances,
notices and official announcements of the CIR that consolidate
the BIR’s position on certain specific issues of law and
administration in relation to the provisions of the Tax Code,
relevant tax laws and other issuances for the guidance of the
public.
8. Revenue Travel Assignment Orders (RTAOs) – These are
administrative orders issued by the CIR transferring, assigning
or re-assigning revenue officers and employees to other or
special duties connected with the enforcement or administration
of revenue laws as the exigencies of the service may require,
provided, however, that revenue officers assigned to perform
assessment or collection functions shall not remain in the same
assignment for more than three years.
9. Revenue Special Orders (RSOs) – These are administrative
orders issued by the CIR assigning revenue officers and
employees to special duties which shall not exceed one year.
 It is widely accepted that the interpretation placed upon statute by
executive officers, whose duty is to enforce it, is entitled great respect
by the courts. Nevertheless, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous.
 BIR ruling can be invoked only by the taxpayer who sought the same.
 Taxpayers should exhaust all administrative remedies before
questioning the validity of a revenue issuance in the court.
 The party with an administrative remedy must not only initiate the
prescribed administrative procedure to obtain relief but also to pursue
it to its appropriate conclusion before seeking judicial intervention in
order to give the administrative agency an opportunity to decide the
matter itself correctly and prevent unnecessary and premature resort
to the court.
 A ruling of the CIR shall be presumed valid until overturned or
modified by the SOF.
 A taxpayer who receives adverse ruling from the CIR may, within 30
days from the date of receipt of such ruling, seek its review by the
SOF. The request for review must be in writing and under oath.
 The SOF may, of his own accord, review the ruling issued by the
CIR. In such a case, the SOF shall order the CIR to transmit a
duplicate copy of the BIR records. The CIR shall transmit such
records within 15 days from receipt of notice of the request for
transmittal.
 The SOF may affirm, reverse or modify a ruling of the CIR.
 In the case of an affirmation, the SOF may rely wholly on the reasons
stated in the ruling of the CIR.

 Subject to Section 246 of RA 8424, a reversal or modification of the
ruling shall terminate its effectivity upon the date of the receipt of
written notice of such reversal or modification by the taxpayer or by
the BIR.
 The expanded jurisdiction under RA 9282 transferred to the CTA the
jurisdiction of the RTCs and the CAs over matters involving criminal
violation and collection of revenues under the NIRC.
 An original action for refund cannot be brought directly to the CTA. It
has to be filed first with the CIR and it can be brought only to the CTA
incase of the CIR’s denial of the claim or because of inaction for a
period of 180 days from the time of the filing of the supporting
documents.
 Original jurisdiction is the power of the court to take judicial
cognizance of a case instituted for judicial action for the first time
under conditions provided by law.
 Appellate jurisdiction is the authority of a Court higher in rank to re-
examine the final order or judgment of a lower court which tried the
case now elevated to judicial review.
 The court in division shall exercise exclusive original or appellate
jurisdiction to review by appeal the following:
1. Decisions of the CIR in cases involving disputed assessments,
refunds of internal revenue taxes, fees, or other charges,
penalties in relation thereto, or other matters arising under the
NIRC or other laws administered by the BIR;
2. Inaction by the CIR in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the
NIRC or other laws administered by the BIR, where the NIRC or
other applicable law provides a specific period for action
- In case of disputed assessments, the inaction of the CIR
within the 180-day-period under Section 228 of the NIRC
shall be deemed a denial for purposes of allowing the
taxpayer to appeal his case to the Court and does not
necessarily constitute a formal decision of the CIR on the
tax case.
- Should the taxpayer opt to await the final decision of the
CIR on the disputed assessments beyond the 180-day-
period abovementioned, the taxpayer may appeal such
final decision to the Court.
- In the case of claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a petition for
review with the court prior to the expiration of the two-year-
period.
 The court in division shall exercise exclusive jurisdiction over cases
involving criminal offenses:
1. Original jurisdiction over all criminal offenses arising from
violations of the NIRC and other laws administered by the BIR,
where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is P1,000,000 or more; and
2. Appellate jurisdiction over appeals from the judgments,
resolutions or orders of the RTCs in their original jurisdiction in
criminal offenses arising from violations of the NIRC and other
laws administered by the BIR, where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is
less than P1,000,000 or where there is no specified amount
claimed.
 The court in division shall have exclusive jurisdiction over tax
collection cases:
1. Original jurisdiction over tax collection cases involving final and
executory assessments for taxes, fees, charges and penalties,
where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is P1,000,000 or more; and
2. Appellate jurisdiction over appeals from the judgments,
resolutions or orders of the RTCs in tax collection cases
originally decided by them within their respective territorial
jurisdiction.
 The CTA en banc shall exercise exclusive appellate jurisdiction to
review by appeal the following:
1. Decisions or resolutions on motions for reconsideration or new
trial of the court in division in the exercise of its exclusive
appellate jurisdiction over tax collection cases decided by the
RTCs in the exercise of their original jurisdiction involving final
and executory assessments for taxes, fees, charges and
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penalties, where the principal amount of taxes and penalties
claimed is less than P1,000,000.
2. Decisions, resolutions or orders of the RTCs in tax collection
cases decided or resolved by them in the exercise of their
appellate jurisdiction.
3. Decisions, resolutions or orders on motions for reconsideration
or new trial of the Court in division in the exercise of its exclusive
original jurisdiction over tax collection cases.
4. Decisions, resolutions or orders on motions for reconsideration
or new trial of the court in division in the exercised of its
exclusive original jurisdiction over cases involving criminal
offenses arising from violations of the NIRC and other laws
administered by the BIR.
5. Decisions, resolutions or orders on motions for reconsideration
or new trial of the court in division in the exercise of its exclusive
appellate jurisdiction over criminal offenses mentioned in the
preceding subparagraph.
6. Decisions, resolutions or orders of the RTCs in the exercise of
their appellate jurisdiction over criminal offenses.
 In criminal cases where the CTA has exclusive original jurisdiction,
the right to file a separate civil action for the recovery of taxes may
not be reserved.
 The filing of the criminal action shall necessarily carry with it the filing
of the civil action. No right to reserve the filing of such action
separately from the criminal action shall be allowed or recognized.
 Proceedings before the CTA in the exercise of its exclusive original
jurisdiction are in the nature or trial de novo.
 Trial de novo is the conduct of a formal trial to prove every minute
aspect of the claim. It is a type of appeal in which the appeals court
holds a trial as if a prior trial had never been held.
 Trial de novo means trial anew or trial for the second time. When a
new trial is granted, the original judgment is vacated and the action
stands for trial de novo and the case is reverted back to its status
prior to the promulgation of the judgment.
 CTA, not he RTC, exercises exclusive appellate jurisdiction over all
issuances and rulings issued by the CIR.
 A taxpayer should first file a motion for reconsideration to the CIR
and exhaust all administrative remedies available to him before
proceeding to the CTA.
 Where what is assailed is the validity or constitutionality of a law, or a
rule or regulation issued by the administrative agency in the
performance of its quasi-legislative function, the regular courts have
jurisdiction to pass upon the same.
 The CTA has no jurisdiction to try an assessment case which was
never appealed to it. In hearing a refund case, the CTA cannot hear
in the same case an assessment dispute even if the parties involved
are the same parties.
 Section 7, RA 1125. The CTA shall have exclusive jurisdiction to
review, by appeal, decisions of the CIR in cases involving disputed
assessments, refunds of internal revenue taxes, fees, or other
charges, penalties in relation thereto, or other matters arising under
the NIRC or other laws administered by the BIR.
 PNOC vs. CA. RA 1125, specifically section 7 on the jurisdiction of
the CTA, is an exception to PD 242. Thus, CTA shall exercise
exclusive appellate jurisdiction over tax disputes and controversies
enumerated therein.
 Disputes, claims and controversies, falling under Section 7 of RA
1125, even though solely among government offices, agencies, and
instrumentalities, including GOCCs, remain in the exclusive appellate
jurisdiction of the CTA.
 Appeal from the CIR’s decision to CTA should be done within 30
days from receipt of the decision. This requirement is jurisdictional
and failure to comply therewith may be raised in a motion to dismiss.
 The findings of fact of the CTA are entitled to great weight and will
not be disturbed on appeal unless it is shown that the lower courts
committed gross error in the appreciation of facts. Said findings shall
be binding on the SC unless such findings are not supported by
substantial evidence.
 Under RA 9282, appeals from the decisions of CTA en banc are now
brought to the SC. File a verified petition on certiorari within 15 days
from receipt of copy of the decision or resolution. If such party has
filed a motion for reconsideration or for new trial, the period herein

fixed shall run from the party’s receipt of a copy of the resolution
denying the motion for reconsideration or for new trial.
Power of the Commissioner to access information, and to summon,
examine, and take testimony of persons.
 In the exercise of the above power, the CIR is authorized to do the
following:
1. To examine any book, paper, record or other data which may be
relevant or material to such inquiry:
2. To access third party information to be able to ascertain the
correctness of any return:
3. To summon the following:
a. The person liable for tax;
b. The person required to file a return;
c. Any officer or employee of such person;
d. Any person having possession, custody or care of the
books of accounts and other records containing entries
relating to the business of the person liable for tax; or
e. Any person to appear before the CIR or his duly authorized
representative at a time and place specified in the
summons; and
f. Any person to produce such books, papers, records, or
other data, and to give testimony;
4. To take such testimony of any person concerned, under oath, as
may be relevant or material to such inquiry.
5. To conduct tax mapping from time to time of any revenue district
or region.
 All of these powers shall not be construed as granting the CIR the
authority to inquire into the taxpayer’s bank deposits because said
power can only be exercised by the CIR under the provisions of
Section 6(F) of the NIRC.
 CIR vs. Gonzales. The lack of consent of the taxpayer under
investigation does not imply that the BIR obtained the information
from third parties illegally or that the information received is false or
malicious. Nor does the lack of consent preclude the BIR from
assessing deficiency taxes on the taxpayer based on the documents.
To require consent of the taxpayer would defeat the intent of the law
to help the BIR assess and collect the correct amount of taxes.
Power to examine returns and determine the tax due
 This is the authority given to the CIR or his duly authorized
representative to examine the return filed and assess the correct
amount of tax due whether or not a return has been filed by such
taxpayer.
 The tax or deficiency tax so assessed shall be paid upon notice and
demand from the CIR or from his duly authorized representative.
 The CIR can delegate his power to make tax assessments to
subordinate officers.
 Any tax return, statement, or declaration filed in any office authorized
to receive the same shall not be withdrawn.
 But said tax return, statement or declaration filed may be modified,
changed or amended within three years from the date of such filing,
provided that no notice for audit or investigation of such return,
statement or declaration has, in the meantime, been actually served
upon the taxpayer.
 The CIR may use the power to assess the proper tax based on the
best evidence obtainable in the following instances:
1. When a report required by law as a basis for the assessment of
any national internal revenue tax shall not be forthcoming within
the time fixed by laws or rules and regulations, such as when the
taxpayers have neglected or refused to make returns; or
2. When there is reason to believe that any such report is false,
fraudulent, incomplete or erroneous.
 Best evidence obtainable shall refer to any book, paper, record, data
or other information or evidence obtained by the internal revenue
officers from any person other than the person whose internal
revenue tax liability is subject to audit or investifation, or from any
officer or officer of the national and local governments, government
agencies, and instrumentalities, government-owned or –controlled
corporations, and from all other sources with whom the taxpayer had
previous transactions or from whom he received any income, which
the internal revenue officer may use as basis for his assessment
when the report required by law as basis for the assessment is not
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forthcoming within the time fixed by law, or when there is reason to
believe that any return filed by the taxpayer is false, fraudulent,
incomplete, or erroneous.
 The assessment made by the CIR or by his duly authorized
representative shall be prima facie presumed correct and the burden
of proof of showing the incorrectness or inaccuracy shall of such
assessment or its details lies with the taxpayer.
 CIR vs. Kudos Metal Corp. As to the alleged delay of the taxpayer to
furnish the BIR of the required documents, this cannot be taken
against him. neither can the BIR use this as an excuse for issuing the
assessments beyond the three-year period because with or without
the required documents, the CIR has the power to make
assessments based on the best evidence obtainable.
Power to conduct inventory taking, surveillance, and benchmarking
 This power is the basis of the conduct of performance bench-marking
method which may be used as the basis for assessing the taxes.
 When it is found that the taxpayer has failed to issue receipts and
invoices, or when there is reason to believe that the books of
accounts or other records of the taxpayer do not correctly reflect the
declarations made, then the CIR has the power to prescribe
presumptive gross sales and receipts.
 Inventory taking is the stock-taking at any time during the taxable
year which consists of the verification of the actual volume, number
or level of inventory or stock so as to ascertain the flow or average
trend of business transactions for purposes of determining the correct
internal revenue tax liabilities of the subject.
 Open-surveillance – where the monitoring of the sales or receipts of a
subject taxpayer is done by assigning Revenue Officers to the
subject business establishment or premises if there is reason to
believe that the taxpayer is not declaring his correct income, sales or
receipts for tax purposes.
Authority to terminate taxable period
 The following are the instances when the CIR may terminate the
taxable period and order the immediate payment of the tax for the
terminated period and any remaining tax that is unpaid:
1. When the taxpayer is retiring from business subject to tax;
2. The taxpayer intends to leave the Philippines or to remove his
property therefrom or to hide or conceal his property; or
3. The taxpayer is performing any act tending to obstruct the
proceedings for the collection of the tax for the past or current
quarter or year or to render the same totally or partially
ineffective unless such proceedings are begun immediately.
 Because of the termination of the taxable period, said taxes shall be
due and demandable immediately.
Authority to prescribe real property values
 The CIR has the power to divide the Philippines into different zones
or areas, and determine the fair market value or real properties in
each zone or area, upon consultation with competent appraisers from
private and public sectors.
 For purposes of computing any internal revenue tax, the value of the
property shall be, whichever is the higher of:
1. The fair market value as determined by the CIR; or
2. The fair market value as shown in the schedule of values of the
Provincial and City Assessors.
 RDO has no authority to unilaterally use the FMV as basis for
determining the capital gains tax and not the zonal value as
determined by the Commissioner.
 The CIR’s act of re-classifying the subject properties from residential
to commercial cannot be done without first complying with the
procedures prescribed by law.
 Section 1(b) of the 1995 Zonal Valuation Guidelines operates only
when no zonal valuation has been prescribed. If the properties
located in a certain place were already subject to a zonal valuation,
such as when the schedule of zonal values in a place where the
subject lots are situated, ahs a single classification only – that of a
residential area, then Section 1(b) of the Zonal Valuation Guidelines
does not apply because it is clear that a zonal value has already
been prescribed.
 Certain guidelines in the Implementation of Zonal Valuation of Real
Properties for RDO No. 38, applying the predominant use of property

as the basis for the computation of the CGT and DST shall apply only
when the real property is located in an area or zone where the
properties are not yet classified and their respective zonal valuation
are not yet determined.
 Zonal valuation was established with the objective of having an
efficient tax administration by minimizing the use of discretion in the
determination of the tax based on the art of the administrator on one
hand and the taxpayer on the other hand. Zonal value is determined
for the purpose of establishing a more realistic basis for real property
valuation. Since internal revenue taxes, such as CGT and DST, are
assessed on the basis of valuation, the zonal valuation existing at the
time of the sale should be taken into account.
 The burden of proof is on the BIR to prove that the classification and
zonal valuation in a certain place have been revised in accordance
with the prevailing memorandum. In the absence of proof to the
contrary, the Zonal Values of Real Properties must be followed.
 Actual use is not considered in zonal valuation, but the predominant
use of other classification of properties located in the zone.
Authority to inquire into bank deposit accounts and other related
information held by financial institutions, and authority to supply
information requested by Foreign Tax Authority.
 Under Section 6(f) of the Tax Code, the CIR or his duly authorized
representative has been allowed, in certain cases, to inquire or look
into the bank deposits of a taxpayer, viz:
1. To determine the gross estate of a decedent;
2. Whenever a taxpayer filed an application for compromise of his
tax liability under Section 204(A)(2) of the Code by reason of
financial incapacity to pay his tax liability, wherein his application
shall not be considered unless and until he waives in writing his
privilege under RA 1405, RA 6426, otherwise known as the
Foreign Currency Deposit Act of the Philippines, or under other
general or special laws, and such waiver shall constitute the
authority of the CIR to inquire into the bank deposits of the
taxpayer.
3. Upon request for the supply of tax information for a specific
taxpayer or taxpayers from a foreign tax authority pursuant to an
international convention or agreement on tax matters to which
the Philippines is a signatory or a party of: Provided, That the
information obtained from the banks and other financial
institutions may be used by the BIR for tax assessment,
verification, audit and enforcement purposes.
 Even a joint account deposit of a decedent will not preclude the CIR
from inquiring thereon because the law mandates that if a bank has
knowledge of the death of a person, who maintained bank deposit
account alone, or jointly with another, it shall not allow any withdrawal
from the said deposit account unless the CIR has certified that the
taxes imposed thereon have been paid.
 The provisions of the Tax Code granting this power is an exception to
the Secrecy of Bank Deposits Law.
 The CIR may obtain information on bank deposits held by financial
institution to respond to request of foreign tax authority.
 Once the information is gathered pursuant to a request for exchange
of information under an international convention or agreement on tax
matters, the BIR is likewise authorized to use, for tax assessment,
verification, audit and enforcement purposes, any such information
obtained from financial institutions.
 For the purpose of exchanging information pursuant to an
international convention or agreement on tax matters, the CIR is
hereby designated as the competent authority. Any such exchange of
information shall not constitute an unlawful divulgence of information
under the NIRC.
 Income tax returns of specific taxpayers subject to a request for
exchange of information by a foreign tax authority pursuant to an
international convention or agreement on tax matters shall be open to
inspection upon the order of the President of the Philippines, under
rules and regulations as prescribed by the SOF, upon the
recommendation of the CIR.
 An information received by a foreign tax authority from the BIR shall
be absolutely confidential.
 In order for the BIR to promptly act upon a request, the following
should be clearly stated in the request:
1. The identity of the person under examination or investigation;
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2. A statement of the information being sought including its nature
and the form in which the said foreign tax authority prefers to
receive the information from the CIR;
3. The tax purpose for which the information is being sought;
4. Grounds for believing that the information requested is held in
the Philippines or is in the possession or control of the a person
within the jurisdiction of the Philippines;
5. To the extent known, the name and address of any person
believed to be in possession of the requested information;
6. A statement that the request is in conformity with the law and
administrative practices of the said foreign tax authority such
that if the requested information was within the jurisdiction of the
said foreign tax authority, then it would be able to obtain the
information under its laws or in the normal course of
administrative practice and that it is in conformity with an
international convention or agreement on tax matters;
7. A statement that the requesting foreign tax authority is also
allowed under its domestic laws to exchange or furnish the
information subject of the request; and
8. A statement that the requesting foreign tax authority has
exhausted all means available in its own territory to obtain the
information, except those that would give rise to disproportionate
difficulties.
 All request for information pursuant to an international convention or
agreement on tax matters shall be coursed through the ITAD.
 A taxpayer shall be duly notified in writing by the CIR that a foreign
tax authority is requesting for exchange information held by financial
institutions pursuant to an international convention or agreement on
tax matters, within 60 days from receipt of such request.
Authority to accredit and register tax agents/practitioners
 Tax agent/practitioners are those who are engaged in the regular
preparation, certification, audit and filing of tax returns, information
returns or other statements or reports required by the Code or
Regulations; those who are engaged in the regular preparation of
requests for ruling, petitions for reinvestigation, protests, requests for
refund or tax credit certificates, compromise settlement and/or
abatement of tax liabilities and other official papers and
correspondence with the BIR, and other similar or related activities,
or those who regularly appear in meetings, conferences, and
hearings before any office of the BIR officially on behalf of a taxpayer
or client in all matters relating to a client’s rights, privileges, or
liabilities under laws or regulations administered by the BIR, shall be
deemed to be engaged in tax practice and are required to apply for
accreditation.
Powers and functions of the Accreditation Boards
 It shall be the duty of the Accreditation Boards to act upon all
applications to practice before the BIR, to institute and provide for the
conduct of accreditation, suspension and disaccreditation
proceedings and to perform such other functions as prescribed by
the SOF.
 Any adverse decision of the RRAB and RNAB shall be appealable to
the CIR.
 Any adverse decision of the CIR may be appealed to the SOF, who
shall rule on the appeal within 60 days from receipt of such appeal.
Failure of the SOF to rule on the appeal within the prescribed period
shall be deemed an affirmation of the decision of the CIR denying the
accreditation.
 The RRAB and the RNA shall have the jurisdiction over and shall
require accreditation with the BIR of the following persons:
1. Individual tax practitioners engaged in private practice who are
CPAs; CPA-Lawyers who issue/sign auditor’s certificate or
otherwise perform functions exclusively pertaining to a CPA; and
individuals other than CPAs who meet the qualifications
prescribed in these Regulations;
2. Partners of a GPP engaged in the practice of taxation
accountancy, and/or auditing; their duly authorized officers or
representatives who regularly appear or otherwise engaged in
tax practice before the BIR;
3. GPP engaged in the practice of taxation, accountancy, and/or
auditing who regularly appears or otherwise engaged in tax
practice before the BIR;

4. Officers or duly authorized representatives of incorporated
business entities engaged in accounting, auditing or tax
consultancy services.
 The following individuals are allowed to appear and practice before
the BIR without undergoing accreditation proceedings:
1. Individual-taxpayers acting on their own behalf provided they
present satisfactory identification;
2. Members of the Philippine Bar not suffering from
suspension/disbarment. However, they may at their option, to
apply for accreditation;
3. Other individuals presenting satisfactory roof of identification or
authority in any of the following circumstances of limited practice
or special appearances:
a. An individual representing a member of his or her
immediate family;
b. A regular full-time employee representing an individual
employer;
c. A bona fide officer or a regular full-time employee in
representation of his employer-corporation, association or
organized group;
d. A trustee, receiver, guardian, administrator, executor, or
regular full-time employee in representation of a trust,
receivership, guardianship or estate;
e. An officer or a regular employee of a government unit,
agency, or instrumentality representing said unit, agency or
instrumentality in the course of his or her official duties.
 In general, the grant of accreditation shall be based on the applicant’s
professional competence, integrity and moral fitness. The following
are the minimum qualifications:
1. For individual tax agents (other than a member of the Philippine
bar)
a. He must be a CPA or good standing with current
professional license from the PRC;
b. If not a CPA, he must have obtained at least a degree in
Law, Juris Doctor or its equivalent, or a Bachelor’s degree
in arts, commerce or Business Administration with at least
18 units in accounting and/or taxation in a college or
university recognized by DepEd/CHED or in a foreign
school of known repute or one duly recognized by its
government.
c. Must be of good moral character
d. Must not have been charged with and convicted by final
judgment of a crime involving moral turpitude, or found
guilty of any act or omission penalized under the Tax Code,
or found guilty of aiding or abetting or causing the
commission of any of the offense by another;
e. Must be a citizen of the Philipines;
f. Must have completed six hours per year or a total of 18
hours for the 3 years of continuing professional education
in taxation from trainings/seminars conducted by the BIR or
from private institutions.
2. For General Professional Partnerships (GPPs). The partners
and/or the duly authorized officers and representatives thereof
shall conform with the following:
a. The partners and duly authorized officers or
representatives thereof must meet all the qualifications of
an individual tax agent prescribed above. In lieu of the
submission of documents or proof thereof, said
qualifications may be certified to under oath by the
managing partner of the firm; and
b. The partnership is one registered with the SEC.
3. In the case of incorporated entities engaged in accounting and
tax consultation other than GPPs:
a. The firm must be registered with the SEC; and
b. The applicant-officer or duly authorized representatives
thereof must meet all the qualifications of an individual as
prescribed hereof.
 All accredited Tax Agents shall be registered.
Authority to prescribe additional procedural or documentary requirements
 The CIR shall prescribe the manner of compliance with any
documentary or procedural requirement in connection with the
5
submission or preparation of financial statements accompanying the
tax returns.
Authority of the CIR to delegate power
 GR. The CIR may delegate the powers the powers vested in him to
any or such subordinate officials with the rank equivalent to a division
chief or higher, subject to certain limitations and restrictions.
 XPN. The following cannot be delegated:
1. The power to recommend the promulgation of rules and
regulations by the SOF.
2. The power to issue rulings of first impression or to reverse,
revoke or modify any existing ruling of the Bureau.
3. The power to compromise or abate any tax liability.
 XPNs to the XPNs:
1. The assessments issued by the regional offices involving basic
deficiency taxes of P500,000 or less; and
2. Minor criminal violations, discovered by the regional and district
officials, may be compromised by the REB.
 The power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are produced or
kept, as often as the exigencies of the revenue service may require,
provided that in no case the stay of the said revenue officer in his
assignment shall not be more than two years.
 The power to assign or reassign Internal Revenue Officers and other
employees to other duties, without change in their official rank and
salary, connected with the enforcement or administration of the
revenue laws as the exigencies of the service may require.
 The internal revenue officers assigned to perform assessment or
collection functions shall not remain in the same assignment for more
than three years while the assignment of internal revenue officers
and employees of the Bureau to special duties shall not exceed one
year.
 BIR Rulings of first impression are the official positions of the CIR to
queries raised for the first time by a taxpayer or other stakeholders
relative to clarification and interpretation of tax laws.
 In order to be considered as a valid BIR ruling of first impression, the
ruling must be the first ever ruling issued by the CIR on that particular
tax issue. It must also be issued within the scope of the authority
granted by the CIR, and should not contravene any law or regulation
or any decision of the SC.
Modes of payment of internal revenue taxes through Authorized Agent
Banks
 Aside from the electronic payment system currently used by some
taxpayers in paying their BIR taxes, the rest shall pay their tax
liabilities through any of the following modes:
1. Over-the-counter cash payment – refers to the payment of tax
liabilities to authorized agent bank in currencies that are legal
tender in the Philippines.
2. Bank debit system – refers to the system whereby a taxpayer,
through a bank debit memo/advice, authorizes withdrawals from
his/its existing bank accounts for payment of tax liabilities.
- This system is allowed only if the taxpayer has a bank
account with the AAB taxpayer has a bank account with the
AAB branch where he/it intends to file and pay his/its tax
return/form/declaration, provided said AAB branch is within
the jurisdiction of the BIR RDO/LTDO where the tax
payment is due and payable.
3. Checks – refers to a bill of exchange or order instrument drawn
on a bank payable on demand.
 In the issuance and accomplishment of checks for the payment of
internal revenue taxes, the taxpayer shall indicate in the space
provided for “Pay to the order of” the following data:
1. Presenting/collecting bank or the bank where the payment is to
be coursed; and
2. For account of BIR as payer;
3. Under the account name the TIN.
 The following checks are not acceptable as payments for internal
revenue taxes:
1. Accommodation check – one issued or drawn by a party other
than the taxpayer making the payment.
2. Second endorsed check – one issued to the taxpayer as payee
who indorses the same as payment for taxes.

3. Stale check – one dated more than six months prior to
presentation to the authorized agent bank.
4. Post-dated check – one dated a day or several days after the
date of presentation to the authorized agent bank.
5. Unsigned check – one with no signature of the drawer.
6. Checks with alterations/erasures.
 Second indorsement of checks which are payable to the BIR or CIR
is absolutely prohibited.
 Taxpayers shall see to it that their tax returns/payment forms with
payment are filed with and internal revenue taxes paid to legitimate
AABs of the BIR. Nonetheless, they may confirm their tax payments
with their home RDO/LTDO or LTDO/RDO where they are required to
file tax returns/payment form and payment internal revenue taxes.
 Effect of failure of the tax agent to pay the tax, in case a taxpayer
entrusts the payment of his tax to a collection agent.
- The principal is not relieved from liability for the tax with the
corresponding penalties. Such liability is not affected by the
fact that misappropriation of the amount intended for
payment of the tax was made with the connivance of the
collecting officer.
 The CIR cannot reclassify and split revenue districts at his whim and
caprice, but he may be allowed to divide/split or classify certain
revenue districts for administrative purposes and upon the approval
of the SOF.
Regional Directors in the Revenue Region
 The Philippines has been divided into 19 Revenue Regions, headed
by 19 Revenue Directors.
 These RDs directly execute and implement the policies, plans,
programs, rules and regulations promulgated by the SOF as
recommended by the CIR in the regional areas, and district offices
under their respective jurisdiction.
 Powers:
1. Implement laws, policies, plans, programs, rules and regulations
of the department or agencies in the regional area.
2. Administer and enforce internal revenue laws, and rules and
regulations, including the assessment and collection of all
internal revenue taxes, charges and fees;
3. Issue letters of Authority for the examination of taxpayers within
the region;
4. Provide economical, efficient and effective service to the people
in the area;
5. Coordinate with regional offices or other departments, bureaus
and agencies in the area;
6. Coordinate with local government units in the area;
7. Exercise control and supervision over the officers and
employees within the region; and
8. Perform such other functions as may be provided by law and as
may be delegated by the RDs.
Duties of Revenue District Officers (RDO) and other Internal Revenue
Officers
1. Ensure that all laws, rules and regulations affecting national
internal revenue taxes are faithfully executed and complied with;
2. Aid in the prevention, detection and punishment of frauds and
delinquencies in connection therewith;
3. Examine the efficiency of all officers and employees of the BIR
under his supervision;
4. Report in writing to the CIR, through the RD, any neglect of duty,
incompetency, delinquency, or malfeasance in office of any
internal revenue officer of which he may obtain knowledge, with
a statement of will the facts and any evidence sustaining each
case;
5. In the performance of his assessment functions pursuant to a
Letter of Authority issued by the RD, examine taxpayers within
the jurisdiction of the district in order to collect the correct
amount of tax; and
6. Recommend the assessment of any delinquency tax due in the
same manner that the said acts could have been performed by
the Revenue Regional Director himself.
 The following are constituted as agents of the Commissioner:
6
1. The Commissioner of Customs and his subordinates with
respect to the collection of national internal revenue taxes on
imported goods;
2. The head of the appropriate government office and his
subordinates with respect to the collection of energy tax; and
3. Banks duly accredited by the CIR with respect to receipt of
payments of internal revenue taxes authorized to be made thru
banks.
 The national internal revenue taxes being collected by the BOC for
and in behalf of the BIR on imported foods are the VAT and Excise
Tax, if any.
 It should be noted that the energy tax on electric power consumption,
which is mandated under P 36 should be withheld by electric utilities
from their respective residential consumers.
Authority of a Revenue Officer
 A letter of authority is the authority given tot eh appropriate revenue
officer assigned to perform assessment functions in any district. It
empowers or enables said revenue officer to examine the books of
account and other accounting records of a taxpayer for the purpose
of collecting the correct amount of tax.
 There must be a grant of authority before any revenue officer can
conduct an examination or assessment.
 The revenue officer so authorized must not go beyond the authority
given.
 In the absence of such authority, the assessment or examination is a
nullity.
Authority of Officers to Administer Oaths and take testimony
 Revenue officials who can administer oaths and take testimony:
1. The CIR
2. Deputy Commissioners
3. Assistant commissioners
4. Head revenue executive assistants
5. Revenue regional directors
6. Assistant revenue regional directors
7. Division chiefs
8. Assistant chiefs
9. Revenue district officers
10. Special deputies of the commissioner
11. Internal revenue officers and any other employee of the Bureau
thereunto specially deputized by the Commissioner.
 The power to administer oaths and to take testimony shall only be
performed in any official matter or investigation conducted by them
regarding matters within the jurisdiction of the Bureau.
Authority of the Internal Revenue Officers to Make Arrests and Seizures
 This does not require previous warrant but it must cover only
violations within the view of the internal revenue officials and
employees when the taxpayer violates any penal law, rules or
regulations administered by the BIR.
When violation of tax laws and regulations should be reported to the CIR
1. The internal revenue officer discovers evidence of violation of
this Code or of any law, rule or regulation administered by the
BIR;
2. The violation is of such character as to warrant the institution of
criminal proceedings;
3. He shall immediately report the facts to the CIR, through his
immediate superior, giving the name and address of the offender
and the names of the witnesses, if possible;
4. In urgent cases, the Revenue Regional Director or the RDO, as
the case may be, may send the report to the corresponding
prosecuting officer, but a copy of his report shall be sent to the
CIR.
Sources of National Internal Revenue Taxes
1. Income tax – based on income, gross or net. Except in cased of
income/earnings which are subject to the final withholding tax
which are based on the gross income, income tax is a tax on the
taxable income.
2. Estate tax – a tax levied, assessed, collected and paid upon the
transfer of the net estate of every decedent, whether resident or
 7

nonresident of the Philippines, based on the value of such net,

by including the value at the time of his death of all property,
personal or real, tangible or intangible, wherever situated.
- In case of nonresident decedent who at the time of his
death was not a citizen of the Philippines, only that part of
the estate which is situated in the Philippines shall be
included in his taxable estate.
3. Donor’s tax – tax levied, assessed and collected and paid upon
the gratuitous transfer by any living person, resident or
nonresident, of the property by gift, whether the transfer is in
trust or otherwise, whether the gift is direct or indirect, and
whether the property is real or personal, tangible or intangible
based on the total net gifts made during the calendar year.
- It is also a tax on the privilege of transmitting one’s property
or property rights to another or others without adequate and
full valuable consideration.
4. Value Added Tax – a business tax mandatorily imposed on any
person or entity with gross sales or receipts exceeding
P1,919,500, who, in the course of trade or business, sells,
barters, exchanges, leases VATable goods or properties, or
renders VATable services, and on any person who imports
goods, whether the importation is for personal use or business
use.
- It is an indirect tax and the amount of tax may be shifted or
passed on to the buyer, transferee or lessee of the goods,
properties or services.
5. Percentage Tax – a business tax imposed on any person or
entity who is not VAT-registered and who, in the course of trade
or business, sells, barters, exchanges, leases goods or
properties, renders services which are exempt from VAT, but
whose gross annual sales or receipts do not exceed
P1,919,500.
- Indirect tax which can be passed on to the buyer.
6. Excise tax – tax on goods manufactured or produced in the
Philippines for domestic sale or consumption or for any other
disposition and to things imported, which tax shall be in addition
to the VAT.
- Specific tax – based on weight or volume capacity or any
other physical unit of measurement
- Ad valorem tax – excise tax imposed and based on selling
price or other specified value of the goods.
- As used in the NIRC, excise taxes may be considered
taxes on production as they are collected only from
manufacturers and producers.
- Basically an indirect tax, excise taxes are directly levied
upon the manufacturer or importer upon removal of the
taxable goods from its place of production or from the
customs custody. These taxes, however, may be actually
passed on to the end consumer as part of the transfer
value or selling price of the goods sold, bartered, or
exchanged.
7. Documentary Stamp Tax – levied on the exercise by persons of
certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through the execution
of specific instruments.
- It is not a tax on the business transaction but an excise on
the privilege, opportunity or facility offered in exchange for
the transaction of the business, separate and apart from
the business itself.

