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SEC.26 NIRC – GPP

General Rule: A General Professional Partnership is not subject to Income Tax.
1. Persons engaging in business as partners, are liable for income tax only in their
SEPARATE & INDIVIDUAL capacities.
2. Distributive Share – will be part of their Gross Income. (Actually & Constructively
Received)
3. Hypo: p. 137 Ingles
a. Professional/Legal Fees – part of gross income, under Sec. 32 (a) (2)
b. Cash Prize received from a religious society in recognition of the exemplary
service of law firm- Not Included in the Gross Income (Prizes & winnings are
generally taxable, (Sec. 32(a) (9)) however, as an exception it is not taxable if:
i. The recipient was selected without any action on his part to enter the
contest and he was not required to render substantial future services as
a condition for receiving the award.
c. Sale of Excess Computers and Laptops – Included in the Gross Income.
d. Salaries of Office Staff – Considered deductions
e. Rentals for Office Space – Considered Deductions
f. Representation Expenses incurred in meetings with clients – Considered
Deductions

*Necessary professional expenses – considered as deductions as long as there is

proper documentation and a direct connection to the operation of the
profession.
g. ABC Law Firm, under Sec. 26 of the NIRC is not subject to income Tax. A,B and C, as
individual partners are liable for income tax only in their separate and individual
capacities.

SEC.32 NIRC – GROSS INCOME

A.
All Income derived from WHATEVER source:
(11)
1. Compensation for services in whatever form paid (fees, salaries, wages, commission,
similar items);
2. Gross Income derived from:
a. Conduct of Trade or Business;
b. Exercise of a Profession.
3. Gains derived from dealing with properties;
4. Interests; (Except those included in Final Tax)
5. Rents;
6. Royalties;
7. Dividends;

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1.Stock Dividends – not subject to income tax, because this represent undistributed
increase in the capital of corporations or firms, joint-stock companies, etc. for a
particular period.
8. Annuities;
9. Prizes and Winnings;
10. Pensions;
11. Partner’s distributive share from the net income of the GPP.

Note: In answering question, ask “Is this Gross Income (look at the enumeration), if not “Is
this excludible?”.

Notes:
1. Convenience of the Employer Rule – No part of the Rental and Travel Allowances for
meetings, as well as the apartment where he will host his clients, redounded to the
employees (Mr Roboto’s) personal benefit, nor were such amounts retained by him.

2. GPP – General Rule – Tax Exempt (Sec. 26 of NIRC)

3. Hypo: A stockholder received a real property (liquidating dividends) is it subject to CGT?

No, receipt by a stockholder, of liquidating dividend is not subject to CGT. It is

not because of the absence of sale, disposition or conveyance but such is subject
to income tax.
4. Hypo: Jomar – QC. Is the expropriation subject to CGT? Who is liable to pay the tax?
a. Yes, Subject to CGT. Transfer of Property through Expropriation Proceedings –
sale or exchange, and profit constitutes Capital Gain.
b. Who shall pay the CGT? -It is the seller, who shall pay, Jomar. Because it is a tax
on passive income. – Tax on the seller, but through agreement, it may be
transferred to the buyer. If buyer is the government, the seller has the option to avail the
6% or under Section 24 (A), wherein the basis under said section is taxable income so
deductions may be allowed. The cost of property may be deducted but when you avail of the
6% the basis is gross selling price or zonal value, whichever is higher

5. Hypo: Johnny – CGT is imposed on the net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold or disposed of through stock exchange. (Dapat outside
siya ng stock exchange)
6. Hypo: Life Insurance – 1M, Son beneficiary,
a. 32 (b) (2) Amount Received by Insured as Return of Premium
i. Not taxable. It is excluded from Gross Income.
ii. 1M, 700 paid, 700 is not taxable, the 300k is taxable. (Income being the
earnings of premium and not return of capital) (return of premium paid
by him)
b. If Marcelo died on the 10th yr. – not taxable, exempt from taxation.

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B. EXCLUSIONS

1. Life Insurance
(Except: Proceeds are held by the insurer under an agreement to pay interest
thereon, the interest payments are included in the gross income)
2. Amount received by insured as return of premium
3. Gifts, Bequests & Devises
a. (But the income on such property shall be included in gross income)
4. Compensation for Injuries or Sickness + Amounts of any damages received.
5. Income exempt under Treaty
6. Retirement Benefits, Pensions, Gratuities
a. Retirement Benefits under RA 7641
i. Those received by employees of private firms
ii. The retiring official has been in the service for atleast 10 yrs. And is not
less than 50 years old at the time of his retirement
iii. This benefit can only be availed once
b. Separation Pay – received by the employee or his heirs due to separation by
reason of sickness, death, disability; Any other cause beyond the control of
employee
c. SSS Benefits
d. GSIS Benefits
e. Benefits received from US Veterans Administration
f. Social Security Benefits, Gratuities, Pensions, received from Foreign Government
Agencies
7. Miscellaneous Items
a. Income Derived by Foreign government
-derived from investment in the PH in loans, stocks, bonds,
- Income should be received by the Foreign Government or Financial
Institutions, or by intl. or regional financing institutions.
b. Income derived by the government or its political subdivisions
c. Prizes & awards
i. Made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievements
ii. ONLY IF:
1. The recipient was selected without any action on his part to enter
the contest or proceeding;
2. The recipient is not required to render substantial future service
as a condition to receive the prize or award.
d. Prizes & awards in Sports Competition
1. Granted to athletes in Local or Intl. Competition
2. Whether held in the PH or abroad
3. Sanctioned by their National Sports Assoc.
th
e. 13 Month Pay and other benefits

