Onsite Session 1
police power of the state
What is taxation?
Taxation is an enforced proportional contribution,
imposed by the State by its sovereign capacity to
support the government
Tax vs. others (Distinguished from other forms)
❖ License and regulatory fee
➢ Regulation of business and occupation
❖ Special assessment
➢ land
❖ Toll
➢ Property ownership
❖ Penalty
➢ Sanction due to a violation
❖ Tariff and customs duties
➢ Importation and exploration of goods
❖ Obligation to pay debts
➢ Based on contract: may be paid in kind
Purpose of taxation in the Philippines
❖ Lifeblood theory
➢ Taxes are the lifeblood of the
government and so should be collected
without unncessary hindrance. Without
taxes, the government would be
paralyzed for lack of the motive power
to activate and operate it
❖ Necessity Theory
➢ The power to tax is an attribute of
sovereignty. It is a power emanating
from necessity
❖ Benefits-protection theory
➢ This principle serves as the basis of
taxation and is founded on the
reciprocal duties of protection and
support between the State and its
inhabitants
1. Revenue raising measure
● The primary source is to generate funds
for the State to finance the needs of the
citizenry and to advance the common
wealth
2. Special or regulatory
● Taxes may be leveled with a regulatory
purpose to provides means for the
rehabilitation and stabilization of a
threatened industry which is affected
with public interest as to be within the
Taxes in the Philippine Setting
Sources of Tax Laws
❖ National Internal Revenue Code, as amended
❖ Tax ordinance of LGUs
❖ Tariffs and Custom Code
❖ Tax treaties
❖ Special Laws
❖ Court Decisions
❖ BIR issuances
Principle of a sound tax system
❖ Fiscal adequacy
➢ The sources of tax revenue should
coincide with, and approximate the
needs of government expenditures
➢ Revenue should be elastic or capable of
expanding or contracting naturally
❖ Administrative feasibility
➢ Tax laws should be capable of
convenient, just and effective
administration
❖ Theoretical justice
➢ The tax burdents should be in proportion
to the taxpayer’s ability to pay (ability to
pay principle)
➢ Taxation should be uniform as well as
equitable
Aspects of taxation
❖ Levying - this process involves the passage of
tax laws or ordinances through the legislature.
The tax laws to be passed shall be determine:
➢ Those to be taxed (person, property and
rights)
➢ How much is to be collected (the rate
and the base of tax); and
➢ How taxes are to be implemented (the
manner of imposing and collecting tax)
❖ It also involves the granting of tax exemptions,
tax amenities or tax condonation
❖ Assessment and collection
❖ Payment - includes the options, schemes or
remedies available to the taxpayer
Characteristics of tax
❖ Enforced contribution
 ❖ Exacted through legislative authority
❖ Proportionate
❖ Payable in money
❖ For raising revenue
❖ Used for public purpose
❖ Not a payment for some special privilege