TAX ON INCOME
Income – any wealth which flows into the taxpayer other than a mere
return of capital. Cash received or its equivalent, the amount of money
coming to a person within a specific time, or something distinct from
principal or capital
Income Tax – a tax based on income, gross or net. It refers to the tax on
earnings derived by a taxpayer for each taxable year arising from
employment or services rendered or for engaging in trade or business or
for exercising a profession.
CRITERIA USES IN IMPOSING PHILIPPINE INCOME TAX
1. Citizenship principle. The basis of the imposition of income tax is
the taxpayer’s citizenship. In case of resident citizens, they are
subject to the income tax on income derived within and without
the Philippines, while nonresident citizens are only subject to the
income tax on the income derived from within the Philippines.
2. Residence Principle. The basis of imposition of income tax is the
residence of the taxpayer. This follows territoriality principle.
3. Source Principle. The basis of the imposition of income tax is the
source of income. All income derived from sources within the
Philippines shall be subject to income tax.
GENERAL PRINCIPLES OF INCOME TAXATION
1. A resident citizen of the Philippines is taxable on all income
derived from sources within and without the Philippines.
2. A nonresident citizen is taxable only on income derived from
sources within the Philippines. (includes seaman engaged
exclusively on international trade).
3. An alien individual, whether a resident or not of the Philippines,
is taxable only on income derived from sources within the
Philippines.
4. A domestic corporation, just like a resident citizen, is taxable on
all income derived from sources within and without the
Philippines.
5. A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived
from sources within the Philippines.
CLASSIFICATION OF CITIZENS OF THE PHILIPPINES FOR
PURPOSES OF INCOME TAXATION
1. Residents citizens
2. Nonresident citizens
Resident citizens – a citizen in the Philippines residing therein.
G.R. taxable on all income derived from all sources within and
without the Philippines subject to the following tax rates:
1. his regular taxable income for each taxable year shall be
subject to scheduler tax rates of 5% to 32%
2. His passive incomes shall be subject to the applicable final
withholding taxes depending on the kind of passive income
received by him.
*Estates and trusts are taxable in the same manner as a
resident citizen.
Nonresident citizens
1. A Citizen of the Philippines who establishes his physical
presence abroad with a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
3. A citizen of the Philippines who works and derives income tax
abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year.
8
4. A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines.
*OCW or OFWs are also considered as nonresident citizens for
income tax purposes.
OCW or OFW – an individual citizen of the Philippines who is working
and deriving income from abroad. He is taxable only on income
derived from all sources within the Philippines. To be considered as
one, he must be duly registered with the POEA. Income arising out of
his overseas employment is exempt from income tax.
The income of a nonresident citizen derived from all sources within
the Philippines for each taxable year shall be subject to the following
tax rates:
1. His regular taxable income shall be subject to the scheduler tax
rates of 5% to 32%
2. However, his passive incomes shall be subject to the applicable
withholding taxes depending on the kind of passive income
received by him.
TAXATION OF INCOME OF RESIDENT ALIENS
 An alien actually present in the Philippines who is not a mere
transient or sojourner is a resident of the Philippines for the purposes
of income tax. Where he is a transient of not is determined by his
intentions with regard to the length and nature of his stay.
 A mere floating intention, indefinite as to time, to return to another
country is not sufficient to constitute him a transient.
 An alien who acquired his residence in the Philippines retains his
status as a resident until he abandons the same and actually departs
from the Philippines.
 The income of a resident alien individual derived during the taxable
year from all sources within the Philippines shall be subject to the
following tax rates:
1. His regular taxable income shall be subject to the scheduler tax
rates of 5% to 32%
2. However, his passive incomes shall be subject to the applicable
withholding taxes depending on the kind of passive income
received by him.
TAXATION OF INCOME OF RESIDENT ALIENS
 Married individuals are required by law to file a consolidated income
tax return, but they shall compute separately their individual income
tax on their income from employment based on their respective total
taxable income.
 It they have income derived from business, or there is any income
which cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same
shall be equally divided between the spouses for purposes of
determining their respective taxable income.
 They will be entitled to certain deductions like the basic personal
exemption and the additional exemption, whenever applicable, plus
they may choose between the itemized deductions incurred for
engaging in business or the 40% optional standard deduction, at the
option of the spouses.
 If they are physically separated but no judicial decree they are still
required to file consolidated returns.
 They file separate, additional husband shall be allowed only to the
husband.
TAXATION OF INCOME OF MINIMUM WAGE EARNERS
 Compensation income being paid the statutory minimum wage, as
fixed by the regional tripartite wage and productivity board/NWPC
shall be exempted from income tax.
 A senior citizen whose salary is equivalent to the SMW shall be
considered as a MWE entitled to the exemption.
 Holiday pay, overtime pay, night shift differential pay and hazard
pay shall also be covered by the exemption.
 9

 However, an employee who receives/earns additional compensation

such as commissions, honoraria, fringe benefits, benefits in excess
of the allowable statutory amount of P30,000, taxable allowances
and other taxable income shall not enjoy the exemption.
 MWEs receiving other income except income subject to final tax, in
addition to the compensation income are not exempted from income
tax on their entire income.
TAXATION OF PASSIVE INCOME OF CITIZENS AND RESIDENT
ALIENS
 The passive income of a citizen or a resident alien may either be:
1. Passive income subject to the final tax. This refers to an
income which tax due is fully collected through the withholding
tax system in the form of final withholding tax. The payor of the
income withholds the tax and remits it to the government. The
recipient is no longer required to include the item of the
income subjected of the final tax as part of his gross income in
his income tax returns.
2. Passive income not subject to the final tax. This is the passive
income not subject to the final withholding tax and therefore
should be included in the determination of the gross income
which will be subject to the regular income tax rates.
Royalties – refers to a fixed sum either in cash or property equivalent, to
be paid at a definite period for the use or enjoyment of the thing or right.
Prize – result of an effort made
Winnings - result of a transaction where the outcome depends upon luck
or chance.
Dividends – refers to the distribution made by a corporation, to its
shareholders out of its unrestricted retained earnings and payable,
whether in money or property.
Net Capital gains – selling price less cost. Selling price refers to the
consideration on the sale or fair market value of the shares of stock at the
time of the sale, whichever is higher. Cost means the original purchase
price plus other costs.
Presumed – means there is a presumed fain on the sale regardless of
whether there is a loss. The conclusive presumption of law is that there is
a gain whenever somebody sells a real property considered as capital
asset
CAPITAL GAINS FROM SALE OF SHARES OF STOCKS

The following are the passive investments income and the
corresponding final withholding tax rates of citizens of the
Philippines, including resident alien individuals:
On interest income from any currency bank deposit in
regular domestic banks, and yield or any other monetary
benefit from deposit substitutes, and trust funds and
similar arrangements.
Interest income received from a depository bank under
the expanded foreign currency deposit system, except
those received by nonresident individuals.
Interest income from a 5-year long-term deposit of
investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management
accounts and other investment certificates prescribed by
the BSP.
In case of pre-termination of said long-term deposit
before the 5th year, rates are based on the remaining
maturity:
4 years to less than 5 years
3 years to less than 4 years
Less than 3 years
Royalties from books as well as other literary works and
literary works and musical composition
Regular royalties
Prizes, except prizes amounting to P10,000 or less
Other winnings, except PCSO and lotto winnings
(exempt)
Cash and property dividends from a domestic
corporation or from an ROHQ of a multinational company
or on the share of an individual in the distributable net
income after tax of a partnership, except GPP, of which
he is a partner; or his share in the net income after tax in
a joint venture
Net capital gains from sale of shares of stock in a
domestic corporation, not listed and traded in the stock
exchange except shares sold or disposed thru the stock
exchange.
Not over P100,000
On any amount excess in P100,000
On presumed capital gains from sale of real property
located in the Philippines except sale of principal
residence
Gross income derived from contracts by sub-contractors
from service contractors engaged in petroleum
operations.
 Dealings on shares of stock of domestic corporations
1. Net capital gains from sale, barter, exchange or other
disposition of shares of stock not listed and not traded in the
local stack exchange held as capital asset shall be subject to
20% the Capital gains tax of 5% on the net capital gains not over
P100,000 plus 10% on any amount in excess of P100,000.
2. In the case, however, of sale, barter or exchange of shares of
stock of domestic corporation which are traded and listed in
7.5% the local stock exchange also held as capital asset, the same
shall be subject to the ½ of 1% stock transaction tax
3. If the sale is made by a dealer in securities, the resulting gains
Exempted is considered as ordinary income.
 Dealings in the shares of stock of a foreign corporation
 Not subject to capital gains tax but to the scheduler rates
of 5% to 32% in the case of individual seller and the
normal corporate income tax rate of 30% in the case of
corporate-seller.
CAPITAL GAINS FROM SALE OF REAL PROPERTY CLASSIFIED AS
CAPITAL ASSETS
5%  The sale by an individual will be subject to the capital gains tax if
12% the said property is considered as his capital asset, including pacto
20% de retro sales and other forms of conditional sales. (6% on the
presumed gain which is the higher value between the current fair
10%
market value or the gross selling price)
 Gross selling price – the actual selling price. For capital gains tax
20%
purposes, the tax base is whichever is the higher value between the
20%
gross selling price or the current fair market value
20%
 The essence of pacto de retro sale is that the title and ownership of
the party sold are immediately vested in the vendee a retro, subject
10%
to the resolutory condition of repurchase by the vendor a retro
within the stipulated period.
 In case of disposition of real property classified as capital asset by
individuals to the government, the capital gains shall be added to
the gross income earned during taxable year subject to scheduler
rates imposed therein, or for the final tax on the presumed capital
gains from sale of real property at 6%, at the option of the seller.
 In case of sale on installment of real property
1. If the buyer is an individual not engaged in trade or business,
5% the following rules apply:
10% a. If the sale is a sale on the installment plan, no withholding
of tax is required to be made on the periodic installment
6%
pays.
b. If the sale is on a cash basis or a deferred-payment sale
not on the installment plan, the buyer shall withhold the
8%
tax based on the gross selling price or fair market value of
the property, whichever is higher, on the first installment.
 10

2. If the buyer is engaged in trade or business, these rules shall Interest income and yield from trust funds and similar 20%
apply: arrangements
a. On installment plan – the tax shall be deducted and Royalties 20%
withheld by the buyer on every installment which tax shall Royalties on books, literary works and musical 10%
be based on the ratio of actual collection of the compositions
consideration against the agreed consideration appearing Prizes exceeding P10,000 20%
in the contract to sell applied to the gross selling price or Winnings, except PCSO and lotto 20%
fair market value of the property at the time of the Gross income from all sources with the Philippines 25%
execution of the contact to sell, whichever is higher. derived by nonresident cinematographic film owners,
- consideration – refers to the selling rice exclusive of lessors or distributos.
interest Interest income from the 5-year long-term deposit. Exempt
b. If the sale is cash basis, the buyer shall withhold the tax In case of pre-termination
based on the gross selling rice or fair market value of the 4 years to less than 5 years
property whichever is higher, on the first installment. 3 years to less than 4 years 5%
 The sale of interest in real property shall be taxable on the part Less than 3 years 12%
of the original buyer based on the realized gain thereon which is 25%
measured by the difference between the agreed consideration Cash and/or property dividends actually or 20%
and the amount actually paid by the said original buyer. constructively received from domestic corporations
On net capital gains of sales of shares of stock in a
SALE OF PRINCIPAL RESIDENCE
domestic corporation not listed and traded in the stock
exchange, held as capital asset
 If the purpose for the sale of principal residence is not to buy a
Not over P100,000
new principal residence, the sale, barter, or exchange of the said
On any amount in excess of P100,000 5%
residence is subject to the capital gains tax based on the
10%
presumed gain on the sale.
On the presumed capital gains from sale of real 6%
 May not be subject to capital gains tax, conditions:
property considered as capital assets.
1. Must be the principal residence of a natural person
Gross income from petroleum contracts (engaged in 8% in lieu
2. The proceeds of the sale must be fully utilized to acquire or
petroleum operations of any and
construct a new principal residence within the 18 calendar
all taxes,
months from the date of sale or disposition
national
3. The historical cost or adjusted basis of the real property
and local
sold or disposed shall be carried over to the new principal
residence built or acquired.
4. The owner/seller must duly notify the Commissioner within
 Only a nonresident alien individual engaged in trade, business
30 days from the sale
or in the exercise of a profession in the Philippines shall be
5. The tax exemption can only be availed once every 10 years
entitled to a personal exemption. He should file a true and
6. If there is no full utilization, the portion of the fain presumed
accurate return of the total income received by him from all
to have been realized shall be subject to capital gains tax.
sources in the Philippines.
7. The buyer/transferee shall withhold from the seller and
shall deduct from the agreed selling price/consideration the Taxation of income of nonresident alien individuals not engaged in trade or
6% capital gains tax business in the Philippines.
8. The buyer/transferee shall file within 30 days the final
capital gains tax return covering the property bought  A nonresident alien individual whose aggregate stay in the
Philippines for any one calendar year is 180 days or less is
Escrow – scroll, writing or deed, delivered by the grantor, promisor, or
considered as a nonresident alien not engaged in trade or
obligor into the hands of a third person, to be held by the latter until the
business within the Philippines.
happening of the condition
 Rules on taxation
 If within the 30 days period after the lapse of the 18-month
on the gross amount of interest, cash and/or 25%
period, the seller fails to submit the documentary evidence showing that
property dividends, rents, salaries, wages,
he has utilized the proceeds, he shall be treated as deficient in the
premiums, annuities, compensation…
payment of his capital gains tax on the sale, and shall be assessed for
On net capital gains from shares of stock of
deficiency capital gains tax, inclusive of penalties and the 20% interest
domestic corporation not listed and traded as
per annum
stock exchange, held as capital asset by
NONRESIDENT ALIEN INDIVIDUAL individuals
Not over P100,00 5%
 Classification In excess of P100,000 10%
1. Those engage in trade and business in the Philippines On the presumed capital gains from sale of real 6%
2. Otherwise property considered as capital assets
 A nonresident alien individual who shall come to the Philippines
and stay for an aggregate period of more than 180 days during
any calendar year shall be deemed a nonresident alien doing TAXATION OF INCOME OF ALIENS INDIVIDUALS SUBJECT TO THE
business in the Philippines. PREFERENTIAL TAX RATE
 In case of regular income, a nonresident alien individual
 Taxation of income on alien individual employed by RHQs and
engaged in trade or business in the Philippines shall be subject
ROHQs of Multinational Companies
to the schedular rates of 5% to 32%
 Levied, collected and aid for each taxable year upon the
 In case of passive investment derived from sources within the
gross income received.
Philippines, the same shall be subject to the following rates:  Multinational company – a foreign firm or entity engaged
in international trade with affiliates or subsidiaries or
Interest income from any currency bank deposit in 20%
branch offices in the Asia-Pacific region and other foreign
regular banking units in the Philippines
markets.
Yield or any monetary benefit from deposit substitutes 20%

 Filipinos exercising the option to be taxed at 15% preferential rate for
occupying the same managerial or technical position as that of an
alien employed in an ROHQ or RHQ must meet all the following
requirements:
1. Position and function test – the employee must occupy a
managerial position or technical position and must actually be
exercising such functions pertaining to said positions
2. Compensation Threshold test – in order to be considered
managerial or technical employee for income tax purposes, the
employee must have received, or is due to receive under a
contract of employment, a gross annual taxable compensation
of at least P975,000
3. Exclusivity test – the Filipino managerial or technical employee
must be exclusively working for the RHQ or ROHQ as a regular
employee and not just a consultant or contractual personnel
 Rank and file employees – who are holding neither managerial nor
supervisory position
 Managerial - who is vested with powers or prerogatives to lay down
and execute management policies and/or to hire, transfer, suspend,
lay-off, recall, discharge, assign or discipline employees
 Supervisory – those who effectively recommend such managerial
actions if the exercise of such authority is not merely routinary or
clerical in nature but requires the use of independent judgment.
 There shall be levied, collected and paid for each taxable year upon
the gross income received by any alien individual employed by
offshore banking units established in the Philippines as salaries,
wages, annuities, compensation, remuneration and other
emoluments, a tax equal to 15% of such gross income.
TAXATION OF INCOME OF GENERAL PROFESSIONAL
PARTNERSHIPS AND THE PARTNERS THEREOF
 General Professional Partnership – a partnership forms by
professionals for the sole purpose of exercising their common
profession, no part of income of which is derived from engaging in
any trade or business.
 GGP not subject to income tax. But they are required to file returns
of their income for the purpose of furnishing information. Partners
are taxable upon their distributive shares of the net income.
However, drawings, advances, sharings, allowances, stipends and
the like, are subject to the 15%, if the payment to the partner for the
current year exceeds P720,000; and 10% EWT if otherwise.
 Pass-through entity – where its income is ultimately taxed to the
partners compromising it.
TAXATION OF INCOME OF OTHER KINDS OF PARTNERSHIP
 GR. Partnerships are taxable just like a corporation.
 Their distributive shares are taxed as dividends subject to the final
withholding tax of 10%.
 All other partnerships, no matter how created or organized, which
include unregistered joint ventures and business partnerships, are
considered as a taxable corporations subject to the corporate
income tax.
 Co-ownership occurs when two or more heirs inherit an undivided
property from a decedent, or a donor makes a gift of an undivided
property in favor of two or more donees. It is automatically converted
into an unregistered partnership the moment the said common
properties and/or income derived therefrom are used as a common
fun with the intern to make profits.
 Requisites of a joint venture
1. Each part must make a contribution
2. There must be an intent to make profits which must be shared
among the parties
3. There must be a joint proprietary interest and right of mutual
control over the subject matter of the enterprise
4. There is a single business transaction.
 GR. a joint venture is not taxed as a corporation and is taxed just like
a GPP.
1. The joint venture should be for the undertaking of a construction
project
2. Involve joining or pooling of resources by licensed local
contractors
11
3. These local contractors are engaged in construction business
4. The joint venture itself must likewise duly licensed
 Joint ventures involving foreign contractors may also be treated as a
non-taxable corporation only if the member foreign contractor is
covered by a special license as contractor by the PCAB of the DTI.
 Absence any of the above requirements, the joint venture is taxable
as a corporation.
TAX ON CORPORATIONS
Domestic Corporations – those created or organized under the Philippine
laws.
 As a general rule, the law imposes a 30% normal corporate income
tax rate on the taxable income received by domestic corporations
and taxable partnerships.
 Sources within and without the Philippines.
Proprietary educational institutions and hospitals
 Proprietary educational institutions and hospitals which are non-profit
shall pay a tax of 10% on their taxable income, except those covered
by section 27(d). However, if the gross income from unrelated trade,
business or other activity exceeds 50% of the total gross income
derived by such educational institutions or hospitals from all sources,
the tax rate of 30% shall be imposed on the entire taxable income.
 Predominance test – if the gross income from unrelated trade,
business or other activity of the non-profit institution exceeds 50% of
the total gross income from all sources, then the entire taxable
income shall be subject to the regular corporate income tax rate of
30%.
 Unrelated trade, business or other activity – the conduct of which is
not substantially related to the exercise or performance of its primary
purpose or function.
 Proprietary educational institution – any private school maintained
and administered by private individuals or groups with an issued
permit to operate
 Section 27 (b) of the NIRC imposes a 10% preferential tax rate on
the income of proprietary non-profit educational institutions and
hospitals.
 Proprietary – private with a government permit
 Nonprofit – no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted
to the institution’s purposes and all it activities conducted not for
profit.
 Subject to 30% tax
1. When gross income from unrelated trade, business or other
activity exceeds 50% of their total gross income derived from all
sources
2. Those claiming to be within the coverage of section 27 (b) of the
NIRC that fails to meet above definition of proprietary and
nonprofit.
CIR vs. St. Luke’s Medical Center
 Revenues from paying patients are income received from activities
conducted for profit. The total revenues from paying patients are not
even incidental to its charity expenditure for non-paying patients.
Being a non-stock, non-profit corporation does not, by this reason
alone, completely exempt an institution from tax. An institution
cannot use its corporate form to prevent its profitable activities from
being taxed. St Luke’s is not operated exclusively for charitable or
social welfare purposes insofar as its revenues from paying patients
are concerned. However, it remains a proprietary nonprofit as long
as it does not distribute any of its profits to its members and such
profits are reinvested pursuant to the corporate purposes.
Government-Owned or Controlled Corporations
 Exempt from paying income tax
 PD 1177
 RA 8424, 5 GOCCs were expressly give the exemption from
payment of the corporate income tax
1. GSIS

2. SSS
3. PHIC
4. PCSO
5. PAGCOR
 RA 9337 eliminated PAGCOR
 RA 10026 added local water district.
 Philippine Health Insurance Corp. is not exempt from its
responsibilities of being a withholding agent of the BIR. Among those
responsibilities include the withholding of the correct tax on its
income payments, ranging from the payment of compensation to its
employees to the payment of its operating expenses such as
acquisition of goods and equipment, payments for services rendered
to the corporations. Under existing issuances, PHIC payments to
medical practitioners are subjected to EWT rates of 10% or 15%,
whichever is appropriate, based on the medical practitioner’s
declared gross income in a year. Payment of hospitals for medical
services provided to PHIC members are subjected to EWT rate of
2%. Professional fees, talent fees, etc. for services rendered by
professionals are subject to expanded withholding tax of either 10%,
if the gross income of the professional does not exceed P720,000 in
a year, or 15%, if the professional’s gross income exceeds P720,000
in a year. The facilities paid to the hospitals or clinic, the EWT rate
shall be 2%.
Passive Income of Domestic Corporation which are subject
to Final Withholding Tax
Interest income from any currency bank deposit in regular 20%
banking units.
Yield or any monetary benefit from deposit substitutes 20%
Interest income and yield from trust funds and similar 20%
arrangements
Royalties derived from sources within the Phil. 20%
Interest income derived from a depository bank under the 7.5%
Foreign Currency Deposit Unit.
Interest income from foreign currency loans granted by 10%
depository bank under the expanded foreign currency
deposit system to residents other than the OBUs in the
Phil. or other depository banks under the expanded
depository system
On net capital gains from sale of shares of stock of a
domestic corporation not listed and traded in the stock
exchange.
Not over P100,000 5%
On any amount in excess of P100,000 10%
On resumed capital gains from sale of lands and/or 6%
buildings located in the Phil. classified as capital assets.
Gross income from contracts engaged in petroleum 8% in
operations. lieu of
any and
all
taxes,
nat’l or
local
 The dividends received by a domestic corporation from another
domestic corporation are not subject to income tax, but the dividends
received by a domestic corporation from a foreign corporation are
subject to income tax and shall form part of the gross income tax.
Minimum Corporate Income Tax (MCIT)
 A MCIT of 2% of the gross income as of the end of the taxable year
(whether fiscal or calendar year) is imposed upon any domestic
corporation beginning on the 4 th taxable year immediately following
the taxable year in which such corporation commenced its business
operations. The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of
MCIT is greater than the normal income tax computed due from such
corporation.
12
 Normal income tax – the income tax rates at 345 on Jan. 1, 1998;
33% effective Jan. 1, 1999; 32% effective Jan. 1, 2000 and 35%
effective Nov. 5, 2005
 In the case of a domestic corporation whose operations or activities
are partly covered by the regular income tax system and partly
covered under a special income tax system, the MCIT shall apply on
operations covered by the regular income tax system.
 Any excess of the MCIT over the normal income tax shall be carried
forward on an annual basis and credited against the normal income
tax for 3 immediately succeeding taxable years.
 The SOF may, upon the recommendation of the Commissioner,
suspend the imposition of the MCIT upon submission of proof by the
corporation, duly verified by the Commissioner’s authorized
representative, that the corporation sustained substantial losses on
account of prolonged labor dispute or because of force majeure, or
because of legitimate business reverses.
 For purposes of MCIT, the taxable income in which business
operations commenced shall be the year in which the domestic
corporation registered with the BIR.
 MCIT payable on a quarterly basis and on a yearly basis.
GR. MCIT is applicable only to domestic corporations that are subject to
the normal corporate income tax.
Domestic Corporations which are not subject to MCIT
1. Those operating as proprietary educational institutions subject to tax
at 10% on their taxable income.
2. Those engaged in hospital operations which are non-profit subject to
tax at 10% on their taxable income
3. Those engaged in business as depositary banks
4. Firms that are taxed under a special income tax regime
 The imposition of MCIT is designed to forestall the prevailing
practice of domestic corporations and resident foreign corporations
of overclaiming deductions in order to reduce their income tax
payments.
 As a tax on gross income, MCIT prevents tax evasion and minimizes
tax avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems.
TAXATION OF INCOME OF RESIDENT FOREIGN CORPORATION
Resident foreign corporation – organized, authorized, or existing under
the laws of any foreign country, but engaged in trade or business within
the Philippines.
 A resident foreign corporation shall be subject to the regular/normal
corporate income tax rate of 30% of the taxable income derived
within the Philippines effective Jan. 1, 2009.
 A foreign corporation transacting business in the Philippines
independently from its branch is not considered the same juridical
entity as its branch office in the Philippines.
 If the business transaction is conducted through the branch office,
the latter becomes the taxpayer, and not the foreign corporation.
 Engaged connotes more than a single act or a single transaction;
involves some continuity of action.
 To engage in business – signifying an employment or occupation
which occupies one’s time, attention and labor for the purpose of a
livelihood or profit.
 Taxable because they do activity in the Philippines.
MCIT on Resident foreign corporation
 An MCIT of 2% of the gross income from sources with the
Philippines is imposed beginning on the 4 th taxable year immediately
following the taxable year in which the corporation commenced its
business operations, whenever the amount of the minimum
corporate income tax is greater than the normal income tax due for
such year.
 MCIT shall not apply to resident foreign corporations which are
subject to normal income tax.

1. Resident foreign corporations engaged in business as
international carrier subject to tax at 2 ½ of their gross
Philippine billings
2. Resident foreign corporations engaged in business as Offshore
Banking Units on their income from foreign currency
transactions with local commercial banks
3. Resident foreign corporations engaged in business as ROHQs
subject to tax at 10% of their taxable income
4. Firms that are taxed under special income tax regime
TAXATION OF INCOME OF INTERNATIONAL CARRIERS
 Gross of Philippine Billings of International Carriers – those carriers
doing business in the Philippines who shall pay a tax of 2.5% on its
Gross Philippine Billings.
1. International air carrier – a foreign airline corporation doing
business in the Philippines having been granted landing rights
in any Philippine port to perform air transportation which is
subject to the Gross Philippine Billings tax of 2.5%.GPB refers
to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the
Philippines.
2. International shipping - a foreign shipping corporation doing
business in the Philippines having been granted landing rights
in any Philippine port to perform international shipping activities
subject to GPB of 2.5%.
 May avail of exemption on the basis of an applicable
tax treaty or international agreement
 GPB – gross revenue whether for passenger, cargo or
mail originating from the Philippines up to final
destination, regardless of the place of sale or
payments of the passage or freight documents.
Different Kinds of International Air Carriers
1. Off-line carrier – having no flight operation to and from the
Philippines. Not subject to any tax in the Philippines but without
prejudice to classifying such taxpayer under a different category
pursuant to a separate provision under this code.
2. On-line Carrier – having or maintaining flight operations to and
from the Philippines.
3. Chartered flight – flight operation which includes operations
between ports or point situated in the Philippines and ports and
points outside the Philippines, which include block charter,
placed under the custody or control of a charterer by a
contract/charter for rent or hire relating to a particular airplane.
Classification of Passengers of an International Air Carrier
1. Transient Passengers – who originated from outside of the
Philippines towards a final destination also outside of the
Philippines but stops in the Philippines for a period of less than
48 hours, or even more than 48 hours, if the delay is due to
force majeure or reasons beyond his control.
2. Non-revenue passengers – Resolution No. 788 regarding Free
and Reduced fare or rate transportation and any other
free/reduced rate mileage programs administered by individual
international air carriers.
3. Adult passenger – who has attained his 12th birth
4. Children – attained their 2nd but not their 12th birthday
5. Infant – who has not attained his 2nd birthday
 Any international air carrier having flights originating from any port or
point in the Philippines is subject to the Gross Billings Tax of 2.5%,
unless subject to a different tax rate under the applicable tax treaty
to which the Philippines is a signatory.
 In computing the GPB, there shall be included the total amount of
gross revenue derived from:
1. Passage of persons
 The gross revenue for passengers whose tickets are sold
in the Philippines shall be the actual amount derived from
transportation services on its uninterrupted flight from the
Philippines to its final destination as reflected in the
remittance area of the tax coupon forming an integral part
13
of the plane ticket. For this purpose the GPB shall be
determined by computing the monthly average net fare of
all the tax coupons issued for the month and multiplied by
the corresponding total number of passengers flown for
the month as declared in the flight manifest.
 For tickets sold outside the Philippines, the gross revenue
on a continuous and uninterrupted flight from the
Philippines to final destination shall be determined using
the locally available net fares applicable to such flight
taking into consideration the seasonal fare rate
established at the time of the flight, the class or passage
the classification of passenger, the date of embarkation,
and the place of final destination.
2. Excess baggage
 Gross revenue shall be computed based on the actual
revenue derived as appearing on the official receipt or any
similar document for the said transaction.
3. Cargo
4. Mail
 Gross revenue for cargo and mail shall be determined
based on the revenue realized from the carriage thereof. It
appears on the airway bill after deducting therefrom the
amount of discounts granted.
Excluded from the computation of taxable base of Gross Philippine Billing
1. Non-revenue passengers
2. Refunded tickets
- In case of a flight that originated from the Philippines but transshipment
takes place elsewhere in another aircraft belonging to a different airline
company, the GPB shall be that portion of the revenue corresponding to
the leg flown from any point in the Philippines to the point of
transshipment.
- In computing the taxable amount, the foreign exchange conversion rate
to be used shall be the average monthly airline rate as provided in the
Bank Settlement Plan monthly sales report or the bankers association of
the Philippines rate, whichever is higher.
- If an international carrier maintains flights to and from the Philippines, it
shall be taxed at the rate of 2.5% of its GPB, which international air
carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country will be taxed
at the rate of 30% of such income.
- We have jurisdiction over the sales of tickets in the Philippines by the
general sales agents or offline air carriers because the sale of the tickets
is the activity that produces income.
GR. Resident foreign corporations shall be liable for 30% income tax on
their income from within the Philippines.
XPN. Those resident foreign corporations that are international carriers –
2.5% of their GPB
NOTE: offline international carrier is an exception to the exception.
TAXATION OF INCOME OF OFFSHORE BANKING UNITS (OBU)
 OBU – a branch, subsidiary or affiliate of a foreign banking corporation
which is duly authorized by the BSP as a separate accounting unit to
transact offshore banking business in the Philippines.
 Offshore Banking – the conduct of banking transactions in foreign
currencies involving the receipt of funds principally from external
sources and the utilization of such funds.
 Foreign currency deposit unit (FCDU) – an accounting unit or
department in a local bank or in an existing local branch or foreign
banks, which is authorized by the BSP to operate under the
expanded foreign currency deposit system.
 Deposits – funds in foreign currencies which are accepted and held by
an OBU in the regular course of business, with the obligation to
return equivalent amount to the owner thereof, with or without
interest.
 14

 Gross offshore income – all income arising from transactions allowed affiliates, subsidiaries, or branches in the Asian-Pacific Region and
by the BSP conducted by and between other foreign markets.
1. In the case of an OBU with another OBU or with an  Not subject to income tax
expanded FCDU or with a nonresident  Regional Operating Headquarters (ROHQs) – a foreign business entity
2. In the case of an expanded FCDU with another expanded which is allowed to derive income in the Philippines by performing
FCDU or with an OBU or with a nonresident qualifying services to its affiliates, subsidiaries or branches in the
 Gross onshore income – gross interest income arising from foreign Philippines, in the Asia-Pacific Region and other foreign markets.
currency loans and advances to and/or investments with residents  Pay a tax of 10% of their taxable income
made by OBUs or EFCDUs.
 Taxation of income of OBU PASSIVE INCOME OF RESIDENT FOREIGN CORPORATIONS
1. Income derived from foreign currency transactions with SUBJECT TO FINAL WITHHOLDING TAX
nonresidents, other OBUs, local commercial banks, including
branches of foreign banks authorized by BSP to transact Income tax from any currency bank deposit and yield or 20%
business with OBUs are exempt from income tax any other monetary benefit from deposit substitutes and
2. Any income or nonresidents from transactions with depository from trust funds and other similar arrangements derived
banks under the expanded system are exempt from income tax from sources within the Philippines
3. The net income from such transactions shall be subject to the Royalties derived from sources within the Philippines 20%
regular income tax rate of 30% Interest income derived from a depository bank under the 7.5%
4. Interest income derived from foreign currency loans granted to expanded FCD system
residents are subject to the final withholding tax of 10% Interest income derived by a resident depository bank 10%
 The income earner cannot evade its liability for FCDU onshore tax by under the expanded FCD system from foreign currency
shifting the blame on the payor-borrower as the withholding agent. As loans granted by such depository banks to residents,
such, it is liable for payment of deficiency onshore tax. other than OBUs in the Philippines or other depository
 Taxable income derived from RBUs is subject to corporate income tax banks under the expanded system.
rate of 30%. On the net capital gains during the taxable year from sale
 Only costs and expenses attributable to the operations of the RBU can of shares of stock in a domestic corporation not traded in
be claimed as deduction to arrive at the taxable income of the RBU the tax exchange, except shares sold or disposed of
subject to the regular income tax. In computing for amount allowable through the stock exchange
as deduction from RBU operations, all costs and expenses should be Not over P100,000
allocated between the RBU and FCDU/EFCDU or OBU using the On any amount in excess of P100,000 5%
following basis: 10%
1. By specific identification Gross income derived from contracts by subcontractors 8% of the
 Expenses which can be specifically identified to a from service contractors engaged in petroleum gross
particular unit shall be reported and declared as the cost operations. income
or expenses of that unit. derived
2. By allocation from such
contracts,
 Common expenses or expenses that cannot be
in liew of
specifically identified for a particular unit shall be allocated
any and
based on percentage share of gross income earnings of a
all taxes,
unit to the total gross income earnings subject to regular
national
income tax and final tax.
and local
BRANCH PROFIT REMITTANCE TAX

