TAXATION LAW

Income Taxation

By:

Christine Angelica B. Elveña

Associate Dean
Head of the Department of Commercial Laws and Taxation,
Saint Louis University School of Law, Baguio City

I.   YOUR CHECKLIST: TAXABILITY OF INCOME

Existence of Income or Gain

Realization of Gain
Gain is not excluded by law
Type of Taxpayer
Situs of Income
Kind of Income (In order to determine the tax implication = tax rate)

II.   EXCLUSION FROM GROSS INCOME (Section 32 B)

A.   Proceeds of life insurance policies.

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of
the insured shall be excluded from the gross income. However, if there is an agreement to
pay interest thereon, only the interest payments shall be included in gross income.

The exclusion from gross income under this rules pertains to the proceeds of life
insurance, not the premium payments made by the employer for the life insurance policy
of the employee, which shall be subject to tax if the beneficiary is the employee of his
family.

Determine the tax implication:

Problem A:

Mr. A insured the life of his employee, Mr. B, and paid the premiums of the life insurance policy.
Mr. A designated himself as beneficiary. The policy earns interest at the rate of 6% per annum.

1)   Will the premium payments be considered as taxable income of Mr. B?

The premium payments will not form part of Mr. B’s gross income because of the non-
existence of gain realized by Mr. B. No benefit redounded in favor of Mr. B.
2)   Can Mr. A recognize the premium payments as deductible expense (allowable
deduction)?

Premiums paid on any life insurance policy covering the life of any officer or employee,
when the taxpayer (employee) is directly or indirectly a beneficiary under such policy, are
not deductible.

Since Mr. A is the beneficiary under the life insurance policy of Mr. B, the premiums are
not deductible.

3)   If Mr. B dies, are the proceeds considered as taxable income of Mr. A?

The amount of proceeds is excluded from the taxable income of Mr. A because it is in the
nature of proceeds of life insurance paid to a beneficiary.

4)   If Mr. B dies and at the time of his death, there is an accrued interest on the policy, is
the interest taxable?

The interest earned shall be included in the gross income. However, the proceeds of life
insurance remain to be excluded from the gross income.

5)   If Mr. B dies, will the proceeds form part of the gross estate of Mr. B?

The inclusion of the proceeds to the gross estate will depend on the nature of the
designation of the beneficiary.

It will form part of the gross estate if the designation is a(n):

1.)   revocable designation and the right to revoke was exercised during the life of the
policy; or
2.)   irrevocable designation and the designated beneficiary is the estate or the estate’s
executor or administrator

It will not form part of the gross estate if the designation is a(n):
1.)   revocable designation and the right to revoke was not exercised during the life of
the policy; or
2.)   irrevocable designation and the designated beneficiary is not the estate or the
estate’s executor or administrator

Problem B:

Mr. A insured the life of his employee, Mr. B, and paid the premiums of the life insurance policy.
Mr. B designated his wife and children as beneficiaries. The policy earns interest at the rate of 6%
per annum.

1)   Will the premium payments be considered as taxable income of Mr. B?

The premium payments will form part of Mr. B’s gross income because of the existence of
gain realized by Mr. B. If Mr. B were a rank-and-file employee, the premium payment
will be subject to normal tax or graduated tax rates (apply 90k threshold). If Mr. B were a
managerial or supervisory employee, the premium payment will be subject to fringe
benefit tax at the rate of 35% of the gross-up monetary value (90k threshold is not
applicable)..
 6)   Can Mr. A recognize the premium payments as deductible expense (allowable
deduction)?

Premiums paid on any life insurance policy covering the life of any officer or employee,
when the taxpayer (employee) is directly or indirectly a beneficiary under such policy, are
not deductible.

Since Mr. A is not the beneficiary under the life insurance policy of Mr. B and the
expenditure is necessary for the trade or business carried on by Mr. A, the premiums are
legitimate business expenses. Hence, these are deductible from the gross income.

7)   If Mr. B dies, are the proceeds considered as taxable income of the wife and the
children?

The proceeds are excluded from the taxable income of the wife and the children because
the amount received is in the nature of proceeds of life insurance paid to a beneficiary.

8)   If Mr. B dies and at the time of his death, there is an accrued interest on the policy, is
the interest taxable?

The interest earned shall be included in gross income. However, the proceeds of life
insurance remain to be excluded from the gross income.

9)   If Mr. B dies, will the proceeds form part of the gross estate of Mr. B?

The inclusion of the proceeds to the gross estate will depend on the nature of the
designation of the beneficiary.

It will form part of the gross estate if the designation is a(n):

1.)   revocable designation and the right to revoke was exercised during the life of the
policy; or
2.)   irrevocable designation and the designated beneficiary is the estate or the estate’s
executor or administrator

It will not form part of the gross estate if the designation is a(n):
1.)   revocable designation and the right to revoke was not exercised during the life of the
policy; or
2.)   irrevocable designation and the designated beneficiary is not the estate or the estate’s
executor or administrator

B.   Amount Received by Insured as Return of Premium

Problem C

Using the facts in Problem A or Problem B, if Mr. B survives a period stipulated upon with the
insurer, such that it will be him (Mr. B) who will receive the future value of the insurance, are the
proceeds be subject to tax?

The return of premium is not subject to tax but the excess over the amount of premiums
paid shall be subject to tax, including the interest.

C.   Gifts, Bequests, and Devises.

 Type of Gratuitous
Transfer
Transfer during the
lifetime (Donation inter
vivos)
Transfer that takes effect
after the death of the
decedent (Donation mortis
causa)
Intestate or Testate
Succession
Transfer for Insufficient
Consideration (It does not
apply to sale of real property
classified as a capital asset)
Tax Implication Applicable Tax
Rates
Donor – Donor’s Tax 6% of the net gifts in
excess of
Donee – No tax implication Php250,000 for
because gifts are excluded from every calendar year
the gross income (regardless of
whether the parties
be relatives or
strangers).
Donor / Decedent – Estate Tax 6% of the net estate
Donee / Heir - No tax implication
because bequests and devises are
excluded from the gross income.
Decedent – Estate Tax 6% of the net estate
Heirs - No tax implication because
bequests and devises are excluded
from the gross income.
Transferor – Donor’s Tax or Estate For Donor’s Tax:
Tax, depending on the date of
effectivity of the transfer. 6% of the net gifts in
excess of
Transferee - No tax implication Php250,000 for
because gifts, bequests and devises every calendar year
are excluded from the gross (regardless of
income. whether the parties
be relatives or
strangers).
For Estate Tax:
6% of the net estate
Amount to be
included to the
gross gift or gross
estate:
The difference
between the
consideration and
the market value of
the property. For
estate tax, however,
the market value is
to be determined at
the time of death.
Transfer to educational Transferor – Donor’s Tax or Estate If taxable:
and/or charitable, Tax, depending on the date of
religious, cultural or social effectivity of the transfer, EXCEPT For Donor’s Tax:
welfare corporation, when the following requisites for
institution, accredited tax exemption are present: 6% of the net gifts in
nongovernment (a)   The recipient institution is excess of
organization, trust or a nonprofit institution. Php250,000 for
philanthrophic (b)   not more than thirty every calendar
organization or research percent (30%) of said gifts, year.
institution or organization bequest or devise shall be used
by such recipient for For Estate Tax:
administration purposes.
6% of the net estate
Transferee - No tax implication
because gifts, bequests and devises
are excluded from the gross
income.

Transfers to to or for the It is not subject to any type of tax.

use of the National
Government or any entity
created by any of its
agencies which is not
conducted for profit, or to
any political subdivision of
the said Government;

Any contribution in cash or Transferor – It is not subject to 6% of the net gifts in

in kind to any candidate, donor’s tax if the following excess of
political party or coalition requisites are complied with: Php250,000 for
of parties for campaign (a)   submission of Statement of every calendar
purposes Contributions and year.
Expenditures (SOCE)
(b)   utilization of the
contribution
*** Expenses that were not
subjected to the 5 percent CWT
are not considered utilized
campaign funds. (see
discussion below)

(c)   contribution must be

utilized during the campaign
period

Transferee – subject to income tax

if the contribution was not utilized.
The following are deemed
unutilized contributions:
 (a)   Expenses that were not
subjected to the 5 percent
CWT
(b)   All contributions, if the
candidate fails to file SOCE.

Revenue Regulation 8-2009 obligates the candidates and the political parties to act as
withholding agent for the 5% creditable withholding tax (CWT) due on income payments
made for all campaign expenditures, and on contributors/supporters, for purchases of
goods and services intended to be given as campaign contribution to political parties and
candidates. Expenses that were not subjected to the 5% CWT are not considered utilized
campaign funds, and the candidates, political parties/ party-list groups are precluded
from claiming such expenditures as deductions from his/her/its campaign contributions.
As such, the full amount corresponding to said expense shall be reported as unutilized
campaign funds subject to income tax.

D.   Compensation for Injuries or Sickness.

(1)   Amounts received, through Accident or Health Insurance or under Workmen's

Compensation Acts, as compensation for personal injuries or sickness,
(2)   Amounts of any damages received, whether by suit or agreement, on account of
such injuries or sickness.

This exclusion includes actual, moral, exemplary and nominal damages received by an
employee or his heirs pursuant to a final judgment or compromise agreement arising out
of or related to an employer-employee relationship.

