NATIONAL INTERNAL REVENUE CODE
Commissioner of Internal Revenue,
OF 1997
>Revenue generation has undoubtedly
been a major consideration in the
passage of the Tax Code.
Powers and duties of the BIR
>The powers and duties of the BIR
shall comprehend:
1. The assessment and collection of
all national internal revenue
taxes, fees and charges;
2. The enforcement of all forfeitures,
penalties and fines connected
therewith;
3. The execution of judgments in all
cases decided in its favor by the
CTA and the ordinary courts; and
4. Effecting and administering the
supervisory and police powers
conferred to it by the Tax Code
and other laws.
Note: The power of taxation is
sometimes called also the power to
destroy. Therefore, it should be
exercised with caution to minimize
injury to the proprietary rights of a
taxpayer. It must be exercised fairly,
equally, and uniformly, lest the tax
collectors kill the hen that lays the
golden egg. And, in order to maintain
the general public’s trust and
confidence in the Government, this
power must be used unjustly and not
treacherously.
>The term “all national internal
revenue taxes, fees, and charges, is
used in the Tax Code in a broad sense
as encompassing all government
revenues collectible by the CIR.
>As applied to taxation, revenue is the
product or fruit of taxation.
>The BIR shall be under the
supervision and control of the
Department of Finance.
CHIEF OFFICIALS OF THE BIR
>The chief officials are the following:
1.
who shall act as the chief; and
2. Four deputy commissioners, who
shall each act as his assistants, and
who shall each be the head of the
following groups, viz:
a. Legal and enforcement group
b. Operations group
c. Information systems group
d. Resource management group
>The offices of the chief officials of the
BIR are all located in the National
Office, the functions of which are
confined to the national policy
formulation and program planning for
efficient and effective implementation
of internal revenue laws and
regulations, including other special tax
laws, and the general direction,
guidance, and control of the entire
operations of the Bureau.
POWER OF THE COMMISSIONER TO
INTERPRET TAX LAWS AND DECIDE
TAX CASES
1. The CIR shall have the exclusive
and original jurisdiction to
interpret the provisions of the Tax
Code and other special tax laws,
subject to review by the SOF.
2. The CIR shall also have the power
to decide the following tax cases
but subject to the exclusive
appellate jurisdiction of the CTA:
a. Disputed assessments,
b. Refunds of internal revenue
taxes, fees or other charges;
c. The penalties imposed in
relation thereto, or
d. Other matters arising under
the Tax Code, other tax laws or
portions thereof administered
by the BIR.
>In the exercise of his jurisdiction to
interpret the provisions of the Tax
Code, the CIR shall have the exclusive
and original jurisdiction to recommend
to the SOF the promulgation of Revenue
Regulations, the issuance of BIR rulings
and other revenue issuances:
1. Revenue Regulations (RRs) – These
are issuances signed by the SOF,
upon recommendation of the CIR,
that specify, prescribe or define
rules and regulations for the
effective enforcement of the
provisions of the NIRC and related
statutes.
2. BIR Rulings – these are official
positions of the CIR to queries
raised by taxpayers and other
stakeholders relative to
clarification and interpretation of
tax laws. BIR rulings may in the
form of BIR Rulings issued by the
Law Division, VAT rulings issued
by the VAT Review Committee and
ITAD Rulings issued by the
International Tax Affairs Division
(ITAD).
>They are administrative
interpretations of the tax laws as
applied and implemented by the
BIR. They can be relied upon by
taxpayers and are valid until
otherwise determined by the
courts or modified or revoked by a
subsequent ruling or opinion.
They are accorded great weight
and respect, but not binding on
the courts.
3. Revenue Memorandum Circulars
(RMCs) – These are issuances that
publish pertinent and applicable
portions, as well as amplifications
of laws, rules, regulations and
precedents issued by the BIR and
other agencies/offices.
>These are considered as
administrative rulings (in the
sense of more specific and less
general interpretations of tax
laws) which are issued from time
to time by the CIR.
4. Revenue Memorandum Order
(RMOs) – these are issuances that
provide directives or instructions;
prescribe guidelines; and outline
processes, operations, activities,
workflows, methods, and
procedures necessary in the
implementation of stated policies,
goals, objectives, plans and
programs of the Bureau in all
areas of operations, except
auditing.
5. Revenue Audit Memorandum
Orders (RAMOs) – These are
revenue memorandum orders
issued specifically stating the
audit programs of the BIR for a
particular taxable year.
6. Revenue Memorandum Rulings
(RMRs) – These are rulings,
opinions, and interpretations of the
CIR with respect to the provisions
of the Tax Code and other tax laws,
as applied to a specific set of facts,
with or without established
precedents, and which the CIR may
issue from time to time for the
purpose of providing taxpayers
guidance on the tax consequences
in specific situations. BIR rulings,
therefore, cannot contravene duly
issued RMRs; otherwise, the
Rulings are null and void ab initio.
7. Revenue Bulletins (RBs) – These
are periodic issuances, notices and
official announcements of the CIR
that consolidate the BIR’s position
on certain specific issues of law
and administration in relation to
the provisions of the Tax Code,
relevant tax laws and other
issuances for the guidance of the
public.
8. Revenue Travel Assignment Orders
(RTAOs)-These are administrative
orders issued by the CIR
transferring, assigning or re-
assigning revenue officers and
employees to other or special
duties connected with the
enforcement or administration of
revenue laws as the exigencies of
the service may require, provided,
however, that revenue officers
 assigned to perform assessment or
collection functions shall not
remain in the same assignment for
more than three years.
9. Revenue Special Orders (RSOs) –
These are administrative orders
issued by the CIR assigning
revenue officers and employees to
special duties which shall not
exceed one year.
>It is widely accepted that the
interpretation placed upon statute by
executive officers, whose duty is to
enforce it, is entitled great respect by
the courts. Nevertheless, such
interpretation is not conclusive and
will be ignored if judicially found to be
erroneous.
>BIR ruling can be invoked only by the
taxpayer who sought the same.
>Taxpayers should exhaust all
administrative remedies before
questioning the validity of a revenue
issuance in the court.
>The party with an administrative
remedy must not only initiate the
prescribed administrative procedure
to obtain relief but also to pursue it to
its appropriate conclusion before
seeking judicial intervention in order
to give the administrative agency an
opportunity to decide the matter itself
correctly and prevent unnecessary and
premature resort to the court.
Note: A ruling of the CIR shall be
presumed valid until overturned or
modified by the SOF.
>A taxpayer who receives adverse
ruling from the CIR may, within 30 days
from the date of receipt of such ruling,
seek its review by the SOF. The request
for review must be in writing and
under oath.
Note: The SOF may, of his own accord,
review the ruling issued by the CIR. In
such a case, the SOF shall order the CIR
to transmit a duplicate copy of the BIR
records. The CIR shall transmit such
records within 15 days from receipt of
notice of the request for transmittal.
>The SOF may affirm, reverse or
modify a ruling of the CIR.
>In the case of an affirmation, the SOF
may rely wholly on the reasons stated
in the ruling of the CIR.
>Subject to Section 246 of RA 8424, a
reversal or modification of the ruling
shall terminate its effectivity upon the
date of the receipt of written notice of
such reversal or modification by the
taxpayer or by the BIR.
**The expanded jurisdiction under RA
9282 transferred to the CTA the
jurisdiction of the RTCs and the CAs
over matters involving criminal
violation and collection of revenues
under the NIRC.
Rule: An original action for refund
cannot be brought directly to the CTA.
It has to be filed first with the CIR and
it can be brought only to the CTA in
case of the CIR’s denial of the claim or
because of inaction for a period of 180
days from the time of the filing of the
supporting documents.
Original jurisdiction is the power of the
court to take judicial cognizance of a
case instituted for judicial action for
the first time under conditions
provided by law.
Appellate jurisdiction is the authority
of a Court higher in rank to re-examine
the final order or judgment of a lower
court which tried the case now
elevated to judicial review.
The court in division shall exercise
exclusive original or appellate
jurisdiction to review by appeal the
following:
1. Decisions of the CIR in cases
involving disputed assessments,
refunds of internal revenue taxes,
fees, or other charges, penalties in
relation thereto, or other matters
 arising under the NIRC or other
laws administered by the BIR;
2. Inaction by the CIR in cases
involving disputed assessments,
refunds of internal revenue taxes,
fees or other charges, penalties in
relation thereto, or other matters
arising under the NIRC or other
laws administered by the BIR,
where the NIRC or other
applicable law provides a specific
period for action
>In case of disputed assessments, the
inaction of the CIR within the 180-day-
period under Section 228 of the NIRC
shall be deemed a denial for purposes
of allowing the taxpayer to appeal his
case to the Court and does not
necessarily constitute a formal decision
of the CIR on the tax case.
>Should the taxpayer opt to await the
final decision of the CIR on the
disputed assessments beyond the 180-
day-period abovementioned, the
taxpayer may appeal such final
decision to the Court.
>In the case of claims for refund of
taxes erroneously or illegally collected,
the taxpayer must file a petition for
review with the court prior to the
expiration of the two-year-period.
>The court in division shall exercise
exclusive jurisdiction over cases
involving criminal offenses:
1. Original jurisdiction over all
criminal offenses arising from
violations of the NIRC and other
laws administered by the BIR,
where the principal amount of
taxes and fees, exclusive of
charges and penalties, claimed is
P1,000,000 or more; and
2. Appellate jurisdiction over
appeals from the judgments,
resolutions or orders of the RTCs
in their original jurisdiction in
criminal offenses arising from
violations of the NIRC and other
laws administered by the BIR,
where the principal amount of
taxes and fees, exclusive of
charges and penalties, claimed is
less than P1,000,000 or where
there is no specified amount
claimed.
>The court in division shall have
exclusive jurisdiction over tax
collection cases:
1. Original jurisdiction over tax
collection cases involving final and
executory assessments for taxes,
fees, charges and penalties, where
the principal amount of taxes and
fees, exclusive of charges and
penalties, claimed is P1,000,000
or more; and
2. Appellate jurisdiction over
appeals from the judgments,
resolutions or orders of the RTCs
in tax collection cases originally
decided by them within their
respective territorial jurisdiction.
>The CTA en banc shall exercise
exclusive appellate jurisdiction to
review by appeal the following:
1. Decisions or resolutions on
motions for reconsideration or
new trial of the court in division in
the exercise of its exclusive
appellate jurisdiction over tax
collection cases decided by the
RTCs in the exercise of their
original jurisdiction involving
final and executory assessments
for taxes, fees, charges and
penalties, where the principal
amount of taxes and penalties
claimed is less than P1,000,000.
2. Decisions, resolutions or orders of
the RTCs in tax collection cases
decided or resolved by them in the
exercise of their appellate
jurisdiction.
3. Decisions, resolutions or orders
on motions for reconsideration or
new trial of the Court in division in
 the exercise of its exclusive
original jurisdiction over tax
collection cases.
4. Decisions, resolutions or orders
on motions for reconsideration or
new trial of the court in division in
the exercised of its exclusive
original jurisdiction over cases
involving criminal offenses arising
from violations of the NIRC and
other laws administered by the
BIR.
5. Decisions, resolutions or orders
on motions for reconsideration or
new trial of the court in division in
the exercise of its exclusive
appellate jurisdiction over
criminal offenses mentioned in the
preceding subparagraph.
6. Decisions, resolutions or orders of
the RTCs in the exercise of their
appellate jurisdiction over
criminal offenses.
Note: In criminal cases where the CTA
has exclusive original jurisdiction, the
right to file a separate civil action for
the recovery of taxes may not be
reserved.
>The filing of the criminal action shall
necessarily carry with it the filing of
the civil action. No right to reserve the
filing of such action separately from
the criminal action shall be allowed or
recognized.
>Proceedings before the CTA in the
exercise of its exclusive original
jurisdiction are in the nature or trial
de novo.
Trial de novo is the conduct of a formal
trial to prove every minute aspect of
the claim. It is a type of appeal in which
the appeals court holds a trial as if a
prior trial had never been held.
>Trial de novo means trial anew or
trial for the second time. When a new
trial is granted, the original judgment
is vacated and the action stands for
trial de novo and the case is reverted
back to its status prior to the
promulgation of the judgment.
>CTA, not the RTC, exercises exclusive
appellate jurisdiction over all
issuances and rulings issued by the
CIR.
>A taxpayer should first file a motion
for reconsideration to the CIR and
exhaust all administrative remedies
available to him before proceeding to
the CTA.
***Where what is assailed is the
validity or constitutionality of a law, or
a rule or regulation issued by the
administrative agency in the
performance of its quasi-legislative
function, the regular courts have
jurisdiction to pass upon the same.
The CTA has no jurisdiction to try an
assessment case which was never
appealed to it. In hearing a refund case,
the CTA cannot hear in the same case
an assessment dispute even if the
parties involved are the same parties.
>Section 7, RA 1125 provides that the
CTA shall have exclusive jurisdiction to
review, by appeal, decisions of the CIR
in cases involving disputed
assessments, refunds of internal
revenue taxes, fees, or other charges,
penalties in relation thereto, or other
matters arising under the NIRC or
other laws administered by the BIR.
PNOC vs. CA
RA 1125, specifically section 7 on the
jurisdiction of the CTA, is an exception
to PD 242. Thus, CTA shall exercise
exclusive appellate jurisdiction over tax
disputes and controversies enumerated
therein.
>Disputes, claims and controversies,
falling under Section 7 of RA 1125,
even though solely among government
offices, agencies, and
instrumentalities, including GOCCs,
remain in the exclusive appellate
jurisdiction of the CTA.
>Appeal from the CIR’s decision to CTA
should be done within 30 days from
receipt of the decision. This
requirement is jurisdictional and
failure to comply therewith may be
raised in a motion to dismiss.
>The findings of fact of the CTA are
entitled to great weight and will not be
disturbed on appeal unless it is shown
that the lower courts committed gross
error in the appreciation of facts. Said
findings shall be binding on the SC
unless such findings are not supported
by substantial evidence.
>Under RA 9282, appeals from the
decisions of CTA en banc are now
brought to the SC. File a verified
petition on certiorari within 15 days
from receipt of copy of the decision or
resolution. If such party has filed a
motion for reconsideration or for new
trial, the period herein fixed shall run
from the party’s receipt of a copy of the
resolution denying the motion for
reconsideration or for new trial.
POWER OF THE COMMISSIONER TO
ACCESS INFORMATION, AND TO
SUMMON, EXAMINE, AND TAKE
TESTIMONY OF PERSONS.
>In the exercise of the above power,
the CIR is authorized to do the
following:
1. To examine any book, paper,
record or other data which may be
relevant or material to such
inquiry:
2. To access third party information
to be able to ascertain the
correctness of any return:
3. To summon the following:
a. The person liable for tax;
b. The person required to file a
return;
c. Any officer or employee of such
person;
d. Any person having possession,
custody or care of the books of
accounts and other records
containing entries relating to the
business of the person liable for
tax; or
e. Any person to appear before the
CIR or his duly authorized
representative at a time and place
specified in the summons; and
f. Any person to produce such books,
papers, records, or other data, and
to give testimony;
4. To take such testimony of any
person concerned, under oath, as
may be relevant or material to
such inquiry.
5. To conduct tax mapping from time
to time of any revenue district or
region.
>All of these powers shall not be
construed as granting the CIR the
authority to inquire into the taxpayer’s
bank deposits because said power can
only be exercised by the CIR under the
provisions of Section 6(F) of the NIRC.
CIR vs. Gonzales
>The lack of consent of the taxpayer
under investigation does not imply
that the BIR obtained the information
from third parties illegally or that the
information received is false or
malicious. Nor does the lack of consent
preclude the BIR from assessing
deficiency taxes on the taxpayer based
on the documents. To require consent
of the taxpayer would defeat the intent
of the law to help the BIR assess and
collect the correct amount of taxes.
POWER TO EXAMINE RETURNS AND
DETERMINE THE TAX DUE
>This is the authority given to the CIR
or his duly authorized representative
to examine the return filed and assess
the correct amount of tax due whether
or not a return has been filed by such
taxpayer.
>The tax or deficiency tax so assessed
shall be paid upon notice and demand
from the CIR or from his duly
authorized representative.
Note: The CIR can delegate his power
to make tax assessments to
subordinate officers.
>Any tax return, statement, or
declaration filed in any office
authorized to receive the same shall
not be withdrawn.
>But said tax return, statement or
declaration filed may be modified,
changed or amended within three
years from the date of such filing,
provided that no notice for audit or
investigation of such return, statement
or declaration has, in the meantime,
been actually served upon the
taxpayer.
>The CIR may use the power to assess
the proper tax based on the best
evidence obtainable in the following
instances:
1. When a report required by law as
a basis for the assessment of any
national internal revenue tax shall
not be forthcoming within the
time fixed by laws or rules and
regulations, such as when the
taxpayers have neglected or
refused to make returns; or
2. When there is reason to believe
that any such report is false,
fraudulent, incomplete or
erroneous.
Best evidence obtainable shall refer to
any book, paper, record, data or other
information or evidence obtained by
the internal revenue officers from any
person other than the person whose
internal revenue tax liability is subject
to audit or investigation, or from any
officer or officer of the national and
local governments, government
agencies, and instrumentalities,
government-owned or –controlled
corporations, and from all other
sources with whom the taxpayer had
previous transactions or from whom
he received any income, which the
internal revenue officer may use as
basis for his assessment when the
report required by law as basis for the
assessment is not forthcoming within
the time fixed by law, or when there is
reason to believe that any return filed
by the taxpayer is false, fraudulent,
incomplete, or erroneous.
>The assessment made by the CIR or
by his duly authorized representative
shall be prima facie presumed correct
and the burden of proof of showing the
incorrectness or inaccuracy shall of
such assessment or its details lies with
the taxpayer.
CIR vs. Kudos Metal Corp.
>As to the alleged delay of the taxpayer
to furnish the BIR of the required
documents, this cannot be taken
against him. neither can the BIR use
this as an excuse for issuing the
assessments beyond the three-year
period because with or without the
required documents, the CIR has the
power to make assessments based on
the best evidence obtainable.
POWER TO CONDUCT INVENTORY
TAKING, SURVEILLANCE, AND
BENCHMARKING
>This power is the basis of the conduct
of performance bench-marking
method which may be used as the basis
for assessing the taxes.
>When it is found that the taxpayer has
failed to issue receipts and invoices, or
when there is reason to believe that
the books of accounts or other records
of the taxpayer do not correctly reflect
the declarations made, then the CIR
has the power to prescribe
presumptive gross sales and receipts.
>Inventory taking is the stock-taking
at any time during the taxable year
which consists of the verification of the
actual volume, number or level of
inventory or stock so as to ascertain
the flow or average trend of business
transactions for purposes of
determining the correct internal
revenue tax liabilities of the subject.
Open-surveillance – where the
monitoring of the sales or receipts of a
subject taxpayer is done by assigning
Revenue Officers to the subject
business establishment or premises if
there is reason to believe that the
taxpayer is not declaring his correct
income, sales or receipts for tax
purposes.
AUTHORITY TO TERMINATE TAXABLE
PERIOD
>The following are the instances when
the CIR may terminate the taxable
period and order the immediate
payment of the tax for the terminated
period and any remaining tax that is
unpaid:
1. When the taxpayer is retiring from
business subject to tax;
2. The taxpayer intends to leave the
Philippines or to remove his
property therefrom or to hide or
conceal his property; or
3. The taxpayer is performing any
act tending to obstruct the
proceedings for the collection of
the tax for the past or current
quarter or year or to render the
same totally or partially
ineffective unless such
proceedings are begun
immediately.
>Because of the termination of the
taxable period, said taxes shall be due
and demandable immediately.
AUTHORITY TO PRESCRIBE REAL
PROPERTY VALUES
>The CIR has the power to divide the
Philippines into different zones or
areas, and determine the fair market
value or real properties in each zone
or area, upon consultation with
competent appraisers from private
and public sectors.
>For purposes of computing any
internal revenue tax, the value of the
property shall be, whichever is the
higher of:
1. The fair market value as
determined by the CIR; or
2. The fair market value as shown in
the schedule of values of the
Provincial and City Assessors.
>RDO has no authority to unilaterally
use the FMV as basis for determining
the capital gains tax and not the zonal
value as determined by the
Commissioner.
>The CIR’s act of re-classifying the
subject properties from residential to
commercial cannot be done without
first complying with the procedures
prescribed by law.
Note: Section 1(b) of the 1995 Zonal
Valuation Guidelines operates only
when no zonal valuation has been
prescribed. If the properties located in
a certain place were already subject to
a zonal valuation, such as when the
schedule of zonal values in a place
where the subject lots are situated, has
a single classification only – that of a
residential area, then Section 1(b) of
the Zonal Valuation Guidelines does
not apply because it is clear that a
zonal value has already been
prescribed.
>Certain guidelines in the
Implementation of Zonal Valuation of
Real Properties for RDO No. 38,
applying the predominant use of
property as the basis for the
computation of the CGT and DST shall
apply only when the real property is
located in an area or zone where the
properties are not yet classified and
their respective zonal valuation are
not yet determined.
 Zonal valuation was established
with the objective of having an
 efficient tax administration by
minimizing the use of discretion in
the determination of the tax based
on the art of the administrator on
one hand and the taxpayer on the
other hand. Zonal value is
determined for the purpose of
establishing a more realistic basis
for real property valuation. Since
internal revenue taxes, such as
CGT and DST, are assessed on the
basis of valuation, the zonal
valuation existing at the time of
the sale should be taken into
account.
>The burden of proof is on the BIR to
prove that the classification and zonal
valuation in a certain place have been
revised in accordance with the
prevailing memorandum. In the
absence of proof to the contrary, the
Zonal Values of Real Properties must
be followed.
>Actual use is not considered in zonal
valuation, but the predominant use of
other classification of properties
located in the zone.
AUTHORITY TO INQUIRE INTO BANK
DEPOSIT ACCOUNTS AND OTHER
RELATED INFORMATION HELD BY
FINANCIAL INSTITUTIONS, AND
AUTHORITY TO SUPPLY
INFORMATION REQUESTED BY
FOREIGN TAX AUTHORITY
>Under Section 6(f) of the Tax Code,
the CIR or his duly authorized
representative has been allowed, in
certain cases, to inquire or look into
the bank deposits of a taxpayer, viz:
1. To determine the gross estate of a
decedent;
2. Whenever a taxpayer filed an
application for compromise of his
tax liability under Section 204(A)
(2) of the Code by reason of
financial incapacity to pay his tax
liability, wherein his application
shall not be considered unless and
until he waives in writing his
privilege under RA 1405, RA 6426,
otherwise known as the Foreign
Currency Deposit Act of the
Philippines, or under other
general or special laws, and such
waiver shall constitute the
authority of the CIR to inquire into
the bank deposits of the taxpayer.
3. Upon request for the supply of tax
information for a specific taxpayer
or taxpayers from a foreign tax
authority pursuant to an
international convention or
agreement on tax matters to which
the Philippines is a signatory or a
party of: Provided, That the
information obtained from the
banks and other financial
institutions may be used by the
BIR for tax assessment,
verification, audit and
enforcement purposes.
Note: Even a joint account deposit of a
decedent will not preclude the CIR from
inquiring thereon because the law
mandates that if a bank has knowledge
of the death of a person, who
maintained bank deposit account alone,
or jointly with another, it shall not
allow any withdrawal from the said
deposit account unless the CIR has
certified that the taxes imposed thereon
have been paid.
>The provisions of the Tax Code
granting this power is an exception to
the Secrecy of Bank Deposits Law.
>The CIR may obtain information on
bank deposits held by financial
institution to respond to request of
foreign tax authority.
>Once the information is gathered
pursuant to a request for exchange of
information under an international
convention or agreement on tax
matters, the BIR is likewise authorized
to use, for tax assessment, verification,
audit and enforcement purposes, any
such information obtained from
financial institutions.
>For the purpose of exchanging that if the requested information
information pursuant to an was within the jurisdiction of the
international convention or agreement said foreign tax authority, then it
on tax matters, the CIR is hereby would be able to obtain the
designated as the competent authority. information under its laws or in
Any such exchange of information shall the normal course of
not constitute an unlawful divulgence administrative practice and that it
of information under the NIRC. is in conformity with an
>Income tax returns of specific international convention or
taxpayers subject to a request for agreement on tax matters;
exchange of information by a foreign 7. A statement that the requesting
tax authority pursuant to an foreign tax authority is also
international convention or agreement allowed under its domestic laws to
on tax matters shall be open to exchange or furnish the
inspection upon the order of the information subject of the request;
President of the Philippines, under and
rules and regulations as prescribed by 8. A statement that the requesting
the SOF, upon the recommendation of foreign tax authority has
the CIR. exhausted all means available in
>An information received by a foreign its own territory to obtain the
tax authority from the BIR shall be information, except those that
absolutely confidential. would give rise to
disproportionate difficulties.
>In order for the BIR to promptly act >All request for information pursuant
upon a request, the following should to an international convention or
be clearly stated in the request: agreement on tax matters shall be
1. The identity of the person under coursed through the ITAD.
examination or investigation; >A taxpayer shall be duly notified in
2. A statement of the information writing by the CIR that a foreign tax
being sought including its nature authority is requesting for exchange
and the form in which the said information held by financial
foreign tax authority prefers to institutions pursuant to an
receive the information from the international convention or agreement
CIR; on tax matters, within 60 days from
3. The tax purpose for which the receipt of such request.
information is being sought;
4. Grounds for believing that the AUTHORITY TO ACCREDIT AND
information requested is held in REGISTER TAX
the Philippines or is in the AGENTS/PRACTITIONERS
possession or control of the Tax agent/practitioners are those who
person within the jurisdiction of are engaged in the regular
the Philippines; preparation, certification, audit and
5. To the extent known, the name filing of tax returns, information
and address of any person returns or other statements or reports
believed to be in possession of the required by the Code or Regulations;
requested information; those who are engaged in the regular
6. A statement that the request is in preparation of requests for ruling,
conformity with the law and petitions for reinvestigation, protests,
administrative practices of the requests for refund or tax credit
said foreign tax authority such certificates, compromise settlement
and/or abatement of tax liabilities and
other official papers and
correspondence with the BIR, and
other similar or related activities, or
those who regularly appear in
meetings, conferences, and hearings
before any office of the BIR officially on
behalf of a taxpayer or client in all
matters relating to a client’s rights,
privileges, or liabilities under laws or
regulations administered by the BIR,
shall be deemed to be engaged in tax
practice and are required to apply for
accreditation.
POWERS AND FUNCTIONS OF THE
ACCREDITATION BOARDS
>It shall be the duty of the
Accreditation Boards to act upon all
applications to practice before the BIR,
to institute and provide for the
conduct of accreditation, suspension
and discreditation proceedings and to
perform such other functions as
prescribed by the SOF.
>Any adverse decision of the RRAB and
RNAB shall be appealable to the CIR.
>Any adverse decision of the CIR may
be appealed to the SOF, who shall rule
on the appeal within 60 days from
receipt of such appeal. Failure of the
SOF to rule on the appeal within the
prescribed period shall be deemed an
affirmation of the decision of the CIR
denying the accreditation.
>The RRAB and the RNA shall have the
jurisdiction over and shall require
accreditation with the BIR of the
following persons:
1. Individual tax practitioners
engaged in private practice who
are CPAs; CPA-Lawyers who
issue/sign auditor’s certificate or
otherwise perform functions
exclusively pertaining to a CPA;
and individuals other than CPAs
who meet the qualifications
prescribed in these Regulations;
2. Partners of a GPP engaged in the
practice of taxation accountancy,
and/or auditing; their duly
authorized officers or
representatives who regularly
appear or otherwise engaged in
tax practice before the BIR;
3. GPP engaged in the practice of
taxation, accountancy, and/or
auditing who regularly appears or
otherwise engaged in tax practice
before the BIR;
4. Officers or duly authorized
representatives of incorporated
business entities engaged in
accounting, auditing or tax
consultancy services.
>The following individuals are allowed
to appear and practice before the BIR
without undergoing accreditation
proceedings:
1. Individual-taxpayers acting on
their own behalf provided they
present satisfactory identification;
2. Members of the Philippine Bar not
suffering from
suspension/disbarment. However,
they may at their option, to apply
for accreditation;
3. Other individuals presenting
satisfactory roof of identification
or authority in any of the following
circumstances of limited practice
or special appearances:
a. An individual representing a
member of his or her immediate
family;
b. A regular full-time employee
representing an individual
employer;
c. A bona fide officer or a regular
full-time employee in
representation of his employer-
corporation, association or
organized group;
d. A trustee, receiver, guardian,
administrator, executor, or
regular full-time employee in
representation of a trust,
receivership, guardianship or
estate;
 e. An officer or a regular employee by the BIR or from private
of a government unit, agency, or institutions.
instrumentality representing 2. For General Professional
said unit, agency or Partnerships (GPPs). The partners
instrumentality in the course of and/or the duly authorized
his or her official duties. officers and representatives
thereof shall conform with the
>In general, the grant of accreditation following:
shall be based on the applicant’s a. The partners and duly
professional competence, integrity and authorized officers or
moral fitness. The following are the representatives thereof must
minimum qualifications: meet all the qualifications of an
1. For individual tax agents (other individual tax agent prescribed
than a member of the Philippine above. In lieu of the submission
bar) of documents or proof thereof,
a. He must be a CPA or good said qualifications may be
standing with current certified to under oath by the
professional license from the managing partner of the firm;
PRC; and
b. If not a CPA, he must have b. The partnership is one
obtained at least a degree in registered with the SEC.
Law, Juris Doctor or its
equivalent, or a Bachelor’s 3. In the case of incorporated entities
degree in arts, commerce or engaged in accounting and tax
Business Administration with at consultation other than GPPs:
least 18 units in accounting a. The firm must be registered
and/or taxation in a college or with the SEC; and
university recognized by b. The applicant-officer or duly
DepEd/CHED or in a foreign authorized representatives
school of known repute or one thereof must meet all the
duly recognized by its qualifications of an individual
government. as prescribed hereof.
c. Must be of good moral character
d. Must not have been charged >All accredited Tax Agents shall be
with and convicted by final registered.
judgment of a crime involving
moral turpitude, or found guilty AUTHORITY TO PRESCRIBE
of any act or omission penalized ADDITIONAL PROCEDURAL OR
under the Tax Code, or found DOCUMENTARY REQUIREMENTS
guilty of aiding or abetting or >The CIR shall prescribe the manner of
causing the commission of any compliance with any documentary or
of the offense by another; procedural requirement in connection
e. Must be a citizen of the with the submission or preparation of
Philippines; financial statements accompanying the
f. Must have completed six hours tax returns.
per year or a total of 18 hours
for the 3 years of continuing AUTHORITY OF THE CIR TO DELEGATE
professional education in POWER
taxation from >General Rule: The CIR may delegate
trainings/seminars conducted the powers the powers vested in him
to any or such subordinate officials
with the rank equivalent to a division
chief or higher, subject to certain
limitations and restrictions.
Exceptions: The following cannot be
delegated:
1. The power to recommend the
promulgation of rules and
regulations by the SOF.
2. The power to issue rulings of first
impression or to reverse, revoke
or modify any existing ruling of
the Bureau.
3. The power to compromise or
abate any tax liability.
XPNs to the XPNs:
1. The assessments issued by the
regional offices involving basic
deficiency taxes of P500,000 or
less; and
2. Minor criminal violations,
discovered by the regional and
district officials, may be
compromised by the REB.
>The power to assign or reassign
internal revenue officers to
establishments where articles subject
to excise tax are produced or kept, as
often as the exigencies of the revenue
service may require, provided that in
no case the stay of the said revenue
officer in his assignment shall not be
more than two years.
>The power to assign or reassign
Internal Revenue Officers and other
employees to other duties, without
change in their official rank and salary,
connected with the enforcement or
administration of the revenue laws as
the exigencies of the service may
require.
>The internal revenue officers
assigned to perform assessment or
collection functions shall not remain in
the same assignment for more than
three years while the assignment of
internal revenue officers and
employees of the Bureau to special
duties shall not exceed one year.
>BIR Rulings of first impression are the
official positions of the CIR to queries
raised for the first time by a taxpayer
or other stakeholders relative to
clarification and interpretation of tax
laws.
Note: In order to be considered as a
valid BIR ruling of first impression, the
ruling must be the first ever ruling
issued by the CIR on that particular tax
issue. It must also be issued within the
scope of the authority granted by the
CIR, and should not contravene any law
or regulation or any decision of the SC.
MODES OF PAYMENT OF INTERNAL
REVENUE TAXES THROUGH
AUTHORIZED AGENT BANKS
>Aside from the electronic payment
system currently used by some
taxpayers in paying their BIR taxes, the
rest shall pay their tax liabilities
through any of the following modes:
1. Over-the-counter cash payment –
refers to the payment of tax
liabilities to authorized agent
bank in currencies that are legal
tender in the Philippines.
2. Bank debit system – refers to the
system whereby a taxpayer,
through a bank debit
memo/advice, authorizes
withdrawals from his/its existing
bank accounts for payment of tax
liabilities.
>This system is allowed only if the
taxpayer has a bank account with
the AAB taxpayer has a bank
account with the AAB branch
where he/it intends to file and pay
his/its tax
return/form/declaration,provided
said AAB branch is within the
jurisdiction of the BIR RDO/LTDO
where the tax payment is due and
payable.
3. Checks – refers to a bill of
exchange or order instrument
drawn on a bank payable on
demand.
>In the issuance and accomplishment
of checks for the payment of internal
revenue taxes, the taxpayer shall
indicate in the space provided for “Pay
to the order of” the following data:
1. Presenting/collecting bank or the
bank where the payment is to be
coursed; and
2. For account of BIR as payer;
3. Under the account name the TIN.
***The following checks are not
acceptable as payments for internal
revenue taxes:
1. Accommodation check – one
issued or drawn by a party other
than the taxpayer making the
payment.
2. Second endorsed check – one
issued to the taxpayer as payee
who indorses the same as
payment for taxes.
3. Stale check – one dated more than
six months prior to presentation
to the authorized agent bank.
4. Post-dated check – one dated a day
or several days after the date of
presentation to the authorized
agent bank.
5. Unsigned check – one with no
signature of the drawer.
6. Checks with alterations/erasures.
>Second indorsement of checks which
are payable to the BIR or CIR is
absolutely prohibited.
>Taxpayers shall see to it that their tax
returns/payment forms with payment
are filed with and internal revenue
taxes paid to legitimate AABs of the
BIR. Nonetheless, they may confirm
their tax payments with their home
RDO/LTDO or LTDO/RDO where they
are required to file tax
returns/payment form and payment
internal revenue taxes.
EFFECT OF FAILURE OF THE TAX
AGENT TO PAY THE TAX, IN CASE A
TAXPAYER ENTRUSTS THE PAYMENT
OF HIS TAX TO A COLLECTION AGENT.
>The principal is not relieved from
liability for the tax with the
corresponding penalties. Such liability
is not affected by the fact that
misappropriation of the amount
intended for payment of the tax was
made with the connivance of the
collecting officer.
>The CIR cannot reclassify and split
revenue districts at his whim and
caprice, but he may be allowed to
divide/split or classify certain revenue
districts for administrative purposes
and upon the approval of the SOF.
REGIONAL DIRECTORS IN THE
REVENUE REGION
>The Philippines has been divided into
19 Revenue Regions, headed by 19
Revenue Directors.
>These RDs directly execute and
implement the policies, plans,
programs, rules and regulations
promulgated by the SOF as
recommended by the CIR in the
regional areas, and district offices
under their respective jurisdiction.
POWERS:
1. Implement laws, policies, plans,
programs, rules and regulations of
the department or agencies in the
regional area.
2. Administer and enforce internal
revenue laws, and rules and
regulations, including the
assessment and collection of all
internal revenue taxes, charges
and fees;
3. Issue letters of Authority for the
examination of taxpayers within
the region;
4. Provide economical, efficient and
effective service to the people in
the area;
5. Coordinate with regional offices or
other departments, bureaus and
agencies in the area;
6. Coordinate with local government
units in the area;
7. Exercise control and supervision
over the officers and employees
within the region; and
8. Perform such other functions as
may be provided by law and as
may be delegated by the RDs.
DUTIES OF REVENUE DISTRICT
OFFICERS (RDO) AND OTHER
INTERNAL REVENUE OFFICERS
1. Ensure that all laws, rules and
regulations affecting national
internal revenue taxes are
faithfully executed and complied
with;
2. Aid in the prevention, detection
and punishment of frauds and
delinquencies in connection
therewith;
3. Examine the efficiency of all
officers and employees of the BIR
under his supervision;
4. Report in writing to the CIR,
through the RD, any neglect of
duty, incompetency, delinquency,
or malfeasance in office of any
internal revenue officer of which
he may obtain knowledge, with a
statement of will the facts and any
evidence sustaining each case;
5. In the performance of his
assessment functions pursuant to
a Letter of Authority issued by the
RD, examine taxpayers within the
jurisdiction of the district in order
to collect the correct amount of
tax; and
6. Recommend the assessment of any
delinquency tax due in the same
manner that the said acts could
have been performed by the
Revenue Regional Director
himself.
The following are constituted as agents
of the Commissioner:
1. The Commissioner of Customs and
his subordinates with respect to
the collection of national internal
revenue taxes on imported goods;
2. The head of the appropriate
government office and his
subordinates with respect to the
collection of energy tax; and
3. Banks duly accredited by the CIR
with respect to receipt of
payments of internal revenue
taxes authorized to be made thru
banks.
>The national internal revenue taxes
being collected by the BOC for and in
behalf of the BIR on imported foods
are the VAT and Excise Tax, if any.
>It should be noted that the energy tax
on electric power consumption, which
is mandated under P 36 should be
withheld by electric utilities from their
respective residential consumers.
AUTHORITY OF A REVENUE OFFICER
>A letter of authority is the authority
given to the appropriate revenue
officer assigned to perform assessment
functions in any district. It empowers
or enables said revenue officer to
examine the books of account and
other accounting records of a taxpayer
for the purpose of collecting the
correct amount of tax.
>There must be a grant of authority
before any revenue officer can conduct
an examination or assessment.
>The revenue officer so authorized
must not go beyond the authority
given.
>In the absence of such authority, the
assessment or examination is a nullity.
AUTHORITY OF OFFICERS TO 2. The violation is of such character
ADMINISTER OATHS AND TAKE as to warrant the institution of
TESTIMONY criminal proceedings;
>Revenue officials who can administer 3. He shall immediately report the
oaths and take testimony: facts to the CIR, through his
1. The CIR immediate superior, giving the
2. Deputy Commissioners name and address of the offender
3. Assistant commissioners and the names of the witnesses, if
4. Head revenue executive assistants possible;
5. Revenue regional directors 4. In urgent cases, the Revenue
6. Assistant revenue regional Regional Director or the RDO, as
directors the case may be, may send the
7. Division chiefs report to the corresponding
8. Assistant chiefs prosecuting officer, but a copy of
9. Revenue district officers his report shall be sent to the CIR.
10. Special deputies of the
commissioner SOURCES OF NATIONAL INTERNAL
11. Internal revenue officers and any REVENUE TAXES
other employee of the Bureau 1. Income tax – based on income,
thereunto specially deputized by gross or net. Except in cased of
the Commissioner. income/earnings which are
subject to the final withholding tax
>The power to administer oaths and to which are based on the gross
take testimony shall only be income, income tax is a tax on the
performed in any official matter or taxable income.
investigation conducted by them 2. Estate tax – a tax levied, assessed,
regarding matters within the collected and paid upon the
jurisdiction of the Bureau. transfer of the net estate of every
decedent, whether resident or
AUTHORITY OF THE INTERNAL nonresident of the Philippines,
REVENUE OFFICERS TO MAKE based on the value of such net, by
ARRESTS AND SEIZURES including the value at the time of
>This does not require previous his death of all property, personal
warrant but it must cover only or real, tangible or intangible,
violations within the view of the wherever situated.
internal revenue officials and >In case of nonresident decedent
employees when the taxpayer violates who at the time of his death was
any penal law, rules or regulations not a citizen of the Philippines,
administered by the BIR. only that part of the estate which
is situated in the Philippines shall
WHEN VIOLATION OF TAX LAWS AND be included in his taxable estate.
REGULATIONS SHOULD BE REPORTED 3. Donor’s tax – tax levied, assessed
TO THE CIR and collected and paid upon the
1. The internal revenue officer gratuitous transfer by any living
discovers evidence of violation of person, resident or nonresident, of
this Code or of any law, rule or the property by gift, whether the
regulation administered by the transfer is in trust or otherwise,
BIR; whether the gift is direct or
indirect, and whether the property
is real or personal, tangible or
 intangible based on the total net
gifts made during the calendar
year.
>It is also a tax on the privilege of
transmitting one’s property or
property rights to another or
others without adequate and full
valuable consideration.
4. Value Added Tax – a business tax
mandatorily imposed on any
person or entity with gross sales
or receipts exceeding P1,919,500,
who, in the course of trade or
business, sells, barters, exchanges,
leases VATable goods or
properties, or renders VATable
services, and on any person who
imports goods, whether the
importation is for personal use or
business use.
>It is an indirect tax and the
amount of tax may be shifted or
passed on to the buyer, transferee
or lessee of the goods, properties
or services.
5. Percentage Tax – a business tax
imposed on any person or entity
who is not VAT-registered and
who, in the course of trade or
business, sells, barters, exchanges,
leases goods or properties,
renders services which are
exempt from VAT, but whose gross
annual sales or receipts do not
exceed P1,919,500.
>Indirect tax which can be passed
on to the buyer.
6. Excise tax – tax on goods
manufactured or produced in the
Philippines for domestic sale or
consumption or for any other
disposition and to things
imported, which tax shall be in
addition to the VAT.
Specific tax – based on weight or
volume capacity or any other
physical unit of measurement
Ad valorem tax – excise tax
imposed and based on selling
price or other specified value of
the goods.
>As used in the NIRC, excise taxes may
be considered taxes on production as
they are collected only from
manufacturers and producers.
>Basically an indirect tax, excise taxes
are directly levied upon the
manufacturer or importer upon
removal of the taxable goods from its
place of production or from the customs
custody. These taxes, however, may be
actually passed on to the end consumer
as part of the transfer value or selling
price of the goods sold, bartered, or
exchanged.
7. Documentary Stamp Tax – levied
on the exercise by persons of
certain privileges conferred by
law for the creation, revision, or
termination of specific legal
relationships through the
execution of specific instruments.
>It is not a tax on the business
transaction but an excise on the
privilege, opportunity or facility
offered in exchange for the
transaction of the business,
separate and apart from the
business itself.
TAX ON INCOME 2. A nonresident citizen is taxable
only on income derived from
Income – any wealth which flows into sources within the Philippines.
the taxpayer other than a mere return (includes seaman engaged
of capital. Cash received or its exclusively on international
equivalent, the amount of money trade).
coming to a person within a specific 3. An alien individual, whether a
time, or something distinct from resident or not of the Philippines,
principal or capital is taxable only on income derived
from sources within the
Income Tax – a tax based on income, Philippines.
gross or net. It refers to the tax on 4. A domestic corporation, just like a
earnings derived by a taxpayer for resident citizen, is taxable on all
each taxable year arising from income derived from sources
employment or services rendered or within and without the
for engaging in trade or business or for Philippines.
exercising a profession. 5. A foreign corporation, whether
engaged or not in trade or
CRITERIA USES IN IMPOSING business in the Philippines, is
PHILIPPINE INCOME TAX taxable only on income derived
from sources within the
1. Citizenship principle. The basis of Philippines.
the imposition of income tax is the
taxpayer’s citizenship. In case of CLASSIFICATION OF CITIZENS OF THE
resident citizens, they are subject PHILIPPINES FOR PURPOSES OF
to the income tax on income INCOME TAXATION
derived within and without the
Philippines, while nonresident 1. Residents citizens
citizens are only subject to the 2. Nonresident citizens
income tax on the income derived
from within the Philippines. Resident citizens – a citizen in the
2. Residence Principle. The basis of Philippines residing therein.
imposition of income tax is the
residence of the taxpayer. This General Rule: taxable on all income
follows territoriality principle. derived from all sources within and
3. Source Principle. The basis of the without the Philippines subject to the
imposition of income tax is the following tax rates:
source of income. All income
derived from sources within the 1. his regular taxable income for
Philippines shall be subject to each taxable year shall be subject
income tax. to scheduler tax rates of 5% to
32%
GENERAL PRINCIPLES OF INCOME 2. His passive incomes shall be
TAXATION subject to the applicable final
withholding taxes depending on
1. A resident citizen of the the kind of passive income
Philippines is taxable on all received by him.
income derived from sources
within and without the *Estates and trusts are taxable in the
Philippines. same manner as a resident citizen.
Nonresident citizens
1. A Citizen of the Philippines who
establishes his physical presence
abroad with a definite intention to
reside therein.
2. A citizen of the Philippines who
leaves the Philippines during the
taxable year to reside abroad,
either as an immigrant or for
employment on a permanent
basis.
3. A citizen of the Philippines who
works and derives income tax
abroad and whose employment
thereat requires him to be
physically present abroad most of
the time during the taxable year.
4. A citizen who has been previously
considered as nonresident citizen
and who arrives in the Philippines
at any time during the taxable
year to reside permanently in the
Philippines.
*OCW or OFWs are also considered as
nonresident citizens for income tax
purposes.
OCW or OFW – an individual citizen of
the Philippines who is working and
deriving income from abroad. He is
taxable only on income derived from
all sources within the Philippines. To
be considered as one, he must be duly
registered with the POEA. Income
arising out of his overseas employment
is exempt from income tax.
The income of a nonresident citizen
derived from all sources within the
Philippines for each taxable year shall
be subject to the following tax rates:
1. His regular taxable income shall
be subject to the scheduler tax
rates of 5% to 32%
2. However, his passive incomes
shall be subject to the applicable
withholding taxes depending on
the kind of passive income
received by him.
TAXATION OF INCOME OF RESIDENT
ALIENS
>An alien actually present in the
Philippines who is not a mere transient
or sojourner is a resident of the
Philippines for the purposes of income
tax. Where he is a transient of not is
determined by his intentions with
regard to the length and nature of his
stay.
>A mere floating intention, indefinite
as to time, to return to another country
is not sufficient to constitute him a
transient.
>An alien who acquired his residence
in the Philippines retains his status as
a resident until he abandons the same
and actually departs from the
Philippines.
>The income of a resident alien
individual derived during the taxable
year from all sources within the
Philippines shall be subject to the
following tax rates:
1. His regular taxable income shall
be subject to the schedular tax
rates of 5% to 32%
2. However, his passive incomes
shall be subject to the applicable
withholding taxes depending on
the kind of passive income
received by him.
TAXATION OF INCOME OF MARRIED
INDIVIDUALS
>Married individuals are required by
law to file a consolidated income tax
return, but they shall compute
separately their individual income tax
on their income from employment