Ingles book
Objective quizzes
Onsite Session 2 Notes
General Principles of Taxation
Essential Characteristics of Tax
❖ If you want exception to paying tax, it is in the
burden of the taxpayer to pay
❖ The tax must be exercised equally and fairly
❖ Levying not just for revenue but also for
regulatory purposes
Purpose / Objective of Taxation
❖ PAL - legislative franchise
➢ Motor vehicle registration both
works as regulatory and revenue
source
❖ PLDT exception were also for direct taxes
❖ Taxers are not political in nature
❖ The government can choose who is the subject
of the taxation
➢ The government can choose who
can/should benefit from tax
collection?
❖ The classification is valid and based on ability
to pay the enjoyment of the benefit and the
administrative
❖ Necessity and territorial in nature
➢ The rights and benefits are exercised
here in the Philippines
❖ The purpose of the tax should never be for
advantage of a person (not public interest)
❖ Infringes the religious freedom
Classification of Taxes
As to scope
1. National - taxed imposed by the national
governent through the Congress administered
by the BIR or the BOC
2. Local - taxed imposed by local governments
through their responsive Sanggunians
administered by the local executive through
the local treasurer
As to burden or incidence
1. Direct - exacted from the very person who, it
is intended or desired, should pay them
2. Indirect - demanded, in the first instance, from,
or are paid by, one person in the expectation
and intention that he can shift the burden to
someone else
Impact - point where the tax is originally
imposed or the one on whom the tax is formally
assessed
Incidence - point on whom the tax burden finally
rests
How Value-Added Tax Works
As to object
1. Personal, poll/capitalization - tax of a fixed
amount imposed on persons residing within a
specified territory, whether citizens or not
2. Property - tax imposed on property, real or
personal, in proportion to its value
3. Excise - tax imposed on the enjoyment of a
privilege or engagement in an occupation,
profession or business
As to tax rates
1. Ad valorem
❖ A tax of a fixed proportion of the value
of the property with respect to which the
tax is assessed
❖ Requires the intervention of assessors or
appraisers to estimate the value of such
property before the amount due from
each taxpayer can be determined
❖ Real property tax - before you pay, it is
based on fair market value
2. Specific
❖ A tax of a fixed amount
❖ Requires no assessment (valuation) other
than the listing or classification of the
objects to be taxed
As to graduation or rate
❖ Proportional/flat rate
➢ The tax rate is based on a fix percentage
of the amount of the property, receipts,
or other basis to be taxed
➢ Vat
❖ Progressive
 ➢ The rate of tax increases as the tax base
or bracket increases
➢ Income tax
❖ Regressive
➢ The rate of tax decreases as the tax base
or bracket increases
Tax systems
● Regressive
○ More indirect taxes than direct
○ More income earners are buying
→ burden on them
● Progressive
○ More direct tax
○ Increasing capacity (getting
richer) → more burden to
taxation
○ Neutral - basic principal of a
sound tax system
Nature and Power of Taxation
❖ Inherent in sovereignty
➢ Distinguished from police power
and eminent domain
❖ Exclusively legislative in nature
❖ Subject to inherent and constitutional
limitations
Taxpayer’s Suit
❖ A taxpayer is allowed to sue where there
is a claim that public funds are illegally
disbursed, or that public money is being
deflected to any improper purpose, or that
there is a wastage of public funds through
enforcement of an invalid or
unconstitutional law
❖ Requisites:
1. Public funds derived from taxation are
disbursed by a political subdivision or
instrumentality and in doing so, a law
is violated or some irregularity is
committed; and
2. The petitioner is directly affected by
the alleged act
Nature and Power of Taxation (cases)
Inherent Limitations
Purpose must be public in nature
The proceeds of tax must be used:
❖ For the support of state; or
❖ For some recognized objects of government or
directly to promote the welfare of the
community
❖ Test: Whether the statute is designed to
promote the public interest, as opposed to the
furtherance of the advantage of individuals
although each advantage to individuals might
incidentally serve the public
❖ Duty test
➢ Duty of government
❖ Promotion of the general welfare
➢ If the proceeds will directly promote
welfare of community in equal
measure
Inherantly legislative
General rule:
❖ Delegata potestas non potest delegari. (No
delegated powers can be further delegated)
❖ The power to tax is exclusively vested in the
legislative body and it may not be re-delegated
For exceptions:
❖ Should not contravene the inherent limitations
❖ It should be delegated by the constitution or
validly
❖ Levy is only in favor of local government
concern
❖ Delegation to the local government
➢ LGUs are now expressly given the
power to create its own sources of
revenue and to levy taxes, fees and
charges, subject to such guidelines and
limitations as the Congress may provide
which must be consistent with the
basiac policy of local autonomy
❖ Delegation to the president
➢ The Congress may, by law, authorize
the President to fix within specified
limits, and subject to such limitations
and restrictions as it may impose, tariff
rates, and import and export quotas,
tonnage and wharfage dues, and other
duties or imposts within the framework
 of the national development program of
the Government
❖ Delegation to administrative agencies
➢ Limited to the administrative
implementation that calls for some
degree of discretionary powers under
sufficient standards expressed by law or
implied from the policy and purposes of
Act.
Exemption of government entities, agencies and
instrumentality
❖ If taxing authority is the National Government
General rule: Agencies have instrumentalities
of the government are exempt from tax. Their
exemption rests on the State’s sovereign
immunity from taxation. The State cannot be
taxed without its consent and such consent,
being in derogation of its sovereignty, is to be
strictly construed
❖ If the taxing authority is a Local Government
RA 7160 expressly prohibits LGUs from
levying tax on the National Government, its
agencies and instrumentalities and other
LGUs.
Some GSOCC that are not taxable: GSIS, SSS,
Philhealth
Limitation of Territorial Jurisdiction
❖ A state may not tax property lying outside its
borders or lay an excise or privilege tax upon
the exercise or enjoyment of a right or
privilege derived from the laws of another
state and therein exercises and enjoyed
Why?
❖ Tax laws do not operate beyond a
country’s territorial limits
❖ Property which is wholly and exclusively
within the jurisdiction of another state
receives none of the protection for which
a tax is supposed to be a compensation
● Manny Pacquiao - already paid in Vegas
● Resolved already provided he paid in Vegas,
he won’t have to pay here → there is a treaty
involved in his case
● Contract can be divisible
○ Only certain portions of contract
could be taxed
Exception
❖ Privity of relationship
➢ The fundamental basis of the right of
tax is the capacity of the government
to provide benefits and protection to
the object of the tax.
A person may be taxed where there is
between him and the taxing rate, a
privity of the relationship justifying
the levy
International Comity
❖ Comity - respect accorded to nations to each
other because they are sovereign equals
➢ Thus, the property or income of a
foreign state or government may not be
the subject of taxation by another state
❖ Won’t be taxing the earning of a different
country
❖ You cant tax other countries
Why?
❖ In par in parem non habet imperium. As
between equals there is no sovereign
❖ In international law, a foreign government may
not be sued without its consent. Therefore, it is
useless to impose a tax which could not be
collected
❖ Usage among states that when a foreign
sovereign enters the territorial jurisdiction of
another, there is an implied understanding that
the former does not intend to degree its dignity
by placing itself under the jurisdiction of the
other.
Constitutional Limitation
● Substantive
○ Must be reasonable and for public
purpose
● Procedural
○ Should there be no arbitraries in
collection
Due process of law
Sec. 1, Art. III, 1987 Constitution
No person shall be deprived of life, liberty, or
property without due process of law, nor shall any
person be denied the equal protection of the laws.
Due Process in Taxation
(a) Public purpose
(b) Imposed within taxing authority’s territorial
jurisdiction
(c) Assessment or collection of is not arbitrary or
oppressive
Equal protection
Sec 1, Art. III, 1987 Consitution
No person shall be deprived of life, liberty, or
property without due process of law, nor shall any
person be denied the equal protection of the laws
Prohibition against imprisonment for non-payment
of poll tax
Sec. 20, Art. III, 1987 constitution
No person shall be imprisoned for debt or non-
payment of a poll tax
Non-impairment of obligations of contracts
Sec. 10, Art. III, 1987 Constitution
No law impairing the obligation of contracts shall
be passed.
Prohibition re: appropriation of proceeds of taxation
Sec. 29, Art. VI, 1987 Constitution
Equal protection
Substantial distinction
Purpose of the law
Not limited to
Should apply to present and future proof
Apply equally to all members
Uniformity and Equity
(1) Uniformity - All taxable articles or properties
of the same class shall be taxed at the same
rate
(2) “Equitable” means fair, just, reasonable and
proportionate to the taxpayer’s ability to pay
Prohibition against infringement of religious
freedom
Sec. 5, Art. III, 1987 Constitution
No law shall be made respecting an establishment
of religion, or prohibiting the free exercise thereof.
The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall be forever be allowed.
No religious test shall be required for the exercise
of civil and political rights.
Prohibition against taxation of religious, charitable
entities and educational entities
Sec. 28(3), Art. VI, 1987 Constitution
Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and
improvements, actually, directly, and exclusively
used for religious, charitable, or educational
purposes shall be exempt from taxation
Prohibition against taxation of
non-stock, non-profit educational
Institutions
Sec. 4 (3) and (4), Art. XIV, Philippine Constitution
All revenues and assets of non-stock, nonprofit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.
Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall
be exempt from tax.
Prohibition against taxation of
non-stock, non-profit educational
institutions
Sec. 28(3), Art. VI, Philippine Constitution
Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from
taxation.
Secs. 27(B) and 30(H) of the Tax Code
Proprietary educational institutions and hospitalswhich
are nonprofit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection
(D) hereof: Provided, That beginning July 1, 2020 until
June 30, 2023, the tax rate herein imposed shall be one
percent (1%).
A nonstock and nonprofit educational institution shall
not be taxed in respect to income received by them as
such