 The rationale for the imposition of the Branch Profit Remittance Tax is  Dividends received by a resident foreign corporation from a domestic
in order to equalize the tax burden of foreign corporations corporation liable to tax under this code shall not be subject to
maintaining, on one hand, local branch offices, and organizing, on the dividends tax.
other hand, a subsidiary domestic corporation.
TAX ON NON-RESIDENT FOREGN CORPORATION
 The branch profit remittance tax of 15% shall be based on the total
profits applied or earmarked for remittance without any deduction for
 Applies to foreign corporation not engaged in trade or business with
the tax component thereof.
the Philippines.
 Interests, dividends, rents, royalties, including remuneration for
 Income derived from all sources in the Philippines shall be subject to
technical services, salaries, wages, premiums, annuities,
the 30% final withholding tax based on the gross income received
emoluments, or other fixed or determinable annual, periodic or causal
during each taxable year.
gains, profits, income and capital gains received by a foreign
corporation during taxable year from all sources within the Philippines  Taxation of other income:
shall not be treated as branch profits unless the same are effectively
On gross income of nonresident cinematographic 25%
connected with the conduct of its trade r business in the Philippines.
film owner, lessor, or distributor
 Only profits remitted abroad by a branch office to its head office which
On gross rental income or charter fees derived by 4.5%
are effectively connected with its trade or business in the Philippines
nonresident owner or lessor of vessels from the
are subject to the 15% branch profit remittance.
leases or charters to Filipino citizens or
TAXATION OF INCOME OF RHQs AND ROHQs OF MULTINATIONAL corporations approved by MARINA
COMPANIES On gross rental income of nonresident lessor of 7.5%
aircraft, machineries and other equipment
 Multinational company – foreign firm or entity engaged in international On interest income on foreign loans derived by 20%
trade with affiliates or subsidiaries or branch offices in the Asia- nonresident foreign corporation
Pacific Region and other foreign markets. Incorporate dividends from a domestic 15%
 Regional or Area Headquarters (RHQs) – a branch established in the corporation.
Philippines by multinational companies and which headquarters do On capital gains from sale of shares of stock not
not earn or derive income from the Philippines and which act as traded in the local stock exchange
supervisory, communications and coordinating center for their Not over P100,000
On any amount in excess of P100,000 5%

10%
 While the general rule is that a foreign corporation is the same juridical
entity as its branch in the Philippines, however, when the corporation
transacts business in the Philippines directly and independently of its
branch, the taxpayer would be the foreign corporation itself and
subject to the dividends tax similarly imposed on nonresident foreign
corporation.
 Condition for the preferential tax rate of 15% on dividends
 Foreign corporation must show that the country of origin
grants a tax credit to the nonresident foreign corporation,
taxes deemed to have been paid in the Philippines
equivalent to at least 15% against the tax due from the said
nonresident foreign corporation.
 CIR vs. Procter and Gamble. Normally, the Philippines
imposes a higher 30% tax rate on corporations. But since
the Philippines seeks to lessen the impact of double
taxation between countries, we impose only the lower tax
rate of 15% on dividends subject to the condition that the
country in which the nonresident foreign corporation is
domiciled allows a tax credit of 15%.
IMPROPERLY ACCUMULATED EARNINGS TAX
 Imposed for each taxable year in the improperly accumulated
earnings taxable income by closely-held domestic corporations. Shall
not apply to the following:
1. Banks and other non-bank financial intermediaries
2. Insurance companies
3. Publicly-held corporations
4. Taxable partnerships
5. Genereal rofessional partnershis
6. Non-taxable joint ventures
7. Enterprises duly registered with PEZA, and enterprises
registered pursuant to the Bases Conversion and Development
Act of 1992
 Purpose: to avoid the income tax with respect to its shareholders or
the shareholders of any corporation, by permitting the earnings and
profits of the corporation to accumulate instead of dividing them
among or distributing them to the shareholders.
 The 10% IAET shall only apply to corporations formed or availed for
the purpose of avoiding income tax, be permitting earnings and
profits to accumulate beyond reasonable needs of the business,
instead of dividing or distributing said profits to its shareholders.
 Closely-held corporations – those corporations at least 50% of the
total combined voting power of all classes of stock entitled to vote is
owned directly or indirectly by or for not more than 20 individuals.
Those not falling herein are considered publicly-held corporations.
The following rules shall apply in determining whether a corporation
is a closely-held one:
1. Stock not owned by individuals – stock owned directly or
indirectly by or for a corporation, partnership, estate or trust
shall be considered as being owned proportionately by its
shareholders, partners or beneficiaries
2. Family and partnership owners – an individual shall be
considered as owing the stock owned directly or indirectly
by or for his family or partner.
3. Option to acquire stocks – if any person has an option to
acquire stock, such stock shall be considered as owned by
such person
4. Constructive ownership as actual ownership
 For corporations found subject to IATaxable Income is first
determined by adding to the taxable year’s the following:
1. Income exempt from tax
2. Income excluded from gross income
3. Income subject to final tax
4. The amount of operating loss carry-over deducted
 The taxable income as thus determined shall be reduced by the sum
of:
1. Income tax paid/payable for the taxable year
2. Dividends actually or constructively paid/issued from applicable
year’s taxable income
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3. Amount reserved for the reasonable needs of the business
emanating from the covered year’s taxable income.
 The resulting IATI is thereby multiplied by 10% to get the IAET.
 The amount that may be retained, taking into consideration the
accumulated earnings within the reasonable needs of business shall
be 100% of the paid up capital or the amount contributed to the
corporation representing the par value of the share of stock.
 Once the profit has been subjected to IAET, the same shall no longer
be subjected to IAET in later years even if not declared as dividend.
 Notwithstanding the imposition of IAET, profits which have been
subjected to IAET, when finally declared as dividends, shall
nevertheless be subject to tax on dividends, shall nevertheless be
subject to tax on dividends except in those instances where the
recipient is not subject thereto.
 An accumulation of earnings or profits is unreasonable if it is not
necessary for the purpose of the business.
 Immediacy test
 Reasonable needs of business – the immediate needs of
the business, including reasonable anticipated needs.
 If not for reasonable needs, penalty tax would apply.
 The following constitute accumulation of earnings for the
reasonable needs of the business:
1. Allowance for the increase in the accumulation of
earnings up to 100% of the aid-up capital of the
corporation as of Balance sheet date, inclusive of
accumulations taken from other years
2. Earnings reserved for definite corporate expansion
projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or
equivalent body
3. Earnings reserved for buildings, plants or equipment
acquisition as approved by the Board of Directors or
equivalent body
4. Earnings reserved for compliance with any load
covenant or pre-existing obligation established under a
legitimate business agreement
5. Earnings required by law or applicable regulations to
be retained by the corporation or in respect of which
there is legal prohibition against its distribution
6. In the case of subsidiaries of foreign corporation in the
Philippines, all undistributed earnings intended or
reserved for investments within the Philippines as can
be proven by corporate records and/or relevant
document evidence.
 The dividends must be declared and paid or issued not later than
one year following the close of the taxable year, otherwise, the
IAET, if any, should be paid within 15 days thereafter.
 The fact that a corporation is a mere holding company or investment
company shall be prima facie evidence of a purpose to avoid the tax
upon its shareholders or members. Likewise, the fact that the
earnings or profits of a corporation are permitted to accumulate
beyond the reasonable needs of the business shall be determinative
of the purpose to avoid the tax. – preponderance of evidence.
 Holding or investment company – a corporation having practically no
activities except holding property, and collecting the income
therefrom or investing the same.
 The following are prima facie avoidance of income tax upon
shareholders:
1. Investment of substantial earnings and profits of the
corporation in unrelated business or in stock or securities of
unrelated business
2. Investment in bonds and other long-term securities
3. Accumulation of earnings in excess of 100% of paid-up capital,
not otherwise intended for the reasonable needs of the
business.
 It is unreasonable if it is not required for the purpose of the business
 Immediate test - The reasonable needs of business mean the
immediate needs of the business, and it is generally held that if the
corporation did not prove an immediate need for the accumulation of
the earnings and profits, the accumulation was not for the reasonable
needs of the business and the penalty tax would apply.
EXEMPTIONS FROM TAX ON CORPORATIONS

1. Labor, agriculture or horticultural organization not organized
principally for profit
2. Mutual savings bank not having a capital stock represented by
shares, and cooperative bank without capital stock organized
and operated for mutual purposes and without profit
3. A beneficiary society, order or association, operating for the
exclusive benefit of the members
4. Cemetery company owned and operated exclusively for the
benefit of its members
5. Nonstick corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person
6. Business league, chamber of commerce, or board of trade, not
organized for profit and no part of the net income which inures to
the benefit of any private stockholder or individual
7. Civil league or organization not organized for profit but operated
exclusively for promotion of social welfare
8. A non-stock and nonprofit educational institution
9. Government educational institutions
10. Farmers or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, or like organization of a
purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the
sole purpose of meeting its expenses
11. Farmers’, fruit growers’ or like association organized and
operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of the
quantity of produce furnished by them.
 Exemptions are construed strictly against the grantee and liberally in
favor of the government.
 A corporation is nonstick where no part of its income is distributable
as dividends to its members, trustees or officers.
 It is a nonprofit if no income accrues to the benefit of any member of
the corporation.
 It is necessary that every organization claiming exemption file an
affidavit with the Commissioner showing the character of the
organization.
 When an organization has established its right to exemption, it need
not make and a file a return of income. However, the organization
should file on or before April 15 of each year, an annual information
return under oath, stating its gross income and expenses incurred
during the preceding year and a certificate shoeing that there has not
been any substantial change in its by-laws, articles of incorporation,
manner of operation and activities as well as sources and
dispositions of income.
 Tax exemptions of corporations does not extend to members
 Organized and operated exclusively – refers to the real substance
and not merely to form.
 Exempt corporations are subject to income tax on their income from
any of their properties, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such
income.
 Clubs which are organized and operated exclusively for pleasure,
recreation and other non-profit purposes are subject to income tax.
According to the doctrine of casus onissus pro omisso habendus est ,
a person, object or thing omitted from the enumeration must be held
to have been omitted intentionally.
Exempt Mutual Savings Bank
1. Has no capital stock represented by shares; and
2. Whose earnings less only the expenses of operation, are
distributable wholly among depositors.
Exempt fraternal beneficiary societies
 Exempt only if operated under lodge system or for the exclusive
benefit of a society operating it.
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 Operating under the lodge system – carrying on its activities under
form of organization that comprises local branches, chartered by a
parent organization and largely self-governing
Exempt cemetery companies
1. It is owned by and operated exclusively for the benefit of its
owners, or
2. It is not operated for profit
 A cemetery company which fulfills the other requirement of the
statute may be exempt, even though it issues preferred stock
entitling the holders to dividend at a fixed rate, provided that its
articles of incorporation require:
1. That the preferred stock shall be retired at par as soon as
sufficient funds are realized from sales, and
2. That all funds not required for the payment of dividends upon
or for the retirement of preferable stock shall be used by the
company for the care and improvement of the cemetery.
Exempt religious, charitable, scientific, athletic, and cultural corporations
1. It must be organized and operated for one or more the specified
purposes, and
2. No part of its net income must inure to the benefit of private
individuals.
 Charitable institutions must be:
1. A non-stock corporation or association
2. Organized exclusively for charitable purposes
3. Operated exclusively for charitable purposes, and
4. 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
 Corporation sole – a special form of corporation usually associated
with clergy. It consists of only one person, and his successor
Exempt business leagues
 A business league is an association of persons having some
common business interest, which limits its activities to work for such
common interest and does not engage in a regular business of a kind
ordinarily carried on for profit.
 If it engages in a regular business of a kind ordinarily carried on for
profit, the fact that the business is conducted on a cooperative basis
or produces only sufficient income to be self-sustaining, is not ground
for exemption.
Exempt Civic leagues
 Comprise those not organized for profit but operated exclusively for
purposes beneficial to the community as a whole.
Exempt nonstick, nonprofit educational institutions
 Article XIV, Section 4(3), Constitution
1. It falls under the classification of nonstick, nonprofit educational
institution
2. The income it seeks to be exempted from taxation is actually,
directly and exclusively used for educational purposes
 The interest income on bank deposits and yields from deposit
substitutes are not automatically exempt from taxation. There must
be a showing that the incomes are included in the school’s annual
information return and duly audited financial statements together
with:
1. Certification from depository banks as to the amount of interest
income earned from passive investments not subject to the 20%
final withholding tax
2. Certification of actual, direct and exclusive utilization of said
income for educational purposes
3. Board resolution on proposed project to be funded out of the
money deposited
 Same rule is used for income derived from dormitories, canteens and
bookstores – must be actual, direct and exclusive for educational
purposes
Exempt mutual insurance companies and similar organizations

 It is necessary that the income of the company be derived solely from
assessments, dues and fees collected from members.
 An organization may be entitled to exemption, although it makes
advance assessment for the sole purpose of meeting its future losses
and expenses, provided that the balance of such assessments
remaining on hand at the end of the year is retained to meet losses
and expenses or is returned to members.
 An organization of a purely local character is one whose business
activities are confined to a particular community, place, or district,
irrespective, however, of political subdivisions.
Exempt farmers’ cooperative marketing and purchasing associations
 Must establish that for their own account, they have no net income
 Cooperative associations acting as purchasing agents are not
expressly exempt from tax, but rebates made to purchases may be
excluded from the gross income.
COMPUTATION OF TAXABLE INCOME
 Taxable income refers to the gross income subject to tax, less
the deductions, whether itemized or optional standard
deductions, and/or personal and additional exemptions, if any,
authorized for such type of income.
 Refers to the tax base.
 For individuals who are employed, it is the income after
deducting the exclusions and the exemptions
 For individuals engaged in trade or business or in the practice of
their profession, it is the income after deducting exemptions.
 For corporations and other juridical entities, it is the net income
after deducting the itemized deduction or the optional standard
deductions of 40%, at the option of the seller.
 In the computation of the tax, various classes of income must be
considered:
1. Income – all wealth which flows into the taxpayer other than
as a mere return of capital.
2. Gross income – income less income which is by statutory
provision or otherwise is exempt from the tax imposed by
law.
3. Taxable income – gross income less statutory deductions.
 Taxable income is to be computed in accordance with the
method of accounting regularly employed in keeping books of
the taxpayer.
Computation of the Taxable Income
 Must be computed with respect to a fixed period. That is twelve
months ending December 31st of every year, except in the case
of corporation filing returns on a fiscal year basis in which case
taxable income will be computed on the basis of such fiscal
year.
 Items of incomes and expenditures need not be in the form of
cash
 If the method of accounting regularly employed by the taxpayer
in keeping his books clearly reflects his income, it is to be
followed with respect to the time as of which items of gross
income and deductions are to be accounted for, otherwise the
computation of taxable income shall be made in such manner as
in the opinion of the Commissioner would clearly reflect it.
Bases of Computation of Taxable Income
 Approved standard methods of accounting will be ordinarily
regarded as clearly reflecting income. A method of accounting
17
will not, however, be regarded as clearly reflecting income
unless all items in the gross income and all deductions are
treated with reasonable consistency.
 All items in the gross income shall be included in the gross
income for the taxable year in which they are received by the
reflect income, such amounts are to properly accounted for as of
a different period.
Methods of Determining the Net Taxable Income
1. Expenditure method – the aggregate yearly expenditures are
deducted from the declared yearly income, not the expenditures
incurred each month and declared thereafter, to arrive at the net
taxable income.
2. Net worth or inventory method – a form of determining income
from any other available facts or evidence, so that the tax may
be assessed and collected.
 Based on assets or properties appearing in the name
of the taxpayer or in the name of his dummies or
friends, without the taxpayer being able to give a
definite reasonable explanation for their existence.
 After determining the assets, liabilities are subtracted
to arrive at the net worth.
 Any decrease or increase in the net worth is adjusted
by adding all non-deductible items and subtracting the
non-taxable receipts.
3. Sales Method or Percentage of Receipts Method – in the
absence of adequate records, the Commissioner can
reconstruct gross profit by ascertaining the total sales or receipts
and then applying an average of gross profit to such sales and
receipts.
 He can also reconstruct taxable income by applying an
average percentage of taxable income to gross
income.
Taxable Income from Sources within the Philippines
GR. From the items of gross income, there shall be deducted the
expenses , interests, losses and other deductions properly allocated
thereto and a ratable part of expenses, interests, losses and other
deductions effectively connecter with the business or trade conducted
exclusively within the Philippines which cannot definitely be allocated to
some items or class of gross income. Such items of deductions shall be
allowed only if fully substantiated by all the information necessary for its
calculation.
XPN. No deductions for interest aid or incurred abroad shall be allowed
from unless indebtedness was actually incurred to provide funds for use in
connection with the conduct or operation of trade or business.
Taxable Income from Sources without the Philippines
 From the items of gross income, there shall be deducted the
expenses, losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some items or
classes of gross income. The remainder, if any, shall be treated in full
as taxable income from sources without the Philippines.
COMPUTATION OF GROSS INCOME
 Gross income means all income derived from whatever sources,
including, but not limited to, the following items:
1. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items

2. Gross income derived from the conduct of trade or
business or the exercise of a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the net income of the GPP
 Passive income, not included – they are already subject to different
rates and taxed finally at source.
 Income differs from capital in that income is any wealth which flows
into the taxpayer other than a return of capital, while capital
constitutes the investment which is the source of income. Capital is
fund, while income is flow. Capital is wealth, while income is service
of wealth. Capital is the tree, income is the fruit.
 Net income or taxable income refers to the gross income less
allowable deductions and/or personal and additional expenses.
Compensation for Services in Whatever Form Paid
 Compensation means all remuneration for services performed by an
employee for his employer under an ee-er relationship, unless
specifically excluded by the code.
 The name by which the remuneration for services is designated is
immaterial.
 Salaries, wages, emoluments and honoraria, allowances,
commissions, fees, including director’s fees, taxable bonuses and
fringe benefits, taxable pensions, and retirement pay and other
income of a similar nature constitute compensation income.
 Honoraria refers to payments given in recognition for services
performed for which the established practice discourages charging a
fixed fee.
 Commission refers to a percentage of total sales or on certain quota f
sales volume attained as part of incentive.
 Fees refer to the amount received by an ee for the services rendered
to the er over and above their regular salaries.
 The basis upon which the remuneration is paid is immaterial in
determining whether the remuneration constitutes compensation.
 Remuneration for services constitutes compensation even if the
relationship of er and ee does not exist any longer at the time when
payment is made between the person in whose employ the services
had been performed and the individual who performed them.
 The term remuneration or wage, which is subject to withholding tax
on compensation, does not include remuneration paid to:
1. For agricultural labor paid entirely in products of the farm
where the labor is performed
2. For domestic service in a private home
3. For casual labor not in the course of the er’s trade or
business
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4. For services by a citizen or resident of the Philippines for a
foreign government or an int’l organization
 If the compensation is paid in cash, the full amount received is the
measure of the income subject to tax.
 Where services are paid for with something other than money, the
fair market value of the thing taken in payment is the amount to be
included as income.
 If the services were rendered at a stipulated price, in the absence of
evidence to the contrary, such price is presumed to be the fair value
of the compensation received.
 When living quarters are furnished in addition to cash salary, the
rental value of such quarters should be reported as income.
 If the shares of stock were given as salary, such shall constitute as
taxable income to the recipient. The par value or the stated value of
the shares issued shall constitute as deductible expense to the
corporation provided it has been subjected to the withholding tax on
compensation.
 Promissory notes or other evidences of indebtedness received in
payment of services, and not merely as security for such payment,
constitute income to the amount of their fair market value.
 A taxpayer receiving as compensation a note regarded as food for its
face value at maturity, but not bearing interest, shall be treated as
income as of the time of receipt of the fair discounted value of the
note at that time.
 If the payment due on note so accounted for is met as they become
due, there should be included as income in respect of each payment
so much thereof as represents recovery for the discount originally
deducted.
 Any amount paid specifically, either as advances or reimbursement
for traveling, representation and other bona fide ordinary and
necessary expenses incurred or reasonably expected to incur by the
ee in the performance of his duty are not subject withholding, if the ff
conditions are satisfied:
1. It is for ordinary and necessary traveling and representation
or entertainment expenses aid or incurred by the ee in the
pursuit of trade, business or profession
2. The ee must account/liquidate the expenses. The excess of
advances made over actual expenses shall constitute
taxable income if such amount is not returned to the er.
Reasonable amounts which are pre-computed on a daily
basis and are aid to an ee while on an assignment of duty
need not be subject to the requirements of substantiation
and to withholding.
Gross Income Derived from the Conduct of Trade or Business or Exercise
of Profession
 The term gross income derived from doing business shall be
equivalent to the gross sales returns, discounts and allowances and
cost of goods sold.
 Cost of goods sold shall include all business expenses directly
incurred to produce the merchandize to bring them to their present
location and use.
 For trading and merchandising, cost of goods sold shall include the
invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually
sold, including insurance while the goods are in transit.
 Cost of goods manufactures and sold shall include all costs of
production.

 In the case of taxpayers engaged in the sale of service, gross income
means gross receipts less sales returns, allowances, discounts and
cost of services.
 Cost of services shall mean all direct costs and expenses necessarily
incurred to provide all services required by the customers and clients
including salaries and benefits of personnel, consultants and
specialists directly rendering the service and cost of facilities directly
utilized in providing the service, provided, however, that in the case of
banks, cost of services shall include interest expense.
 A taxpayer engaged in the exercise or practice of profession is
subject to income derived from such. There should be no ee-er
relationship between him and his client.
 In computing the income of partners of a GPP, all expenses which
are ordinary and necessary, incurred or aid for the practice of
profession are allowed as deductions.
 Since the taxable income is in the hands of the partner, as a rule,
apart from the expenses claimed by the GPP in determining its net
income, the individual partner can still claim deductions incurred or
paid by him that contributed to the earning of the income taxable to
him which were not deducted from the gross income of the GPP.
Gains Derived from Dealings in Property
 Gains derived from dealings in property, such as sales or exchanges
of property, may result in the gain or loss, depending on the nature of
the property as to whether said property is a capital asset or an
ordinary asset.
Dealings in Shares of Stocks of Domestic Corporations
 Net capital gains from sale, barter, exchange or other disposition held
as capital stock not listed and traded in the local stock exchange shall
be subject to the capital gains tax of 5% on the net capital gains not
over P100,000 plus 10% on any amount in excess of P100,00.
 Sale, barter or exchange of stock held as capital assets which are
traded and listed in the local stock exchange, the same shall not be
subject to capital gains tax but to the ½ of 1% stack transaction tax
based on the gross selling price or gross value in money of the
shares of stock sold or transferred.
 If the shares of stock are held as ordinary assets and the sale is
made by a dealer in securities, the resulting gain or loss is
considered as ordinary income.
 Whether the acquisition of disposition by a corporation of its own
capital stock gives rise to taxable gain or deductible loss depends
upon the real nature of the transaction.
 The receipt by a corporation of the subscription price of shares of its
capital stock upon their original issuance fives rise to neither taxable
gain nor deductible loss, when the subscription or issue rice be in
excess of, or less than, the par or stated value of such stock.
 If the corporation deals in its own shares as it might in the shares of
another corporation, the resulting gain or loss is to be computed in
the same manner as though the corporation were dealing in the
shares of another.
 If the corporation receives its own stock as consideration upon the
sale of property by it, or in satisfaction of indebtedness to it, the gains
or loss resulting is to be computed in the same manner as though the
payment had been made in any other property.
 In the event that ees who obtained shares of stack subsequently sell,
barter, exchange or otherwise dispose of the said shares of stock, the
tax treatment is as follows:
1. If the shares involves are shares of stock in a domestic
corporation not traded in the stock exchange, the gain is
subject to capital gains tax. The gain shall be the
19
difference between the selling price or book value or fair
market value of the shares, whichever is higher, at the date
of the sale and the price at the time of exercise if the option
2. If the shares involved are shares of stock listed and traded
through the Local Stock Exchange, the transaction is
subject to stock transaction tax
3. If the shares involved are shares of stock in a foreign
corporation, the gain is subject to ordinary income tax.
Dealings in Real Property
 In case of non-redemption of properties sold during involuntary
sales, 6% final tax based on the gross selling price or current fair
market value, if the property is a capital asset, or the Credible
tax withholding (section 57), in case of an ordinary asset, VAT,
stamp tax.
 The buyer of the subject property, who is deemed to have
withheld the CGT or CWT due from the sales, shall then file the
CGT return and remit the said tax to the Bureau within 30 days
from the expiration of the applicable statutory redemption period,
or file within 10 days following the end of the month after the
expiration of the applicable statutory redemption; provided that
the taxes withheld in Dec, the CWT return shall be filed and the
taxes remitted before Jan. 15 the ff year.
 If the property sold through involuntary sale is under the
circumstances which warrant the imposition of VAT, said tax
must be paid before the 20 th or the 25th day, whichever is
applicable, of the month following the month when the right of
redemption prescribes.
 The DST return shall be filed and the tax paid within 5 days after
the close of the month after the lapse of the applicable statutory
redemption period.
 The CWT/CGT/VAT/DST shall be based on the bid price of the
highest bidder or the FMV or the ZV, whichever is higher.
 Gains derived from expropriation of property are taxable since
there is a material gain in the transaction.
 Generally, income realized from the sale of capital assets are
not to be reported as part of the gross income of an individual in
the income tax returns as they are already subject to the final
withholding tax.
 Income or capital gains derived from the sale of other capital
assets of an individual taxpayer, which are not subject to final
withholding tax, should be declared or reported as part of the
gross income in an annual income tax returns of the individual
taxpayer.
 Income realized from the sale of ordinary assets is subject to the
ordinary income tax and the said income shall be declared in the
quarterly/annual income tax return.
INTEREST INCOME
 Interest – compensation allowed by law or fixed by the parties
for the use or forbearance of money or as damages for its
detention.
 The term public means borrowing from 20 or more individual or
corporate lenders at any one time.
 19 Lender rule – in order for an instrument to qualify as a
deposit substitute, the borrowing must be made from 20 to more
individual or corporate lenders at any one time.
 Deposit substitutes – an alternative form of obtaining funds from
the public, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the

borrower’s own account, for the purpose of re-lending or
purchasing of receivables and other obligations, or financing
their own needs or the needs of their dealer.
 The tax treatment of interest income derived from the
government:
1. Government debt instruments and securities, including
BOT issued instruments and securities, shall be considered
as deposit substitutes irrespective of number of lenders at
the time of origination if such debt instruments and
securities are to be traded or exchanged in the secondary
market
2. Interest income derived therefrom is subject to FWT.
3. The mere issuance of government debt instruments and
securities is deemed as falling within the coverage of
deposit substitutes – FWT
 Long-term deposit or investment certificate refers to certificate of
time deposit or investment in the form of savings, common or
individual funds, deposit substitutes, investment management
accounts and other investments with a maturity period of not
less than 5 years. The form of which shall be prescribed by the
BSP only.
 The tax treatment from long term deposits of investment
certificates:
1. Interest income shall be exempt from income tax, provided
that the ff characteristics/conditions are present:
a. The depositor or investor is an individual, not a
corporation
b. Said certificates should be under the name of the
individual
c. Said certificate must be in the form of savings,
common trust funds, individual trust funds, investment
management accounts, deposit substitutes, other
investments evidenced by certificates in such form
prescribed by the BSP
d. Certificates must be issued by banks only
e. The maturity period must be not less than 5 years
f. They should be in denominations of P10,000 and
other denominations as may be prescribed by the BSP
g. They should not be terminated by the original investor
before the 5th year, otherwise it shall be subjected to
the graduated rates of 5%, 12% or 20% on interest
income earnings
h. Except those specifically exempted by law or
regulations, any other income such as gains from
trading, foreign exchange gain, shall not be covered
by income exemption.
2. Absent the above, interest income from long term deposit
or investment shall be subject to FWT at the rate of 20%
3. Interest income from long term deposit or investment that is
pre-terminated by the depositor of investor before the 5 th
year shall be subject to FWT on the entire income and shall
be withheld by the depository bank
a. Interest income from LTD/I shall be subject to FWT at
25% if received by a nonresident alien not engaged in
trade or business in the Philippines.
b. 30% if received by a nonresident foreign corporation
20
c. 30% if received by a domestic corporation
and resident foreign corporation.
4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%
 Interest income derived from currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements derived from sources with
the Philippines.
1. Subject to a FWT of 20% if received from citizens, resident
aliens, nonresident aliens engaged in trade or business in
the Philippines, domestic corporations and resident foreign
corporations
2. Subject to FWT of 25% if the interest income is received by
nonresident aliens engaged in trade or business in the Phil.
3. Subject to FWT of 30% if received by nonresident foreign
corporation, unless the interest income is from foreign
loans contracted on or after Aug. 1, 1986 – 20%
 Interest income derived from a depository bank under the
expanded foreign currency deposit system
1. Subject to FWT of 7 ½ % if the interest income is received
by citizens, resident aliens, domestic corporations and
resident foreign corporations.
2. Any income from nonresident, I or C, from transactions with
depository banks under the expanded system shall be
exempt from income tax
3. If a bank account is jointly in the name of a nonresident
citizen, 50% of the interest income shall be subject to 7 1/2
% while the other haft shall be exempt
4. Derived by a depository bank under the expanded foreign
currency transactions with nonresidents, OBUs, local
commercial banks that may be authorized by the BSP –
exempt from all taxes , except net income from such
transactions
5. Interest income from foreign currency loans granted by
such depository banks under the expanded system to
residents shall be subject to final tax rate of 10%
 Interest income derived by OBUs
1. From foreign currency transactions with nonresidents, other
OBUs, local commercial banks, including foreign banks that
may be authorized by the BSP – exempt from all taxes
except net income from such transactions
2. Derived from foreign currency loans granted to residents –
FWT of 10%
3. Any income of nonresidents, I or C – exempt from income
tax.
 Interest income derived from all other instruments
 Any other debt instruments not within the coverage of
deposit substitutes – CWT at the rate of 20%
 Interest income received by banks from payors belonging to the
top 20,000 corporations strictly arising from individual loans
obtained from banks that are not securitized, assigned or
participated out remains to be subject to CWT at 2%. The 20%
FWT and CWT imposed under the Tax Code cover interest
arising from and paid out of debt securities.

