Professional Documents
Culture Documents
TAX ON INDIVIDUALS
RATES:
I. GRADUATED RATES
II. Final Withholding tax on passive income subject to final tax
III. Capital gains tax on capital assets subject to CGT
I. GRADUATED RATES
A. Compensation income
B. Business and professional income
C. Not subject to final tax
- NRA-NETB is not subject to graduated rates - ALL INCOME FROM SOURCES WITHIN PH SHALL BE
SUBJECT TO 25% WITHHOLDING TAX AND NO DEDUCTIONS ALLOWED.
- A stock dividend representing the transfer of surplus to capital account shall not be taxable
(CAPITAL)
- During liquidation, the transfer of properties by dissolving corporation to its stockholders by
way of liquidating dividend is not a sale. It is not subject to income tax, DST or creditable
withholding tax.
INTEREST INCOME
1. From any current bank deposit yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements derived from sources within PH.
DEPOSIT SUBSTITUTE - Must be from the PUBLIC - from 20 or more individual or corporate lenders at
one time.
- 19 lender rule - In order for a borrowing to qualify as deposit substitute, the borrowing must be
made from 20 or more individual or corporate lenders. Mere floatation of debt instrument is
not considered as public if there is only 19 or less than 19.
- When through any of the foregoing transactions, funds are simultaneously obtained from 20 or
more lenders, there is deemed to be a public borrowing.
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PRIZES AND WINNINGS
1. FC, NRC, RA, NRA-ETB - 20%
2. NRA-NETB - 25%
- Prizes amounting to 10K or less although exempt from final tax are to be included in the gross
income.
- Prizes and winnings from sources without the PH are included in the gross income of RC only.
MINIMUM WAGE EARNER - Exempt from income tax and withholding tax.
- An employee who receives or earns additional compensation such as commissions, honoraria,
fringe benefits in excess of allowable by law and earning allowances other than SMW, Holiday
pay, OT, Hazard pay, Night shift, shall not enjoy the privilege of MWE and are taxable for their
entire earnings.
OPTION TO
1. 15% final income tax
1. Multinational and offshore - Filipino must be holding a managerial or technical position
and must be exclusively working and not as a mere consultant.
2. Graduated rates
TAX ON CORPORATIONS
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MCIT IS NOT APPLICABLE
1. Those subject to preferential rate
2. Domestic depositary bank
3. Resident foreign international carrier
4. Resident foreign offshore banking units
5. Peza law
6. Real estate investment in trust
TAX SPARRING RULE - The ordinary 30% tax rate applicable to dividend remittances to non
resident corporate stockholder of PH corporation goes down to 15% if the country of domicile
allows such foreign corporation a tax credit for taxes deemed paid in the PH
- 15%
- Domicile of NRFC shall allow tax credit
- Such country does not impose tax on dividends
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1. Non resident
2. Offshore banking units
3. Local commercial banks including branches of foreign banks that may be authorized by
the BSP
3. GOCC
- PAGCOR is deleted to the list of exempt GOCC
- Income derived from public utility or from the exercise of government function accruing to the
government shall be exempt from income tax.
8. Non stock corporations or associations organized and operated exclusively for religious,
charitable, scientific, athletic, cultural purposes or for the rehabilitation of veterans, no part of
its net income shall inure to the benefit of any member.
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- Religious activities income from the conduct of strictly religious activities are not subject to tax
REQUISITES
1. EXCLUSIVELY for such purpose.
2. All the net income/assets must be devoted for its purpose and no part accrues to any person
3. Not be a branch of foreign non stock non profit organization
IF CHARITABLE INSTITUTION ENGAGES IN ACTIVITIES FOR PROFIT: It does not lose its tax exempt
status. Such profit shall only be subject to tax.