Summary
● Power to levy tax
● Ability to pay
● Enjoyment of the privilege
● Administrative convenience
Onsite Session 3 - Feb. 8, 2023 ➢ LGC - prescriptive periods in the
assessment and collection of local taxes,
Prospectivity of Tax Laws fees or charges
❖ Tax must be applied prospectively, except by ❖ Prescription period of law in assessment and
provision of law collection
❖ Why?
➢ The nature and amount of tax under the Situs of taxation (places of taxation)
tax laws enacted after the transaction ❖ Factors:
could not have been foreseen and 1. Nature of the tax;
understood by the taxpayer at the time of 2. Subject matter of the tax (person,
the transaction property, act);
❖ Exception 3. Possible protection and benefit that may
➢ Tax laws may be applied retroactively accrue between the government and
provided it is expressly declared or it is taxpayer;
clearly the legislative intent (e.g., 4. Citizenship of the taxpayer;
increase taxes on income already earned) 5. Residence of the taxpayer; and
except when retroactive application 6. Source of income
would be so hard and oppressive ❖ Places that has jurisdiction to assess and
collect tax
Non-retroactivity of rulings ❖ Property: in personal taxes, kung san nakatira
❖ General rule: Rulings do not have retroactive nung taxpayer
application if the revocation, modification, or
reversal will be prejudicial to the taxper Kind of Tax Factors
❖ Exception
➢ Taxpayer’s deliberate misstatement or Income tax 1. Citizenship
omission of facts 2. Residency
➢ BIR’s gathered facts is materially 3. Within or without PH
different from the facts from which the
Property tax 1. Kind of property (real,
ruling was based on
tangible personal,
➢ Taxpayer acted in bad faith intangible personal)
❖ BIR rulings
❖ Only applies if the same taxpayer is the one Excise tax 1. Kinds of excise tax
claiming the ruling (income, donor’s estate)
❖ Court nullify the ruling then wala na
Business tax 1. Kind of business tax
(VAT, sale of real or
Imprescriptibility of taxes personal property)
❖ Unless otherwise provided by law, taxes are
imprescriptible
Double Taxation
❖ The law on prescription, being a remedial
❖ “Taxing the same person twice by the same
measure, should be liberally construed in order
jurisdiction for the same thing.”
to afford such protection. As a corollary, the
❖ Freeflow of goods and services between
exceptions to the law on prescription should
countries
perforce be strictly construed
❖ Strict Sense (Direct Double Taxation)
❖ Prescription provided in statutes
➢ Requisites:
➢ Tax Code (NIRC) - limitations in the
1. Both taxes must be imposed on the
assessment and collection of taxes
same property or subject matter;
(Sections 203, 222)
2. For the same purpose;
➢ CMTA - limitations in the assessment
3. By the same State, Government, or
(Section 430)
taxing authority;
 4. Within the same territory,
jurisdiction, or taxing district;
5. During the same taxing period; and
6. Of the same kind of character of tax
❖ Broad Sense (Indirect Duplicate Taxation)
➢ One or more of the elements for direct
double taxation is absent
❖ There is no constitutional prohibition against
double taxation in the Philippines.
➢ International double taxation - usually
takes place when a person is resident of a
contracting state and derives income
from, or owns capital in, the other
contracting state and both states impose
tax on that income or capital
Escape from Taxation
❖ Shifting of tax burden
➢ The act of transferring the burden of a
tax from the original payer or the one
whom the tax was assessed or imposed
to someone else
❖ Tax avoidance
➢ The exploitation by the taxpayer of
legally permissible alternative tax rates
or methods of assessing taxable property
or income in order to avoid or reduce tax
liability
➢ This is not punishable by law
❖ Tax evasion
➢ The use by the taxpayer of illegal or
fraudulent means to defeat or lessen the
payment of a tax
➢ This is punishable by law.
❖ Elements of tax evasion
1. The end to be achieved;
2. An accompanying state of mind
described as being “evil”, “in bad faith”,
“willful” or “deliberate and not
accidental”
3. A course of action (or failure of action)
which is unlawful
❖ Willful Blindness Doctrine
➢ A taxpayer can no longer raise the
defense that the errors on their tax
returns are not their responsibility or that
it is the fault of the accountants they
hired. Intent to defraud need not to be
shown for a conviction of tax evasion
❖ Backward shifting of tax burden
❖ Section 40 C2
❖ Tax evasion - Government first then the
taxpayer will be the one to prove if there will
be payment or none
Exemption from Taxation
❖ Nature of Tax Exemption:
➢ Mere personal privilege
➢ General rule: Revocable by the
government
➢ Implies a waiver on the part of the
government
➢ Not necessarily discriminatory, provided,
it has a reasonable foundation or rational
basis
❖ Taws exemption - construed strictly against the
taxpayer
❖ Doctrine of Equitable Recoupment
The doctrine of equitable recoupment allows a
taxpayer whose claim for refund has been
barred by prescription to offset such claims
against a current asessment.
The doctrine also allows the government to
offset taxes that have not been collected from
the taxpayer against a current claim for refund,
although the government is time-barred from
collecting previous taxes.
Prohibition on Compensation and Set-off
❖ Taxes cannot be subject to compensation.
➢ Why —> The government and the
taxpayer are not creditors and debtors of
each other
➢ However, if the claims against the
government have been recognized and an
amount has already been appropriated
for that purpose when both claims have
become (1) due, (2) demandable, and (3)
fully liquidated, compensation takes
place by operation of law
Compromise and Tax Amnesty
❖ Taxpayers can enter into a COMPROMISES
with the government.
❖ Requisites:
1. The taxpayer has a tax liability;
2. There is an offer (by the taxpayer or the
Commissioner) of an amount to be paid
by the taxpayer;
 3. There is an acceptance by the The reason for this principle is the tenderness of the law
Commissioner or the taxpayer of the for the rights of individuals and the object is to establish
offer a certain rule by conformity to which mankind would be
❖ A tax amnesty partakes of an absolute safe, and the discretion of the court limited.
forgiveness or waiver by the Government of its ❖ Penal provisions - always construed against the
right to collect what otherwise would be due it. state
➢ Tax amnesty - immunity from all
criminal and civil obligations arising Reminders:
from non-payment of taxes. It is a March 1 long exam - module 1 and module 2
general pardon given to all taxpayers. It
● Getting questions from the quiz
applies to past tax periods, hence of
● Similar with the cases with the given
retroactive application
➢ Tax exemption - immunity from all civil
liability only. It is an immunity or
privilege, a freedom from a charge or
burden of which others are subjected
❖ Judy Ann Case

Contruction and Interpretation of Tax Laws,

Rules, and Regulations

Tax Laws
❖ General Rule: Tax laws are construed against
the government and liberally in favor of the
taxpayer
Tax Exemption and Exclusion
❖ General Rule: Tax exemptions must be show
to exist clearly and categorically, and
supported by clear legal provisions. In the
construction of tax statutes, exemptions are not
favored and are construed as strictissimi juris
against the taxpayer.