based on their respective total taxable
income.
>It they have income derived from
business, or there is any income which
cannot be definitely attributed to or
identified as income exclusively
earned or realized by either of the
spouses, the same shall be equally
divided between the spouses for
purposes of determining their
respective taxable income.
>They will be entitled to certain
deductions like the basic personal
exemption and the additional
exemption, whenever applicable, plus
they may choose between the itemized
deductions incurred for engaging in
business or the 40% optional standard
deduction, at the option of the spouses.
Note: If they are physically separated
but no judicial decree they are still
TAXATION OF INCOME OF MINIMUM
WAGE EARNERS
>Compensation income being paid the
statutory minimum wage, as fixed by
the regional tripartite wage and
productivity board/NWPC shall be
exempted from income tax.
>A senior citizen whose salary is
equivalent to the SMW shall be
considered as a MWE entitled to the
exemption.
>Holiday pay, overtime pay, night shift
differential pay and hazard pay shall
also be covered by the exemption.
>However, an employee who
receives/earns additional
compensation such as commissions,
honoraria, fringe benefits, benefits in
excess of the allowable statutory
amount of P30,000 (TRAIN: 90,000),
taxable allowances and other taxable
income shall not enjoy the exemption.
>MWEs receiving other income except
income subject to final tax, in addition
to the compensation income are not
exempted from income tax on their
entire income.
TAXATION OF PASSIVE INCOME OF
CITIZENS AND RESIDENT ALIENS
>The passive income of a citizen or a
resident alien may either be:
1. Passive income subject to the final
tax. This refers to an income which
tax due is fully collected through
the withholding tax system in the
form of final withholding tax. The
payor of the income withholds the
tax and remits it to the
government. The recipient is no
longer required to include the
item of the income subjected of
the final tax as part of his gross
income in his income tax returns.
2. Passive income not subject to the
final tax. This is the passive
income not subject to the final
withholding tax and therefore
should be included in the
determination of the gross income
which will be subject to the
regular income tax rates.
The following are the passive
investments income and the
corresponding final withholding tax
rates of citizens of the Philippines,
including resident alien individuals:
On interest income from 20%
any currency bank
deposit in regular
domestic banks, and yield
or any other monetary
benefit from deposit
substitutes, and trust
funds and similar
arrangements. except GPP, of which he is
Interest income received 7.5% a partner; or his share in
from a depository bank the net income after tax in
under the expanded a joint venture
foreign currency deposit Net capital gains from
system, except those sale of shares of stock in a
received by nonresident domestic corporation, not
individuals. listed and traded in the
Interest income from a 5- Exempted stock exchange except
year long-term deposit of shares sold or disposed
investment in the form of thru the stock exchange.
savings, common or Not over P100,000 5%
individual trust funds, On any amount excess in 10%
deposit substitutes, P100,000
investment management On presumed capital 6%
accounts and other gains from sale of real
investment certificates property located in the
prescribed by the BSP. Philippines except sale of
principal residence
In case of pre-termination Gross income derived 8%
of said long-term deposit from contracts by sub-
before the 5th year, rates contractors from service
are based on the contractors engaged in
remaining maturity: petroleum operations.
4 years to less than 5 5% Royalties – refers to a fixed sum either
years in cash or property equivalent, to be
3 years to less than 4 12% paid at a definite period for the use or
years enjoyment of the thing or right.
Less than 3 years 20%
Royalties from books as 10% Prize – result of an effort made
well as other literary
works and literary works Winnings - result of a transaction
and musical composition where the outcome depends upon luck
Regular royalties 20% or chance.
Prizes, except prizes 20%
amounting to P10,000 or Dividends – refers to the distribution
less made by a corporation, to its
Other winnings, except 20% shareholders out of its unrestricted
PCSO and lotto winnings retained earnings and payable,
(exempt) whether in money or property.
Cash and property 10%
dividends from a Net Capital gains – selling price less
domestic corporation or cost. Selling price refers to the
from an ROHQ of a consideration on the sale or fair
multinational company or market value of the shares of stock at
on the share of an the time of the sale, whichever is
individual in the higher. Cost means the original
distributable net income purchase price plus other costs.
after tax of a partnership,
Presumed – means there is a presumed
fain on the sale regardless of whether
there is a loss. The conclusive
presumption of law is that there is a
gain whenever somebody sells a real
property considered as capital asset
CAPITAL GAINS FROM SALE OF SHARES
OF STOCKS
Dealings on shares of stock of domestic
corporations
1. Net capital gains from sale, barter,
exchange or other disposition of
shares of stock not listed and not
traded in the local stock exchange
held as capital asset shall be
subject to the Capital gains tax of
5% on the net capital gains not
over P100,000 plus 10% on any
amount in excess of P100,000.
2. In the case, however, of sale,
barter or exchange of shares of
stock of domestic corporation
which are traded and listed in the
local stock exchange also held as
capital asset, the same shall be
subject to the ½ of 1% stock
transaction tax
3. If the sale is made by a dealer in
securities, the resulting gains is
considered as ordinary income.
Dealings in the shares of stock of a
foreign corporation
>Not subject to capital gains tax but to
the schedular rates of 5% to 32% in
the case of individual seller and the
normal corporate income tax rate of
30% in the case of corporate-seller.
CAPITAL GAINS FROM SALE OF REAL
PROPERTY CLASSIFIED AS CAPITAL
ASSETS
>The sale by an individual will be
subject to the capital gains tax if the
said property is considered as his
capital asset, including pacto de retro
sales and other forms of conditional
sales. (6% on the presumed gain which
is the higher value between the
current fair market value or the gross
selling price)
Gross selling price – the actual selling
price. For capital gains tax purposes,
the tax base is whichever is the higher
value between the gross selling price
or the current fair market value
>The essence of pacto de retro sale is
that the title and ownership of the
party sold are immediately vested in
the vendee a retro, subject to the
resolutory condition of repurchase by
the vendor a retro within the
stipulated period.
>In case of disposition of real property
classified as capital asset by individuals
to the government, the capital gains
shall be added to the gross income
earned during taxable year subject to
schedular rates imposed therein, or for
the final tax on the presumed capital
gains from sale of real property at 6%,
at the option of the seller.
In case of sale on installment of real
property
1. If the buyer is an individual not
engaged in trade or business, the
following rules apply:
a. If the sale is a sale on the
installment plan, no
withholding of tax is required
to be made on the periodic
installment pays.
b. If the sale is on a cash basis or a
deferred-payment sale not on
the installment plan, the buyer
shall withhold the tax based on
the gross selling price or fair
market value of the property,
whichever is higher, on the
first installment.
2. If the buyer is engaged in trade or
business, these rules shall apply:
a. On installment plan – the tax
shall be deducted and withheld
by the buyer on every
installment which tax shall be
based on the ratio of actual
collection of the consideration
against the agreed
consideration appearing in the
contract to sell applied to the
gross selling price or fair
market value of the property at
the time of the execution of the
contact to sell, whichever is
higher.
consideration – refers to the
selling price exclusive of
interest
b. If the sale is cash basis, the
buyer shall withhold the tax
based on the gross selling price
or fair market value of the
property whichever is higher,
on the first installment.
>The sale of interest in real property
shall be taxable on the part of the
original buyer based on the realized
gain thereon which is measured by the
difference between the agreed
consideration and the amount actually
paid by the said original buyer.
SALE OF PRINCIPAL RESIDENCE
General Rule: If the purpose for the
sale of principal residence is not to buy
a new principal residence, the sale,
barter, or exchange of the said
residence is subject to the capital gains
tax based on the presumed gain on the
sale.
Exemption: May not be subject to
capital gains tax, conditions:
1. Must be the principal residence of
a natural person
2. The proceeds of the sale must be
fully utilized to acquire or
construct a new principal
residence within the 18 calendar
months from the date of sale or
disposition
3. The historical cost or adjusted
basis of the real property sold or
disposed shall be carried over to
the new principal residence built
or acquired.
4. The owner/seller must duly notify
the Commissioner within 30 days
from the sale
5. The tax exemption can only be
availed once every 10 years
6. If there is no full utilization, the
portion of the fain presumed to
have been realized shall be subject
to capital gains tax.
7. The buyer/transferee shall
withhold from the seller and shall
deduct from the agreed selling
price/consideration the 6%
capital gains tax
8. The buyer/transferee shall file
within 30 days the final capital
gains tax return covering the
property bought
Escrow – scroll, writing or deed,
delivered by the grantor, promisor, or
obligor into the hands of a third
person, to be held by the latter until
the happening of the condition
>If within the 30 days period after the
lapse of the 18-month period, the
seller fails to submit the documentary
evidence showing that he has utilized
the proceeds, he shall be treated as
deficient in the payment of his capital
gains tax on the sale, and shall be
assessed for deficiency capital gains
tax, inclusive of penalties and the 20%
interest per annum
NONRESIDENT ALIEN INDIVIDUAL owners, lessors or
distributos.
Classification Interest income from Exempt
the 5-year long-term
1. Those engage in trade and deposit.
business in the Philippines
2. Otherwise In case of pre-
 A nonresident alien individual termination
who shall come to the Philippines 4 years to less than 5 5%
and stay for an aggregate period of years
more than 180 days during any 3 years to less than 4 12%
calendar year shall be deemed a years
nonresident alien doing business Less than 3 years 25%
in the Philippines. Cash and/or property 20%
 In case of regular income, a dividends actually or
nonresident alien individual constructively received
engaged in trade or business in from domestic
the Philippines shall be subject to corporations
the schedular rates of 5% to 32% On net capital gains of
 In case of passive investment sales of shares of stock
derived from sources within the in a domestic
Philippines, the same shall be corporation not listed
subject to the following rates: and traded in the stock
exchange, held as
Interest income from 20% capital asset
any currency bank Not over P100,000 5%
deposit in regular On any amount in 10%
banking units in the excess of P100,000
Philippines On the presumed 6%
Yield or any monetary 20% capital gains from sale
benefit from deposit of real property
substitutes considered as capital
Interest income and 20% assets.
yield from trust funds Gross income from 8% in
and similar petroleum contracts lieu of
arrangements (engaged in petroleum any and
Royalties 20% operations all
Royalties on books, 10% taxes,
literary works and national
musical compositions and
Prizes exceeding 20% local
P10,000 >Only a nonresident alien individual
Winnings, except PCSO 20% engaged in trade, business or in the
and lotto exercise of a profession in the
Gross income from all 25% Philippines shall be entitled to a
sources with the personal exemption. He should file a
Philippines derived by true and accurate return of the total
nonresident income received by him from all
cinematographic film sources in the Philippines.
Taxation of income of nonresident
alien individuals not engaged in trade
or business in the Philippines.
>A nonresident alien individual whose
aggregate stay in the Philippines for
any one calendar year is 180 days or
less is considered as a nonresident
alien not engaged in trade or business
within the Philippines.
Rules on taxation
on the gross amount of 25%
interest, cash and/or property
dividends, rents, salaries,
wages, premiums, annuities,
compensation…
On net capital gains from
shares of stock of domestic
corporation not listed and
traded as stock exchange, held
as capital asset by individuals
Not over P100,00 5%
In excess of P100,000 10%
On the presumed capital gains 6%
from sale of real property
considered as capital assets
TAXATION OF INCOME OF ALIENS
INDIVIDUALS SUBJECT TO THE
PREFERENTIAL TAX RATE
>Taxation of income on alien individual
employed by RHQs and ROHQs of
Multinational Companies
 Levied, collected and aid for each
taxable year upon the gross
income received.
 Multinational company – a foreign
firm or entity engaged in
international trade with affiliates
or subsidiaries or branch offices in
the Asia-Pacific region and other
foreign markets.
>Filipinos exercising the option to be
taxed at 15% preferential rate for
occupying the same managerial or
technical position as that of an alien
employed in an ROHQ or RHQ must
meet all the following requirements:
1. Position and function test – the
employee must occupy a
managerial position or technical
position and must actually be
exercising such functions
pertaining to said positions
2. Compensation Threshold test – in
order to be considered managerial
or technical employee for income
tax purposes, the employee must
have received, or is due to receive
under a contract of employment, a
gross annual taxable
compensation of at least P975,000
3. Exclusivity test – the Filipino
managerial or technical employee
must be exclusively working for
the RHQ or ROHQ as a regular
employee and not just consultant
or contractual personnel
Rank and file employees – who are
holding neither managerial nor
supervisory position
Managerial - who is vested with
powers or prerogatives to lay down
and execute management policies
and/or to hire, transfer, suspend, lay-
off, recall, discharge, assign or
discipline employees
Supervisory – those who effectively
recommend such managerial actions if
the exercise of such authority is not
merely routinary or clerical in nature
but requires the use of independent
judgment.
>There shall be levied, collected and
paid for each taxable year upon the
gross income received by any alien
individual employed by offshore
banking units established in the
Philippines as salaries, wages,
annuities,compensation, remuneration
and other emoluments, a tax equal to
15% of such gross income.
TAXATION OF INCOME OF GENERAL
PROFESSIONAL PARTNERSHIPS AND
THE PARTNERS THEREOF
General Professional Partnership – a
partnership forms by professionals for
the sole purpose of exercising their
common profession, no part of income
of which is derived from engaging in
any trade or business.
>GGP not subject to income tax. But
they are required to file returns of
their income for the purpose of
furnishing information. Partners are
taxable upon their distributive shares
of the net income. However, drawings,
advances, sharings, allowances,
stipends and the like, are subject to the
15%, if the payment to the partner for
the current year exceeds P720,000;
and 10% EWT if otherwise.
Pass-through entity – where its income
is ultimately taxed to the partners
compromising it.
TAXATION OF INCOME OF OTHER
KINDS OF PARTNERSHIP
General Rule: Partnerships are taxable
just like a corporation.
>Their distributive shares are taxed as
dividends subject to the final
withholding tax of 10%.
>All other partnerships, no matter how
created or organized, which include
unregistered joint ventures and
business partnerships, are considered
as a taxable corporations subject to the
corporate income tax.
>Co-ownership occurs when two or
more heirs inherit an undivided
property from a decedent, or a donor
makes a gift of an undivided property
in favor of two or more donees. It is
automatically converted into an
unregistered partnership the moment
the said common properties and/or
income derived therefrom are used as a
common fun with the intern to make
profits.
Requisites of a joint venture
1. Each part must make a
contribution
2. There must be an intent to make
profits which must be shared
among the parties
3. There must be a joint proprietary
interest and right of mutual
control over the subject matter of
the enterprise
4. There is a single business
transaction.
General Rule: a joint venture is not
taxed as a corporation and is taxed just
like a GPP.
1. The joint venture should be for the
undertaking of a construction
project
2. Involve joining or pooling of
resources by licensed local
contractors
3. These local contractors are
engaged in construction business
4. The joint venture itself must
likewise duly licensed
Note: Joint ventures involving foreign
contractors may also be treated as a
non-taxable corporation only if the
member foreign contractor is covered
by a special license as contractor by the
PCAB of the DTI.
>Absence any of the above
requirements, the joint venture is
taxable as a corporation.
TAX ON CORPORATIONS
Domestic Corporations – those created
or organized under the Philippine
laws.
>As a general rule, the law imposes a
30% normal corporate income tax rate
on the taxable income received by
domestic corporations and taxable
partnerships.
 Sources within and without the
Philippines.
Proprietary educational institutions
and hospitals
Proprietary educational institutions
and hospitals which are non-profit
shall pay a tax of 10% on their taxable
income, except those covered by
section 27(d). However, if the gross
income from unrelated trade, business
or other activity exceeds 50% of the
total gross income derived by such
educational institutions or hospitals
from all sources, the tax rate of 30%
shall be imposed on the entire taxable
income.
Predominance test – if the gross income
from unrelated trade, business or
other activity of the non-profit
institution exceeds 50% of the total
gross income from all sources, then the
entire taxable income shall be subject
to the regular corporate income tax
rate of 30%.
Unrelated trade, business or other
activity – the conduct of which is not
substantially related to the exercise or
performance of its primary purpose or
function.
Proprietary educational institution –
any private school maintained and
administered by private individuals or
groups with an issued permit to
operate
>Section 27 (b) of the NIRC imposes a
10% preferential tax rate on the
income of proprietary non-profit
educational institutions and hospitals.
Proprietary – private with a
government permit
Nonprofit – no net income or asset
accrues to or benefits any member or
specific person, with all the net income
or asset devoted to the institution’s
purposes and all its activities
conducted not for profit.
Subject to 30% tax
1. When gross income from
unrelated trade, business or other
activity exceeds 50% of their total
gross income derived from all
sources
2. Those claiming to be within the
coverage of section 27 (b) of the
NIRC that fails to meet above
definition of proprietary and
nonprofit.
CIR vs. St. Luke’s Medical Center
>Revenues from paying patients are
income received from activities
conducted for profit. The total revenues
from paying patients are not even
incidental to its charity expenditure
for non-paying patients. Being a non-
stock, non-profit corporation does not,
by this reason alone, completely exempt
an institution from tax. An institution
cannot use its corporate form to
prevent its profitable activities from
being taxed. St Luke’s is not operated
exclusively for charitable or social
welfare purposes insofar as its
revenues from paying patients are
concerned. However, it remains a
proprietary nonprofit as long as it does
not distribute any of its profits to its Passive Income of Domestic
members and such profits are Corporation which are subject to Final
reinvested pursuant to the corporate Withholding Tax
purposes. Interest income from any 20%
currency bank deposit in
Government-Owned or Controlled regular banking units.
Corporations Yield or any monetary 20%
benefit from deposit
>Exempt from paying income tax substitutes
>PD 1177 Interest income and yield 20%
>RA 8424, 5 GOCCs were expressly give from trust funds and
the exemption from payment of the similar arrangements
corporate income tax Royalties derived from 20%
GSIS sources within the Phil.
SSS Interest income derived 7.5%
PHIC from a depository bank
PCSO under the Foreign
PAGCOR Currency Deposit Unit.
>RA 9337 eliminated PAGCOR Interest income from 10%
>RA 10026 added local water district. foreign currency loans
>Philippine Health Insurance Corp. is granted by depository
not exempt from its responsibilities of bank under the expanded
being a withholding agent of the BIR. foreign currency deposit
Among those responsibilities include system to residents other
the withholding of the correct tax on than the OBUs in the Phil.
its income payments, ranging from the or other depository banks
payment of compensation to its under the expanded
employees to the payment of its depository system
operating expenses such as acquisition
On net capital gains from
of goods and equipment, payments for
sale of shares of stock of a
services rendered to the corporations.
domestic corporation not
Under existing issuances, PHIC
listed and traded in the
payments to medical practitioners are
stock exchange.
subjected to EWT rates of 10% or 15%,
Not over P100,000 5%
whichever is appropriate, based on the
On any amount in excess 10%
medical practitioner’s declared gross
of P100,000
income in a year. Payment of hospitals
On resumed capital gains 6%
for medical services provided to PHIC
from sale of lands and/or
members are subjected to EWT rate of
buildings located in the
2%. Professional fees, talent fees, etc.
Phil. classified as capital
for services rendered by professionals
assets.
are subject to expanded withholding
Gross income from 8% in lieu
tax of either 10%, if the gross income
contracts engaged in of any and
of the professional does not exceed
petroleum operations. all taxes,
P720,000 in a year, or 15%, if the
nat’l or
professional’s gross income exceeds
local
P720,000 in a year. The facilities paid
to the hospitals or clinic, the EWT rate
shall be 2%.
Note: The dividends received by a
domestic corporation from another
domestic corporation are not subject
to income tax, but the dividends
received by a domestic corporation
from a foreign corporation are subject
to income tax and shall form part of
the gross income tax.
MINIMUM CORPORATE INCOME TAX
(MCIT)
>A MCIT of 2% of the gross income as
of the end of the taxable year (whether
fiscal or calendar year) is imposed
upon any domestic corporation
beginning on the 4th taxable year
immediately following the taxable year
in which such corporation commenced
its business operations. The MCIT shall
be imposed whenever such
corporation has zero or negative
taxable income or whenever the
amount of MCIT is greater than the
normal income tax computed due from
such corporation.
 Normal income tax – the income
tax rates at 345 on Jan. 1, 1998;
33% effective Jan. 1, 1999; 32%
effective Jan. 1, 2000 and 35%
effective Nov. 5, 2005
 In the case of a domestic
corporation whose operations or
activities are partly covered by
the regular income tax system
and partly covered under a
special income tax system, the
MCIT shall apply on operations
covered by the regular income tax
system.
 Any excess of the MCIT over the
normal income tax shall be
carried forward on an annual
basis and credited against the
normal income tax for 3
immediately succeeding taxable
years.
 The SOF may, upon the
recommendation of the
Commissioner, suspend the
imposition of the MCIT upon
submission of proof by the
corporation, duly verified by the
Commissioner’s authorized
representative, that the
corporation sustained substantial
losses on account of prolonged
labor dispute or because of force
majeure, or because of legitimate
business reverses.
 For purposes of MCIT, the taxable
income in which business
operations commenced shall be
the year in which the domestic
corporation registered with the
BIR.
 MCIT payable on a quarterly basis
and on a yearly basis.
GR. MCIT is applicable only to
domestic corporations that are
subject to the normal corporate
income tax.
Domestic Corporations which are not
subject to MCIT
1. Those operating as proprietary
educational institutions subject to
tax at 10% on their taxable
income.
2. Those engaged in hospital
operations which are non-profit
subject to tax at 10% on their
taxable income
3. Those engaged in business as
depositary banks
4. Firms that are taxed under a
special income tax regime
 The imposition of MCIT is
designed to forestall the
prevailing practice of domestic
corporations and resident foreign
corporations of overclaiming
deductions in order to reduce
their income tax payments.
 As a tax on gross income, MCIT
prevents tax evasion and
 minimizes tax avoidance schemes year in which the corporation
achieved through sophisticated commenced its business
and artful manipulations of operations, whenever the amount
deductions and other stratagems. of the minimum corporate income
tax is greater than the normal
TAXATION OF INCOME OF RESIDENT income tax due for such year.
FOREIGN CORPORATION  MCIT shall not apply to resident
foreign corporations which are
Resident foreign corporation – subject to normal income tax.
organized, authorized, or existing 1. Resident foreign
under the laws of any foreign country, corporations engaged in
but engaged in trade or business business as international
within the Philippines. carrier subject to tax at 2 ½
of their gross Philippine
 A resident foreign corporation billings
shall be subject to the 2. Resident foreign
regular/normal corporate income corporations engaged in
tax rate of 30% of the taxable business as Offshore Banking
income derived within the Units on their income from
Philippines effective Jan. 1, 2009. foreign currency transactions
 A foreign corporation transacting with local commercial banks
business in the Philippines 3. Resident foreign
independently from its branch is corporations engaged in
not considered the same juridical business as ROHQs subject to
entity as its branch office in the tax at 10% of their taxable
Philippines. income
 If the business transaction is 4. Firms that are taxed under
conducted through the branch special income tax regime
office, the latter becomes the
taxpayer, and not the foreign TAXATION OF INCOME OF
corporation. INTERNATIONAL CARRIERS
 Engaged connotes more than a
single act or a single transaction;  Gross of Philippine Billings of
involves some continuity of International Carriers – those
action. carriers doing business in the
 To engage in business – signifying Philippines who shall pay a tax of
an employment or occupation 2.5% on its Gross Philippine
which occupies one’s time, Billings.
attention and labor for the 1. International air carrier – a
purpose of a livelihood or profit. foreign airline corporation
 Taxable because they do activity doing business in the
in the Philippines. Philippines having been
granted landing rights in any
MCIT on Resident foreign corporation Philippine port to perform air
transportation which is
 An MCIT of 2% of the gross subject to the Gross
income from sources with the Philippine Billings tax of
Philippines is imposed beginning 2.5%.GPB refers to the
on the 4th taxable year amount of gross revenue
immediately following the taxable derived from carriage of
 persons, excess baggage, points outside the Philippines,
cargo and mail originating which include block charter,
from the Philippines. placed under the custody or
2. International shipping - a control of a charterer by a
foreign shipping corporation contract/charter for rent or
doing business in the hire relating to a particular
Philippines having been airplane.
granted landing rights in any
Philippine port to perform Classification of Passengers of an
international shipping International Air Carrier
activities subject to GPB of
2.5%. 1. Transient Passengers – who
 May avail of originated from outside of the
exemption on the Philippines towards a final
basis of an applicable destination also outside of the
tax treaty or Philippines but stops in the
international Philippines for a period of less
agreement than 48 hours, or even more
 GPB – gross revenue than 48 hours, if the delay is
whether for due to force majeure or
passenger, cargo or reasons beyond his control.
mail originating from 2. Non-revenue passengers –
the Philippines up to Resolution No. 788 regarding
final destination, Free and Reduced fare or rate
regardless of the transportation and any other
place of sale or free/reduced rate mileage
payments of the programs administered by
passage or freight individual international air
documents. carriers.
3. Adult passenger – who has
Different Kinds of International Air attained his 12th birth
Carriers 4. Children – attained their 2nd
but not their 12th birthday
1. Off-line carrier – having no 5. Infant – who has not attained
flight operation to and from his 2nd birthday
the Philippines. Not subject to
any tax in the Philippines but  Any international air carrier
without prejudice to having flights originating from
classifying such taxpayer any port or point in the
under a different category Philippines is subject to the Gross
pursuant to a separate Billings Tax of 2.5%, unless
provision under this code. subject to a different tax rate
2. On-line Carrier – having or under the applicable tax treaty to
maintaining flight operations which the Philippines is a
to and from the Philippines. signatory.
3. Chartered flight – flight  In computing the GPB, there shall
operation which includes be included the total amount of
operations between ports or gross revenue derived from:
point situated in the 1. Passage of persons
Philippines and ports and
  The gross revenue for  Gross revenue shall be
passengers whose computed based on the
tickets are sold in the actual revenue derived
Philippines shall be the as appearing on the
actual amount derived official receipt or any
from transportation similar document for the
services on its said transaction.
uninterrupted flight 3. Cargo
from the Philippines to 4. Mail
its final destination as  Gross revenue for cargo
reflected in the and mail shall be
remittance area of the determined based on the
tax coupon forming an revenue realized from
integral part of the plane the carriage thereof. It
ticket. For this purpose appears on the airway
the GPB shall be bill after deducting
determined by therefrom the amount of
computing the monthly discounts granted.
average net fare of all
the tax coupons issued Excluded from the computation of
for the month and taxable base of Gross Philippine Billing
multiplied by the
corresponding total 1. Non-revenue passengers
number of passengers 2. Refunded tickets
flown for the month as
declared in the flight - In case of a flight that originated from
manifest. the Philippines but transshipment
 For tickets sold outside takes place elsewhere in another
the Philippines, the aircraft belonging to a different airline
gross revenue on a company, the GPB shall be that portion
continuous and of the revenue corresponding to the
uninterrupted flight leg flown from any point in the
from the Philippines to Philippines to the point of
final destination shall be transshipment.
determined using the
locally available net - In computing the taxable amount, the
fares applicable to such foreign exchange conversion rate to be
flight taking into used shall be the average monthly
consideration the airline rate as provided in the Bank
seasonal fare rate Settlement Plan monthly sales report
established at the time or the bankers association of the
of the flight, the class or Philippines rate, whichever is higher.
passage the
classification of - If an international carrier maintains
passenger, the date of flights to and from the Philippines, it
embarkation, and the shall be taxed at the rate of 2.5% of its
place of final GPB, which international air carriers
destination. that do not have flights to and from the
2. Excess baggage Philippines but nonetheless earn
income from other activities in the
country will be taxed at the rate of
30% of such income.
- We have jurisdiction over the sales of
tickets in the Philippines by the
general sales agents or offline air
carriers because the sale of the tickets
is the activity that produces income.
GR. Resident foreign corporations shall
be liable for 30% income tax on their
income from within the Philippines.
XPN. Those resident foreign
corporations that are international
carriers – 2.5% of their GPB
NOTE: offline international carrier is
an exception to the exception.
TAXATION OF INCOME OF OFFSHORE
BANKING UNITS (OBU)
 OBU – a branch, subsidiary or
affiliate of a foreign banking
corporation which is duly
authorized by the BSP as a
separate accounting unit to
transact offshore banking
business in the Philippines.
 Offshore Banking – the conduct of
banking transactions in foreign
currencies involving the receipt of
funds principally from external
sources and the utilization of such
funds.
 Foreign currency deposit unit
(FCDU) – an accounting unit or
department in a local bank or in
an existing local branch or foreign
banks, which is authorized by the
BSP to operate under the
expanded foreign currency
deposit system.
 Deposits – funds in foreign
currencies which are accepted and
held by an OBU in the regular
course of business, with the
obligation to return equivalent
amount to the owner thereof, with
or without interest.
 Gross offshore income – all income
arising from transactions allowed
by the BSP conducted by and
between
1. In the case of an OBU with
another OBU or with an
expanded FCDU or with a
nonresident
2. In the case of an
expanded FCDU with
another expanded FCDU
or with an OBU or with a
nonresident
 Gross onshore income – gross
interest income arising from
foreign currency loans and
advances to and/or investments
with residents made by OBUs or
EFCDUs.
 Taxation of income of OBU
1. Income derived from foreign
currency transactions with
nonresidents, other OBUs, local
commercial banks, including
branches of foreign banks
authorized by BSP to transact
business with OBUs are exempt
from income tax
2. Any income or nonresidents
from transactions with
depository banks under the
expanded system are exempt
from income tax
3. The net income from such
transactions shall be subject to
the regular income tax rate of
30%
4. Interest income derived from
foreign currency loans granted
to residents are subject to the
final withholding tax of 10%
 The income earner cannot evade its
liability for FCDU onshore tax by
shifting the blame on the payor-
borrower as the withholding
agent. As such, it is liable for
payment of deficiency onshore tax.
 Taxable income derived from RBUs
is subject to corporate income tax
rate of 30%.
 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 the
regular income tax. In computing
for amount allowable as deduction
from RBU operations, all costs and
expenses should be allocated
between the RBU and
FCDU/EFCDU or OBU using the
following basis:
1. By specific identification
 Expenses which can be
specifically identified to
a particular unit shall be
reported and declared
as the cost or expenses
of that unit.
2. By allocation
 Common expenses or
expenses that cannot be
specifically identified for
a particular unit shall be
allocated based on
percentage share of
gross income earnings of
a unit to the total gross
income earnings subject
to regular income tax
and final tax.
BRANCH PROFIT REMITTANCE TAX
 The rationale for the imposition of
the Branch Profit Remittance Tax
is in order to equalize the tax
burden of foreign corporations
maintaining, on one hand, local
branch offices, and organizing, on
the other hand, a subsidiary
domestic corporation.
 The branch profit remittance tax of
15% 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 remuneration
for technical services, salaries,
wages, premiums, annuities,
emoluments, or other fixed or
determinable annual, periodic or
causal gains, profits, income and
capital gains received by a foreign
corporation during taxable year
from all sources within the
Philippines shall not be treated as
branch profits unless the same are
effectively connected with the
conduct of its trade r business in
the Philippines.
 Only profits remitted abroad by a
branch office to its head office
which are effectively connected
with its trade or business in the
Philippines are subject to the 15%
branch profit remittance.
TAXATION OF INCOME OF RHQs AND
ROHQs OF MULTINATIONAL
COMPANIES
 Multinational company – foreign
firm or entity engaged in
international trade with affiliates
or subsidiaries or branch offices in
the Asia-Pacific Region and other
foreign markets.
 Regional or Area Headquarters
(RHQs) – 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 Asian-Pacific
Region and other foreign markets.
 Not subject to income tax
 Regional Operating Headquarters
(ROHQs) – a foreign business
entity which is allowed to derive
income in the Philippines by
performing qualifying services to
 its affiliates, subsidiaries or Gross income derived 8% of the
branches in the Philippines, in the from contracts by gross
Asia-Pacific Region and other subcontractors from income
foreign markets. service contractors derived
 Pay a tax of 10% of their engaged in petroleum from
taxable income operations. such
contracts,
PASSIVE INCOME OF RESIDENT in liew of
FOREIGN CORPORATIONS SUBJECT TO any and
FINAL WITHHOLDING TAX all taxes,
national
Income tax from any 20% and local
currency bank deposit
and yield or any other
monetary benefit from  Dividends received by a resident
deposit substitutes and foreign corporation from a
from trust funds and other domestic corporation liable to
similar arrangements tax under this code shall not be
derived from sources subject to dividends tax.
within the Philippines
Royalties derived from 20% TAX ON NON-RESIDENT FOREGN
sources within the CORPORATION
Philippines
Interest income derived 7.5%  Applies to foreign corporation not
from a depository bank engaged in trade or business with
under the expanded FCD the Philippines.
system  Income derived from all sources in
Interest income derived 10% the Philippines shall be subject to
by a resident depository the 30% final withholding tax
bank under the expanded based on the gross income
FCD system from foreign received during each taxable year.
currency loans granted by  Taxation of other income:
such depository banks to
residents, other than On gross income of 25%
OBUs in the Philippines or nonresident
other depository banks cinematographic film
under the expanded owner, lessor, or
system. distributor
On the net capital gains On gross rental income 4.5%
during the taxable year or charter fees derived
from sale of shares of by nonresident owner or
stock in a domestic lessor of vessels from the
corporation not traded in leases or charters to
the tax exchange, except 5% Filipino citizens or
shares sold or disposed of 10% corporations approved
through the stock by MARINA
exchange On gross rental income 7.5%
Not over P100,000 of nonresident lessor of
On any amount in aircraft, machineries and
excess of P100,000 other equipment
 On interest income on 20%
foreign loans derived by
nonresident foreign
corporation
Incorporate dividends 15%
from a domestic
corporation.
On capital gains from
sale of shares of stock
not traded in the local
stock exchange 5%
Not over P100,000 10%
On any amount in
excess of P100,000
 While the general rule is that a
foreign corporation is the same
juridical entity as its branch in the
Philippines, however, when the
corporation transacts business in
the Philippines directly and
independently of its branch, the
taxpayer would be the foreign
corporation itself and subject to the
dividends tax similarly imposed on
nonresident foreign corporation.
 Condition for the preferential tax
rate of 15% on dividends
 Foreign corporation must
show that the country of
origin grants a tax credit
to the nonresident
foreign corporation, taxes
deemed to have been paid
in the Philippines
equivalent to at least 15%
against the tax due from
the said nonresident
foreign corporation.
 CIR vs. Procter and
Gamble. Normally, the
Philippines imposes a
higher 30% tax rate on
corporations. But since
the Philippines seeks to
lessen the impact of
double taxation between
countries, we impose only
the lower tax rate of 15%
on dividends subject to
the condition that the
country in which the
nonresident foreign
corporation is domiciled
allows a tax credit of
15%.
IMPROPERLY ACCUMULATED
EARNINGS TAX
 Imposed for each taxable year in
the improperly accumulated
earnings taxable income by
closely-held domestic
corporations. Shall not apply to
the following:
1. Banks and other non-bank
financial intermediaries
2. Insurance companies
3. Publicly-held corporations
4. Taxable partnerships
5. Genereal rofessional
partnershis
6. Non-taxable joint ventures
7. Enterprises duly registered
with PEZA, and enterprises
registered pursuant to the
Bases Conversion and
Development Act of 1992
 Purpose: to avoid the income tax
with respect to its shareholders or
the shareholders of any
corporation, by permitting the
earnings and profits of the
corporation to accumulate instead
of dividing them among or
distributing them to the
shareholders.
 The 10% IAET shall only apply to
corporations formed or availed for
the purpose of avoiding income
tax, be permitting earnings and
profits to accumulate beyond
reasonable needs of the business,
instead of dividing or distributing
said profits to its shareholders.
 Closely-held corporations – those
corporations at least 50% of the
total combined voting power of all
classes of stock entitled to vote is
 owned directly or indirectly by or
for not more than 20 individuals.
Those not falling herein are
considered publicly-held
corporations. The following rules
shall apply in determining
whether a corporation is a closely-
held one:
1. Stock not owned by
individuals – stock owned
directly or indirectly by
or for a corporation,
partnership, estate or
trust shall be considered
as being owned
proportionately by its
shareholders, partners or
beneficiaries
2. Family and partnership
owners – an individual
shall be considered as
owing the stock owned
directly or indirectly by
or for his family or
partner.
3. Option to acquire stocks –
if any person has an
option to acquire stock,
such stock shall be
considered as owned by
such person
4. Constructive ownership
as actual ownership
 For corporations found subject to
IATaxable Income is first
determined by adding to the
taxable year’s the following:
1. Income exempt from tax
2. Income excluded from gross
income
3. Income subject to final tax
4. The amount of operating loss
carry-over deducted
 The taxable income as thus
determined shall be reduced by
the sum of:
1. Income tax paid/payable for
the taxable year
2. Dividends actually or
constructively paid/issued
from applicable year’s taxable
income
3. Amount reserved for the
reasonable needs of the
business emanating from the
covered year’s taxable
income.
 The resulting IATI is thereby
multiplied by 10% to get the IAET.
 The amount that may be retained,
taking into consideration the
accumulated earnings within the
reasonable needs of business shall
be 100% of the paid up capital or
the amount contributed to the
corporation representing the par
value of the share of stock.
 Once the profit has been subjected
to IAET, the same shall no longer
be subjected to IAET in later years
even if not declared as dividend.
 Notwithstanding the imposition of
IAET, profits which have been
subjected to IAET, when finally
declared as dividends, shall
nevertheless be subject to tax on
dividends, shall nevertheless be
subject to tax on dividends except
in those instances where the
recipient is not subject thereto.
 An accumulation of earnings or
profits is unreasonable if it is not
necessary for the purpose of the
business.
 Immediacy test
 Reasonable needs of
business – the immediate
needs of the business,
including reasonable
anticipated needs.
 If not for reasonable
needs, penalty tax would
apply.
 The following constitute
accumulation of earnings
for the reasonable needs
of the business:
1. Allowance for the
increase in the
accumulation of
 earnings up to 100% and/or relevant
of the aid-up capital document evidence.
of the corporation as  The dividends must be declared
of Balance sheet date, and paid or issued not later than
inclusive of one year following the close of
accumulations taken the taxable year, otherwise, the
from other years IAET, if any, should be paid
2. Earnings reserved for within 15 days thereafter.
definite corporate  The fact that a corporation is a
expansion projects or mere holding company or
programs requiring investment company shall be
considerable capital prima facie evidence of a purpose
expenditure as to avoid the tax upon its
approved by the shareholders or members.
Board of Directors or Likewise, the fact that the
equivalent body earnings or profits of a
3. Earnings reserved for corporation are permitted to
buildings, plants or accumulate beyond the
equipment reasonable needs of the business
acquisition as shall be determinative of the
approved by the purpose to avoid the tax. –
Board of Directors or preponderance of evidence.
equivalent body  Holding or investment company –
4. Earnings reserved for a corporation having practically
compliance with any no activities except holding
load covenant or pre- property, and collecting the
existing obligation income therefrom or investing
established under a the same.
legitimate business  The following are prima facie
agreement avoidance of income tax upon
5. Earnings required by shareholders:
law or applicable 1. Investment of substantial
regulations to be earnings and profits of the
retained by the corporation in unrelated
corporation or in business or in stock or
respect of which securities of unrelated
there is legal business
prohibition against 2. Investment in bonds and
its distribution other long-term securities
6. In the case of 3. Accumulation of earnings in
subsidiaries of excess of 100% of paid-up
foreign corporation capital, not otherwise
in the Philippines, all intended for the reasonable
undistributed needs of the business.
earnings intended or  It is unreasonable if it is not
reserved for required for the purpose of the
investments within business
the Philippines as  Immediate test - The reasonable
can be proven by needs of business mean the
corporate records immediate needs of the business,
 and it is generally held that if the 7. Civil league or organization
corporation did not prove an not organized for profit but
immediate need for the operated exclusively for
accumulation of the earnings and promotion of social welfare
profits, the accumulation was not 8. A non-stock and nonprofit
for the reasonable needs of the educational institution
business and the penalty tax 9. Government educational
would apply. institutions
10. Farmers or other mutual
EXEMPTIONS FROM TAX ON typhoon or fire insurance
CORPORATIONS company, mutual ditch or
irrigation company, or like
1. Labor, agriculture or organization of a purely local
horticultural organization not character, the income of
organized principally for which consists solely of
profit assessments, dues, and fees
2. Mutual savings bank not collected from members for
having a capital stock the sole purpose of meeting
represented by shares, and its expenses
cooperative bank without 11. Farmers’, fruit growers’ or
capital stock organized and like association organized and
operated for mutual purposes operated as a sales agent for
and without profit the purpose of marketing the
3. A beneficiary society, order or products of its members and
association, operating for the turning back to them the
exclusive benefit of the proceeds of sales, less the
members necessary selling expenses on
4. Cemetery company owned the basis of the quantity of
and operated exclusively for produce furnished by them.
the benefit of its members  Exemptions are construed strictly
5. Nonstick corporation or against the grantee and liberally
association organized and in favor of the government.
operated exclusively for  A corporation is nonstick where
religious, charitable, no part of its income is
scientific, athletic, or cultural distributable as dividends to its
purposes, or for the members, trustees or officers.
rehabilitation of veterans, no  It is a nonprofit if no income
part of its net income or asset accrues to the benefit of any
shall belong to or inure to the member of the corporation.
benefit of any member,  It is necessary that every
organizer, officer or any organization claiming exemption
specific person file an affidavit with the
6. Business league, chamber of Commissioner showing the
commerce, or board of trade, character of the organization.
not organized for profit and  When an organization has
no part of the net income established its right to exemption,
which inures to the benefit of it need not make and a file a
any private stockholder or return of income. However, the
individual organization should file on or
before April 15 of each year, an
 annual information return under
oath, stating its gross income and
expenses incurred during the
preceding year and a certificate
shoeing that there has not been
any substantial change in its by-
laws, articles of incorporation,
manner of operation and activities
as well as sources and dispositions
of income.
 Tax exemptions of corporations
does not extend to members
 Organized and operated
exclusively – refers to the real
substance and not merely to form.
 Exempt corporations are subject
to income tax on their income
from any of their properties, real
or personal, or from any of their
activities conducted for profit,
regardless of the disposition made
of such income.
 Clubs which are organized and
operated exclusively for pleasure,
recreation and other non-profit
purposes are subject to income
tax. According to the doctrine of
casus onissus pro omisso habendus
est, a person, object or thing
omitted from the enumeration
must be held to have been omitted
intentionally.
Exempt Mutual Savings Bank
1. Has no capital stock
represented by shares; and
2. Whose earnings less only the
expenses of operation, are
distributable wholly among
depositors.
Exempt fraternal beneficiary societies
 Exempt only if operated under
lodge system or for the
exclusive benefit of a society
operating it.
 Operating under the lodge
system – carrying on its
activities under form of
organization that comprises
local branches, chartered by a
parent organization and largely
self-governing
Exempt cemetery companies
1. It is owned by and operated
exclusively for the benefit of
its owners, or
2. It is not operated for profit
A cemetery company which fulfills the
other requirement of the statute
may be exempt, even though it
issues preferred stock entitling
the holders to dividend at a fixed
rate, provided that its articles of
incorporation require:
1. That the preferred stock
shall be retired at par as
soon as sufficient funds are
realized from sales, and
2. That all funds not required
for the payment of dividends
upon or for the retirement of
preferable stock shall be
used by the company for the
care and improvement of the
cemetery.
Exempt religious, charitable, scientific,
athletic, and cultural corporations
1. It must be organized and
operated for one or more the
specified purposes, and
2. No part of its net income must
inure to the benefit of private
individuals.
 Charitable institutions must be:
1. A non-stock corporation or
association
2. Organized exclusively for
charitable purposes
3. Operated exclusively for
charitable purposes, and
4. No part of its net income or
asset shall belong to or inure
to the benefit of any member,
 organizer, officer or any
specific person
 Corporation sole – a special form
of corporation usually associated
with clergy. It consists of only one
person, and his successor
Exempt business leagues
 A business league is an association
of persons having some common
business interest, which limits its
activities to work for such
common interest and does not
engage in a regular business of a
kind ordinarily carried on for
profit.
 If it engages in a regular business
of a kind ordinarily carried on for
profit, the fact that the business is
conducted on a cooperative basis
or produces only sufficient income
to be self-sustaining, is not ground
for exemption.
Exempt Civic leagues
 Comprise those not organized for
profit but operated exclusively for
purposes beneficial to the
community as a whole.
Exempt nonstick, nonprofit
educational institutions
 Article XIV, Section 4(3),
Constitution
1. It falls under the
classification of nonstick,
nonprofit educational
institution
2. The income it seeks to be
exempted from taxation is
actually, directly and
exclusively used for
educational purposes
 The interest income on bank
deposits and yields from deposit
substitutes are not automatically
exempt from taxation. There must
be a showing that the incomes are
included in the school’s annual
information return and duly
audited financial statements
together with:
1. Certification from depository
banks as to the amount of
interest income earned from
passive investments not
subject to the 20% final
withholding tax
2. Certification of actual, direct
and exclusive utilization of
said income for educational
purposes
3. Board resolution on proposed
project to be funded out of the
money deposited
 Same rule is used for income
derived from dormitories,
canteens and bookstores – must
be actual, direct and exclusive for
educational purposes
Exempt mutual insurance companies
and similar organizations
 It is necessary that the income of
the company be derived solely
from assessments, dues and fees
collected from members.
 An organization may be entitled to
exemption, although it makes
advance assessment for the sole
purpose of meeting its future
losses and expenses, provided that
the balance of such assessments
remaining on hand at the end of
the year is retained to meet losses
and expenses or is returned to
members.
 An organization of a purely local
character is one whose business
activities are confined to a
particular community, place, or
district, irrespective, however, of
political subdivisions.
Exempt farmers’ cooperative
marketing and purchasing
associations