Determine the tax implication:

1.)   A female employee received a special leave benefit of two months with full pay based on her
gross monthly compensation following surgery caused by gynecological disorders. Will it be
subject to tax?

The items or transactions considered as compensation for injuries or sickness under

the NIRC specifically cover amounts received by an insured or his estate or
beneficiaries through accident or health insurance or under workmen’s compensation
acts, and do not include the special leave of female employees under RA 9710. The
benefit should be included as part of their gross income subject to income tax, and
consequently, to withholding tax on compensation.

2.)   A female employee received a leave benefit for being a solo parent and a leave for being a victim
of violence. Will the benefit be subject to tax?

The benefits that working women derive from availing of them are considered
compensation income subject to income tax and, consequently, to the withholding tax
since they are not granted tax exemption under the NIRC or pertinent law which
authorizes their grant.

3.)   Ms. A and her minor children instituted an action for damages arising from a crime. The Court
awarded them with actual, consequential, moral and exemplary damages. Separately, Ms. A
also instituted a civil case for the annulment of a sale of real property. The Court granted the
 annulment of the sale with damages and ordered the transfer of the subject property to A. (BIR
Ruling No.026-2018)

(a)   Are the damages awarded by the Court classified as taxable income?

It depends. Pursuant to Section 32 (B) (4) of the Tax Code, compensatory damages,
actual damages, moral damages, exemplary damages, attorney’s fees, and the cost
of the suit are excluded from gross income. However, consequential damages
representing loss of the victim’s earning capacity are not excluded from gross
income. Such consequential damages are mere replacements of income which
would have been subjected to tax, if earned. Thus, only the consequential damages
is subject to income tax.

(b)   Is the transfer of the real property in satisfaction of the Court’s award for damages
taxable?

It depends. The phrase “other disposition” includes within its purview all kinds
of dispositions of real property under Section 24 (D) (1) of the Tax Code, unless
specifically excluded therefrom or subjected to another tax treatment.
Considering, however, that the transfer of the subject property is for the
satisfaction of the Court’s award for damages in favor of Ms. A, the taxability of
said transfer must be qualified. The current fair market value of the property,
determined in accordance with Section 6 (E) of the Tax Code, which corresponds
to the award of compensatory, actual, moral, exemplary damages, attorney’s fees,
and the cost of the suit is exempt from CGT and DST. On the other hand, the
current fair market value of the property corresponding to the amount of
consequential damages representing loss of the victim’s earning capacity
including legal interest is subject to CGT and DST.

E.   Income Exempt under Treaty.

This is pursuant to International Comity, which is an inherent limitation of the power to

taxation.

F.   Retirement Benefits, Pensions, Gratuities, etc.-

As a general rule, retirement benefits are subject to tax. It will be excluded from the gross
income when the following requisites are present:

RA 4917 RA 7641
With CBA Without CBA

Existence of a Having a RPBP is It is not a requirement for tax

reasonable private requirement for tax exemption of retirement benefits
benefit plan (RPBP) exemption of
retirement benefits
Age requirement 50 years of age 50 years of age 60-65 years of
age (Although
the regulations
provide for a
 qualifying age
of 50 years in
order to avail of
the tax
exemption, the
employee
cannot avail of
the benefit
under the RA
7641 if the
employee is
below 60 years
of age or above
65 years of age)
Length of service 10 years, same 10 years, same For purposes of
required for tax employer employer determining tax
exemption exemption, the
employee
should be in
service of the
same employer
for at least 10
years (to avail of
the retirement
benefit, the
employee is
merely required
to render
service for at
least 5 years)
Availed of the It is a requirement It is a requirement It is a
benefit once requirement

Memory aid (Tax exemption):

RA 4917: 50-10-once
RA 7641 (CBA) : 50-10-once
RA 7641 (without CBA): 60/65 – 5 - once

If employee dies, the retirement benefits will be INCLUDED in the gross estate but will
be DEDUCTED from the gross estate in computing the amount of net estate. (ADD then
DEDUCT)

G.   Separation Pay

Separation pay received by an employee, or his heirs, because of death, sickness, or other
physical disability, or for any cause beyond the control of the employee, is exempt from
income tax, and consequently from withholding tax pursuant to Section 32(B)(6)(b) of the
Tax Code. Causes beyond the control of the employee includes authorized causes such as
retrenchment due to redundancy or installation of labor-saving devices, or due to closure
of the business. These causes do not include the just causes in terminating employer-
employee relationship.
H.   Income Derived by Foreign Government.

This is pursuant to International Comity, which is an inherent limitation of the power to

taxation.

I.   Income Derived by the Government or its Political Subdivisions.

This is pursuant to inherent limitation of the power to taxation that the government enjoys
tax exemption. This extends to the Republic of the Philippines, its political subdivisions
and its instrumentalities.

However, this exclusion is not applicable to income derived by government-owned and

controlled corporations.

Income of Instrumentality = Exempt

Income of GOCC = Not exempt, unless its charter provides for tax
exemption.

J.   Prizes and Awards

As a general rule, prizes and awards are subject to tax. Prizes in the amount of Php10,000
or less are subject to normal tax. Prizes in the amount of more than PHp10,000 are subject
to 20% FWT.

The following prizes are exempt:

A.)  Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement, if:
(1)   The recipient was selected without any action on his part to enter the contest or
proceeding.
(2)   The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
B.)   Prizes and awards in sports competition
(1)   The prize was granted to athletes in local and international sports competitions.
(2)   The tournament was sanctioned by their national sports associations. "National
sports association" shall mean those duly accredited by the Philippine Olympic
Committee. (RA 7549)

K.   De Minimis Benefits

The following are the de minimis benefits:

1.   Monetized unused vacation leave credits of private employees not exceeding 10 days
during the year;
2.   Medical cash allowance to dependents of employees, not exceeding P1,500 per
employee per semester or P250 per month;
3.   Rice subsidy of P2,000 or one 50-kg sack of rice per month worth not more than
P2,000;
4.   Uniforms and clothing allowance not exceeding P6,000 per annum;
5.   Actual medical assistance not exceeding P10,000 per annum;
6.   Laundry allowance not exceeding P300 per month;
 7.   Employees’ achievement awards, which must be in the form of tangible personal
property other than cash or gift certificates, with an annual monetary value not
exceeding P10,000 received by the employee under an established written plan which
does not discriminate in favor of highly paid employees;
8.   Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
9.   Daily meal allowance for overtime work and night/graveyard shift not exceeding
25% of the basic minimum wage; and
10.   Benefits received by an employee by virtue of a Collective Bargaining Agreement
(CBA) and productivity incentive schemes, provided the total annual monetary value
received from both CBA and productivity incentive schemes combined do not exceed
P10,000 per employee per taxable year.

The enumeration is exclusive. All other benefits given by employers, which are not
included in the above-enumeration, shall not be considered as de minimis benefits.

Before Jan. 1, 2018 After Jan. 1, 2018

Medical cash allowance to 750 per semester 1,500 per semester
dependents
Rice subsidy 1,500 per month 2,000 per month
Uniform and clothing 5,000 per annum 6,000 per annum
allowance

What shall be the treatment of the de minimis benefits given to employees which are beyond the
prescribed amount of benefits?(RMC 50-2018)

The benefits given in excess of the maximum amount allowed as a de minimis benefits shall
be included as part of “other benefits” which is subject to Php90,000 ceiling. Any amount
in excess of the Php90,000 ceiling shall be subject to income tax using graduated tax rates.

L.   13 Month Pay and Other Benefits.

th

13 month pay and other benefits in the amount of Php90,000 shall be exempt.
th

Php90,000 : Exempt
More than Php90,000 : Php90,000 is exempt; excess is subject to tax

What is the treatment for the Premium on Health Card paid by the employer for the “rank and file”
employees, as well as those employees holding “managerial and supervisory” function? (RMC 50-
2018)

Premium on Health Card paid by the employer for all employees, whether rank-and-file
or managerial, under a group insurance shall be included as part of other benefits, which
are subject to the Php90,000 threshold. However, individual premiums (not part of group
insurance) paid for selected employees holding managerial or supervisory functions are
considered fringe benefits subject to 35% fringe benefit tax.

What would be the treatment of additional income as a result of the benefits provided under the
Attrition Law wherein employees who are performing well will receive rewards?(RMO 50-2018)
 The said additional income, whether in the form of cash or reward in kind, shall form part
of compensation income subject to income tax, and consequently, withholding tax on
compensation.

What would be the treatment of commission given to an employee in addition to the regular
compensation received from the same employer? (RMC 50-2018)

The commission received from the same employer shall be considered as supplementary
income. It shall be added to the regular compensation subject to income tax and
consequently to withholding tax.

M.   GSIS, SSS, Medicare and Other Contributions

Under the TRAIN Law, there is no change in the provision of law excluding the
mandatory deductions from gross compensation of employees, such as SSS, GSIS,
Philhealth and Pag-ibig contributions (limited to compulsory contributions), as well as
union dues. They are deductible to arrive at the taxable compensation income. (RMC 50-
2018)

N.   Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness

Gains realized from the same or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five (5) years shall be excluded
from gross income, thus, they are exempt from tax.