Tax Rules and Regulations

The secretary of Finance, upon recommendation of CIR,
shall promulgate all needful rules and regulations for the
effective enforcement of the provisions of the NIRC.
[Sec. 244, NIRC]

Requisites for validity and effectivity of regulations:

a. Reasonable;
b. WIthin the authority conferred;
c. Not contrary to law and the Constitution [Art.
7, NCC]; and
d. Must be Published

Penal Provisions of Tax Laws

A penal statue should be construed strictly agains the
State and in favor of the accused.
Onsite Session 3 - Feb. 17, 2023
Tax Profit
❖ Tax on all yearly profits arising from property,
professions, trades, or offices, or as tax on the
person’s income, emoluments, profits and the
like
❖ It may be succinctly defined as tax on income,
whether gross or net, realized in one taxable
year
Relevant Provision: Section 23, Tax Code
(A) A citizen of the Philippines residing therein is
taxable on all income derived from sources
within and without the Philippines;
(B) A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
(C) An individual citizen of the Philippines who is
working and deriving income from abroad as
an overseas contact worker is taxable only on
income derived from sources within the
Philippines: Provided, That a seaman who is a
citizen of the Philippines and who receives
compensation for services rendered abroad as a
member of the complement of a vessel
engaged exclusively in intentional trade shall
be treated as an overseas contract worker;
(D) An alien individual, whether a resident or in
the Philippines, is taxable only on income
derived from sources within the Philippines;
(E) A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
(F) A foreign corporation, whether engaged or not
in trade or business in the Philippines, is
taxable only on income derived from sources
within the Philippines
Income Tax Systems
❖ Global Tax System
➢ A global tax system is one where the tax
treatment views indifferently the tax
base and generally treats in common all
categories of taxable income of the
taxpayer
❖ Schedular Tax System
➢ A schedular approach in taxation is one
where the income tax treatment varies
and is made to depend on the kind or
category of taxable income of the
taxpayer
❖ Semi-global or semi-schedular tax system
➢ Note: This system being followed in the
PH
❖ Global
➢ Subject with one tax rate
❖ Schedular
➢ Subjected according to income
➢ Subjected to different tax rate
Features of the Philippine Income Tax Law
❖ Direct tax - tax burden is borne by the income
recipient upon whom the tax is imposed
❖ Progressive - the tax rate increases as the tax
base increases
❖ Comprehensive - The Philippines adopted the
citizenship principle, residence principle, and
the source principle in imposing income tax
❖ Semi-schedular or semi-global tax system
Criteria in Imposing Philippine Income Tax
1. Citizenship
2. Residence
3. Source
Types of Philippine Income Tax
Kinds of Taxpayers (individual)
❖ Resident citizens
❖ Non-resident citizens
❖ Resident aliens
❖ Non-resident aliens
Kinds of Taxpayers (Corporations)
❖ Domestic Corporations - Law of Incorporation
Test
❖ Resident Foreign Corporations
❖ Non-resident Foreign Corporations
Kinds of Taxpayers
❖ Estates
❖ Trust
❖ Partnerships
❖ Joint venture/consortiums
❖ Section 22 tax code - kinds of taxpayer
❖ Under SEC - domestic corporation
❖ Being a stockholder does not mean “doing
business” in the Philippines

❖ Trust - transferring ownership/one legal title to
another
❖ GPP - will not be taxed
Concept of Income
❖ What is income?
➢ Income means all wealth which flows to
the taxpayer other than a mere return of
capital
➢ Income is a gain derived from labor or
capital, or both labor and capital; and
includes the gain derived from the sale
or exchange of capital assets
❖ When is income taxable?
➢ Income is realized when there is gain or
profit derived from a closed and
completed transaction. The realization of
gain may take the form of actual receipt
of cash or may occur as constructive Methods of Accounting
receipt of income 1.
➢ Requisites: 2.
1. There is income, gain or profit;
2. Received or realized during
taxable year; 1.
3. Not exempt from income tax 2.
❖ Income - lawfully or lawfully acquired that 3.
you are needed to pay tax
❖ Taxable years - calendar year, fiscal year
Situs of Income (Section 23 and 42, Tax Code)
❖ Actual receipt - receipt of the income mismo
❖ Constructive - interest rate in the bank
Really read the tax codes from now on
states that that person is the owner of
that time
➢ It is not an income untill you sell your
property; it is just an increase in your
capital
➢ Economic Benefit Test / Doctrine of
Properierty Interest
Any economic benefit to the employee
that increases his net worth, whatever
may have been the mode by which it is
effected, is taxable
➢ Severence Test
In order that income may exist, it is
necessary that there be a separation from
capital of something of exchangeable
value. The income requires a realization
of gain
Cash method
Accrual method
a. Hybrid method
Cash method - whatever you earn
Accrual - counts right to receive
Hybrid -

❖ Tests in Determining Whether Income is

Earned for Tax Purposes Tan v. Del Rosario
➢ Realization Test ● Uniformity of taxation
No taxable income until there is a
separation from capital of something of
exchangeable value, thereby supplying Review:
the realization or transmutation which ● Pwede na double - one tax, one penalty
would result in receipt of income ● Remember the 6 requisites
❖ 2 requisites:
❖ Income is complete
❖ There is an exchange that took place