EXAMPLE
1. Corporate dividends
2. Rentals
3. Interests
4. Income from agricultural lands
5. Profits from sale of property
GROSS INCOME
- All income, gain, or profit subject to income tax
- Cash deposits or advances received by the taxpayers other than GPP form part of GI
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4. Monetary benefits
5. Fringe benefits of Rank and file
4. Dividends not subject to Final tax (those which are from Foreign corporations not 50%)
EXCLUSIONS (LAG-CRIM)
- All kinds of taxpayers, individuals, citizens or aliens, estates, trusts and corporate may avail
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3. Must have been in service of the same employer for at least 10 years AND must
be at least 50 years old at the time of the retirement
4. Not availed of this privilege (only availed once)
5. GSIS, SSS
7. MISCELLANEOUS ITEMS
1. 13th Month pay to the extent of 90K
2. Passive income by Foreign Governments
4. Prizes and awards granted to athletes in sports competitions locally or abroad and
sanctioned by their NATIONAL SPORTS ASSOCIATION (Duly accredited by Philippine
olympic committee)
FRINGE BENEFITS
- Any good, service or other benefit furnished or granted by an employer in addition to basic
salaries to an individual employee.
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NON TAXABLE FRINGE BENEFITS
1. Housing privileges of Military Officials of the Aft consisting of officials of the PH Army, Navy
and Air force
2. Temporary House for an employee who stays in the housing unit for three months or less
3. Housing unit which is situated inside OR Adjacent to the business premises which is 50meters
from the perimeter
4. Household expenses
5. Interest on loan at less than market rate to the extent of difference between market rate and
actual rate granted
6. Membership fees, dues borne by employer for social, athletic clubs or other organizations
7. Holiday and vacation expenses
8. Expenses for foreign travel except if for business meeting
9. Educational assistance to the employee and dependent
- Except when it is directly connected with business and asked to retain employment
10. Insurance premium
DE MINIMIS BENEFITS
- Facilities and privileges furnished or offered by an employer to his employees as a means of
promoting CHEG (contentment, Heath, Efficiency and Good will)
EXCLUSIVE ENUMERATION
1. Rice subsidy of PHP1500
2. Uniform and clothing allowance not exceeding 5K per annum
3. Monetized Unused vacation leave credits of PRIVATE EMPLOYEES not exceeding 10 days
during a year
4. Monetized value of Vacation and sick leave credits of GOVERNMENT OFFICIALS and
employees (No limit)
5. Medical cash allowance to dependents of employees not exceeding PHP 750 per employee
per semester or PHP125 per month
6. Actual yearly medical benefits not exceeding 10K per annum
7. Gift given during Christmas and major anniversary not exceeding 5K per annum
8. Benefits received by employee by virtue of CBA and productivity schemes not exceeding
10K
9. Daily meal allowance for OT and Night/Graveshift not exceeding 25% of the basic minimum
wage
10. Laundry allowance not exceeding 300 per month
11. Employees’ Achievement awards in a form of tangible personal property other than cash or
gift with annual monetary value not exceeding 10K
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DEDUCTIONS from Gross Income
Itemized Deductions
1.Ordinary and Necessary Expenses in TBP
2.Interest
3.Taxes
4.Losses
5.Bad Debts
6.Depreciation
7.Depletion
8.Charitable and Other Contributions
9.Research and Development
10.Pension Trusts
Note: Itemized Deductions do not apply to taxpayers earning compensation income from ER-EE
Relationship
COHAN RULE - If there is showing that the expenses has been incurred but the exact amount
cannot be ascertained due to absence of evidence, it is the duty of the BIR to make an
estimate deduction that may be allowed.
- Amount must not be a capital expenditure to create goodwill for the product or business.
CAPITAL EXPENSE - Payment which creates or enhances what is essentially separate and distinct
asset or made to increase the value of the taxpayer’s property.
- Not deductible as ordinary and necessary expenses.
- Any amount paid of payable shall be allowed deduction only if it is shown that the tax
required to be deducted and withheld therefrom has been paid to the BIR.
- Any payments as kickback directly or indirectly is not deductible.