 If there is no stipulation between the parties regarding the
application of compounded interest, apply simple interest only.
 Under Art. 1959 of the CC, unless there is a stipulation to the
contrary, interest due should not further earn interest.
 Arm’s length interest from advances – not subject to income tax
Rental income
 The amount paid for the use or lease or enjoyment of personal
or real property.
 Any additional amount paid, directly or indirectly, by the lessee
in consideration for the said lease, also considered as rental
 If the rented property is being used in business, said rental
income shall be subject to EWT of 5% to be withheld by the
lessee. Failure of the lessee to withhold and remit the same
shall not entitle him to claim the rental expense as deduction
from his gross income.
 Where a corporation has leased its property in consideration that
the lessee shall pay in lieu of other rental an amount equivalent
to a certain rate of dividend on the lessor’s capital stock or
interest on the lessor’s outstanding indebtedness, such
payments shall be considered rental payments.
 When buildings are erected or improvements made by the
lessee in pursuance to the lease agreement, and such are not
subject to removal, the lessor may at his option report the
income:
1. Outright method – the lessor may report as income at the
time when such B or I are completed – fair market value
2. Spread-out method – the lessor may spread over the life of
the lease and estimated depreciated value of such B or I at
the termination of the lease and report as income for each
year of the lease an aliquot art thereof.
 Halvering vs. Brunn. If improvements are in lieu of rent, the
value thereof is income to the landlord only in the year of
termination of the lease.
 The VAT added rental paid by the lessee is not art of the gross
income if the lessor is VAT-registered by shall be considered as
the output tax of the lessor. The VAT may be passed on by the
lessor to the lessee. The passed on VAT shall be considered as
an input tax by the lessee if the lessee is VAT-registered or it will
become part of the cost of the lease, if the lessee is not VAT-
registered.
 Prepaid or advance rental shall only be considered as rental
income of the lessor once the advance rental is utilized by the
lessee. Otherwise, it will only be treated as security deposit
which is not considered as income.
 Entire amount of advance rental is considered as taxable
income to the lessor in the year received, if so received under a
claim of right and without restriction as to its use.
 Security deposit applied to the rental of the terminal month or
period of contract must be recognized as income at the time it is
applied. Security deposit is to ensure faithful performance of
certain obligations of the lessee, it is not income to the lessor
until the lessee violates any provision of the contract.
 Income from long-term contracts is taxable for the period in
which the income is determined.
 Long term contract – building, installation or construction
contracts covering period in excess of one year. Report income
upon the basis of percentage completion. The return should be
accompanied by a return certificate.
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Royalty Income
 Royalties mean a payment or a portion of the proceeds paid to
the owner of a right for the use of such rights.
 Royalty is a valuable property that can be developed and sold
on a regular basis for a consideration. Any gain derived
therefrom is considered as an active business income subject to
normal income tax.
 When a person pays royalty to another for the use of its
intellectual property, such as copyrights, patents, trademarks,
such royalty is a passive income of the owner subject to
withholding tax.
 The payor is required to deduct and withhold final taxes on
royalty payments when the royalty is paid or is payable. After
which, the corresponding return or remittance must be made
within 10 days after the end of each month.
Dividend Income
 Dividends mean any distribution made by a corporation to its
shareholders out of its unrestricted retained earnings payable to
its shareholders, whether in money or in other property.
 Where a corporation distributes all its assets in complete
liquidation or dissolution, the gain realized or loss sustained by
the stockholder is taxable income or a deductible loss.
 While liquidation gains are characterized as gains from sale or
exchange of shares, they are still subject to the ordinary income
tax rates depending on the status of the stockholder.
 Cash and/or property dividends declared or distributed on or
after Jan. 1, 1998 shall be subject to the 10% withholding tax.
 Cash dividends are paid in cash. The dividends belong to the
shareholder at the time of declaration.
 Property dividends are paid in securities or other property, in
which the earnings of a corporation have been invested, which
are income to the recipients to the amount of the full market
value of such property when receivable by individual
stockholders. When receivable by corporations, the amount of
such dividends includible for purposes of the tax on corporations
is specified.
 A dividend paid in stock of another corporation is not a stock
dividend, the income arising to the recipients of such stock is its
market value at the time the dividend becomes payable.
 Scrip – a certificate representing fractions of a share of stock.
 Scrip dividend – in the form of a promissory note taxable to the
extent of its fair market value in the year when the warrant is
issued.
 Warrant is a type of security which entitles the holder the right to
subscribe to, the unissued stock of a corporation or to purchase
issued shares in the future.
 Scrip dividend is subject to tax in the year in which the warrants
are issued.
 The rationale for the imposition of the 10% withholding final tax
on cash and property dividends received by citizens and
resident aliens from domestic corporation is to ensure that the
taxes will be fully collected from the dividends earned by the
said taxpayers. Subjecting the same to the progressive tax
rated would mean that there is a need to include the same in the
ITRs of the individuals, hence, there is no assurance that the
said income will be declared.

 The responsibility for the remittance of the tax is shifted to the
corporations.
 Intercorporate dividends received by a domestic corporation
from another domestic corporation are exempt from income tax.
 Dividends received by a domestic corporation from a foreign
corporation are included in the computation of the gross income
because there is no law exempting the same.
 Since the Philippines seeks to lessen the impact of double
taxation between countries, it imposes only the lower tax rate of
15% on intercorporate dividends received by a non-resident
foreign corporation from a domestic corporation subject to the
condition that the country in which the nonresident foreign
corporation is domiciled allows a tax credit of 15%. The fact that
the country in which the nonresident foreign corporation is
domiciled does not impose any tax on the dividends received by
such corporation should be held as full satisfaction of the
condition for the availment of the 15% final tax.
 A stock dividend which represents the transfer of surplus to
capital account is not subject to income tax because they are not
realized income. – exempt from income tax.
 A stock dividend constitutes income if it gives the shareholder an
interest different from that which has former stockholdings
represented.
 A stock dividend does not constitute income if the new shares
confer no different rights or interest than did the old.
 If a corporation or redeems stock issued as a dividend in such
manner as to make the distribution and cancellation or
redemption essentially equivalent to the distribution of a taxable
dividend, the amount so distributed is taxable income.
 Dividends declared in the guise of treasury stock dividend to
avoid the effects of income taxation is taxable.
 Liquidating dividends – the share of each stockholder in the
assets upon liquidation. – subject to tax in Section 39.
 Complete liquidation includes any one of a series of distributions
made by a corporation in complete cancellation or redemption of
all its stock in accordance with a bona fide plan of liquidation
under which the transfer of all the assets under liquidation is to
be complete within a reasonable time, usually not to exceed one
year.
 If the amount received by the stockholder in liquidation is less
than the cost or other basis of the stock, deductible
 During liquidation, any sales of property by them are to be
treated as if made by the corporation for the purpose of
ascertaining the gain or loss.
 Disguised dividends are those income payments made by a
domestic corporation, which is a subsidiary of a nonresident
foreign corporation, to the latter ostensible for services rendered
by the latter to the former, but which payments are
disproportionately larger than the actual value of the services
rendered. – subject to normal tax rate or preferential tax rate if
there is a treaty
 Income which is credited to the account of or set aside for a
taxpayer and which may be drawn upon by him at any time is
subject to tax for the year during which so credited or set apart
although not then actually reduced to possession.
 If the income is not credited, but is set apart, such income must
be unqualifiedly subject to the demand of the taxpayer.
 Where a corporation contingently credits its ees with bonus
stock, but the stock is not available until some future date, the
22
mere crediting on the books of the corporation does not
constitute receipt.
 A mere increase or appreciation in the value of shares of stock
cannot be considered income for taxation purposes. The same
must be sold at a profit to constitute taxable income.
Annuities and Proceeds from Insurance
 Annuity – refers to annuity policies sold by insurance
companies, which provides installment payments for life, or for a
guaranteed fixed period of time, whichever is longer.
 If the annuity is a return of premium, it is not taxable.
 Annuities paid be religious, charitable and educational
corporations are subject to tax to the extent that the aggregate
amount of the payments to the annuitant exceeds the amounts
paid by him as consideration for the contract.
 An annuity charged upon devised land is taxable taxable to a
donee-annuitant, whether paid by the devisee out of the rents of
the land or from other sources. The devisee is not required to
return as gross income the amount of rent paid to the annuitant,
and he is not entitled to deduct from his gross income any sum
paid to the annuitant.
 Failure to comply with the requirements of a tax-exempt annuity
makes it taxable and included in the gross income.
 Proceeds from life insurance received by the beneficiaries or
other types of insurance are not subject to income tax if they are
just mere return of capital. If it is subject to interest, the interest
payment is included in the gross income.
Prizes and Winnings
 When prizes and awards considered taxable income
1. Contest awards and prizes received from an er or another
are generally taxable. Si also are prizes won in a
competitive contest conducted for non-commercial or
commercial purposes. Amounts received as prizes and
awards made primarily for religious, charitable, scientific,
educational, artistic, literary or civic achievement are not
taxable if:
a. The recipient was selected without any action on his
part to enter the contest or proceeding
b. The recipient is not required to render substantial
future services as a condition to receiving the prize or
award.
2. All prizes and awards granted to athletes in local and
international competitions whther held in the Philippines or
abroad and sanctioned by their national sports association
shall be excluded from the gross income.
 If the prizes are derived from sources without the Philippines,
the same shall be included in the gross income for taxpayers
whose income derived within and without the Philippines are
taxable in the Philippines.
Pensions
 Retirement benefits and pensions received, other than those
received under RAs 4917, 7641, 8282, 8291 and other laws on
pension benefits excluded from gross income, are considered as
taxable income.
 Pension is either a lump sum payment or on a staggered basis
payment in consideration of services rendered given to an ee
after an individual reaches the age of retirement.

Partner’s Distributive Share from the Net Income of a GPP
 For purposes of computing the distributive share of the partners,
the net income of the partnership shall be computed in the same
manner as a corporation.
 Each partner shall repost as gross income his distributive share,
actually and constructively received, in the net income of the
partnership in his individual return.
 GPPs are required to render, in duplicate, a return of their
earnings, profits and income, setting forth the items of gross
income and the deductions allowable, and the names and
addresses of the individuals who would be entitled to the net
income if distributed.
 Taxable business partnership – normal income tax. The share of
a partner in the distributable net income after tax of a taxable
business partnership is subject to the 10% final withholding tax
on cash or property dividends and is not included in the taxable
gross income.
Gross Income from Whatever Source Derived
 For whatever source – includes whether coming from legal or
illegal sources.
 Theory underlying the taxability of income derived from illegal
sources is based on the principle that an unlawful or prohibited
business is not exempt from the payment of taxes that it would
have to pay if it were a lawful business.
 The liability to pay the tax is based on the swindler’s having
realized a taxable income from his swindling activities and will
not affect his obligation to make restitution. Payment of tax is a
civil liability imposed by law while restitution is a civil liability
arising from a crime.
 Recovery of bad debts previously charged off is taxable to the
extent of income tax benefit of said deduction. The general rule
is that recovery of amounts deducted in prior years would result
to an income.
 Tax-benefit rule – when the deduction did not result in tax
benefit, the subsequent recovery is not taxable income.
 Taxes paid which are allowed as deductions from gross income
are taxable when subsequently refunded only to the extent of
the income tax benefit of said deduction. Taxes paid which are
not allowed as deduction from gross income are not taxable
even if refunded.
 Campaign contributions are not included in the taxable income
of the candidate to whom they were given. Reason: such
contributions for his/her campaign were not given for the
personal benefit of the candidate.
 Unutilized or excess funds of campaign contributions are taxable
to the candidate.
 If failed to file SOCE, he is automatically precluded from
claiming expenditures as deductions. The entire amount of such
campaign contributions shall be subject to income tax.
 Subsidy may be considered as income, subject to tax.
 The cancellation and forgiveness of indebtedness may amount
to payment of income, to a gift, or to a capital transaction.
EXCLUSIONS FORM GROSS INCOME
 Exclusions from gross income are in the nature of tax
exemptions and it behooves upon the taxpayer to establish them
as convincing.
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 Exclusions from the gross income are items of income which are
not included in the taxable income.
 Excluded by the Consti, tax treaties, tax code or by special tax
laws.
 The term gross income as used in the Tax Code does not
include those items of income exempted by statute or
fundamental law. The exclusion of such income should not be
confused with the reduction of gross income by the application
of allowable exemption.
 Exclusions from gross income are actually income received or
earned by the taxpayer but is not taxable as income because of
the exemption provided for by law or by treaties.
 Deductions from gross income are the expenses and other
allowable deductions as provided by law which are incurred for
engaging in trade or business or exercise of a profession.
 Tax credits are amount of tax previously paid by the taxpayer,
whether erroneously. Illegally or excessively paid, or thru the
withholding tax system, but which later on can be claimed as tax
credit deductible from the tax liability of the taxpayer.
 The rationale for the exclusions from gross income are:
1. It merely represent return of capital
2. Some items may be subject to another kind of internal
revenue tax
3. Some items are income, gains or profits that are expressly
exempt from income tax.
Proceeds of Life Insurance Paid to the Heirs
 Exempt – return of capital only. It is immaterial whether the
proceeds are received in a single sum or in installments.
 If such proceeds are held by the insurer under an agreement to
pay interest thereon, the interest payments must be included in
gross income.
 Proceeds of life insurance received by a child as an irrevocable
beneficiary is considered return of capital.
Amount Received by Insured as Return of Premium
 Excluded from gross income.
 If such amounts, when added to amounts received before the
taxable year under such contract, exceed the aggregate
premiums or consideration paid, then the excess shall be
included in the gross income.
 In case of transfer of a life insurance, endowment or annuity
contract, only the actual amount of the premiums paid is exempt
from tax.
Value of Property Acquired by Gifts, Bequests and Devises
 Bequest – something which is bequeathed by virtue of a will
usually in the form of personal property
 Devise – a gift of real property given by virtue or a will
 Property received as a gift or received under a will or testament
or through legal succession, is exempt from income tax,
although the income therefrom or income derived from its
investment or sale shall be included in the gross income.
 An amount of principal paid under a marriage settlement is a gift.

 Neither alimony nor allowance based on a separation agreement
is taxable income.
 Where there was no prior agreement or negotiations between
two parties that one party will be compensated for services
rendered, the transfer having been made gratuitously should be
treated as gift, subject to donor’s tax.
Compensation for Injuries or Sickness
 Excluded
1. Amounts received through accident or health insurance or
under the workmen’s compensation act
2. Damages recovered by suit or agreement on account of
such injuries or sickness
 It is based on incapacity to work.
 The payments being in lieu of wages or based on the loss
thereof.
 Considered by law as mere return of capital
Income Exempt Under Tax Treaty
 Treaty – an international compact negotiated between the
representatives of two sovereign nations and made in the name
and on behalf of the contracting parties and dealing with
important relations between 2 countries
 International convention or tax treaty – only refer to the double
taxation Convention or double taxation Agreements negotiated
between Philippines and other countries
 Income of any kind to the extent required by any treaty
obligation binding upon the government may be excluded from
gross income.
 Business profits of a foreign corporation organized under the
laws of a treaty country from sources within the Philippines are
not subject to income tax, unless such profits are attributable to
a permanent establishment of the foreign corporation created or
deemed created in the Philippines.
Retirement Benefits, Pensions, Gratuities, etc.
 Purpose of retirement laws: to entice competent women and
men to enter the government service and to permit them to retire
therefrom with relative security.
 Retirement laws are construed liberally in favor of the retiree
because their intention is to provide for his sustenance, and
hopefully even comfort, when he no longer has the stamina to
continue earning his livelihood.
 In order to avail of the exemption of retirement benefits under
RA 7641 from private employers without any retirement plans,
the following must be met:
1. The retirement benefits must be received under existing
CBA or other agreement
2. This is given in the absence of retirement plan or
agreement providing for retirement benefits
3. The retiring ee has served at least 5 years in the said
establishment
4. That he is not less than 60 years of age but not more than
65
5. He shall be entitled to retirement pay equivalent to at least
½ month salary for every year of service
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 RA 4917 exempts from all taxes the retirement benefits received
by officials and ees of private firms under a reasonable private
benefit plan. The following requirements must be met:
1. The plan must be reasonable.
2. The benefit plan must be approved by the BIR
3. The retiring official or ee must have been in the service of
the same er for at least 10 years and at least 50 years old
at the time of the retirement
4. The retiring official or ee should not have previously availed
of the privilege under the retirement benefit plan of the
same or another er.
 Reasonable private benefit plan – a pension, gratuity, stock
bonus or profit-sharing plan maintained by an er for the benefit
of some or all of his officials or ees, wherein contributions are
made by such er for the officials or ees, or both, for the purpose
of distributing to such officials and ees the earnings and principal
of the fund thus accumulated, and wherein it is provided in the
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 ees.
 Additional payments in the form of gifts for loyalty and valuable
services given by private ers on top of the retirement benefits
under a reasonable private benefit plan – taxed as taxable gift to
the donor who/which is subject to the donor’s tax.
 If the gift falls within the provision of de minimis benefits,
excluded from the gross income
 Gratuity is the amount paid to the beneficiary for past services
purely out of generosity of the giver of grantor. It is a bounty
given by the gov’t in consideration or recognition of meritorious
services and springs from the appreciation and graciousness of
the gov’t.
 Terminal leave pay or the commutation of leave credits is cash
value of the officer’s or ee’s accumulated leave credits. It is not
salary, but a retirement gratuity and is thus not subject to income
tax.
 Right to pension is a vested right and cannot be revoked or
impaired.
 The law exempts retirement and pension benefits from
attachment, garnishment, levy or execution.
 Separation ay – the amount that an ee receives at the time of his
severance from the service and is designed to provide the ee
with the wherewithal during the period that he is to look for
another employment.
 Ee is entitled to separation pay when his services are terminated
as a result of retrenchement, closure of business or disease, or
when as a measure of social justice, the ee is validly dismissed
for causes other than serious misconduct of those involving
moral turpitude.
 GR. An ee lawfully dismissed is not entitled to separation pay.
 XPNs.
1. The installation of labor-saving device
2. Redundancy
3. Retrenchment
4. Cessation of the er’s business

5. When the ee is suffering from an disease and his continued
employment is prohibited
 Requisites in order that a separation pay may be excluded from
gross income
1. Amount received must be due to death, sickness or other
physical disability or for any cause beyond the control of
the official or ee, such as retrenchment, redundancy or
cessation of business
2. The separation from the service must not be asked for or
initiated by him
3. The separation was not of his own making
4. WON the separation is beyond the control of the official or
ee shall be determined on the basis of prevailing facts and
circumstances and shall be duly established by the er
5. Amounts received by reason of involuntary separation
remain exempt from income tax even if the official or ee, at
the time of separation, had rendered less than 10 years of
service and/or is below 50 years of age.
 But any payment made by an er to an ee on account of
dismissal, constitutes compensation.
 Separation pay of an ee who offered to resign to take advantage
of the Firm’s offer of voluntary redundancy program - taxable.
What is excluded is the separation pay for any cause beyond the
control of the official or ee.
 The ex gratia payments given to ees who were lawfully
separated and the cash equivalent of unused vacation and sick
leave credits are exempt from income tax.
 It is in nature of separation due to causes beyond the ee’s
control
 Social security benefits, retirement gratuities, pensions and
other similar benefits received by residents or nonresident
citizens or aliens who come to reside to the Philippines
permanently form foreign government are not taxable in the
Philippines.
 Benefits received from SSS – not taxable
 Benefits received from GSIS – not taxable. Option to retire:
1. Upon completion of 30 years of total service and attainment
of age 57
2. After rendering a total service of 30 years regardless of age
3. After having rendered a total of at least 20 years of service,
the last 3 years continuous regardless of age.
 Interest income derived from depositing in the bank the monthly
pension received from GSIS of a retiree is subject to the 20%
final withholding tax. – passive investment income
Miscellaneous Items
 Income derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from interest
deposits in banks in the Philippines by:
1. Foreign governments
2. Financing institutions owned, controlled, or enjoying
refinancing from foreign governments
3. International or regional financial institutions established by
foreign governments
25
 are excluded from gross income
 The stipulation in a loan agreement between a government
agency and a private international bank that the interest income
to be derived by the lender shall be made free from all Philippine
taxes is valid.
 A mere executive agreement cannot provide for a tax
exemption.
 Interest loans which would be granted by a private foreign
financial institution entered into in an executive agreement would
not be exempt from income tax.
 Income derived by the Government from any public utility or
from the exercise of any essential Government function accruing
to the Government of the Philippines, or to any political
subdivision thereof shall be excluded from gross income. In
order that the income derived by the Government will be exempt
from income tax, the income should accrue to the government
and must be derived:
1. From any public utility
2. From the exercise of any essential governmental function.
 An award received by a person for an outstanding short story
writing definitely requires on the part of the taxpayer concerned
to enter the said contest – taxable.
 If the sports association which sanctioned the sports competition
or tournament is not the Philippine Sports Commission thru its
Philippine Olympic Committee, the prize received in the sports
competition shall be subject to income tax. Donors – exempt
from donor’s tax
 13th month pay- 1/12 if the basic salary within a calendar year,
excluded in the computation of fringe benefits.
 The gross benefits received by officials and ees of public and
private entities in the form of 13 th month pay and other benefits
are excluded from the gross income for income tax purposes to
the extent of P30,000. Any excess will be included in the gross
income per income tax return as part of gross compensation
income.
 The amount of de minimis benefits given to ees shall also be
excluded from the gross income
 The ff shall be considered as de minimis benefits
1. Monetized unused vacation leave credits or private ees not
exceeding 10 days during the year
2. Monetized unused leave credits of government officials and
ees during the year
3. Medical cash allowance to dependents of ees not
exceeding P750 per ee per semester or P125 per month
4. Rice subsidy of P1,500 or 1 sack of 50-kg. rice per month
amounting to not more than P1,500
5. Uniform and clothing allowance not exceeding P5,000
6. Actual yearly benefits not exceeding P10,000 per annum
7. Laundry allowance not exceeding P300 per month
8. Ees achievement awards which must be in the form of a
tangible personal property other than cash or gift certificate,
with an annual monetary value not exceeding P10,000
received by the ee under an established written plan
9. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per ee per annum

10. Daily meal allowance for overtime work not exceeding 25%
of the basic minimum wage
 De minimis benefits are actually fringe benefits which are not
taxable. They need not be reported in the preparation of income
tax return because they are exempt.
 These benefits shall constitute a deductible expense upon the
er.
 GSIS, SSS, Medicare and Pag-ibig contributions – exempt from
tax
 Gains realized from the sale or exchange or retirement of bonds,
debentures or other certificate of indebtedness with a maturity of
more than 5 years shall be excluded from gross income
 Gains realized by an investor upon redemption of shares of
stock in a mutual fund company shall be excluded from the
gross income.
SPECIAL TREATMENT OF FRINGE BENEFITS
 Fringe benefits – any goods, services, or other benefit furnished
and granted in cash or in kind by an er to an ee, except rank and
file ee
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel
5. Interest on loan at less than market rate to the extent the
difference between the market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the
er for the ee in social and athletic clubs or other similar
organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the ee or his dependents
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
 The tax imposed on the fringe benefits received by managerial
or supervisory ees shall be treated as a final income tax on the
ee, but shall be withheld and paid by the er on a calendar
quarterly basis.
 It is the er who is legally required to pay the fringe benefits tax.
 If the tax is not paid, the legal recourse of the BIR is to go
against the er
 Convenience of the er Rule. A final withholding tax of 32% is
imposed on the grossed-up monetary value of fringe benefit
furnished, granted and paid by the er to the ee, except when:
1. The fringe benefit is required by the nature of or necessary
to the trade, business or profession of the er
2. When the fringe benefit is for the convenience or
advantage of the er.
 The grossed-up monetary value of fringe benefit shall be
determined by dividing the monetary value of the fringe benefit
by 68%.
26
 The grossed-monetary value of the fringe benefit represents the
whole amount of income realized by the ee which includes the
net amount of money or net monetary value of property which
has been received plus the amount of the fringe benefit tax
thereon.
 Managerial ee – one who is vested with powers or prerogatives
to lay down and execute management policies and/or to hire,
transfer, suspend, lay-off, recall, discharge, assign, discipline
ees.
 Supervisory – those whom in the interest of the er, effectively
recommend such managerial actions if the exercise of such
authority is not merely routinary or clerical in nature but requires
the use of independent judgment.
 Rank-and-file ees – who are holding nether managerial nor
supervisory position.
 Taxation of fringe benefits granted to nonresident alien
individuals
1. Not engaged in trade or business in the Philippines, 25% of
the grossed up monetary value of the fringe benefit. The
tax base shall be computed by dividing the monetary value
of the fringe benefit to 75%.
2. Fringe benefit tax of 15% shall be imposed upon the
grossed-up monetary value of the fringe benefit of the ff
alien individuals. The tax base shall be computed by
dividing the monetary value of the fringe benefit be 85%.
a. Alien individual employed by RHQ and ROHQ,
including any of its Filipino ees occupying the same
positions
b. Alien individual employed by OBU, including any of its
Filipino ees occupying the same positions
c. Alien individual employed by a contractor or
subcontractor engaged in petroleum operations in the
Philippines, including any of its Filipino ees occupying
the same positions
 In general, the computation of the fringe benefits tax would
entail:
1. Valuation of the benefit granted
2. Determination of the proportion or percentage of the benefit
which is subject to the fringe benefit tax.
 Fringe benefits which are required by the nature of, or necessary
to the trade, business or profession of the er, or when the fringe
benefit is for the convenience or advantage of the er – not
subject to the FBT.
 Unless otherwise provided in the Regulations, the valuation of
fringe benefits shall be as follows:
1. If the fringe benefit is granted in money, or is directly aid for
by the er, then the value is the amount granted or paid for
2. If the fringe benefit is granted or furnished by the eer in
property other than money and ownership is transferred to
the ee, then the value of the fringe benefit shall be equal to
fair market value of the property
3. If the fringe benefit is granted or furnished by the er in
property other than money but ownership is not transferred
to the ee, the value of the fringe benefit is equal to the
depreciation value of the property
Guidelines for valuation
Housing Privilege

1. If the er leases a residential property for the use of his ee and
the said property is the usual place of residence of the ee, the
value of the benefit shall be the rental paid thereon to the er.
The monetary value of the fringe benefit shall be 50% of the
value of the benefit
2. If the er owns a residential property and the same is assigned
for the use of his ee as his usual place of residence, the annual
value of the benefit shall be 5% of the market value of the land
and improvement, as declared in the Real property tax
declaration form, or zonal value as determined by the
Commissioner, whichever is higher. The monetary value of the
fringe benefit shall be 50% of the value of the benefit
3. If the er purchases a residential property on installment basis
and allows the ee to use the same as his usual place of
residence, the annual value of the benefit shall be 5% of the
acquisition cost, exclusive of interest. The monetary value of the
fringe benefit shall be 50% of the value of the benefit
4. If the employer purchases a residential property and transfers
the ownership to the ee, the value of the benefit shall be the er’s
acquisition cost or zonal value, whichever is higher. The
monetary value of the fringe benefit shall be the entire value of
the benefit.
5. If the er purchases a residential property and transfers
ownership thereon to his ee for the latter’s residential use, at a
price less than the er’s acquisition cost, the value of the benefit
shall be the difference between the fair market value and the
cost of the ee. The monetary value of fringe benefit shall be the
entire value of the benefit.
6. Housing privilege of the AFP shall not be treated as taxable
fringe benefit. The state shall provide its soldiers with necessary
quarters which are within or accessible from the military camp.
7. A housing unit which is situated inside or adjacent to the
premises of a business or factory shall not be considered as a
taxable fringe benefit. Must be located within the maximum 50
meters from the perimeter of the business premises.
8. Temporary housing for an ee who stays for 3 months shall not
be considered as taxable fringe benefit.
Expense Account
1. In general, expenses incurred by the ee but which are paid
by the er are taxable fringe benefits, except when the
expenditures do not partake the nature of a personal
expense attributable to the ee
2. Expenses paid for by the ee but reimbursed by his er shall
be treated as taxable income except only when the
expenditures do not partake the nature of a personal
expense attributable to the said ee
3. Personal expenses of the ee paid for or reimbursed by the
er to the ee shall be treated as taxable fringe benefits of the
ee WON the same are duly receipted for and in the name
of the er
4. Representation and transportation allowances which are
fixed in amounts and are regularly received by the ees as
part of their monthly compensation income shall not be
treated as taxable fringe benefits – but subject to income
tax
Motor Vehicle of Any Kind
1. If the er purchases the motor vehicle in the name of the ee, the
value of the benefit is the acquisition cost thereof. The monetary
value of the fringe benefit shall be the entire value of the benefit.
2. If the er provided the ee with cash for the purchase of the
vehicle, the ownership of which is placed in the name of the ee,
27
the value of the benefit shall be the amount of cash received by
the ee. The monetary value of the fringe benefit shall be the
entire value of the benefit, unless the same is subjected to a
withholding tax as compensation income.
3. If the er purchases the car on installment basis, the ownership of
which is laced in the name of the ee, the value of the benefit
shall be the acquisition cost exclusive of interest, divided by 5
years. The monetary value of the fringe benefit shall be the
entire value of the benefit.
4. If the er shoulders a portion of the amount of the purchase price
of a motor vehicle, the ownership of which is placed in the name
of the ee, the value of the benefit shall be the amount
shouldered by the er. The monetary value of the fringe benefit
shall be the entire value of the benefit.
5. If the er owns and maintains a fleet of motor vehicles for the use
of the business and the ees, the value of the benefit shall be the
acquisition cost of all the motor vehicles not normally used for
sales, freight, delivery service and other non personal use
divided by 5 years. The monetary value of the fringe benefit shall
be 50% of the value of benefit.
6. If the er leases and maintains a fleet of motor vehicles for the
use of the business and the ees, the value of the benefit shall be
the amount of rental payments for motor vehicles not normally
used for sales, freight, delivery services and other non-personal
use. The monetary value of the fringe benefit shall be 50% of the
value of benefit.
7. The use of aircraft owned and maintained by the er shall be
treated as business use and not subject to fringe benefit
8. The use of yacht whether owned or maintained or leased by the
er shall be treated as taxable fringe benefit. The value of the
benefit shall be measured based on the depreciation of the
yacht at an estimated useful lifetime of 20 years.
Household Expenses
 Such as salaries of help, personal driver, or other similar
personal expenses shall be treated as taxable fringe benefit.
Interest on Loan at Less Than Market Value
 If the er lends money to his ee free of interest or at a rate lower
than 12%, such interest foregone by the er or the difference of
the interest assumed by the ee and the rate of 12% shall be
treated as taxable fringe benefit
 12% applies to installment payments or loans with interest rate
lower than 12% starting Jan. 1, 1998
Membership Fees, Dues, and Other Expenses Borne by the ER for his
manager or Supervisor in Social and Athletic Clubs of Other Similar
Organizations
 Shall be treated as taxable fringe benefits in full.
 Assignment – not subject to income tax.
Expenses for Foreign Travel
1. Reasonable business expenses which are paid for by the er for
the purpose of attending business meetings or conventions shall
not be treated as taxable fringe benefits. Inland travel expenses
amounting to an average of US$300 or less er day, shall not be
subject to a FBT. The cost of economy or business class
airplane ticket shall not be subject to FBT. However 30% of the
cost of first class airplane ticket shall be subject to a FBT.
2. No documentary evidence showing that the travel is for business
meetings, the entire cost of the ticket, including cost of hotel

accommodations and other expenses incidental thereto shall be
treated as taxable fringe benefits.
3. Traveling expenses which are paid by the er for the travel of the
family members of the ee shall be treated a taxable fringe
benefits of the ee.
Holiday and Vacation Expenses
 Taxable fringe benefits
Educational assistance to the ee or his dependents
a. GR. taxable fringe benefit. However, a scholarship grant to the
ee by the er shall not be treated as taxable fringe benefit if the
education or study involved is directly connected with the er’s
trade, business or profession, and there is a written contract
between them that the ee is under obligation to remain in the
employ of the er for the period of time that they have mutually
agreed.
b. Extended to the ee’s dependents – taxable fringe benefits,
unless the assistance is provided thru a competitive scheme
under the scholarship program of the company.
Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows
 GR. taxable fringe benefit. XPN
1. Contributions of the er for the benefit of the ee, pursuant to
the SS, GSIS or similar contributions
2. The cost of premiums borne by the er for the group of his
ees
STOCK OPTION
 Any income or gain derived from stock option plans granted to
managerial and supervisory ees which qualify as fringe benefits
is subject to FBT.
 The additional compensation or the taxable fringe benefit, as the
case may be, is the difference of the book value/fair market
value of the shares, whichever is higher, at the time of exercise
of the stock option and the price fixed on the grant date.
 The option has value only if, at the time of the exercise, the
stock is worth more than the price fixed on the grant date.
 If the income or gain is derived from the exercise of stock option
is derived by the rank-and-file ees, the same is considered as
additional compensation subject to income tax.
 FBT shall not be imposed on the ff fringe benefits:
1. Those authorized and exempted from income tax under this
code or under any special law
2. Contributions of the er for the benefit of the ee to
retirement, insurance and hospitalization benefit plans
3. Benefits given to the rank and file
4. De minimis benefits
5. If the grant of fringe benefits to the ee is required by the
nature of, or necessary to the trade, business or profession
of the er
6. If the grant of the fringe benefit is for the convenience of the
er.
28
 If the fringe benefit is exempted from the FBT, the same may still
form part of the ee’s gross compensation income.
 As a general rule, the amount of taxable fringe benefit and the
FBT shall constitute allowable deductions from gross income of
the er. However, if the basis of computation of the FBT is the
depreciation value, the zonal value or the fair market value, only
the actual fringe benefits tax paid shall constitute a deductible
expense for the er.
 If the zonal value or fair market value of the property is greater
than its cost subject to depreciation, the excess amount shall be
allowed as a deduction from the er’s gross income as fringe
benefit expense.
 The test of supervisory or managerial status depends on
whether a person possesses authority to act in the interest of his
er and whether such authority is not merely routinary or clerical
in nature, but requires the use of independent judgment.
 Elements of managerial ee
1. His primary duty consists of performance of work directly
related to management policies
2. He customarily and regularly exercises discretion and
independent judgment in the performance of his function
3. He regularly and firectly assist in the management of the
establishment
4. He does not devote 20% of his time to work other than
those above prescribed.
ALLOWABLE DEDUCTIONS
 Means the items enumerated in Section 34, including special
deductions allowed to insurance companies under Section 37;
Provided, that in case of an individual and a corporation entitled
to claim the Optional Standard Deduction, under Section 34 (L),
in lieu of the deductions enumerated under Section 34(A) to (J),
the term allowable deductions shall mean the aforesaid OSD.
 In case of individuals, deduction of premium payments on health
and/or hospitalization insurance may be allowed, if applicable.
Taxpayers allowed to claim the allowable deductions
1. Individual resident and nonresident citizens
2. Individual resident aliens
3. Nonresident alien individual engaged in trade or business within
the Philippines
4. GPP and partners thereof
5. Domestic corporations, including proprietary educational
institutions and hospitals; and GOCC, agencies or
instrumentalities
6. Resident foreign corporations
Taxpayers not allowed to claim the allowable deductions
 Income taxes of these taxpayers are subject to final withholding
taxes based on the gross income except for RHQs which is
exempt from income tax
 29

1. Taxpayers earning compensation income arising from personal
services rendered under the er-ee relationship (except for the
deduction on premium payments on HHI)
2. Nonresident alien individuals not engage in trade or business
within the Philippines
Return of capital which may be deducted from the gross sales or gross
revenue
 Income tax is levied only on income, hence, the amount
representing return of capital should be deducted from proceeds
from sales and should not be subject to income tax.

3. Alien individual employed by RHQs or ROHQs of Multinational  Return of capital are in the form of coast of sales or cost of
Companies service paid or incurred by the taxpayer in the conduct of his
business or exercise of profession.
4. Alien individuals employed by OBUs
 Cost of goods purchased for resale, with proper adjustment for
5. Alien individuals employed by petroleum service contractors and opening and closing inventories, are deducted from gross sales
subcontractors in computing gross income
6. International carriers  In sale of goods representing inventory, the amount received by
the seller consists of return of capital and gain from sale of
7. OBUs
goods or properties. Return of capital is not subject to income
8. Branches of foreign corporations on the profits remitted to their tax.
head offices
 Real estate dealers and dealers in securities are ordinarily not
9. RHQs allowed to compute the amount representing return of capital
thru cost of sales. Rather, they are required to deduct the total
10. ROHQs cost specifically identifiable to the real property or shares of
stock sold and exchanged.
11. Nonresident foreign corporations
 In the sale of services, the portion of the cost of services
representing the return of capital is not subject to income tax.