➢ Claim of Right Doctrine

➢ Claim of right doctrine - It does not
matter if youll eventually lose the
ownership to a property, the doctrine
Gross Income
● All income derived from whatever source
○ Compensation income, business
income, rents, royalties, dividends
● The total income of a taxpayer subject to tax. It
includes the gains, profits and income derived
from whatever source, whether legal or illegal
Net Income/Taxable Income
● Gross Income - Statutory Deductions and
Exemptions = Net Income
Sources of Income Subject to Tax
● Compensation Income
○ All remunerations for services
performed by an employee for his
employer under an employer-
employee (ER-EE) relationship,
unless excepted under the provisions
of the Tax Code are considered as
compensation income
○ Note: Special rule for Minumum
Wage Earners [RA 9504]
● Fringe Benefits
○ Any goods, services, or other benefit
furnished or granted in cash or in
kind, in addition to basic salaries, to
an individual employee, except a
rank and file employee
Tax Rate and Tax Base
● Tax Base - based on the grossed-up monetary
value (GMV) of fringe benefits
● Tax Rate - General Rule: 35%
● Fringe Benefit Tax is calculated by
multiplying the GMV by 35%
GMV
GMV represents:
● The whole amount of income realized by the
employee which includes the net amount of
money or net monetary value of property that
has been received; and
● The amount of fringe benefit tax due from the
employee which has been withheld and paid
by the employer for and in behalf of his
employee
How GMV is determined:
● GMV is determined by dividing the actual
monetary value of the fringe benefit by 65%
(100 - tax rate of 35%)
● For example, the actual monetary value of the
fringe benefit is P1,000
The GMV is equal to P1537.46(P1000/ 0.65)
The fringe benefit tax, therefore, is P538.46
(P1538.46 x 35%)
Taxable and Non-Taxable Fringe Benefits
● Fringe benefits not considered as gross income
—if it is required or necessary to the business
of employer; if it is for the convenience or
advantage of employer
● Fringe Benefit that is not taxable under Sec.
32(B) - Exclusions from Gross Income
● Fringe benefits not subject to Fringe Benefit
Tax:
1. Fringe Benefits which are authorized
and exempted from income tax under
the Code or under special laws;
2. Contributions of the employer for the
benefit of the employee for
retirement, insurance and
hospitalization benefit plans;
3. Benefits given to the rank-and-file
employees, whether granted under a
collective bargaining agreement or
not; and
4. Fringe benefits granted for the
convenience of the employer;
5. De minimis benefits
De Minimis Benefits
De Minimis Benefits are facilities and
privileges furnished or offered by an employer
to his employees that are relatively small value
and are offered or finished by the employer
merely as means of promoting health,
goodwill, contentment and efficiency of his
employees
● Professional Income
○ Refers to fees received by a
professional from the practice of his
profession, provided that there is NO
employer-employee relationship
between him and his clients
○ It includes the fees derived from
engaging in and endeavor requiring
special training as professional as
 means of livelihood , which includes,
but is not limited to, the fees of
CPAs, doctors, lawyers, engineers
and the line (RR. No. 2-98)
● Income from Business
○ Any income derived from doing
business
○ Doing Business: the term implies a
continuity of commercial dealings
and arrangements, and contemplates,
to that extent, the performance of acts
or works or the exercise of some of
the functions normally incident to,
and in progressive prosecution of, the
purpose and object of its organization
● Income from Dealings in Property
○ First, you must determine if the asset
is an ordinary asset or a capital asset
○ Capital Asset - property held by the
taxpayeer, whether or not connected
with his trade or business which is
not an ordinary asset
○ Ordinary Assets -
■ Stock in trade of the
taxpayer / other property of
a kind which would
properly be included in the
inventory of the taxpayer if
on hand at the close of the
taxable year
■ Property held by the
taxpayer primarily for sale
to customers in the ordinary
course of his trade or
business
■ Property used in the trade or
business of a character
which is subject to the
allowawnce for
depreciation, or
■ Real property used in the
rade or business of the
taxpayer, including property
held for rent
Actual Gain vs. Presumed Gain
● Actual gain - the tax based in the sale of real
property classified as an ordinary asset
● Presumed gain - if the sale involves a capital
asset, the tax base is the gross selling price or
fair market value, whichever is higher. The
law presumes that the seller makes a gain from
such sale.
○ Thsus, whether or not the seller
makes a profit from the sale of real
property, he has to pay 6% capital
gains tax
Long Term Capital Gain vs. Short Term Capital Gain
● Long-term capital gain: Capital asset is held
for more than twelve months before it is sold.
Only 50% of the gain is recognized.
● Short-term capital gain: Capital asset is held
for 12 months or less, 100% of the gain is
subject to tax
● Note: if the taxpayer is a corporation, 100% of
the gain is recognized regardless of the holding
period
Income Tax Treatment of Capital Loss
Capital loss limitation rule (applicable to both
corporations and individuals)
● General rule: Losses from sales or exchanges
of capital assets shall be allowed only to the
extent of the gains from such sales or
exchanges
● Note: Exception for Banks and Trust
Companies
● Net loss carry-over rule (applicable only to
individuals):
○ If an individual sustain in any taxable
year a net capital loss, such loss (in
an amount not in excess of the net
income for the year) shall be treated
in the succeeding taxable year as a
loss from the sale or exchange of a
capital asset held for more than 12
months
Tax-Free Exchanges (Section 40(c)(2), Tax Code)
No gain or loss shall be recognized if in pursuance of a
plan or merger or consolidation
a. A corporation, which is a party to a merger or
consolidation, exchanged property solely for
stock in a corporation, whic hsi a party to the
merger or consolidation; or
b. A shareholder exchanges stock in a
corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or
 c. A security holder of a corporation, which is a
party to the merger or consolidation,
exchanged his securities in such corporation,
solely for stock or securities in such
corporation, a party to the merger or
consolidation
Initial Acquisition of Control
No gain or loss shall be recognized if the property is
transferred to a corporation by a person in exchange for
stock or unit of participation in such a corporation of
which as a result of such exchange said person, alone or
together with others, not exceeding four (4) persons,
gains control of said corporation: Provided, that stocks
issued for services shall not be considered as issued in
return for property.
Passive Investment Income
Under Sec 24(B) of the Tax Code, a final tax is imposed
upon gross passive income of citizen and resident aliens.
An income is considered passive if the taxpayer merely
waits for it to be realized.
Interest Income
An earning derived from depositing or lending of
money, goods or credits
Royalty Income
Where a person pays royalty to another for the use of its
intellectual property, such royalty is generally a passive
income of the owner thereof subject to withholding tax
Dividend Income
A form of earnings derived from the distribution made
by a corporation out of its earnings or profits and
payable to its stockholders, whether in money or in
property.
The following are the classifications of dividends:
1. Cash dividends
2. Stock dividends
3. Property dividends; and
4. Liquidating dividends
Rental Income
Refers to earnings derived from leasing real estate as
well as personal property. Aside from the regular
amount of payment for using the property, it also
includes all other obligations assumed to be paid by the
lessee to the third party in behalf of the lessor (e.g.
interest, taxes, loans, insurance premiums, etc.)
● Note: Leasehold improvements
Annuities, Proceed from Life insurance or Other Types
of Insurance
It refers to periodic installment payments of income or
pension by insurance companies during the life of a
person or for a guaranteed fixed period of time, whiever
is longer, in consideration of capital paid by him. It is
paid annually, monthly or periodically, computed upon
the amount paid yearly, but necessarily for life
The annuity payments represent a part that is taxable
and not taxable. If part of annuity payment represents
interest, then it is a taxable income. If the annuity is a
return of premium, it is not taxable.
Prizes and Awards
A prize is a reward for a contest or a competition. Such
payment constitutes gain derived from labor.
General Rule: Taxable
The exceptions are as follows:
1. Prizes and awards made primarily in
recognition of religious, charitable, scientific,
educational, aritistic, literary or civic
achievements are exclusions from gross
income if
● The recipient was selected without
any action on his part to enter a
contest or proceedings; and
● The recipient is not required to
render substantial future services as a
condition to receiving the prize or
award
2. Prizes and awards granted to athletes in local
and international sports competitions and
tournaments held in the Philippines and abroad
and sanctioned by their national associations
Pensions, Retirement Benefit or Separation Pay
A stated allowance paid regularly to a person on his
retirement or to his dependents on his death, in
consideration of past services, meritorious work, age,
loss or injury
Income from any Source
Inclusion of all income not expressly exempted within
the class of taxable income under the laws irrespective
of the voluntary or involuntary action of the taxpayer in
producing the gains, and whether derived from legal or
illegal sources