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1. The total exclusion shall not exceed 90k

2. Productivity Incentives; Christmas Bonus

Others:
1. PCSO & other lotto winnings

SEC.33 NIRC – FRINGE BENEFITS

A. IMPOSITION OF TAX
1. Final Tax of 35% is hereby imposed on the grossed-up monetary value
a. Except: Rank and File employees
b. Unless the Fringe Benefit is:
i. required by the nature of or necessary to trade, business or
profession
ii. For the benefit of employer
c. Payable by: Employer
d. Grossed Up Monetary Value of the Fringe Benefit shall be determined by
dividing the actual value of the fringe benefit by 65%.
2. Fringe Benefits Tax – is a Final Income Tax
B. FRINGE BENEFITS
1. Meaning: Any good, service, or other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except rank & file employees)
2. Who is legally required to pay the income tax on it?
a. It is the employer who is legally required to pay the income tax on fringe
benefits.
b. It is due to the employee but paid by the employer for and in behalf of the
employee
c. Additional cost to the employer, additional benefit to the employee.
3. FB is an expense to the employer, hence deductible from his Gross Income – the
deduction is the GUMV. (Grossed-Up Monetary Value)
C. FRINGE BENEFITS THAT ARE NOT TAXABLE
1. Fringe Benefits that are exempted from tax by a special law;
2. Contributions of employer for benefit of employee (Retirement, Medical, Insurance)
3. Benefits given to a rank & file employee – whether granted under a CBA;
4. De Minimis Benefits

How to compute FBT?

Rate: 35%
1. Determine the grossed up monetary value of the fringe benefit (Monetary Value of the
Fringe Benefit divided by 65%) (GUMV – 1M / 65%)
a. FORMULA:

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i. AMV/65% = GUMV
ii. GUMV x 35% = FBT

SEC.34 NIRC – DEDUCTIONS FROM GROSS INCOME

1. Expenses
a. Ordinary & Necessary Trade, Business or Professional Expenses
i. Reasonable Allowance for Salaries, Wages & Other forms of
compensation (Including Fringe Benefits)
ii. Reasonable Allowance for Travel Expenses – here and abroad, while away
from home, in the pursuit of trade, business or profession.
iii. Rentals & Others – which are required for the continued use of property
1. To which the taxpayer has not taken, or is not taking title, or in
which he has no equity other than that of a lessee, user or
possessor.
iv. Entertainment, Amusement, & Recreation expenses
1. Directly Connected to trade, business or profession
2. Should not be contrary to law, morals, etc.
b. Substantiation Requirements:
i. Substantiate with Sufficient Evidence – official receipts, adequate
records, the amount of the expense being deducted, and its connection
or relation of the expense.
c. Payments of bribes, kickbacks
i. Whether given to the government or private person are not deductible
Requisites:
1. Expense must be ordinary and necessary;
2. Paid or incurred during the taxable year;
3. Paid or incurred in carrying on the trade or business;
4. Supported by receipts, records or other pertinent papers.

2. Expenses allowable to Private Educational Institutions

-May at its option deduct either:
1. Expenditures considered as capital outlays of depreciable assets
incurred during the taxable year for expansion of school facilities;
2. deduct allowance for depreciation thereof

3. Interest
a. Must be incurred in connection with the taxpayer’s trade or business;
b. Allowable deduction is reduced by 33% of the interest income subject to final
tax.

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4. Taxes – Taxes paid or incurred within the taxable year in connection with taxpayer’s
profession, trade or business.
a. Exceptions:
i. Income Tax (Except Fringe Benefits)
ii. Income Tax imposed by a foreign country – for income sourced outside
the PH
iii. Estate or Donor’s tax
iv. Special Assessments
v. Income, war Profits
vi. VAT
vii. Stock Transaction Tax
Hypo: A Corporation
Taxable Income PH: 300,000
Taxable Income US: 100,000 (Paid: 40,000) = (60,000)

A corporation wants Tax Credit for the income tax paid in the US:
1. Tax Income (BTC) USA – 100,000
2. Tax Income (BTC) PH – 300,000
3. Taxable Income Worldwide – 400,000
4. Corporate Income Tax – 30% (400k x 30%) = 120,000
5. (Taxable Income Foreign Country / Taxable Income Worldwide) (CIT) = (100k/400k
=0.25 x 120,000 (corporate income tax) = 30,000 (allowed tax credit)
6. Foreign Income Tax paid = 40k (choose whats lower)

