INCOME TAXATION

 Taxable Income
Formula:
Gross Income (Sec. 32 – 33) P xxx
Allowable Deductions (Sec. 34 to 42) (xxx)
Taxable Income P xxx

 Valuation of Income
1. Cash received for income earned;
2. Fair value of property received as payment for income earned;
3. Fair value (at the date the income was earned) of the share of stocks received as payment of the income earned;
4. Fair value of the service received (in the absence of stipulated price) as payment of income earned;
5. Fair value of the promissory notes received as payment of income is
 Face value of the note, if interest bearing;
 Discounted (present) value of the note, if non-interest bearing.

 Who are covered by Income Tax?

Persons (Natural and Juridical) which include:

1.Individuals, including trust and estate (properties)
2.Corporation – includes partnership, joints stock companies, joint accounts, association, or insurance companies but not
general professional partnership (as a business)* and a joint venture or consortium formed for the purpose of undertaking
construction, coal, petroleum, other energy operations, and geothermal, contracted with the Government (CCPEG).
 Who need to file income tax return?
1. Resident Citizen (RC) – taxable within and without the Philippines
 Filipino citizens at the time of adoption of 1987 Constitution;
 Those whose fathers or mothers are Filipino citizens (born after 1973 Constitution); If not, naturalized.
 Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of
majority; (3-year rule)
 Those naturalized in accordance with law

*(Art. IV, Sec. 1 of 1987 Constitution)

2. Non-resident Citizen (NRC) – taxable within the Philippines (OCW). Citizens in the Philippines who:
 Intend to reside abroad;
 As an immigrant, or for employment on a permanent basis;
 Work and derives income from abroad;
 Previously considered as non-resident citizen during the taxable year.
 Submit an evidence to the Commissioner.

*Test in case of lack of proof: “physically present abroad most of the time during the taxable year” – more than 183
days (not necessary that it must be continuous, but aggregate – combined days)

 Includes OCW (seaman, OFW) with valid certificate

3. Resident Alien (RA) – taxable within the Philippines. Residence is within the Philippines and who is not a citizen thereof.
 Not a mere transient or sojourner (visitor/tourist);
 With definite purpose and make the Philippines as temporary home;
 “floating intention”, means need to extend the stay.
4. Non-resident Alien (NRA) whether engage or not engage in business - taxable income within the Philippines. Residence is
not within the Philippines and not a citizen thereof.
 Engaged in business – stayed in the Philippines for more than 180 days.
 Not engaged in business – less than 180 days.
 AGGREGATE PERIOD

5. Domestic Corporation (Incorporated in PH) – taxable within and without the Philippines. created or organized in the
Philippines or under its laws
6. Foreign Corporation – taxable within the Philippines
 Resident foreign corporation (RFC) – engaged in trade or business within the Philippines
 Non-resident foreign corporation (NRFC)– not engaged in trade or business within the Philippines
7. Taxable partnerships (includes taxable joint venture, co – ownership for income)
8. Estates and trust engaged in trade or business

 TAX SITUS – Test: Within or without the Philippines

Nature of Tax Citizenship Residency Within PH Without PH

Filipino Resident Yes Yes
Filipino Non – Resident Yes No
Income Tax
Aliens Resident Yes No
Aliens Non – Resident Yes No
 Domestic Corp Yes Yes
Foreign Corp Yes No

RC & DC – Within/Without; Others – Within only

Income Test - Source of Income

Interest from loans Residence of the debtor
Income from services Place of performance
Rent Location of property
Royalty Place of use of intangible
Sale of real property Location of property
Sale of personal property (except domestic
Place of sale
shares)
Incorporation (regardless where it is sold) -where it is
Sale of domestic of shares of stock
registered/incorporated
Dividend income (from domestic) Income within Philippines
Dividend income (from resident foreign corp.) Predominance test
Dividend income (from non-resident foreign) Income without the Philippines

*Merchandising Income – where the goods are sold.