Example:
1. Condonation of indebtedness
2. Recovery of Accounts Previously Written Off
3. Receipts of tax refunds or credit
Exclusions
Rationale and Who May Avail
The term “exclusions” refers to items that are not
included in the determination of gross income because:
1. They represent return of capital or are not
income, gain or profit
a. May be availed by all taxpayers
2. They are subject to another kind of internal
revenue tax;
a. May be availed by all taxpayers
unless provided that income will be
included
3. They are income, gain or profit expressly
exempt from income tax under the
Consitution, tax treaty, Tax Code, or a general
or special law
a. May only be availed by those
provided under the exclusion
order to arrive at taxes payable.
Exclusions Under the Constitution
Income derived by the government or its political
subdivisions from the exercise of any essential
governmental function.
Also, all assets and revenues of a non-stock, non-profit
private educational institution used directly, actually and
exclusively for private educational purposes shall be
exempt from taxation.
Exclusions Under the Tax Code
1. Proceeds from life insurance policies
2. Return of premium paid
3. Amount received under life insurance,
endowment or annuity contracts
4. Property acquired by gift, bequest, devise or
descent
5. Amount received through accident or health
insurance
6. Income exempt under tax treaty
7. Retirement benefits, pensions, gratuities, etc.
8. Winnings, prizes and awards, including those
in sports competitions

Exclusions
Refer to flow of wealth to the taxpayer which are not
treated as part of gross income for purposes of
computing the taxpayer’s taxable income, due to the
following reasons: (1) it is exempted by the Constitution
or a statute; or (2) it does not come within the definition
of income

Deductions
Deductions, on the other hand, are the amounts which
the law allows to be subtracted from gross income in
order to arrive at net income

Exclusions v. Deductions
Exclusions pertain to the computation of gross income,
while deductions pertain to the computation of net
income.

Exclusions are something received or earned by the

taxpayer which do not form part of gross income while
deductions are something spent or paid in earning gross
income.