5. Losses
a. Actually sustained during taxable year
b. Not compensated for by insurance, or other forms of indemnity, shall be allowed
as deductions.
c. Incurred in Trade, Profession or Business;
d. Property connected with trade, busines or profession
i. If the loss arises from fires, storms, shipwrecks, or other casualties
ii. From robbery, theft or embezzlement
e. No loss shall be allowed as a deduction, if at the time of the filing of the return,
such loss has been claimed as a deduction for estate tax purposes, in the estate
tax return.
f. Declaration of Loss: within 45 days from the time of loss
g. File a Sworn Declaration of Loss
h. In case of Non-Resident Individuals & Foreign Corporations

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i. Losses should be actually sustained in the taxable year

ii. Incurred within the PH
6. Bad Debts
a. Requisites:
i. There is an existing debt due to the taxpayer which is valid & legally
demandable;
ii. Debts are connected to trade, business or profession of the taxpayer;
iii. Debts are ascertained to be worthless, uncollectible & charged off within
the taxable year;
iv. Taxpayer must show that it is uncollectible even in the future;
v. The debts are not between related parties;
vi. If ever these are recovered, it should be included in the year of recovery.
b. To prove worthlessness, the taxpayer must prove that he exerted diligent
efforts to collect, such as:
i. Sending of Statement of Accounts;
ii. Sending of Collection Letters;
iii. Giving the account to a lawyer for collection;
iv. Filing a Collection Case.
7.

Notes:
1. Exclusions are not included in the Income Tax Return.
2. Itemized Deductions, do not apply to taxpayers earning compensation income from
employer-employee relationship.
3. Trade Secrets? – Not deductible. Considered as payment of bribes or kickbacks,
hence not deductible. (Such is not deductible whether given to the govt or private
person. (Payments to private corporations)
4. Hypo: A a full time working employee of Nu Skin, is a travelling salesman, he went to
far flung areas, when his car suddenly got wrecked by militants. Deductible?
a. Answer: NO. General Rule, No deductions are allowed for Taxpayers earning
compensation income arising from personal services rendered under an
employer-employee relationship.
5. Advertisements (Deductible as necessary/ordinary expenses?)
a. To be deductible, it must comply with the following requisites:
i. The expense must be Ordinary & Necessary;
ii. Must have been paid or incurred during the taxable year;
iii. Must have been paid or incurred in carrying on the trade or business
of the taxpayer;
iv. Must be supported by receipts, records, or other pertinent papers.
6. Protection of Brand Franchise, deductible as ordinary or necessary expense, or is it
a capital expenditure?

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a. Protection of Brand Franchise is a capital Expenditure. Hence, must be

spread out over a reasonable period of time.
7.
8. Optional Standard Deduction (OSD) – 40%
a. Applicable both to individual or corporation
b. 40% of his gross sales, or receipts
c. No need to substantiate with receipts
d. GS: Accrual; GR: Cash Basis =Individuals
e. Gross Income = Corporation
f.

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SEC.42 NIRC - SITUS

1. Important Factor to determine the source of income:

(A) Gross Income from Sources within the Philippines:

(1) INTERESTS;
a. Bonds
b. Notes
c. Interest Bearing Obligations

1.Loan was used in the PH

2.Obligor/Debtor: is in the Ph

“Residence of the obligor who pays the interest, rather than the physical location
of the bonds/notes, is the determining factor” of the source of the interest
income.”

(2) DIVIDENDS;
-amount received as dividends
A. Domestic
B. Foreign – unless less than 50% of the gross income of the foreign corporation was
derived from the Philippines for the 3 year period, (ending with the close of its
taxable year)

Eg: A (Japanese Corp), derives 60% of its gross income in the PH for the past 3 years
(more than 50% of its gross income). If it declares dividends to a Japanese Citizen (a
non-resident) the dividend income will be considered sourced within the PH)

(3) SERVICES – Compensation for labor or personal services performed in the

Philippines.
-Source of Income: Property, Activity, Service that produced the income

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-The place of activity is controlling, and not the place of residence or business of the
corporation.

Eg:
1. Income is from labor – the place where the labor is done;
a. Philippines – income sourced in the Philippines;
2. Income is from Capital – the place where the capital is employed;
a. Philippines – income is sourced in the Philippines;
3. Income is from sale of Capital Assets – the place where the sale is made should
be decisive.

(4) RENTALS & ROYALTIES – from property located in the Philippines, or from any
interest in such property.
a. Use of – copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand
b. Use of – industrial, commercial, scientific equipment
c. Supply of Services by a non-resident person in connection with the above
mentioned;
d. Technical Advice, assistance or service in connection with (B)
e. Use of Motion Pictures, films, tapes for radio.

(5) SALE OF REAL PROPERTY – sale of real property located in the PH

(6) SALE OF PERSONAL PROPERTY –

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