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What are included?
a.Salaries, Wages, and other forms of compensation including Fringe Benefits (provided tax
has been paid)
b.Travel Expenses in pursuit of TB and incurred WHILE AWAY FROM HOME.
c.Rentals
d.Entertainment, amusement, recreation expenses connected to TBP which shall not exceed:
a.Engaged in sale of goods or properties - .50% of net sales
b.Engaged in sale of services - 1% of net revenues
c.Engaged in both - Apportionment
ENTERTAINMENT FACILITIES - Yacht, Vacation home, condo, any similar property used primarily for
the entertainment of guests.
GUESTS - Direct business relations. But shall not include officers, employees, SH, Directors.
Bonuses?
-Bonuses to employees are deductible as long as not exceed reasonable compensation
-Bonuses to corporate officers are not deductible in the absence of showing what role said
officers performed
-Bonuses must be reasonable
-CM Hoskins vs. Commissioner: There is no fixed Test of Reasonableness, it depends on may
factors
oBonus is compensation
oFor personal services actually rendered
oReasonable
Substantiation Requirement
a.Sufficient Evidence of the amount
b.Direct connection/relation to TBP
c.For depreciation, show that the tax required has been paid to the BIR
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Note:
-Taxpayer must deduct this expense during the taxable year
-If he failed to do so, he cannot deduct it for next year
-Litigation expense is not deductible
-Other business expense allowed by special laws as deduction:
-PWD/SC discounts
-RA 9999
-RA 8502
-RA 10028
-RA 8525
Interest
Requisites:
a.Existing indebtedness
b.Interest expense has been paid/incurred
c.Indebtedness of taxpayer
d.Connected with TBP
e.Paid or incurred during taxable year
f.Interest stipulated in writing
g.Legally due and demandable
h.Not treated as capex
TAX ARBITRAGE - Situation where a taxpayer profits from the differences on how income or gains
are taxed. Proceeds of a taxpayer’s loan obtained in connection with operations is deposited
and invested.
- REDUCED BY 33%
- Interest on unpaid business related taxes are fully deductible
RELATED taxpayers
a.Between members of a family, including his brothers and sisters, spouse, ancestors, and
lineal descendants; (Except in the case of distributions in liquidation)
b.Between an individual and corporation more than 50%in value of the OCS is owned by or
for such individual (Except in the case of distributions in liquidation)
c.Between 2 corporations more than 50% in value of the OCS is owned by or for the same
individual ;
d.Between the grantor and a fiduciary of any trust;
e.Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust;
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f.Between a fiduciary and beneficiary of same trust
- At the option of the taxpayer, interest incurred to acquire property used in trade in business
may be allowed as interest expense or capex. MUTUALLY EXCLUSIVE.
Taxes as Indebtedness
-Collector vs. Vda. De Prieto: Indebtedness is an unconditional and legally enforceable
obligation for the payment of money
-Palanca vs. CIR: Where statutes impose a personal liability for a tax, the tax becomes a
debt. Thus, interests on taxes should be considered as interest on indebtedness under
Section 34(b)
-BUT Taxes only ha, not penalties, fines and surcharges
NOTE:
-If there is Interest INCOME from Bank Deposits, reduce interest expense with interest income
-Deduct 33% of Interest Income from the Interest Expense claimed
Taxes
-Taxes paid/accrued during the taxable year in connection with the taxpayer’s TBP
-ALL taxes are deductible EXCEPT:
-Income Tax
-Estate Tax
-Donor’s Tax
-Special Assessments
-Foreign Income Tax
-Stock Transaction tax
-VAT
-BUT Taxes only, not fines, penalties and surcharges
Tax Credits
-Only RC, DC, RA under principle or reciprocity may avail this
-Because they are the only taxpayers taxed on income from sources worldwide
-Not Aliens without reciprocity and FC
Limitations on Deductions
-Allowed only to the extent of income from sources within the Philippines
Gutierrez vs. Collector: Capital Expenditures are NOT deductible as Business Expense BUT must be
integrated into the cost of Capital Assets
Losses
Requisites:
a.Must be actually sustained during the taxable year, charged off
b. For individuals: Incurred in TBP or in any transaction incurred for profit
c.For CASUALTY LOSSES, declaration with BIR within 45 days from discovery
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d.Not compensated by insurance
e.Not from sham sale
f.Declaration of Loss is filed within 45 days from time of loss for casualty losses
- Both Ordinary and Casualty losses are deductible but there is an additional requirement for
deductibility in casualty losses.