 Must establish that for their own

account, they have no net income
 Cooperative associations acting as
purchasing agents are not
expressly exempt from tax, but
rebates made to purchases may be
excluded from the gross income.
COMPUTATION OF TAXABLE INCOME
 Taxable income refers to the
gross income subject to tax,
less the deductions, whether
itemized or optional standard
deductions, and/or personal
and additional exemptions, if
any, authorized for such type
of income.
 Refers to the tax base.
 For individuals who are
employed, it is the income
after deducting the exclusions
and the exemptions
 For individuals engaged in
trade or business or in the
practice of their profession, it
is the income after deducting
exemptions.
 Taxable income is to be
computed in accordance with
the method of accounting
regularly employed in
keeping books of the
taxpayer.
Computation of the Taxable Income
 Must be computed with
respect to a fixed period. That
is twelve months ending
December 31st of every year,
except in the case of
corporation filing returns on a
fiscal year basis in which case
taxable income will be
computed on the basis of such
fiscal year.
 Items of incomes and
expenditures need not be in
the form of cash

 For corporations and other  If the method of accounting

juridical entities, it is the net regularly employed by the
income after deducting the taxpayer in keeping his books
itemized deduction or the clearly reflects his income, it
optional standard deductions is to be followed with respect
of 40%, at the option of the to the time as of which items
seller. of gross income and
deductions are to be
 In the computation of the tax, accounted for, otherwise the
various classes of income computation of taxable
must be considered: income shall be made in such
manner as in the opinion of
1. Income – all wealth which the Commissioner would
flows into the taxpayer clearly reflect it.
other than as a mere
return of capital. Bases of Computation of Taxable
Income
2. Gross income – income
less income which is by  Approved standard methods
statutory provision or of accounting will be
otherwise is exempt from ordinarily regarded as clearly
the tax imposed by law. reflecting income. A method
of accounting will not,
3. Taxable income – gross however, be regarded as
income less statutory clearly reflecting income
deductions. unless all items in the gross
 income and all deductions are
treated with reasonable
consistency.
 All items in the gross income
shall be included in the gross
income for the taxable year in
which they are received by
the reflect income, such
amounts are to properly
accounted for as of a different
period.
Methods of Determining the Net
Taxable Income
1. Expenditure method – the
aggregate yearly expenditures
are deducted from the
declared yearly income, not
the expenditures incurred
each month and declared
thereafter, to arrive at the net
taxable income.
2. Net worth or inventory
method – a form of
determining income from any
other available facts or
evidence, so that the tax may
be assessed and collected.
 Based on assets or
properties appearing
in the name of the
taxpayer or in the
name of his dummies
or friends, without
the taxpayer being
able to give a definite
reasonable
explanation for their
existence.
 After determining the
assets, liabilities are
subtracted to arrive
at the net worth.
 Any decrease or
increase in the net
worth is adjusted by
adding all non-
deductible items and
subtracting the non-
taxable receipts.
3. Sales Method or Percentage of
Receipts Method – in the
absence of adequate records,
the Commissioner can
reconstruct gross profit by
ascertaining the total sales or
receipts and then applying an
average of gross profit to such
sales and receipts.
 He can also
reconstruct taxable
income by applying
an average
percentage of taxable
income to gross
income.
Taxable Income from Sources within
the Philippines
GR. From the items of gross income,
there shall be deducted the expenses ,
interests, losses and other deductions
properly allocated thereto and a
ratable part of expenses, interests,
losses and other deductions effectively
connecter with the business or trade
conducted exclusively within the
Philippines which cannot definitely be
allocated to some items or class of
gross income. Such items of
deductions shall be allowed only if
fully substantiated by all the
information necessary for its
calculation.
XPN. No deductions for interest aid or
incurred abroad shall be allowed from
unless indebtedness was actually
incurred to provide funds for use in
connection with the conduct or 8. Annuities
operation of trade or business.
9. Prizes and winnings
Taxable Income from Sources without
the Philippines 10. Pensions

 From the items of gross income, 11. Partner’s distributive

there shall be deducted the
expenses, losses, and other
deductions properly apportioned
or allocated thereto and a ratable
part of any expense, loss or other
deduction which cannot definitely
be allocated to some items or
classes of gross income. The
remainder, if any, shall be treated
in full as taxable income from
sources without the Philippines.
COMPUTATION OF GROSS INCOME
 Gross income means all income
derived from whatever sources,
including, but not limited to, the
following items:
1. Compensation for
services in whatever form
paid, including, but not
limited to fees, salaries,
wages, commissions, and
similar items
2. Gross income derived
from the conduct of trade
or business or the
exercise of a profession
3. Gains derived from
dealings in property
4. Interests
share from the net
income of the GPP
 Passive income, not included –
they are already subject to
different rates and taxed finally at
source.
 Income differs from capital in that
income is any wealth which flows
into the taxpayer other than a
return of capital, while capital
constitutes the investment which
is the source of income. Capital is
fund, while income is flow. Capital
is wealth, while income is service
of wealth. Capital is the tree,
income is the fruit.
 Net income or taxable income
refers to the gross income less
allowable deductions and/or
personal and additional expenses.
Compensation for Services in
Whatever Form Paid
 Compensation means all
remuneration for services
performed by an employee for his
employer under an ee-er
relationship, unless specifically
excluded by the code.
 The name by which the
remuneration for services is
designated is immaterial.

5. Rents  Salaries, wages, emoluments and

honoraria, allowances,
6. Royalties commissions, fees, including
director’s fees, taxable bonuses
7. Dividends and fringe benefits, taxable
 pensions, and retirement pay and
other income of a similar nature
constitute compensation income.
 Honoraria refers to payments
given in recognition for services
performed for which the
established practice discourages
charging a fixed fee.
 Commission refers to a percentage
of total sales or on certain quota f
sales volume attained as part of
incentive.
 Fees refer to the amount received
by an ee for the services rendered
to the er over and above their
regular salaries.
 The basis upon which the
remuneration is paid is
immaterial in determining
whether the remuneration
constitutes compensation.
 Remuneration for services
constitutes compensation even if
the relationship of er and ee does
not exist any longer at the time
when payment is made between
the person in whose employ the
services had been performed and
the individual who performed
them.
 The term remuneration or wage,
which is subject to withholding tax
on compensation, does not include
remuneration paid to:
1. For agricultural labor
paid entirely in products
of the farm where the
labor is performed
2. For domestic service in a
private home
3. For casual labor not in
the course of the er’s
trade or business
4. For services by a citizen
or resident of the
Philippines for a foreign
government or an int’l
organization
 If the compensation is paid in
cash, the full amount received is
the measure of the income subject
to tax.
 Where services are paid for with
something other than money, the
fair market value of the thing
taken in payment is the amount to
be included as income.
 If the services were rendered at a
stipulated price, in the absence of
evidence to the contrary, such
price is presumed to be the fair
value of the compensation
received.
 When living quarters are
furnished in addition to cash
salary, the rental value of such
quarters should be reported as
income.
 If the shares of stock were given as
salary, such shall constitute as
taxable income to the recipient.
The par value or the stated value
of the shares issued shall
constitute as deductible expense
to the corporation provided it has
been subjected to the withholding
tax on compensation.
 Promissory notes or other
evidences of indebtedness
received in payment of services,
and not merely as security for
such payment, constitute income
 to the amount of their fair market
value.
 A taxpayer receiving as
compensation a note regarded as
food for its face value at maturity,
but not bearing interest, shall be
treated as income as of the time of
receipt of the fair discounted value
of the note at that time.
 If the payment due on note so
accounted for is met as they
become due, there should be
included as income in respect of
each payment so much thereof as
represents recovery for the
discount originally deducted.
 Any amount paid specifically,
either as advances or
reimbursement for traveling,
representation and other bona
fide ordinary and necessary
expenses incurred or reasonably
expected to incur by the ee in the
performance of his duty are not
subject withholding, if the ff
conditions are satisfied:
1. It is for ordinary and
necessary traveling and
representation or
entertainment expenses
aid or incurred by the ee
in the pursuit of trade,
business or profession
2. The ee must
account/liquidate the
expenses. The excess of
advances made over
actual expenses shall
constitute taxable income
if such amount is not
returned to the er.
Reasonable amounts
which are pre-computed
on a daily basis and are
aid to an ee while on an
assignment of duty need
not be subject to the
requirements of
substantiation and to
withholding.
Gross Income Derived from the
Conduct of Trade or Business or
Exercise of Profession
 The term gross income derived
from doing business shall be
equivalent to the gross sales
returns, discounts and allowances
and cost of goods sold.
 Cost of goods sold shall include all
business expenses directly
incurred to produce the
merchandize to bring them to
their present location and use.
 For trading and merchandising,
cost of goods sold shall include the
invoice cost of the goods sold, plus
import duties, freight in
transporting the goods to the
place where the goods are actually
sold, including insurance while the
goods are in transit.
 Cost of goods manufactures and
sold shall include all costs of
production.
 In the case of taxpayers engaged in
the sale of service, gross income
means gross receipts less sales
returns, allowances, discounts and
cost of services.
 Cost of services shall mean all
direct costs and expenses
necessarily incurred to provide all
services required by the
customers and clients including
salaries and benefits of personnel,
consultants and specialists
directly rendering the service and
cost of facilities directly utilized in
 providing the service, provided,
however, that in the case of banks,
cost of services shall include
interest expense.
 A taxpayer engaged in the exercise
or practice of profession is subject
to income derived from such.
There should be no ee-er
relationship between him and his
client.
 In computing the income of
partners of a GPP, all expenses
which are ordinary and necessary,
incurred or aid for the practice of
profession are allowed as
deductions.
 Since the taxable income is in the
hands of the partner, as a rule,
apart from the expenses claimed
by the GPP in determining its net
income, the individual partner can
still claim deductions incurred or
paid by him that contributed to
the earning of the income taxable
to him which were not deducted
from the gross income of the GPP.
Gains Derived from Dealings in
Property
 Gains derived from dealings in
property, such as sales or
exchanges of property, may result
in the gain or loss, depending on
the nature of the property as to
whether said property is a capital
asset or an ordinary asset.
Dealings in Shares of Stocks of
Domestic Corporations
 Net capital gains from sale, barter,
exchange or other disposition held
as capital stock not listed and
traded in the local stock exchange
shall be subject to the capital gains
tax of 5% on the net capital gains
not over P100,000 plus 10% on
any amount in excess of P100,00.
 Sale, barter or exchange of stock
held as capital assets which are
traded and listed in the local stock
exchange, the same shall not be
subject to capital gains tax but to
the ½ of 1% stack transaction tax
based on the gross selling price or
gross value in money of the shares
of stock sold or transferred.
 If the shares of stock are held as
ordinary assets and the sale is
made by a dealer in securities, the
resulting gain or loss is considered
as ordinary income.
 Whether the acquisition of
disposition by a corporation of its
own capital stock gives rise to
taxable gain or deductible loss
depends upon the real nature of
the transaction.
 The receipt by a corporation of the
subscription price of shares of its
capital stock upon their original
issuance fives rise to neither
taxable gain nor deductible loss,
when the subscription or issue
rice be in excess of, or less than,
the par or stated value of such
stock.
 If the corporation deals in its own
shares as it might in the shares of
another corporation, the resulting
gain or loss is to be computed in
the same manner as though the
corporation were dealing in the
shares of another.
 If the corporation receives its own
stock as consideration upon the
sale of property by it, or in
satisfaction of indebtedness to it,
the gains or loss resulting is to be
computed in the same manner as
 though the payment had been
made in any other property.
 In the event that ees who obtained
shares of stack subsequently sell,
barter, exchange or otherwise
dispose of the said shares of stock,
the tax treatment is as follows:
1. If the shares involves are
shares of stock in a
domestic corporation not
traded in the stock
exchange, the gain is
subject to capital gains
tax. The gain shall be the
difference between the
selling price or book
value or fair market value
of the shares, whichever
is higher, at the date of
the sale and the price at
the time of exercise if the
option
2. If the shares involved are
shares of stock listed and
traded through the Local
Stock Exchange, the
transaction is subject to
stock transaction tax
3. If the shares involved are
shares of stock in a
foreign corporation, the
gain is subject to ordinary
income tax.
Dealings in Real Property
 In case of non-redemption of
properties sold during
involuntary sales, 6% final tax
based on the gross selling
price or current fair market
value, if the property is a
capital asset, or the Credible
tax withholding (section 57),
in case of an ordinary asset,
VAT, stamp tax.
 The buyer of the subject
property, who is deemed to
have withheld the CGT or CWT
due from the sales, shall then
file the CGT return and remit
the said tax to the Bureau
within 30 days from the
expiration of the applicable
statutory redemption period,
or file within 10 days
following the end of the
month after the expiration of
the applicable statutory
redemption; provided that the
taxes withheld in Dec, the
CWT return shall be filed and
the taxes remitted before Jan.
15 the ff year.
 If the property sold through
involuntary sale is under the
circumstances which warrant
the imposition of VAT, said tax
must be paid before the 20 th
or the 25th day, whichever is
applicable, of the month
following the month when the
right of redemption
prescribes.
 The DST return shall be filed
and the tax paid within 5 days
after the close of the month
after the lapse of the
applicable statutory
redemption period.
 The CWT/CGT/VAT/DST shall
be based on the bid price of
the highest bidder or the FMV
or the ZV, whichever is higher.
 Gains derived from
expropriation of property are
taxable since there is a
material gain in the
transaction.
 Generally, income realized
from the sale of capital assets
 are not to be reported as part than deposits, through the
of the gross income of an issuance, endorsement, or
individual in the income tax acceptance of debt
returns as they are already instruments for the
subject to the final borrower’s own account, for
withholding tax. the purpose of re-lending or
purchasing of receivables and
 Income or capital gains other obligations, or financing
derived from the sale of other their own needs or the needs
capital assets of an individual of their dealer.
taxpayer, which are not
subject to final withholding  The tax treatment of interest
tax, should be declared or income derived from the
reported as part of the gross government:
income in an annual income
tax returns of the individual 1. Government debt
taxpayer. instruments and
securities, including BOT
 Income realized from the sale issued instruments and
of ordinary assets is subject to securities, shall be
the ordinary income tax and considered as deposit
the said income shall be substitutes irrespective
declared in the of number of lenders at
quarterly/annual income tax the time of origination if
return. such debt instruments
and securities are to be
INTEREST INCOME traded or exchanged in
the secondary market
 Interest – compensation
allowed by law or fixed by the 2. Interest income derived
parties for the use or therefrom is subject to
forbearance of money or as FWT.
damages for its detention.
3. The mere issuance of
 The term public means government debt
borrowing from 20 or more instruments and
individual or corporate securities is deemed as
lenders at any one time. falling within the
coverage of deposit
 19 Lender rule – in order for substitutes – FWT
an instrument to qualify as a
deposit substitute, the  Long-term deposit or
borrowing must be made investment certificate refers
from 20 to more individual or to certificate of time deposit
corporate lenders at any one or investment in the form of
time. savings, common or
individual funds, deposit
 Deposit substitutes – an substitutes, investment
alternative form of obtaining management accounts and
funds from the public, other other investments with a
 maturity period of not less denominations as
than 5 years. The form of may be prescribed by
which shall be prescribed by the BSP
the BSP only.
g. They should not be
 The tax treatment from long terminated by the
term deposits of investment original investor
certificates: before the 5th year,
otherwise it shall be
1. Interest income shall be subjected to the
exempt from income tax, graduated rates of
provided that the ff 5%, 12% or 20% on
characteristics/condition interest income
s are present: earnings

a. The depositor or h. Except those

investor is an specifically exempted
individual, not a by law or regulations,
corporation any other income
such as gains from
b. Said certificates trading, foreign
should be under the exchange gain, shall
name of the not be covered by
individual income exemption.

c. Said certificate must 2. Absent the above, interest

be in the form of income from long term
savings, common deposit or investment
trust funds, shall be subject to FWT at
individual trust the rate of 20%
funds, investment
management 3. Interest income from long
accounts, deposit term deposit or
substitutes, other investment that is pre-
investments terminated by the
evidenced by depositor of investor
certificates in such before the 5th year shall
form prescribed by be subject to FWT on the
the BSP entire income and shall
be withheld by the
d. Certificates must be depository bank
issued by banks only
a. Interest income from
e. The maturity period LTD/I shall be
must be not less than subject to FWT at
5 years 25% if received by a
nonresident alien not
f. They should be in engaged in trade or
denominations of business in the
P10,000 and other Philippines.
 b. 30% if received by a income is from foreign
nonresident foreign loans contracted on or
corporation after Aug. 1, 1986 – 20%

c. 30% if received by a  Interest income derived from

domestic corporation a depository bank under the
and resident foreign expanded foreign currency
corporation. deposit system

4 years to 5% 1. Subject to FWT of 7 ½ %

less than 5 if the interest income is
years received by citizens,
resident aliens, domestic
3 years to 12% corporations and
less than 4 resident foreign
years corporations.