Deductions and exemptions allowed to taxpayers * Incentives to lawyers – a lawyer or GPPs rendering free legal services
shall be entitled to an allowable deduction from the gross income, the
Type of Taxpayer Allowable Deduction amount that could have been collected for the actual free legal services
rendered or up to 10% of the gross income derived from the actual
Individuals earning pure 1. Personal and Additional performance of the legal profession, whichever is lower; Provided, that the
compensation income (except exemptions; actual free legal services herein contemplated shall be exclusive of the
nonresident aliens not engaged in minimum 60-hour mandatory legal aid services rendered to indigent
trade or business in the 2. Premium payments on litigants.
Philippines) HHI, if applicable

Individuals deriving income from 1. Personal and additional

trade or business, or exercise of exemptions Business expense vis-à-vis capital expense
profession
2. Premium payments on  Business expense – expenditures related to the conduct of the
HHI, if applicable business of the taxpayer and deductible in the year incurred

3. Itemized deductions or  Capital expenses – expenditures that improve or add to the

OSD value of the property or equipment of the business. They are not
immediately deductible but may be deducted overtime in the
Corporations (except nonresident Itemized deductions or OSD form of allowance for depreciation.
foreign corporation)

Business expenses that may be deducted from gross income

Deductions from Gross income, how construed
 Since a deduction for income tax purposes partakes of the
nature of a tax exemption, then it must also be strictly construed
against the taxpayer, who must prove by convincing evidence
that he is entitled to the deductions claimed.
 Include the ordinary and necessary expenditures directly
connected with or pertaining to the taxpayer’s trade or business,
should be deducted from the gross income in the year incurred.
 The cost of goods purchased for resale, with proper adjustment
for opening and closing inventories, is deducted from gross
sales in computing the gross income.

General rules for the deductibility of certain transactions from gross  Among the items included in the business expenses are:
income
1. Salaries, wages, compensation for services rendered;
1. Deductions must be paid or incurred in connection with the pensions, compensation for injuries; commissions
taxpayer’s trade, business or exercise of profession
2. Benefits of ees, including de minimis benefits and the
2. Deductions must be paid or incurred during the taxable year grossed-up monetary value of fringe benefits subject to
FBT
3. Deductions must be supported by adequate receipts or invoices
3. Traveling expenses while away from home solely in the
4. Deductible expenses must have been subjected to withholding pursuit of a trade or business
tax
4. Rentals for the use of business property
 30

5. Entertainment, amusement and recreation expenses 7. Must be legitimately paid

6. Incidental repairs

7. Cost of materials and supplies Meaning of ordinary and necessary expenses

8. Advertising expense and other selling expenses
9. Professional services
10. Insurance premiums against fire, storm, theft, accident or
other similar losses in the case of a business
11. Equipment used in the trade or business
12. Organizational and operating expenses
 Ordinary – not lavish, extravagant or excessive under the
circumstances
 A business expense is ordinary when it connotes payment which
is normal in relation to the business of the taxpayer and the
surrounding circumstances. It does not require that the
payments be habitual or normal in the sense that the same
taxpayer will have to make them often; the payment may be
unique on non-recurring to the particular taxpayer.

13. Management expenses  Necessary – where the expenditure is appropriate and helpful in
the development of the taxpayer’s business. – day to day
14. Training expenses expense

15. Other necessary expenses incurred in carrying on the  Whether an ordinary and necessary expense is deductible
business expense must be determined from the nature of expenditure
itself, which in turn depends on the extent and permanency of
the work accomplished by the expenditure.

Professional Expenses

 A professional may claim as deduction from gross income the Meaning of paid or incurred during the taxable year
following:
 The deduction shall be taken for the taxable year in which paid
1. The cost of supplies used by him in the practice of his or accrued or paid or incurred depending upon the accounting
profession method in which taxable income is computed.

2. Expenses aid in the operation and repair of transportation  Under the accrual method of accounting, expenses not claimed
equipment used in making professional calls as deduction in the current year when they are incurred cannot
be claimed as deduction from income from the succeeding year.
3. Dues to professional societies
 The amount of liability does not have to be determined exactly; it
4. Subscriptions to professional journals must be determined with reasonable accuracy, which implies
something less than exact or completely accurate amount.
5. Rent paid for office rooms
 The propriety of an accrual must be judged by the facts that a
6. Fuel, light, water, telephone expenses used in offices taxpayer knew, or could reasonably be expected to have known,
at the closing of its books for the taxable year.
7. Salaries or office assistants

8. Amounts currently expended for books, furniture and

professional instruments and equipment, the useful life of SALARIES AND OTHER FORMS OF COMPENSATION FOR
which is short PERSONAL SERVICES ACTUALLY RENDERED
9. Training expenses  Must be reasonable allowance for salaries or other
compensation for personal services actually rendered.
10. Other necessary expenses incurred in the practice of
profession
 Must be payments purely for service

 This test and its practical application may be further stated and
Requisites for the deductibility of business and professional expenses illustrated as follows

1. Expenses must be ordinary and necessary 1. Any amount in the form of compensation, but not in fact as
the purchase price of service, is not deductible.
2. Must be aid or incurred during the taxable year
2. The form or method of fixing compensation is not decisive
3. Must be paid or incurred in carrying on the trade or business, or as to deductibility. If contingent compensation is paid
the exercise of profession by the taxpayer, or attributable to the pursuant to a free bargain between the er and the individual
development, management or operation of the trade, business made before the services are rendered, not influenced by
or profession any consideration on the part of the er other than that of
securing on fair and advantageous terms the service of the
4. Amount must be reasonable individual, it should be allowed as a deduction even though
in the actual working out of the contract may prove to be
5. Must be substantiated by sales invoice or official receipts, greater than the amount which would ordinarily be paid.
records or other pertinent documents showing the amount of
expenses and the direct connection to the business 3. In any event the allowance for compensation paid may not
exceed what is reasonable under the circumstances. It is
6. If subject to withholding tax, the same should be properly generally just to assume that reasonable and true
withheld and remitted to the BIR compensation is only such amount as would be paid for like

services by like enterprises in like circumstances. The
circumstances to be taken into consideration are those
existing at the date when the contract of services was
made.
Treatment of excessive compensation
 In case of excessive payments by corporations, if such
payments correspond or bear a close relationship to
stockholdings, and are found to be distribution of earnings or
profits, the excessive payments will be treated as dividends
 If such payments constitute payments for property, they should
be treated by the payer as a capital expenditure and by the
recipient as part of the purchase price.
Bonuses to ees
 A bonus is an amount granted and paid ex gratia to the ees, it is
an amount granted and paid to an ee for his industry and loyalty
which contributed to the success of the er’s business and made
possible the realization of profits.
 It is not demandable and enforceable obligation, unless made a
part of the wage or salary, or is embodied in a CBA
 Constitute allowable deductions from gross income when such
payments are made in good faith and as additional
compensation for the services rendered to ees, provided such
payments, when added to the stipulated salaries, do not exceed
a reasonable compensation for the services rendered.
 Donations made to ees and others which do not have in them
the element of compensation or are in excess of reasonable
compensation for services, are not deductible from gross
income.
 Reasonable amount only is deductible.
 Giving an extra bonus at the time when the company has
declared a net operating loss is not a payment in good faith and
not normal to the business, hence unreasonable and would not
qualify as ordinary and necessary expense.
Pensions; Compensation for injuries
 Proper deductions as ordinary and necessary expenses
 Such deductions are limited to the amount not compensated for
by insurance companies.
FRINGE BENEFITS EXPENSE
 The company can deduct the amount of the grossed-u monetary
value of the fringe benefit given to the managers or supervisors
as fringe benefit expense provided that the said fringe benefits
had been subjected to FWT on the fringe benefits.
TRAVELLING/TRANSPORTATION EXPENSES
 If the trip is undertaken for other than business purposes, the
transportation expenses are personal expenses, and the meals
and lodging are living expenses, and therefore not deductible.
 If the trip is solely on business, the reasonable and necessary
travelling expenses, including transportation expenses, meals
and lodging, become business expenses instead of personal
expenses.
a. If an individual, whose business requires him to travel,
receives a salary as full compensation for his services
31
without reimbursement for travelling expenses, or is
employed on a commission basis with no expense
allowance, his travelling expenses, including the entire
amount expended for meals and lodging, are deductible
from gross income.
b. If an individual receives as salary and is also repaid his
actual travelling expenses, he shall include in the gross
income, the amount so repaid and may deduct such
expenses.
c. If the individual receives a salary and also an allowance for
meals and lodging, the amount of the allowance should be
included in gross income and the cost of such meals and
lodging may be deducted therefrom.
 A payment for the use of a sample room in a hotel for the display
of foods is a business expense. Only such expenses as are
reasonable and necessary in the conduct of the business and
directly attributable to it may be deducted. He must attach to his
return a statement showing:
1. The nature of the business in which he is engaged
2. The number of days away from home during the taxable
year on account of business
3. The total amount of expenses incident to meals and lodging
while absent from home in the pursuit of business during
the taxable year
4. The total amount of other expenses incident to travel and
claimed as a deduction
 Claims for deductions referred to herein must be substantiated
by records showing in detail the amount and nature of the
expenses incurred.
Proof of deductibility for travel expenses when claimed by passengers, as
well as freight charges incurred on transport of cargoes by airline
companies
 For purposes of validating the deductions claimed, the
passenger coupon of the plane ticket/airway bill which reflects
the CAB rate shall not be used as the basis for the claim of
expenses.
 The amount of expenses to be claimed shall be the actual cost
incurred for the purchase of the plane ticket/airway bill which is
the net amount of the ticket fare/airway bill after deducting the
corresponding fare/freight adjustments.
 In case of plane tickets, if said tickets are purchased from travel
agents, travel expenses as claimed by the passengers shall be
validated on the basis of the sales invoice/official receipt issued
by the travel agent representing the actual cost of the ticket and
the reasonable margin added by the travel agent as payment for
the services.
Essential Requisites of traveling/transportation expense
1. Expense must be reasonable and necessary
2. It must be paid or incurred while away from home
 While away from home means away from the location
of the ee’s official place of employment regardless of
where the family residence is maintained, like
business trips
3. It must be paid or incurred in the conduct of trade or business or
exercise of profession

RENTAL EXPENSE
Rental and/or payments for use or possession of property
 Requisites
1. Rental must be ordinary and necessary
2. It must have been paid or incurred during the taxable year
 On the accrual basis, rent is deductible as expense
when liability is incurred during the period of use. On
cash basis, rent is deductible when incurred and paid.
An advance payment is not deductible expense of the
lessee until the period is used, although the lessor
may be required to report the amount when received.
3. It must be paid or incurred in carrying trade or business of
the taxpayer or practice of profession.
4. It must be supported by official receipts, records or other
pertinent papers
5. It is required as a condition for the continued use or
possession of the property being leased
6. The taxpayer has not taken or is not taking title to the
property or has no equity other than that of a lessee, user,
or possessor
7. Rentals should be subject to the expanded withholding tax
of 5% of the rental charge, net of vat, if any.
Expenses under lease agreements
 Where a leasehold is acquired for business purposes for a
specified sum, the purchaser may take as a deduction in his
return an aliquot part of such sum each year, based on the
number of years the lease has to run.
 Taxes paid by a tenant to or for a landlord for business property
are additional rent and constitute a deductible item to the tenant
and taxable income to the landlord, the amount of the tax
deductible by the latter.
 The cost borne by a lessee in erecting buildings or making
permanent improvement on ground of which he is a lessee is
held to be a capital investment and not deductible as a business
expense. In order to return to such taxpayer his investment of
capital, an annual deduction may be made from gross income of
an amount equal to the cost of such improvements divided by
the number of years remaining of the term of lease, and such
deduction shall be in lieu of a deduction for depreciation if the
remainder of the term of lease is greater than the probable life of
the building erected, or of the improvement made, and this
deduction shall take the form of an allowance for depreciation.
ENTERTAINMENT, AMUSEMENT AND REPRESENTATION EXPENSES
 Representation expenses – refer to the expenses incurred by a
taxpayer in connection with the conduct of his trade, business or
exercise of a profession, in entertaining, providing amusement
and recreation to, or meeting with, a guest/s at a dining place,
place of amusement, country club, theater, concert, play,
sporting event, and similar events or places.
32
 Shall not refer to fixed representation allowances that are
subject to withholding tax on wages pursuant to an er-ee
relationship
 Entertainment facilities – shall refer to:
1. A yacht, vacation home or condominium; and
2. A similar item of real or personal property used by the
taxpayer primarily for the entertainment, amusement, or
recreation of guests or ees.
 To be considered entertainment facility, the
aforementioned 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.
 A yacht shall be considered an entertainment
facility if its use is in fact not restricted to
specified officers or ees or positions in such a
manner as to make the same a fringe benefit for
purposes of imposing the FBT.
 The term guests mean persons or entities with
which the taxpayer has direct business relations.
It does not include ees, officers, partners,
directors, stockholders, or trustees of the
taxpayer.
 In the case particularly of a country, golf, sports club, or any
other similar club where the ee or officer of the taxpayer is the
registered member and the expenses thereto are paid for by the
taxpayer, there shall be a presumption that such expenses are
fringe benefits unless the taxpayer can prove that these are
actually representation expenses. For purposes of proving that
said expense is representation, the taxpayer should maintain
receipts and adequate records that indicate the:
1. Amount of expense
2. Date and place of expense
3. Purpose of expense
4. Professional or business relationship of expense
5. Name of person or company entertained with contact
details
Requisites of deductibility of entertainment, amusement and recreation
expenses
1. It must be paid or incurred during the taxable year
2. The amount must be reasonable
3. It must be:
a. Directly connected to the development, management and
operation of the trade, business or profession of the
taxpayer; or
b. Directly related to or in furtherance of the conduct of his or
its trade, business or exercise of a profession
4. It must not contrary to law, morals, good customs, public policy
or public order
5. It must not have been paid, directly or indirectly, to an official or
ee of the national government, or any local government unit, or
of any GOCC, or of a foreign government, or to a private
individual, or corporation, or GPP, or a similar entity, if it
constitutes a bribe, kickback, or other similar payment

6. It must not exceed the ceiling of .50% of net sales for sellers of
goods or properties or 1% of net revenues for sellers of services
7. It must be duly substantiated by adequate proof
8. The appropriate amount of withholding tax, if applicable, should
have been withheld therefrom and paid to by the BIR.
Ceiling on entertainment, amusement, and recreation expense
 There shall be allowed a deduction from gross income for
entertainment, amusement and recreation expense in an
amount equivalent to the actual entertainment, amusement and
recreation expense paid or incurred within the taxable year by
the taxpayer, but in no case shall such deduction exceed .50%
of net sales for taxpayers engaged in sale or goods or
properties; or 1% of net revenue if taxpayer is engaged in sale of
services, including exercise of profession and use or lease of
properties.
 If the taxpayer is deriving income from both sale of
goods/properties and services, the allowable entertainment,
amusement and recreation expense shall in all cases be
determined based on an apportionment formula taking into
consideration the percentage of the net sales/net revenue to the
total net sales/net revenue, but which in no case shall exceed
the maximum percentage ceiling.
 Apportionment formula: net sales/net revenue over total net
sales and net revenue time actual expense
 Notwithstanding the ceiling imposed on such expense, the
claimed expenses shall be subject to verification and audit for
purposes of determining its deductibility as well as compliance
with the substantiation requirements.
 It after the verification, a taxpayer is found to have shifted the
amount of the entertainment, amusement and recreation
expense to any other expense in order to avoid being subjected
to the ceiling, the amount shifted shall be disallows in its totality,
without prejudice to such penalties under the tax code.
Excluded from the entertainment, amusement, and recreation expenses
1. Expenses which are treated as compensation or fringe benefits
for services rendered under an er-ee relationship
2. Expenses for charitable or fund raising events
3. Expenses for bona fide business meeting of stockholders,
partners or directors
4. Expenses for attending or sponsoring an ee to a business
league or professional organization meeting
5. Expenses for events organized for promotion, marketing and
advertising including concerts, conferences, seminars,
workshops, conventions, and other similar events; and
6. Other expenses of a similar nature
 Not exhaustive
Reporting requirements
 The taxpayer is required to use in its financial statements and
income tax return the account title entertainment, amusement
and recreation expense, or in the alternative, to disclose in the
notes to financial statements the amount corresponding thereto
when recording expenses paid or incurred in the nature of the
expense.
33
 Such expense should be reported in the taxpayer’s income tax
return as a separate expense item.
MINOR OR ORDINARY REPAIRS AND MAINTENANCE
Incidental, minor or ordinary repairs and maintenance
 The cost of incidental repairs which neither materially add to the
value of the property nor appreciably prolong its life, but keep it
in an ordinarily efficient operating condition may be deducted as
expenses, provided the plant and property account is not
increased by the amount of such expenditure.
 MAJOR OR EXTRAORDINARY REPAIRS – Repairs in the
nature of replacement, to the extent that they arrest deterioration
and appreciably prolong the life of the property or increase its
value are capital expenditures and should be charged/debited
against the depreciation reserves if such account is kept.
COSTS OF MATERIALS AND SUPPLIES
 Taxpayers carrying materials and supplies on hand should
include in expenses the charges for materials and supplies only
to the amount that they are actually consumed and used in
operation during the year for which the return is made, provided
that the cost of such has not been deducted in determining the
net income for any previous year.
 If a taxpayer carries incidental materials and supplies on hand
and for which no record of consumption is kept or of which
physical inventories at the beginning and end of the year are not
taken, it will be permissible for the taxpayer to include in his
expenses and deduct from gross income the total cost of such
supplies and materials as were purchased during the year for
which the return is made, provided the taxable income is clearly
reflected by this method.
 If the materials and supplies are used directly or indirectly in the
production of the product, the related cost shall form part of the
cost of the product and will be deductible as such when the
products are sold.
ADVERTISING AND OTHER SELLING EXPENSES
 A taxpayer is entitled to deduct the necessary expenses aid in
carrying on his business from his gross income from whatever
sources.
 Advertising includes the use of spoken or written word in printed
matter, movies, radio and television acquaint the public with the
taxpayer’s merchandise or services.
 Two kinds of advertising
1. To stimulate the current sales of merchandise or use of
services
2. Designed to stimulate the future sale of merchandize or use
of services
 If the expenditures are for the first kind, then except as to the
question of the reasonableness of amount, there is no doubt that
such expenditures are deductible as business expenses.
 If the expenditures are for the second kind, then normally there
should be spread out over a reasonable period of time.

 Advertising expense duly covered by a VAT invoice is a
legitimate business expense.
PROFESSIONAL SERVICES
 Hiring the services of professionals shall be considered
deductible expense subject to the condition that the same shall
be subject to the EWT, except only if the professional is a
member/partner of a GPP.
TRAINING EXPENSE
 Incurred during the taxable year for training ees of the office
shall be considered as ordinary and necessary deductible
expense.
MANAGEMENT EXPENSES
OTHER NECESSARY BUSINESS EXPENSES
CAPITAL EXPENDITURES
 Non-deductible during the taxable year but can be amortized
1. Equipment needed in trade or business
2. Organizational and pre-operating expenses
 Organizational and pre-operating expenses of a
corporation are considered capital expenditures and
are therefore, not deductible in the year they are paid
or incurred
 But taxpayers who incur these expenses and
subsequently enter the trade and business to which
the expenditures relate can elect to amortize these
expenditures over a period of not less than 60 months.
– Does not apply to a situation where an existing
corporation incurs such for the purpose of expanding
its business in a new line of trade, venture or activity.
 Organizational expenses are amortized across the life
of the firm. Where no such life exists or is determined,
the amortization period is 5 years. Under the
Investment Incentives Act, such expenses are
amortized by a registered enterprise for a period of not
more than 10 years.
Substantiation requirement
 No expenses shall be allowed as deduction from gross income
unless the taxpayer shall substantiate with sufficient evidence,
such as official receipts or other adequate records:
1. The amount of the expense being deducted
2. 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.
Bribery or kickback not allowed as deduction
34
 To a government official in order to facilitate the processing of a
transaction from a government office
 However, on the part of the subject approving official, who
received the bribe, the said amount would constitute as a
taxable income because all income from legal or illegal sources
whatsoever are taxable.
Insurance premium on the life of a government official not a deductible
expense by a private firm-payor
 Because it is not an ordinary and necessary business expense
 Paying premiums for the insurance of a person not connected
with the company is not normal, usual or customary.
 It is also an illegal compensation made to a government ee.
 If the company is made the beneficiary, whether directly or
indirectly, the premium is not allowed as deduction from gross
income.
Political campaign expenses and contributions to a candidate in an
election not allowed as deductible from gross income
 The contributor is not allowed to deduct his contributions
because the said expense is not directly attributable to the
development, management, operation and/or conduct of a trade,
business or profession.
 If candidate is an incumbent government official or ee, it may
even be considered as a bribe or kickback.
EXPENSES ALLOWABLE TO PRIVATE EDUCTIONAL INSTITUTIONS
 In addition to the expenses allowable as deductions, a private
educational institution, may at its option, elect either:
1. To deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the taxable
year for the expansion of school facilities, or
2. To deduct allowance for depreciation.
Interest Expense – refer to payment for the use or forbearance or
detention of money, regardless of the name it is called or denominated. It
includes the amount paid for the borrower’s use of money during the term
of the loan, as well as for his detention of money after the due date of its
payment.
Requisites for deductibility of interest expense
1. There must be an indebtedness
2. There should be an interest expense paid or incurred upon such
indebtedness during the taxable year
3. The indebtedness must be that of the taxpayer
4. The indebtedness must be connected with the taxpayer’s trade,
business or exercise of profession
5. The interest must be stipulated in writing
6. The interest must be legally due

7. The interest payment arrangement must not be between related
taxpayers
8. The interest must not incurred to finance petroleum operations
9. In case of interest incurred to acquire property used in trade,
business or exercise of profession, the same was not treated as
a capital expenditure
10. That the allowable deduction for interest expense shall be
reduced to 33% of the interest income subjected to the final tax
11. The interest is not expressly disallowed by law to be deducted
from gross income of the taxpayer
Rules on the deductibility of interest expense
 G.R. The amount of interest expense paid or incurred within a
taxable year on indebtedness in connection with the taxpayer’s
trade, business or exercise of profession shall be allowed as
deduction from the taxpayer’s gross income
 Limitation. The amount of interest paid or incurred by a taxpayer
in connection with his trade, business or exercise of a profession
from an existing shall be reduced by an amount equal to 33% of
the interest income earned which had been subjected to the final
tax.
 This limitation shall apply regardless of WON a tax arbitrage
scheme was entered into by the taxpayer or regardless of the
date when the interest bearing loan and the date when the
interest bearing loan and the date when the investment was
made for as long as, during the taxable year, there is interest
expense incurred on one side and an interest income earned on
the other side, which income had been subjected to final
withholding tax.
 Tax Arbitrage Scheme – a method of borrowing without entering
into a debtor/creditor relationship, often to resolve financing and
exchange control problems. In tax cases, back-to-back loan is
used to take advantage of the lower rate of tax on interest
income and a higher rate of tax on interest expense deduction.
 Interest on unpaid taxes. Shall be fully deductible from gross
income and shall not be diminished by the percentage of interest
income earned which had been subjected to FWT.
Deductible interest expense
1. Interest on taxes, such as those paid for tax deficiency or tax
delinquency, provided that the tax is a deductible tax.
Other cases of non-deductible interest expense
 Fines, penalties and surcharges on unpaid taxes are not
deductible.
 The interest on unpaid business tax is not subject to 33%.
2. Interest paid on the mortgage upon real property of which the
corporation is the equitable owner.
3. Interest on deposits paid by authorized banks of the BSP to
depositors provided that the tax on such interest had been
withheld.
No interest expense shall be allowed as deduction from gross income in
any of the following cases:
1. Interest paid in advance thru discount or otherwise within the
taxable year, an individual taxpayer reporting income on the
cash basis incurs an indebtedness
35
 Such interest shall be allowed as a deduction only in the year
the indebtedness is paid.
2. In the case of interest periodically amortized, if the indebtedness
is payable in periodic amortization, 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.
 A self-employed individual is allowed to deduct from his gross
income the entire amount of interest expense actually paid
during the taxable year. However, if the interest expense is paid
in advance and the accounting method used is the cash-basis
accounting method, such interest expense paid in advance shall
not be allowed as deduction. However, it shall only be allowed
as deduction in the year when he has fully paid his liability.
 On the other hand, even if the interest expense is paid in
advance but the indebtedness is payable in periodic
amortization, the amount of interest expense which corresponds
to the amount of the principal amortized or paid during the
respective years.
3. Interest payments made between related taxpayers. No interest
expense shall be allowed as deductions if both the taxpayer and
the person to whom the payment has been made or is to be
made are persons:
1. Between members of the family. (includes only his brothers
and sisters, spouse, ancestors, and lineal descendants
2. Between an individual and a corporation more that 50% in
value of the outstanding stock of which is owned, directly
and indirectly, by or for such individual
3. Between two corporations more than 50% in value of the
outstanding stock of each of which is owned, directly or
indirectly, by or for the same individual
4. Between the grantor and a fiduciary of any trust
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
6. Between a fiduciary of a trust and a beneficiary of such
trust.
4. Interest on indebtedness incurred to finance petroleum
operations. No interest expense shall be allowed as deductions
if the indebtedness on which the interest expense is paid is
incurred to finance petroleum exploration in the Philippines.
1. Interest imposed on taxpayer as penalty for failure to pay
donor’s tax on time not deductible from gross income.
 Reason: not one that can be considered as having been
incurred in connection with the taxpayer’s trade, business or
exercise of a profession. To allow the deductibility of such
interest would be to diminish the punitive and deterrent effects of
the imposition, and thus diminishing the importance of prompt
payment of taxes.
2. Deterred dividends on the preferred shares of stock cannot be
claimed as interests deductible from the gross income for
income tax purposes
 Reason: preferred shares shall be considered capital regardless
of the condition under which such shares are issued. Dividends
paid thereon are not considered interest.

 So-called interest on preferred stock, which is in reality a
dividend thereon, cannot be deducted in computing tax on
income.
 Interest on indebtedness incurred or continued to purchase
bonds and other securities, the interest upon which is exempt
from tax, is also not deductible.
3. Interest on Capital. Which does not represent a charged rising
under an interest-bearing obligation is not allowable deduction.
At the option of the taxpayer, the interest expense on a capital expenditure
incurred to acquire property used in trade, business or exercise of a
profession may be allowed as:
1. Outright deduction – a deduction in full in the year when incurred
2. Treated as a capital expenditure – for which the taxpayer may
claim only as a deduction the periodic amortization/depreciation
of such expenditure.
 The taxpayer is not entitled to both the deduction from gross
income and the adjusted basis for determining gain or loss and
the allowable depreciation charge.
TAXES
 Means taxes proper and no deductions should be allowed for
amounts representing interest, surcharge, or penalties incident
to delinquency.
 Postage is not a tax deductible from gross income but it may be
deducted as business expense.
 Taxes are deductible as such only by the person upon whom it
is imposed.
 The taxes deductible are those levied for the general public
welfare by the proper taxing authorities at a like rate against all
property in the territory over which such authorities have
jurisdiction.
 No deductions should be allowed for amounts representing
interest, surcharge, or penalties incident to delinquency in the
payment of taxes.
Requisite for the deductibility of taxes
1. Taxes must be aid or incurred in connection with the taxpayer’s
trade or business or exercise of profession
2. Tax must be imposed by law directly on the taxpayers
3. Taxes must be paid or incurred during the taxable year
4. Taxes must be those allowed and not disallowed to be deducted
from gross income
5. Said taxes must be duly substantiated by official receipts
Taxes deductible from gross income
1. Indirect taxes payable to the BIR
2. Taxes payable to the Bureau of Customs
3. Local taxes payable to the LGU
36
4. Automobile registration fees for vehicles being used in business
or practice of profession are considered as taxes
5. Any other taxes of every name or nature aid directly to the
Government of the Philippines or to any political subdivision
thereof.
 When assessments are made for the purpose of maintenance or
repair of local benefits, the taxpayer may deduct assessments
paid as an excuse incurred in business, if the payment of such
assessments is necessary to the conduct of his business.
Non-deductible taxes
1. Philippine income Tax, except fringe benefit tax
2. Foreign income taxes imposed by authority of any foreign
country, except when a resident citizen, domestic corporation or
estate signifies in his/its return his/its desire to have the benefits
of crediting against his taxes payable in the Philippines the taxes
he/it paid in foreign countries
3. Estate tax
4. Donor’s tax
5. Tax on sale, barter, exchange of shares of stock listed and
traded thru the local stock exchange or thru initial public offering
6. Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed
7. Taxes not connected with the trade, business or exercise of
profession of the taxpayer
8. Energy tax on electric power consumption
9. FWTaxes on passive income, the same being in the nature of
income tax.
Tax treatment of special assessment; when a tax is considered assessed
against local benefits tending to increase the value of the property
assessed
 So called taxes, more properly special assessments, paid for
local benefits, such as street, sidewalk and other like
improvements, imposed because of and measured by some
benefit inuring directly to the property against which the
assessment is levied, do not constitute an allowable deduction
from gross income.
 A tax is considered assessed against local benefits when the
property subject to the tax is limited to the property benefited.
 Not deductible even though an incidental benefit may inure to
the public welfare.
 What is deductible are those levied for the general public welfare
by the proper taxing authorities at a like rate against all property
in the territory over which such authorities have jurisdiction.
 When assessments are made for the purpose of maintenance or
repair of local benefits, the taxpayer may deduct assessments
paid as an expense incurred in business, if the payment of such
assessments is necessary to the conduct of his business.
 When the assessments are made for the purpose of
constructing local benefits, the payments by the taxpayer are in
the nature of capital expenditures and are not deductible.
 When assessments are made for the purpose of construction
and maintenance or repairs, the burden is on the taxpayer to

show the allocation of the amounts assessed to the different
purposes. If the allocation cannot be made, none of the amounts
so paid is deductible.
Tax benefit Rule
 GR. Recovery of amounts deducted in prior years would result
to income.
 Where the deduction did not result in tax benefit, the subsequent
recovery is not taxable income.
 Applicable also to taxes previously deducted from gross income
but which were subsequently refunded or credited.
 The taxpayer is also required to report as taxable income the
subsequent tax refund or tax credit granted to the extent of the
tax benefit the taxpayer enjoyed when such taxes were
previously claimed as deduction from income.
 Taxes paid which are not allowed as deduction from gross
income are not taxable even when refunded.
Limitations on deductions
 Nonresident alien individuals engaged in trade or business in the
Philippines and resident foreign corporations shall only be
allowed to deduct taxes from gross income if and to the extent
that they are connected with their income from sources within
the Philippines.
Persons entitled to credit against income tax payable in the Philippines for
the taxes paid in foreign countries.
 If the taxpayer signifies in his return his desire to have benefits
of crediting against his taxes payable in the Philippines the taxes
paid in foreign countries, he must demonstrate that he is entitled
to tax credit, and the tax imposed shall be credited with:
1. Citizen and domestic corporation, the amount of income taxes
paid or incurred during the taxable year to any foreign country
2. Partnerships and estates. In case of a person who is a member of
a G or a beneficiary of an estate or trust, his proportionate share
of such taxes of the GP or the estate or trust paid or incurred
during the taxable year to a foreign country, if his distributive
share of the income of such partnership or trust is reported for
taxation.
 XPN. An alien individual, resident or not, and a foreign
corporation shall not be allowed to credit against the taxes paid
in the Philippines the taxes paid in foreign countries because
they are subject to Philippine income tax only on income derived
from sources within the Philippines.
Limitations on credit
 Tax credit refers to the taxpayer’s right to deduct from income
tax payable in the Philippines the foreign income tax he has paid
subject to the following limitations:
1. Per country limit. The amount of credit allowed is the lower
between per country limit and the foreign income tax paid.
Taxable income from foreign country X Phil. Income
Taxable income from all sources tax payable
(within and without the Phil)
2. Worldwide limit. Applicable only when the taxpayer derives
income from more than one foreign country. In order to determine
the tax credit that may be allowed, determine first the lower
between the worldwide limit and the total foreign income taxes
37
paid. Then compare the result with the per country limit, then the
lower amount is the allowed tax credit.
TI from all foreign countries X Phil. Income tax
Taxable income from all sources payable
(within and without the Phil)
Adjustments on payment of incurred taxes
 In case credit has been given for taxes accrued, or a
proportionate share thereof, and the amount that is actually paid
on account of such taxes, or a proportionate share thereof, is not
the same as the amount of such credit, or in case any tax
payment credited is refunded in whole or in art, the taxpayer
shall immediately notify the CIR.
 The CIR shall re-determine the amount paid for the year or
years which such incurred credit was granted.
 The amount of tax due to such redetermination shall be paid by
the taxpayer upon notice and demand by the CIR.
 If there was overpaid, it shall be credited or refunded to the
taxpayer.
 In case of such a tax incurred but not paid, the CIR as a
condition precedent to the allowance of this credit may require
the taxpayer to give a bond with sureties satisfactory to and to
be approved by the CIR, conditioned upon the payment by the
taxpayer of any amount of tax found due upon any such re-
determination.
Where credits for taxes may be taken
 The credit for taxes of the foreign country may ordinarily be
taken either in the return for the year in which the taxes accrued
or in which the taxes were paid, dependent upon whether the
accounts of the taxpayer are kept and his return filed upon the
accrual basis or upon the cash receipts and disbursement basis.
 The taxpayer, at his option and irrespective of the method of
accounting employed in keeping his books, is allowed to take
such credit for taxes as may be allowable in the return for the
year in which the taxes of the foreign country accrued.
 An election made must be followed in returns for all subsequent
years, and no portion of any such taxes will be allowed as a
deduction from gross income.
Proof of credits
1. The total amount of income derived from sources within the
Philippines
2. The amount of income derived from each country, the tax paid
or incurred to which is claimed as a credit
3. All other information necessary for the verification and
computation of such credits.
Information regarding taxes that should be included in the Notes to
Financial Statements
1. The amount of Vat output tax declared during the year and the
account title and amount/s upon which the same is based. If
there are zero-rated sales/receipts and/or exempt sales/receipts,
a statement to that effect and the legal basis therefor;
2. The amount of VAT input taxes claimed and broken down into:
a. Beginning of the year
 38

b. Current year’s domestic purchases/payments for: Casualty Losses

i. Goods for resale/manufacture or further  Refers to the complete or partial destruction of property resulting
processing from an identifiable event of sudden, unexpected, or unusual
nature, such as those arising from fire, storm, shipwreck, or
ii. Goods other than for resale or manufacture other casualty, or theft or robbery.
iii. Capital goods subject to amortization  The basis of the loss in the case of total destruction is the net
book value immediately preceding the casualty to be reduced by
iv. Capital goods not subject to amortization the amount of insurance or compensation received.
v. Services lodges under cost of goods sold
 In the case of partial destruction, the basis of the loss in the
vi. Services lodged under other accounts replacement cost to restore the property to its normal operating
condition, but in no case shall the deductible loss more than the
c. Claims for tax credit/refund and other adjustments net book value of the property as a whole, immediately before
casualty.
d. Balance at the end of the year
 The excess over the net book value immediately before the
3. The landed cost of imports and the amount of customs duties casualty should be capitalized, subject to depreciation over the
and tariff fees paid or accrued thereon remaining useful life of the property.