- Capital losses arising from sale or exchange of capital assets may be deductible only to the
extent of capital gains
REQUISITES:
1. Incurred during the period that taxpayer is not exempt from income.
2. No substantial change in ownership
- IN TAX FREE MERGER, NOLCO of the absorbed corporation is not one of the assets of the latter
that can be transferred and absorbed by the surviving corporation as this privilege can be
availed merely by the ABSORBED CORPORATION.
- Taxpayer who claims the 40% OSD shall not simultaneously claim deduction of the NOLCO.
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-EXC: If disposition is made in the ordinary course of business
-Dealer, Stockbrokers
CWagering Loss
-Allowed only to the extent of the gains from such transaction
DAbandonment Losses
-When petroleum operation is partially and wholly abandoned all accumulated exploration
and development expenses shall be allowed as deduction
Note:
-Loss is deductible only in the taxable year it actually happens or is sustained
-However, if it is compensable by insurance, deduction for the loss is postponed to a
subsequent year, in which it appeared that no compensation at all can be had (Close and
Completed Transaction)
-Plaridel Surety Insurance vs. CIR: Taxpayer must exhaust his remedies first to recover or
reduce his loss
Requisites:
1Existing Indebtedness, valid and legally demandable
1Connected with TBP
1Actually ascertained to be worthless, uncollectible
1In case of Banks, BSP must declare (RR 5-99)
1In case of Insurance companies, Insurance Commission must declare (RR 5-99)
1Charged off within the taxable year
1Not between related parties
- A debt is worthless after taking of reasonable steps to collect the debt and that there is no
likelihood of recovery at any time in the future.
NOTE:
-GR: Voluntary cancellation of Debt is NOT deductible
-EXC: If Debt was worthless
-To prove worthlessness, taxpayer must prove that he exerted diligent efforts to collect
-Collector vs. Goodrich International Rubber Co: Good faith is not enough. Taxpayer must
show that he had reasonably investigated the relevant facts and had drawn a reasonable
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inference from the information thus obtained by him. He must attach statement showing
propriety of deductions
-Fernandez Hermanos, Inc. vs. CIR: Bad debts are deductible in full or not at all. There are NO
partial deductions
Depreciation
-Gradual Diminution in the useful value of tangible and intangible property from wear and
tear
Requisites:
a.Reasonable
b.Depreciation is of property arising out of its use in TBP
c.Charged off during the taxable year
d.Statement of Allowance must be attached to the ITR
Methods of Depreciation
1Straight Line Method
1Cost of fixed asset is reduced uniformly over the useful life of the asset
1Declining Balance Method
1Amount of Depreciation that is charged during the beginning declines over time
1Sum of the Years Digit Method
1In this method, most of the depreciation is recognized in the first few years
Petroleum Operations
-Depreciate 10 years if property is used DIRECTLY
-Depreciate 5 years if property is used INDIRECTLY in production of petroleum
Mining Operations
-If expected life is 10 years or less, normal rate of depreciation
-If expected life more than 10 years, notify the CIR
For NRA Engaged in TB or RFC
-Reasonable rate is allowed on properties located HERE in the Philippines
Note:
-Basilan Estate Inc vs. Commissioner: The law does not allow/authorize claim for
depreciation beyond acquisition cost
-RR 12-2012 limits claim of depreciation of vehicles
-Such as 1 employee 1 vehicle only
-Value must not exceed P2.4M
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-No depreciation for yachts, helicopters, airplanes UNLESS taxpayer’s line of business
is transport operations or lease of transportation equipment and the vehicles
purchased are used in said operations
Depletion
-Oil and Gas wells or mines are allowed a reasonable allowance for depletion or
amortization computed using the cost-depletion method
-“Cost Depletion Method”
-When allowance for depletion equals the capital invested, no further allowance shall be
granted
-If NRA or RFC, allowance for depletion is limited to oil wells and mines in the Philippines
Charitable Contributions
-Must be paid within the taxable year
REQUISITES:
1. Given to organizations specified by law
2. Actually paid
3. Made within the taxable year
4. Substantiated
Non- Government Organization - IF FAILED TO COMPLY WITH THE REQUISITES, SUBJECT TO 5% 10%
-Non-profit domestic corporation
-Exclusively for their purpose (S R E YSD . . .)