Differentiate this from interest income earned from long-term deposit:

Gains from sale of bonds Interest income

Requisites for tax Holding period is more
exemption than 5 years
Trading The income is derived from
the trading or sale of the
bonds.
Tax Treatment Net gain is subject to
normal tax (graduated tax
rates)
Holding period is at least 5
years (Long-term deposit)
The income is derived from
the interest income arising
from the holding of the
bonds, loans or securities.
The interest income is
subject to:
a)   20% final
withholding tax
(holding period is less
than 5 years), if the
income was earned from
bank deposit or deposit
substitute;
b)   normal tax, if the
interest was earned from
facilities other than bank
deposit or deposit
substitute

What is a deposit substitute?

 The term 'deposit substitutes' shall mean an alternative form of obtaining funds from the
public (the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time).

20 or more lenders = deposit substitute = interest income is subject to 20% FWT

less than 20 lenders = not a deposit substitute = interest income is subject to normal tax

O.   Gains from Redemption of Shares in Mutual Fund

Gains realized by the investor upon redemption of shares of stock in a mutual fund
company, which is an open-end and close-end investment company as defined under the
Investment Company Act shall be excluded from gross income, thus, they are exempt
from tax.

P.   Minimum Wage Earners

Minimum Wage Earner (MWE)- refers to a worker in the private sector who is paid with
a statutory minimum wage (SMW) rates, or to an employee in the public sector with
compensation income of not more than the statutory minimum wage rates in the non-
agricultural sector where the worker/employee is assigned.

The basic salary, including the overtime pay holiday pay, night shift differential and
hazard pay. 13 month pay and other benefits in the amount of Php90,000 and de minimis
th

benefits are exempt from tax. Income other than those mentioned forms part of the taxable
income.

Q.   Senior citizen

Income of senior citizens who are considered to be minimum wage earners shall be
exempt from tax.

R.   Taxable income in the amount of Php250,000

The tax on all income subject to normal income tax shall be computed based on the
graduated tax rates. Based on the tax table, net taxable income in the amount of
Php250,000 or less shall be exempt from tax.

III.   TYPE OF TAXPAYER

A.   Individual Taxpayer

1.   Resident citizen – resident and citizen of the Philippines

2.   Non-resident citizen – a citizen who:
a.   establishes to the satisfaction of the Commissioner the fact of his physical presence
abroad with a definite intention to reside therein;
b.   leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis;
c.   works and derives income from abroad and whose employment thereat requires
him to be physically present abroad most of the time during the taxable year;
d.   has been previously considered as nonresident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a nonresident citizen for the taxable year
 in which he arrives in the Philippines with respect to his income derived from
sources abroad until the date of his arrival in the Philippines.

3.   Resident Alien - an individual whose residence is within the Philippines and who is
not a citizen thereof.

4.   Non-resident alien engaged in trade or business – a non-resident alien who is engaged

in business in the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a 'nonresident alien doing
business in the Philippines.

5.   Non-resident alien not engaged in trade or business – a non-resident alien who is not
engaged in business in the Philippines

RC NRC RA NRAETB NRANETB

Component of Gross Within Within Within Within Within
Income and
without
Allowable Deductions Itemized Itemized Itemized Itemized or No
or or or Optional deductions
Optional Optional Optional Standard
Standard Standard Standard Deduction
Deduction Deduction Deduction
Filing of tax return Required Required Required Required Not
required
Substituted Filing (for Qualified Qualified Qualified Not Not
purely compensation qualified qualified
income earners)

B.   Corporate Taxpayer
1.   Domestic corporation – a corporation established under the laws of the Republic of
the Philippines.
2.   Resident Foreign Corporation - a foreign corporation engaged in trade or business
within the Philippines.
3.   Non-resident foreign corporation- a foreign corporation not engaged in trade or
business within the Philippines.

DC RFC NRFC
Component of Gross Income Within and Within Within
without
Allowable Deductions Itemized or Itemized or No deductions
Optional Optional
Standard Standard
Deduction Deduction
Filing of return Required Required Not required

C.   Estates and Trusts

1.   Estate – When an estate is being judicially settled, the income earned after death and
pending the settlement of the estate shall be reported by the estate as a separate and
distinct taxpayer.
2.   Trust – When the trust is an irrevocable trust, the income derived from the property of the
trustor shall be reported by the trust as a separate and distinct taxpayer.

IV.   SITUS OF INCOME

Only resident citizens and domestic corporations shall be subject to tax for income wherever
sourced. Other individual and corporate taxpayers shall be subject to tax for income sourced
from within the Philippines. Hence, it is important to determine the situs of the income.

The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. (CIR v. BOAC, G.R. No. L-65773—74,
April 30, 1987)

Section 42 of the NIRC provides for specific rules on situs:

1.)   Interest Income : place of residence of the debtor

2.)   Dividend Income : depends on the issuer corporation
Issuer is a DC – sourced within the Philippines
Issuer is a RFC – at least fifty percent (50%) of the gross income of such foreign
corporation for the three-year period ending with the close of its taxable year
preceding the declaration of such dividends or for such part of such period as the
corporation has been in existence) was derived from sources within the Philippines =
pro-rate based on the gross income sourced from within that bears over the worldwide
income.

less than fifty percent (50%) of the gross income of such foreign corporation for the
three-year period ending with the close of its taxable year preceding the declaration
of such dividends or for such part of such period as the corporation has been in
existence) was derived from sources within the Philippines = sourced outside the
Philippines

Issuer is a NRFC – sourced without the Philippines

3.)   Services – place where the service was performed

4.)   Rentals and Royalties – place where the property is located or where the right to use the
subject of the royalty shall be exercised

5.)   Sale of Real Property – place where the property is located

6.)   Sale of personal property – (a) Produced or manufactured goods: Gains, profits and
income from the sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly from sources
within and partly from sources without the Philippines.
 (b)Purchased goods - 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
form sources within the country in which sold

(c)   Shares of stock in a domestic corporation – sourced within the Philippines

V.   KIND OF INCOME

After determining the concurrence of the elements of taxability of the income, the type of
taxpayer and the source of the income, the determination of the kind of income must be
made in order to determine the tax implication.

A.   INDIVIDUAL TAXPAYER

1)   COMPENSATION INCOME

a)   Compensation income means all remuneration for services performed by an

employee for his employer under an employer-employee relationship, unless
specifically excluded by the Code. The name by which the remuneration for
services is designated is immaterial.
b)   The salary, OT Pay, holiday pay, night shift differential and hazard pay are subject
to normal tax or graduated tax rates. This applies to both rank-and-file and
managerial employees.
c)   With respect to benefits received by rank-and-file and managerial employees,
determine the nature of benefits. If the benefit received is one of those benefits
listed as de minimis and within the ceiling amount, the benefit is exempt from tax.
If the amount granted exceeds the ceiling amount, the excess shall form part of
other benefits subject to the Php90,000 (formerly pegged at Php82,000) ceiling. The
excess over the Php90,000 shall be subject to normal tax, if the employee is a rank-
and-file employee, or fringe benefit tax, if the employee is a managerial/
supervisory employee.

However, if the benefit received by a managerial/supervisory employee falls

within the hereunder enumeration, the fringe benefit is not subject to the
Php90,000 ceiling and is immediately subject to 35% or 25% (for NRANETB) fringe
benefit tax based on the grossed-up monetary value of the benefit:

1.   Housing;
2.   Expense account;
3.   Vehicle of any kind;
4.   Household personnel, such as maid, driver and others;
5.   Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
6.   Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or other
similar organizations;
7.   Expenses for foreign travel;
8.   Holiday and vacation expenses;
9.   Education assistance to the employee or his dependents; and
 10.   Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows.

Problem:

MRU Company (employer) granted Ms. MHLCO, in addition to her basic

salaries, Php5,000 cash per quarter for her personal membership fees at Country Golf Club.
What tax shall be imposed on the benefit?

Fringe Benefit Tax shall be imposed on the grossed-up monetary value of

the fringe benefit. The amount of Php5,000 is the monetary value of the benefit,
which represents the amount of benefit, net of fringe benefit tax. Hence, in order
to compute the grossed-up monetary value, the actual monetary value of the
benefit received shall be divided by 65% (i.e. 100% less 35% FBT).

MRU Company (employer) granted Ms. MHLCO, in addition to her basic

salaries, Php5,000 cash per quarter for her loyalty allowance. What tax shall be imposed
on the benefit?

In this case, the loyalty allowance is still classified as a fringe benefit.

However, since it does not fall within the above-mentioned enumeration, the
loyalty allowance shall be added to the 13 month pay and other bonuses, which
th

is subject to the Php90,000 ceiling. Any amount in excess of the Php90,000 ceiling
shall be subject to fringe benefit tax.

d)   In arriving at the taxable income, no deductions (itemized deduction or optional

standard deduction) shall be allowed except the mandatory contributions
(SSS/GSIS, Pag-ibig, Philhealth or union due) and the non-taxable items. If the net
taxable income is PHp250,000 or less, the taxable income is exempt from tax.