4. The amount of excise tax/es classified per major product Requisites for deductibility of casualty losses
category, paid on:
1. The taxpayer is engaged in trade or business.
a. Locally produced excisable items
2. Properties that shall be reported as casualty losses must have
b. Imported excisable items been reported as part of the taxpayer’s assets in the taxpayer’s
accounting records and financial statements in the year
5. Documentary stamp tax on loan instruments, shares of stock immediately preceding the occurrence of the loss, with the costs
and other transactions subject thereto of acquisition clearly established and recorded.

6. All other taxes, local or national, including real estate taxes, 3. The recovery of casualty losses thru insurance claims shall be
license and permit fees, lodged under the Taxes and Licenses governed by RR 12-77. The amount of loss that shall be
account both under the cost of sales and operating expense compensated by insurance coverage should not be claimed as a
accounts deductible loss. If the insurance proceeds exceed the net book
value of the damages, such excess shall be subject to the
7. The amount of withholding taxes categorized into regular income tax, but not to the VAT, since the
indemnifications not an actual sale of goods by the insured
a. Tax on compensation and benefits company to the insurance company.
b. Credible withholding taxes 4. The following guidelines shall also be observed:
c. FWT a. The deduction of assets as capital losses must be properly
recorded in accounting reports, with the adjustment of the
8. Periods covered and amounts of deficiency tax assessments, applicable accounts.
whether protested or not
b. The restoration of the damaged property, or the acquisition
9. Tax cases, and amounts involved, under preliminary of new property to replace it must be properly recorded and
investigation, litigation and/or prosecution in courts or bodies recognized as either a repair expense of a capitalized
outside the BIR. asset.

5. It must be evidenced by a declaration of loss filed within 45 days

with the BIR from the date of the casualty or robbery, theft or
LOSSES
embezzlement.
 those allowed from deductions are those actually sustained
during the taxable year and not compensated for by insurance or
other forms of indemnity. Value of the casualty loss deductible

 Deductible casualty loss shall be the difference between the

value of property immediately preceding casualty and its value
Types of Losses
immediately thereafter, but shall not exceed the amount equal to
1. Casualty losses the cost of other adjusted basis of property, or depreciated cost
in the case of property used in business and reduced by any
2. Net operating loss carry over insurance or other compensation received.

3. Capital losses and securities becoming worthless  The book value of assets destroyed less any proceeds from
insurance and other compensation shall also be deductible loss.
4. Special losses
 When the insurance proceeds are greater than book value of
a. Losses from wash sales of stocks or securities assets destroyed, then that will be a taxable gain.

b. Wagering losses  Casualty losses with claim for reimbursement (with reasonable
prospect of recovery until it is ascertained with reasonable
c. Abandonment losses.
 39

certainty is a question of fact which may be determined upon an

examination of all facts and circumstances.
Taxpayers not entitled to deduct NOLCO from gross income
 The difference between the value of the property immediately
preceding casualty and its value immediately thereafter shall be 1. OBU and FCDU, duly authorized as such by the BSP;
deductible.
2. Any enterprise registered with the BOI with respect to its BOI-
registered activity enjoying the ITH incentive.

Net Operating Loss carry-over 3. An enterprise registered with the PEZA

 Net Operating Loss – means the excess of allowable deduction 4. An enterprise registered under RA 7227
over gross income of the business in a taxable year.
5. Foreign corporations engaged in international shipping or air
 The net operating losses which have not been previously offset carriage business in the Philippines
as deduction from gross income shall be carried over as a
6. Any person, natural or juridical, enjoying exemption from income
deduction from gross income for the next 3 consecutive taxable
tax.
years immediately following the year of such loss.

Entitlement to NOLCO
Requisites for the availment of NOLCO

1. The taxpayer was not exempt from income tax in the year the  Domestic corporations subject to the normal income tax rate are
loss was incurred. liable to the 2% MCIT, if applicable, computed based on gross
income, whenever the amount of the MCIT is greater than the
2. There has been no substantial change in the ownership of the normal income tax due. Thus, such corporation cannot enjoy the
business or enterprise wherein at least 75% of the nominal value benefit of NOLCO for as long as it is subject to MCIT in any
of outstanding issued shares is held by or on behalf of the same taxable year.
persons if the business is in the name of the corporation; or at
least 75% of the paid up capital of the corporation is held by or
on behalf of the same persons
Capital Losses
3. The net operating losses which have not been previously offset
 Losses from sales or exchanges of capital assets.
as deduction from gross income shall be carried over as a
deduction from gross income for the next 3 consecutive taxable
 Following are requirements in order that capital losses may be
years immediately following the year of such loss.
allowed as deduction:
4. Except, however, in the case of mines other than oil and gas
1. Capital losses from sales or exchanges of capital assets are
wells, where a net operating loss incurred in any of the first 10
deductible only to the extent of the capital gains from such sales
years of operation may be carried over as a deduction from
or exchanges of capital assets of both corporations and
gross income for the next 5 years immediately following the year
individuals, except banks and trusts companies. If the dealings
of such loss.
of the taxpayer in capital assets during the year result in a net
capital loss, such loss cannot be deducted from his ordinary
income, inasmuch as capital losses are allowable only to the
General Principles and Policies extent of capital gains.

 In general, NOLCO shall be allowed as a deduction from the
gross income of the same taxpayer who sustained and
accumulated the net operating losses regardless of the change
in its ownership.
 Unless otherwise provided in the regulations, NOLCO of the
taxpayer shall not be transferred or assigned to another person,
whether directly or indirectly, such as, but not limited to, the
transfer or assignment thereof thru a merger, consolidation or
any form of business combination of such taxpayer with another
person.
 NOLCO shall also be allowed if there has been no substantial
change in the ownership of the business or enterprise in that not
less than 75% in nominal value of the outstanding issued shares
or not less than 75% of the paid up capital of the corporation, if
the business is in the name of the corporation, is held by or on
behalf of the same persons.
Taxpayers entitled to deduct NOLCO from gross income
1. Any individual, including estates and trusts, engaged in trade or
business or in the exercise of his profession; and
2. Domestic and resident foreign corporations subject to the normal
income tax or preferential rates under the Code on their taxable
income.
2. “Securities considered as worthless” refers to shares of stock
when offered for sale or requested for share redemption, no
amount can be realized by the owner of the share. Securities
becoming worthless, which are capital assets, shall be
considered as a loss from the sale or exchange of capital assets
on the last day of such taxable year.
 Worthless securities, which are ordinary assets, are
not allowed as deduction from gross income because
the loss is not realized.
 Losses due to voluntary removal or demolition of old
buildings, the scrapping of old machinery, equipment,
etc., incident to renewals and replacements will be
deductible from gross income.
 The term wash sale of stocks or securities is a sale or
other disposition of stock or securities where the
taxpayer has acquired or has entered into a contract
or option to acquire substantially identical stocks or
securities within a 61-day period, beginning 30 days
before the sale and ending 30 days after the sale.
 Losses from wash sale are not deductible from gross
income, except if it is a loss incurred by a dealer in
securities in the ordinary course of business.

 Requisites of wash sales:
1. The sale or other disposition of stock resulted to a loss
2. There was an acquisition or contract or option for acquisition of
stock or securities within 30 days before the sale or 30 days
after the sale; and
3. The stock or securities sold were substantially the same.
 Losses from wagering transactions shall be allowed only to
individuals to the extent of the wagering gains or winnings from
such transaction.
 A wager is made when the outcome depends upon chance.
 Cases when no loss can be recognized:
1. Loss on the sale of real property considered as capital asset;
2. Loss sustained by the transfer of property by gift
3. Loss sustained by the transfer of property by death
4. Losses sustained in illegal transactions
5. Losses claimed as deduction from the gross estate for estate tax
purposes can no longer be claimed as deduction from gross
income for income tax purposes
6. Losses in transactions between related taxpayers
7. In the case of merger, consolidation, or control of securities,
where no gains are recognized
8. Losses in exchanges not solely in king.
BAD DEBTS
 Refer to those debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due the taxpayer by
others, arising from money lent or from uncollectible amounts of
income from goods sold or services rendered actually ascertained to
be worthless and charged off within the taxable year.
Requisites for deductibility of bad debts
1. There must be an existing indebtedness fur to the taxpayer
which must be valid and legally demandable
2. The same must be connected with the taxpayer’s trade,
business or practice of profession
3. The same must not be sustained in a transaction entered into
between parties enumerated under Section 36(b) of the Tax
Code
4. The same must be actually charged off in the books of accounts
of the taxpayer as of the end of the taxable year
5. The same must be actually ascertained to be worthless and
uncollectible as of the end of the taxable year and even in the
future.
Meaning of the phrase “actually ascertained to be worthless”
 A debt is not worthless simply because it is doubtful value or difficult
to collect.
 Worthless is determined upon the exercise of sound business
judgment.
 Depends upon the particular facts and the circumstances of the case.
 A taxpayer may not postpone a bad debt deduction on the basis of a
mere hope of ultimate collection or because of a continuance of
attempts to collect notes which have long become overdue, and
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where there is no showing that the surrounding circumstances differ
from those relating to other notes which were charged off in a prior
year.
 A reasonable possibility of recovery will permit the account to be
carried along notwithstanding that the probabilities are that the debt
may not be collected at all.
 Good faith does not require that the taxpayer be an incorrigible
optimist but on the other hand, he may not be unduly pessimistic.
Meaning of the phrase “actually charged off from the taxpayer’s books of
accounts”
 The amount of money lent by the taxpayer, in the course of his
business, trade or profession, to his debtor had been recorded in his
books of account as a receivable has actually become worthless as
of the end of the taxable year, that the said receivable has been
cancelled and written-off from the said taxpayer’s books of account.
 A mere recording in the taxpayer’s books of account of estimated
uncollectible accounts does not constitute a write-off of the said
receivable, hence, shall not be a valid basis for its deduction as a bad
debt expense.
When there is a reasonable degree of certainty
 Before a taxpayer may charge off and deduct a debt, he must
ascertain and be able to demonstrate with reasonable degree of
certainty the uncollectibility of the bad debts.
 In no case may a receivable from an insurance or surety company be
written-off from the taxpayer’s books and claimed as bad debts
deduction unless such company has been declared closed due to
insolvency or for any such similar reason by the Insurance
Commissioner.
Tax Benefit Rule or the Equitable Doctrine of Tax Benefit in case of
recovery of bad debts
 The recovery of bad debts previously allowed as deduction in the
preceding year/s shall be included as part of the taxpayer’s gross
income in the year of such recovery to the extent of the income tax
benefit of said deduction. Reason: considered as mere return of
capital.
Rules in allowing bad debts as deduction from gross income
 Where all the surrounding circumstances indicate that a debt is
worthless, and the debt is charged off on the books of the taxpayer
within the year, the same may be allowed as a deduction in
computing taxable income.
 Before a taxpayer may charge off and deduct a debt, he must
ascertain and be able to demonstrate, with reasonable degree of
certainty, the uncollectibility of the debt.
 If a taxpayer computes his income upon the basis of valuing his notes
or accounts receivable at fair market value when received, which may
be less than their face value, the amount deductible for bad debts in
any case is limited to such original valuation.
Other factors to determine whether a bad debt is already worthless
1. The debtor has been adjudged bankrupt or insolvent
2. The debtor has no property nor visible income
3. The collateral shares have already become worthless
4. There are many debtors with small amounts of debts and further
action on the accounts would entail expenses exceeding the
amounts sought to be collected.
Reserves for bad debts are not allowed as deduction from gross income

 Bad debts must be charged off during the taxable year to be allowed
as deduction to gross income.
Advances cannot be claimed as deduction from gross income
 Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must
prove by convincing evidence that he is entitled to the deduction
claimed.
 There is a need to substantiate the assertion that the advances were
subsisting debts that could be deducted from the gross income.
When worthless securities are deductible from gross income as bad debts
 Worthless securities which are ordinary assets are not allowed as
deduction from gross income because loss is not realized.
 However, if these worthless securities are capital assets, and
charged off within the taxable year, the owner is considered to have
incurred a capital loss from the sale or exchange of capital assets, as
of the last day of the taxable year and, therefore, deductible to the
extent of the capital gains.
 This rule is not true in the case of banks or trust companies
incorporated under the laws of the Philippines.
DEPRECIATION
 A reasonable allowance for the exhaustion, wear and tear, and
obsolescence of property used in the trade or business may be
deducted from gross income.
 Depreciation excludes any idea of a mere reduction in market value
resulting from wear and tear or obsolescence.
 The proper allowance for such depreciation of any property used in
the trade or business for such depreciation of any property used in
the trade or business is that amount which should be set aside for the
taxable year in accordance with a reasonable consistent plan
whereby the aggregate of the amount so set aside, plus the salvage
value, will, at the end of the useful life of the property in business,
equal the basis of the property.
 In case of property held by one person for life with remainder to
another person, the deduction shall be computed as if the life tenant
were the absolute owner of the property and shall be allowed to the
life tenant.
 In the case of property held in trust, the allowable deduction shall be
apportioned between he income beneficiaries and the trustees in
accordance with the pertinent provisions of the instrument creating
the trust, or in the absence of such provisions, on the basis of the
trust income allowable to each.
When obsolescence may be allowed to be deducted from gross income, in
addition to depreciation
 With respect to physical property the whole or any portion of which is
clearly shown by the taxpayer as being affected by economic
conditions that will result in its being abandoned at a future date prior
to the end of its normal useful life, so that depreciation deductions
alone are insufficient to return the cost at the end of its economic
term of usefulness, a reasonable deduction for obsolescence, in
addition to depreciation, may be allowed.
 No deductions for obsolescence will be permitted merely because, in
the opinion of a taxpayer, the property may become obsolete at some
later date.
Depreciable property
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 The necessity for a depreciation allowance arises from the fact that
certain property used in the business gradually approaches a point
where its usefulness is exhausted.
 This does not apply to inventories of to stock in trade, nor to land
apart from the improvements or physical development added to it.
 It does not apply to bodies of minerals which try the process of
removal suffer depletion.
Requisites for deductibility of allowance for depreciation
1. It must be sustained by the person who owns or who has a
capital investment in the property
2. It must be reasonable in that the amount of depreciation must be
in accordance with the depreciation method being adopted by
the company
3. The property being depreciated is being used in the trade or
business
4. The allowance for depreciation must be charged off during the
taxable year
5. The property must have a limited useful life
6. The allowance for depreciation should not exceed the cost of the
property
7. The schedule of the allowance must be attached to the return.
Depreciation expense on vehicles, and other expenses incurred thereon
 It cannot be presumed that the purchase of a vehicle is a purchase of
a property used in business.
 Guidelines:
1. No deduction from gross income for depreciation shall be
allowed unless the taxpayer substantiates the purchase with
sufficient evidence, which must contain the following:
a. Specific motor vehicle identification number
b. Total price
c. The direct connection or relation of the vehicle to the
development, management, operation and/or conduct of
the trade or business or profession of the taxpayer
2. Only one vehicle for land transport is allowed for the use of an
official or ee, the value of which should not exceed 2.4M.
3. No depreciation shall be allowed for yachts, helicopters,
airplanes and/or aircrafts, and land vehicle which exceed the
above threshold amount, unless the taxpayer’s main line of
business is transport operations or lease of transportation
equipment and the vehicles purchased are used in the said
operations.
4. All maintenance expenses on account of non-depreciable
vehicles for taxation purposes are disallowed in its entirety.
5. All maintenance expenses incurred on non-depreciable vehicles
are likewise disallowed for taxation purposes.
How to charge off depreciation
 A depreciation allowance, in order to constitute an allowable
deduction from gross income must be charged off.
 The particular manner in which is shall be charged off is not material,
except that the amount measuring a reasonable allowance for
depreciation must be either deducted directly from the book value of
the assets or preferably credited to a depreciation reserve account,
which must be reflected in the annual balance sheet.
Statement to be attached to return
 There should be attached a statement showing the item, unit, or group
of depreciable property, the cost price, the rate of charge, amount
previously deducted, and the amount claimed in the return.

 These data must agree with those appearing the in the books of the
taxpayer.
No depreciation may be allowed on the appraisal increase of fixed assets
 The income tax does not allow depreciation of an asset beyond its
acquisition cost.
 Reason: deductions from the gross income are privileges, not matters
of right.
 The idea of profit on the investment made has never been the
underlying reason for the allowance of a deduction for depreciation.
Methods of computing allowance for depreciation
 The proper allowance for depreciation of any property used in trade or
business refers to the reasonable allowance for the exhaustion, wear
and tear, including reasonable allowance for obsolescence of said
property
 Methods
1. Straight-line method – to the effect that the rate and the base are
constant.
Cost of property – salvage value = A for D
Useful life of the property
2. Declining-balance method – the fixed percentage of diminishing
book value method is to the effect that the rate of yearly
depreciation remains the same but the base upon which the rate
is applied diminishes year to year.
Cost – Depreciation X rate = A for D
Estimated useful life
3. Sum of the years digit method – the capital sum to be replaced
should be charged off over the useful life of the property.
Nth period X Cost – Salvage value = A for D
Sum of all the years digits
4. Any other method which may be prescribed by the SOF upon
recommendation of the CIR.
 Method adopted must be reasonable.
 The reasonableness of any claim for depreciation shall be determined
upon the condition known to exist at the end of the period for which the
return is made.
 If it develops that the useful life will be longer or shorter, the portion of
the cost or other basis of the property not already provided for thru
depreciation allowances should spread over the remaining useful life
of the property as re-estimated in the light of the subsequent facts.
Agreement as to the useful life on which the depreciation rate is based
 Taxpayer and the CIR, binding.
 The responsibility of establishing the existence of such facts and
circumstances shall rest upon the party initiating modification.
Capital sum recoverable thru depreciation allowances
 The capital sum to be replaced by depreciation allowances is the cost
or other basis of the property in respect of which the allowance is
made.
 To this amount should be added from time to time the cost of
improvements, additions, and betterment and from it should be
deducted from time to time the amount of any definite loss or damage
sustained by the property thru casualty, as distinguished from the
gradual exhaustion of its utility which is the basis of the depreciation
allowance.
 Where the lessee of the real property erects improvements, and
income has been returned by the lessor as a result thereof, the caital
sum to be replaced by depreciation allowance is the same as though
no such improvement was made.
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 No depreciation deduction will be allowed in case of property which
has been amortized to its scrap value and is no longer in use.
Depreciation of properties used in petroleum operations
 An allowance for depreciation in respect of all properties related to
production of petroleum initially placed in service in a taxable year
shall be allowed under the straight-line or declining-balance method of
depreciation at the option of the service contractor.
 If the service contractor initially elects the declining-balance method, it
may at any subsequent date, shift to the straight-line method.
 The useful life of properties used shall be 10 years or such shorter life
as may be permitted by the CIR.
 Properties not used directly shall be depreciated under the straight-line
method on the basis of an estimated useful life of 5 years.
Depreciation of properties used in mining operations
 Shall be computed as follows
1. At the normal rate of depreciation if the expected life is 10 years
or less
2. Depreciated over any number of years between 5 years and the
expected life if the latter is more than 10 years, and the
depreciation thereon allowed as deduction from taxable income
Depreciation deductible by nonresident aliens engaged in trade or
business in the Philippines
 a reasonable allowance for the deterioration of property arising out of
its use or employment or its non-use in the business, trade or
profession shall be permitted only when such property is located in the
Philippines.
DEPLETION
 Refers to the exhaustion of natural resources owing to production or
severance.
 The allowance for depletion is based on the theory that the extraction
of minerals gradually exhausts the capital investment in the mineral
deposit.
 In computing taxable income, there shall be allowed as deduction, in
the case of mines, a reasonable allowance for depletion thereof not to
exceed the market value in the mine of the product thereof which has
been mined and sold during the year for which the return is made.
 In determining the amount, three factors are essential:
1. The basis of the property
2. The estimated total recoverable units in the property
3. The number of units discovered during the taxable year.
 Minerals – all naturally occurring inorganic substances in solid, liquid
or any intermediate state including coal.
 Mining or to mine – to extract, remove, utilize minerals and includes
operations necessary for that purpose.
Who may avail of the cost of depletion
 Annual depletion deductions are allowed only in mining entities which
own an economic interest in mineral deposits.
 Economic interest is possessed in every case in which the taxpayer
has acquired by investment any interest in mineral, in place and
secures, by any form of legal relationship, such as, but not limited to,
operating agreement and service contract agreement, income from the
extraction of mineral, to which it must look for a return of capital.
Basis of Cost of Depletion

 The adjusted cost of basis of the mining property being mined
 The adjusted cost basis shall be the accumulated exploration and
development expenses incurred on the mining properties minus
accumulated cost depletion that should have been deducted as of the
same date of same property.
 Exploration expenditures – expenditures paid or incurred for the
purpose of ascertaining the existence, location, extent, quality of any
deposit for ore or other mineral, and paid or incurred before the
beginning of the development stage of mine or deposit of a particular
mining property.
 Development expenditures – include all capital expenditures paid or
incurred during the development stage of the mine or other natural
deposit.
Limitation of cost depletion
 The basis for cost depletion mineral deposits does not include:
1. Amounts recoverable thru depreciation, thru deferred expenses
thru deductions other than depletion
2. The residual value of improvements at the end of operation.
 Such basis does include exploration and development expenses
incurred on mining properties or area other than those presently being
mined. These expenses shall be treated as deferred expenses.
 The annual allowable cost depletion shall not exceed the market value
as used for purposes of imposing the mining ad valorem taxes in the
mine of the product thereof which has been mined and sold during the
year for which the return and computation are made.
 The allowable cost depletion deduction shall be limited only to the
extent of the capital invested in the particular mining property.
 Capital invested in the particular mining shall include the accumulated
exploration and development expenditures and expenditures incurred
on the ongoing mine exploration and development on the same mining
are which –
1. Increases the value of the mine
2. Decreases the cost of production of mineral units
3. Restores property to its previous condition or in making good the
exhaustion thereof for which an allowance is or has been made.
 No further deduction for cost depletion shall be allowed when the sum
of the cost depletion equals the cost of adjusted basis of the property
plus allowable capital additions.
 Actual commercial production – shall mean the stage of mining
operation attained by a mine in which mineral or mineral products of
marketable grade and quantity have been produced and sold to local
and/or foreign markets.
Manner of computation of cost depletion
 Computed by dividing the adjusted cost basis by the number of units of
minerals remaining as of the taxable year and by multiplying the
depletion unit so determined by the number of units of minerals sold
within the taxable year.
 Number of units of minerals remaining as of the taxable year is the
number of units of minerals remaining at the end of the period to be
recovered from the property plus the number of units sold within the
taxable year.
 The number of units sold within the taxable year is
1. In case of taxpayer reporting income on the cash basis, include
units for which payments were received within the taxable year
although extracted or sold prior to the period and exclude units
sold but not paid for in the taxable year.
2. In case of taxpayer reporting income on the accrual method,
include all units extracted and sold during the period, whether
paid for or not, but does not include units with respect to depletion
43
deductions which are allowed or allowable prior to the taxable
year.
 In the case of natural gas or oil wells, the taxpayer may computed the
cost depletion in respect of such property for the taxable year by
multiplying the adjusted cost basis of the property by a fraction, the
numerator of which is equal to the number of cubic feet or barrels of oil
recovered during the year and the denominator of which is equal to the
expected recoverable number of cubic feet of gas or barrels of oil at
the end of the taxable year plus the number of cubic feet of gas or
barrels of oil recovered during the year.
Determination of mineral content of deposits remaining as of the taxable
year
 The mineral contents remaining as of the taxable year pertains to the
estimated mineral products reasonably known or on good evidence
believed to have existed in place as of the end of the taxable year, the
estimate of determination of which was made according to the method
current in the industry and in the light of the most accurate and reliable
information obtainable.
 The estimated mineral products remaining as of the taxable year shall
include both quantity and grade:
1. The positive ores and mineral deposits, which include ores and
minerals blocked out and developed or assured in the usual
conventional meaning.
 Positive ore shall mean the full tonnage computed with good
mining practice from dimensions revealed in outcrops, branches,
underground workings and drill holes and for which the grade is
computed from results of detailed sampling.
2. The probable or prospective ores and mineral deposits, which
include ores and minerals that are believed to exist on the basis
of good evidence although not actually known to occur on the
basis of existing development. Such probable or prospective ores
or minerals may be estimated:
a. As to quantity, only in case they are extensions of known
deposits or are new bodies or masses whose existence is
indicated by geological surveys or other evidence to a high
degree of probability
b. As to grade, only in accordance with the best indications
available as to richness.
 Probable or prospective ore shall mean the ore for which tonnage and
grade are computed partly from specific measurement, samples and
partly from projection for a reasonable distance on geologic evidence.
Records to be kept
 Every taxpayer claiming and making a deduction for depletion of
mineral property shall keep a separate account for each and every
area in his books of accounts in which shall be accurately recorded the
cost or other basis of such property and thereafter to be debited by
any and all capital additions.
 In addition, the taxpayer must assemble, segregate and have readily
available at his principal place of business, all supporting data which
were used in compiling the summary statement required to be
attached to the income tax return to be filed.
Basis of depreciation of improvements
 There shall be allowed as a deduction a reasonable allowance for
depreciation of improvements including, but not limited to, mining and
milling equipment.
Aggregation or combination of separate properties
 In the case of mining companies with several mining properties, it may
aggregate into one operating unit, several mining properties for

purposes of determining the adjusted cost basis recoverable thru
depletion subject to the following conditions:
1. All contiguous areas included in a single concession grant or in
separate concession grants may be constituted as a single
operating unit
2. Operating mineral interests which are geographically widespread
may not be treated as parts of the same operating unit
3. Undeveloped operating mineral unit may be aggregated only with
those interests with which it will be operated as a unit when it
reaches the production stage.
Intangible costs in petroleum operations.
 Refers to any cost incurred in petroleum operations which in itself has
no salvage value and which is incidental to and necessary for the
drilling of wells and preparation of wells for the production of
petroleum.
 Any intangible exploration, drilling and development expenses allowed
as a deduction in computing taxable income during the year shall not
be taken into consideration in computing the adjusted cost basis for
the purpose of computing allowable cost depletion.
Election to deduct exploration and development expenditures
 In computing taxable income from mining operations, the taxpayer
may, at his option, deduct exploration and development expenditures
accumulated as cost of adjusted basis for cost depletion as of date of
prospecting, as well as exploration and development expenditures
paid or incurred during the taxable year: Provided, That the total
amount of deductible for exploration and development expenditures
shall not exceed 25% of the taxable income from mining operations
computed without the benefit of any tax incentives under existing laws.
 The actual exploration and development expenditures minus 25% of
the taxable income from mining shall be carried forward to the
succeeding years until fully deducted.
 This election by the taxpayer is irrevocable and shall be binding in
succeeding taxable years.
Net income from mining operations
 Mean the gross income from operations less allowable deductions
which are necessary or related to mining operations.
Depletion of oil and gas wells and mines deductible by a nonresident alien
individual or foreign corporation
 Shall be authorized only in respect to oil and gas wells or mines
located within the Philippines.
CHARITABLE AND OTHER CONTRIBUTIONS
 Requisites
1. The contribution must have been actually made to entities
specified by law
2. The contribution must have been made within the taxable year
3. It must be evidenced by adequate receipts and records
4. For contributions other than money, the amount shall be based on
the acquisition cost of the property not the fair market value at the
time of the contribution
5. For contributions subject to statutory limitations, the same must
not exceed 10% in the case of individuals engaged in business or
profession or 5% in case of corporations of the said taxpayer’s
taxable income before deducting the charitable contributions.
Contributions subject to statutory limits
44
 The following donations or contributions are subject to limitations of
not exceeding 10% (in case of individuals) or to 5% (in case of
corporations) based on the taxpayer’s gross income derived from
trade, business or practice of profession computed without first
deducting the contributions:
1. Contributions for non-priority activities or gifts actually paid or
made within the taxable year to, or for the use of the Government
of the Philippines or any of its agencies or any political
subdivision thereof exclusively for public purposes, or
2. Donations, contributions or gifts actually paid or made within the
taxable year to accredited non-profit corporations organized and
operated exclusively for religious, charitable, scientific, youth and
sports development, cultural or educational purposes or for the
rehabilitation of veterans, or to social welfare institutions, or to
non-government organizations, no part of the net income of which
inures to the benefit of any private stock holder or individual shall
be allowed limited deductibility in an amount not in excess of 10%
for an individual donor, and 5% for a corporate donor, of the
donor’s taxable income derived from trade, business or practice
of profession as computed without the benefit of this deduction.
 The amount deductible is the actual contribution or the statutory limit
computed, whichever is lower.
Contributions/donations deductible in Full
1. Donations to the Government
 Including fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking priority 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 NEDA in
consultation with appropriate government agencies, including its
regional development councils and private philanthropic persons
and institutions.
2. Donations to certain foreign institutions or international
organizations
 The subject donations must be fully deductible in pursuance of
or in compliance with agreements, treaties, or commitments
entered into by the Government of the Philippines and the
foreign institutions or international organizations or in pursuance
of special laws.
3. Donations to accredited non-stock, non-profit corporations/NGOs
1. Organized and operated exclusively for scientific, research,
educational, character-building and youth and sports
development, health, social welfare, cultural or charitable
purposes, or combination thereof, no part of the taxable
income of which inures to the benefit of any private
individual
2. Which, not later than 15 th day of the third month after the
close of the accredited NGO’s 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
3. The level of administrative expense of which shall, on an
annual basis and in no case to exceed 30% of the total
expenses
4. The assets of which, in the event of dissolution, would be
distributed to another NGO organized for similar purpose or
purposes, or to the state for public purpose, or to another
NGO to be used in such manner as in the judgment of a
court shall best accomplish the general purpose for which
the dissolved organization was organized

5. Only to the extent of the acquisition cost (not the fair market
value) of the property, if the contribution is other than
money, shall be allowed full deductibility
 Donations and gifts made in favor of accredited non-stock, non-profit
corporations/NGOs shall be exempted from the donor’s tax;
Provided, however, That not more than 30% of the said donations
and gifts for the taxable year shall be used by such accredited non-
stock, non-profit corporations/NGOs institutions qualified done-
institution for administration purposes.
Utilization requirements
 Amounts set aside for specific project must have the prior approval of
the Commissioner in writing
 Amounts set aside shall be evidenced by book entries and
documents showing evidence of deposits or investments, including
investment of the funds so set aside, or other documents that the
Commissioner may require.
Accreditation of non-stock, non-profit corporations/NGOs by the
accrediting Entity
 The accrediting entity shall examine, evaluate and accredit non-
stock, non-profit corporations and NGOs as a prerequisite for their
registration with the BIR as qualified-donee institutions.
 Newly-organized and existing non-stock, non-profit corporations and
NGOs shall apply with the Accrediting Entity for accreditation and
submit to a process of examination and evaluation.
 The accrediting Entity shall evaluate and accredit NGOs by using a
set of major criteria.
Certificate of donations
 All credited NGOs are required to issue a certificate of donation in
such form as prescribed by the BIR, on every donation or gift they
receive.
Notice of donations
 The donor, on the hand, should give a notice for every donation
worth over P1M to the RDO where his lace of business is located
within 30 days after the receipt of the Certificate of Donation
attaching to the said notice the copy of the Certificate of Donation
issued to him by the accredited NGO.
Date and place of filing
 By the donors – at the time of filing their income tax returns.
 By the accredited NGO – not later than 15th day of the 4th month
after the close of its taxable year in order to maintain its status as an
accredited NGO.
 File in the RDO where the place of business of the donor or donee
is located.
Contributions to a candidate in an election not allowed as deduction from
gross income of a taxpayer.
 Because the said expense is not directly attributable to, the
development, management, operation and/or conduct of a trade,
business or profession.
Monitoring and verification of the annual information return
 May be examined by the BIR annually for purposes of ascertaining
compliance with the conditions where which they have been granted
tax exemptions or tax incentives, and their tax liability, if any.
45
RESEARCH AND DEVELOPMENT
 Research is original and planned investigation undertaken by the
taxpayer with the prospect of gaining new scientific or technical
knowledge and understanding, while development is the application
of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices,
products, processes, systems or services before the start of
commercial production or use.
Requisites
1. Research or development expenditures were paid or incurred in
connection with the taxpayer’s trade, business or practice of
profession
2. The same had been paid or incurred during the taxable year as
ordinary and necessary expenses
3. The same had not been charged to the capital account
Amortization of certain research and development expenditures
 The following research and development expenditures may be
treated as deferred expenses:
1. The same had been paid or incurred by the taxpayer in
connection with his trade, business or practice of profession
2. The same was not treated as an ordinary and necessary
expense
3. The same was chargeable to capital account but not chargeable
to property of a character which is subject to depreciation or
depletion
4. The deduction is ratably distributed over a period of not less
than 60 months beginning with the month in which the taxpayer
first realized the benefits from such expenditures.
Limitations on deduction
1. The expenditure shall not apply to the acquisition or
improvement of land or for the improvement of property to be
used in connection with research and development of a
character which is subject to depreciation and depletion
2. For any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral, including oil or gas.
PENSION TRUSTS
 A trust established or maintained by the er to provide for the payment
of reasonable pensions to its ees.
Pension trust contributions
 A deduction applicable only to the er on account of its contribution to
a private pension plan for the benefit of its ees.
 This deduction is purely business in character.
Normal Cost
 Refers to the contributions during the taxable year into the pension
plan to cover the pension liability accruing during the taxable year.
 Allowed as an ordinary and necessary business expense.
Past service cost
 Refers to the amount in excess of the above contribution (covering
pension liability pertaining to old ees which accrued during the years
previous to the establishment of the pension trust).