Less than 3 20% 2. Any income from

years nonresident, I or C, from
transactions with
 Interest income derived from depository banks under
currency bank deposit and the expanded system
yield or any other monetary shall be exempt from
benefit from deposit income tax
substitutes and from trust
funds and similar 3. If a bank account is
arrangements derived from jointly in the name of a
sources with the Philippines. nonresident citizen, 50%
of the interest income
1. Subject to a FWT of 20% shall be subject to 7 1/2
if received from citizens, % while the other haft
resident aliens, shall be exempt
nonresident aliens
engaged in trade or 4. Derived by a depository
business in the bank under the expanded
Philippines, domestic foreign currency
corporations and transactions with
resident foreign nonresidents, OBUs, local
corporations commercial banks that
may be authorized by the
2. Subject to FWT of 25% if BSP – exempt from all
the interest income is taxes , except net income
received by nonresident from such transactions
aliens engaged in trade or
business in the Phil. 5. Interest income from
foreign currency loans
3. Subject to FWT of 30% if granted by such
received by nonresident depository banks under
foreign corporation, the expanded system to
unless the interest
 residents shall be subject
to final tax rate of 10%
 Interest income derived by
OBUs
1. From foreign currency
transactions with
nonresidents, other
OBUs, local commercial
banks, including foreign
banks that may be
authorized by the BSP –
exempt from all taxes
except net income from
such transactions
Rental income
2. Derived from foreign
currency loans granted to
residents – FWT of 10%
3. Any income of
nonresidents, I or C –
exempt from income tax.
 Interest income derived from
all other instruments
 Any other debt
instruments not
within the coverage
of deposit substitutes
– CWT at the rate of
20%
 Interest income received by
banks from payors belonging
to the top 20,000
corporations strictly arising
from individual loans
obtained from banks that are
not securitized, assigned or
participated out remains to be
subject to CWT at 2%. The
20% FWT and CWT imposed
under the Tax Code cover
interest arising from and paid
out of debt securities.
 If there is no stipulation
between the parties regarding
the application of
compounded interest, apply
simple interest only.
 Under Art. 1959 of the CC,
unless there is a stipulation to
the contrary, interest due
should not further earn
interest.
 Arm’s length interest from
advances – not subject to
income tax
 The amount paid for the use
or lease or enjoyment of
personal or real property.
 Any additional amount paid,
directly or indirectly, by the
lessee in consideration for the
said lease, also considered as
rental
 If the rented property is being
used in business, said rental
income shall be subject to
EWT of 5% to be withheld by
the lessee. Failure of the
lessee to withhold and remit
the same shall not entitle him
to claim the rental expense as
deduction from his gross
income.
 Where a corporation has
leased its property in
consideration that the lessee
shall pay in lieu of other
rental an amount equivalent
to a certain rate of dividend
on the lessor’s capital stock or
interest on the lessor’s
outstanding indebtedness,
such payments shall be
considered rental payments.
 When buildings are erected or
improvements made by the
lessee in pursuance to the
lease agreement, and such are
not subject to removal, the
lessor may at his option
report the income:
1. Outright method – the
lessor may report as
income at the time when
such B or I are completed
– fair market value
2. Spread-out method – the
lessor may spread over
the life of the lease and
estimated depreciated
value of such B or I at the
termination of the lease
and report as income for
each year of the lease an
aliquot art thereof.
 Halvering vs. Brunn. If
improvements are in lieu of
rent, the value thereof is
income to the landlord only in
the year of termination of the
lease.
 The VAT added rental paid by
the lessee is not art of the
gross income if the lessor is
VAT-registered by shall be
considered as the output tax
of the lessor. The VAT may be
passed on by the lessor to the
lessee. The passed on VAT
shall be considered as an
input tax by the lessee if the
lessee is VAT-registered or it
will become part of the cost of
the lease, if the lessee is not
VAT-registered.
 Prepaid or advance rental
shall only be considered as
rental income of the lessor
once the advance rental is
utilized by the lessee.
Otherwise, it will only be
treated as security deposit
which is not considered as
income.
 Entire amount of advance
rental is considered as taxable
income to the lessor in the
year received, if so received
under a claim of right and
without restriction as to its
use.
 Security deposit applied to
the rental of the terminal
month or period of contract
must be recognized as income
at the time it is applied.
Security deposit is to ensure
faithful performance of
certain obligations of the
lessee, it is not income to the
lessor until the lessee violates
any provision of the contract.
 Income from long-term
contracts is taxable for the
period in which the income is
determined.
 Long term contract – building,
installation or construction
contracts covering period in
excess of one year. Report
income upon the basis of
percentage completion. The
return should be
accompanied by a return
certificate.
Royalty Income
 Royalties mean a payment or
a portion of the proceeds paid
to the owner of a right for the
use of such rights.
 Royalty is a valuable property
that can be developed and
 sold on a regular basis for a
consideration. Any gain
derived therefrom is
considered as an active
business income subject to
normal income tax.
 When a person pays royalty to
another for the use of its
intellectual property, such as
copyrights, patents,
trademarks, such royalty is a
passive income of the owner
subject to withholding tax.
 The payor is required to
deduct and withhold final
taxes on royalty payments
when the royalty is paid or is
payable. After which, the
corresponding return or
remittance must be made
within 10 days after the end of
each month.
Dividend Income
 Dividends mean any
distribution made by a
corporation to its
shareholders out of its
unrestricted retained
earnings payable to its
shareholders, whether in
money or in other property.
 Where a corporation
distributes all its assets in
complete liquidation or
dissolution, the gain realized
or loss sustained by the
stockholder is taxable income
or a deductible loss.
 While liquidation gains are
characterized as gains from
sale or exchange of shares,
they are still subject to the
ordinary income tax rates
depending on the status of the
stockholder.
 Cash and/or property
dividends declared or
distributed on or after Jan. 1,
1998 shall be subject to the
10% withholding tax.
 Cash dividends are paid in
cash. The dividends belong to
the shareholder at the time of
declaration.
 Property dividends are paid
in securities or other
property, in which the
earnings of a corporation
have been invested, which are
income to the recipients to the
amount of the full market
value of such property when
receivable by individual
stockholders. When
receivable by corporations,
the amount of such dividends
includible for purposes of the
tax on corporations is
specified.
 A dividend paid in stock of
another corporation is not a
stock dividend, the income
arising to the recipients of
such stock is its market value
at the time the dividend
becomes payable.
 Scrip – a certificate
representing fractions of a
share of stock.
 Scrip dividend – in the form of
a promissory note taxable to
the extent of its fair market
value in the year when the
warrant is issued.
 Warrant is a type of security
which entitles the holder the
 right to subscribe to, the
unissued stock of a resident foreign corporation
corporation or to purchase
issued shares in the future.
 Scrip dividend is subject to tax
in the year in which the
warrants are issued.
 The rationale for the
imposition of the 10%
withholding final tax on cash
and property dividends
received by citizens and
resident aliens from domestic
corporation is to ensure that
the taxes will be fully
collected from the dividends
earned by the said taxpayers.
Subjecting the same to the
progressive tax rated would
mean that there is a need to
include the same in the ITRs
of the individuals, hence,
there is no assurance that the
said income will be declared.
 The responsibility for the
remittance of the tax is shifted
to the corporations.
 Intercorporate dividends
received by a domestic
corporation from another
domestic corporation are
exempt from income tax.
 Dividends received by a
domestic corporation from a
foreign corporation are
included in the computation
of the gross income because
there is no law exempting the
same.
 Since the Philippines seeks to
lessen the impact of double
taxation between countries, it
imposes only the lower tax
rate of 15% on intercorporate
dividends received by a non-
from a domestic corporation
subject to the condition that
the country in which the
nonresident foreign
corporation is domiciled
allows a tax credit of 15%.
The fact that the country in
which the nonresident foreign
corporation is domiciled does
not impose any tax on the
dividends received by such
corporation should be held as
full satisfaction of the
condition for the availment of
the 15% final tax.
 A stock dividend which
represents the transfer of
surplus to capital account is
not subject to income tax
because they are not realized
income. – exempt from
income tax.
 A stock dividend constitutes
income if it gives the
shareholder an interest
different from that which has
former stockholdings
represented.
 A stock dividend does not
constitute income if the new
shares confer no different
rights or interest than did the
old.
 If a corporation or redeems
stock issued as a dividend in
such manner as to make the
distribution and cancellation
or redemption essentially
equivalent to the distribution
of a taxable dividend, the
amount so distributed is
taxable income.
 Dividends declared in the
guise of treasury stock
dividend to avoid the effects
of income taxation is taxable.
 Liquidating dividends – the
share of each stockholder in
the assets upon liquidation. –
subject to tax in Section 39.
 Complete liquidation includes
any one of a series of
distributions made by a
corporation in complete
cancellation or redemption of
all its stock in accordance
with a bona fide plan of
liquidation under which the
transfer of all the assets under
liquidation is to be complete
within a reasonable time,
usually not to exceed one
year.
 If the amount received by the
stockholder in liquidation is
less than the cost or other
basis of the stock, deductible
 During liquidation, any sales
of property by them are to be
treated as if made by the
corporation for the purpose of
ascertaining the gain or loss.
 Disguised dividends are those
income payments made by a
domestic corporation, which
is a subsidiary of a installment payments for life,
nonresident foreign
corporation, to the latter
ostensible for services
rendered by the latter to the
former, but which payments
are disproportionately larger
than the actual value of the
services rendered. – subject to
normal tax rate or
preferential tax rate if there is
a treaty
 Income which is credited to
the account of or set aside for
a taxpayer and which may be
drawn upon by him at any
time is subject to tax for the
year during which so credited
or set apart although not then
actually reduced to
possession.
 If the income is not credited,
but is set apart, such income
must be unqualifiedly subject
to the demand of the taxpayer.
 Where a corporation
contingently credits its ees
with bonus stock, but the
stock is not available until
some future date, the mere
crediting on the books of the
corporation does not
constitute receipt.
 A mere increase or
appreciation in the value of
shares of stock cannot be
considered income for
taxation purposes. The same
must be sold at a profit to
constitute taxable income.
Annuities and Proceeds from
Insurance
 Annuity – refers to annuity
policies sold by insurance
companies, which provides
or for a guaranteed fixed
period of time, whichever is
longer.
 If the annuity is a return of
premium, it is not taxable.
 Annuities paid be religious,
charitable and educational
corporations are subject to
tax to the extent that the
 aggregate amount of the prizes and awards made
payments to the annuitant primarily for religious,
exceeds the amounts paid by charitable, scientific,
him as consideration for the educational, artistic,
contract. literary or civic
achievement are not
 An annuity charged upon taxable if:
devised land is taxable
taxable to a donee-annuitant, a. The recipient was
whether paid by the devisee selected without any
out of the rents of the land or action on his part to
from other sources. The enter the contest or
devisee is not required to proceeding
return as gross income the
amount of rent paid to the b. The recipient is not
annuitant, and he is not required to render
entitled to deduct from his substantial future
gross income any sum paid to services as a
the annuitant. condition to
receiving the prize or
 Failure to comply with the award.
requirements of a tax-exempt
annuity makes it taxable and 2. All prizes and awards
included in the gross income. granted to athletes in
local and international
 Proceeds from life insurance competitions whther held
received by the beneficiaries in the Philippines or
or other types of insurance abroad and sanctioned by
are not subject to income tax their national sports
if they are just mere return of association shall be
capital. If it is subject to excluded from the gross
interest, the interest payment income.
is included in the gross
income.  If the prizes are derived from
sources without the
Prizes and Winnings Philippines, the same shall be
included in the gross income
 When prizes and awards for taxpayers whose income
considered taxable income derived within and without
the Philippines are taxable in
1. Contest awards and the Philippines.
prizes received from an
er or another are Pensions
generally taxable. Si also
are prizes won in a  Retirement benefits and
competitive contest pensions received, other than
conducted for non- those received under RAs
commercial or 4917, 7641, 8282, 8291 and
commercial purposes. other laws on pension
Amounts received as benefits excluded from gross
 income, are considered as
taxable income.
 Pension is either a lump sum
payment or on a staggered
basis payment in
consideration of services
rendered given to an ee after
an individual reaches the age
of retirement.
Partner’s Distributive Share from the
Net Income of a GPP
 For purposes of computing
the distributive share of the
partners, the net income of
the partnership shall be
computed in the same manner
as a corporation.
 Each partner shall repost as
gross income his distributive
share, actually and
constructively received, in the
net income of the partnership
in his individual return.
 GPPs are required to render,
in duplicate, a return of their
earnings, profits and income,
setting forth the items of gross
income and the deductions
allowable, and the names and
addresses of the individuals
who would be entitled to the
net income if distributed.
 Taxable business partnership
– normal income tax. The
share of a partner in the
distributable net income after
tax of a taxable business
partnership is subject to the
10% final withholding tax on
cash or property dividends
and is not included in the
taxable gross income.
Gross Income from Whatever Source
Derived
 For whatever source –
includes whether coming
from legal or illegal sources.
 Theory underlying the
taxability of income derived
from illegal sources is based
on the principle that an
unlawful or prohibited
business is not exempt from
the payment of taxes that it
would have to pay if it were a
lawful business.
 The liability to pay the tax is
based on the swindler’s
having realized a taxable
income from his swindling
activities and will not affect
his obligation to make
restitution. Payment of tax is a
civil liability imposed by law
while restitution is a civil
liability arising from a crime.
 Recovery of bad debts
previously charged off is
taxable to the extent of
income tax benefit of said
deduction. The general rule is
that recovery of amounts
deducted in prior years would
result to an income.
 Tax-benefit rule – when the
deduction did not result in tax
benefit, the subsequent
recovery is not taxable
income.
 Taxes paid which are allowed
as deductions from gross
income are taxable when
subsequently refunded only
to the extent of the income tax
benefit of said deduction.
Taxes paid which are not
 allowed as deduction from
gross income are not taxable
even if refunded.
 Campaign contributions are
not included in the taxable
income of the candidate to
whom they were given.
Reason: such contributions
for his/her campaign were
not given for the personal
benefit of the candidate.
 Unutilized or excess funds of
campaign contributions are
taxable to the candidate.
 If failed to file SOCE, he is
automatically precluded from
claiming expenditures as
deductions. The entire
amount of such campaign
contributions shall be subject
to income tax.
 Subsidy may be considered as
income, subject to tax.
 The cancellation and
forgiveness of indebtedness
may amount to payment of
income, to a gift, or to a
capital transaction.
EXCLUSIONS FORM GROSS INCOME
 Exclusions from gross income
are in the nature of tax
exemptions and it behooves
upon the taxpayer to establish
them as convincing.
 Exclusions from the gross
income are items of income
which are not included in the
taxable income.
 Excluded by the Consti, tax
treaties, tax code or by special
tax laws.
 The term gross income as
used in the Tax Code does not
include those items of income
exempted by statute or
fundamental law. The
exclusion of such income
should not be confused with
the reduction of gross income
by the application of
allowable exemption.
 Exclusions from gross income
are actually income received
or earned by the taxpayer but
is not taxable as income
because of the exemption
provided for by law or by
treaties.
 Deductions from gross income
are the expenses and other
allowable deductions as
provided by law which are
incurred for engaging in trade
or business or exercise of a
profession.
 Tax credits are amount of tax
previously paid by the
taxpayer, whether
erroneously. Illegally or
excessively paid, or thru the
withholding tax system, but
which later on can be claimed
as tax credit deductible from
the tax liability of the
taxpayer.
 The rationale for the
exclusions from gross income
are:
1. It merely represent
return of capital
2. Some items may be
subject to another kind of
internal revenue tax
 3. Some items are income, usually in the form of
gains or profits that are personal property
expressly exempt from
income tax.  Devise – a gift of real property
given by virtue or a will
Proceeds of Life Insurance Paid to the
Heirs  Property received as a gift or
received under a will or
 Exempt – return of capital testament or through legal
only. It is immaterial whether succession, is exempt from
the proceeds are received in a income tax, although the
single sum or in installments. income therefrom or income
derived from its investment
 If such proceeds are held by or sale shall be included in the
the insurer under an gross income.
agreement to pay interest
thereon, the interest  An amount of principal paid
payments must be included in under a marriage settlement
gross income. is a gift.

 Proceeds of life insurance  Neither alimony nor

received by a child as an allowance based on a
irrevocable beneficiary is separation agreement is
considered return of capital. taxable income.

Amount Received by Insured as Return  Where there was no prior

of Premium
 Excluded from gross income.
 If such amounts, when added
to amounts received before
the taxable year under such
contract, exceed the aggregate
premiums or consideration
paid, then the excess shall be
included in the gross income.
agreement or negotiations
between two parties that one
party will be compensated for
services rendered, the
transfer having been made
gratuitously should be treated
as gift, subject to donor’s tax.
Compensation for Injuries or Sickness
 Excluded

 In case of transfer of a life 1. Amounts received

insurance, endowment or through accident or
annuity contract, only the health insurance or under
actual amount of the the workmen’s
premiums paid is exempt compensation act
from tax.
2. Damages recovered by
Value of Property Acquired by Gifts, suit or agreement on
Bequests and Devises account of such injuries
or sickness
 Bequest – something which is
bequeathed by virtue of a will
  It is based on incapacity to
work.
 The payments being in lieu of
wages or based on the loss
thereof.
 Considered by law as mere
return of capital
Income Exempt Under Tax Treaty
 Treaty – an international
compact negotiated between
the representatives of two
sovereign nations and made
in the name and on behalf of
the contracting parties and
dealing with important
relations between 2 countries
 International convention or
tax treaty – only refer to the
double taxation Convention or
double taxation Agreements
negotiated between
Philippines and other
countries
 Income of any kind to the
extent required by any treaty
obligation binding upon the
government may be excluded
from gross income.
 Business profits of a foreign
corporation organized under
the laws of a treaty country
from sources within the
Philippines are not subject to
income tax, unless such
profits are attributable to a
permanent establishment of
the foreign corporation
created or deemed created in
the Philippines.
Retirement Benefits, Pensions,
Gratuities, etc.
 Purpose of retirement laws: to
entice competent women and
men to enter the government
service and to permit them to
retire therefrom with relative
security.
 Retirement laws are
construed liberally in favor of
the retiree because their
intention is to provide for his
sustenance, and hopefully
even comfort, when he no
longer has the stamina to
continue earning his
livelihood.
 In order to avail of the
exemption of retirement
benefits under RA 7641 from
private employers without
any retirement plans, the
following must be met:
1. The retirement benefits
must be received under
existing CBA or other
agreement
2. This is given in the
absence of retirement
plan or agreement
providing for retirement
benefits
3. The retiring ee has served
at least 5 years in the
said establishment
4. That he is not less than 60
years of age but not more
than 65
5. He shall be entitled to
retirement pay
equivalent to at least ½
month salary for every
year of service
 RA 4917 exempts from all
taxes the retirement benefits
received by officials and ees of
private firms under a private ers on top of the
reasonable private benefit
plan. The following
requirements must be met:
1. The plan must be
reasonable.
2. The benefit plan must be
approved by the BIR
3. The retiring official or ee
must have been in the
service of the same er for
at least 10 years and at
least 50 years old at the
time of the retirement
4. The retiring official or ee
should not have
previously availed of the
privilege under the
retirement benefit plan of
the same or another er.
 Reasonable private benefit
plan – a pension, gratuity,
stock bonus or profit-sharing
plan maintained by an er for
the benefit of some or all of
his officials or ees, wherein
contributions are made by
such er for the officials or ees,
or both, for the purpose of
distributing to such officials
and ees the earnings and
principal of the fund thus
accumulated, and wherein it
is provided in the said plan
that at no time shall any part
of the corpus or income of the
fund be used for, or be
diverted to, any purpose other
than for the exclusive benefit
of the said officials and ees.
 Additional payments in the
form of gifts for loyalty and
valuable services given by
retirement benefits under a
reasonable private benefit
plan – taxed as taxable gift to
the donor who/which is
subject to the donor’s tax.
 If the gift falls within the
provision of de minimis
benefits, excluded from the
gross income
 Gratuity is the amount paid to
the beneficiary for past
services purely out of
generosity of the giver of
grantor. It is a bounty given by
the gov’t in consideration or
recognition of meritorious
services and springs from the
appreciation and
graciousness of the gov’t.
 Terminal leave pay or the
commutation of leave credits
is cash value of the officer’s or
ee’s accumulated leave
credits. It is not salary, but a
retirement gratuity and is
thus not subject to income tax.
 Right to pension is a vested
right and cannot be revoked
or impaired.
 The law exempts retirement
and pension benefits from
attachment, garnishment, levy
or execution.
 Separation ay – the amount
that an ee receives at the time
of his severance from the
service and is designed to
provide the ee with the
wherewithal during the
 period that he is to look for
another employment.
 Ee is entitled to separation
pay when his services are
terminated as a result of
retrenchement, closure of
business or disease, or when
as a measure of social justice,
the ee is validly dismissed for
causes other than serious
misconduct of those involving
moral turpitude.
 GR. An ee lawfully dismissed
is not entitled to separation
pay.
 XPNs.
1. The installation of labor-
saving device
2. Redundancy
3. Retrenchment
4. Cessation of the er’s
business
5. When the ee is suffering
from an disease and his
continued employment is
prohibited
 Requisites in order that a
separation pay may be
excluded from gross income
1. Amount received must be
due to death, sickness or
other physical disability
or for any cause beyond
the control of the official
or ee, such as
retrenchment,
redundancy or cessation
of business
2. The separation from the
service must not be asked
for or initiated by him
3. The separation was not of
his own making
4. WON the separation is
beyond the control of the
official or ee shall be
determined on the basis
of prevailing facts and
circumstances and shall
be duly established by the
er
5. Amounts received by
reason of involuntary
separation remain
exempt from income tax
even if the official or ee,
at the time of separation,
had rendered less than 10
years of service and/or is
below 50 years of age.
 But any payment made by an
er to an ee on account of
dismissal, constitutes
compensation.
 Separation pay of an ee who
offered to resign to take
advantage of the Firm’s offer
of voluntary redundancy
program - taxable. What is
excluded is the separation pay
for any cause beyond the
control of the official or ee.
 The ex gratia payments given
to ees who were lawfully
separated and the cash
equivalent of unused vacation
and sick leave credits are
exempt from income tax.
 It is in nature of separation
due to causes beyond the ee’s
control
  Social security benefits,
retirement gratuities,
pensions and other similar
benefits received by residents
or nonresident citizens or
aliens who come to reside to
the Philippines permanently
form foreign government are
not taxable in the Philippines.
 Benefits received from SSS –
not taxable
 Benefits received from GSIS –
not taxable. Option to retire:
1. Upon completion of 30
years of total service and
attainment of age 57
2. After rendering a total
service of 30 years
regardless of age
3. After having rendered a
total of at least 20 years
of service, the last 3 years
continuous regardless of
age.
 Interest income derived from
depositing in the bank the
monthly pension received
from GSIS of a retiree is
subject to the 20% final
withholding tax. – passive
investment income
Miscellaneous Items
 Income derived from
investments in the Philippines
in loans, stocks, bonds or
other domestic securities, or
from interest deposits in
banks in the Philippines by:
1. Foreign governments
2. Financing institutions
owned, controlled, or
enjoying refinancing from
foreign governments
3. International or regional
financial institutions
established by foreign
governments
 are excluded from
gross income
 The stipulation in a loan
agreement between a
government agency and a
private international bank
that the interest income to be
derived by the lender shall be
made free from all Philippine
taxes is valid.
 A mere executive agreement
cannot provide for a tax
exemption.
 Interest loans which would be
granted by a private foreign
financial institution entered
into in an executive
agreement would not be
exempt from income tax.
 Income derived by the
Government from any public
utility or from the exercise of
any essential Government
function accruing to the
Government of the
Philippines, or to any political
subdivision thereof shall be
excluded from gross income.
In order that the income
derived by the Government
will be exempt from income
tax, the income should accrue
to the government and must
be derived:
1. From any public utility
 2. From the exercise of any
essential governmental
function.
 An award received by a
person for an outstanding
short story writing definitely
requires on the part of the
taxpayer concerned to enter
the said contest – taxable.
 If the sports association which
sanctioned the sports
competition or tournament is
not the Philippine Sports
Commission thru its
Philippine Olympic
Committee, the prize received
in the sports competition shall
be subject to income tax.
Donors – exempt from donor’s
tax
 13th month pay- 1/12 if the
basic salary within a calendar
year, excluded in the
computation of fringe
benefits.
 The gross benefits received by
officials and ees of public and
private entities in the form of
13th month pay and other
benefits are excluded from
the gross income for income
tax purposes to the extent of
P30,000. Any excess will be
included in the gross income
per income tax return as part
of gross compensation
income.
 The amount of de minimis
benefits given to ees shall also
be excluded from the gross
income
 The ff shall be considered as
de minimis benefits
1. Monetized unused
vacation leave credits or
private ees not exceeding
10 days during the year
2. Monetized unused leave
credits of government
officials and ees during
the year
3. Medical cash allowance to
dependents of ees not
exceeding P750 per ee
per semester or P125 per
month
4. Rice subsidy of P1,500 or
1 sack of 50-kg. rice per
month amounting to not
more than P1,500
5. Uniform and clothing
allowance not exceeding
P5,000
6. Actual yearly benefits not
exceeding P10,000 per
annum
7. Laundry allowance not
exceeding P300 per
month
8. Ees achievement awards
which must be in the form
of a tangible personal
property other than cash
or gift certificate, with an
annual monetary value
not exceeding P10,000
received by the ee under
an established written
plan
9. Gifts given during
Christmas and major
anniversary celebrations
not exceeding P5,000 per
ee per annum
 10. Daily meal allowance for
overtime work not
exceeding 25% of the
basic minimum wage
 De minimis benefits are
actually fringe benefits which
are not taxable. They need not
be reported in the
preparation of income tax
return because they are
exempt.
 These benefits shall constitute
a deductible expense upon the
er.
 GSIS, SSS, Medicare and Pag-
ibig contributions – exempt
from tax
 Gains realized from the sale
or exchange or retirement of
bonds, debentures or other
certificate of indebtedness
with a maturity of more than
5 years shall be excluded from
gross income
 Gains realized by an investor
upon redemption of shares of
stock in a mutual fund
company shall be excluded
from the gross income.
SPECIAL TREATMENT OF FRINGE
BENEFITS
 Fringe benefits – any goods,
services, or other benefit
furnished and granted in cash
or in kind by an er to an ee,
except rank and file ee
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel
5. Interest on loan at less
than market rate to the
extent the difference
between the market rate
and actual rate granted
6. Membership fees, dues
and other expenses borne
by the er for the ee in
social and athletic clubs
or other similar
organizations
7. Expenses for foreign
travel
8. Holiday and vacation
expenses
9. Educational assistance to
the ee or his dependents
10. Life or health insurance
and other non-life
insurance premiums or
similar amounts in excess
of what the law allows.
 The tax imposed on the fringe
benefits received by
managerial or supervisory ees
shall be treated as a final
income tax on the ee, but shall
be withheld and paid by the er
on a calendar quarterly basis.
 It is the er who is legally
required to pay the fringe
benefits tax.
 If the tax is not paid, the legal
recourse of the BIR is to go
against the er
 Convenience of the er Rule. A
final withholding tax of 32%
is imposed on the grossed-up
monetary value of fringe
 benefit furnished, granted and  Rank-and-file ees – who are
paid by the er to the ee, except holding nether managerial
when: nor supervisory position.

1. The fringe benefit is  Taxation of fringe benefits

required by the nature of granted to nonresident alien
or necessary to the trade, individuals
business or profession of
the er 1. Not engaged in trade or
business in the
2. When the fringe benefit is Philippines, 25% of the
for the convenience or grossed up monetary
advantage of the er. value of the fringe
benefit. The tax base shall
 The grossed-up monetary be computed by dividing
value of fringe benefit shall be the monetary value of the
determined by dividing the fringe benefit to 75%.
monetary value of the fringe
benefit by 68%. 2. Fringe benefit tax of 15%
shall be imposed upon
 The grossed-monetary value the grossed-up monetary
of the fringe benefit value of the fringe benefit
represents the whole amount of the ff alien individuals.
of income realized by the ee The tax base shall be
which includes the net computed by dividing the
amount of money or net monetary value of the
monetary value of property fringe benefit be 85%.
which has been received plus
the amount of the fringe a. Alien individual
benefit tax thereon. employed by RHQ
and ROHQ, including
 Managerial ee – one who is any of its Filipino ees
vested with powers or occupying the same
prerogatives to lay down and positions
execute management policies
and/or to hire, transfer, b. Alien individual
suspend, lay-off, recall, employed by OBU,
discharge, assign, discipline including any of its
ees. Filipino ees
occupying the same
 Supervisory – those whom in positions
the interest of the er,
effectively recommend such c. Alien individual
managerial actions if the employed by a
exercise of such authority is contractor or
not merely routinary or subcontractor
clerical in nature but requires engaged in
the use of independent petroleum
judgment. operations in the
Philippines,
 including any of its
Filipino ees
occupying the same
positions
 In general, the computation of
the fringe benefits tax would
entail:
1. Valuation of the benefit
granted
2. Determination of the
proportion or percentage
of the benefit which is
subject to the fringe
benefit tax.
 Fringe benefits which are
required by the nature of, or
necessary to the trade,
business or profession of the
er, or when the fringe benefit
is for the convenience or
advantage of the er – not
subject to the FBT.
 Unless otherwise provided in
the Regulations, the valuation
of fringe benefits shall be as
follows:
1. If the fringe benefit is
granted in money, or is
directly aid for by the er,
then the value is the
amount granted or paid
for
2. If the fringe benefit is
granted or furnished by
the eer in property other
than money and
ownership is transferred
to the ee, then the value
of the fringe benefit shall
be equal to fair market
value of the property
3. If the fringe benefit is
granted or furnished by
the er in property other
than money but
ownership is not
transferred to the ee, the
value of the fringe benefit
is equal to the
depreciation value of the
property
Guidelines for valuation
Housing Privilege
1. If the er leases a residential
property for the use of his ee
and the said property is the
usual place of residence of the
ee, the value of the benefit
shall be the rental paid
thereon to the er. The
monetary value of the fringe
benefit shall be 50% of the
value of the benefit
2. If the er owns a residential
property and the same is
assigned for the use of his ee
as his usual place of
residence, the annual value of
the benefit shall be 5% of the
market value of the land and
improvement, as declared in
the Real property tax
declaration form, or zonal
value as determined by the
Commissioner, whichever is
higher. The monetary value of
the fringe benefit shall be
50% of the value of the
benefit
3. If the er purchases a
residential property on
installment basis and allows
the ee to use the same as his
usual place of residence, the
annual value of the benefit
shall be 5% of the acquisition
 cost, exclusive of interest. The Expense Account
monetary value of the fringe
benefit shall be 50% of the 1. In general, expenses
value of the benefit incurred by the ee but
which are paid by the er
4. If the employer purchases a are taxable fringe
residential property and benefits, except when the
transfers the ownership to the expenditures do not
ee, the value of the benefit partake the nature of a
shall be the er’s acquisition personal expense
cost or zonal value, whichever attributable to the ee
is higher. The monetary value
of the fringe benefit shall be 2. Expenses paid for by the
the entire value of the benefit. ee but reimbursed by his
er shall be treated as
5. If the er purchases a taxable income except
residential property and only when the
transfers ownership thereon expenditures do not
to his ee for the latter’s partake the nature of a
residential use, at a price less personal expense
than the er’s acquisition cost, attributable to the said ee
the value of the benefit shall
be the difference between the 3. Personal expenses of the
fair market value and the cost ee paid for or reimbursed
of the ee. The monetary value by the er to the ee shall be
of fringe benefit shall be the treated as taxable fringe
entire value of the benefit. benefits of the ee WON
the same are duly
6. Housing privilege of the AFP receipted for and in the
shall not be treated as taxable name of the er
fringe benefit. The state shall
provide its soldiers with 4. Representation and
necessary quarters which are transportation
within or accessible from the allowances which are
military camp. fixed in amounts and are
regularly received by the
7. A housing unit which is ees as part of their
situated inside or adjacent to monthly compensation
the premises of a business or income shall not be
factory shall not be treated as taxable fringe
considered as a taxable fringe benefits – but subject to
benefit. Must be located income tax
within the maximum 50
meters from the perimeter of Motor Vehicle of Any Kind
the business premises.
1. If the er purchases the motor
8. Temporary housing for an ee vehicle in the name of the ee,
who stays for 3 months shall the value of the benefit is the
not be considered as taxable acquisition cost thereof. The
fringe benefit. monetary value of the fringe
 benefit shall be the entire
value of the benefit.
2. If the er provided the ee with
cash for the purchase of the
vehicle, the ownership of
which is placed in the name of
the ee, the value of the benefit
shall be the amount of cash
received by the ee. The
monetary value of the fringe
benefit shall be the entire
value of the benefit, unless the
same is subjected to a
withholding tax as
compensation income.
3. If the er purchases the car on
installment basis, the
ownership of which is laced in
the name of the ee, the value
of the benefit shall be the
acquisition cost exclusive of
interest, divided by 5 years.
The monetary value of the
fringe benefit shall be the
entire value of the benefit.
4. If the er shoulders a portion of
the amount of the purchase
price of a motor vehicle, the
ownership of which is placed
in the name of the ee, the
value of the benefit shall be
the amount shouldered by the
er. The monetary value of the
fringe benefit shall be the
entire value of the benefit.
5. If the er owns and maintains a
fleet of motor vehicles for the
use of the business and the
ees, the value of the benefit
shall be the acquisition cost of
all the motor vehicles not
normally used for sales,
freight, delivery service and
other non personal use
divided by 5 years. The
monetary value of the fringe
benefit shall be 50% of the
value of benefit.
6. If the er leases and maintains
a fleet of motor vehicles for
the use of the business and
the ees, the value of the
benefit shall be the amount of
rental payments for motor
vehicles not normally used for
sales, freight, delivery
services and other non-
personal use. The monetary
value of the fringe benefit
shall be 50% of the value of
benefit.
7. The use of aircraft owned and
maintained by the er shall be
treated as business use and
not subject to fringe benefit
8. The use of yacht whether
owned or maintained or
leased by the er shall be
treated as taxable fringe
benefit. The value of the
benefit shall be measured
based on the depreciation of
the yacht at an estimated
useful lifetime of 20 years.
Household Expenses
 Such as salaries of help,
personal driver, or other
similar personal expenses
shall be treated as taxable
fringe benefit.
Interest on Loan at Less Than Market
Value
 If the er lends money to his ee
free of interest or at a rate
lower than 12%, such interest
foregone by the er or the
difference of the interest
assumed by the ee and the
 rate of 12% shall be treated as
taxable fringe benefit
 12% applies to installment
payments or loans with
interest rate lower than 12%
starting Jan. 1, 1998
Membership Fees, Dues, and Other
Expenses Borne by the ER for his
manager or Supervisor in Social and
Athletic Clubs of Other Similar
Organizations
 Shall be treated as taxable
fringe benefits in full.
 Assignment – not subject to
income tax.
Expenses for Foreign Travel
1. Reasonable business
expenses which are paid for
by the er for the purpose of
attending business meetings
or conventions shall not be
treated as taxable fringe
benefits. Inland travel
expenses amounting to an
average of US$300 or less er
day, shall not be subject to a
FBT. The cost of economy or
business class airplane ticket
shall not be subject to FBT.
However 30% of the cost of
first class airplane ticket shall
be subject to a FBT.
2. No documentary evidence
showing that the travel is for
business meetings, the entire
cost of the ticket, including
cost of hotel accommodations
and other expenses incidental
thereto shall be treated as
taxable fringe benefits.
3. Traveling expenses which are
paid by the er for the travel of
the family members of the ee
shall be treated a taxable
fringe benefits of the ee.
Holiday and Vacation Expenses
 Taxable fringe benefits
Educational assistance to the ee or his
dependents
a. GR. taxable fringe benefit.
However, a scholarship grant
to the ee by the er shall not be
treated as taxable fringe
benefit if the education or
study involved is directly
connected with the er’s trade,
business or profession, and
there is a written contract
between them that the ee is
under obligation to remain in
the employ of the er for the
period of time that they have
mutually agreed.
b. Extended to the ee’s
dependents – taxable fringe
benefits, unless the assistance
is provided thru a competitive
scheme under the scholarship
program of the company.
Life or health insurance and other non-
life insurance premiums or similar
amounts in excess of what the law
allows
 GR. taxable fringe benefit. XPN
1. Contributions of the er
for the benefit of the ee,
pursuant to the SS, GSIS
or similar contributions
2. The cost of premiums
borne by the er for the
group of his ees
STOCK OPTION
 Any income or gain derived
from stock option plans
granted to managerial and
supervisory ees which qualify
as fringe benefits is subject to
FBT.
 The additional compensation
or the taxable fringe benefit,
as the case may be, is the
difference of the book
value/fair market value of the
shares, whichever is higher, at
the time of exercise of the
stock option and the price
fixed on the grant date.
 The option has value only if, at
the time of the exercise, the
stock is worth more than the
price fixed on the grant date.
 If the income or gain is
derived from the exercise of
stock option is derived by the
rank-and-file ees, the same is
considered as additional
compensation subject to
income tax.
 FBT shall not be imposed on
the ff fringe benefits:
1. Those authorized and
exempted from income
tax under this code or
under any special law
2. Contributions of the er
for the benefit of the ee to
retirement, insurance
and hospitalization
benefit plans
3. Benefits given to the rank
and file
4. De minimis benefits
5. If the grant of fringe
benefits to the ee is
required by the nature of,
or necessary to the trade,
business or profession of
the er
6. If the grant of the fringe
benefit is for the
convenience of the er.
 If the fringe benefit is
exempted from the FBT, the
same may still form part of
the ee’s gross compensation
income.
 As a general rule, the amount
of taxable fringe benefit and
the FBT shall constitute
allowable deductions from
gross income of the er.
However, if the basis of
computation of the FBT is the
depreciation value, the zonal
value or the fair market value,
only the actual fringe benefits
tax paid shall constitute a
deductible expense for the er.
 If the zonal value or fair
market value of the property
is greater than its cost subject
to depreciation, the excess
amount shall be allowed as a
deduction from the er’s gross
income as fringe benefit
expense.
 The test of supervisory or
managerial status depends on
whether a person possesses
authority to act in the interest
of his er and whether such
authority is not merely
routinary or clerical in nature,
but requires the use of
independent judgment.
 Elements of managerial ee
 1. His primary duty consists 1. Individual resident and
of performance of work nonresident citizens
directly related to
management policies 2. Individual resident aliens

2. He customarily and 3. Nonresident alien individual

regularly exercises engaged in trade or business
discretion and within the Philippines
independent judgment in
the performance of his 4. GPP and partners thereof
function
5. Domestic corporations,
3. He regularly and firectly including proprietary
assist in the management educational institutions and
of the establishment hospitals; and GOCC, agencies
or instrumentalities
4. He does not devote 20%
of his time to work other 6. Resident foreign corporations
than those above
prescribed.