2)   INCOME FROM BUSINESS, TRADE OR PROFESSION

Income from Business, Trade or Profession shall be subject to the following rules:

a)   PURELY SELF-EMPLOYED / PROFESSIONAL

Gross sales or receipts is P3M or less Gross sales or receipts is more than P3M

Taxpayer has the option to choose Taxpayer has no option.

between:
1. The graduated rates under The net income shall be subject to
Section 24(A)(2)(a) of the Tax
graduated rates under Section 24(A)(2)(a)
Code, as amended; OR
2. An eight percent (8%) tax on of the Tax Code, as amended AND the
gross sales or receipts and other gross sales or receipts is subject to 12%
non- operating income in excess of Value-added Tax.
two hundred fifty thousand pesos
(P250,000.00) in lieu of the
graduated income tax rates under
Section 24(A) and the percentage
tax under Section 116 all under the
Tax Code, as amended.
The option to choose 8% tax is NOT available to:
a.1) VAT registered taxpayers
a.2) Taxpayer who is subject to other percentage tax (OPT), such as common
carriers and operators of water and gas utilities.
a.3) Partners of General Professional Partnership by virtue of their distributive
share

b)   MIXED INCOME EARNER

Mixed Income Earner - an individual earning compensation income from

employment, and income from business, practice of profession and/or other sources
aside from employment.

Gross sales or receipts amount to Gross sales or receipts are more than
P3M or less (EXCLUDING P3M
compensation income) (EXCLUDING compensation income)

With respect to the compensation With respect to the compensation income,

income, the amount of taxable the amount of taxable compensation
compensation income shall be subject income shall be subject to graduated tax
to graduated tax rates. rates.

With respect to the income from With respect to the income from
business, trade or profession, business, trade or profession, the
taxpayer has the option to choose taxpayer has no option. The net income
between: derived from business, trade or
1. The graduated rates under profession shall be subject to graduated
Section 24(A)(2)(a) of the Tax rates under Section 24(A)(2)(a) of the Tax
Code, as amended; OR Code, as amended AND the gross sales
2. An eight percent (8%) tax on or receipts is subject to 12% Value-added
gross sales or receipts and other Tax.
non- operating income in lieu of
the graduated income tax rates
under Section 24(A) and the
percentage tax under Section
116 all under the Tax Code, as
amended. (The amount of
Php250,000 is not deducted
from the gross sales/gross
receipts)

Reminder:

Compensation income is ALWAYS subject to graduated tax rates. It will NEVER be

subject to value-added tax or other percentage tax.

The amount of gross sales or gross receipts pertains to the amount earned from
business, trade or profession only. The amount of compensation income is not added
to the amount of gross sales or gross receipts in order to determine the 3M threshold.
 Mixed income earners can no longer deduct Php250,000 from the gross sales or gross
receipts.

If the compensation income is more than 3M and the income from profession or
business is less than 3M, the taxpayer can still exercise his option to choose between
8% and graduated tax rate with respect to the professional or business income.

If the taxpayer is a minimum wage earner and earns income from business, there will
still be no Php250,000 deduction.

The 8% option applies only to self-employed individuals or professionals

(individuals earning income from business, trade or profession) whose gross
receipts or gross sales do not exceed Php3M.

The differences between graduated income tax rates and 8% income tax rates are:

Particulars Graduated IT Rates 8% IT Rates

Applicability In general, applicable to May be availed by
all individual taxpayers qualified individuals
engaged in business /
practice of profession
whose gross sales/receipts
and other non-operating
income did not exceed
Php3M.
Basis of IT Net taxable income Gross sales/receipts and
other non-operating
income
Allowable Deductions Allowable itemized or Allowed reduction of
OSD Php250,000 from gross,
only for individual whose
income comes purely from
business/practice of
profession; otherwise, no
reduction / deduction
allowed
Business Tax OPT / VAT If qualified: Not subject to
OPT/VAT
Required FS 1.   If itemized: If qualified: no FS required
FS – if gross is less than
Php3M
Audited FS 0 if gross is
more than Php3M

2.   If OSD: no FS
required

3)   PASSIVE INCOME (D-R-I-P)

a)   Dividend Income

a.1) cash dividend – it is subject to tax based on the fair value of the cash received
 a.2) property dividend – it is subject to tax based on the fair market value of the
property received.

a.3) stock dividend – As a general rule, stock dividend is not subject to tax, except:

a.3.1) When the corporation gave an option to the stockholders to choose

between cash (or property) dividend or stock dividend and some of the
stockholders chose cash (or property) dividend.
a.3.2) The redemption or cancellation of stock dividends, depending on the
"time" and "manner" it was made, is essentially equivalent to a distribution of
taxable dividends," making the proceeds thereof "taxable income" "to the extent it
represents profits".

a.4) liquidating dividend – It is not subject to tax up to the extent that the
liquidating dividend represents return of investment.

Memory aid as to taxability of dividends:

ISSUER RECIPIENT
RC NRC RA NRAEBT NRANEBT DC RFC NRFC

DC 10% 10% 10% 20% FWT 25% FWT Exempt Exempt 30%/
FWT FWT FWT 15% (if
tax
sparing
applies)
RFC NIT NIT, for NIT, for NIT, for 25%, for NCIT NCIT, for 30%
income income income income income FWT, for
sourced sourced sourced sourced sourced income
within within within within within sourced
within
NRFC NIT Not Not Not taxable Not taxable NCIT Not Not
taxable taxable taxable taxable

*NIT – Normal Income Tax

* NCIT – Normal Corporate Income Tax
* Inter-corporate dividend principle: Dividend income declared by a DOMESTIC
CORPORATION in favor of another DOMESTIC CORPORATION or a
RESIDENT FOREIGN CORPORATION shall be exempt from tax.
* Tax Sparing Rule: When a non-resident foreign corporation receives dividend
income from a domestic corporation, the lower rate of 15% (instead of 30%) shall
be imposed if the domiciliary country of the non-resident foreign corporation
grants a tax credit at least equivalent to the tax forgone in the Philippines.

b)   Royalties

Royalties are subject to 20% FWT, except when the royalties were earned from
literary works, books and musical compositions (LBM).

In case of royalties earned from LBM, 10% FWT shall be imposed.

 Memory Aid:

RC NRC RA NRAETB NRANETB DC RFC NRFC

Royalties 20% 20% 20% 20% FWT 25% FWT 20% 20% 30%
FWT FWT FWT FWT FWT FWT

10% 10% 10% 10% FWT,

FWT, FWT, FWT, LBM
LBM LBM LBM

c)   Interest Income

Type of Interest Earned Tax Implication

Interest income from bank deposit -Peso 20% FWT
account
Interest income from deposit substitute (20 or 20% FWT
more lenders) – Peso account
Interest income from bank deposit – foreign 15% FWT for residents
currency account (previously pegged at 7.5%)

Exempt for non-residents

Interest income from deposit substitute (20 or 15% FWT for residents
more lenders) – foreign currency account (previously pegged at 7.5%)

Exempt for non-residents

Interest income from loans and other facilities Normal tax
which do not qualify as a deposit substitute
(less than 20 lenders)- peso account
Interest income from loans and other facilities Normal tax
which do not qualify as a deposit substitute
(less than 20 lenders)- foreign currency
account

The following are the interest income exempt from tax:

(a)   Interest income earned by a non-resident (whether citizen or alien) from bank
deposit or deposit substitute under the expanded foreign currency system
(EFCDS).
(b)   Interest income earned from long-term deposit (holding period of at least 5
years), except when the deposit is pre-terminated. if it is pre-terminated, the
interest income shall be subject to the following rates:

5%- 4 years to less than 5 years had lapsed

12%- 3 years to less than 4 years had lapsed
20%- less than 3 years had lapsed

Memory Aid:

Type of RC NRC RA NRAEBT NRANEBT DC RFC NRFC

Income
 Interest 20% 20% 20% 20% FWT, 25% FWT 20% 20% 30%
Income from FWT, FWT, FWT, except FWT FWT FWT,
bank except except except long-term except
deposits and long- long- long- deposit interest
deposit term term term on
substitute deposit deposit deposit foreign
loans,
20%
FWT

Interest 15% Exempt 15% Exempt Exempt 15% 7.5% Exempt

Income from Final Final Tax Final FWT
bank Tax Tax
deposits and
deposit
substitute
(EFCDS –
foreign
account)
Interest Normal Normal Normal Normal 25% FWT NCIT NCIT 30%
Income, tax tax tax tax FWT,
which is not except
sourced interest
from bank on
deposits and foreign
deposit loans,
substitute 20%
FWT

Reminder:

The rate of 15% FWT imposed on interest income from bank deposit and
deposit substitutes under EFCDS is applicable beginning 01 January 2018, which
is the effectivity date of the TRAIN Law (RA No. 10963). The rate imposed on
interest income (EFCDS) earned by a resident foreign corporation was not
amended.

d)   Prizes and Winnings

As a general rule, prizes and winning are subject to 20% FWT, except:

a)   Prizes amounting to P10,000 or less shall be subject to normal tax.

b)   Prizes that are excluded from the gross income (see discussion on exclusions)
shall be exempt from tax.
c)   PCSO and lotto winnings in the amount of Php10,000 or less shall be exempt
from tax.