 It represents 1/10th of the reasonable amount paid by the er to the
trust during the taxable year to cover in whole or in part the pension
liability applicable to the years prior to the taxable year, or so paid to
place the trust in a sound financial basis.
 Allowed as a deduction if:
1. Such amount has not yet been allowed as a deduction
2. Said amounts had been apportioned in equal parts over a
period of 10 consecutive years beginning with the year in which
the payment is made.
Requisites for deductibility of Past service cost
1. The er must have established a pension or retirement plan to
provide for the payment of reasonable pensions to his ees;
2. The pension plan is reasonable and actually sound;
3. It must be funded by the er
4. The amount contributed must no longer be subject to the control
and disposition of the er;
5. The payment has not yet been allowed as a deduction;
6. The deduction is apportioned in equal parts over a period of 10
consecutive years beginning with the year in which the transfer
of payment is made; and
7. The er shall be allowed to deduct from gross income reasonable
amounts paid to such trust, in accordance with the pension plan
OPTIONAL STANDARD DEDUCTION
 Who may avail, in lieu of the itemized deduction
1. Individuals and taxable estates and trusts, except individuals
earning pure income and non resident aliens
2. Corporations, except nonresident foreign corporations.
Requisites for individuals who want to avail of the OSD
1. The individual is a citizen or a resident alien
2. The taxpayer’s income is not pure compensation income
3. The individual signifies in his return filed for the first quarter his
intention to elect OSD as deduction, otherwise, he is considered
as having availed of the itemized deductions
4. The election to avail OSD is irrevocable for the year in which
made; however, he can change to itemized deductions in
succeeding years if he opts to
5. The OSD allowed shall be a maximum of 40% of gross sales or
gross receipts during the taxable year.
Determination of the amount of OSD for individuals
 The OSD allowed to individual taxpayers shall be a maximum 40% of
the gross sales or gross receipts during the taxable year.
 If the individual is on the accrual basis of accounting for his income
and deductions, the OSD shall be based on the gross sales during
the taxable year.
 If the individual employs the cash basis of accounting for his income
and deductions, the OSD shall be based on his gross receipts during
the taxable year.
 For other individuals allowed by law to report their income and
deductions under a different method of accounting other than cash
and accrual method of accounting, the gross sales or gross receipts
shall be determined in accordance with said acceptable method of
accounting.
Requisites for corporations who want to avail of the OSD
1. The corporation is a domestic or a resident foreign corporation.
46
2. The corporation signifies in his return filed for the first quarter his
intention to elect OSD as deduction, otherwise, it is considered
as having availed of the itemized deductions.
3. The election to avail OSD is irrevocable for the year in which it is
made; however, it can change to itemized deductions in
succeeding years if it opts to.
4. The OSD allowed shall be a maximum of 40% of gross income
during the taxable year.
Determination of the amount of OSD for corporations
 The OSD allowed shall be in an amount not exceeding 40% of their
gross income.
 Gross income – the gross sales less sales returns, discounts and
allowances and cost of goods sold.
 Passive income – not included.
Determination of the OSD for GPPs and Partners of GPPs
 Like corporations.
 The net income determined by either claiming the itemized deduction
or OSD from the GPP’s income is the distributable net income from
which the share of each partner is to be determined.
Claim of the partners of GPP of their deductions from their share in the
taxable income of the GPP
 Rules
1. If the GPP availed of the itemized deduction in computing its net
income, the partners may still claim itemized deductions;
Provided, That in claiming itemized deductions, the partner is
precluded from claiming the same expenses already claimed by
the GPP.
 Is the GPP claimed itemized deductions, the partners
comprising it can only claim itemized deductions which are in the
nature of ordinary and necessary expenses for the practice of
profession which were not claimed by the GPP in computing its
net income or distributable net income during the year.
 The OSD is in lieu of the items of deductions claimed by the
GPP and the items deduction claimed by the partners.
2. If the GPP avails of OSD in computing its net income, the
partners comprising it can no longer claim further deduction from
their share in the said net income.
PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION
INSURANCE
 This represents an amount of premium on health and/or
hospitalization insurance paid by an individual taxpayer for himself
and/or for the members of his family during the taxable year.
Requisites for deductibility of premium payments on HHI from gross
income
1. Hospitalization insurance must actually have been taken by the
individual for himself and/or for the members of his family.
2. The individual availing either earns pure compensation or
earning business income or engaged in the practice of
profession.
3. The gross income of the family of the individual does not exceed
P250,000 for the taxable year.
4. The amount of the premium deductible does not exceed P2,400
per family or P200 per month
5. In case of married individuals, only the spouse claiming
additional exemption shall be entitled to this deduction.

Who may avail
1. Individual taxpayers earning purely compensation income during
the year
2. Individual taxpayers engaged in business or in the practice of
profession whether availing of itemized or OSD during the
taxable income.
PERSONAL EXEMPTIONS
 An arbitrary amount allowed for personal living, or family expenses of
an individual taxpayer.
 Allowed only to citizens of the Philippines and to resident aliens and
non resident aliens in certain cases.
 P50,000
Persons qualified to claim basic personal exemptions
1. The claimant must be a citizen or a resident alien.
2. Nonresident aliens engaged in trade or business only by way of
reciprocity but not to additional exemptions.
3. The individual claiming basic personal exemption must be
earning income for the taxable year.
4. The amount allowed for each individual who earns income is
P50,000, regardless of whether the individual is single or
married.
5. 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.
Amount of additional exemption of individuals
 Each legitimate, illegitimate and legally adopted child, not exceeding
4, is entitled to an additional exemption of P25,000, if apart from
being a minor (21) and not gainfully employed, they are unmarried,
living with and dependent upon the parent for their chief support.
Persons qualified to claim additional exemptions.
1. The claimant may be married or unmarried for as long as he has
a qualified dependent child.
2. The claimant must be a citizen or a resident alien.
3. In case of married individuals, the proper claimant is the
husband, except when there is an express waiver by the
husband in favor of his wife.
4. The wife automatically claims the additional exemptions in the ff
instances:
a. The husband has no income or unemployed
b. The husband is a nonresident citizen working abroad
c. In case she is legally separated and she has the custody of
the qualified child or children.
Individual benefactor of senior citizen not allowed to claim additional
exemption
 Regardless of WON an individual is a benefactor of a senior citizen,
he shall only be entitled to a personal exemption of P50,000.
 The senior citizen does not fall within the meaning of the term
dependent under the Tax code that would entitle the benefactor to
claim the additional personal exemption.
Right to claim withholding exemptions
 An employee receiving compensation shall be entitled to withholding
exemptions.
Meaning of the term dependent for purposes of additional exemption
47
1. Legitimate, illegitimate, legally adopted or foster child of the
taxpayer
2. Chiefly dependent for support upon and living with the taxpayer
3. Such dependent is not more than 21 years of age
4. Such dependent is unmarried and not gainfully employed
5. Except if such dependent, regardless of age, is incapable of self-
support because of mental or physical defect.
Employer should ascertain WON a child being claimed is a qualified
dependent.
 If the ee should have additional dependents during the taxable year,
he may claim the corresponding additional exemption, in full for such
year.
Status-at-the-end-of-the-year rule.
 Whatever is the individual taxpayer’s status at the end of the calendar
year may be used for determining his basic personal and additional
exemptions.
 For purposes of filing the income tax return in a particular year, the
taxpayer, who changed his civil status during the year can still use his
old civil status, or he may opt to use his new status in his income tax
return.
Limit of the basic personal exemption allowed to a nonresident alien
individual engaged in trade or business in the Philippines.
 Entitled only to personal exemption, but not to additional exemption, in
an amount equal to the exemptions allowed by the income tax law in
the country which he is a citizen or allowed to citizens of the
Philippines who are also nonresidents in that country, but not to
exceed personal exemption of P50,000.
 The exemption allowed to nonresident aliens is a reciprocal one; that
is, it is only allowed if the country of said nonresident aliens allowed
similar exemptions to Filipinos who are considered as non-residents of
such country but deriving income from sources therein.
 If the nonresident alien individual is not engaged in trade or business
in the Philippines, he will not be allowed to claim any personal
exemption because his income tax is subject to the final withholding
tax of 25% based on the gross income.
ITEMS AND EXPENSES WHICH ARE NON-DEDUCTIBLE FROM THE
GROSS INCOME.
 G.R. In computing the taxable income, no deduction shall in any case
be allowed in respect to:
1. Personal, living or family expenses
2. Amount paid out for new buildings or permanent improvements,
or betterments made to increase the value of any property or
estate; except in the case of intangible drilling and development
costs incurred in petroleum operations.
3. Amount expended in restoring property or in making food the
exhaustion thereof for which an allowance of depreciation or
depletion is or has been made
4. Premiums paid on life insurance policy covering the life of any
officer or ee, or of any person financially interested in any trade or
business carried on by the taxpayer, individual or corporate, when
the taxpayer is directly or indirectly a beneficiary under such
policy
5. Interest expense and bad debts from sales of property between
related parties.
6. Losses from sales or exchanges of property between related
parties.

Personal, living, and family expenses which are not deductible from gross
income.
 They are deemed covered by personal and additional exemption.
Losses which are not deductible from the gross income.
 Designed to avoid sham or pretended sales or exchanges designed to
create losses so as to enable the taxpayer to deduct the same from
gross income and consequently fall under a lower bracket.
Rationale for the prohibition from deductibility of capital losses from
ordinary gains
 Designed to forestall the shifting of deductions from an area subject to
lower taxes to an area subject to a higher taxes, thereby unnecessarily
resulting in leakage of tax revenues.
WHAT CONSTITUTEES AS GROSS INCOME FOR INSURANCE
COMPANIES
 Consists of their income from all sources within the taxable year,
except as otherwise provided by the statute.
Deductions allowed to insurance companies
 They are entitled to same deductions as other corporations, and also
to the deductions of the net addition required by law to be made within
the taxable year on policy and annuity contracts.
Gross income of mutual insurance companies.
 Consists of their total revenue from the operation of the business and
of their income from all other sources within the taxable year, except
as otherwise provided by the statute.
 Mutual insurance companies, other than mutual life and mutual marine
insurance companies, which require their members to make premium
deposits to provide for losses and expenses, are allowed to deduct
from gross income the aggregate amount of premium deposits
returned to their policyholders or retained for the payment of losses,
expenses, and reinsurance reserves.
 Mutual marine companies should include in gross income the gross
premiums collected and received by them less amounts paid for
reinsurance. They may deduct from gross income amounts repaid to
policyholders on account of premiums previously paid by them
together with the interest actually paid upon such amounts between
the date of ascertainment and the date of payment thereof.
WASH SALES OF STOCKS AND SECURITIES
 A sale or other disposition of stocks or securities where it appears
that within a period beginning 30 days before the date of such sale or
disposition and ending 30 days after such date, the taxpayer has
acquired or has entered into a contract or option to acquire,
substantially identical stock or securities.
 Not deductible loss.
 XPN: may be deductible in the following case:
1. If the claim is made by a dealer in stock and securities; and
2. With respect to a transaction made in the ordinary course of the
business of such dealer in stock or securities.
Purposes of wash sales of stock or securities
48
 To prevent taxpayers from selling stock or securities to establish a
loss deduction and then immediately repurchasing the same or
substantially the same securities.
Rules on losses from wash sales of stock and securities
 Where more than one loss is claimed to have been sustained within
the taxable year from the sale or other disposition of stock and
securities, the provisions of this section shall be applied to the losses
in the order in which the stock or securities the disposition of which
resulted in the respective losses were disposed of (beginning with the
earliest disposition). If the order of disposition of stock or securities
disposed of at a loss on the same day cannot be determined, the
stock or securities will be considered to have been disposed of in the
order in which they were originally acquired.
Basis of stock or securities acquired in wash sales
 In the sale or other disposition of stocks or securities, the acquisition
of which resulted in the non-deductibility of the loss from the sale or
other disposition of substantially identical stock or securities, the
basis shall be the basis of the substantially identical stock or
securities so sold or disposed of, increased or decreased, as the
case may be by the difference, if any, between the rice at which the
stock or securities was acquired and the price at which such
substantially identical stock or securities were sold or otherwise
disposed of.
CAPITAL ASSETS VIS-À-VIS ORDINARY ASSETS
 Capital asset – all properties not being used for trade or business.
 Ordinary asset – all properties that are being used primarily or for
sale in the ordinary course of trade or business. (those included in
the inventory, primarily for sale, subject to the allowance for
depreciation)
 In the case of a taxpayer not engaged in the real estate business,
real properties, whether land, building, or other improvements, which
are used or being used or have been previously used in the trade or
business of the taxpayer shall be considered as ordinary assets.
 Properties classified as ordinary asset for being used in business by
a taxpayer engaged in business other an real estate business are
automatically converted into capital asset upon showing of proof that
the same have not been used in business for more than 2 years prior
to the consummation of the taxable transactions involving said
properties.
Capital gains distinguished from ordinary gains.
Capital Gains Ordinary Gains
Sources of capital gains are sales Sources of ordinary gains are
or exchanges of capital assets. sales or exchanges of ordinary
assets.
Capital gains are generally profits Ordinary gains generally come
from sale of assets not stock in from assets constituting stock in
trade. trade.
Basis of capital gains tax is on the Basis of the ordinary tax is on the
presumed gain. actual gain.
Excess of gains from sales or All sales or exchanges of ordinary
exchanges of other capital assets assets should be included in the
(i.e., other than capital gains from gross income.
sales or exchanges of shares of
stock and real properties which
are considered as capital assets)
over the capital losses from such
sale or exchanges should be
included in the gross income.

Actual gain distinguished from presumed gain.
 Actual gain – the gain actually or constructively derived from the sale
of assets/properties treated as ordinary assets in excess of the cost
to the taxpayer.
 Presumed gain – the capital gain presumed to have been realized
from the sale, exchange or disposition of real property located in the
Philippines, classified as capital asset, including pacto de retro sales
and other forms of conditional sales, by individuals, including estates
and trusts, regardless of whether he suffers a loss than a gain, the
basis of which is the zonal value of the property or the gross selling
price, whichever is higher.
Net capital gain distinguished from net capital loss.
 Net capital gains – the excess of the gains from sales or exchanges
of capital assets over the losses from such sales or exchanges. It is
added to the ordinary gain.
 Net capital loss – the excess of the losses from sales or exchanges
of other capital assets over the capital gains from such sales or
exchanges. It is not deductible from the ordinary gain.
Long term capital gain distinguished from short term capital gain;
Percentages taken into account; Holding Period rule
 In computing net capital gain, net capital loss, and net taxable income
in the case of individual taxpayers, the ff percentages of capital gains
or loss shall be recognized and taken into account upon the sale or
exchange of a capital asset depending on the actual holding period.
 Short-term capital gain – 100% of the capital gains or loss is taken
into account, if the capital asset has been held for not more than 12
months
 Long-term capital gain – 50% of the capital gains or loss is taken into
account, if the capital asset has been held for more than 12 months.
Capital loss limitation rule applicable to both corporations and individuals.
 G.R. Capital losses from sales or exchanges of capital assets are
allowed only to the extent of the gains from such sales or exchanges.
 The net capital loss is not deductible in arriving at the taxable net
income inasmuch as capital losses are allowed only to the extent of
capital gains.
 XPN. In a bank or trust incorporated under the laws of the
Philippines, a substantial part of whose business is the receipt of
deposits, sells any bond, debenture, not or certificate or other
evidences of indebtedness issued by any corporation, including the
government, with interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the limitation, and
shall not be included in determining the applicability of such limitation
to other losses.
Rationale for the rule prohibiting the deduction of capital losses from
ordinary gains.
 To insure that only costs or expenses incurred in earning the income
shall be deductible for income tax purposes consonant with the
requirement of the law that only necessary expenses are allowed as
deductions from gross income.
 This is also the reason why all non-business connected expenses,
like personal, living and family expenses, are not allowed as
deduction from gross income.
Net capital loss carry over (NCLCO) vis-à-vis net operating
loss carry over (NOLCO).
NCLCO NOLCO
49
Can be availed of only by Available to both individuals and
individual taxpayer. corporate taxpayers.
Covers only one year period. May be deducted from the gross
income for the next three
consecutive years.
A capital asset transaction. An ordinary asset transaction.
Directly governed by the Tax Code Directly governed by the Tax Code
only. and by the Investment Incentives
Act.
Retirement bonds
 For income tax purposes, amounts received by the holder upon the
retirement of bonds, debentures, notes or certificates or other
evidences of indebtedness issued y any corporation with interest
coupons or in registered form, shall be considered as amounts
received in exchange thereof.
Taxation of shares redeemed for cancellation or retirement.
 When preferred shares are redeemed at a time when the issuing
corporation is still in its going concern and is not contemplating in
dissolving or liquidating its assets and liabilities, capital gain or capital
loss upon redemption shall be recognized on the basis of the
difference between the amount/value received at the time of
redemption and the cost of the preferred shares.
 The capital gain or loss derived shall be subject to the regular rates.
 This section does not cover the situation where a corporation
voluntarily buys back its own shares, in which it becomes treasury
shares. Stock transaction tax applies, if listed and traded in the local
stock exchange. Otherwise, it is subject to 5% or 10% net capital gains
tax.
Taxation of surrender of shares by the investor upon dissolution of the
corporation and liquidation of assets and liabilities of said corporation.
 Upon surrender by the investor of the shares in exchange for cash and
property distributed by the issuing corporation upon its dissolution and
liquidation of all assets and liabilities, the investor shall recognize
either capital gain or loss upon such surrender of shares computed by
comparing the cash and fair market value of property received against
the cost of the investment in shares.
 The capital gain or loss shall be subject to the regular income tax.
Short sales
 Refer to any sale of a security which the seller does not own or any
sale which is consummated by the delivery of a security borrowed by,
or for the account of the sellers.
 A person shall be deemed to own a security if:
1. He or his agent has title to it
2. He has purchased or has entered into an unconditional contract,
binding on both parties thereto, to purchase it and has not yet
received it
3. He owns a security convertible into or exchangeable for it and has
tendered such security for conversion or exchange
4. He has an option to purchase or acquire it and has exercised
such option
5. He has rights or warrants to subscribe to it and has exercised
such rights or warrants provided however that a person shall be
deemed to own securities only to the extent he has a net long
position in such securities.
When short sale is deemed consummated.

 For income tax purposes, a short sale is not deemed to be
consummated until the delivery of property to cover the short sale.
DETERMINATION OF GAIN OR LOSS IN EXCHANGE OF PROPERTY
 The amount of income derived or loss sustained from an exchange of
property is the difference between eh market value at the time of the
exchange of the property received in exchange of and the original
cost, or other basis, of the property exchanged.
Basis for determining gain or loss from sale or disposition of property
1. If the property is acquired by purchase – basis is the cost of the
property acquired on or after March 1, 1913
2. If the property is acquired by inheritance – basis is the fair
market price or value as of the moment of death of the decedent
3. If the property is acquired by donation – basis is the cost in the
hands of the donor or the last previous owner who did not
acquire it by donation. If the basis, however, is greater than the
fair market value of the property at the time of donation, then, for
purposes of determining loss, the basis shall be such fair market
value.
4. If the property is acquired for less than an adequate
consideration in money or money’s worth – basis shall be the
amount paid by the transferee for the property
5. If the property was acquired thru previous tax-free exchange, the
basis of stock or securities received by the transferor is the
same as the basis of the property, stock or securities exchanged
or transferred. Basis of the property transferred in the hands of
the transferee – same as it would be in the hands of the
transferor.
 The property received as boot refers to the money received and
other property received in excess of the stock or securities
received by the transferor on a tax-free exchange.
Recognition of gain or loss in exchange of property
 GR. the entire amount of the gain or loss on the sale or exchange of
properties should be recognized.
 XPN. If in pursuance to a plan merger or consolidation:
1. A corporation exchanges property solely for stocks in a
corporation
2. A shareholder exchanges stock in a corporation for the stock of
another corporation
3. A security holder of a corporation exchanges his securities in
such corporation solely for stock or securities in another
corporation
4. The transfer is made by a person, acting alone or together with
others, not exceeding four persons
5. As a result of the exchange, the transferor, alone or together
with others, not exceeding four, gains control of the transferee.
The following are the tax consequences of a tax-free exchange of property
for shares of stock of a controlled corporation:
1. Income tax – The transferor shall not recognize any gain or loss
on the transfer of the property to the transferee. The transferor
will not be subject to capital gains tax, income tax, or to
creditable withholding tax on the transfer of such property to the
transferee. Neither may the transferor recognize a loss, if any,
incurred in the transfer.
 Control – means ownership of stocks in a corporation
possessing at least 51% of the total voting power of all classes
of stocks entitled to vote.
 The assumption of liabilities or the transfer of property that is
subject to a liability does not affect the non-recognition of gain or
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loss, since the total amount of such liabilities does not exceed
the basis of the property transferred. If the amount of the
liabilities assumed plus the amount of the liabilities to which the
property is subject exceed the total amount of the adjusted basis
of the property transferred pursuant to such exchange, then
such excess shall be considered as a gain from the sale or
exchange of a capital asset or of property which is not a capital
asset, as the case may be.
 The transferee is not subject to income tax on its receipts of the
property as contribution to its capital, even if the value of such
property exceeds the par value or stated value of the shares
issued to the transferor.
2. Donor’s tax – the transferor is not subject to donor’s tax,
regardless whether the value of the property transferred
exceeds the par/stated value of the transferee shares issued to
the transferor, there being no intent to donate on the part of the
transferor.
3. Value-Added Tax – the VAT shall not apply to goods or
properties which are originally intended for sale or for use in the
course of business.
 XPN. The exchange of goods or properties including the real
estate properties used in business or held for sale or for lease
by the transferor, for shares of stocks, whether resulting in
corporate control or not, is subject to VAT.
4. Documentary Stamp Tax – in the case of tax-free exchange of
properties for shares or shares for shares, said exchange shall
be exempt.
INVENTORIES
 Two tests for which inventory must conform
1. It must conform as nearly as possible to the best accounting
method in the trade or business; and
2. It must clearly reflect the income.
 Inventory rules cannot be uniform but must give effect to trade
customs which come within the scope of the best accounting practice
in the particular trade or business.
 In order to clearly reflect income, the inventory practice should be
consistent from year to year.
 Inventories should be recorded in a legible manner, properly
computed and summarized, and should be preserved as a part of the
accounting record of the taxpayer.
 Inventory losses which are allowable as tax deduction are:
1. Losses from the sale of excess or obsolete raw materials
2. Losses from production of initial batches of new products
3. Production losses from reprocessing of stocks returned for
reconditioning.
 Inventory valuation method adopted by the taxpayer should be
applied from year to year.
Rationale behind the power of the State to tax persons, properties and
business within its jurisdiction.
 Based on the theory that the tax laws of a state can have no
extraterritorial operation.
 Violation of the constitutional provision that no person shall be
deprived of his property without due process of law.
Classification of income as to sources
1. Within the Philippines
2. Without the Philippines
3. Partly within and partly without the Philippines
Gross income from sources within the Philippines

1. Interest income – interest on bonds or notes or other interest-
bearing obligations of residents, corporate or otherwise.
2. Dividends
a. From domestic corporation
b. From a foreign corporation unless less than 50% of its
gross income for the 3-year period ending with the close of
its taxable year preceding the declaration of such
dividends, or for such part of such period as it has been in
existence was derived from sources within the Philippines;
but only in an amount which bears the same ratio to such
dividends as the gross income from all sources.
 In the case of dividends derived from a foreign corporation, the
same is subject to the 50% rule, i.e., if the 3-year period
preceding the declaration of such dividend, the ratio of such
corporation’s Philippines gross income to the world gross
income is
i. Less than 50% - then the income is considered derived
entirely without
ii. If 50% or more – then the income is considered derived
within.
3. Services – includes compensation for labor or personal services
performed within the Philippines regardless of the residence of the
payor, of the place in which the contract for service was made, or of
the place of payment.
4. Rentals and royalties – the income arising from the rental of property
whether tangible or intangible, located within the Philippines, or from
the use of property, whether tangible or intangible, located within the
Philippines.
5. Sale of real property – those located in the Philippines
6. Sale of personal property – in the country where the personal
property is sold. The country in which sold means the place where
the property is marketed. This section does not apply to income from
the sale of property produced by the taxpayer within and sold without
the Philippines or produced by the taxpayer without and sold within
the Philippines.
7. Sale of shares of stock of domestic corporation – within the
Philippines, regardless of where the said shares are sold. The
transfer by a nonresident alien or a foreign corporation to anyone of
any share of stock issued by a domestic corporation sold thru a
foreign stock exchange shall still be subject to Philippine income tax
and shall not be affected or made in its book unless:
a. The transferor has filed with the Commissioner a bond
conditioned upon the future payment by him of any income tax
that may be due on the gains derived from such transfer, or
b. The Commissioner certified that the taxes, if any, due on the
gain realized from such sale or transfer have been paid.
GROSS INCOME FROM SOURCES WITHOUT THE PHIL
1. Interests other than those derived from sources within the
Philippines
2. Dividends other than those derived from sources within the
Philippines
3. Compensation for labor or personal services performed without
the Philippines
4. Rentals or royalties from property located without the Philippines
or from any interest in such property including rentals or
royalties for the use or for the privilege of using without the
Philippines, patents, copyrights, secret processes and formulas,
goodwill, trademarks, trade brands, franchises and other like
properties;
5. Gains, profits and income from the sale of real property located
without the Philippines.
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INCOME FROM SOURCES PARTLY WITHIN AND PARTLY
WITHOUT THE PHILIPPINES
 The taxable income may first be computed by deducting the
expenses, losses or other deductions apportioned or allocated
thereto and a ratable part of any expense, loss or other deduction
which cannot be definitely be allocated to some items or classes of
gross income; and the portion of such taxable income attributable to
sources within the Philippines may be determined by the processes
and formulas of general apportionment prescribed by the SOF.
 Gains, profits and income from the sale of personal property
produced by the taxpayer within and sold without the Philippines, or
produced by the taxpayer without and sold within the Philippines,
shall be treated as derived partly from sources without the
Philippines.
 Gains, profits and income derived from the purchase of personal
property within and its sale without the Philippines, or from the
purchase of personal property without and its sale within the
Philippines shall be treated as derived entirely from sources within
the country in which sold.
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
Accounting Periods
 Taxable year or taxable accounting period – the calendar year or the
fiscal year ending during such calendar year, upon the basis of which
the taxable income under Title II of the Tax Code is computed.
Different taxable accounting periods
 G.R. the accounting period of a taxpayer is a period of 12 months:
1. Calendar accounting year - taxable period adopted by
individuals or corporations using the calendar year, which is a
period of 12 months starting from Jan. 1 to Dec. 31.
 If the taxpayer had no annual accounting period, or does not
keep books, or if the taxpayer is an individual, the taxable
income shall be computed on the basis of the calendar year.
2. Fiscal accounting period – taxable period adopted by
corporations using the fiscal year, which is a period of 12
months ending on the last day of any month other than
December.
 In no instance shall individual taxpayers be authorized to
establish a fiscal year as basis for filing their returns and
computing their income.
 But a taxpayer may have a taxable period of less than 12
months.
3. Short accounting period – adopted by a taxpayer in the case of a
return made for a fractional part of a year or which is a period of
less than 12 months.
 Occurs when a taxpayer, with the approval of the Commissioner,
changes the basis of computing taxable income. It may also
occur when a taxpayer dies, or is newly organized, or a
corporation is dissolved at any time during the year after the
beginning of the calendar year or fiscal year.
Accounting Methods
 Comprise of a set of rules for determining when and how to report
income and deductions.
 The accounting method for tax purposes must be one generally
employed in keeping the taxpayer’s books, provided that the method
clearly reflects the income.

 In case of conflict between the Tax Code and that of the generally
accepted accounting principles, the provisions of the Tax Code and
its IRR shall prevail.
 If the taxpayer does not regularly employ a method of accounting
which clearly reflects his income, the computation shall be made in
such manner as in the opinion of the Commissioner clearly reflects it.
Essentials of a standard accounting method in order to truly reflect a
taxpayer’s taxable income
 In all cases in which the production, purchase, or sale of
merchandise of any kind is an income-producing factor, inventories of
the merchandise on hand should be taken at the beginning and end
of the year and used in computing the taxable income of the year.
 Expenditures made during the year should be properly classified as
between capital and income
 In any case in which the cost of capital assets is being recovered thru
deductions for wear and tear, depletion or obsolescence, any
expenditure (other than ordinary repairs) made to restore the property
or prolong its useful life should be added to the property account or
charged against the appropriate reserve and not to current expenses.
Different accounting methods under the Tax Code
1. Cash Accounting Method – all items of income actually received
during the year shall be accounted for in such taxable year and
the corresponding expenses actually paid shall also be claimed
as deductions during the year.
2. Accrual accounting method – income, gains and profits are
included in the gross income when earned regardless of whether
or not actually received, and the expenses are allowed as
deductions from the gross income when actually incurred,
although not yet paid. This is allowed because expenses not
being claimed as deductions by a taxpayer in the current year
when they are incurred cannot be claimed as deduction from
income for the succeeding year.
3. Installment payment basis method – a method considered
appropriate when collections extends over relatively long periods
of time and there is a strong possibility that full collection will not
be made. As customers make installment payments, the seller
recognizes the gross profit on sale in proportion to the cash
collected. In order that payments may be considered as on
installment payment basis, the initial payments in the year of
sale should not exceed 25% of the gross selling price.
4. Deferred payment basis method – a method being applied by
real estate dealers in their sale of real properties, which,
although the mode of payment being employed is on the
installment basis, the said sale shall be considered as on a cash
basis when the initial payments in the year of sale of the real
properties exceed 25% of the gross selling price.
5. Percentage-of-completion-basis method – a method applicable
in the case of a building, installation or construction contract
covering a period in excess of one year whereby gross income
derived from such contract may be reported upon the basis of
percentage of completion or progress of work.
Period in which items of gross income included
 In case of death of a taxpayer, gains, profits, and income are to be
included in the gross income for the taxable year in which they are
received by the taxpayer, unless they are included as of a different
period in accordance with the approved method of accounting
followed by him.
 If the taxpayer is keeping books of accounts on the cash basis,
income earned is taxable in the year of actual receipt.
52
 If his books of accounts and records are kept on the accrual basis,
income is taxable in the year it is earned, irrespective of the year in
which it is actually received.
Meaning of the terms paid and incurred and paid or accrued
 The terms will be construed according to the method of accounting
upon the basis of which the taxable income is computed by the
taxpayer.
 In case of the death of a taxpayer, there shall be allowed as
deduction for the taxable period in which falls the date of his death,
amounts accrued up to the date of his death if not otherwise properly
allowable in respect of such period or a prior period.
All-events-test
 The accrual of income and expense is permitted when the all-events-
test has been met.
 The all-events-tests requires
1. Fixing of a right to income or liability to pay
2. The availability of the reasonable accurate determination of such
income or liability.
 The test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable
accuracy.
 The basis of accrual system of accounting is that obligations incurred
in the normal course of business will be discharged in due course;
that the deductions have been paid or accrued, or paid and accrues,
in order to be accruable in the taxable year, a valid obligation upon
which the profit or loss, in case of deduction, is to be determined
must have existed in the year in which the obligation became binding
and enforceable.
Change of accounting period
 A taxpayer who changes the method of accounting employed in
keeping his books shall, before computing his income upon such new
method for purposes of taxation, secure the consent of the
Commissioner.
 Application for permission to change the method of accounting
employed and the basis upon which return is made shall be filed
within 90 days after the beginning of the taxable year to be covered
by the return.
 An individual cannot change his accounting period from calendar
year to fiscal year because he is only allowed to use the calendar
year.
 A corporation, including a duly registered GPP, who desires to
change its accounting shall at any time not less than 60 days prior to
the beginning of the proposed new accounting period submit a written
application to the Commissioner.
 The certification approving the adoption of a new accounting period
must be released within 30 working days from the date of receipt of
the complete documentary requirements.
Final or adjusted returns for a period of less than 12 months
 GR. No return can be made for a period of more than 12 months
 A separate return for a fractional part of a year is required whenever
there is a change, with the approval of the Commissioner, on the
basis of computing taxable income from one taxable year to another.
Accounting for long-term contracts
 Percentage-of-completion basis

Installment basis
 The income of a dealer in a personal property on the installment plan
may be ascertained by taking as income that proportion of the total
payments received in the taxable year from installment sales which
the total or gross profit realize or to be realized on the total
installment sales made during each year bears to the total contract
price of all such sales made during that respective year.
 The income from a casual sale or casual disposition of personal
property (other than property of a kind which should be properly be
included in inventory) may be reported on the installment basis only if
the sales price exceeds P1,000 and the initial payments do not
exceed 25% of the selling price.
 The term initial payment does not include the amounts received by
the vendor in the year of sale from the disposition to a third person of
notes given by the vendee as part of the purchase price which are
due and payable in subsequent years.
RETURNS AND PAYMENT OF TAX
 The following individuals are required to file income tax return
1. Filipino citizen residing in the Philippines
2. Filipino citizen residing outside the Philippines on his income
from sources within the Philippines
3. Alien residing in the Philippines on income derived in the
Philippines
4. Nonresident alien engaged in trade or business or in the
exercise of a profession in the Philippines
5. A citizen of the Philippines and any alien individual engaged in
business or practice of profession within the Philippines,
regardless of the amount of gross income
6. An individual earning purely compensation income but who is
currently employed by two or more employers at any time during
the taxable year.
Individuals not required to file income tax return
1. An individual whose gross income does not exceed his total
personal and additional exemptions as dependents
2. An individual with respect to pure compensation income derived
from sources within the Philippines, the income tax on which has
been correctly withheld.
3. An individual whose sole income has been subjected to final
withholding tax
4. A minimum wage earner or an individual exempt from income
tax
5. Senior citizens who are considered as minimum wage earners
Taxation of marginal Income Earners
 Marginal income earners – refer to individuals not otherwise deriving
compensation as an ee under an er-ee relationship but who are self-
employed and deriving gross sales/receipts not exceeding P100,000
during any 12 month period. The activities of such are considered
principally for subsistence or livelihood.
 They are exempt from VAT and any percentage tax.
 They are not required to pay any registration although they are
required to register as taxpayers for being a possible income tax and
withholding tax filers.
 They are required to file the annual income tax return reflecting
income from whatever source.
 Any individual not required to file an income tax return may
nevertheless be required to file an information return.
Income tax returns of individuals for the preceding taxable year shall be
filed in duplicate by the ff persons:
53
1. A resident citizen – on his income for all sources
2. A nonresident citizen – on his income derived from sources
within the Philippines
3. A resident alien – on his income from all sources within the
Philippines
4. A nonresident alien engaged in trade or business in the
Philippines – on his income derived from sources within the
Philippines.
In case of individuals subject to capital gains tax:
1. From the sale or exchange of shares of stock not traded thru a
local stock exchange, the return should be filed within 30 days
after each transaction and final consolidated return on or before
April 15 of each taxable year covering all stock transactions of
the preceding year
2. From the sale or disposition of real property, the return should
be filed within 30 days following each sale or other disposition.
Return of Husband and Wife
 Those who do not derive income purely from compensation, shall file
a return for the taxable year to include the income of both spouses,
but where it is impracticable for the spouses to file one return, each
spouse may file a separate return of income but the returns so filed
shall be consolidated by the Bureau for the purposes of verification
for the taxable year.
Returns of minors and persons with disability.
 If he is unable to make his own return, the return may be made by the
ff:
1. His duly authorized agent or representative
2. By the guardian
3. Other person charge with the care of his person, property, the
principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties for
erroneous, false or fraudulent returns
4. In the case of income of unmarried minors derived from property
received form living parent, said income shall be included in the
return of the parents, except:
a. When the donor’s tax has been paid on such property;
b. When the transfer of such property is exempt from donor’s
tax.
The fact that an individual’s named is signed to a file return shall be prima
facie evidence for all purposes that the return was actually signed.
Return of individuals with concurrent employers
 At any time during the taxable year shall file an income tax return
regardless of whether she is an MWE or regardless of whether her
personal and additional exemption does not exceed his total wages.
CORPORATION RETURNS
 Every corporation subject to tax, except foreign corporations not
engaged in trade or business in the Philippines, shall render, in
duplicate, a true and accurate quarterly income tax return and final or
adjustment return.
 A corporation which has received a charter but has never perfected
its organization, and which has transacted no business and had no
income from any source, may upon presentation of the facts to the
Commissioner be relieved from the necessity of making a return so
long as it remains in an unorganized condition.