Taxpayers not allowed to claim the

allowable deductions
ALLOWABLE DEDUCTIONS
 Income taxes of these
 Means the items enumerated taxpayers are subject to final
in Section 34, including withholding taxes based on
special deductions allowed to the gross income except for
insurance companies under RHQs which is exempt from
Section 37; Provided, that in income tax
case of an individual and a
corporation entitled to claim 1. Taxpayers earning
the Optional Standard compensation income arising
Deduction, under Section 34 from personal services
(L), in lieu of the deductions rendered under the er-ee
enumerated under Section relationship (except for the
34(A) to (J), the term deduction on premium
allowable deductions shall payments on HHI)
mean the aforesaid OSD.
2. Nonresident alien individuals
 In case of individuals, not engage in trade or
deduction of premium business within the
payments on health and/or Philippines
hospitalization insurance may
be allowed, if applicable. 3. Alien individual employed by
RHQs or ROHQs of
Multinational Companies

Taxpayers allowed to claim the 4. Alien individuals employed by

allowable deductions OBUs
 5. Alien individuals employed by 3. Itemized
petroleum service contractors deductions
and subcontractors or OSD

6. International carriers Corporations Itemized deductions

(except or OSD
7. OBUs nonresident
foreign
8. Branches of foreign corporation)
corporations on the profits
remitted to their head offices

9. RHQs Deductions from Gross income, how

construed
10. ROHQs
 Since a deduction for income
11. Nonresident foreign tax purposes partakes of the
corporations nature of a tax exemption,
then it must also be strictly
construed against the
taxpayer, who must prove by
Deductions and exemptions allowed to convincing evidence that he is
taxpayers entitled to the deductions
claimed.
Type of Allowable Deduction
Taxpayer

Individuals 1. Personal and General rules for the deductibility of

earning pure Additional certain transactions from gross income
compensatio exemptions;
n income 1. Deductions must be paid or
(except 2. Premium incurred in connection with
nonresident payments on the taxpayer’s trade, business
aliens not HHI, if or exercise of profession
engaged in applicable
trade or 2. Deductions must be paid or
business in incurred during the taxable
the year
Philippines)
3. Deductions must be
Individuals 1. Personal and supported by adequate
deriving additional receipts or invoices
income from exemptions
trade or 4. Deductible expenses must
business, or 2. Premium have been subjected to
exercise of payments on withholding tax
profession HHI, if
applicable
Return of capital which may be
deducted from the gross sales or gross
revenue
 Income tax is levied only on
income, hence, the amount
representing return of capital
should be deducted from
proceeds from sales and
should not be subject to
income tax.
 Return of capital are in the
form of coast of sales or cost
of service paid or incurred by
the taxpayer in the conduct of
his business or exercise of
profession.
 Cost of goods purchased for
resale, with proper
adjustment for opening and
closing inventories, are
deducted from gross sales in
computing gross income
 In sale of goods representing
inventory, the amount
received by the seller consists
of return of capital and gain
from sale of goods or
properties. Return of capital
is not subject to income tax.
 Real estate dealers and
dealers in securities are
ordinarily not allowed to
compute the amount
representing return of capital
thru cost of sales. Rather, they
are required to deduct the
total cost specifically
identifiable to the real
property or shares of stock
sold and exchanged.
 In the sale of services, the
portion of the cost of services
representing the return of
capital is not subject to
income tax.
* Incentives to lawyers – a lawyer or
GPPs rendering free legal services
shall be entitled to an allowable
deduction from the gross income, the
amount that could have been collected
for the actual free legal services
rendered or up to 10% of the gross
income derived from the actual
performance of the legal profession,
whichever is lower; Provided, that the
actual free legal services herein
contemplated shall be exclusive of the
minimum 60-hour mandatory legal aid
services rendered to indigent litigants.
Business expense vis-à-vis capital
expense
 Business expense –
expenditures related to the
conduct of the business of the
taxpayer and deductible in
the year incurred
 Capital expenses –
expenditures that improve or
add to the value of the
property or equipment of the
business. They are not
immediately deductible but
may be deducted overtime in
the form of allowance for
depreciation.
Business expenses that may be
deducted from gross income
 Include the ordinary and
necessary expenditures
directly connected with or
pertaining to the taxpayer’s
trade or business, should be
 deducted from the gross losses in the case of a
income in the year incurred. business

 The cost of goods purchased 11. Equipment used in the

for resale, with proper trade or business
adjustment for opening and
closing inventories, is 12. Organizational and
deducted from gross sales in operating expenses
computing the gross income.
13. Management expenses
 Among the items included in
the business expenses are: 14. Training expenses

1. Salaries, wages, 15. Other necessary expenses

compensation for incurred in carrying on
services rendered; the business
pensions, compensation
for injuries; commissions

2. Benefits of ees, including Professional Expenses

de minimis benefits and
the grossed-up monetary  A professional may claim as
value of fringe benefits deduction from gross income
subject to FBT the following:

3. Traveling expenses while 1. The cost of supplies used

away from home solely in by him in the practice of
the pursuit of a trade or his profession
business
2. Expenses aid in the
4. Rentals for the use of operation and repair of
business property transportation
equipment used in
5. Entertainment, making professional calls
amusement and
recreation expenses 3. Dues to professional
societies
6. Incidental repairs
4. Subscriptions to
7. Cost of materials and professional journals
supplies
5. Rent paid for office rooms
8. Advertising expense and
other selling expenses 6. Fuel, light, water,
telephone expenses used
9. Professional services in offices

10. Insurance premiums 7. Salaries or office

against fire, storm, theft, assistants
accident or other similar
 8. Amounts currently
expended for books,
furniture and
professional instruments
and equipment, the useful
life of which is short
9. Training expenses
10. Other necessary expenses
incurred in the practice of
profession
Requisites for the deductibility of
business and professional expenses
1. Expenses must be ordinary
and necessary
2. Must be aid or incurred
during the taxable year
3. Must be paid or incurred in
carrying on the trade or
business, or the exercise of
profession by the taxpayer, or
attributable to the
development, management or
operation of the trade,
business or profession
4. Amount must be reasonable
5. Must be substantiated by
sales invoice or official
receipts, records or other
pertinent documents showing
the amount of expenses and
the direct connection to the
business
6. If subject to withholding tax,
the same should be properly
withheld and remitted to the
BIR
7. Must be legitimately paid
Meaning of ordinary and necessary
expenses
 Ordinary – not lavish,
extravagant or excessive
under the circumstances
 A business expense is
ordinary when it connotes
payment which is normal in
relation to the business of the
taxpayer and the surrounding
circumstances. It does not
require that the payments be
habitual or normal in the
sense that the same taxpayer
will have to make them often;
the payment may be unique
on non-recurring to the
particular taxpayer.
 Necessary – where the
expenditure is appropriate
and helpful in the
development of the taxpayer’s
business. – day to day expense
 Whether an ordinary and
necessary expense is
deductible expense must be
determined from the nature
of expenditure itself, which in
turn depends on the extent
and permanency of the work
accomplished by the
expenditure.
Meaning of paid or incurred during the
taxable year
 The deduction shall be taken
for the taxable year in which
paid or accrued or paid or
incurred depending upon the
accounting method in which
taxable income is computed.
  Under the accrual method of
accounting, expenses not
claimed as deduction in the
current year when they are
incurred cannot be claimed as
deduction from income from
the succeeding year.
 The amount of liability does
not have to be determined
exactly; it must be determined
with reasonable accuracy,
which implies something less
than exact or completely
accurate amount.
 The propriety of an accrual
must be judged by the facts
that a taxpayer knew, or could
reasonably be expected to
have known, at the closing of
its books for the taxable year.
SALARIES AND OTHER FORMS OF
COMPENSATION FOR PERSONAL
SERVICES ACTUALLY RENDERED
 Must be reasonable allowance
for salaries or other
compensation for personal
services actually rendered.
 Must be payments purely for
service
 This test and its practical
application may be further
stated and illustrated as
follows
1. Any amount in the form of
compensation, but not in fact as the
purchase price of service, is not
deductible.
2. The form or method of fixing
compensation is not decisive as to
deductibility. If contingent
compensation is paid pursuant to a free
bargain between the er and the
individual made before the services are
rendered, not influenced by any
consideration on the part of the er other
than that of securing on fair and
advantageous terms the service of the
individual, it should be allowed as a
deduction even though in the actual
working out of the contract may prove
to be greater than the amount which
would ordinarily be paid.
3. In any event the allowance for
compensation paid may not exceed
what is reasonable under the
circumstances. It is generally just to
assume that reasonable and true
compensation is only such amount as
would be paid for like services by like
enterprises in like circumstances. The
circumstances to be taken into
consideration are those existing at the
date when the contract of services was
made.
Treatment of excessive compensation
 In case of excessive payments
by corporations, if such
payments correspond or bear
a close relationship to
stockholdings, and are found
to be distribution of earnings
or profits, the excessive
payments will be treated as
dividends
 If such payments constitute
payments for property, they
should be treated by the
payer as a capital expenditure
and by the recipient as part of
the purchase price.
Bonuses to ees
 A bonus is an amount granted
and paid ex gratia to the ees, it
is an amount granted and paid
to an ee for his industry and
loyalty which contributed to
the success of the er’s
business and made possible
the realization of profits.
 It is not demandable and
enforceable obligation, unless
made a part of the wage or
salary, or is embodied in a
CBA
 Constitute allowable
deductions from gross income
when such payments are
made in good faith and as
additional compensation for
the services rendered to ees,
provided such payments,
when added to the stipulated
salaries, do not exceed a
reasonable compensation for
the services rendered.
 Donations made to ees and
others which do not have in
them the element of
compensation or are in excess
of reasonable compensation
for services, are not
deductible from gross income.
 Reasonable amount only is
deductible.
 Giving an extra bonus at the
time when the company has
declared a net operating loss
is not a payment in good faith
and not normal to the
business, hence unreasonable
and would not qualify as
ordinary and necessary
expense.
Pensions; Compensation for injuries
 Proper deductions as
ordinary and necessary
expenses
 Such deductions are limited to
the amount not compensated
for by insurance companies.
FRINGE BENEFITS EXPENSE
 The company can deduct the
amount of the grossed-u
monetary value of the fringe
benefit given to the managers
or supervisors as fringe
benefit expense provided that
the said fringe benefits had
been subjected to FWT on the
fringe benefits.
TRAVELLING/TRANSPORTATION
EXPENSES
 If the trip is undertaken for
other than business purposes,
the transportation expenses
are personal expenses, and
the meals and lodging are
living expenses, and therefore
not deductible.
 If the trip is solely on
business, the reasonable and
necessary travelling expenses,
including transportation
expenses, meals and lodging,
become business expenses
instead of personal expenses.
a. If an individual, whose
business requires him to
travel, receives a salary
as full compensation for
his services without
reimbursement for
travelling expenses, or is
employed on a
commission basis with no
 expense allowance, his meals and lodging while
travelling expenses, absent from home in the
including the entire pursuit of business
amount expended for during the taxable year
meals and lodging, are
deductible from gross 4. The total amount of other
income. expenses incident to
travel and claimed as a
b. If an individual receives deduction
as salary and is also
repaid his actual  Claims for deductions
travelling expenses, he referred to herein must be
shall include in the gross substantiated by records
income, the amount so showing in detail the amount
repaid and may deduct and nature of the expenses
such expenses. incurred.

c. If the individual receives

a salary and also an
allowance for meals and Proof of deductibility for travel
lodging, the amount of the expenses when claimed by passengers,
allowance should be as well as freight charges incurred on
included in gross income transport of cargoes by airline
and the cost of such meals companies
and lodging may be
deducted therefrom.  For purposes of validating the
deductions claimed, the
 A payment for the use of a passenger coupon of the plane
sample room in a hotel for the ticket/airway bill which
display of foods is a business reflects the CAB rate shall not
expense. Only such expenses be used as the basis for the
as are reasonable and claim of expenses.
necessary in the conduct of
the business and directly  The amount of expenses to be
attributable to it may be claimed shall be the actual
deducted. He must attach to cost incurred for the purchase
his return a statement of the plane ticket/airway bill
showing: which is the net amount of the
ticket fare/airway bill after
1. The nature of the deducting the corresponding
business in which he is fare/freight adjustments.
engaged
 In case of plane tickets, if said
2. The number of days away tickets are purchased from
from home during the travel agents, travel expenses
taxable year on account as claimed by the passengers
of business shall be validated on the basis
of the sales invoice/official
3. The total amount of receipt issued by the travel
expenses incident to agent representing the actual
 cost of the ticket and the  On the accrual basis,
reasonable margin added by rent is deductible as
the travel agent as payment expense when
for the services. liability is incurred
during the period of
use. On cash basis,
rent is deductible
Essential Requisites of when incurred and
traveling/transportation expense paid. An advance
payment is not
1. Expense must be reasonable deductible expense
and necessary of the lessee until the
period is used,
2. It must be paid or incurred although the lessor
while away from home may be required to
report the amount
 While away from when received.
home means away
from the location of 3. It must be paid or
the ee’s official place incurred in carrying trade
of employment or business of the
regardless of where taxpayer or practice of
the family residence profession.
is maintained, like
business trips 4. It must be supported by
official receipts, records
3. It must be paid or incurred in or other pertinent papers
the conduct of trade or
business or exercise of 5. It is required as a
profession condition for the
continued use or
possession of the
property being leased
RENTAL EXPENSE
6. The taxpayer has not
taken or is not taking title
to the property or has no
Rental and/or payments for use or equity other than that of a
possession of property lessee, user, or possessor
 Requisites 7. Rentals should be subject
to the expanded
1. Rental must be ordinary withholding tax of 5% of
and necessary the rental charge, net of
vat, if any.
2. It must have been paid or
incurred during the
taxable year
Expenses under lease agreements
  Where a leasehold is acquired
for business purposes for a
specified sum, the purchaser  Representation expenses –
may take as a deduction in his refer to the expenses incurred
return an aliquot part of such by a taxpayer in connection
sum each year, based on the with the conduct of his trade,
number of years the lease has business or exercise of a
to run. profession, in entertaining,
providing amusement and
 Taxes paid by a tenant to or recreation to, or meeting with,
for a landlord for business a guest/s at a dining place,
property are additional rent place of amusement, country
and constitute a deductible club, theater, concert, play,
item to the tenant and taxable sporting event, and similar
income to the landlord, the events or places.
amount of the tax deductible
by the latter.  Shall not refer to fixed
representation allowances
 The cost borne by a lessee in that are subject to
erecting buildings or making withholding tax on wages
permanent improvement on pursuant to an er-ee
ground of which he is a lessee relationship
is held to be a capital
investment and not  Entertainment facilities –
deductible as a business shall refer to:
expense. In order to return to
such taxpayer his investment 1. A yacht, vacation home or
of capital, an annual condominium; and
deduction may be made from
gross income of an amount 2. A similar item of real or
equal to the cost of such personal property used
improvements divided by the by the taxpayer primarily
number of years remaining of for the entertainment,
the term of lease, and such amusement, or recreation
deduction shall be in lieu of a of guests or ees.
deduction for depreciation if
the remainder of the term of  To be considered
lease is greater than the entertainment
probable life of the building facility, the
erected, or of the aforementioned
improvement made, and this must be owned
deduction shall take the form or form part of
of an allowance for the taxpayer’s
depreciation. trade, business
or profession, or
rented by such
taxpayer, for
ENTERTAINMENT, AMUSEMENT AND which the
REPRESENTATION EXPENSES taxpayer claims
 a depreciation or receipts and adequate records
rental expense. that indicate the:

 A yacht shall be 1. Amount of expense

considered an
entertainment 2. Date and place of expense
facility if its use
is in fact not 3. Purpose of expense
restricted to
specified officers 4. Professional or business
or ees or relationship of expense
positions in such
a manner as to 5. Name of person or
make the same a company entertained
fringe benefit for with contact details
purposes of
imposing the
FBT.
Requisites of deductibility of
 The term guests entertainment, amusement and
mean persons or recreation expenses
entities with
which the 1. It must be paid or incurred
taxpayer has during the taxable year
direct business
relations. It does 2. The amount must be
not include ees, reasonable
officers,
partners, 3. It must be:
directors,
a. Directly connected to the
stockholders, or
development,
trustees of the
management and
taxpayer.
operation of the trade,
business or profession of
 In the case particularly of a
the taxpayer; or
country, golf, sports club, or
any other similar club where
b. Directly related to or in
the ee or officer of the
furtherance of the
taxpayer is the registered
conduct of his or its trade,
member and the expenses
business or exercise of a
thereto are paid for by the
profession
taxpayer, there shall be a
presumption that such
4. It must not contrary to law,
expenses are fringe benefits morals, good customs, public
unless the taxpayer can prove
policy or public order
that these are actually
representation expenses. For 5. It must not have been paid,
purposes of proving that said directly or indirectly, to an
expense is representation, the official or ee of the national
taxpayer should maintain government, or any local
 government unit, or of any
GOCC, or of a foreign
government, or to a private
individual, or corporation, or
GPP, or a similar entity, if it
constitutes a bribe, kickback,
or other similar payment
6. It must not exceed the ceiling
of .50% of net sales for sellers
of goods or properties or 1%
of net revenues for sellers of
services
7. It must be duly substantiated
by adequate proof
8. The appropriate amount of
withholding tax, if applicable,
should have been withheld
therefrom and paid to by the
BIR.
Ceiling on entertainment, amusement,
and recreation expense
 There shall be allowed a
deduction from gross income
for entertainment,
amusement and recreation
expense in an amount
equivalent to the actual
entertainment, amusement
and recreation expense paid
or incurred within the taxable
year by the taxpayer, but in no
case shall such deduction
exceed .50% of net sales for
taxpayers engaged in sale or
goods or properties; or 1% of
net revenue if taxpayer is
engaged in sale of services,
including exercise of
profession and use or lease of
properties.
 If the taxpayer is deriving
income from both sale of
goods/properties and
services, the allowable
entertainment, amusement
and recreation expense shall
in all cases be determined
based on an apportionment
formula taking into
consideration the percentage
of the net sales/net revenue
to the total net sales/net
revenue, but which in no case
shall exceed the maximum
percentage ceiling.
 Apportionment formula: net
sales/net revenue over total
net sales and net revenue
time actual expense
 Notwithstanding the ceiling
imposed on such expense, the
claimed expenses shall be
subject to verification and
audit for purposes of
determining its deductibility
as well as compliance with the
substantiation requirements.
 It after the verification, a
taxpayer is found to have
shifted the amount of the
entertainment, amusement
and recreation expense to any
other expense in order to
avoid being subjected to the
ceiling, the amount shifted
shall be disallows in its
totality, without prejudice to
such penalties under the tax
code.
Excluded from the entertainment,
amusement, and recreation expenses
1. Expenses which are treated as
compensation or fringe
benefits for services rendered
under an er-ee relationship
 2. Expenses for charitable or
fund raising events
Incidental, minor or ordinary repairs
3. Expenses for bona fide and maintenance
business meeting of
stockholders, partners or  The cost of incidental repairs
directors which neither materially add
to the value of the property
4. Expenses for attending or nor appreciably prolong its
sponsoring an ee to a business life, but keep it in an
league or professional ordinarily efficient operating
organization meeting condition may be deducted as
expenses, provided the plant
5. Expenses for events organized and property account is not
for promotion, marketing and increased by the amount of
advertising including such expenditure.
concerts, conferences,
seminars, workshops,  MAJOR OR EXTRAORDINARY
conventions, and other REPAIRS – Repairs in the
similar events; and nature of replacement, to the
extent that they arrest
6. Other expenses of a similar deterioration and appreciably
nature prolong the life of the
property or increase its value
 Not exhaustive are capital expenditures and
should be charged/debited
Reporting requirements against the depreciation
reserves if such account is
 The taxpayer is required to kept.
use in its financial statements
and income tax return the
account title entertainment,
amusement and recreation COSTS OF MATERIALS AND SUPPLIES
expense, or in the alternative,
to disclose in the notes to  Taxpayers carrying materials
financial statements the and supplies on hand should
amount corresponding include in expenses the
thereto when recording charges for materials and
expenses paid or incurred in supplies only to the amount
the nature of the expense. that they are actually
consumed and used in
 Such expense should be operation during the year for
reported in the taxpayer’s which the return is made,
income tax return as a provided that the cost of such
separate expense item. has not been deducted in
determining the net income
for any previous year.

MINOR OR ORDINARY REPAIRS AND  If a taxpayer carries

MAINTENANCE incidental materials and
 supplies on hand and for
which no record of
consumption is kept or of
which physical inventories at
the beginning and end of the
year are not taken, it will be
permissible for the taxpayer
to include in his expenses and
deduct from gross income the
total cost of such supplies and
materials as were purchased
during the year for which the
return is made, provided the
taxable income is clearly
reflected by this method.
 If the materials and supplies
are used directly or indirectly
in the production of the
product, the related cost shall
form part of the cost of the
product and will be
deductible as such when the
products are sold.
ADVERTISING AND OTHER SELLING
EXPENSES
 A taxpayer is entitled to
deduct the necessary
expenses aid in carrying on
his business from his gross
income from whatever
sources.
 Advertising includes the use
of spoken or written word in
printed matter, movies, radio
and television acquaint the
public with the taxpayer’s
merchandise or services.
 Two kinds of advertising
1. To stimulate the current
sales of merchandise or
use of services
2. Designed to stimulate the
future sale of
merchandize or use of
services
 If the expenditures are for the
first kind, then except as to
the question of the
reasonableness of amount,
there is no doubt that such
expenditures are deductible
as business expenses.
 If the expenditures are for the
second kind, then normally
there should be spread out
over a reasonable period of
time.
 Advertising expense duly
covered by a VAT invoice is a
legitimate business expense.
PROFESSIONAL SERVICES
 Hiring the services of
professionals shall be
considered deductible
expense subject to the
condition that the same shall
be subject to the EWT, except
only if the professional is a
member/partner of a GPP.
TRAINING EXPENSE
 Incurred during the taxable
year for training ees of the
office shall be considered as
ordinary and necessary
deductible expense.
MANAGEMENT EXPENSES
  Organizational
expenses are
OTHER NECESSARY BUSINESS amortized across the
EXPENSES life of the firm.
Where no such life
exists or is
determined, the
CAPITAL EXPENDITURES amortization period
is 5 years. Under the
 Non-deductible during the Investment
taxable year but can be Incentives Act, such
amortized expenses are
amortized by a
1. Equipment needed in trade or registered enterprise
business for a period of not
more than 10 years.
2. Organizational and pre-
operating expenses

 Organizational and Substantiation requirement

pre-operating
expenses of a  No expenses shall be allowed
corporation are as deduction from gross
considered capital income unless the taxpayer
expenditures and are shall substantiate with
therefore, not sufficient evidence, such as
deductible in the official receipts or other
year they are paid or adequate records:
incurred
1. The amount of the
 But taxpayers who expense being deducted
incur these expenses
and subsequently 2. The direct connection or
enter the trade and relation of the expense
business to which the being deducted to the
expenditures relate development,
can elect to amortize management, operation
these expenditures and/or conduct of the
over a period of not trade, business or
less than 60 months. profession of the
– Does not apply to a taxpayer.
situation where an
existing corporation
incurs such for the
purpose of expanding Bribery or kickback not allowed as
its business in a new deduction
line of trade, venture
or activity.  To a government official in
order to facilitate the
 processing of a transaction operation and/or conduct of a
from a government office trade, business or profession.

 However, on the part of the  If candidate is an incumbent

subject approving official,
who received the bribe, the
said amount would constitute
as a taxable income because
all income from legal or illegal
sources whatsoever are
taxable.
government official or ee, it
may even be considered as a
bribe or kickback.
EXPENSES ALLOWABLE TO PRIVATE
EDUCTIONAL INSTITUTIONS

 In addition to the expenses

Insurance premium on the life of a allowable as deductions, a
government official not a deductible private educational
expense by a private firm-payor institution, may at its option,
elect either:
 Because it is not an ordinary
and necessary business 1. To deduct expenditures
expense otherwise considered as
capital outlays of
 Paying premiums for the depreciable assets
insurance of a person not incurred during the
connected with the company taxable year for the
is not normal, usual or expansion of school
customary. facilities, or

 It is also an illegal 2. To deduct allowance for

compensation made to a depreciation.
government ee.

 If the company is made the

beneficiary, whether directly
or indirectly, the premium is
not allowed as deduction from
gross income.
Political campaign expenses and
contributions to a candidate in an
election not allowed as deductible
from gross income
 The contributor is not allowed
to deduct his contributions
because the said expense is
not directly attributable to the
development, management,
Interest Expense – refer to payment for
the use or forbearance or detention of
money, regardless of the name it is
called or denominated. It includes the
amount paid for the borrower’s use of
money during the term of the loan, as
well as for his detention of money after
the due date of its payment.
Requisites for deductibility of interest
expense
1. There must be an
indebtedness
 2. There should be an interest  G.R. The amount of interest
expense paid or incurred expense paid or incurred
upon such indebtedness within a taxable year on
during the taxable year indebtedness in connection
with the taxpayer’s trade,
3. The indebtedness must be business or exercise of
that of the taxpayer profession shall be allowed as
deduction from the taxpayer’s
4. The indebtedness must be gross income
connected with the taxpayer’s
trade, business or exercise of  Limitation. The amount of
profession interest paid or incurred by a
taxpayer in connection with
5. The interest must be his trade, business or exercise
stipulated in writing of a profession from an
existing shall be reduced by
6. The interest must be legally an amount equal to 33% of
due the interest income earned
which had been subjected to
7. The interest payment the final tax.
arrangement must not be
between related taxpayers  This limitation shall apply
regardless of WON a tax
8. The interest must not arbitrage scheme was entered
incurred to finance petroleum into by the taxpayer or
operations regardless of the date when
the interest bearing loan and
9. In case of interest incurred to the date when the interest
acquire property used in bearing loan and the date
trade, business or exercise of when the investment was
profession, the same was not made for as long as, during
treated as a capital the taxable year, there is
expenditure interest expense incurred on
one side and an interest
10. That the allowable deduction
income earned on the other
for interest expense shall be
side, which income had been
reduced to 33% of the interest
subjected to final withholding
income subjected to the final
tax.
tax
 Tax Arbitrage Scheme – a
11. The interest is not expressly
method of borrowing without
disallowed by law to be
entering into a
deducted from gross income
debtor/creditor relationship,
of the taxpayer
often to resolve financing and
exchange control problems. In
tax cases, back-to-back loan is
Rules on the deductibility of interest used to take advantage of the
expense lower rate of tax on interest
income and a higher rate of
 tax on interest expense
deduction.
 Interest on unpaid taxes. Shall
be fully deductible from gross
income and shall not be
diminished by the percentage
of interest income earned
which had been subjected to
FWT.
Deductible interest expense
1. Interest on taxes, such as
those paid for tax deficiency
or tax delinquency, provided
that the tax is a deductible tax.
 Fines, penalties and
surcharges on unpaid taxes
are not deductible.
 The interest on unpaid
business tax is not subject to
33%.
2. Interest paid on the mortgage
upon real property of which
the corporation is the
equitable owner.
3. Interest on deposits paid by
authorized banks of the BSP
to depositors provided that
the tax on such interest had
been withheld.
No interest expense shall be allowed as
deduction from gross income in any of
the following cases:
1. Interest paid in advance thru
discount or otherwise within
the taxable year, an individual
taxpayer reporting income on
the cash basis incurs an
indebtedness
 Such interest shall be allowed
as a deduction only in the year
the indebtedness is paid.
2. In the case of interest
periodically amortized, if the
indebtedness is payable in
periodic amortization, the
amount of interest which
corresponds to the amount of
the principal amortized or
paid during the year shall be
allowed as deduction in such
taxable year.
 A self-employed individual is
allowed to deduct from his
gross income the entire
amount of interest expense
actually paid during the
taxable year. However, if the
interest expense is paid in
advance and the accounting
method used is the cash-basis
accounting method, such
interest expense paid in
advance shall not be allowed
as deduction. However, it
shall only be allowed as
deduction in the year when he
has fully paid his liability.
 On the other hand, even if the
interest expense is paid in
advance but the indebtedness
is payable in periodic
amortization, the amount of
interest expense which
corresponds to the amount of
the principal amortized or
paid during the respective
years.
3. Interest payments made
between related taxpayers. No
interest expense shall be
allowed as deductions if both
 the taxpayer and the person
to whom the payment has
been made or is to be made Other cases of non-deductible interest
are persons: expense
1. Between members of the
family. (includes only his
brothers and sisters,
spouse, ancestors, and
lineal descendants
2. Between an individual
and a corporation more
that 50% in value of the
outstanding stock of
which is owned, directly
and indirectly, by or for
such individual
3. Between two
corporations more than
50% in value of the
outstanding stock of each
of which is owned,
directly or indirectly, by
or for the same individual
4. Between the grantor and
a fiduciary of any trust
5. Between the fiduciary of a
trust and the fiduciary of
another trust if the same
person is a grantor with
respect to each trust
6. Between a fiduciary of a
trust and a beneficiary of
such trust.
4. Interest on indebtedness
incurred to finance petroleum
operations. No interest
expense shall be allowed as
deductions if the
indebtedness on which the
interest expense is paid is
incurred to finance petroleum
exploration in the Philippines.
1. Interest imposed on taxpayer
as penalty for failure to pay
donor’s tax on time not
deductible from gross income.
 Reason: not one that can be
considered as having been
incurred in connection with
the taxpayer’s trade, business
or exercise of a profession. To
allow the deductibility of such
interest would be to diminish
the punitive and deterrent
effects of the imposition, and
thus diminishing the
importance of prompt
payment of taxes.
2. Deterred dividends on the
preferred shares of stock
cannot be claimed as interests
deductible from the gross
income for income tax
purposes
 Reason: preferred shares
shall be considered capital
regardless of the condition
under which such shares are
issued. Dividends paid
thereon are not considered
interest.
 So-called interest on
preferred stock, which is in
reality a dividend thereon,
cannot be deducted in
computing tax on income.
 Interest on indebtedness
incurred or continued to
purchase bonds and other
securities, the interest upon
which is exempt from tax, is
also not deductible.
 3. Interest on Capital. Which
does not represent a charged
rising under an interest-
bearing obligation is not
allowable deduction.
At the option of the taxpayer, the
interest expense on a capital
expenditure incurred to acquire
property used in trade, business or
exercise of a profession may be
allowed as:
1. Outright deduction – a
deduction in full in the year
when incurred
2. Treated as a capital
expenditure – for which the
taxpayer may claim only as a
deduction the periodic
amortization/depreciation of
such expenditure.
 The taxpayer is not entitled to
both the deduction from gross
income and the adjusted basis
for determining gain or loss
and the allowable
depreciation charge.
TAXES
 Means taxes proper and no
deductions should be allowed
for amounts representing
interest, surcharge, or
penalties incident to
delinquency.
 Postage is not a tax deductible
from gross income but it may
be deducted as business
expense.
 Taxes are deductible as such
only by the person upon
whom it is imposed.
 The taxes deductible are
those levied for the general
public welfare by the proper
taxing authorities at a like
rate against all property in
the territory over which such
authorities have jurisdiction.
 No deductions should be
allowed for amounts
representing interest,
surcharge, or penalties
incident to delinquency in the
payment of taxes.
Requisite for the deductibility of taxes
1. Taxes must be aid or incurred
in connection with the
taxpayer’s trade or business
or exercise of profession
2. Tax must be imposed by law
directly on the taxpayers
3. Taxes must be paid or
incurred during the taxable
year
4. Taxes must be those allowed
and not disallowed to be
deducted from gross income
5. Said taxes must be duly
substantiated by official
receipts
Taxes deductible from gross income
1. Indirect taxes payable to the
BIR
 2. Taxes payable to the Bureau
of Customs
3. Local taxes payable to the LGU
4. Automobile registration fees
for vehicles being used in
business or practice of
profession are considered as
taxes
5. Any other taxes of every name
or nature aid directly to the
Government of the
Philippines or to any political
subdivision thereof.
 When assessments are made
for the purpose of
maintenance or repair of local
benefits, the taxpayer may
deduct assessments paid as an
excuse incurred in business, if
the payment of such
assessments is necessary to
the conduct of his business.
Non-deductible taxes
1. Philippine income Tax, except
fringe benefit tax
2. Foreign income taxes imposed
by authority of any foreign
country, except when a
resident citizen, domestic
corporation or estate signifies
in his/its return his/its desire
to have the benefits of
crediting against his taxes
payable in the Philippines the
taxes he/it paid in foreign
countries
3. Estate tax
4. Donor’s tax
5. Tax on sale, barter, exchange
of shares of stock listed and
traded thru the local stock
exchange or thru initial public
offering
6. Taxes assessed against local
benefits of a kind tending to
increase the value of the
property assessed
7. Taxes not connected with the
trade, business or exercise of
profession of the taxpayer
8. Energy tax on electric power
consumption
9. FWTaxes on passive income,
the same being in the nature
of income tax.
Tax treatment of special assessment;
when a tax is considered assessed
against local benefits tending to
increase the value of the property
assessed
 So called taxes, more properly
special assessments, paid for
local benefits, such as street,
sidewalk and other like
improvements, imposed
because of and measured by
some benefit inuring directly
to the property against which
the assessment is levied, do
not constitute an allowable
deduction from gross income.
 A tax is considered assessed
against local benefits when
the property subject to the tax
is limited to the property
benefited.
  Not deductible even though an
incidental benefit may inure
to the public welfare.
 What is deductible are those
levied for the general public
welfare by the proper taxing
authorities at a like rate
against all property in the
territory over which such
authorities have jurisdiction.
 When assessments are made
for the purpose of
maintenance or repair of local
benefits, the taxpayer may
deduct assessments paid as an
expense incurred in business,
if the payment of such
assessments is necessary to
the conduct of his business.
 When the assessments are
made for the purpose of
constructing local benefits,
the payments by the taxpayer
are in the nature of capital
expenditures and are not
deductible.
 When assessments are made
for the purpose of
construction and
maintenance or repairs, the
burden is on the taxpayer to
show the allocation of the
amounts assessed to the
different purposes. If the
allocation cannot be made,
none of the amounts so paid is
deductible.
Tax benefit Rule
 GR. Recovery of amounts
deducted in prior years would
result to income.
 Where the deduction did not
result in tax benefit, the
subsequent recovery is not
taxable income.
 Applicable also to taxes
previously deducted from
gross income but which were
subsequently refunded or
credited.
 The taxpayer is also required
to report as taxable income
the subsequent tax refund or
tax credit granted to the
extent of the tax benefit the
taxpayer enjoyed when such
taxes were previously claimed
as deduction from income.
 Taxes paid which are not
allowed as deduction from
gross income are not taxable
even when refunded.
Limitations on deductions
 Nonresident alien individuals
engaged in trade or business
in the Philippines and
resident foreign corporations
shall only be allowed to
deduct taxes from gross
income if and to the extent
that they are connected with
their income from sources
within the Philippines.
Persons entitled to credit against
income tax payable in the Philippines
for the taxes paid in foreign countries.
 If the taxpayer signifies in his
return his desire to have
benefits of crediting against
his taxes payable in the
 Philippines the taxes paid in
foreign countries, he must
demonstrate that he is
entitled to tax credit, and the
tax imposed shall be credited
with:
1. Citizen and domestic
corporation, the amount of
income taxes paid or incurred
during the taxable year to any
foreign country
2. Partnerships and estates. In
case of a person who is a
member of a G or a beneficiary
of an estate or trust, his
proportionate share of such
taxes of the GP or the estate or
trust paid or incurred during
the taxable year to a foreign
country, if his distributive
share of the income of such
partnership or trust is
reported for taxation.
 XPN. An alien individual,
resident or not, and a foreign
corporation shall not be
allowed to credit against the
taxes paid in the Philippines
the taxes paid in foreign
countries because they are
subject to Philippine income
tax only on income derived
from sources within the
Philippines.
Limitations on credit
 Tax credit refers to the
taxpayer’s right to deduct
from income tax payable in
the Philippines the foreign
income tax he has paid subject
to the following limitations:
1. Per country limit. The amount
of credit allowed is the lower
between per country limit and
the foreign income tax paid.
Taxable income from foreign country X
Phil. Income
Taxable income from all sources
tax payable
(within and without the Phil)
2. Worldwide limit. Applicable
only when the taxpayer derives
income from more than one
foreign country. In order to
determine the tax credit that
may be allowed, determine
first the lower between the
worldwide limit and the total
foreign income taxes paid.
Then compare the result with
the per country limit, then the
lower amount is the allowed
tax credit.
TI from all foreign countries X
Phil. Income tax
Taxable income from all sources
payable
(within and without the Phil)
Adjustments on payment of incurred
taxes
 In case credit has been given
for taxes accrued, or a
proportionate share thereof,
and the amount that is
actually paid on account of
such taxes, or a proportionate
share thereof, is not the same
as the amount of such credit,
or in case any tax payment
credited is refunded in whole
 or in art, the taxpayer shall
immediately notify the CIR.
 The CIR shall re-determine
the amount paid for the year
or years which such incurred
credit was granted.
 The amount of tax due to such
redetermination shall be paid
by the taxpayer upon notice
and demand by the CIR.
 If there was overpaid, it shall
be credited or refunded to the
taxpayer.
 In case of such a tax incurred
but not paid, the CIR as a
condition precedent to the
allowance of this credit may
require the taxpayer to give a
bond with sureties
satisfactory to and to be
approved by the CIR,
conditioned upon the
payment by the taxpayer of
any amount of tax found due
upon any such re-
determination.
Where credits for taxes may be taken
 The credit for taxes of the
foreign country may
ordinarily be taken either in
the return for the year in
which the taxes accrued or in
which the taxes were paid,
dependent upon whether the
accounts of the taxpayer are
kept and his return filed upon
the accrual basis or upon the
cash receipts and
disbursement basis.
 The taxpayer, at his option
and irrespective of the
method of accounting
employed in keeping his
books, is allowed to take such
credit for taxes as may be
allowable in the return for the
year in which the taxes of the
foreign country accrued.
 An election made must be
followed in returns for all
subsequent years, and no
portion of any such taxes will
be allowed as a deduction
from gross income.
Proof of credits
1. The total amount of income
derived from sources within
the Philippines
2. The amount of income
derived from each country,
the tax paid or incurred to
which is claimed as a credit
3. All other information
necessary for the verification
and computation of such
credits.
Information regarding taxes that
should be included in the Notes to
Financial Statements
1. The amount of Vat output tax
declared during the year and
the account title and
amount/s upon which the
same is based. If there are
zero-rated sales/receipts
and/or exempt sales/receipts,
a statement to that effect and
the legal basis therefor;
2. The amount of VAT input a. Locally produced
taxes claimed and broken excisable items
down into:
b. Imported excisable items
a. Beginning of the year
5. Documentary stamp tax on
b. Current year’s domestic loan instruments, shares of
purchases/payments for: stock and other transactions
subject thereto
i. Goods for
resale/manufact 6. All other taxes, local or
ure or further national, including real estate
processing taxes, license and permit fees,
lodged under the Taxes and
ii. Goods other than Licenses account both under
for resale or the cost of sales and operating
manufacture expense accounts

iii. Capital goods 7. The amount of withholding

subject to taxes categorized into
amortization
a. Tax on compensation and
iv. Capital goods not benefits
subject to
amortization b. Credible withholding
taxes
v. Services lodges
under cost of c. FWT
goods sold
8. Periods covered and amounts
vi. Services lodged of deficiency tax assessments,
under other whether protested or not
accounts
9. Tax cases, and amounts
c. Claims for tax involved, under preliminary
credit/refund and other investigation, litigation
adjustments and/or prosecution in courts
or bodies outside the BIR.
d. Balance at the end of the
year

3. The landed cost of imports LOSSES

and the amount of customs
duties and tariff fees paid or
accrued thereon
4. The amount of excise tax/es
classified per major product
category, paid on:
 those allowed from
deductions are those actually
sustained during the taxable
year and not compensated for
by insurance or other forms of
indemnity.