RC NRC RA NRAETB NRANETB DC RFC NRFC

Prizes 20% FWT, 20% FWT, 20% FWT, 20% FWT, 25% FWT NCIT NCIT 30%
if more if more if more if more FWT
than 10,000 than 10,000 than 10,000 than 10,000
normal tax, normal tax normal tax normal tax
if 10k or if 10k or if 10k or if 10k or
less less less less
Winnings 20% FWT 20% FWT 20% FWT 20% FWT 25% FWT NCIT NCIT 30%
PCSO and PCSO and PCSO and PCSO and FWT
lotto lotto lotto lotto
winnings: winnings: winnings: winnings:
P10k or P10k or P10k or P10k or
less- less- less- less-
exempt exempt exempt exempt
 More than More than More than More than
10k – 20% 10k – 20% 10k – 20% 10k – 20%

Reminder:

Prior to the effectivity of the TRAIN Law, PCSO and lotto winnings are exempt
from tax, regardless of the amount.

4)   INCOME FROM CAPITAL DEALINGS

Capital dealings are transactions involving capital assets. “Capital assets” means
property held by the taxpayer (whether or not connected with his trade or business),
but does not include: (SIS ReaD)
(a)   stock in trade of the taxpayer;
(b)   Other property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year;
(c)   property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business;
(d)  real property used in trade or business of the taxpayer;
(e)   property used in the trade or business, of a character which is subject to the
allowance for depreciation.

The above-enumerated properties are ordinary assets.

The proper classification of the asset is necessary in determining the tax implication
of the sale of the same.

Type of Transaction Ordinary Asset Capital Asset

Sale of Real Property Regular or normal Capital Gains Tax based
income tax on the gross selling price,
based on the net income or zonal value, or
assessed value,
AND whichever is highest

Other Percentage Tax

(OPT) or VAT
based on gross sales
------
OR

8% option, if gross sales

Sale of Personal Property,
except sale of shares of
stock
during the year will not
exceed 3M
Regular or normal
income tax Regular or normal
based on the net income income tax
based on the net income
AND

OPT or VAT
based on gross sales
------
OR
 8% option, if gross sales
during the year will not
exceed 3M
Regular or normal
Sale of shares of stocks income tax 6/10 of 1% stock
listed in the stock based on the net income transaction tax based on
exchange the gross selling price
AND

VAT
based on gross sales
(RR 16-2012)

Regular or normal
Sale of share of stock not income tax 15% final tax based on the
listed in the stock based on the net income net capital gain
exchange
AND

OPT or VAT
based on gross sales

------
OR

8% option, if gross sales

during the year will not
exceed 3M

Reminders:

The tax implication involving sale of ordinary assets is the same for both sales of real
and personal properties.

Prior to 01 January 2018, sale of listed shares of stocks is subject to ½ of 1% based on

the gross selling price.

Prior to 01 January 2018, sale of unlisted shares of stocks is subject to 5% for the first
P100,000 net capital gain and 10% for the excess of P100,000 net capital gain.

Memory Aid:

RC NRC RA NRAETB NRANETB DC RFC NRFC

Sale of 6% capital 6% 6% capital 6% capital 6% capital 6% NCIT 30%
real gains tax capital gains tax gains tax gains tax capital FWT
property gains gains
(capital tax tax
asset)
Sale of Normal Norma Normal Normal 25% FWT NCIT NCIT N/A
real and tax/8% l tax/8% tax/8%
personal option, if tax/8% option, if option, if
property gross sales option, gross sales gross sales
if gross
 (ordinary is 3M or sales is is 3M or is 3M or
asset) less 3M or less less
less
AND AND AND
AND
OPT/VAT OPT/VAT OPT/VAT
OPT/
VAT
Sale of Normal Norma Normal Normal 25% FWT NCIT NCIT 30%
personal tax l tax tax tax FWT
property
(capital
asset)
Sale of 6/10 of 6/10 of 6/10 of 6/10 of 6/10 of 1% 6/10 of 6/10 6/10 of
shares of 1% 1% 1% 1% 1% of 1% 1%
stocks
(listed)
Sale of 15% final 15% 15% final 15% final 15% final 15% 15% 15%
shares of tax final tax tax tax final final final
stocks tax tax tax15 tax
(unlisted) %
final
tax

Special rules to remember:

a)   Sale, exchange or disposition of principal residence: The sale of principal residence

is exempt from tax provided that the following requisites concur:

a.1) The sale of the principal residence is for the purpose of acquiring or
constructing a new principal residence.
a.2) The proceeds from sale, exchange or disposition of must be fully utilized
within 18 calendar months from the date of its sale, exchange or disposition.
a.3) The tax exemption herein granted may be availed of only once every ten (10)
years.
a.4) The historical cost or adjusted basis of his old principal residence sold,
exchanged or disposed shall be carried over to the cost basis of his new principal
residence; and
a.5) If there is no full utilization of the proceeds of sale, exchange or disposition of
his old principal residence for the acquisition or construction of his new principal
residence, the unutilized portion shall be subject to capital gains tax.

b)   Sale made in favor of the government: The tax liability, if any, on gains from sales
or other dispositions of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations shall
be determined either under Section 24 (A) or under this Subsection, at the option
of the individual taxpayer. This alternative taxation is not applicable to:

b.1) Sales made by corporate taxpayers;

b.2) Sales made in favor of entities other than government or any of its
political subdivisions or agencies or to government-owned or controlled
corporations;
b.3) Sales involving personal properties;
b.4) Sales involving real properties classified as ordinary assets.

c)   Tax-free exchange: To qualify as a tax-free exchange, a person transfers property

to a corporation in exchange for stocks issued by that corporation, and as a result
 of such exchange, said person, alone or together with others, not exceeding four
(4) persons, gains control of said corporation.

Tax-free exchanges are likewise exempt from value-added tax or other percentage
tax.

d)   Ways to avoid imposition of capital gains tax

d.1) Sale of principal residence 


d.2) There is a sale made in favor of government 

d.3) Sales by reason of Comprehensive Agrarian Reform Law 

d.4) Section 40c – transfer to obtain corporate control

e)   Payment of tax in cases of foreclosure sales

In foreclosure sale and for purposes of determining the accrual of the tax
liability, the tax shall accrue only upon the expiration of the redemption period.
The mortgagor can redeem the property within one year from the date of
registration of the sale in the Office of the Register of Deeds, or three months from
the date of approval by the executive judge of the certificate of sale.

The one-year redemption period shall apply to individual mortgagors or to non-

bank mortgagee. The three-month redemption period shall apply only if the
mortgagor is a juridical entity and the mortgagee is a banking institution.

Foreclosure sales involving capital assets

In cases of foreclosure sales involving capital assets, these are the rules with
respect to the accrual of the tax liability:

(1) In case the mortgagor exercises his right of redemption within one year from
the date of registration of the sale in the Office of the Register of Deeds, or three
months from the date of approval by the executive judge of the certificate of sale,
no capital gains tax shall be imposed because no capital gains have been derived
by the mortgagor and no sale or transfer of real property was realized.

(2) In case of non-redemption, the capital gains tax on the foreclosure sale imposed
under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based
on the bid price of the highest bidder but only upon the expiration of the one-year
or three-month period of redemption, and shall be paid within thirty (30) days
from the expiration of the said redemption period.

Foreclosure sales involving ordinary assets

In cases of foreclosure sales involving ordinary assets, these are the rules with
respect to the accrual of the tax liability:

(1) In case the mortgagor exercises his right of redemption within one year from
the date of registration of the sale in the Office of the Register of Deeds, or three
months from the date of approval by the executive judge of the certificate of sale,
no income tax shall be imposed because no ordinary gains have been derived by
the mortgagor and no sale or transfer of real property was realized.
 (2) In case of non-redemption, the income tax, in the form of creditable
withholding tax, on the foreclosure sale shall become due based on the bid price
of the highest bidder but only upon the expiration of the one-year or three-month
period of redemption, and shall be paid within ten (10) days from close of the
taxable month when the said redemption period expired.

B.   CORPORATE TAXPAYER

Possible taxes imposed on corporate taxpayers

1.   NCIT – It is equivalent to 30% of the net income.

2.   MCIT – The following elements must concur for the imposition of minimum
corporate income tax (MCIT):
(a)   The corporation is either a domestic corporation or a resident foreign
corporation;
(b)   The corporation is not subject to preferential tax rates;
(c)   It is imposed beginning on the fourth taxable year immediately following
the year in which such corporation commenced its business operations. Under
Sec. 2.27 (E)(5) of Revenue Regulations No. 9-98, it is provided that for purposes
of the MCIT, the taxable year within which the business operations commenced
shall be the year in which the domestic corporation is considered registered with
the BIR.
(d)   It is imposed when the minimum income tax is greater than the normal
corporate income tax for the taxable year.

Minimum corporate income tax is equivalent to two percent (2%) of the gross
income as of the end of the taxable year. The term 'gross income' shall mean gross sales
less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold'
shall include all business expenses directly incurred to produce the merchandise to bring
them to their present location and use.

Any excess of the minimum corporate income tax over the normal income tax shall
be carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.

The Secretary of Finance is hereby authorized to suspend the imposition of the

minimum corporate income tax in any of these cases:
(a)   the corporation suffers losses on account of prolonged labor dispute
(b)   the corporation suffers losses by reason of force majeure
(c)   the corporation suffers losses because of legitimate business reverses.

3.   BPRT – The tax is imposed when:

(a)   The corporation is a resident foreign corporation
(b)   The corporation does not enjoy tax exemption under a tax treaty.
(c)   Profits were not derived from qualified activities remitted by a branch
registered with the Philippine Economic Zone Authority. These profits are exempt
from branch profit remittance tax.