 A domestic corporation is required to file income tax returns 4 times
for income earned during a single taxable year. Reason: to endure
the timeliness of collection to meet the budgetary needs of the
government; to ease the burden on the taxpayer by providing it with
an installment payment scheme, rather than requiring payment of the
tax on a lump-sum basis after the end of the year.
 GR. stockholders cannot be held liable for the unpaid taxes of a
dissolved corporation. XPN. If it appears that the corporate assets
have been passed into their hands.
Reasons for the grant of extension to file returns
 The Commissioner may grant, in meritorious cases
1. Destruction of books of accounts and other records of the
taxpayer thru fire, flood or typhoon and the said books and other
records are in the process of reconstruction;
2. Epidemic, pestilence or other calamities prevailing in specific
sectors of the country where the taxpayer resides or where the
principal business is being conducted. Sickness or illness of the
accountant, bookkeeper or the manager or proprietor of the
business shall not be considered a reasonable cause.
Returns of receivers, trustees in bankruptcy or assignees
 Must make returns of income for such corporations, partnerships or
associations covering each year or part of the year during which they
are in control.
Returns of GPPs
 Are not subject to income tax, but are required to file returns of their
income for the purpose of furnishing information as to the share in the
gains or profits which each partner shall include in his individual
return.
 They are required to render a return of their earnings, profits and
income, setting forth the items of gross income and the deductions
allowable, and the names and addresses, TIN and shares of each of
the partners who would be entitled to the net earnings, profits, and
income, is distributed.
PAYMENT AND ASSESSMENT OF INCOME TAX FOR INDIVIDUALS
AND CORPORATIONS
 The total amount of income shall be paid at the time the return is
filed, such tax to be paid by the person subject thereto.
 Installment payment of income tax allowed only to individuals.
 Interest on income tax is not punitive in nature but compensatory; it is
a compensation to the State for the delay in the payment of the tax.
WITHHOLDING TAX-AT-SOURCE
 Withholding tax is a method of collecting in advance income tax and
business tax of certain taxpayers who are liable to pay income tax or
business tax in the Philippines.
 In the operation of the withholding tax system, the payee is the
taxpayer, the person on whom the tax is imposed, while the payor, a
separate entity, acts no more than an agent of the government for the
collection of the tax in order to ensure its payment.
 If the payor who is duty bound to withhold the tax fails to withhold and
to remit the said tax to the government, the said expenses of the
payor shall generally be disallowed as deduction from the gross
income.
3-Fold purpose of the withholding tax system
54
1. To provide the taxpayer with a convenient way of paying his tax
liability
2. To ensure the collection of tax
3. To improve the government’s cashflow
 The withholding agent is liable only insofar as he failed to perform his
duty to withhold the tax and remit the same to the government.
Who are constituted as withholding agent
 A withholding agent is any person or entity who is required to deduct
and remit the taxes withheld to the government.
1. In general, any juridical person, whether engaged or not in trade
or business;
2. An individual, with respect to payments made in connection with
his trade or business.
 Insofar as taxable sales, exchanges or transfers of real property are
concerned, the buyers, WON engaged in trade or business, are
constituted as withholding agents.
 The tax withheld is considered a part of the consideration agreed
upon between the seller and the buyer resulting, therefore, to a net
take to the seller of only the difference between the agreed
consideration/selling price and the tax withheld.
3. All government offices, including GOCCs, as well as well
provincial, city and municipal governments and barangays.
4. All individuals, juridical persons and political parties, with respect
to their income payments made as campaign expenditures
and/or purchase of goods and services intended as campaign
contributions.
Duties and obligations of the withholding agent
1. To register as a withholding agent within 10 days after acquiring
such status with the RDO having jurisdiction where his business
is located.
2. To deduct and withhold taxes.
3. To remit the tax withheld
4. To file annual information return
5. To issue withholding tax certificates to recipient of income
payments subject to the withholding.
Income which may be subjected to the withholding tax at source
 Only fixed or determinable annual or periodical income is subject to
withholding.
 The statute subjects interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, and
emoluments, including royalties, to withholding tax at source.
 Income is fixed when it is to be paid in amounts definitely pre-
determined.
 It is determinable whenever there is a basis of calculation by which
the amount to be paid may be ascertained.
Time of withholding
 When the income payment is paid or payable or accrued or the
income payment is accrued or recorded as an expense or asset,
whichever is earlier.
Kinds of withholding tax-at-source
1. Withholding of final tax on certain incomes
2. Withholding of creditable tax at source
3. Withholding tax on interest from tax-free covenant bonds.
Concept of the final withholding tax system

 The amount of income tax withheld by the withholding agent is
constituted as a full and final payment of the income tax due from the
payee on the said income.
 In case of the payor’s failure to withhold the tax or incase of
underwithholding, the deficiency tax shall be collected from the payor.
 The payee is not required to file an income tax return for the
particular income.
 The finality of the withholding tax is limited only to the payee’s income
tax liability on the particular income, it does not extend to the payee’s
other tax liability on income.
Rationale for the withholding of final tax on income payment to
nonresident aliens not engaged in trade or business in the Philippines
 Subject to final withholding tax
 At 25%
 Designed to enable the government to collect the proper and correct
tax on incomes derived from the Philippines by aliens outside the
taxing jurisdiction.
Government as withholding agent
 Before making any money payment to private individuals,
corporations, partnerships and/or associations on account of each
purchase of goods and services shall deduct final withholding tax due
on the gross money payments thereof.
Concept of creditable withholding tax system
 Taxes withheld on certain income payments are intended to equal or
at least approximate the tax due of the payee on said income.
 The income recipient is still required to file an income tax return.
Kinds of creditable withholding tax system
1. Expanded withholding tax
2. Withholding tax on compensation or wages
3. Withholding tax on interest from tax-free covenant bonds
Expanded Withholding Tax
 A kind of creditable withholding tax, which is prescribed to be
withheld both by the government and private payors from the different
items of income payments to sellers/suppliers residing in the
Philippines on their sale of goods and service, which is creditable
against the income tax due of the said payees/sellers/suppliers for
the taxable year quarter/year.
Conditions in order that income payment may be subjected to EWT
1. The income payment must be paid or payable by a taxpayer
who is residing in the Philippines
2. The recipient of the income who is liable to income tax must also
be residing or has business in the Philippines
3. The income is fixed or determinable at the time of payment
4. The income is one listed under the consolidated withholding tax
regulations
A nonresident foreign corporation not doing business in the Philippines
retained by a domestic corporation to do the advertising of its product
abroad paid thru outward remittances is not subject to EWT.
 The fees paid by a domestic corporation to a nonresident foreign
corporation are not subject to EWT since they are not subject to the
Philippine income tax.
 Expanded withholding taxes are only imposed on income payments
to persons residing in the Philippines.
55
When the obligation of withholding agent to deduct and withhold the tax
arise
 At the time an income payment is paid or payable, or when the
income payment has accrued or recorded as an expense or asset,
whichever is applicable, in the payor’s books and which comes first.
 The term payable refers to the date the obligation becomes due,
demandable or legally enforced.
Persons exempted from being subjected to the EWT
1. National government agencies and its instrumentalities,
including provincial, city, municipal governments and barangays
except GOCCs
2. Persons enjoying exemption of income taxes pursuant to the
provisions of any law, general or special.
Withholding tax on compensation or wages
 Also a form of creditable withholding tax which is withheld from
individuals receiving compensation income.
 No withholding of tax shall be required where the income received by
an ee does not exceed the statutory minimum wage.
Withholding tax on interest of tax-free covenant bonds
 Withholding is required of a tax of 30% in the case of interest upon
bonds, obligations or securities issued by domestic or resident
foreign corporations, containing a so-called tax-free covenant clause,
payable either to citizens or aliens, where the owner of such interest
income does not file with the withholding agent a signed notice
claiming the benefit of personal exemption.
 Subject to the exception just mentioned, withholding taxes take place
in all cases of payments of interest upon tax-free covenant bonds or
other securities regardless of the place where such bonds or
securities are issued or marketed and the interest thereupon paid.
 Not required in the case of a citizen or resident alien individual files
with the withholding agent when presenting interest coupons for
payment, not later the Feb. 1 following the taxable year, an
ownership and exemption certificate on the requisite form claiming a
personal exemption or credits for dependents.
RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE
 Income upon which any creditable tax is required to be withheld at
source shall be included in the return of its recipient.
 The excess of the withheld tax over the tax due on his return shall be
refunded to him subject to the authority of the Commissioner to
refund taxes.
 The taxes withheld by the withholding agents shall be maintained in
separate accounts and should not be commingled with any other
funds of the withholding agent. They shall be considered as a trust
fund held for government until they are remitted.
 Every person who is required to withhold the tax from the
compensation of an ee is liable for the payment of such tax to the
BIR. Such liability stays even if the ee subsequently pays the tax.
 Any income payment which is otherwise deductible shall be allowed
as deduction from the payor’s gross income only if it is shown that the
income tax required to be withheld has been paid to the Bureau.
TAX ON PROFITS COLLECTIBLE FROM THE OWNER
 Income tax not otherwise collectible from taxpayers chargeable to his
duly authorized representative.
ESTATES AND TRUSTS

Income of estates and trusts which are subject to income tax
 The income tax imposable upon individuals shall apply to the income
of estates or of any kind of property held in trust, including:
1. Income accumulated in trust
a. For the benefit of unborn or unascertained persons or
persons with contingent interest: and
b. Income accumulated or held for future distribution under
the terms of the will or trust.
2. Income which is to be distributed currently be the fiduciary to the
beneficiaries
3. Income collected by a guardian of an infant which is to be held
or distributed as the court may direct
4. Income received by the estates of deceased persons during the
period of administration or settlement of the estate
5. Income which, in the discretion of the fiduciary, may be either
distributed tot eh beneficiaries or accumulated.
But the income of the ees’ trust is exempt from income tax
 The income of the ees’ trust which forms part of a pension, stock
bonus or profit-sharing plan of an er for the benefit of some or all of
his ees shall be exempt from income tax if the following conditions
are met:
1. The contributions are made to the trust by such er, or ees, or
both;
2. Such contributions are made for the purpose of distributing to
such ees the earnings and principal of the fund accumulated by
the trust in accordance with the plan;
3. Under the trust instrument, it is impossible, (in the taxable year
and at any time thereafter prior to the satisfaction of all liabilities
with respect to ees under the trust) for any part of the corpus or
income to be used for, or diverted to, purposes other than for the
exclusive benefit of his ees; and
4. The same is duly registered as such with the BIR.
 Purpose: to encourage the formation of private plan outside SSS.
 Tax exemption is likewise enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution of
accumulated income and reduce whatever the trust beneficiaries
would receive out of the trust fund.
 The income of the trust funds shall be exempt from payment of final
withholding tax.
Instances when ees’ trusts may be taxed.
1. Mere resolution setting aside every month a reserve fun to pay
pensions for all the present and future ees, without evidence that
the pension plan is actuarially sound.
2. Any amount actually distributed tot eh ee or distributee of an
ees’ trust shall be taxable to the ee in the year in which so
distributed to the extent that it exceeds the amount contributed
by such ee or distributee.
 A foundation existing for the purpose of holding title to, and
administering, the tax exempt Ees’ Trust Fund established for the
benefit of the ees, has the personality to claim tax refunds due to the
Ees’ Trust Fund.
Other trusts which are exempt from income tax.
1. Revocable trust. The trust itself is exempt but the trustor/grantor
is subject to the payment of the income tax of the trust.
2. Trust, the income of which, in whole or in part, may be held or
distributed for the benefit of the grantor. If part of the income of
the trust is to be held or distributed for the benefit of the grantor,
the same should be included in the grantor’s return.
56
The following income taxes are payable when a person who owns
property dies:
1. Income tax of the decedent when he was still alive, to cover the
period beginning January up to the time of his death;
2. Estate income if the estate is under administration or judicial
settlement.
When income of estates and trusts taxable to fiduciaries.
 Fiduciary is a term which applies to all persons or corporations that
occupy positions of peculiar confidence towards others such as
trustees, executors, or administrators; and a fiduciary, for income tax
purposes, is any person or corporation which holds in trust an estate
of another person/s.
 GR. the income tax of estate or trust shall be computed upon the
taxable income of the estate or trust and shall be paid by the
fiduciary.
 Where under the terms of a will or deed, the trustee may, in his
discretion, distribute the income or accumulate it, the income is taxed
to the trustee, irrespective of the exercise of his discretion. The
imposition of the tax is not affected by the fact that an ultimate
beneficiary may be a person exempt from tax.
 The income of a trust which is to be accumulated or held for future
distribution must be returned by and will be taxed to the trustee.
When income of estate and trust taxable to beneficiaries.
1. A trust, the income of which is to be distributed annually or
regularly
2. An estate of a decedent the statement of which is not the object
of judicial testamentary or intestate proceedings; and
3. Properties held under a co-ownership or tenancy in common,
the income is taxable directly to the beneficiary.
Rules in the consolidation of income of two or more trusts.
1. There are two or more trusts which derive income
2. The creator of the trust in each instance is the same person, and
the beneficiary in each instance is the same.
3. The income of the said trust should be consolidated.
4. Where the creator of the trust in each instance is the same
person and the beneficiary in each instance is the same, the tax
due on the consolidated income will be collected from the
trustees in proportion to the taxable income of the respective
trusts.
5. When the creator of the trust in each instance is the same
person and the trustee in each instance is the same but the
beneficiaries are different, the trustee should make a separate
return for each of the trusts in his hands.
6. When a trustee holds trust created by different persons for the
benefit of the same beneficiary, he should also make a return for
each trust separately.
7. Where a trustor/grantor created two or more trusts in favor of the
same beneficiary appointing two or more trustees, the trustees
should each make a separate return for each trust. However, the
Commissioner will consolidate the taxable incomes, allowing
only one absolute exemption of P20,000.
8. The income tax computed on the consolidated taxable income
shall be allocated between several trusts in proportion to their
respective taxable income.
Computation of taxable income of estates or trusts.
G.R. The taxable income of the estate or trust shall be computed in the
same manner and on the same basis as in the case of an individual

XPN.
1. Allowable deductions:
a. The amount of the income of the estate or trust for the
taxable year which is to be distributed currently by the
fiduciary to the beneficiaries shall be allowed as deduction
in computing the taxable income of the estate or trust
b. The amount of the income collected by a guardian and
infant which is to be held or distributed as the court may
direct shall also be allowed as deduction in computing the
taxable income.
c. However, the said amounts so allowed as a deduction shall
be included in computing the taxable income of the
beneficiaries, whether or not distributed to them.
2. Additional allowable deductions
a. There shall be allowed an additional deduction in
computing the taxable income of the estate or trust the
amount of the income of the estate or trust for its taxable
year, which is properly paid or credited during such year to
any legatee, heir or beneficiary. This applies in cases of:
i. Income received by estates of deceased persons
during the period of administration or settlement of the
estate; and
ii. Income which, in the discretion of the fiduciary, may
either be distributed to the beneficiary or accumulated.
b. However, the amount so allowed as a deduction shall be
included in computing the taxable income of the legatee,
heir or beneficiary.
3. No deductions allowed. In the case of trust administered in a
foreign country:
a. The deductions mentioned in Subsections A and B of
Section 61 shall not be allowed.
b. The amount of any income included in the return of said
trust shall not be included in computing the income of the
beneficiaries.
c. The income of the trust, undiminished by any amount
distributed to the beneficiaries shall be taxed to the trustee.
4. Personal exemption allowed. – P20,000
Casasola believes that the personal exemption of estates and
trusts should be P50,000 since they are taxed like an individual.
The term period of administration and settlement of the estate is the period
required by the executor or administrator to perform the ordinary duties
pertaining to administration, in particular, the collection of assets and the
payment of debts and legacies.
Tax consequences during the period of administration and settlement of
the estate.
1. Estates during the period of administration have but one
beneficiary and that beneficiary is the estate.
2. No taxable income is realized from the passage of property to
the executor or administrator on the death of the decedent, even
though it may have appreciated in value since the decedent
acquired it.
3. In the event of delivery of property in kind to a legatee or
distributee, no income is realized.
4. Where, however, prior to the settlement of the estate, the
executor or administrator sells the property of the decedent’s
estate for more than the appraised value placed upon it at the
death of the decedent, the excess is income, taxable to the
estate.
5. Where the property is sold after the settlement of the estate by
the devisee, legatee or heir at a price greater than the appraised
57
value placed upon it at the time he inherited the property from
the decedent, he is taxable individually on the profit derived.
6. An allowance paid a widow or heir out of the corpus of the estate
is not deductible from gross income.
Effects of distribution to heirs of the income of the estate.
 Distribution to the heirs during the taxable year of the income of the
estate is deductible from the taxable income of the estate since the
distributed income shall form part of the respective heir’s taxable
income.
 Where no such distribution to the heirs is made during the taxable
year when the income is earned, and such income is subjected to
income tax payment by the estate, the subsequent distribution
thereof is no longer taxable on the part of the recipient.
Effects of termination of judicial settlement where the heirs still do not
divide the property.
 If the heirs contribute to the estate money, property or industry with
intention to divide the profits between or among them, an
unregistered partnership is formed and the estate becomes liable for
the payment of corporate income tax.
 If the heirs, without contributing money, property or industry to
improve the estate, simply divide the fruits thereof between or among
themselves, a co-ownership is created and individual income tax is
imposed on the income received by each of the heirs, payable in their
separate and individual capacity.
Exemption allowed to estates and trusts.
 Each beneficiary is entitled to but one personal exemption, no matter
how many trusts he may receive income.
 No additional exemption is allowed to the income of estates and
trusts.
Revocable Trust
 A trust where the title can revert back to the grantor anytime.
 It is not taxable itself as separate entity because the income forms
part of the income of the grantor.
 Paid by the grantor
Requisites of a revocable trust
1. The power to revert in the grantor title to any part of the corpus
of the trust is vested in the grantor at any time either alone or in
conjunction with any person not having a substantial adverse
interest in the disposition of such part of the corpus or the
income therefrom; or
2. The power to revert in the grantor title to any part of the corpus
of the trust is vested in the grantor at any time in any person not
having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom;
3. The income of such part of the trust shall be included in
computing the taxable income of the grantor, and thus the
grantor/trustor shall be the one subject to the income tax.
Irrevocable Trust
 A trust irrevocable both as to corpus and to income.
 Requisites:
1. The trust itself, through the trustee or fiduciary, is liable for the
payment of the income tax
2. It is taxed exactly in the same way as estates under judicial
settlement and its status as an individual is that of the trustor.

3. The distribution of the trust income during the taxable year to the
beneficiaries is deductible from the taxable income of the trust.
When estate and trust may be taxable as a separate entity
 The estate of the decedent is taxable as a separate entity when it is
already subject to a judicial proceeding.
 A trust is taxable as a separate entity if the trust is irrevocable and
the grantor has no more control over the corpus of the trust. If there is
a condition that provides that a portion does not convert the
irrevocable trust to a revocable trust, but that portion is a taxable
income of the grantor.
Requisites when income shall be considered for the benefit of the grantor
1. Any part of the income of a trust is, or in the discretion of the
grantor or of any person not having a substantial adverse
interest in the distribution of such part of the income may be held
or accumulated for future distribution to the grantor;
2. Any apart of the income of a trust may, or in the discretion of the
grantor or of any person not having a substantial adverse
interest in the disposition of such part of the income, be
distributed to the grantor; or
3. Such part of the income of the trust shall be included in
computing the taxable income of the grantor/trustor.
 The term in the discretion of the grantor means in the discretion of
the grantor, either alone or in conjunction with any person not having
a substantial adverse in the disposition of the part of the income in
question.
Fiduciary Returns
 In order that a fiduciary relationship may exist, it is necessary that a
legal trust be created.
 Fiduciaries are required to make returns of income of the trust when
the gross income of the person, trust or estate for whom or which
they act amounts of P20,000 or more and will be subject to all the
provisions of law which apply to individuals.
Income tax return by receiver
 A receiver who stands in the place of an individual or corporation
must render a return of income and pay the tax for his trust, but a
receiver of only part of the property of an individual or corporation
need not.
Fiduciaries to be indemnified against claims for taxes paid.
 Fiduciaries are indemnified against the claims or demands of every
beneficiary for all payments of taxes which they shall be required to
make and they shall have credit for such payments in any accounting
they make as such fiduciaries.
WITHHOLDING ON WAGES
Compensation Income
 Means all remuneration for services performed by an ee for his er
under an er-ee relationship, unless specifically excluded by the Code.
 The name by which the remuneration for services is designated is
Payroll period
immaterial.
 The period of services for which a payment of compensation is
Remunerations not considered as compensation income
1. Remuneration paid for agricultural labor.
Employee
 An individual performing services under an er-ee relationship.
58
G.R. Remuneration for services which constitute agricultural
labor and paid entirely in products of the farm where the labor is
performed is not subject to withholding tax.
XPN. Subject to withholding tax
a. Services performed in connection with forestry, lumbering
or landscaping, because the term agricultural labor does
not include the same.
b. Remuneration paid entirely in products of the farm where
the labor is performed be an ee of any person in connection
with any of the following activities is excepted as
remuneration for agricultural labor:
i. The cultivation of soil;
ii. The raising, shearing, feeding, caring for, training, or
management of livestock, bees, poultry, or wildlife; or
iii. The raising or harvesting of any other agricultural or
horticultural commodity.
c. The remuneration paid entirely in products of the farm
where the labor is performed for the following services in
the employ of the owner or tenant or other operator of one
or more farms is not considered remuneration, provided the
major part of such services is performed on a farm.
i. Services performed in connection with the operation,
management, conservation, improvement, or
maintenance of any such farms or its tools or equipment;
or
ii. Services performed in salvaging timber, or clearing land
brush and other debris left by a hurricane.
d. Remuneration paid entirely in products of the farm where
labor is performed by an ee in the employ of any person In
connection with any of the following operations is not
considered as remuneration without regard to the place
where such services are performed;
i. The making of copra, stripping of abaca, etc.;
ii. The hatching of poultry;
iii. The raising of fish;
iv.The operation or maintenance of ditches, canals,
reservoirs, or waterways used exclusively for supplying
or storing water for farming purposes; and
v. The production or harvesting of crude gum from a living
tree or the processing of such crude gum into gum spirits
or turpentine and gum resin, provided such processing is
carried on by the original producer of such crude gum.
e. Remuneration paid entirely in products of the farm where
labor is performed by an ee in the employ of a farmer or a
farmer’s cooperative, organization or group in the handling,
planting, drying, pacing, packaging, processing, freezing,
grading, storing or delivering to storage or to market or to
carrier for transportation to market, of any agricultural or
horticultural commodity produced by such farmer or farmer-
members of such organization or group.
2. Remuneration for domestic services. Not subject to withholding.
3. Remuneration for casual labor not in the course of an er’s trade
or business.
4. Compensation for services by a citizen or resident of the
Philippines for a foreign government or an international
organization.
ordinarily made to an ee by his er.

Employer
 Any person for whom an individual performs or performed any
service, of whatever nature, under an er-ee relationship.
Withholding tax on compensation income
 A method of collecting the income tax at source upon receipt of the
income.
 The er is constituted as the withholding agent.
 No withholding of tax shall be required on the SMW, including holiday
pay, night shift differential and hazard pay of MWEs in the
private/public sectors.
 The tax withheld by the ers from the compensation income of the ees
is considered as the tax aid by the recipient of the income.
 The tax deducted and withheld at source on compensation income
shall neither be allowed as a deduction from the er’s gross income or
from the recipient’s gross compensation income.
 The creditable tax withheld at source, however. Is allowable as a
credit against the tax imposed by the NIRC to the recipient of the
income.
 Any excess of the tax withheld at source, over the tax ascertained to
be due on the income tax return shall be refunded or automatically
credited, at the taxpayer’s option, to the recipient of the income.
 Any excess of the tax which was withheld on compensation over the
tax due from the taxpayer shall be returned not later than July 15 of
the following year.
 Refunds made after such time shall earn interest at the rate of 6%
per annum, starting after the lapse of the 3 month period up to the
date when the refund is made.
 The withholding exemptions to which an ee is entitled depends upon
his status and the number of dependents qualified for additional
exemptions.
 Individual taxpayers regardless of status are entitled to P50K
personal exemption.
 An individual, whether single or married, shall be allowed an
additional exemption of P25K for each qualified dependent child,
provided that the total number of dependents for which additional
exemptions may be claimed shall not exceed 4 dependents.
 Taxpayer who died during the taxable year may still claim personal
and additional exemption for himself and his dependents.
 If the spouse or any of the dependents dies or if any of such
dependents marries, becomes 21 years old or becomes gainfully
employed during the taxable year, the taxpayer may still claim the
same exemptions as if such happened at the close of such year.
 Where both husband and wife are each recipients of compensation
either from the same or different ers, taxes to be withheld on the ff
basis:
a. The husband shall be deemed the proper claimant of the
additional exemption in respect to any dependent children,
unless he explicitly waives his right in favor of his wife in the
application for registration or in the withholding exemption
certificate.
b. In general, taxes shall be withheld from the wages of the wife in
accordance with the schedule for a married person without any
qualified dependent.
 Compensation for services rendered in the Philippines paid to
nonresident aliens engaged in trade or business shall also be subject
to withholding tax on compensation just like a resident alien.
 There shall also be imposed a final withholding tax of 15% on the
salaries, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances paid to its alien ees
occupying managerial and technical positions and Filipino ees
59
occupying similar positions by ROHQs, OBUs and Petroleum Service
contractors and sub-contractors.
 The following are liabilities of the er for the tax:
1. In general, the er shall be responsible for the withholding and
remittance of the correct amount of tax required by deducting
and withholding from the compensation income of his ees.
2. The er, who required to collect, account for and remit any tax
imposed by the NIRC, who willfully fail to collect such tax, or
account for and remit such tax or willfully assist in any manner to
evade any payment thereof, shall in addition to other penalties,
to a penalty equal to the amount of the tax not collected nor
accounted for or remitted.
3. Any er/withholding agent who fails or refuses to refund excess
withholding tax not later than Jan 25 of the succeeding year
shall, in addition to any penalties, be liable to the total amount of
refund which was not refunded to the ee resulting from any
excess of the amount withheld over the tax actually due on their
return.
 The following are the violations that may be committed by the
er/withholding agent relative to withholding taxes on compensation
and its year-end adjustment:
1. Non-withholding of tax
2. Under withholding
3. Non-remittance
4. Underremittance
5. Late remittance
6. Failure to refund excess taxes withheld to its ees.
 Liabilities of the ee for the tax. Where an ee fails or refuses to file an
application of refistration or certificate to update of exemption and the
er’s and ee’s information, together with the attachments, or willfully
supplies false or inaccurate information thereunder after due written
notice by the er, the tax otherwise to be withheld by the er shall be
collected from him including penalties or additions to the tax from the
due date of remittance until the date of payment.
 Where the ee, after due written notice form the er, willfully fails or
refuses to file the application for registration, or the certificate of
update of exemption and the er’s and ee’s information, whichever is
applicable, or willfully supplies false and inaccurate information, the
excess taxes withheld by the er shall not be refunded to the ee but
shall be forfeited in favor of the government.
 Persons having control of the payment of wages or salaries are
authorized to deduct and withhold upon such wages or salaries the
withholding tax due thereon. In this case, the garnishees are the
persons owning debts due to the er or in possession or control of
credits to which the er are entitled. Accordingly, they are authorized
to deduct and withhold the income tax due from the backwages,
allowances and benefits to be paid to ees, and are respectively liable
for such deductions.
 In order to ensure the collection of the appropriate withholding taxes
on wages, garnishees of a judgment award in a labor dispute are
constituted as withholding agents with the duty of deducting the
corresponding withholding tax on wages due thereon in an amount
equivalent to 5% of the portion of the judgment award representing
the taxable backwages, allowances and benefits.
 Failure of the withholding agent of compensation income to remit
withholding taxes is tantamount to non-payment of taxes by payee.
 Substituted filing is when the er’s annual return may be considered as
the substitute ITR of the ee inasmuch as the information provided in
his income tax return would exactly be the same information
contained in the er’s annual return.
 Under substituted filing, an individual taxpayer although required
under the law to file his income tax return, will no longer have to
personally file his own income tax return but instead the er’s annual
information return filed with be considered as the substitute ITR of the
 60

ee inasmuch as the information in the er’s return is exactly the same

information contained in the ee’s return.
 Non-filing is applicable to certain types of individual taxpayers who
are not required under the law to file an income tax return.
 The ee who is qualified for substituted filing of income tax return shall
no longer be required to file income tax return.
 Persons qualified for substituted filing of income tax returns
1. The ee who receives purely compensation income during the
taxable year
2. The ee who receives the income only form one er in the
Philippines during the taxable year
3. The amount of tax due from the ee at the end of the year equals
the amount of tax withheld by the er.
4. The ee’s spouse also complies with all 3 conditions stated
above.
5. The er files an annual information return
6. The er issues BIR Form No. 2316 to each ee.
 Persons not qualified for substituted filing of the ITR
1. Individuals deriving compensation income from two or more ers
concurrently or successively at anytime during the taxable year.
2. Ees deriving compensation income, regardless of the amount,
whether from a single or several ers, during the calendar year,
the income tax of which has not been withheld correctly resulting
to collectible or refundable return.
3. Individuals deriving other non-business, non-profession-related
income in addition to compensation income not otherwise
subject to a final tax.
4. Individuals receiving purely compensation income from a single
er, although the income tax of which has been correctly
withheld, but whose spouse falls under paragraphs a, b and c
above.
5. Nonresident aliens engaed in trade or business in the
Philippines deriving purely compensation income, or
compensation income and other non-business, non-profession
related income.
 Constructive receipt of Compensation Theory. Compensation is
constructively paid when it is credited to the account of or set apart
for an ee so that it may be drawn upon by him at any time although
not then actually reduced to possession.