Types of Losses
1. Casualty losses
2. Net operating loss carry over
3. Capital losses and securities
becoming worthless
4. Special losses
a. Losses from wash sales of
stocks or securities
b. Wagering losses
c. Abandonment losses.
Casualty Losses
 Refers to the complete or
partial destruction of
property resulting from an
identifiable event of sudden,
unexpected, or unusual
nature, such as those arising
from fire, storm, shipwreck,
or other casualty, or theft or
robbery.
 The basis of the loss in the
case of total destruction is the
net book value immediately
preceding the casualty to be
reduced by the amount of
insurance or compensation
received.
 In the case of partial
destruction, the basis of the
loss in the replacement cost to
restore the property to its
normal operating condition,
but in no case shall the
deductible loss more than the
net book value of the property
as a whole, immediately
before casualty.
 The excess over the net book
value immediately before the
casualty should be capitalized,
subject to depreciation over
the remaining useful life of
the property.
Requisites for deductibility of casualty
losses
1. The taxpayer is engaged in
trade or business.
2. Properties that shall be
reported as casualty losses
must have been reported as
part of the taxpayer’s assets in
the taxpayer’s accounting
records and financial
statements in the year
immediately preceding the
occurrence of the loss, with
the costs of acquisition clearly
established and recorded.
3. The recovery of casualty
losses thru insurance claims
shall be governed by RR 12-
77. The amount of loss that
shall be compensated by
insurance coverage should
not be claimed as a deductible
loss. If the insurance proceeds
exceed the net book value of
the damages, such excess shall
be subject to the regular
income tax, but not to the
VAT, since the
indemnifications not an actual
sale of goods by the insured
company to the insurance
company.
4. The following guidelines shall
also be observed:
a. The deduction of assets as
capital losses must be
properly recorded in
accounting reports, with
 the adjustment of the
applicable accounts.
b. The restoration of the
damaged property, or the
acquisition of new
property to replace it
must be properly
recorded and recognized
as either a repair expense
of a capitalized asset.
5. It must be evidenced by a
declaration of loss filed within
45 days with the BIR from the
date of the casualty or
robbery, theft or
embezzlement.
Value of the casualty loss deductible
 Deductible casualty loss shall
be the difference between the
value of property immediately
preceding casualty and its
value immediately thereafter,
but shall not exceed the
amount equal to the cost of
other adjusted basis of
property, or depreciated cost
in the case of property used in
business and reduced by any
insurance or other
compensation received.
 The book value of assets
destroyed less any proceeds
from insurance and other
compensation shall also be
deductible loss.
 When the insurance proceeds
are greater than book value of
assets destroyed, then that
will be a taxable gain.
 Casualty losses with claim for
reimbursement (with
reasonable prospect of
recovery until it is
ascertained with reasonable
certainty is a question of fact
which may be determined
upon an examination of all
facts and circumstances.
 The difference between the
value of the property
immediately preceding
casualty and its value
immediately thereafter shall
be deductible.
Net Operating Loss carry-over
 Net Operating Loss – means
the excess of allowable
deduction over gross income
of the business in a taxable
year.
 The net operating losses
which have not been
previously offset as deduction
from gross income shall be
carried over as a deduction
from gross income for the
next 3 consecutive taxable
years immediately following
the year of such loss.
Requisites for the availment of NOLCO
1. The taxpayer was not exempt
from income tax in the year
the loss was incurred.
2. There has been no substantial
change in the ownership of
the business or enterprise
wherein at least 75% of the
nominal value of outstanding
issued shares is held by or on
behalf of the same persons if
 the business is in the name of
the corporation; or at least
75% of the paid up capital of
the corporation is held by or
on behalf of the same persons
3. The net operating losses
which have not been
previously offset as deduction
from gross income shall be
carried over as a deduction
from gross income for the
next 3 consecutive taxable
years immediately following
the year of such loss.
4. Except, however, in the case of
mines other than oil and gas
wells, where a net operating
loss incurred in any of the
first 10 years of operation
may be carried over as a
deduction from gross income
for the next 5 years
immediately following the
year of such loss.
General Principles and Policies
 In general, NOLCO shall be
allowed as a deduction from
the gross income of the same
taxpayer who sustained and
accumulated the net
operating losses regardless of
the change in its ownership.
 Unless otherwise provided in
the regulations, NOLCO of the
taxpayer shall not be
transferred or assigned to
another person, whether
directly or indirectly, such as,
but not limited to, the transfer
or assignment thereof thru a
merger, consolidation or any
form of business combination
of such taxpayer with another
person.
 NOLCO shall also be allowed if
there has been no substantial
change in the ownership of
the business or enterprise in
that not less than 75% in
nominal value of the
outstanding issued shares or
not less than 75% of the paid
up capital of the corporation,
if the business is in the name
of the corporation, is held by
or on behalf of the same
persons.
Taxpayers entitled to deduct NOLCO
from gross income
1. Any individual, including
estates and trusts, engaged in
trade or business or in the
exercise of his profession; and
2. Domestic and resident foreign
corporations subject to the
normal income tax or
preferential rates under the
Code on their taxable income.
Taxpayers not entitled to deduct
NOLCO from gross income
1. OBU and FCDU, duly
authorized as such by the BSP;
2. Any enterprise registered
with the BOI with respect to
its BOI-registered activity
enjoying the ITH incentive.
3. An enterprise registered with
the PEZA
4. An enterprise registered
under RA 7227
 5. Foreign corporations engaged
in international shipping or
air carriage business in the
Philippines
2.
6. Any person, natural or
juridical, enjoying exemption
from income tax.
Entitlement to NOLCO
 Domestic corporations
subject to the normal income
tax rate are liable to the 2%
MCIT, if applicable, computed
based on gross income,
whenever the amount of the
MCIT is greater than the
normal income tax due. Thus,
such corporation cannot enjoy
the benefit of NOLCO for as
long as it is subject to MCIT in
any taxable year.
income, inasmuch as capital
losses are allowable only to
the extent of capital gains.
“Securities considered as
worthless” refers to shares of
stock when offered for sale or
requested for share
redemption, no amount can
be realized by the owner of
the share. Securities
becoming worthless, which
are capital assets, shall be
considered as a loss from the
sale or exchange of capital
assets on the last day of such
taxable year.
 Worthless securities,
which are ordinary
assets, are not
allowed as deduction
from gross income
because the loss is
not realized.

Capital Losses  Losses due to

voluntary removal or
 Losses from sales or demolition of old
exchanges of capital assets. buildings, the
scrapping of old
 Following are requirements in machinery,
order that capital losses may equipment, etc.,
be allowed as deduction: incident to renewals
and replacements
1. Capital losses from sales or will be deductible
exchanges of capital assets from gross income.
are deductible only to the
extent of the capital gains  The term wash sale
from such sales or exchanges of stocks or
of capital assets of both securities is a sale or
corporations and individuals, other disposition of
except banks and trusts stock or securities
companies. If the dealings of where the taxpayer
the taxpayer in capital assets has acquired or has
during the year result in a net entered into a
capital loss, such loss cannot contract or option to
be deducted from his ordinary acquire substantially
 identical stocks or 1. Loss on the sale of real
securities within a property considered as
61-day period, capital asset;
beginning 30 days
before the sale and 2. Loss sustained by the transfer
ending 30 days after of property by gift
the sale.
3. Loss sustained by the transfer
 Losses from wash of property by death
sale are not
deductible from 4. Losses sustained in illegal
gross income, except transactions
if it is a loss incurred
by a dealer in 5. Losses claimed as deduction
securities in the from the gross estate for
ordinary course of estate tax purposes can no
business. longer be claimed as
deduction from gross income
 Requisites of wash for income tax purposes
sales:
6. Losses in transactions
1. The sale or other disposition between related taxpayers
of stock resulted to a loss
7. In the case of merger,
2. There was an acquisition or consolidation, or control of
contract or option for securities, where no gains are
acquisition of stock or recognized
securities within 30 days
before the sale or 30 days 8. Losses in exchanges not solely
after the sale; and in king.

3. The stock or securities sold

were substantially the same.
BAD DEBTS
 Losses from wagering
transactions shall be allowed  Refer to those debts resulting
only to individuals to the from the worthlessness or
extent of the wagering gains uncollectibility, in whole or in
or winnings from such part, of amounts due the taxpayer
transaction.
by others, arising from money lent
 A wager is made when the or from uncollectible amounts of
outcome depends upon income from goods sold or
chance. services rendered actually
ascertained to be worthless and
 Cases when no loss can be charged off within the taxable
recognized: year.
Requisites for deductibility of bad
debts
1. There must be an existing
indebtedness fur to the
taxpayer which must be valid
and legally demandable
2. The same must be connected
with the taxpayer’s trade,
business or practice of
profession
3. The same must not be
sustained in a transaction
entered into between parties
enumerated under Section
36(b) of the Tax Code
4. The same must be actually
charged off in the books of
accounts of the taxpayer as of
the end of the taxable year
5. The same must be actually
ascertained to be worthless
and uncollectible as of the end
of the taxable year and even
in the future.
Meaning of the phrase “actually
ascertained to be worthless”
 A debt is not worthless simply
because it is doubtful value or
difficult to collect.
 Worthless is determined upon the
exercise of sound business
judgment.
 Depends upon the particular facts
and the circumstances of the case.
 A taxpayer may not postpone a
bad debt deduction on the basis of
a mere hope of ultimate collection
or because of a continuance of
attempts to collect notes which
have long become overdue, and
where there is no showing that the
surrounding circumstances differ
from those relating to other notes
which were charged off in a prior
year.
 A reasonable possibility of
recovery will permit the account
to be carried along
notwithstanding that the
probabilities are that the debt may
not be collected at all.
 Good faith does not require that
the taxpayer be an incorrigible
optimist but on the other hand, he
may not be unduly pessimistic.
Meaning of the phrase “actually
charged off from the taxpayer’s books
of accounts”
 The amount of money lent by the
taxpayer, in the course of his
business, trade or profession, to
his debtor had been recorded in
his books of account as a
receivable has actually become
worthless as of the end of the
taxable year, that the said
receivable has been cancelled and
written-off from the said
taxpayer’s books of account.
 A mere recording in the taxpayer’s
books of account of estimated
uncollectible accounts does not
constitute a write-off of the said
receivable, hence, shall not be a
valid basis for its deduction as a
bad debt expense.
When there is a reasonable degree of
certainty
 Before a taxpayer may charge off
and deduct a debt, he must
ascertain and be able to
 demonstrate with reasonable
degree of certainty the
uncollectibility of the bad debts.
 In no case may a receivable from
an insurance or surety company
be written-off from the taxpayer’s
books and claimed as bad debts
deduction unless such company
has been declared closed due to
insolvency or for any such similar
reason by the Insurance
Commissioner.
Tax Benefit Rule or the Equitable
Doctrine of Tax Benefit in case of
recovery of bad debts
 The recovery of bad debts
previously allowed as deduction in
the preceding year/s shall be
included as part of the taxpayer’s
gross income in the year of such
recovery to the extent of the
income tax benefit of said
deduction. Reason: considered as
mere return of capital.
Rules in allowing bad debts as
deduction from gross income
 Where all the surrounding
circumstances indicate that a debt
is worthless, and the debt is
charged off on the books of the
taxpayer within the year, the same
may be allowed as a deduction in
computing taxable income.
 Before a taxpayer may charge off
and deduct a debt, he must
ascertain and be able to
demonstrate, with reasonable
degree of certainty, the
uncollectibility of the debt.
 If a taxpayer computes his income
upon the basis of valuing his notes
or accounts receivable at fair
market value when received,
which may be less than their face
value, the amount deductible for
bad debts in any case is limited to
such original valuation.
Other factors to determine whether a
bad debt is already worthless
1. The debtor has been adjudged
bankrupt or insolvent
2. The debtor has no property
nor visible income
3. The collateral shares have
already become worthless
4. There are many debtors with
small amounts of debts and
further action on the accounts
would entail expenses
exceeding the amounts sought
to be collected.
Reserves for bad debts are not allowed
as deduction from gross income
 Bad debts must be charged off
during the taxable year to be
allowed as deduction to gross
income.
Advances cannot be claimed as
deduction from gross income
 Deductions for income tax
purposes partake of the nature of
tax exemptions and are strictly
construed against the taxpayer,
who must prove by convincing
evidence that he is entitled to the
deduction claimed.
 There is a need to substantiate the
assertion that the advances were
subsisting debts that could be
deducted from the gross income.
When worthless securities are
deductible from gross income as bad
debts
 Worthless securities which are
ordinary assets are not allowed as
deduction from gross income
because loss is not realized.
 However, if these worthless
securities are capital assets, and
charged off within the taxable
year, the owner is considered to
have incurred a capital loss from
the sale or exchange of capital
assets, as of the last day of the
taxable year and, therefore,
deductible to the extent of the
capital gains.
 This rule is not true in the case of
banks or trust companies
incorporated under the laws of the
Philippines.
DEPRECIATION
 A reasonable allowance for the
exhaustion, wear and tear, and
obsolescence of property used in
the trade or business may be
deducted from gross income.
 Depreciation excludes any idea of
a mere reduction in market value
resulting from wear and tear or
obsolescence.
 The proper allowance for such
depreciation of any property used
in the trade or business for such
depreciation of any property used
in the trade or business is that
amount which should be set aside
for the taxable year in accordance
with a reasonable consistent plan
whereby the aggregate of the
amount so set aside, plus the
salvage value, will, at the end of
the useful life of the property in
business, equal the basis of the
property.
 In case of property held by one
person for life with remainder to
another person, the deduction
shall be computed as if the life
tenant were the absolute owner of
the property and shall be allowed
to the life tenant.
 In the case of property held in
trust, the allowable deduction
shall be apportioned between he
income beneficiaries and the
trustees in accordance with the
pertinent provisions of the
instrument creating the trust, or
in the absence of such provisions,
on the basis of the trust income
allowable to each.
When obsolescence may be allowed to
be deducted from gross income, in
addition to depreciation
 With respect to physical property 2. It must be reasonable in that
the whole or any portion of which the amount of depreciation
is clearly shown by the taxpayer as must be in accordance with
being affected by economic the depreciation method
conditions that will result in its being adopted by the
being abandoned at a future date company
prior to the end of its normal 3. The property being
useful life, so that depreciation depreciated is being used in
deductions alone are insufficient the trade or business
to return the cost at the end of its 4. The allowance for
economic term of usefulness, a depreciation must be charged
reasonable deduction for off during the taxable year
obsolescence, in addition to 5. The property must have a
depreciation, may be allowed. limited useful life
 No deductions for obsolescence 6. The allowance for
will be permitted merely because, depreciation should not
in the opinion of a taxpayer, the exceed the cost of the
property may become obsolete at property
some later date. 7. The schedule of the allowance
must be attached to the
Depreciable property return.

 The necessity for a depreciation Depreciation expense on vehicles, and

allowance arises from the fact that
certain property used in the
business gradually approaches a
point where its usefulness is
exhausted.
 This does not apply to inventories
of to stock in trade, nor to land
apart from the improvements or
physical development added to it.
 It does not apply to bodies of
minerals which try the process of
removal suffer depletion.
Requisites for deductibility of
allowance for depreciation
1. It must be sustained by the
person who owns or who has
a capital investment in the
property
other expenses incurred thereon
 It cannot be presumed that the
purchase of a vehicle is a purchase
of a property used in business.
 Guidelines:
1. No deduction from gross
income for depreciation shall
be allowed unless the
taxpayer substantiates the
purchase with sufficient
evidence, which must contain
the following:
a. Specific motor vehicle
identification number
b. Total price
c. The direct connection or
relation of the vehicle to
the development,
management, operation
and/or conduct of the
 trade or business or credited to a depreciation reserve
profession of the account, which must be reflected
taxpayer in the annual balance sheet.
2. Only one vehicle for land
transport is allowed for the Statement to be attached to return
use of an official or ee, the
value of which should not  There should be attached a
exceed 2.4M. statement showing the item, unit,
3. No depreciation shall be or group of depreciable property,
allowed for yachts, the cost price, the rate of charge,
helicopters, airplanes and/or amount previously deducted, and
aircrafts, and land vehicle the amount claimed in the return.
which exceed the above  These data must agree with those
threshold amount, unless the appearing the in the books of the
taxpayer’s main line of taxpayer.
business is transport
No depreciation may be allowed on the
operations or lease of
appraisal increase of fixed assets
transportation equipment
and the vehicles purchased
 The income tax does not allow
are used in the said
depreciation of an asset beyond its
operations.
acquisition cost.
4. All maintenance expenses on
 Reason: deductions from the gross
account of non-depreciable
income are privileges, not matters
vehicles for taxation purposes
of right.
are disallowed in its entirety.
 The idea of profit on the investment
5. All maintenance expenses
made has never been the
incurred on non-depreciable
underlying reason for the
vehicles are likewise
allowance of a deduction for
disallowed for taxation
depreciation.
purposes.
Methods of computing allowance for
How to charge off depreciation
depreciation
 A depreciation allowance, in order
 The proper allowance for
to constitute an allowable
depreciation of any property used
deduction from gross income must
in trade or business refers to the
be charged off.
reasonable allowance for the
 The particular manner in which is
exhaustion, wear and tear,
shall be charged off is not
including reasonable allowance for
material, except that the amount
obsolescence of said property
measuring a reasonable allowance
 Methods
for depreciation must be either
deducted directly from the book
value of the assets or preferably
 1. Straight-line method – to the
effect that the rate and the base
are constant.
Cost of property – salvage value
= A for D
Useful life of the property
2. Declining-balance method – the
fixed percentage of
diminishing book value
method is to the effect that the
rate of yearly depreciation
remains the same but the base
upon which the rate is applied
diminishes year to year.
Cost – Depreciation X rate = A
for D
Estimated useful life
3. Sum of the years digit method –
the capital sum to be replaced
should be charged off over the
useful life of the property.
Nth period X Cost – Salvage
value = A for D
Sum of all the years digits
4. Any other method which may
be prescribed by the SOF upon
recommendation of the CIR.
 Method adopted must be
reasonable.
 The reasonableness of any claim for
depreciation shall be determined
upon the condition known to exist
at the end of the period for which
the return is made.
 If it develops that the useful life will
be longer or shorter, the portion of
the cost or other basis of the
property not already provided for
thru depreciation allowances
should spread over the remaining
useful life of the property as re-
estimated in the light of the
subsequent facts.
Agreement as to the useful life on
which the depreciation rate is based
 Taxpayer and the CIR, binding.
 The responsibility of establishing
the existence of such facts and
circumstances shall rest upon the
party initiating modification.
Capital sum recoverable thru
depreciation allowances
 The capital sum to be replaced by
depreciation allowances is the cost
or other basis of the property in
respect of which the allowance is
made.
 To this amount should be added
from time to time the cost of
improvements, additions, and
betterment and from it should be
deducted from time to time the
amount of any definite loss or
damage sustained by the property
thru casualty, as distinguished from
the gradual exhaustion of its utility
which is the basis of the
depreciation allowance.
 Where the lessee of the real
property erects improvements, and
income has been returned by the
lessor as a result thereof, the caital
sum to be replaced by depreciation
allowance is the same as though no
such improvement was made.
 No depreciation deduction will be
allowed in case of property which
has been amortized to its scrap
value and is no longer in use.
Depreciation of properties used in
petroleum operations
 An allowance for depreciation in
respect of all properties related to
production of petroleum initially
placed in service in a taxable year
shall be allowed under the straight-
line or declining-balance method of
depreciation at the option of the
service contractor.
 If the service contractor initially
elects the declining-balance
method, it may at any subsequent
date, shift to the straight-line
method.
 The useful life of properties used
shall be 10 years or such shorter
life as may be permitted by the CIR.
 Properties not used directly shall
be depreciated under the straight-
line method on the basis of an
estimated useful life of 5 years.
Depreciation of properties used in
mining operations
 Shall be computed as follows
1. At the normal rate of
depreciation if the expected
life is 10 years or less
2. Depreciated over any number
of years between 5 years and
the expected life if the latter is
more than 10 years, and the
depreciation thereon allowed
as deduction from taxable
income
Depreciation deductible by
nonresident aliens engaged in
trade or business in the Philippines
 a reasonable allowance for the
deterioration of property arising
out of its use or employment or its
non-use in the business, trade or
profession shall be permitted only
when such property is located in
the Philippines.
DEPLETION
Refers to the exhaustion of natural
resources owing to production or
severance.
The allowance for depletion is based
on the theory that the extraction of
minerals gradually exhausts the
capital investment in the mineral
deposit.
In computing taxable income, there
shall be allowed as deduction, in
the case of mines, a reasonable
allowance for depletion thereof not
to exceed the market value in the
mine of the product thereof which
has been mined and sold during the
year for which the return is made.
In determining the amount, three
factors are essential:
1. The basis of the property
2. The estimated total
recoverable units in the
property
3. The number of units
discovered during the taxable
year.
 Minerals – all naturally occurring
inorganic substances in solid, liquid
or any intermediate state including
coal.
 Mining or to mine – to extract,
remove, utilize minerals and
includes operations necessary for
that purpose.
Who may avail of the cost of depletion
 Annual depletion deductions are
allowed only in mining entities
which own an economic interest in
mineral deposits.
 Economic interest is possessed in
every case in which the taxpayer
has acquired by investment any
interest in mineral, in place and
secures, by any form of legal
relationship, such as, but not
limited to, operating agreement
and service contract agreement,
income from the extraction of
mineral, to which it must look for a
return of capital.
Basis of Cost of Depletion
 The adjusted cost of basis of the
mining property being mined
 The adjusted cost basis shall be the
accumulated exploration and
development expenses incurred on
the mining properties minus
accumulated cost depletion that
should have been deducted as of
the same date of same property.
 Exploration expenditures – 
expenditures paid or incurred for
the purpose of ascertaining the
existence, location, extent, quality
of any deposit for ore or other
mineral, and paid or incurred
before the beginning of the
development stage of mine or
deposit of a particular mining
property.
 Development expenditures – production of mineral units
include all capital expenditures
paid or incurred during the
development stage of the mine or
other natural deposit.
Limitation of cost depletion
 The basis for cost depletion
mineral deposits does not include:
1. Amounts recoverable thru
depreciation, thru deferred
expenses thru deductions
other than depletion
2. The residual value of
improvements at the end of
operation.
 Such basis does include exploration
and development expenses
incurred on mining properties or
area other than those presently
being mined. These expenses shall
be treated as deferred expenses.
 The annual allowable cost
depletion shall not exceed the
market value as used for purposes
of imposing the mining ad valorem
taxes in the mine of the product
thereof which has been mined and
sold during the year for which the
return and computation are made.
 The allowable cost depletion
deduction shall be limited only to
the extent of the capital invested in
the particular mining property.
Capital invested in the particular
mining shall include the
accumulated exploration and
development expenditures and
expenditures incurred on the
ongoing mine exploration and
development on the same mining
are which –
1. Increases the value of the mine
2. Decreases the cost of
3. Restores property to its
previous condition or in
making good the exhaustion
thereof for which an allowance
is or has been made.
 No further deduction for cost
depletion shall be allowed when
the sum of the cost depletion equals
the cost of adjusted basis of the
property plus allowable capital
additions.
 Actual commercial production –
shall mean the stage of mining
operation attained by a mine in
which mineral or mineral products
of marketable grade and quantity
have been produced and sold to
local and/or foreign markets.
Manner of computation of cost
depletion
 Computed by dividing the adjusted
cost basis by the number of units of
minerals remaining as of the
taxable year and by multiplying the
depletion unit so determined by the
number of units of minerals sold
within the taxable year.
 Number of units of minerals
remaining as of the taxable year is
the number of units of minerals
remaining at the end of the period
to be recovered from the property
plus the number of units sold
within the taxable year.
 The number of units sold within the
taxable year is
1. In case of taxpayer reporting
income on the cash basis,
include units for which
payments were received within
the taxable year although
extracted or sold prior to the
period and exclude units sold
but not paid for in the taxable
year.
2. In case of taxpayer reporting
income on the accrual method,
include all units extracted and
sold during the period,
whether paid for or not, but
does not include units with
respect to depletion
deductions which are allowed
or allowable prior to the
taxable year.
 In the case of natural gas or oil
wells, the taxpayer may computed
the cost depletion in respect of such
property for the taxable year by
multiplying the adjusted cost basis
of the property by a fraction, the
numerator of which is equal to the
number of cubic feet or barrels of
oil recovered during the year and
the denominator of which is equal
to the expected recoverable
number of cubic feet of gas or
barrels of oil at the end of the
taxable year plus the number of
cubic feet of gas or barrels of oil
recovered during the year.
Determination of mineral content of
deposits remaining as of the taxable
year
 The mineral contents remaining as
of the taxable year pertains to the
estimated mineral products
reasonably known or on good
evidence believed to have existed
in place as of the end of the taxable
year, the estimate of determination
of which was made according to the
method current in the industry and
in the light of the most accurate and
reliable information obtainable.
 The estimated mineral products
remaining as of the taxable year
shall include both quantity and
grade:
 1. The positive ores and mineral
deposits, which include ores
and minerals blocked out and
developed or assured in the
usual conventional meaning.
 Positive ore shall mean the
full tonnage computed with
good mining practice from
dimensions revealed in
outcrops, branches,
underground workings and
drill holes and for which the
grade is computed from
results of detailed sampling.
2. The probable or prospective
ores and mineral deposits,
which include ores and
minerals that are believed to
exist on the basis of good
evidence although not actually
known to occur on the basis of
existing development. Such
probable or prospective ores
or minerals may be estimated:
a. As to quantity, only in case
they are extensions of
known deposits or are new
bodies or masses whose
existence is indicated by
geological surveys or other
evidence to a high degree
of probability
b. As to grade, only in
accordance with the best
indications available as to
richness.
 Probable or prospective ore shall
mean the ore for which tonnage
and grade are computed partly
from specific measurement,
samples and partly from projection
for a reasonable distance on
geologic evidence.
Records to be kept
 Every taxpayer claiming and
making a deduction for depletion of
mineral property shall keep a
separate account for each and
every area in his books of accounts
in which shall be accurately
recorded the cost or other basis of
such property and thereafter to be
debited by any and all capital
additions.
 In addition, the taxpayer must
assemble, segregate and have
readily available at his principal
place of business, all supporting
data which were used in compiling
the summary statement required to
be attached to the income tax
return to be filed.
Basis of depreciation of improvements
 There shall be allowed as a
deduction a reasonable allowance
for depreciation of improvements
including, but not limited to, mining
and milling equipment.
Aggregation or combination of
separate properties
 In the case of mining companies
with several mining properties, it
may aggregate into one operating
unit, several mining properties for
purposes of determining the
adjusted cost basis recoverable
thru depletion subject to the
following conditions:
1. All contiguous areas included
in a single concession grant or
in separate concession grants
 may be constituted as a single
operating unit
2. Operating mineral interests
which are geographically
widespread may not be treated
as parts of the same operating
unit
3. Undeveloped operating
mineral unit may be
aggregated only with those
interests with which it will be
operated as a unit when it
reaches the production stage.
Intangible costs in petroleum
operations.
 Refers to any cost incurred in
petroleum operations which in
itself has no salvage value and
which is incidental to and
necessary for the drilling of wells
and preparation of wells for the
production of petroleum.
 Any intangible exploration, drilling
and development expenses allowed
as a deduction in computing
taxable income during the year
shall not be taken into
consideration in computing the
adjusted cost basis for the purpose
of computing allowable cost
depletion.
Election to deduct exploration and
development expenditures
 In computing taxable income from
mining operations, the taxpayer
may, at his option, deduct
exploration and development
expenditures accumulated as cost
of adjusted basis for cost depletion
as of date of prospecting, as well as
exploration and development
expenditures paid or incurred
during the taxable year: Provided,
That the total amount of deductible
for exploration and development
expenditures shall not exceed 25%
of the taxable income from mining
operations computed without the
benefit of any tax incentives under
existing laws.
 The actual exploration and
development expenditures minus
25% of the taxable income from
mining shall be carried forward to
the succeeding years until fully
deducted.
 This election by the taxpayer is
irrevocable and shall be binding in
succeeding taxable years.
Net income from mining operations
 Mean the gross income from
operations less allowable
deductions which are necessary or
related to mining operations.
Depletion of oil and gas wells and
mines deductible by a nonresident
alien individual or foreign corporation
 Shall be authorized only in respect
to oil and gas wells or mines
located within the Philippines.
CHARITABLE AND OTHER
CONTRIBUTIONS
 Requisites
1. The contribution must have
been actually made to entities
specified by law
 2. The contribution must have
been made within the taxable
year
3. It must be evidenced by
adequate receipts and records
4. For contributions other than
money, the amount shall be
based on the acquisition cost of
the property not the fair
market value at the time of the
contribution
5. For contributions subject to
statutory limitations, the same
must not exceed 10% in the
case of individuals engaged in
business or profession or 5%
in case of corporations of the
said taxpayer’s taxable income
before deducting the charitable
contributions.
Contributions subject to statutory
limits
 The following donations or
contributions are subject to
limitations of not exceeding 10%
(in case of individuals) or to 5% (in
case of corporations) based on the
taxpayer’s gross income derived
from trade, business or practice of
profession computed without first
deducting the contributions:
1. Contributions for non-priority
activities or gifts actually paid
or made within the taxable
year to, or for the use of the
Government of the Philippines
or any of its agencies or any
political subdivision thereof
exclusively for public
purposes, or
2. Donations, contributions or
gifts actually paid or made
within the taxable year to
accredited non-profit
corporations organized and
operated exclusively for
religious, charitable, scientific,
youth and sports development,
cultural or educational
purposes or for the
rehabilitation of veterans, or to
social welfare institutions, or
to non-government
organizations, no part of the
net income of which inures to
the benefit of any private stock
holder or individual shall be
allowed limited deductibility in
an amount not in excess of
10% for an individual donor,
and 5% for a corporate donor,
of the donor’s taxable income
derived from trade, business or
practice of profession as
computed without the benefit
of this deduction.
 The amount deductible is the actual
contribution or the statutory limit
computed, whichever is lower.
Contributions/donations deductible in
Full
1. Donations to the Government
 Including fully-owned
government corporations,
exclusively to finance, to
provide for, or to be used in
undertaking priority in
education, health, youth and
sports development, human
settlements, science and
culture, and in economic
development according to a
national Priority Plan
determined by the NEDA in
 consultation with appropriate
government agencies,
including its regional
development councils and
private philanthropic persons
and institutions.
2. Donations to certain foreign
institutions or international
organizations
 The subject donations must
be fully deductible in
pursuance of or in compliance
with agreements, treaties, or
commitments entered into by
the Government of the
Philippines and the foreign
institutions or international
organizations or in pursuance
of special laws.
3. Donations to accredited non-
stock, non-profit
corporations/NGOs
1. Organized and operated
exclusively for scientific,
research, educational,
character-building and
youth and sports
development, health,
social welfare, cultural or
charitable purposes, or
combination thereof, no
part of the taxable income
of which inures to the
benefit of any private
individual
2. Which, not later than 15th
day of the third month
after the close of the
accredited NGO’s taxable
year in which
contributions are
received, makes
utilization directly for the
active conduct of the
activities constituting the
purpose or function for
which it is organized and
operated
3. The level of
administrative expense of
which shall, on an annual
basis and in no case to
exceed 30% of the total
expenses
4. The assets of which, in the
event of dissolution,
would be distributed to
another NGO organized
for similar purpose or
purposes, or to the state
for public purpose, or to
another NGO to be used in
such manner as in the
judgment of a court shall
best accomplish the
general purpose for
which the dissolved
organization was
organized
5. Only to the extent of the
acquisition cost (not the
fair market value) of the
property, if the
contribution is other than
money, shall be allowed
full deductibility
 Donations and gifts made in favor
of accredited non-stock, non-profit
corporations/NGOs shall be
exempted from the donor’s tax;
Provided, however, That not more
than 30% of the said donations
and gifts for the taxable year shall
be used by such accredited non-
stock, non-profit
corporations/NGOs institutions
qualified done-institution for
administration purposes.
Utilization requirements
 Amounts set aside for specific
project must have the prior
approval of the Commissioner in
writing
 Amounts set aside shall be
evidenced by book entries and
documents showing evidence of
deposits or investments, including
investment of the funds so set
aside, or other documents that the
Commissioner may require.
Accreditation of non-stock, non-profit
corporations/NGOs by the accrediting
Entity
 The accrediting entity shall
examine, evaluate and accredit
non-stock, non-profit corporations
and NGOs as a prerequisite for
their registration with the BIR as
qualified-donee institutions.
 Newly-organized and existing non-
stock, non-profit corporations and
NGOs shall apply with the
Accrediting Entity for
accreditation and submit to a
process of examination and
evaluation.
 The accrediting Entity shall
evaluate and accredit NGOs by
using a set of major criteria.
Certificate of donations
 All credited NGOs are required to
issue a certificate of donation in
such form as prescribed by the
BIR, on every donation or gift
they receive.
Notice of donations
 The donor, on the hand, should
give a notice for every donation
worth over P1M to the RDO
where his lace of business is
located within 30 days after the
receipt of the Certificate of
Donation attaching to the said
notice the copy of the Certificate
of Donation issued to him by the
accredited NGO.
Date and place of filing
 By the donors – at the time of
filing their income tax returns.
 By the accredited NGO – not later
than 15th day of the 4th month
after the close of its taxable year
in order to maintain its status as
an accredited NGO.
 File in the RDO where the place of
business of the donor or donee is
located.
Contributions to a candidate in an
election not allowed as deduction from
gross income of a taxpayer.
 Because the said expense is not
directly attributable to, the
development, management,
operation and/or conduct of a
trade, business or profession.
Monitoring and verification of the
annual information return
 May be examined by the BIR
annually for purposes of
ascertaining compliance with the
conditions where which they
have been granted tax
exemptions or tax incentives, and
their tax liability, if any.