-No part of net income inures to the benefit of any private individual
-Administrative expense NOT exceed 30% of total expenses
-Utilize contributions not later than 15th day of the 3rd month after close of taxable year
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Special Laws
-To UP
-National Book Trust Fund
-Foster Child Agencies
-IBP
-DONATIONS OF PRIZES AND AWARDS TO ATHLETES
1. Local and international tournaments and competitions
2. Sanctioned by their respective national sports associations
Note:
-If donation is over 50K, notify RDO within 30 days
-There must be Certificate of Donation/ Official Receipt from Donee
-Roxas vs. CTA: Contributions to Christmas Funds of city police are not deductible because
not for public purposes
Requisites:
i.Incurred during the taxable year
ii.In connection with TB
Pension Trusts
Employer may deduct pension trust established for Employee’s benefit if:
i.Amount is reasonable
ii.Funded by employer
iii.Not have been previously allowed for deduction
iv.Apportioned in equal parts over a period of 10 consecutive years
Note:
-NRA and Non-Resident FC cannot avail OSD
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- Fixed percentage deduction without regard to actual expenditure in lieu of itemized
deductions. No need to substantiate with receipts
Rate?
For Individuals (RC, NRC, RA)
-40% of Gross Sales or Gross Receipts
SPECIAL DEDUCTIONS
1. Establishments granting sales discount to or employing Senior citizens
- Only portion of gross sales exclusively used, consumed, or enjoyed by the senior citizen
- Same as Tax deduction based on the cost of goods or s
- Only the actual amount granted may be deducted.
- Seller must nor claim OSD during the same taxable year.
PERSONAL EXEMPTIONS
ADDITIONAL EXEMPTIONS
“Dependent”
-Legitimate, Illegitimate or Adopted
-Not more than 21 years old
oRegardless of age if with Mental or Physical defect
oUnmarried
oNot gainfully employed
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Non-Resident Aliens Engaged in TB
-Entitled to Personal Exemption
-Amount equal to exemptions allowed in the country of NRA to Filipinos therein
-But up to P50,000 only
If Taxpayer –
-Dies
-Estate may claim the personal and additional exemptions
Note: If dependent dies, marries, becomes 21, or gainfully employed, Taxpayer may still
claim the same exemptions
SENIOR CITIZEN - A benefactor of SCIT shall be entitled to claim the basic personal exemption of
50K
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RULES ON CAPITAL GAINS AND LOSSES
It shall apply only if the transaction on capital asset is EITHER sale or exchange.
Ordinary Loss
-Any loss from the sale or exchange of property which is not a capital asset
-Holding Period: For individual taxpayer, the following percentages of the gain or loss shall be
taken into account:
o100% of the gain/loss if the asset has been held for not more than 12 months
o50% of the gain/loss if the asset has been held for more than 12 months
oBUT: This does not apply to a Corporation because capital gains or losses are always
considered at 100%
oNo Holding Period for Corporations
oNo Net Capital Loss carry over for corporations
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-Ordinary assets are subject to the Gross income. And Ordinary losses are deductible to
Gross income.