* Manufacturing Income
Production Distribution Tax Situs
Local Local Income is within
Foreign Foreign Income is without
Production income is within, distribution income
Local Foreign
is without
Production income is without, distribution income
Foreign Local
is within

 Instances of Short Accounting Period

Start of previous accounting period up to the designated year-end of the

Change of Accounting Period
Newly commenced business
Dissolution of the business
Death of the taxpayer
Accounting period terminated by
BIR Commissioner (Jeopardy
Assessment)
new accounting period.
Fiscal to Fiscal - close of the former fiscal year and the date designated
as the close of the new fiscal year
Date of the start of the business until designated year end of the business.
Start of the current year up to date of dissolution.
Start of the calendar year until the death of the taxpayer.
Start of the current year until the termination of the accounting period.

 General Accounting Method

o Accrual Basis
 Income
Cash Income xxx
Accrued (uncollected) income xxx
Advanced Income xxx
Gross Income xxx
 Expense
Cash Expense xxx
Accrued (unpaid expense) xxx
Amortization of prepayments and
Depreciation of capital expenditures xxx
Deductions xxx

o Cash Basis
 Income
Cash Income xxx
Advanced Income xxx
Gross Income xxx
 Expense
Cash Expense xxx
Amortization of prepayments and
 Depreciation of capital expenditures xxx
Deductions xxx

 Installment Method

Personal Property Real Property

Regular Income Tax

Ordinary
Regular Income Tax
Asset Test - Ratio (IP/SP)
25% & below – installment
Above 25% - deferred

Regular Income Tax

Test - Ratio (IP/SP) Capital Gains Tax

25% & below – installment
Capital Asset Above 25% - deferred
Test - Ratio (IP/SP)
Holding period 25% & below – installment
1 year – 100% Above 25% - deferred
More than 1 year – 50%

Note:
 Basic or ordinary tax – progressive tax using tax table under Sec. 24A of the Tax Code;
 Capital Gains Tax (CGT) – 6% of selling price, or fair market value (either assessed value or zonal value),
whichever is higher.

 Formats of Computation – Installment

1. Selling Price (SP) (amount realized)

Cash received P xxx

FMV of the property received xxx
Receivables xxx
Unpaid mortgage assumed by the buyer xxx
Selling Price (SP) P xxx

2. Contract Price (CP) (agreed to pay)

Selling Price P xxx

Less: Mortgage assumed by the buyer xxx
Balance P xxx
Add: Excess unpaid mortgage over cost xxx
Contract price P xxx

3. Initial Payments (IP)

Down payment P xxx

Expected installment collection in the year of sale xxx
Excess of unpaid mortgage over cost xxx
Initial Payments P xxx

4. Installment capital gain tax = (Collection/ Contract Price) x Total CGT

5. Realized Gross Profit (RGP) (if subject to basic tax)

RGP = Collections x GPR; GPR = Gross Profit/ Contract Price, or

(Collections/Contract Price) x Gross Profit

*Gross Profit = Selling Price – Cost

*CGT = Selling Price x 6%

 Deferred Payment Method

Cash downpayment xxx

Present Value of the Note xxx
Selling Price xxx
 Tax Basis of the property (cost) (xxx)
Gross Income xxx

Interest Income = Cash downpayment – Present Value of the note

 Surcharge
o 25% of the basic tax for failure to file or pay on time, or filed in wrong jurisdiction;
o 50% of the basic tax it there’s a willful neglect.
 Interest Penalty – 12%
 Compromise Penalty 10,000 (20,000 – 50,000); 15,000 (50,000 – 100,000); 20,000 (100,000 – 500,000)
 Information Return Penalty – For each failure to file without willful neglect, the penalty is P 1,000; but not to exceed P 25,000
for all such failure.