Tax Credit
Refers to amounts subtracted from the computed tax in
Deduction from Gross Income
● Deductions are amounts allowed by the Tax
Code to be deducted from Gross Income to
arrive at the taxable income for purposes of
computing the income tax liability under Sec.
24A, 25(A), 26(A. c) and 28(A)(1).
○ Individuals and corporation engaged
in trade/business
○ Individuals in the exercise of
profession
● Deductions are items or amounts authorized by
law to be subtracted from the pertinent items
of gross income to arrive at taxable income
Concept of Deductions
● “Deductions are a matter of legislative grace.
A taxpayer can deduct an item or amount from
gross income only if there is a law authorizing
such deductions. In the absence of a law, the
expense of the taxpayer, whether business-
related, reasonable, or equitable, cannot be
deducted from gross income.”
● The taxpayer can deduct:
a. The full amount of the deduction
allowed
b. The lesser amount
c. Not to claim any deduction at all
Kinds of Deduction
1. Itemized Deductions
2. Optional Standard Deduction (OSD)
General Rule in Claiming Deductions
1. It is necessary, ordinary and substantiated
2. Depends upon the taxpayer’s residence, and
citizenship and his/her source of income
3. There is a law authorizing the deduction
1. Deductions must be paid or incurred in
connection with the taxpayer’ss trade, business
or profession
2. Deductions must be supported by adequate
receipts or invoices (except standard
deduction)
Exclusion vs Deduction
● Exclusion → income exempt from taxation
● Deduction → “expense”
Capital Expenditure vs Revenue Expenditure
● Capital expenditure → non-recurring large
monetary amount and typically benefit more
than one accounting period
● Revenue Expenditure → recurring and
typically benefit one accounting period
Concept of Return of Capital
Income tax is levied by law only on income; hence, the
amount representing return of capital should be
deducted from proceed from sale of assets and should
not be subject to income tax.
Itemized Deductions → specific expenses and other
items are deductible from gross income. Under Sec. 34
of the Tax COde, it consist of the following items:
1. Expenses
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Deplation of oil and gas wells and mines
8. Charitable and other contributions
9. Research and Development Expenses
10. Pension Trust Contributions
Election of Deduction: Itemized Deductions or OSD
● “The 1st Quarter or the initial quarter of the
taxable year after the commencement of a new
business/practice of profession once the
election is made it must be consistently applied
to all succeeding quarterly returns and in the
final income tax return for the taxable year.”
Who may claim the itemized deductions?
1. Individual citizens, resident aliens and non-
resident aliens engaged in trade or business,
under the graduated rates
 2. Domestic corporations and business
partnerships
3. Propiertary educational institutions and
hospitals which are non-profit
4. Goverment-owned and controlled
corporations, agencies and instrumentalities
5. Resident foreign corporations
6. General Professional Partnership shall be
allowed the same deductions for purposes of
computing the distributive shares of its
partners
Business Expenses → ordinary and necessary expenses
paid or incurred during the taxable year in carrying on
or which are directly attributable to the development,
management, operation and/or conduct of the trade,
business or the exercise of a profession
Items included in business expenses
1. Management expenses
2. Commissions
3. Labor
4. Supplies
5. Incidental repairs
6. Operating expenses of transportation
equipment used in the trade, profession or
business
7. Rental for the use of business property
8. Advertising and other selling expenses
9. Travelling expenses while away from home
solely in the pursuit of a trade, profession or
business
10. Insurance premiums against fire, storm, theft,
accident or other similar losses in trade or
business
1. Salaries, wages, and other forms of
compensation
2. Travelling expenses
Reasonable and necessary expenses related to
transportation, emals, and lodging. It must be
incurred and paid in the conduct of trade or
business.
3. Cost of materials
Deductible only to the amount that they are
actually consumed and used in operation
during the year for which the return is made,
provided that their cost has not been deducted
determining the net income for any previous
year.
4. Rentals and/or other payments for use or
possession of property
● Required as a condition for continued use
or possession of property
● For purposes of trade business or
profession
● Taxpayer has not taken or is not taking
title to the property or has no equity other
than that of lessee, user, or possessor
5. Repairs and maintenance
6. Expenses under lease agreements
7. Expenses for Professionals
Deductible in the year the professional services
are rendered, not in the year they are billed,
provided that the “all events is present.”
8. Entertainment expenses
These are entertainment amusement and
recreation (EAR) expenses incurred or paid
during the year that are directly connected to
the development, management and operation
of the rade, business or profession of the
taxpayer.
9. Political campaign expenses
Amount expended for political campaign
purposes or payments to campaign funds are
NOT deductible either as business expenses
or as contribution.
10. Training expenses
Organization and pre-operating expenses of a
corporation (including training expenses) are
considered as capital expenditures and are
therefore, not deductible in the year they are
paid or incurred.
But taxpayers who incur these expenses and
subsequently enter the trade or business to
which the expenditures related can electe to
amortize these expenditures over a period not
less than sixty (60) months.
11. Others
Requisites for Deduction of Business Expenses
1. The expense must be ordinary and necessary
2. It must be paid or incurred during the taxable
year
3. It must be connected with the trade, profession
or business
4. It must be reasonable
5. The amount paid shall be allowed as deduction
only if it is shown that the tax required to be
deducted and withheld therefrom has been paid
to the BIR (legitimately paid)
 6. Substantiated by adequate proof
Substantiation Requirements
“No deduction shall be allowed unless the taxpayer shall
substantiate with sufficient evidence such as official
receipts or other adequate records.”
Entertainment, Amusement and Recreation
Expenses
It includes representation expenses and/or depreciation
or rental expenses relating to entertainment facilities
Requisites of deductibility of EAR expenses
1. It must be paid or incurred during the taxable
year
2. It must be (i) directly connected with the
development, management and operating of, or
(ii) in the furtherance of the conduct of, the
taxpayers trade, business or exercise of
profession.
3. It must not be contrary to law, morals, good
customs, public policy or public order
4. It must not constitute a bribe, kickback or
other similar payment
5. It must be substantiated with adequate proof.
The official receipts, invoices, or bills or
statement of accounts should be in the name of
the taxpayer claiming the deductions’
6. The appropriate amount of withholding tax, if
applicable, should have been withheld
therefrom and paid to the BIR
Ceilings of EAR Expenses
● Sales of goods/properties → ½ of 1% net of
sales
● Sales of services → 1% of net revenues
Non-deductible EAR Expenses
a. Expenses incurred for police protection
b. Expenses for political campaigns
c. Expenses to attend funeral of friends
d. Cost of admission tickets to operas
Exclusions → not considered as EAR expenses but may
qualify as other items for deduction
a. Compensation or fixed representation
allowances subject to withholding tax on
wages, or fringe benefits for services under
employer-employee relationship
b. Expenses for charitable or find raising events
c. Expenses for bonafide meetings of
shareholders, partners or directors
d. Expenses for attending or sponsoring an
employee to a business league or professional
organizational meeting
e. Expenses for events organized for promotion,
marketing, and advertising including concerts,
conferences, seminars, workshops,
conventions and other similar events
f. Other expenses of similar nature
Interest → is the compensation in money stipulated by
the parties or fixed buy law for loan use or forbearance
of money or credits
Requisites for Deduction of Interest
1. There is an indebtedness
2. There should be an interest expense paid or
incurred upon such indebtedness during the
taxable year
3. The indebtedness is that of the taxpayer
4. The indebtedness is connected with the
taxpayer’s profession, trade or business
5. There is a liability to pay interest on the
indebtedness in that such interest is stipulated
in writing and is legally due
6. The interest payment arrangement must not be
between related taxpayers as provided in Sec.
36 (B) of the Tax Code
7. The interest must not be incurred to finance
petroleum operations
8. In case where interest is incurred to acquire
property to be used in trade, business or in the
exercise of profession the same is not treated
as a capital expenditure
Reduction of Allowable Deduction for Interest Expense
“The taxpayers otherwise allowable deduction for
interest expense shall be reduced by an amount equal to
33% of interest income subject to final tax. This
limitation has been imposed primarily to nullify the tax
arbitrage schemes.”
Sample:
Total Interest Expense 100,000
Interest Income subject (16,500)
to final tax