Any profit remitted by a branch to its head office shall be subject to a tax of fifteen
(15%) which shall be based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof.
 Interests, dividends, rents, royalties (including remunerations for technical
services), salaries, wages, premiums, annuities, emoluments or other fixed or
determinable annual periodic or casual gains, profits, income and capital gains received
by a foreign corporation during each taxable year from all sources within the Philippines
shall not be considered as branch profits unless the same are effectively connected with
the conduct of its trade or business in the Philippines.

Please note that this is imposed on remittances of branches, not subsidiaries.

Branch Subsidiary (Domestic Corporation)

1.   It is an extension of a resident 1.   It has a separate and distinct
foreign corporation, thus, it does personality from the parent
not have a separate personality. company.

2.   Only the income from sources 2.   All income, whether earned from
within the Philippines shall be sources within or without the
subject to tax. Philippines, shall be subject to tax.

3.   Profits remitted by the branch to its 3.   Dividends paid by a Philippine

head office are subject to branch
profit remittance tax of 15%, or a
lower rate provided under tax
treaties, or exempt, if qualified .
4.   A branch office is not subject to
documentary stamp tax (DST) for
the issuance of shares simply
because it does not issue shares of
stock.
subsidiary to non-resident
shareholders is subject to 30% in
general or 15% subject to certain
conditions or preferential tax
treaty rates.
4.   A subsidiary is liable to pay DST
on the original issuance of shares
of stock.

5.   Subject to certain conditions, 5.   The Philippine subsidiary is not

overhead expenses of the Head entitled to the allocation of
Office may be allocated to the overhead expenses of its parent
Philippine branch office company.

6.   A branch is not liable to pay the 6.   A subsidiary is liable to pay the

10% improperly accumulated 10% improperly accumulated
earnings tax earnings tax

4.   IAET - This tax is being imposed in the nature of a penalty to the corporation for
the improper accumulation of its earnings, and as a form of deterrent to the avoidance of
tax upon shareholders who are supposed to pay dividends tax on the earnings distributed
to them by the corporation.

It will be imposed when:

(a)   The taxpayer is a closely-held domestic corporation. Closely-held

corporations are those corporations at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total combined voting
power of all classes of stock entitled to vote is owned directly or indirectly by or
 for not more than twenty (20) individuals. Domestic corporations not falling under
the aforesaid definition are, therefore, publicly-held corporations.
(b)   Amount of retained earnings is more than 100% of the corporation’s paid-
up capital.
(c)   There is no reasonable need that will justify the accumulation of profits.
the term "reasonable needs of the business" are hereby construed to mean the
immediate needs of the business, including reasonably anticipated needs.

(“Immediacy test”)

Improperly Accumulated Earnings Tax shall not apply to the following

corporations:

a. Banks and other non-bank financial intermediaries;

b. Insurance companies;
c. Publicly-held corporations;

d. Taxable partnerships;

e. General professional partnerships;

f. Non- taxable joint ventures; and

g. Enterprises duly registered with the Philippine Economic Zone Authority
(PEZA) under R.A. 7916, and enterprises registered pursuant to the Bases
Conversion and Development Act of 1992 under R.A. 7227, as well as other
enterprises duly registered under special economic zones declared by law which
enjoy payment of special tax rate on their registered operations or activities in lieu
of other taxes, national or local.

5.   30% FWT- Final withholding tax is imposed upon the earnings of a non-resident
foreign corporation sourced within the Philippines. It may also be imposed on domestic
or resident foreign corporations on transactions that are defined by law to be subject to
final tax.

Exempt Corporations

Section 30 of the NIRC provides the list of corporations exempt from tax. The enumeration
includes non-stock non-profit entities and government educational institutions. There are
two tests in determining entitlement to tax exemption, namely:

(a)   Organizational test

Organizational test requires that the corporation or association is a non-profit corporation

or a government educational institution and its primary purpose is exclusively limited to
those described in Sec. 30 of the 1997 Tax Code.

(b)   Operational test

Operational test requires that the regular activities of the corporation or association be
exclusively devoted to the accomplishment of the purpose specified in Sec. 30 of the 1997
Tax Code. A corporation or association fails to meet this test if substantial part of its
operation is considered an activity conducted for profit.

Notwithstanding the tax exemption, the income of whatever kind and character of the tax-
exempt organizations 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, shall be
subject to tax. Evidently, what determines the taxability of the income is the source thereof,
not its usage.

Type of income Non-stock Non-stock Other entities

nonprofit non-profit under Sec. 30 of the
educational hospital NIRC
institution
Income was derived from the Tax-exempt Tax-exempt Tax-exempt
purpose for which the entity
was established, and was used
for such purpose
Income was derived from Tax-exempt Taxable Taxable
proprietary activity and was
used for the purpose for which
the entity was established
Income was derived from the Tax-exempt Tax-exempt Tax-exempt
purpose for which the entity
was established, and was used
for proprietary purpose (e.g.
purchase of land to be leased).
Income was derived from Taxable Taxable Taxable
proprietary activity and was
used for such or another
proprietary activity

Problem:

1.   X University is a non-stock non-profit educational institution. Is X University exempt from

income tax for the gross receipts it earned from tuition fees and proprietary activities?

Yes. Section 30 of the NIRC provides for tax exemption with respect to income earned
from activities for which the institution was established. In this case, the tuition fees are
income earned from educational service, thus, they are exempt from tax. The income
earned from proprietary activities may be exempt from tax if the income will be used for
educational purpose (Section 4(3), Article XIV of the 1987 Constitution).

2.   X Foundation is a corporation that operates as a social welfare and development agency

implementing community-based programs and services for children with special needs. It is duly
recognized by the DepEd to operate a Complete Elementary Course for Special Children. Is X
Foundation exempt from income tax for the gross receipts it earned from tuition fees and
proprietary activities?

Yes. Section 30 of the NIRC provides for tax exemption with respect to income earned
from activities for which the institution was established. In this case, the tuition fees are
income earned from educational service, thus, they are exempt from tax. The income
earned from proprietary activities is exempt from tax if the income will be used for
educational purpose (Section 4(3), Article XIV of the 1987 Constitution).

3.   X Foundation is a corporation that operates as a non-profit organization established to ensure the

protection of the rights of women. Is X Foundation exempt from income tax for the gross receipts
it earned from subsidies and proprietary activities?
 Yes. Section 30 of the NIRC provides for tax exemption with respect to income earned
from activities for which the institution was established. In this case, the subsidies are
income earned from its main purpose as a non-profit organization, thus, they are exempt
from tax. The income earned from proprietary activities, regardless of the use thereof, is
not exempt because it was sourced from proprietary activities.

4.   X Hospital is a corporation that operates as a non-stock non-profit hospital. Is X Hospital exempt

from income tax for the gross receipts it earned from subsidies and paying patients?

Yes. Section 30 of the NIRC provides for tax exemption with respect to income earned
from activities for which the institution was established. In this case, the subsidies are
income earned from its main purpose as a non-profit organization, thus, they are exempt
from tax. However, the income earned from paying patients, regardless of the use thereof,
is not exempt because it was sourced from proprietary activities. The income is subject to
10% tax based on the net income if 50% or more of its gross income was earned from
hospital related activities.

Special Corporations

1.   Proprietary educational institutions and non-profit hospitals

The net income of proprietary educational institutions and non-profit hospitals is subject
to the preferential rate of 10% if there is compliance with the predominance test.

“Predominance test” means that if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, normal corporate income tax of 30% shall be
imposed on the entire taxable income. Otherwise, the preferential rate of 10% shall be
imposed.

The term 'unrelated trade, business or other activity' means any trade, business or other
activity, the conduct of which is not substantially related to the exercise or performance
by such educational institution or hospital of its primary purpose or function.

Predominance test is applicable to the following:

a)   Income earned by proprietary educational institution;
b)   Income earned by non-stock nonprofit hospital from proprietary activity,
regardless of the manner on how the income was used;
c)   Income earned by non-stock non-profit educational institution from proprietary
activity, which income was not used for educational purpose.

2.   Government-owned or controlled corporations, agencies, or instrumentalities

All corporations, agencies, or instrumentalities owned or controlled by the Government,

except the Government Service Insurance System (GSIS), the Social Security System (SSS),
the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes
Office (PCSO) and the local water districts (LWD), shall pay normal corporate income tax.
 Please take note that PAGCOR is no longer exempt normal corporate income tax.
However, it is exempt from value-added tax with respect to gross receipts from its gaming
operations.

3.   Domestic depository banks (foreign currency deposit units)

The following income of depositary banks shall be exempt from all taxes:

1.)   Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with nonresidents;
2.)   Income earned by local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system

The exemptions mentioned in the above law include branch profit remittance tax,
documentary stamp tax, gross receipts tax, and privilege tax.

Interest income from foreign currency loans granted by such depository banks under said
expanded system to residents other than offshore banking units in the Philippines or
other depository banks under the expanded system shall be subject to a final tax at the
rate of ten percent (10%).

Regular Banking Foreign Currency Offshore Banking

Unit (RBU) Deposit Unit Unit
(FCDU/EFCDU) (OBU)
Tax treatment of 30% NCIT 10% (loans granted 10% (loans granted
Income to residents) OR to residents) OR
exempt (loans exempt (loans
granted to non- granted to non-
residents) residents)

Only costs and expenses attributable to the operations of the RBU can be claimed as
deduction to arrive at the taxable income of the RBU subject to regular Income Tax. Any
cost or expense related with or incurred for the operations of the FCDU or OBU are not
allowed as deduction from the RBU’s taxable income.