 Interest income

Final Tax Regular Tax

Currency Bank deposits: Short-term deposits & Loan/Lending Activities, whether or not in the course
Long-term deposits/ investment certificates of business
Deposit Substitutes Investment in bonds
Government Securities Promissory Notes
Money Market placements Foreign Sources, whether bank or non-bank
Trust funds Penalty or Legal delay/default
Other investments evidenced by certificates
prescribed by BSP

 Entities taxable as Corporations – 10% Final Tax

o Real Estate Investment Trusts (REIT)
o Business Partnership
o Taxable Associations
o Taxable joint venture, joint accounts or consortia
o Taxable co-ownership

 Tax Informers Rewards – 10% Final Tax

o Amount of cash reward is P 1,000,000 or 10% of the revenues, surcharges, or fees recovered and or fine or penalty
imposed and collected, whichever is lower.

12,000,000 x 10% = 1.2M choose 1m x 10% = 100,000 = 900,000

FINAL WITHOLDING TAX FOR PASSSIVE INCOME

INDIVIDUALS CORPORATION
NRA- NRA- F
RC NRC RA D
ETB NETB R NR
Interest Income/Yield
Short-term deposits 20% 20% 20% 20% 25% 20% 20% 30%

Long-term deposits/
investment certificates EXEMPT

Note: Savings or time deposit with cooperatives is exempt.

Pre-termination interest rate
Less than 3 years 20% 20% 20% 20% 25% 20% 20% 30%
3 to less than 4 years 12% 12% 12% 12% 25% 20% 20% 30%
4 to less than 5 years 5% 5% 5% 5% 25% 20% 20% 30%
FCDS (Foreign Currency
Deposit System
 FCDUs/OBU depositary 15% X 15% X X 15% 7.5% X
EFCDUs/OBU banks 10% X 10% X X 10% 10% X
Foreign Loans N/A N/A N/A N/A N/A N/A N/A 20%
Tax Free Covenant Bonds 30% 30% 30% 30% 30% N/A N/A N/A
Joint account between resident and non – resident on forex deposit – 50/ 50 rule
50% - exempt; 50% - 15% Final Tax

30% or
Dividends from 10% 10% 10% 20% 25% EXEMPT 15%
 Domestic (TSP)
Corporation
 Foreign Corporation Regular Tax Regular Tax**
Exempted: Dividends received from cooperatives & intercorporate dividends
*Pre-dominance test: < 50% - Without; > 50% - Within

Royalties
 Books, literary 10% 10% 10% 10%
works, and musical 25% 20% 20% 30%
compositions
 Other Sources
20%
Books sold on e-copies or CDs (e-Books) – 20%
Cinematographic Films & similar works (NRA & NRFCs) – 25%
Vessels: NRA-NETB – 25%; NRFC – 4.5%
Aircrafts, machineries, & other equipment: NRA-NETB – 25%; NRFC – 7.5%

Prizes 20%
 Exceeding P10,000
25% Regular Tax 30%
 Not exceeding
P10,000
Regular Tax

Exempt Prizes: (1) received without any effort; (2) received from sports competition sanctioned by their respective national sport
organizations.
Requisites of exemption: (1) selected without any action on contestant; (2) no substantial future services.

Winnings
 PCSO or Exempt
sweepstakes not
exceeding P10,000
25% Regular Tax 30%
 PCSO or
sweepstakes 20% 20% 20% 20%
exceeding P10,000
 Other winnings
20% 20% 20% 20%

Informer’s Tax Reward 10% 10% 10% 10% 25% 10% 10% 30%
Share in Net Income
Taxable partnership, joint venture, and co- 10% 10% 10% 20% 25% 10% 10% 30%
ownership

*Passive Income from outside the Philippines shall be considered as Active

 Taxation on Dealings in Properties (Ordinary gains Vs. Capital Gains)

Type of Gains Type of Tax Transactions

Sales of domestic stocks not in PSE (directly
Capital Gains Capital Gains Tax to the buyer)
Sale of real property as capital asset
Capital Gains Regular Income Tax Other than those mentioned above
Ordinary Gains Regular Income Tax Sale of ordinary asset