RESEARCH AND DEVELOPMENT
 Research is original and planned
investigation undertaken by the
taxpayer with the prospect of
gaining new scientific or
technical knowledge and
understanding, while
development is the application of
research findings or other
knowledge to a plan or design for
the production of new or
substantially improved
materials, devices, products,
processes, systems or services
before the start of commercial
production or use.
Requisites
1. Research or development
expenditures were paid or
incurred in connection with
the taxpayer’s trade, business
or practice of profession
2. The same had been paid or
incurred during the taxable
year as ordinary and
necessary expenses
3. The same had not been
charged to the capital account
Amortization of certain research and
development expenditures
 The following research and
development expenditures may be
treated as deferred expenses:
1. The same had been paid or
incurred by the taxpayer in
connection with his trade,
business or practice of
profession
2. The same was not treated as
an ordinary and necessary
expense
3. The same was chargeable to
capital account but not
chargeable to property of a
character which is subject to
depreciation or depletion
4. The deduction is ratably
distributed over a period of
not less than 60 months
beginning with the month in
which the taxpayer first
realized the benefits from
such expenditures.
Limitations on deduction
1. The expenditure shall not
apply to the acquisition or
improvement of land or for
the improvement of property
to be used in connection with
research and development of
a character which is subject to
depreciation and depletion
2. For any expenditure paid or
incurred for the purpose of
ascertaining the existence,
location, extent, or quality of
any deposit of ore or other
mineral, including oil or gas.
PENSION TRUSTS
 A trust established or maintained
by the er to provide for the
payment of reasonable pensions
to its ees.
Pension trust contributions
 A deduction applicable only to the
er on account of its contribution to
 a private pension plan for the 1. The er must have established
benefit of its ees. a pension or retirement plan
 This deduction is purely business to provide for the payment of
in character. reasonable pensions to his
ees;
Normal Cost 2. The pension plan is
reasonable and actually
 Refers to the contributions sound;
during the taxable year into the 3. It must be funded by the er
pension plan to cover the pension 4. The amount contributed must
liability accruing during the no longer be subject to the
taxable year. control and disposition of the
 Allowed as an ordinary and er;
necessary business expense. 5. The payment has not yet been
allowed as a deduction;
Past service cost
6. The deduction is apportioned
in equal parts over a period of
 Refers to the amount in excess of
10 consecutive years
the above contribution (covering
beginning with the year in
pension liability pertaining to old
which the transfer of payment
ees which accrued during the
is made; and
years previous to the
7. The er shall be allowed to
establishment of the pension
deduct from gross income
trust).
reasonable amounts paid to
 It represents 1/10th of the
such trust, in accordance with
reasonable amount paid by the er
the pension plan
to the trust during the taxable
year to cover in whole or in part
the pension liability applicable to
the years prior to the taxable OPTIONAL STANDARD DEDUCTION
year, or so paid to place the trust
in a sound financial basis.  Who may avail, in lieu of the
 Allowed as a deduction if: itemized deduction
1. Such amount has not yet 1. Individuals and taxable
been allowed as a deduction estates and trusts, except
2. Said amounts had been individuals earning pure
apportioned in equal parts income and non resident
over a period of 10 aliens
consecutive years beginning 2. Corporations, except
with the year in which the nonresident foreign
payment is made. corporations.

Requisites for deductibility of Past Requisites for individuals who want to

service cost avail of the OSD
 1. The individual is a citizen or a
resident alien
2. The taxpayer’s income is not
pure compensation income
3. The individual signifies in his
return filed for the first
quarter his intention to elect
OSD as deduction, otherwise,
he is considered as having
availed of the itemized
deductions
4. The election to avail OSD is
irrevocable for the year in
which made; however, he can
change to itemized deductions
in succeeding years if he opts
to
5. The OSD allowed shall be a
maximum of 40% of gross
sales or gross receipts during
the taxable year.
Determination of the amount of OSD
for individuals
 The OSD allowed to individual
taxpayers shall be a maximum
40% of the gross sales or gross
receipts during the taxable year.
 If the individual is on the accrual
basis of accounting for his income
and deductions, the OSD shall be
based on the gross sales during
the taxable year.
 If the individual employs the cash
basis of accounting for his income
and deductions, the OSD shall be
based on his gross receipts during
the taxable year.
 For other individuals allowed by
law to report their income and
deductions under a different
method of accounting other than
cash and accrual method of
accounting, the gross sales or
gross receipts shall be determined
in accordance with said acceptable
method of accounting.
Requisites for corporations who want
to avail of the OSD
1. The corporation is a domestic
or a resident foreign
corporation.
2. The corporation signifies in
his return filed for the first
quarter his intention to elect
OSD as deduction, otherwise,
it is considered as having
availed of the itemized
deductions.
3. The election to avail OSD is
irrevocable for the year in
which it is made; however, it
can change to itemized
deductions in succeeding
years if it opts to.
4. The OSD allowed shall be a
maximum of 40% of gross
income during the taxable
year.
Determination of the amount of OSD
for corporations
 The OSD allowed shall be in an
amount not exceeding 40% of
their gross income.
 Gross income – the gross sales less
sales returns, discounts and
allowances and cost of goods sold.
 Passive income – not included.
Determination of the OSD for GPPs and
Partners of GPPs
 Like corporations.
 The net income determined by
either claiming the itemized
deduction or OSD from the GPP’s
income is the distributable net
income from which the share of
each partner is to be determined.
Claim of the partners of GPP of their
deductions from their share in the
taxable income of the GPP
 Rules
1. If the GPP availed of the
itemized deduction in
computing its net income, the
partners may still claim
itemized deductions;
Provided, That in claiming
itemized deductions, the
partner is precluded from
claiming the same expenses
already claimed by the GPP.
 Is the GPP claimed itemized
deductions, the partners
comprising it can only claim
itemized deductions which
are in the nature of ordinary
and necessary expenses for
the practice of profession
which were not claimed by the
GPP in computing its net
income or distributable net
income during the year.
 The OSD is in lieu of the items
of deductions claimed by the
GPP and the items deduction
claimed by the partners.
2. If the GPP avails of OSD in
computing its net income, the
partners comprising it can no
longer claim further
deduction from their share in
the said net income.
PREMIUM PAYMENTS ON HEALTH
AND/OR HOSPITALIZATION
INSURANCE
 This represents an amount of
premium on health and/or
hospitalization insurance paid by
an individual taxpayer for himself
and/or for the members of his
family during the taxable year.
Requisites for deductibility of
premium payments on HHI from gross
income
1. Hospitalization insurance
must actually have been taken
by the individual for himself
and/or for the members of his
family.
2. The individual availing either
earns pure compensation or
earning business income or
engaged in the practice of
profession.
3. The gross income of the
family of the individual does
not exceed P250,000 for the
taxable year.
4. The amount of the premium
deductible does not exceed
P2,400 per family or P200 per
month
5. In case of married individuals,
only the spouse claiming
additional exemption shall be
entitled to this deduction.
Who may avail
1. Individual taxpayers earning
purely compensation income
during the year
 2. Individual taxpayers engaged
in business or in the practice
of profession whether availing
of itemized or OSD during the
taxable income.
PERSONAL EXEMPTIONS
 An arbitrary amount allowed for
personal living, or family expenses
of an individual taxpayer.
 Allowed only to citizens of the
Philippines and to resident aliens
and non resident aliens in certain
cases.
 P50,000
Persons qualified to claim basic
personal exemptions
1. The claimant must be a citizen
or a resident alien.
2. Nonresident aliens engaged in
trade or business only by way
of reciprocity but not to
additional exemptions.
3. The individual claiming basic
personal exemption must be
earning income for the
taxable year.
4. The amount allowed for each
individual who earns income
is P50,000, regardless of
whether the individual is
single or married.
5. In the case of married
individuals, where only one of
the spouses is deriving gross
income, only such spouse
shall be allowed the personal
exemption.
Amount of additional exemption of
individuals
 Each legitimate, illegitimate and
legally adopted child, not
exceeding 4, is entitled to an
additional exemption of P25,000,
if apart from being a minor (21)
and not gainfully employed, they
are unmarried, living with and
dependent upon the parent for
their chief support.
Persons qualified to claim additional
exemptions.
1. The claimant may be married
or unmarried for as long as he
has a qualified dependent
child.
2. The claimant must be a citizen
or a resident alien.
3. In case of married individuals,
the proper claimant is the
husband, except when there is
an express waiver by the
husband in favor of his wife.
4. The wife automatically claims
the additional exemptions in
the ff instances:
a. The husband has no
income or unemployed
b. The husband is a
nonresident citizen
working abroad
c. In case she is legally
separated and she has the
custody of the qualified
child or children.
Individual benefactor of senior citizen
not allowed to claim additional
exemption
 Regardless of WON an individual
is a benefactor of a senior citizen,
he shall only be entitled to a
personal exemption of P50,000.
 The senior citizen does not fall
within the meaning of the term
dependent under the Tax code
that would entitle the benefactor
to claim the additional personal
exemption.
Right to claim withholding exemptions
 An employee receiving
compensation shall be entitled to
withholding exemptions.
Meaning of the term dependent for
purposes of additional exemption
1. Legitimate, illegitimate,
legally adopted or foster child
of the taxpayer
2. Chiefly dependent for support
upon and living with the
taxpayer
3. Such dependent is not more
than 21 years of age
4. Such dependent is unmarried
and not gainfully employed
5. Except if such dependent,
regardless of age, is incapable
of self-support because of
mental or physical defect.
Employer should ascertain WON a
child being claimed is a qualified
dependent.
 If the ee should have additional
dependents during the taxable
year, he may claim the
corresponding additional
exemption, in full for such year.
Status-at-the-end-of-the-year rule.
 Whatever is the individual
taxpayer’s status at the end of the
calendar year may be used for
determining his basic personal
and additional exemptions.
 For purposes of filing the income
tax return in a particular year, the
taxpayer, who changed his civil
status during the year can still use
his old civil status, or he may opt
to use his new status in his income
tax return.
Limit of the basic personal exemption
allowed to a nonresident alien
individual engaged in trade or
business in the Philippines.
 Entitled only to personal
exemption, but not to additional
exemption, in an amount equal to
the exemptions allowed by the
income tax law in the country
which he is a citizen or allowed to
citizens of the Philippines who are
also nonresidents in that country,
but not to exceed personal
exemption of P50,000.
 The exemption allowed to
nonresident aliens is a reciprocal
one; that is, it is only allowed if the
country of said nonresident aliens
allowed similar exemptions to
Filipinos who are considered as
non-residents of such country but
deriving income from sources
therein.
 If the nonresident alien individual
is not engaged in trade or business
in the Philippines, he will not be
allowed to claim any personal
exemption because his income tax
 is subject to the final withholding Personal, living, and family expenses
tax of 25% based on the gross which are not deductible from gross
income. income.

ITEMS AND EXPENSES WHICH ARE  They are deemed covered by

NON-DEDUCTIBLE FROM THE GROSS personal and additional exemption.
INCOME.
Losses which are not deductible from
 G.R. In computing the taxable the gross income.
income, no deduction shall in any
case be allowed in respect to:  Designed to avoid sham or
1. Personal, living or family pretended sales or exchanges
expenses designed to create losses so as to
2. Amount paid out for new enable the taxpayer to deduct the
buildings or permanent same from gross income and
improvements, or betterments consequently fall under a lower
made to increase the value of bracket.
any property or estate; except
in the case of intangible Rationale for the prohibition from
drilling and development costs deductibility of capital losses from
incurred in petroleum ordinary gains
operations.
 Designed to forestall the shifting of
3. Amount expended in restoring
deductions from an area subject to
property or in making food the
lower taxes to an area subject to a
exhaustion thereof for which
higher taxes, thereby unnecessarily
an allowance of depreciation or
resulting in leakage of tax
depletion is or has been made
revenues.
4. Premiums paid on life
insurance policy covering the
WHAT CONSTITUTEES AS GROSS
life of any officer or ee, or of
INCOME FOR INSURANCE COMPANIES
any person financially
interested in any trade or  Consists of their income from all
business carried on by the sources within the taxable year,
taxpayer, individual or except as otherwise provided by
corporate, when the taxpayer the statute.
is directly or indirectly a
beneficiary under such policy Deductions allowed to insurance
5. Interest expense and bad debts companies
from sales of property between
related parties.
6. Losses from sales or exchanges
of property between related
parties.
 They are entitled to same
deductions as other corporations,
and also to the deductions of the
net addition required by law to be
made within the taxable year on
policy and annuity contracts.
Gross income of mutual insurance
companies.
 Consists of their total revenue from
the operation of the business and of
their income from all other sources
within the taxable year, except as
otherwise provided by the statute.
 Mutual insurance companies, other
than mutual life and mutual marine
insurance companies, which
require their members to make
premium deposits to provide for
losses and expenses, are allowed to
deduct from gross income the
aggregate amount of premium
deposits returned to their
policyholders or retained for the
payment of losses, expenses, and
reinsurance reserves.
 Mutual marine companies should
include in gross income the gross
premiums collected and received
by them less amounts paid for
reinsurance. They may deduct from
gross income amounts repaid to
policyholders on account of
premiums previously paid by them
together with the interest actually
paid upon such amounts between
the date of ascertainment and the
date of payment thereof.
WASH SALES OF STOCKS AND
SECURITIES
 A sale or other disposition of
stocks or securities where it
appears that within a period
beginning 30 days before the date
of such sale or disposition and
ending 30 days after such date, the
taxpayer has acquired or has
entered into a contract or option
to acquire, substantially identical
stock or securities.
 Not deductible loss.
 XPN: may be deductible in the
following case:
1. If the claim is made by a
dealer in stock and securities;
and
2. With respect to a transaction
made in the ordinary course
of the business of such dealer
in stock or securities.
Purposes of wash sales of stock or
securities
 To prevent taxpayers from selling
stock or securities to establish a
loss deduction and then
immediately repurchasing the
same or substantially the same
securities.
Rules on losses from wash sales of
stock and securities
 Where more than one loss is
claimed to have been sustained
within the taxable year from the
sale or other disposition of stock
and securities, the provisions of
this section shall be applied to the
losses in the order in which the
stock or securities the disposition
of which resulted in the respective
losses were disposed of
 (beginning with the earliest  In the case of a taxpayer not
disposition). If the order of engaged in the real estate
disposition of stock or securities business, real properties, whether
disposed of at a loss on the same land, building, or other
day cannot be determined, the improvements, which are used or
stock or securities will be being used or have been
considered to have been disposed previously used in the trade or
of in the order in which they were business of the taxpayer shall be
originally acquired. considered as ordinary assets.
 Properties classified as ordinary
Basis of stock or securities acquired in asset for being used in business by
wash sales a taxpayer engaged in business
other an real estate business are
 In the sale or other disposition of
automatically converted into
stocks or securities, the
capital asset upon showing of
acquisition of which resulted in
proof that the same have not been
the non-deductibility of the loss
used in business for more than 2
from the sale or other disposition
years prior to the consummation
of substantially identical stock or
of the taxable transactions
securities, the basis shall be the
involving said properties.
basis of the substantially identical
stock or securities so sold or Capital gains distinguished from
disposed of, increased or ordinary gains.
decreased, as the case may be by
the difference, if any, between the Capital Gains Ordinary Gains
rice at which the stock or Sources of capital Sources of
securities was acquired and the gains are sales or ordinary gains are
price at which such substantially exchanges of sales or exchanges
capital assets. of ordinary assets.
identical stock or securities were
Capital gains are Ordinary gains
sold or otherwise disposed of.
generally profits generally come
from sale of from assets
CAPITAL ASSETS VIS-À-VIS ORDINARY assets not stock constituting stock
ASSETS in trade. in trade.
Basis of capital Basis of the
 Capital asset – all properties not gains tax is on the ordinary tax is on
being used for trade or business. presumed gain. the actual gain.
 Ordinary asset – all properties Excess of gains All sales or
that are being used primarily or from sales or exchanges of
exchanges of ordinary assets
for sale in the ordinary course of
other capital should be
trade or business. (those included assets (i.e., other included in the
in the inventory, primarily for than capital gains gross income.
sale, subject to the allowance for from sales or
depreciation) exchanges of
shares of stock
and real other capital assets over the
properties which capital gains from such sales or
are considered as exchanges. It is not deductible
capital assets) from the ordinary gain.
over the capital
losses from such
Long term capital gain distinguished
sale or exchanges
should be from short term capital gain;
included in the Percentages taken into account;
gross income. Holding Period rule