4.   International carriers doing business in the Philippines

International carriers doing business in the Philippines shall be subject to the following
taxes:
a.)   Gross Philippine Billings Tax for the revenue earned from transport of passengers,
cargo or excess baggage originating from the Philippines;
b.)   Unless a tax treaty provides for exemption, Branch Profit Remittance Tax for
amount remitted or earmarked for remittance to the head office;
c.)   Normal Corporate Income Tax for the revenue earned from the sale of tickets in
the Philippines but the passengers, cargo or excess baggage will originate outside
the Philippines;
d.)   Percentage Tax, regardless of the amount of gross sales or gross receipts.

Gross Philippine Billings Tax attaches only when the carriage of persons, excess baggage,
cargo, and mail originated from the Philippines in a continuous and uninterrupted flight,
 regardless of where the passage documents were sold. An offline carrier, not having
flights to and from the Philippines, is clearly not liable for the Gross Philippine Billings
tax. However, since an offline carrier is a resident foreign corporation, it is taxable on its
income derived from sources within the Philippines. Its income from sale of airline tickets,
through a local sales agent, is income realized from the pursuit of its business activities in
the Philippines.

5.   Off-shore banking units

Offshore banking units in the Philippines shall be exempt from all taxes with respect to
transactions with non-residents.

6.   Resident foreign depository banks (foreign currency deposit units)

Resident foreign depository banks (foreign currency deposit units shall be exempt from
all taxes with respect to transactions with non-residents.

7.   Regional or area headquarters and regional operating headquarters of multinational

companies

Regional or area headquarters as defined in Sec. 22(DD) shall not be subject to income tax.
'Regional or area headquarters' means a branch established in the Philippines by
multinational companies and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.

Regional operating headquarters as defined in Sec. 22 (EE) shall pay a tax of ten percent (10%)
of their taxable income. 'Regional operating headquarters' means a branch established in the
Philippines by multinational companies which are engaged in any of the limited qualifying
services provided under the NIRC.

Taxes on other business entities

1.   General partnerships

General partnerships or business partnerships are taxed similar to corporate taxpayers.

The income of the partners on the other hand shall be taxed similar to dividend income to the
extent of the amount received by the partners. The receipt of income shall pertain to the amount
actually and constructively received. Section 73 (D) of the NIRC provides that the taxable income
declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this
Code, after deducting the corporate income tax imposed therein, shall be deemed to have been
actually or constructively received by the partners in the same taxable year and shall be taxed to
them in their individual capacity, whether actually distributed or not.

2.   General professional partnerships

General professional partnership is not an income taxpayer, hence, it is not subject to tax. It is
merely a pass-through entity where the partners are the ones proportionately liable for the tax
imposed on the earnings of the partnership.

General Partnerships or General Professional

Income taxpayer with
respect to the earnings of
the partnership
Tax treatment of income
earned by the
partnership
Tax treatment of the
distributive share of the
partners
considered a dividend income
business partnerships (BP)
General Partnership
30% NCIT and other taxes
applicable to corporate
taxpayers
Apply tax rates imposed on
dividend income.
The distributive share is
Partnerships (GPP)
Partners of the GPP
Exempt from tax
The distributive share
shall form part of the
gross income subject to
normal tax.

3.   Co-ownerships

Co-ownerships per se are not subject to tax. They are not considered as partnerships, which are
subject to corporate income taxes. Hence, any division of the profit, which is merely incidental
to the dissolution of the co-ownership, shall not be considered as a dividend income.

Problem:

The Longa heirs inherited a 'hacienda' pro-indiviso from their deceased parents. They did not contribute
or invest additional ' capital to increase or expand the inherited properties. They merely continued
dedicating the property to the use to which it had been put by their forebears. They individually reported
in their tax returns their corresponding shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order 'to preserve its (the 'hacienda') value and to
continue the existing contractual relations with the Central Azucarera de Bais for milling purposes. Is the
co-ownership treated as an unregistered partnership for tax purposes?

The co-ownership is not considered as an unregistered partnership. Hence, it will not be subject
to corporate income tax.

Co-ownerships are not deemed unregistered partnerships. Co-Ownership who own properties
which produce income should not automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax law. To hold otherwise,
would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does
not produce an income at all, it is not subject to any kind of income tax, whether the income tax
on individuals or the income tax on corporation. However, the proportionate income received
by the heirs shall be subject to income tax on individuals.

This case is different from the case of Ona v. Commissioner of Internal Revenue, where heirs allowed
not only the incomes from their respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oña as a common fund in undertaking several
transactions or in business, with the intention of deriving profit to be shared by them
 proportionally. Such act was tantamount to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered partnership
.

Mr. A and Mr. B bought two (2) parcels of land from Mr. C and one year after said purchase, they bought
another three (3) parcels of land from Mr. D. The first two parcels of land were sold by Mr. A and Mr. B
in 2016 to M Corporation, while the three parcels of land were sold by them to Spouses Samson in 2018.
Mr. A and Mr. B realized a net profit in the sale made in 2016 and 2018. Will the net profit be subject to
corporate income tax?

No. The transactions were isolated. The character of habituality peculiar to business transactions
for the purpose of gain was not present. They did not sell the same nor make any improvements
thereon. Hence, no unregistered partnership was created.

The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to
form a partnership, the existence of a juridical personality different from the individual
partners, and the freedom of each party to transfer or assign the whole property.

Mr. A and Mr. B borrowed a sum of money from their father which together with their own personal funds
they used in buying several real properties. They appointed their brother to manage their properties with
full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various
tenants for several years and they gained net profits from the rental income. Thus, the Commissioner of
Internal Revenue assessed the income tax on a corporation from them. Is the assessment proper?

The assessment is well-founded. The series of transactions will show that the purpose was not
limited to the conservation or preservation of the common fund or even the properties acquired
by them. The character of habituality peculiar to business transactions engaged in for the purpose
of gain was present. Thus, there is an unregistered partnership created, which is subject to normal
corporate income tax.

4.   Joint ventures and consortium

Joint ventures or consortium are subject to normal corporate income tax except:
(a)   Joint venture or consortium formed for the purpose of undertaking construction
projects; or
(b)   Joint venture or consortium engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract with the
Government.

Although the income of the aforementioned joint ventures is exempted from the payment of
income tax, members of a joint venture shall be responsible for the reporting and the payment of
the appropriate income taxes on their respective shares in the joint venture profit.

The requirements for the implementation of tax exemptions on joint ventures undertaking
construction projects are as follows:

(a)   Local joint venture or consortium should be:

a.1. For the undertaking of a construction project
a.2. Should involve pooling of resources by licensed local contractors, who are
licensed as general contractor by the Philippine Contractor’s Accreditation Board
(PCAB) of the Department of Trade and Industry (DTI)
 a.3. These local contractors are engaged in construction business;
a.4. The unincorporated joint venture itself must be likewise duly licensed by PCAB
of the DTI.

(b)   Joint ventures involving foreign contractors, member foreign contractor should be:
b.1. Covered by special license as contractor by PCAB of the DTI;
Construction project is certified appropriate Tendering Agency (government agency)
that the project is a foreign financed or internationally funded project.

Absence of one of the requirements will result to the disqualification from tax exemption.

Further, the tax exemption granted to joint ventures and consortium shall not include the
mere suppliers of goods, services or capital to a construction project.

Problem:

An unregistered Amended JV Agreement was executed between A Co., a residential subdivision developer,
and B Co., an owner of land. Both A Co. and B Co. did not submit documents to the BIR showing that they
are duly licensed by the Philippine Contractors Accreditation Board (PCAB) as general contractors.
Neither did the parties submit proof that the JV itself was duly licensed by the PCAB. Is the JV considered
tax exempt?

No. Section 3 of RR No. 10-2012, which implements Section 22 (B) of the Tax Code, provides that
a tax-exempt JV: (a) should be for the undertaking of a construction project; (b) should involve
joining or pooling of resources by PCAB-licensed local contractors; (c) the local contractors are
engaged in construction business; and, (d) the JV itself must likewise be duly licensed by the
PCAB. Absent any one of these requirements, the JV shall be considered a taxable corporation.
Here, the parties failed meet requirements (b) and (d). Consequently, the JV is considered a
taxable corporation.

VI.   DEDUCTIONS

Types of Deductions

1)   Optional Standard Deduction. Requisites of deductibility:

(a)   If the taxpayer is an individual, he must not have availed of the 8% income tax option;
(b)   The amount of deduction is limited to:
40% of the gross sales, in case of individual taxpayers
40% of the gross income, in case of corporate taxpayers
(c)   If the taxpayer is an individual, no deductions shall be allowed from compensation
income.
(d)  If the taxpayer is an individual taxpayer, he must not be a non-resident alien not
engaged in trade or business.