-If Real Estate Dealer, Developer, Lessor, Habitually engaged in the real estate business: All
properties used – Ordinary Asset
-If NOT engaged in the Real Estate Business, but real property is used in the trade or business
of the taxpayer, still ordinary assets
IF NOT used
-A real property not used in trade or business as evidenced by a Certification from the Brgy
Chairman shall be treated as capital asset
If Seller/Transferor: DEALER
-Shares are treated as ordinary assets
-Thus, the gains = Ordinary Gains
-Ordinary Gains are subject to Graduated Income Tax Rates
-5% - 32% if individual
-30% corporate income tax
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-Exempt from Income tax
-BUT: Subject to Stock Transaction Tax
-½ of 1% Stock Transaction Tax based on the Gross Selling Price or Gross Value in
money of the shares
-Whether there is gain or not
-If cash sale: Total consideration
-If partly: Cash + FMV of property received
-If Exchange: FMV of property
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EXCEPTIONS TO CGT:
1. Principal Residence Exempt from Capital Gains Tax
a.Fully utilize the proceeds to acquire a new principal residence within 18 months
b.Historical cost shall be carried over to the new principal residence
c.Notify the Commissioner within 30 days, of his intention to avail the exemption
d.Open an escrow account and deposit the 6% CGT
e.Avail only once every 10 years
NOTE:
-Yung owner ng residential house bibili ng bagong residential house
-Only Filipinos or Residents may avail. NRA cannot (of course wala syang principal residence
dito eh)
2. IF the buyer is the government, political subdivision or GOCC and the seller is an
individual, choice to subject it to CGT or Income Tax Rate
3. IF subject to right of redemption, the CGT is based on the bid price of the highest
bidder
-If mortgagor exercises right of redemption within 1 year, no CGT because no capital gains
realized
-If no redemption was made, capital gains based on the highest bid price
-All other capital assets are subject to graduated income tax rates if individual
-Or corporate income tax of 30%
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-NOTE: This applies only to individuals, not corporations
In answering:
Principal Residence?
UPSTREAM MERGER - Merger between a parent company and its subsidiaries where the parent
will not be ISSUING ANY SHARES to the subsidiaries in exchange for the assets to be transferred as
a result of the merger - NOT TAX FREE EXCHANGE.
- In the nature of a donation.
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Estates and Trusts
Trust is a legal arrangement whereby the trustor of property transfers ownership to the trustee to
hold and control the property
- Estate is taxable to the income received during the period of administration or settlement of
estate
- Trust is taxable when:
1. Income accumulated in trust for the benefit of unborn
2. Income to be distributed currently by the fiduciary
REVOCABLE TRUST - Power to revert in the grantor title to any part of the corpus is vested:
1. Grantor either alone or in conjunction with any person not having a substantial adverse
interest
2. Any person not having substantial interest
- Trustor is not the trust itself and is subject to the payment of income tax.
Cases:
-Ona vs. CIR: The moment the heirs used the properties and income thereof as common
fund in several transactions with intention to divide profits, they formed an unregistered
partnership
-Evangelista vs. Collector: Character of Habituality to the business transactions for purposes
of gain
-Pascual vs. CIR: Isolated transactions and not habitual are not taxable as Unreg Partnership
Accounting Methods
METHODS:
1. Cash method - Income reported in the year payments are received while expenses are
deducted the year paid.
2. Accrual method - Income is reported in the year it is earned while expenses is deducted in
the year it is incurred regardless of receipt of disbursement of cash.
EXCEPTIONS:
1. Gross income dies not exceed total personal and additional exemption
EXCEPT: Engaged in business or practice of profession in PH
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2. Pure compensation income derived from sources within the PH correctly withheld.
EXCEPT: Deriving compensation from two or more employer
3. Individual whose sole income has been subjected to final withholding tax
4. Exempt from tax
SPECIAL RULES
1. HUSBAND AND WIFE - File one return if they are married and do not derive purely
compensation income.
2. UNMARRIED MINOR - Included in the return of parents except: Donors tax has been paid on
such property or transfer is exempt.
SUBSTITUTED FILING
REQUISITES
1. Purely compensation income regardless of amount
2. One employer only
3. Amount of tax due from employee is equal to amount withheld
WITHHOLDING TAXES
Withholding agents - Person having control over the payment and who at the same time claims
the expenses.
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Sorry for all the typographical errors. Good luck and God bless you! Kindly pass
this or pay it foward! In God's perfect timing I know you will be the person you
aspire to be.
- Edward Arriba
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