FINAL TAX ON CAPITAL GAINS

INDIVIDUALS CORPORATION
From sources within the F
NRA- NRA-
Philippines RC NRC RA D
ETB NETB R NR
 Sales of shares of stock of a
domestic corporation not
listed and traded thru local
stock exchange held as capital 15%
asset on net
15% on net capital gain
capital
Net capital gain not over P gain
5%
On any amount in excess of P
10%

Sale of real property in the

Philippines held as capital
asset, including pacto de retro
sales and other conditional 6% 6% N/A
sales.

*The higher of GSP, or the FMV at

the time of sale
Exemptions:
 Sale to government or any of its political subdivision or agencies or to government-owned or controlled corporation
shall be either, at the option of the taxpayer:
o under Section 24A (Normal Tax) or
o under this subsection (Capital Gain Tax)
 Taxpayer is exempt from paying CGT when:
o the property sold is principal residence;
o the proceeds of which is fully utilized in acquiring or constructing new principal residence within 18 calendar months from the date of
sale or disposition;
o the historical cost or adjusted basis of the real property shall be carried over to the new principal residence acquired or built;
o The Commissioner shall have been duly notified within 30 days from the date of sale or disposition;
o the exemption can only be availed once for every ten years;
o and if not fully utilized, the excess shall be subject to capital gain tax.
o Under special laws
 Sale of land pursuant to CARP: Similarly, interest income on selling price is also exempted.
 Sale of socialized housing units by NHA: It does not include the sale of NHA of the commercial lots.

Taxable gain = The higher of GSP or FMV x (unutilized portion/ GSP)

Basis of New Residence = (utilized portion/ GSP) x Acquisition cost

 Stock Transaction Tax (STT)

o Sale of shares of stock held as capital asset through PSE.
o The tax is 6/10 of 1% of selling price.

*If the seller is a dealer in securities (broker), the gain on sale shall be subject to regular income tax and VAT.

 SP & TB

SELLING PRICE TAX BASIS

Cash sale face value of consideration received
Partly in money and partly in property face value + FMV of the property
Exchange FMV of the property received
Purchase Cost
Gratuitous FMV
Inadequate SP > Cost = CGT
FP – SP Transfer Tax
 Predominance Test - Sec. 42(2)b

Dividend income received from a foreign corporation:

If the ratio of the Philippine gross income over the world gross income of the resident foreign corporation in
the three-year period preceding the year of dividend declaration is:

o At least 50%, the portion of the dividend corresponding to the Philippine gross income ratio is earned within the
Philippines;
o Less than 50%, the entire dividend received is earned without.

 Partnership vs. Joint Venture

Partnership Joint Venture

General Partnership – taxable as corporation Taxable Joint Venture – taxable as corporation
General Professional Partnership – not taxable as Non-taxable Joint Venture – not taxable as
corporation; partners are taxable on their individual corporation; venturers are taxable on their
capacity. individual capacity.
 Regular Income (Progressive Tax Table) – Sec. 24

INDIVIDUAL INCOME TAX

Taxable Income per year Income Tax Rate
P250,000 and below 0%
Above P250,000 to P400,000 20% of the excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
*NRA-NETB = 25% final tax on Gross Income

CORPORATE INCOME TAX

Proportional/Flat tax of 30% on Taxable Income

 Tax Basis of Regular Income Tax

Gross Income (Sales/receipts – cost) P xxx
Allowable Deductions (or Expenses) (xxx)
Taxable Income P xxx
x tax rate (proportional tax or progressive tax) xxx
Regular income tax P xxx
 Other Provisions