If the taxpayer chose this type of deduction, he/it can no longer avail of itemized
deductions. The election of the option to use OSD is irrevocable for the taxable year for
which the return is made. The election to claim either the itemized or the OSD for the
taxable year must be signified by checking the appropriate box in the income tax return
filed for the first quarter or the initial quarter of the taxable year. Once the election is
made, it must be consistently applied to all the succeeding quarterly returns and in the
final income tax return for the taxable year. The taxpayer cannot shift from OSD to
itemized and vice versa.
2)   Itemized Deduction

Itemized Deductions must be connected with the business, trade or profession of the
taxpayer and duly substantiated with official receipts or other competent proof for those
expenses where the nature of the deduction is not ordinarily covered by official receipts.

BAR ZONES:

a.)   Bad debts

The requisites of deductibility are:

(1)   There must be an existing indebtedness due to the taxpayer which must be valid
and legally demandable;
(2)   The same must be connected with the taxpayer’s trade, business or practice of
profession;
(3)   The same must not be sustained in a transaction entered into between related
parties enumerated under Sec. 36(B) of the Tax Code of 1997;
(4)   The same must be actually charged off the books of accounts of the taxpayer as of
the end of the taxable year; and
(5)   The same must be actually ascertained to be worthless and uncollectible as of the
end of the taxable year.

Related taxpayers are:

1.   between members of the family – spouse, ascendant, descendant, brothers and

sisters (SAD(lineal) BroS)
2.   between an individual and a corporation more than 50% in value of the
outstanding stock of which is owned by or for such individual
3.   between two corporations more than fifty percent in value of the outstanding stock
of each of which is owned by or for the same individual
4.   between 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

b)   General and ordinary expenses

The requisites of deductibility are:

1)   ordinary (reasonably expected in business: e.g. litigation cost) and necessary (tend
to increase income and reduce expense: e.g. advertising expense) for the conduct of
business
2)   substantiated with receipts
3)   reasonable in amount 
(There are expenses subject to limitation. Example,
representation and entertainment expense (1% of GR or 1⁄2% of GS))
4)   withheld with tax and paid to the BIR, if such is required (e.g. salaries and rent)

5)   not contrary to law, morals and public policy (relate to income from whatever
source; e.g. facilitation fees)
6)   incurred or paid and deducted during the taxable year
 Rules when there is failure to withhold taxes:

The expenses that are subject to withholding tax shall be disallowed if the tax was not
withheld from such expense. The examples of these expenses are rent expense,
salaries expense, fringe benefits, professional fees to service providers and security
agency fees.

If the taxpayer belatedly withheld the tax, the expense can still be recognized. What
is material is the fact of withholding.

All-events test

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, 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. Thus, a taxpayer who is authorized to deduct certain
expenses and other allowable deductions for the current year but failed to do so cannot
deduct the same for the next year.

The accrual method relies upon the taxpayer's right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which characterizes
the cash method of accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability. Similarly, liabilities
are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.

For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income or
expense? The accrual of income and expense is permitted when the all-events test has been
met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability
of the reasonable accurate determination of such income or liability.

Stated otherwise, an expense is accrued and deducted for tax purposes when:
(1) the obligation to pay is already fixed;
(2) the amount can be determined with reasonable accuracy; and,
(3) it is already knowable or the taxpayer can reasonably be expected to have known at the
closing of its books for the taxable year.

c)   Loss

The requisites of deductibility of casualty loss are:

1)   The loss is related to business and it arises from theft, robbery, embezzlement, and
other casual and unusual sudden occurrences (TRECUSO). These losses are called
casualty loss.
2)   It was actually sustained during the taxable year.
3)   It was not compensated by insurance.
4)   The fact of loss is reported to the BIR within 45 days from the date the loss occurred.
 Net operating loss carry over

The net operating loss of a business for any taxable year immediately preceding the
current year, which has not been previously offset as deduction from gross income,
shall be carried over as a deduction from gross income for the next three consecutive
taxable years immediately following the year of the loss.

d)   Charitable Contributions

The deductible charitable contributions are limited to those given to qualified

recipients. Otherwise, the charitable contribution is not deductible.

Deductible in full:
1.)   Donations to the Government. - Donations to the Government of the
Philippines or to any of its agencies or political subdivisions, including fully-
owned government corporations, exclusively to finance, to provide for, or to be
used in undertaking priority activities in education, health, youth and sports
development, human settlements, science and culture, and in economic
development (priority project) 

2.)   Donations to foreign institutions or international organizations which are
fully deductible in pursuance of or in compliance with agreements, treaties, or
commitments entered into by the Government of the Philippines 

3.)   Donation to accredited 'nongovernment organization', which means a non
profit domestic corporation

Deductible with limitation:

1.)   Contributions 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 to accredited
domestic corporation or associations organized and operated exclusively for
religious, charitable, scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of veterans, or to social welfare
institutions, or to non-government organizations. The domestic corporations
must be nonprofit and not more than 30% of the donation is used for charitable
purpose.

The deductible amount must not exceed 5% of the taxable income before the
recognition of the charitable contribution (corporate taxpayer-donor) or 10% of the
taxable income before the recognition of the charitable contribution (individual
taxpayer-donor).

Tax Benefit Rule

Tax Benefit rule provides that the amount of an expense recovered must be included in income
in the year of the recovery to the extent the original expense resulted in a tax benefit. The expense
will result to a tax benefit if the expense is considered an allowable deduction. If the expense is
disallowed as a deduction, Tax Benefit rule will not apply.
The most common example is a refund of deductible tax expense or a recovery of uncollectible
accounts, which had been deducted as bad debts expense.

Rules on deductions of General Professional Partnership (GPP) and its Partners

GPP is not subject to income tax imposed pursuant to Sec. 26 of the NIRC. However, the partners
shall be liable to pay income tax on their separate and individual capacities for their respective
distributive share in the net income of the GPP. The GPP is not a taxable entity for income tax
purposes since it is only acting as a "pass-through entity where its income is ultimately taxed to
the partners comprising it. However, Section 26 of the Tax Code. as amended, provides that- "For
purposes of computing the distributive share of the partners, the net income of the GPP shall be
computed in the same manner as a corporation.” As such, a GPP may claim either the itemized
deductions or in lieu thereof, it can opt to avail of the OSD. When a GPP chooses its option, the
partners comprising it must comply with the following rules:

GPP Partner Legality

OSD OSD NOT ALLOWED

OSD ID NOT ALLOWED

ID OSD NOT ALLOWED

ID ID ALLOWED, provided that the expenses deducted by the partners

were not deducted by the GPP

ID 8% NOT ALLOWED

OSD 8% NOT ALLOWED

VII.   ADMINISTRATIVE REQUIREMENTS

A.   Filing of Tax Returns

1.   Income Tax Returns

As a general rule, taxpayers are required to file an income tax return, except non-
resident alien not engaged in trade or business and non-resident foreign corporations.

The deadline for the filing of the income tax returns are:

Tax Period Individual Corporate

 1Q May 15 Within 60 days after the
close of the taxable
quarter
2Q August 15 Within 60 days after the
close of the taxable
quarter
3Q November 15 Within 60 days after the
close of the taxable
quarter
Annual April 15 of the following April 15 of the following
year year

The following individuals are not required to file income tax return:

a.   An individual earning purely compensation income whose taxable income does

not exceed Two Hundred Fifty Thousand Pesos (Php250,000)
b.   An individual whose income tax has been correctly withheld by his employer,
provided such individual has only one employer for the taxable year – the
Certificate of Withholding filed by the respective employers, duly stamped
“Received” by the Bureau, shall be tantamount to the substituted filing of income
tax returns by said employees.
c.   An individual whose sole income has been subjected to final withholding tax.
d.   A minimum wage earner – the Certificate of Withholding filed by the respective
employers, duly stamped “Received” by the Bureau, shall be tantamount to the
substituted filing of income tax returns by said employee.

Substituted filing is when the employer's annual return (BIR Form 1604CF) may
be considered as the “substitute” Income Tax Return (ITR) of employee since the
information that will be provided by his income tax return (BIR Form 1700) is also
the same information contained in the employers BIR Form 1604CF.

The following are not qualified for substituted filing:

1.)   Individuals deriving compensation from two or more employers concurrently or

successively at any time during the taxable year.
2.)   Employees deriving compensation income, regardless of the amount, whether
from a single or several employers during the calendar year, the income tax of
which has not been withheld correctly (i.e. tax due is not equal to the tax withheld)
resulting to collectible or refundable return
3.)   Individuals deriving other non-business, non-professional-related income in
addition to compensation income not otherwise subject to a final tax.
4.)   Individuals receiving purely compensation income from a single employer,
although the income tax of which has been correctly withheld, but whose spouse
falls under 1, 2 or 3 of this enumeration.
5.)   Non-resident aliens engaged in trade or business in the Philippines deriving
purely compensation income, or compensation income and other non- business,
non-professional-related income.

2.   Creditable Withholding Tax

 Creditable withholding taxes are in the nature of advance payment of taxes. They are
deductible from the tax due at the end of the quarter or at the end of the year.

3.   Final Withholding Tax

Final withholding taxes extinguish the tax liability upon the withholding and
remittance of the tax.

4.   Capital Gains Tax Return

Capital Gains Tax Return must be filed when the taxpayer sold a real property
classified as a capital asset. It must be filed within 30 days from the date of sale or
within 30 days after the expiration of the redemption period.

© Copyright and all other relevant rights over this material are owned by the author.

© No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or
by any means, mechanical, electronic, photocopying, recording or otherwise without the prior written
permission of the author.

©All rights reserved. 2019