 In computing net capital gain, net

Actual gain distinguished from
presumed gain.
 Actual gain – the gain actually or
constructively derived from the
sale of assets/properties treated
as ordinary assets in excess of the
cost to the taxpayer.
 Presumed gain – the capital gain
presumed to have been realized
from the sale, exchange or
disposition of real property
located in the Philippines,
classified as capital asset,
including pacto de retro sales and
other forms of conditional sales,
by individuals, including estates
and trusts, regardless of whether
he suffers a loss than a gain, the
basis of which is the zonal value of
the property or the gross selling
price, whichever is higher.
Net capital gain distinguished from net
capital loss.
 Net capital gains – the excess of
the gains from sales or exchanges
of capital assets over the losses
from such sales or exchanges. It is
added to the ordinary gain.
 Net capital loss – the excess of the
losses from sales or exchanges of
capital loss, and net taxable
income in the case of individual
taxpayers, the ff percentages of
capital gains or loss shall be
recognized and taken into account
upon the sale or exchange of a
capital asset depending on the
actual holding period.
 Short-term capital gain – 100% of
the capital gains or loss is taken
into account, if the capital asset
has been held for not more than
12 months
 Long-term capital gain – 50% of
the capital gains or loss is taken
into account, if the capital asset
has been held for more than 12
months.
Capital loss limitation rule applicable
to both corporations and individuals.
 G.R. Capital losses from sales or
exchanges of capital assets are
allowed only to the extent of the
gains from such sales or
exchanges.
 The net capital loss is not
deductible in arriving at the
taxable net income inasmuch as
capital losses are allowed only to
the extent of capital gains.
 XPN. In a bank or trust year period. from the gross
incorporated under the laws of the income for the
Philippines, a substantial part of next three
consecutive
whose business is the receipt of
years.
deposits, sells any bond,
A capital asset An ordinary asset
debenture, not or certificate or transaction. transaction.
other evidences of indebtedness Directly governed Directly governed
issued by any corporation, by the Tax Code by the Tax Code
including the government, with only. and by the
interest coupons or in registered Investment
form, any loss resulting from such Incentives Act.
sale shall not be subject to the
limitation, and shall not be
Retirement bonds
included in determining the
applicability of such limitation to  For income tax purposes, amounts
other losses. received by the holder upon the
retirement of bonds, debentures,
Rationale for the rule prohibiting the
notes or certificates or other
deduction of capital losses from
evidences of indebtedness issued y
ordinary gains.
any corporation with interest
coupons or in registered form, shall
 To insure that only costs or
be considered as amounts received
expenses incurred in earning the
in exchange thereof.
income shall be deductible for
income tax purposes consonant
Taxation of shares redeemed for
with the requirement of the law
cancellation or retirement.
that only necessary expenses are
allowed as deductions from gross  When preferred shares are
income. redeemed at a time when the
 This is also the reason why all issuing corporation is still in its
non-business connected expenses, going concern and is not
like personal, living and family contemplating in dissolving or
expenses, are not allowed as liquidating its assets and liabilities,
deduction from gross income. capital gain or capital loss upon
redemption shall be recognized on
Net capital loss carry over (NCLCO) vis-
the basis of the difference between
à-vis net operating loss carry over
the amount/value received at the
(NOLCO).
time of redemption and the cost of
the preferred shares.
NCLCO NOLCO
Can be availed of Available to both  The capital gain or loss derived
only by individual individuals and shall be subject to the regular rates.
taxpayer. corporate  This section does not cover the
taxpayers. situation where a corporation
Covers only one May be deducted
 voluntarily buys back its own
shares, in which it becomes
treasury shares. Stock transaction
tax applies, if listed and traded in
the local stock exchange.
Otherwise, it is subject to 5% or
10% net capital gains tax.
Taxation of surrender of shares by the
investor upon dissolution of the
corporation and liquidation of assets
and liabilities of said corporation.
 Upon surrender by the investor of
the shares in exchange for cash and
property distributed by the issuing
corporation upon its dissolution
and liquidation of all assets and
liabilities, the investor shall
recognize either capital gain or loss
upon such surrender of shares
computed by comparing the cash
and fair market value of property
received against the cost of the
investment in shares.
 The capital gain or loss shall be
subject to the regular income tax.
Short sales
 Refer to any sale of a security which
the seller does not own or any sale
which is consummated by the
delivery of a security borrowed by,
or for the account of the sellers.
 A person shall be deemed to own a
security if:
1. He or his agent has title to it
2. He has purchased or has
entered into an unconditional
contract, binding on both
parties thereto, to purchase it
and has not yet received it
3. He owns a security convertible
into or exchangeable for it and
has tendered such security for
conversion or exchange
4. He has an option to purchase
or acquire it and has exercised
such option
5. He has rights or warrants to
subscribe to it and has
exercised such rights or
warrants provided however
that a person shall be deemed
to own securities only to the
extent he has a net long
position in such securities.
When short sale is deemed
consummated.
 For income tax purposes, a short
sale is not deemed to be
consummated until the delivery of
property to cover the short sale.
DETERMINATION OF GAIN OR LOSS IN
EXCHANGE OF PROPERTY
 The amount of income derived or
loss sustained from an exchange of
property is the difference between
eh market value at the time of the
exchange of the property received
in exchange of and the original
cost, or other basis, of the
property exchanged.
Basis for determining gain or loss from
sale or disposition of property
1. If the property is acquired by
purchase – basis is the cost of
the property acquired on or
after March 1, 1913
2. If the property is acquired by
inheritance – basis is the fair
 market price or value as of the
moment of death of the
decedent
3. If the property is acquired by
donation – basis is the cost in
the hands of the donor or the
last previous owner who did
not acquire it by donation. If
the basis, however, is greater
than the fair market value of
the property at the time of
donation, then, for purposes
of determining loss, the basis
shall be such fair market
value.
4. If the property is acquired for
less than an adequate
consideration in money or
money’s worth – basis shall be
the amount paid by the
transferee for the property
5. If the property was acquired
thru previous tax-free
exchange, the basis of stock or
securities received by the
transferor is the same as the
basis of the property, stock or
securities exchanged or
transferred. Basis of the
property transferred in the
hands of the transferee – same
as it would be in the hands of
the transferor.
 The property received as boot
refers to the money received
and other property received
in excess of the stock or
securities received by the
transferor on a tax-free
exchange.
Recognition of gain or loss in exchange
of property
 GR. the entire amount of the gain
or loss on the sale or exchange of
properties should be recognized.
 XPN. If in pursuance to a plan
merger or consolidation:
1. A corporation exchanges
property solely for stocks in a
corporation
2. A shareholder exchanges
stock in a corporation for the
stock of another corporation
3. A security holder of a
corporation exchanges his
securities in such corporation
solely for stock or securities
in another corporation
4. The transfer is made by a
person, acting alone or
together with others, not
exceeding four persons
5. As a result of the exchange,
the transferor, alone or
together with others, not
exceeding four, gains control
of the transferee.
The following are the tax
consequences of a tax-free exchange of
property for shares of stock of a
controlled corporation:
1. Income tax – The transferor
shall not recognize any gain or
loss on the transfer of the
property to the transferee.
The transferor will not be
subject to capital gains tax,
income tax, or to creditable
withholding tax on the
transfer of such property to
the transferee. Neither may
the transferor recognize a
loss, if any, incurred in the
transfer.
 Control – means ownership of
stocks in a corporation
possessing at least 51% of the
total voting power of all
classes of stocks entitled to
vote.
 The assumption of liabilities
or the transfer of property
that is subject to a liability
does not affect the non-
recognition of gain or loss,
since the total amount of such
liabilities does not exceed the
basis of the property
transferred. If the amount of
the liabilities assumed plus
the amount of the liabilities to
which the property is subject
exceed the total amount of the
adjusted basis of the property
transferred pursuant to such
exchange, then such excess
shall be considered as a gain
from the sale or exchange of a
capital asset or of property
which is not a capital asset, as
the case may be.
 The transferee is not subject
to income tax on its receipts of
the property as contribution
to its capital, even if the value
of such property exceeds the
par value or stated value of
the shares issued to the
transferor.
2. Donor’s tax – the transferor is
not subject to donor’s tax,
regardless whether the value
of the property transferred
exceeds the par/stated value
of the transferee shares
issued to the transferor, there
being no intent to donate on
the part of the transferor.
3. Value-Added Tax – the VAT
shall not apply to goods or
properties which are
originally intended for sale or
for use in the course of
business.
 XPN. The exchange of goods or
properties including the real
estate properties used in
business or held for sale or for
lease by the transferor, for
shares of stocks, whether
resulting in corporate control
or not, is subject to VAT.
4. Documentary Stamp Tax – in
the case of tax-free exchange
of properties for shares or
shares for shares, said
exchange shall be exempt.
INVENTORIES
 Two tests for which inventory
must conform
1. It must conform as nearly as
possible to the best
accounting method in the
trade or business; and
2. It must clearly reflect the
income.
 Inventory rules cannot be uniform
but must give effect to trade
customs which come within the
scope of the best accounting
practice in the particular trade or
business.
 In order to clearly reflect income,
the inventory practice should be
consistent from year to year.
 Inventories should be recorded in
a legible manner, properly
computed and summarized, and
 should be preserved as a part of
the accounting record of the
taxpayer.
 Inventory losses which are
allowable as tax deduction are:
1. Losses from the sale of excess
or obsolete raw materials
2. Losses from production of
initial batches of new
products
3. Production losses from
reprocessing of stocks
returned for reconditioning.
 Inventory valuation method
adopted by the taxpayer should be
applied from year to year.
Rationale behind the power of the
State to tax persons, properties and
business within its jurisdiction.
 Based on the theory that the tax
laws of a state can have no
extraterritorial operation.
 Violation of the constitutional
provision that no person shall be
deprived of his property without
due process of law.
Classification of income as to sources
1. Within the Philippines
2. Without the Philippines
3. Partly within and partly
without the Philippines
Gross income from sources within the
Philippines
1. Interest income – interest on
bonds or notes or other
interest-bearing obligations
of residents, corporate or
otherwise.
2. Dividends
a. From domestic
corporation
b. From a foreign
corporation unless less
than 50% of its gross
income for the 3-year
period ending with the
close of its taxable year
preceding the declaration
of such dividends, or for
such part of such period
as it has been in existence
was derived from sources
within the Philippines;
but only in an amount
which bears the same
ratio to such dividends as
the gross income from all
sources.
 In the case of dividends
derived from a foreign
corporation, the same is
subject to the 50% rule, i.e., if
the 3-year period preceding
the declaration of such
dividend, the ratio of such
corporation’s Philippines
gross income to the world
gross income is
i. Less than 50% - then the
income is considered
derived entirely without
ii. If 50% or more – then the
income is considered
derived within.
3. Services – includes compensation
for labor or personal services
performed within the Philippines
regardless of the residence of the
payor, of the place in which the
contract for service was made, or
of the place of payment.
4. Rentals and royalties – the income sale or transfer have been
arising from the rental of property paid.
whether tangible or intangible,
located within the Philippines, or GROSS INCOME FROM SOURCES
from the use of property, whether WITHOUT THE PHIL
tangible or intangible, located
within the Philippines. 1. Interests other than those
5. Sale of real property – those derived from sources within
located in the Philippines the Philippines
6. Sale of personal property – in the 2. Dividends other than those
country where the personal derived from sources within
property is sold. The country in the Philippines
which sold means the place where 3. Compensation for labor or
the property is marketed. This personal services performed
section does not apply to income without the Philippines
from the sale of property 4. Rentals or royalties from
produced by the taxpayer within property located without the
and sold without the Philippines Philippines or from any
or produced by the taxpayer interest in such property
without and sold within the including rentals or royalties
Philippines. for the use or for the privilege
7. Sale of shares of stock of domestic of using without the
corporation – within the Philippines, patents,
Philippines, regardless of where copyrights, secret processes
the said shares are sold. The and formulas, goodwill,
transfer by a nonresident alien or trademarks, trade brands,
a foreign corporation to anyone of franchises and other like
any share of stock issued by a properties;
domestic corporation sold thru a 5. Gains, profits and income
foreign stock exchange shall still from the sale of real property
be subject to Philippine income located without the
tax and shall not be affected or Philippines.
made in its book unless:
INCOME FROM SOURCES PARTLY
a. The transferor has filed with
WITHIN AND PARTLY WITHOUT
the Commissioner a bond
THE PHILIPPINES
conditioned upon the future
payment by him of any  The taxable income may first be
income tax that may be due on computed by deducting the
the gains derived from such expenses, losses or other
transfer, or deductions apportioned or
b. The Commissioner certified allocated thereto and a ratable
that the taxes, if any, due on part of any expense, loss or other
the gain realized from such deduction which cannot be
 definitely be allocated to some
items or classes of gross income;
and the portion of such taxable
income attributable to sources
within the Philippines may be
determined by the processes and
formulas of general
apportionment prescribed by the
SOF.
 Gains, profits and income from the
sale of personal property
produced by the taxpayer within
and sold without the Philippines,
or produced by the taxpayer
without and sold within the
Philippines, shall be treated as
derived partly from sources
without the Philippines.
 Gains, profits and income derived
from the purchase of personal
property within and its sale
without the Philippines, or from
the purchase of personal property
without and its sale within the
Philippines shall be treated as
derived entirely from sources
within the country in which sold.
ACCOUNTING PERIODS AND METHODS
OF ACCOUNTING
Accounting Periods
 Taxable year or taxable
accounting period – the calendar
year or the fiscal year ending
during such calendar year, upon
the basis of which the taxable
income under Title II of the Tax
Code is computed.
Different taxable accounting periods
 G.R. the accounting period of a
taxpayer is a period of 12 months:
1. Calendar accounting year -
taxable period adopted by
individuals or corporations
using the calendar year, which
is a period of 12 months
starting from Jan. 1 to Dec. 31.
 If the taxpayer had no annual
accounting period, or does not
keep books, or if the taxpayer
is an individual, the taxable
income shall be computed on
the basis of the calendar year.
2. Fiscal accounting period –
taxable period adopted by
corporations using the fiscal
year, which is a period of 12
months ending on the last day
of any month other than
December.
 In no instance shall individual
taxpayers be authorized to
establish a fiscal year as basis
for filing their returns and
computing their income.
 But a taxpayer may have a
taxable period of less than 12
months.
3. Short accounting period –
adopted by a taxpayer in the
case of a return made for a
fractional part of a year or
which is a period of less than
12 months.
 Occurs when a taxpayer, with
the approval of the
Commissioner, changes the
basis of computing taxable
income. It may also occur
when a taxpayer dies, or is
newly organized, or a
corporation is dissolved at
 any time during the year after
the beginning of the calendar
year or fiscal year.
Accounting Methods
 Comprise of a set of rules for
determining when and how to
report income and deductions.
 The accounting method for tax
purposes must be one generally
employed in keeping the
taxpayer’s books, provided that
the method clearly reflects the
income.
 In case of conflict between the Tax
Code and that of the generally
accepted accounting principles,
the provisions of the Tax Code and
its IRR shall prevail.
 If the taxpayer does not regularly
employ a method of accounting
which clearly reflects his income,
the computation shall be made in
such manner as in the opinion of
the Commissioner clearly reflects
it.
Essentials of a standard accounting
method in order to truly reflect a
taxpayer’s taxable income
 In all cases in which the
production, purchase, or sale of
merchandise of any kind is an
income-producing factor,
inventories of the merchandise on
hand should be taken at the
beginning and end of the year and
used in computing the taxable
income of the year.
 Expenditures made during the
year should be properly classified
as between capital and income
 In any case in which the cost of
capital assets is being recovered
thru deductions for wear and tear,
depletion or obsolescence, any
expenditure (other than ordinary
repairs) made to restore the
property or prolong its useful life
should be added to the property
account or charged against the
appropriate reserve and not to
current expenses.
Different accounting methods under
the Tax Code
1. Cash Accounting Method – all
items of income actually
received during the year shall
be accounted for in such
taxable year and the
corresponding expenses
actually paid shall also be
claimed as deductions during
the year.
2. Accrual accounting method –
income, gains and profits are
included in the gross income
when earned regardless of
whether or not actually
received, and the expenses
are allowed as deductions
from the gross income when
actually incurred, although
not yet paid. This is allowed
because expenses not being
claimed as deductions by a
taxpayer in the current year
when they are incurred
cannot be claimed as
deduction from income for the
succeeding year.
3. Installment payment basis
method – a method
considered appropriate when
 collections extends over
relatively long periods of time
and there is a strong
possibility that full collection
will not be made. As
customers make installment
payments, the seller
recognizes the gross profit on
sale in proportion to the cash
collected. In order that
payments may be considered
as on installment payment
basis, the initial payments in
the year of sale should not
exceed 25% of the gross
selling price.
4. Deferred payment basis
method – a method being
applied by real estate dealers
in their sale of real properties,
which, although the mode of
payment being employed is on
the installment basis, the said
sale shall be considered as on
a cash basis when the initial
payments in the year of sale of
the real properties exceed
25% of the gross selling price.
5. Percentage-of-completion-
basis method – a method
applicable in the case of a
building, installation or
construction contract
covering a period in excess of
one year whereby gross
income derived from such
contract may be reported
upon the basis of percentage
of completion or progress of
work.
Period in which items of gross income
included
 In case of death of a taxpayer,
gains, profits, and income are to
be included in the gross income
for the taxable year in which they
are received by the taxpayer,
unless they are included as of a
different period in accordance
with the approved method of
accounting followed by him.
 If the taxpayer is keeping books of
accounts on the cash basis, income
earned is taxable in the year of
actual receipt.
 If his books of accounts and
records are kept on the accrual
basis, income is taxable in the year
it is earned, irrespective of the
year in which it is actually
received.
Meaning of the terms paid and
incurred and paid or accrued
 The terms will be construed
according to the method of
accounting upon the basis of
which the taxable income is
computed by the taxpayer.
 In case of the death of a taxpayer,
there shall be allowed as
deduction for the taxable period in
which falls the date of his death,
amounts accrued up to the date of
his death if not otherwise properly
allowable in respect of such
period or a prior period.
All-events-test
 The accrual of income and
expense is permitted when the all-
events-test has been met.
 The all-events-tests requires
 1. Fixing of a right to income or
liability to pay
2. The availability of the
reasonable accurate
determination of such income
or liability.
 The test does not demand that the
amount of income or liability be
known absolutely, only that a
taxpayer has at his disposal the
information necessary to compute
the amount with reasonable
accuracy.
 The basis of accrual system of
accounting is that obligations
incurred in the normal course of
business will be discharged in due
course; that the deductions have
been paid or accrued, or paid and
accrues, in order to be accruable
in the taxable year, a valid
obligation upon which the profit
or loss, in case of deduction, is to
be determined must have existed
in the year in which the obligation
became binding and enforceable.
Change of accounting period
 A taxpayer who changes the
method of accounting employed in
keeping his books shall, before
computing his income upon such
new method for purposes of
taxation, secure the consent of the
Commissioner.
 Application for permission to
change the method of accounting
employed and the basis upon
which return is made shall be filed
within 90 days after the beginning
of the taxable year to be covered
by the return.
 An individual cannot change his
accounting period from calendar
year to fiscal year because he is
only allowed to use the calendar
year.
 A corporation, including a duly
registered GPP, who desires to
change its accounting shall at any
time not less than 60 days prior to
the beginning of the proposed new
accounting period submit a
written application to the
Commissioner.
 The certification approving the
adoption of a new accounting
period must be released within 30
working days from the date of
receipt of the complete
documentary requirements.
Final or adjusted returns for a period
of less than 12 months
 GR. No return can be made for a
period of more than 12 months
 A separate return for a fractional
part of a year is required
whenever there is a change, with
the approval of the Commissioner,
on the basis of computing taxable
income from one taxable year to
another.
Accounting for long-term contracts
 Percentage-of-completion basis
Installment basis
 The income of a dealer in a
personal property on the
installment plan may be
ascertained by taking as income
that proportion of the total
 payments received in the taxable
year from installment sales which
the total or gross profit realize or
to be realized on the total
installment sales made during
each year bears to the total
contract price of all such sales
made during that respective year.
 The income from a casual sale or
casual disposition of personal
property (other than property of a
kind which should be properly be
included in inventory) may be
reported on the installment basis
only if the sales price exceeds
P1,000 and the initial payments do
not exceed 25% of the selling
price.
 The term initial payment does not
include the amounts received by
the vendor in the year of sale from
the disposition to a third person of
notes given by the vendee as part
of the purchase price which are
due and payable in subsequent
years.
RETURNS AND PAYMENT OF TAX
 The following individuals are
required to file income tax return
1. Filipino citizen residing in the
Philippines
2. Filipino citizen residing
outside the Philippines on his
income from sources within
the Philippines
3. Alien residing in the
Philippines on income
derived in the Philippines
4. Nonresident alien engaged in
trade or business or in the
exercise of a profession in the
Philippines
5. A citizen of the Philippines
and any alien individual
engaged in business or
practice of profession within
the Philippines, regardless of
the amount of gross income
6. An individual earning purely
compensation income but
who is currently employed by
two or more employers at any
time during the taxable year.
Individuals not required to file income
tax return
1. An individual whose gross
income does not exceed his
total personal and additional
exemptions as dependents
2. An individual with respect to
pure compensation income
derived from sources within
the Philippines, the income
tax on which has been
correctly withheld.
3. An individual whose sole
income has been subjected to
final withholding tax
4. A minimum wage earner or an
individual exempt from
income tax
5. Senior citizens who are
considered as minimum wage
earners
Taxation of marginal Income Earners
 Marginal income earners – refer to
individuals not otherwise deriving
compensation as an ee under an
er-ee relationship but who are
self-employed and deriving gross
sales/receipts not exceeding
P100,000 during any 12 month
 period. The activities of such are
considered principally for
subsistence or livelihood.
 They are exempt from VAT and
any percentage tax.
 They are not required to pay any
registration although they are
required to register as taxpayers
for being a possible income tax
and withholding tax filers.
 They are required to file the
annual income tax return
reflecting income from whatever
source.
 Any individual not required to file
an income tax return may
nevertheless be required to file an
information return.
Income tax returns of individuals for
the preceding taxable year shall be
filed in duplicate by the ff persons:
1. A resident citizen – on his
income for all sources
2. A nonresident citizen – on his
income derived from sources
within the Philippines
3. A resident alien – on his
income from all sources
within the Philippines
4. A nonresident alien engaged
in trade or business in the
Philippines – on his income
derived from sources within
the Philippines.
In case of individuals subject to
capital gains tax:
1. From the sale or exchange of
shares of stock not traded
thru a local stock exchange,
the return should be filed
within 30 days after each
transaction and final
consolidated return on or
before April 15 of each
taxable year covering all stock
transactions of the preceding
year
2. From the sale or disposition of
real property, the return
should be filed within 30 days
following each sale or other
disposition.
Return of Husband and Wife
 Those who do not derive income
purely from compensation, shall
file a return for the taxable year to
include the income of both
spouses, but where it is
impracticable for the spouses to
file one return, each spouse may
file a separate return of income
but the returns so filed shall be
consolidated by the Bureau for the
purposes of verification for the
taxable year.
Returns of minors and persons with
disability.
 If he is unable to make his own
return, the return may be made by
the ff:
1. His duly authorized agent or
representative
2. By the guardian
3. Other person charge with the
care of his person, property,
the principal and his
representative or guardian
assuming the responsibility of
making the return and
incurring penalties for
 erroneous, false or fraudulent
returns
4. In the case of income of
unmarried minors derived
from property received form
living parent, said income
shall be included in the return
of the parents, except:
a. When the donor’s tax has
been paid on such
property;
b. When the transfer of such
property is exempt from
donor’s tax.
The fact that an individual’s named is
signed to a file return shall be prima
facie evidence for all purposes that the
return was actually signed.
Return of individuals with concurrent
employers
 At any time during the taxable
year shall file an income tax
return regardless of whether she
is an MWE or regardless of
whether her personal and
additional exemption does not
exceed his total wages.
CORPORATION RETURNS
 Every corporation subject to tax,
except foreign corporations not
engaged in trade or business in
the Philippines, shall render, in
duplicate, a true and accurate
quarterly income tax return and
final or adjustment return.
 A corporation which has received
a charter but has never perfected
its organization, and which has
transacted no business and had no
income from any source, may
upon presentation of the facts to
the Commissioner be relieved
from the necessity of making a
return so long as it remains in an
unorganized condition.
 A domestic corporation is
required to file income tax returns
4 times for income earned during
a single taxable year. Reason: to
endure the timeliness of collection
to meet the budgetary needs of the
government; to ease the burden
on the taxpayer by providing it
with an installment payment
scheme, rather than requiring
payment of the tax on a lump-sum
basis after the end of the year.
 GR. stockholders cannot be held
liable for the unpaid taxes of a
dissolved corporation. XPN. If it
appears that the corporate assets
have been passed into their hands.
Reasons for the grant of extension to
file returns
 The Commissioner may grant, in
meritorious cases
1. Destruction of books of
accounts and other records of
the taxpayer thru fire, flood or
typhoon and the said books
and other records are in the
process of reconstruction;
2. Epidemic, pestilence or other
calamities prevailing in
specific sectors of the country
where the taxpayer resides or
where the principal business
is being conducted. Sickness
or illness of the accountant,
bookkeeper or the manager
or proprietor of the business
 shall not be considered a
reasonable cause.
Returns of receivers, trustees in
bankruptcy or assignees
 Must make returns of income for
such corporations, partnerships or
associations covering each year or
part of the year during which they
are in control.
Returns of GPPs
 Are not subject to income tax, but
are required to file returns of their
income for the purpose of
furnishing information as to the
share in the gains or profits which
each partner shall include in his
individual return.
 They are required to render a
return of their earnings, profits
and income, setting forth the items
of gross income and the
deductions allowable, and the
names and addresses, TIN and
shares of each of the partners who
would be entitled to the net
earnings, profits, and income, is
distributed.
PAYMENT AND ASSESSMENT OF
INCOME TAX FOR INDIVIDUALS AND
CORPORATIONS
 The total amount of income shall
be paid at the time the return is
filed, such tax to be paid by the
person subject thereto.
 Installment payment of income tax
allowed only to individuals.
 Interest on income tax is not
punitive in nature but
compensatory; it is a
compensation to the State for the
delay in the payment of the tax.
WITHHOLDING TAX-AT-SOURCE
 Withholding tax is a method of
collecting in advance income tax
and business tax of certain
taxpayers who are liable to pay
income tax or business tax in the
Philippines.
 In the operation of the
withholding tax system, the payee
is the taxpayer, the person on
whom the tax is imposed, while
the payor, a separate entity, acts
no more than an agent of the
government for the collection of
the tax in order to ensure its
payment.
 If the payor who is duty bound to
withhold the tax fails to withhold
and to remit the said tax to the
government, the said expenses of
the payor shall generally be
disallowed as deduction from the
gross income.
3-Fold purpose of the withholding tax
system
1. To provide the taxpayer with
a convenient way of paying his
tax liability
2. To ensure the collection of tax
3. To improve the government’s
cashflow
 The withholding agent is liable
only insofar as he failed to
perform his duty to withhold the
tax and remit the same to the
government.
Who are constituted as withholding
agent
 A withholding agent is any person
or entity who is required to deduct
and remit the taxes withheld to
the government.
1. In general, any juridical
person, whether engaged or
not in trade or business;
2. An individual, with respect to
payments made in connection
with his trade or business.
 Insofar as taxable sales, exchanges
or transfers of real property are
concerned, the buyers, WON
engaged in trade or business, are
constituted as withholding agents.
 The tax withheld is considered a
part of the consideration agreed
upon between the seller and the
buyer resulting, therefore, to a net
take to the seller of only the
difference between the agreed
consideration/selling price and
the tax withheld.
3. All government offices,
including GOCCs, as well as
well provincial, city and
municipal governments and
barangays.
4. All individuals, juridical
persons and political parties,
with respect to their income
payments made as campaign
expenditures and/or
purchase of goods and
services intended as
campaign contributions.
Duties and obligations of the
withholding agent
1. To register as a withholding
agent within 10 days after
acquiring such status with the
RDO having jurisdiction
where his business is located.
2. To deduct and withhold taxes.
3. To remit the tax withheld
4. To file annual information
return
5. To issue withholding tax
certificates to recipient of
income payments subject to
the withholding.
Income which may be subjected to the
withholding tax at source
 Only fixed or determinable annual
or periodical income is subject to
withholding.
 The statute subjects interest,
dividends, rents, salaries, wages,
premiums, annuities,
compensations, remunerations,
and emoluments, including
royalties, to withholding tax at
source.
 Income is fixed when it is to be
paid in amounts definitely pre-
determined.
 It is determinable whenever there
is a basis of calculation by which
the amount to be paid may be
ascertained.
Time of withholding
 When the income payment is paid
or payable or accrued or the
income payment is accrued or
recorded as an expense or asset,
whichever is earlier.
Kinds of withholding tax-at-source
 1. Withholding of final tax on
certain incomes
2. Withholding of creditable tax
at source
3. Withholding tax on interest
from tax-free covenant bonds.
Concept of the final withholding tax
system
 The amount of income tax
withheld by the withholding agent
is constituted as a full and final
payment of the income tax due
from the payee on the said income.
 In case of the payor’s failure to
withhold the tax or incase of
underwithholding, the deficiency
tax shall be collected from the
payor.
 The payee is not required to file an
income tax return for the
particular income.
 The finality of the withholding tax
is limited only to the payee’s
income tax liability on the
particular income, it does not
extend to the payee’s other tax
liability on income.
Rationale for the withholding of final
tax on income payment to nonresident
aliens not engaged in trade or business
in the Philippines
 Subject to final withholding tax
 At 25%
 Designed to enable the
government to collect the proper
and correct tax on incomes
derived from the Philippines by
aliens outside the taxing
jurisdiction.
Government as withholding agent
 Before making any money
payment to private individuals,
corporations, partnerships and/or
associations on account of each
purchase of goods and services
shall deduct final withholding tax
due on the gross money payments
thereof.
Concept of creditable withholding tax
system
 Taxes withheld on certain income
payments are intended to equal or
at least approximate the tax due of
the payee on said income.
 The income recipient is still
required to file an income tax
return.
Kinds of creditable withholding tax
system
1. Expanded withholding tax
2. Withholding tax on
compensation or wages
3. Withholding tax on interest
from tax-free covenant bonds
Expanded Withholding Tax
 A kind of creditable withholding
tax, which is prescribed to be
withheld both by the government
and private payors from the
different items of income
payments to sellers/suppliers
residing in the Philippines on
their sale of goods and service,
which is creditable against the
income tax due of the said
payees/sellers/suppliers for the
taxable year quarter/year.
Conditions in order that income
payment may be subjected to EWT
1. The income payment must be
paid or payable by a taxpayer
who is residing in the
Philippines
2. The recipient of the income
who is liable to income tax
must also be residing or has
business in the Philippines
3. The income is fixed or
determinable at the time of
payment
4. The income is one listed
under the consolidated
withholding tax regulations
A nonresident foreign corporation not
doing business in the Philippines
retained by a domestic corporation to
do the advertising of its product
abroad paid thru outward remittances
is not subject to EWT.
 The fees paid by a domestic
corporation to a nonresident
foreign corporation are not
subject to EWT since they are not
subject to the Philippine income
tax.
 Expanded withholding taxes are
only imposed on income payments
to persons residing in the
Philippines.
When the obligation of withholding
agent to deduct and withhold the tax
arise
 At the time an income payment is
paid or payable, or when the
income payment has accrued or
recorded as an expense or asset,
whichever is applicable, in the
payor’s books and which comes
first.
 The term payable refers to the
date the obligation becomes due,
demandable or legally enforced.
Persons exempted from being
subjected to the EWT
1. National government agencies
and its instrumentalities,
including provincial, city,
municipal governments and
barangays except GOCCs
2. Persons enjoying exemption
of income taxes pursuant to
the provisions of any law,
general or special.
Withholding tax on compensation or
wages
 Also a form of creditable
withholding tax which is withheld
from individuals receiving
compensation income.
 No withholding of tax shall be
required where the income
received by an ee does not exceed
the statutory minimum wage.
Withholding tax on interest of tax-free
covenant bonds
 Withholding is required of a tax of
30% in the case of interest upon
bonds, obligations or securities
issued by domestic or resident
foreign corporations, containing a
so-called tax-free covenant clause,
payable either to citizens or
aliens, where the owner of such
interest income does not file with
 the withholding agent a signed
notice claiming the benefit of
personal exemption.
 Subject to the exception just
mentioned, withholding taxes take
place in all cases of payments of
interest upon tax-free covenant
bonds or other securities
regardless of the place where such
bonds or securities are issued or
marketed and the interest
thereupon paid.
 Not required in the case of a
citizen or resident alien individual
files with the withholding agent
when presenting interest coupons
for payment, not later the Feb. 1
following the taxable year, an
ownership and exemption
certificate on the requisite form
claiming a personal exemption or
credits for dependents.
RETURNS AND PAYMENT OF TAXES
WITHHELD AT SOURCE
 Income upon which any creditable
tax is required to be withheld at
source shall be included in the
return of its recipient.
 The excess of the withheld tax
over the tax due on his return
shall be refunded to him subject to
the authority of the Commissioner
to refund taxes.
 The taxes withheld by the
withholding agents shall be
maintained in separate accounts
and should not be commingled
with any other funds of the
withholding agent. They shall be
considered as a trust fund held for
government until they are
remitted.
 Every person who is required to
withhold the tax from the
compensation of an ee is liable for
the payment of such tax to the BIR.
Such liability stays even if the ee
subsequently pays the tax.
 Any income payment which is
otherwise deductible shall be
allowed as deduction from the
payor’s gross income only if it is
shown that the income tax
required to be withheld has been
paid to the Bureau.
TAX ON PROFITS COLLECTIBLE FROM
THE OWNER
 Income tax not otherwise
collectible from taxpayers
chargeable to his duly authorized
representative.
ESTATES AND TRUSTS
Income of estates and trusts which are
subject to income tax
 The income tax imposable upon
individuals shall apply to the
income of estates or of any kind of
property held in trust, including:
1. Income accumulated in trust
a. For the benefit of unborn
or unascertained persons
or persons with
contingent interest: and
b. Income accumulated or
held for future
distribution under the
terms of the will or trust.
2. Income which is to be
distributed currently be the
fiduciary to the beneficiaries
 3. Income collected by a other than for the exclusive
guardian of an infant which is
to be held or distributed as
the court may direct
4. Income received by the
estates of deceased persons
during the period of
administration or settlement
of the estate
5. Income which, in the
discretion of the fiduciary,
may be either distributed tot
eh beneficiaries or
accumulated.
But the income of the ees’ trust is
exempt from income tax
 The income of the ees’ trust which
forms part of a pension, stock
bonus or profit-sharing plan of an
er for the benefit of some or all of
his ees shall be exempt from
income tax if the following
conditions are met:
1. The contributions are made to
the trust by such er, or ees, or
both;
2. Such contributions are made
for the purpose of distributing
to such ees the earnings and
principal of the fund
accumulated by the trust in
accordance with the plan;
3. Under the trust instrument, it
is impossible, (in the taxable
year and at any time
thereafter prior to the
satisfaction of all liabilities
with respect to ees under the
trust) for any part of the
corpus or income to be used
for, or diverted to, purposes
benefit of his ees; and
4. The same is duly registered as
such with the BIR.
 Purpose: to encourage the
formation of private plan outside
SSS.
 Tax exemption is likewise enjoyed
by the income of the pension trust.
Otherwise, taxation of those
earnings would result in a
diminution of accumulated income
and reduce whatever the trust
beneficiaries would receive out of
the trust fund.
 The income of the trust funds shall
be exempt from payment of final
withholding tax.
Instances when ees’ trusts may be
taxed.
1. Mere resolution setting aside
every month a reserve fun to
pay pensions for all the
present and future ees,
without evidence that the
pension plan is actuarially
sound.
2. Any amount actually
distributed tot eh ee or
distributee of an ees’ trust
shall be taxable to the ee in
the year in which so
distributed to the extent that
it exceeds the amount
contributed by such ee or
distributee.
 A foundation existing for the
purpose of holding title to, and
administering, the tax exempt Ees’
Trust Fund established for the
benefit of the ees, has the
 personality to claim tax refunds in trust an estate of another
due to the Ees’ Trust Fund. person/s.
 GR. the income tax of estate or
Other trusts which are exempt from trust shall be computed upon the
income tax. taxable income of the estate or
trust and shall be paid by the
1. Revocable trust. The trust
fiduciary.
itself is exempt but the
 Where under the terms of a will or
trustor/grantor is subject to
deed, the trustee may, in his
the payment of the income tax
discretion, distribute the income
of the trust.
or accumulate it, the income is
2. Trust, the income of which, in
taxed to the trustee, irrespective
whole or in part, may be held
of the exercise of his discretion.
or distributed for the benefit
The imposition of the tax is not
of the grantor. If part of the
affected by the fact that an
income of the trust is to be
ultimate beneficiary may be a
held or distributed for the
person exempt from tax.
benefit of the grantor, the
 The income of a trust which is to
same should be included in
be accumulated or held for future
the grantor’s return.
distribution must be returned by
The following income taxes are and will be taxed to the trustee.
payable when a person who owns
When income of estate and trust
property dies:
taxable to beneficiaries.
1. Income tax of the decedent
1. A trust, the income of which is
when he was still alive, to
to be distributed annually or
cover the period beginning
regularly
January up to the time of his
2. An estate of a decedent the
death;
statement of which is not the
2. Estate income if the estate is
object of judicial testamentary
under administration or
or intestate proceedings; and
judicial settlement.
3. Properties held under a co-
When income of estates and trusts ownership or tenancy in
taxable to fiduciaries. common, the income is
taxable directly to the
 Fiduciary is a term which applies beneficiary.
to all persons or corporations that
Rules in the consolidation of income of
occupy positions of peculiar
two or more trusts.
confidence towards others such as
trustees, executors, or
1. There are two or more trusts
administrators; and a fiduciary,
which derive income
for income tax purposes, is any
person or corporation which holds
2. The creator of the trust in
each instance is the same
person, and the beneficiary in
each instance is the same.
3. The income of the said trust
should be consolidated.
4. Where the creator of the trust
in each instance is the same
person and the beneficiary in
each instance is the same, the
tax due on the consolidated
income will be collected from
the trustees in proportion to
the taxable income of the
respective trusts.
5. When the creator of the trust
in each instance is the same
person and the trustee in each
instance is the same but the
beneficiaries are different, the
trustee should make a be allowed as deduction
separate return for each of
the trusts in his hands.
6. When a trustee holds trust
created by different persons
for the benefit of the same
beneficiary, he should also
make a return for each trust
separately.
7. Where a trustor/grantor
created two or more trusts in
favor of the same beneficiary
appointing two or more
trustees, the trustees should
each make a separate return
for each trust. However, the
Commissioner will
consolidate the taxable
incomes, allowing only one
absolute exemption of
P20,000.
8. The income tax computed on
the consolidated taxable
income shall be allocated
between several trusts in
proportion to their respective
taxable income.
Computation of taxable income of
estates or trusts.
G.R. The taxable income of the estate
or trust shall be computed in the same
manner and on the same basis as in the
case of an individual
XPN.
1. Allowable deductions:
a. The amount of the income
of the estate or trust for
the taxable year which is
to be distributed
currently by the fiduciary
to the beneficiaries shall
in computing the taxable
income of the estate or
trust
b. The amount of the income
collected by a guardian
and infant which is to be
held or distributed as the
court may direct shall
also be allowed as
deduction in computing
the taxable income.
c. However, the said
amounts so allowed as a
deduction shall be
included in computing
the taxable income of the
beneficiaries, whether or
not distributed to them.
2. Additional allowable
deductions
a. There shall be allowed an
additional deduction in
 computing the taxable
income of the estate or
trust the amount of the
income of the estate or
trust for its taxable year,
which is properly paid or
credited during such year
to any legatee, heir or
beneficiary. This applies
in cases of:
i. Income received by
estates of deceased
persons during the
period of
administration or
settlement of the
estate; and
ii. Income which, in the
discretion of the
fiduciary, may either
be distributed to the
beneficiary or
accumulated.
b. However, the amount so
allowed as a deduction
shall be included in
computing the taxable
income of the legatee,
heir or beneficiary.
3. No deductions allowed. In the
case of trust administered in a
foreign country:
a. The deductions
mentioned in Subsections
A and B of Section 61
shall not be allowed.
b. The amount of any
income included in the
return of said trust shall
not be included in
computing the income of
the beneficiaries.
c. The income of the trust,
undiminished by any
amount distributed to the
beneficiaries shall be
taxed to the trustee.
4. Personal exemption allowed.
– P20,000
Casasola believes that the
personal exemption of estates
and trusts should be P50,000
since they are taxed like an
individual.
The term period of administration and
settlement of the estate is the period
required by the executor or
administrator to perform the ordinary
duties pertaining to administration, in
particular, the collection of assets and
the payment of debts and legacies.
Tax consequences during the period of
administration and settlement of the
estate.
1. Estates during the period of
administration have but one
beneficiary and that
beneficiary is the estate.
2. No taxable income is realized
from the passage of property
to the executor or
administrator on the death of
the decedent, even though it
may have appreciated in value
since the decedent acquired it.
3. In the event of delivery of
property in kind to a legatee
or distributee, no income is
realized.
4. Where, however, prior to the
settlement of the estate, the
executor or administrator
sells the property of the
decedent’s estate for more
than the appraised value
 placed upon it at the death of
the decedent, the excess is
income, taxable to the estate.
5. Where the property is sold
after the settlement of the
estate by the devisee, legatee
or heir at a price greater than
the appraised value placed
upon it at the time he
inherited the property from
the decedent, he is taxable
individually on the profit
derived.
6. An allowance paid a widow or
heir out of the corpus of the
estate is not deductible from
gross income.
Effects of distribution to heirs of the
income of the estate.
 Distribution to the heirs during
the taxable year of the income of
the estate is deductible from the
taxable income of the estate since
the distributed income shall form
part of the respective heir’s
taxable income.
 Where no such distribution to the
heirs is made during the taxable
year when the income is earned,
and such income is subjected to
income tax payment by the estate,
the subsequent distribution
thereof is no longer taxable on the
part of the recipient.
Effects of termination of judicial
settlement where the heirs still do not
divide the property.
 If the heirs contribute to the estate
money, property or industry with
intention to divide the profits
between or among them, an
unregistered partnership is
formed and the estate becomes
liable for the payment of
corporate income tax.
 If the heirs, without contributing
money, property or industry to
improve the estate, simply divide
the fruits thereof between or
among themselves, a co-
ownership is created and
individual income tax is imposed
on the income received by each of
the heirs, payable in their
separate and individual capacity.
Exemption allowed to estates and
trusts.
 Each beneficiary is entitled to but
one personal exemption, no
matter how many trusts he may
receive income.
 No additional exemption is
allowed to the income of estates
and trusts.
Revocable Trust
 A trust where the title can revert
back to the grantor anytime.
 It is not taxable itself as separate
entity because the income forms
part of the income of the grantor.
 Paid by the grantor
Requisites of a revocable trust
1. The power to revert in the
grantor title to any part of the
corpus of the trust is vested in
the grantor at any time either
alone or in conjunction with
any person not having a
 substantial adverse interest in
the disposition of such part of
the corpus or the income
therefrom; or
2. The power to revert in the
grantor title to any part of the
corpus of the trust is vested in
the grantor at any time in any
person not having a trust. If there is a condition that
substantial adverse interest in
the disposition of such part of
the corpus or the income
therefrom;
3. The income of such part of the
trust shall be included in
computing the taxable income
of the grantor, and thus the
grantor/trustor shall be the
one subject to the income tax.
Irrevocable Trust
 A trust irrevocable both as to
corpus and to income.
 Requisites:
1. The trust itself, through the
trustee or fiduciary, is liable
for the payment of the income
tax
2. It is taxed exactly in the same
way as estates under judicial
settlement and its status as an
individual is that of the
trustor.
3. The distribution of the trust
income during the taxable
year to the beneficiaries is
deductible from the taxable
income of the trust.
When estate and trust may be taxable
as a separate entity
 The estate of the decedent is
taxable as a separate entity when
it is already subject to a judicial
proceeding.
 A trust is taxable as a separate
entity if the trust is irrevocable
and the grantor has no more
control over the corpus of the
provides that a portion does not
convert the irrevocable trust to a
revocable trust, but that portion is
a taxable income of the grantor.
Requisites when income shall be
considered for the benefit of the
grantor
1. Any part of the income of a
trust is, or in the discretion of
the grantor or of any person
not having a substantial
adverse interest in the
distribution of such part of
the income may be held or
accumulated for future
distribution to the grantor;
2. Any apart of the income of a
trust may, or in the discretion
of the grantor or of any
person not having a
substantial adverse interest in
the disposition of such part of
the income, be distributed to
the grantor; or
3. Such part of the income of the
trust shall be included in
computing the taxable income
of the grantor/trustor.
 The term in the discretion of the
grantor means in the discretion of
the grantor, either alone or in
conjunction with any person not
having a substantial adverse in the
 disposition of the part of the  Means all remuneration for
income in question. services performed by an ee for
his er under an er-ee relationship,
Fiduciary Returns unless specifically excluded by the
Code.
 In order that a fiduciary
 The name by which the
relationship may exist, it is
remuneration for services is
necessary that a legal trust be
designated is immaterial.
created.
 Fiduciaries are required to make Remunerations not considered as
returns of income of the trust compensation income
when the gross income of the
person, trust or estate for whom 1. Remuneration paid for
or which they act amounts of agricultural labor.
P20,000 or more and will be G.R. Remuneration for
subject to all the provisions of law services which constitute
which apply to individuals. agricultural labor and paid
entirely in products of the
Income tax return by receiver farm where the labor is
performed is not subject to
 A receiver who stands in the place withholding tax.
of an individual or corporation XPN. Subject to withholding
must render a return of income tax
and pay the tax for his trust, but a a. Services performed in
receiver of only part of the connection with forestry,
property of an individual or lumbering or
corporation need not. landscaping, because the
term agricultural labor
Fiduciaries to be indemnified against
does not include the
claims for taxes paid.
same.
b. Remuneration paid
 Fiduciaries are indemnified
entirely in products of the
against the claims or demands of
farm where the labor is
every beneficiary for all payments
performed be an ee of any
of taxes which they shall be
person in connection with
required to make and they shall
any of the following
have credit for such payments in
activities is excepted as
any accounting they make as such
remuneration for
fiduciaries.
agricultural labor:
WITHHOLDING ON WAGES i. The cultivation of soil;
ii. The raising, shearing,
Compensation Income feeding, caring for,
training, or
management of
 livestock, bees, poultry, such services are
or wildlife; or performed;
iii. The raising or i. The making of copra,
harvesting of any other stripping of abaca, etc.;
agricultural or ii. The hatching of
horticultural poultry;
commodity. iii. The raising of fish;
c. The remuneration paid iv. The operation or
entirely in products of the maintenance of ditches,
farm where the labor is canals, reservoirs, or
performed for the waterways used
following services in the exclusively for
employ of the owner or supplying or storing
tenant or other operator water for farming
of one or more farms is purposes; and
not considered v. The production or
remuneration, provided harvesting of crude
the major part of such gum from a living tree
services is performed on or the processing of
a farm. such crude gum into
i. Services performed in gum spirits or
connection with the turpentine and gum
operation, resin, provided such
management, processing is carried on
conservation, by the original
improvement, or producer of such crude
maintenance of any gum.
such farms or its tools e. Remuneration paid
or equipment; or entirely in products of the
ii. Services performed in farm where labor is
salvaging timber, or performed by an ee in the
clearing land brush and employ of a farmer or a
other debris left by a farmer’s cooperative,
hurricane. organization or group in
d. Remuneration paid the handling, planting,
entirely in products of the drying, pacing, packaging,
farm where labor is processing, freezing,
performed by an ee in the grading, storing or
employ of any person In delivering to storage or to
connection with any of market or to carrier for
the following operations transportation to market,
is not considered as of any agricultural or
remuneration without horticultural commodity
regard to the place where produced by such farmer
 or farmer-members of
such organization or
group.
2. Remuneration for domestic
services. Not subject to
withholding.
3. Remuneration for casual
labor not in the course of an
er’s trade or business.
4. Compensation for services by
a citizen or resident of the
Philippines for a foreign
government or an
international organization.
Payroll period
 The period of services for which a
payment of compensation is
ordinarily made to an ee by his er.
Employee
 An individual performing services
under an er-ee relationship.
Employer
 Any person for whom an
individual performs or performed
any service, of whatever nature,
under an er-ee relationship.
Withholding tax on compensation
income
 A method of collecting the income
tax at source upon receipt of the
income.
 The er is constituted as the
withholding agent.
 No withholding of tax shall be
required on the SMW, including
holiday pay, night shift differential
and hazard pay of MWEs in the
private/public sectors.
 The tax withheld by the ers from
the compensation income of the
ees is considered as the tax aid by
the recipient of the income.
 The tax deducted and withheld at
source on compensation income
shall neither be allowed as a
deduction from the er’s gross
income or from the recipient’s
gross compensation income.
 The creditable tax withheld at
source, however. Is allowable as a
credit against the tax imposed by
the NIRC to the recipient of the
income.
 Any excess of the tax withheld at
source, over the tax ascertained to
be due on the income tax return
shall be refunded or automatically
credited, at the taxpayer’s option,
to the recipient of the income.
 Any excess of the tax which was
withheld on compensation over
the tax due from the taxpayer shall
be returned not later than July 15
of the following year.
 Refunds made after such time
shall earn interest at the rate of
6% per annum, starting after the
lapse of the 3 month period up to
the date when the refund is made.
 The withholding exemptions to
which an ee is entitled depends
upon his status and the number of
dependents qualified for
additional exemptions.
 Individual taxpayers regardless of
status are entitled to P50K
personal exemption.
 An individual, whether single or
married, shall be allowed an
additional exemption of P25K for
each qualified dependent child,
provided that the total number of
dependents for which additional
exemptions may be claimed shall
not exceed 4 dependents.
 Taxpayer who died during the
taxable year may still claim
personal and additional
exemption for himself and his
dependents.
 If the spouse or any of the
dependents dies or if any of such
dependents marries, becomes 21
years old or becomes gainfully
employed during the taxable year,
the taxpayer may still claim the
same exemptions as if such
happened at the close of such year.
 Where both husband and wife are
each recipients of compensation
either from the same or different
ers, taxes to be withheld on the ff
basis:
a. The husband shall be deemed
the proper claimant of the
additional exemption in
respect to any dependent
children, unless he explicitly
waives his right in favor of his
wife in the application for
registration or in the
withholding exemption
certificate.
b. In general, taxes shall be
withheld from the wages of
the wife in accordance with
the schedule for a married
person without any qualified
dependent.
 Compensation for services
rendered in the Philippines paid
to nonresident aliens engaged in
trade or business shall also be
subject to withholding tax on
compensation just like a resident
alien.
 There shall also be imposed a final
withholding tax of 15% on the
salaries, annuities, compensation,
remuneration and other
emoluments, such as honoraria
and allowances paid to its alien
ees occupying managerial and
technical positions and Filipino
ees occupying similar positions by
ROHQs, OBUs and Petroleum
Service contractors and sub-
contractors.
 The following are liabilities of the
er for the tax:
1. In general, the er shall be
responsible for the
withholding and remittance of
the correct amount of tax
required by deducting and
withholding from the
compensation income of his
ees.
2. The er, who required to
collect, account for and remit
any tax imposed by the NIRC,
who willfully fail to collect
such tax, or account for and
remit such tax or willfully
assist in any manner to evade
any payment thereof, shall in
addition to other penalties, to
a penalty equal to the amount
of the tax not collected nor
accounted for or remitted.
3. Any er/withholding agent
who fails or refuses to refund
 excess withholding tax not
later than Jan 25 of the
succeeding year shall, in
addition to any penalties, be
liable to the total amount of
refund which was not
refunded to the ee resulting
from any excess of the amount
withheld over the tax actually
due on their return.
 The following are the violations
that may be committed by the
er/withholding agent relative to
withholding taxes on
compensation and its year-end
adjustment:
1. Non-withholding of tax
2. Under withholding
3. Non-remittance
4. Underremittance
5. Late remittance
6. Failure to refund excess taxes
withheld to its ees.
 Liabilities of the ee for the tax.
Where an ee fails or refuses to file
an application of refistration or
certificate to update of exemption
and the er’s and ee’s information,
together with the attachments, or
willfully supplies false or
inaccurate information
thereunder after due written
notice by the er, the tax otherwise
to be withheld by the er shall be
collected from him including
penalties or additions to the tax
from the due date of remittance
until the date of payment.
 Where the ee, after due written
notice form the er, willfully fails or
refuses to file the application for
registration, or the certificate of
update of exemption and the er’s
and ee’s information, whichever is
applicable, or willfully supplies
false and inaccurate information,
the excess taxes withheld by the er
shall not be refunded to the ee but
shall be forfeited in favor of the
government.
 Persons having control of the
payment of wages or salaries are
authorized to deduct and withhold
upon such wages or salaries the
withholding tax due thereon. In
this case, the garnishees are the
persons owning debts due to the
er or in possession or control of
credits to which the er are
entitled. Accordingly, they are
authorized to deduct and withhold
the income tax due from the
backwages, allowances and
benefits to be paid to ees, and are
respectively liable for such
deductions.
 In order to ensure the collection of
the appropriate withholding taxes
on wages, garnishees of a
judgment award in a labor dispute
are constituted as withholding
agents with the duty of deducting
the corresponding withholding tax
on wages due thereon in an
amount equivalent to 5% of the
portion of the judgment award
representing the taxable
backwages, allowances and
benefits.
 Failure of the withholding agent of
compensation income to remit
withholding taxes is tantamount
to non-payment of taxes by payee.
 Substituted filing is when the er’s
annual return may be considered
as the substitute ITR of the ee
 inasmuch as the information
provided in his income tax return
would exactly be the same
information contained in the er’s
annual return.
 Under substituted filing, an
individual taxpayer although
required under the law to file his
income tax return, will no longer
have to personally file his own
income tax return but instead the
er’s annual information return
filed with be considered as the
substitute ITR of the ee inasmuch
as the information in the er’s
return is exactly the same
information contained in the ee’s
return.
 Non-filing is applicable to certain
types of individual taxpayers who
are not required under the law to
file an income tax return.
 The ee who is qualified for
substituted filing of income tax
return shall no longer be required
to file income tax return.
 Persons qualified for substituted
filing of income tax returns
1. The ee who receives purely
compensation income during
the taxable year
2. The ee who receives the
income only form one er in
the Philippines during the
taxable year
3. The amount of tax due from
the ee at the end of the year
equals the amount of tax
withheld by the er.
4. The ee’s spouse also complies
with all 3 conditions stated
above.
5. The er files an annual
information return
6. The er issues BIR Form No.
2316 to each ee.
 Persons not qualified for
substituted filing of the ITR
1. Individuals deriving
compensation income from
two or more ers concurrently
or successively at anytime
during the taxable year.
2. Ees deriving compensation
income, regardless of the
amount, whether from a
single or several ers, during
the calendar year, the income
tax of which has not been
withheld correctly resulting
to collectible or refundable
return.
3. Individuals deriving other
non-business, non-profession-
related income in addition to
compensation income not
otherwise subject to a final
tax.
4. Individuals receiving purely
compensation income from a
single er, although the income
tax of which has been
correctly withheld, but whose
spouse falls under paragraphs
a, b and c above.
5. Nonresident aliens engaed in
trade or business in the
Philippines deriving purely
compensation income, or
compensation income and
other non-business, non-
profession related income.
 Constructive receipt of
Compensation Theory.
Compensation is constructively
paid when it is credited to the
account of or set apart for an ee so
that it may be drawn upon by him
at any time although not then
actually reduced to possession.