INDIVIDUAL
EXEMPTED:
 Minimum wage earners, including senior
and PWD
 Holiday Pay, Overtime Pay, Night-shift
Differential, Hazard Pay (HONH)
Professional or self-employed
 Tax Option: 8% of the gross sales/ receipts
and other non-operating income in excess of P
250,000
o gross sales or receipts and other non-
operating income shall not exceed the VAT
threshold (P 3,000,000).
Mix Income Earners
 Income from compensation – tax table
(graduated tax)
 Tax Option: 8% of the gross sales/ receipts
and other non-operating income in excess of P
250,000
o gross sales or receipts and other non-
operating income shall not exceed the VAT
threshold (P 3,000,000).
Exceptions to 8% Rule
 Partners of GPP
 Taxpayers under Barangay Micro Business
CORPORATION
RCIT – 30% of Taxable Income:
 Applicable to all corporations except:
o Proprietary educational institutions and
non-profit hospitals provided that the gross
income from unrelated business does not
exceed 50% of the total gross income from
all sources; the tax is 10% of the taxable
income
 GOCC, agencies or instrumentalities taxable
(proprietary) except:
o SSS, GSIS, PHILHEALTH, Local Water
Districts (LWD)
MCIT – 2% of Gross Income:
 Beginning on the FOURTH taxable year
IMMEDIATELY following the year of
business commencement.
o MCIT > RCIT = MCIT
 The excess shall be carried forward and
credited against the normal income tax
for the three (3) immediately
succeeding taxable year.
o MCIT < RCIT = RCIT
o Applicable ONLY to domestic and resident
foreign corporation.
o Not applicable to o Hospitals;
Educational Institution; Non-resident
foreign corporations; International Carrier;
Offshore Banking Units (HENIO)
Special Tax Rate for Special Resident Foreign
Corporation
• Resident International (air and sea) Carrier –
2.5% of Gross Billings, Philippines;
• Offshore Banking Units – 10% from Interest
income from foreign currency loans granted to
residents, otherwise exempt;
• Tax on Branch Profits Remittances – 15% based
on total profits remitted to its head office without
any deduction for the tax component thereof
(except those registered with PEZA)
• Regional or Area Headquarters (supervisory,
communicating, and coordinating center)–
exempt
• Regional Operating Headquarters – 10% of
taxable income
Special Tax Rate for Non-resident Foreign
Corporation
• Non-resident cinematographic film owner,
 Enterprise (BMBEs)
 Purely Compensation Income Earners
 VAT registered taxpayers
 Subject to OPT except Sec. 116
Special Employees
1. Special employees
a. regional or area headquarters and regional
operating headquarters of multinational
companies;
b. offshore banking units
c. petroleum service contractor and
subcontractor
2. The gross income includes salaries, wages,
annuities, compensation, remuneration, and
other emoluments, such as honoraria, and
allowances.
3. tax rate is Sec. 24A (tax table)
NRA-NETB – 25% of Gross Income
lessor, or distributor – 25% of gross income
• Non-resident owner or lessor of vessels
chartered by Philippine Nationals – 4.5% of
gross income
• Non-resident owner or lessor of aircraft
machineries and other equipment – 7.5% of the
gross income
Improperly Accumulated Earnings Taxes (IAET)
 10% of the improperly accumulated taxable
income;
 Taxes in lieu of dividends (earnings) not
distributed to the shareholders but accumulated,
thus no income taxes paid by the shareholders.
 It does not apply to (BPI):
o Banks and other non-banks financial
intermediaries
o Publicly held corporation
o Insurance companies
 IAE are allowed within the reasonable needs of
the business, which is necessary to prove by the
corporations.
NRFC – 30% of Gross Income

 Formula to Compute IAET

Taxable income xxx
Add:
Income exempt from tax xxx
Income excluded from gross income xxx
Income subject to final tax, net of tax xxx
Net operating loss carry-over (NOLCO) xxx xxx
Total xxx
Less:
Dividend actually or constructively paid xxx
Income tax paid for the taxable year xxx
Appropriated Retained Earnings xxx xxx
Improperly Accumulated Earnings xxx
X IAET rate 10%
IAE Tax xxx