Deductible Interest 83,500
Exxpense
Taxes → amount of money, usually a percentage of
one’s income or of the value of property owned, that
one must pay to help support the government
Requisites for Deduction of Taxes
1. It must be paid or incurred within the taxable
year
2. IT must be paid or incurred in connection with
the taxpayer’s profession, trade or business
3. The tax must be imposed directly upon the
taxpayer
Deductible Taxes
1. Import duties paid to the proper customs
officers
2. Business taxes, like percentage taxes, except
tax on sale, barter or exchange of shares of
stock listed and traded through the local
exchange or through initial public offerings
3. Local business taxes
4. Community tax
5. Municipal tax
6. Occupation taxes
7. Privilege and license taxes
8. Excise taxes
9. Documentary stamp taxes
10. Automobile registration fees
Non-Deductible Taxes
1. Philippine Income tax
2. Foreign Income tax, if claimed as a tax credit
3. Estate and Donor’s Taxes
4. Taxes assessed against the local benefits of a
kind tending to increase the value of property
assessed (special assessment)
5. Electricity energy consumption tax
6. Final taxes on passive income
7. Capital gains taxes on capital gains
8. Value-added tax (VAT)
Bad Debts → debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts clue the
taxpayer by others, arising from money lent or
uncollectible amounts of income from goods sold or
services rendered.
Requisites for Deductions of Bad Debts
1. There must be an existing indebtedness due to
the taxpayer which must be valid and legally
demandable
2. The debt must be connected with the
profession, trade or business of the taxpayer
3. The debt must not be sustained in a transaction
entered into between related parties
enumerated under Sec. 36(B) of the tax code
4. THe debt must actually be ascertained to be
worthless and uncolletible as of the end of the
taxable year
5. The debt must be actually charged off the
books of accounts of the taxpayer as of the end
of the taxable year
Loss → implies an unintended destruction or
deprivation of or separation from property or something
of value not in the ordinary course of things
Kinds of losses
1. Ordinary losses
2. Capital losses
3. Special losses
4. Non-deductible losses
Ordinary loss
1. Loss incurred in trade, profession or business
→ Business Loss
2. Loss due to fire, storms, shipwreck or other
casualties of property connected with trade,
business or profession → Casualty Loss
3. Loss due to robbery, theft or embezzelement of
property connected with a trade, business or
profession → Casualty Loss
4. Net operating loss carry-over → NOLCO
Requisites for Deduction of Casualty Losses
1. The loss must be actually sustained
2. The loss must involve ordinary properties
3. It must be sustained in a dosed and completed
transaction
4. The loss must be that of the taxpayer
5. The loss must not have been claimed as a
deduction for estate tax purposes
6. The loss must not be compensated by
insurance or other forms of indemnity
7. The loss must be reported to the BIR within 45
days from the date of the loss
Net Operating Loss (NOL) → excess of allowable
deductions over gross income of the business in a
taxable year
Taxapayer Entitled to Deduct NOLCO
1. Individuals engaged in trade or business or in
the exercise of profession
2. Estates and Trusts
3. Domestic and Resident Foreign Corp. subject
to Normal Income Tax
4. Special Corporations subject to Preferential
Tax Rates such as private education
institutions, hospitals and regional operating
headquarters
5. Tourism Enterprises registered with the
Tourism Infrastructure and Enterprise Zone
Authority (TIEZA)
General Principles and Policies
1. In general, NOLCO shall be allowed as a
deduction of the same taxpayer regardless of
the change in its ownership
2. However, NOLCO shall be allowed only if
there is no substantial change in ownership of
the business:
“Hel by or on behalf of the same persons”
- 75% in nominal value of the
outstanding share
- 75% of the paid-up capital
3. NOLCO shall not be transferred or assigned to
another person
4. NOLCO shall be allowed as a deduction in
computing taxpayer’s Quarterly Income
Returns and Annual Final Adjustment Income
Tax Return
5. NOLCO may be carried over as a deduction
for the next three (3) consecutive years
immediately following the year of such loss
6. NOLCO shall be allowed on a “First In, First
Out” basis
7. NOLCO shalle be presented as a separate line
item of deductions. It shall not be included as
part of other itemized deductions. It must be
show in the RECONCILLIATION SECTION
of the tax return
Capital Losses
- Losses arising from sale of capital assets
- Deductible only up to the extent of capital
asset gains
Non-Deductible Losses
1. Wagering losses in excess of wagering
winnings
2. Loss from shrinkage in value of stocks w/o
actual disposition of the same
3. Loss from wash sale of share of stock where
the seller is not a dealer in stock or securities
4. Loss from sale or exchange of property
between family members and related taxpayers
mentioned in Sec. 36 (B) of the Tax Code
5. Loss from exchange of property in pursuance
of a plan of merger or consolidation
Special Losses
1. Wagering losses → only to the extent of gains
from such transactions
a. Wagering transaction - transaction
where the outcome is dependent upon
chance
2. Loss from shrinkage in the value of stocks →
the loss allowable is that actually suffered
when the stock is disposed of
a. Shrinkage value → decline in the
value of stocks through market
fluctuation
3. Loss from wash sale of share of stocks →
where the seller is a dealer in stock or
securities
a. Wash sale - sale of share of stocks
where it appears that within a period
beginning 30 days before the date of
such sale and edngin 30 days after
such date, the taxpayer has acquired
or has entered in a contract or option
so to acquire, substantially identical
stocks
4. Loss of stocks becoming worthless →
considered as ordinary asset
5. Loss of useful value of asset due to change in
business conditions
6. Loss due to voluntary removal of building,
machinery, etc. indecent to
renewal/replacement
7. Abandonment losses in petroleum operations
and producing wells
8. Loss brought about by pilferage, shrinkage and
wrong pricing
9. Money confiscated by foreign customs
officials for violation of foreign country’s
financial regulations
Depreciation → is the gradual diminution of the useful
value of tangible property resulting from weer and tear
and normal obsolescence
● The term is also applied to the amoritzation of
the value of intangible assets the use of which
in trade or business is definitely limited in
duration
Requisites for Deduction of Depreciation
1. The asset ust be used in trade or business
2. The asset must have a limited useful life
3. The allowance must be reasonable
4. The allowance must be charged off during the
year
Methods and Rate
1. Straight-line method
2. Declining balance method, using a rate not
exceeding twice the rate which would have
been used had the annual allowance been
computed under the method described in Sec.
34 (F)(1) of the Tax Code
3. Sum-of-the-years-digit method
4. Any other method which may be prescribed by
the Secretary of Finance upon the
recommendation of the Commissioner
Depletion → allocation of the cost or other basis of a
wasting asset over the period the natural resource is
extracted or produced
● Wasting assets are physically consumable and
irreplaceable. It usually includes coal, oil, ore,
timber and precious metals like gold and silver
Rules on Depletion
1. When the allowance for depletion equals
capital invested, no further depletion is
allowed
2. After production in commercial quantities hsa
commenced, certain intangible exploration and
development drilling cost shall be deducted
a. In the year incurred → non
producing wells/mines
b. In the year paid or incurred OR
→producing wells/mines
c. Capitalized and amortized
Election to Deduct (Limitation → Mining)
1. Shall not exceed 25% of net income from
mining operations
2. Actual exploration and development cost
minus 25% of net income from mining shall be
carried forward to the succeeding years until
fully deducted
Charitable and Other Contributions
● Charity → the voluntary giving of help
Requisites for Deduction of Contributions
1. The contribution or gift must be actually paid
2. It must be given to entity or Institution
specified by law
3. The net income of the institution must not
inure to the benefit opf any private stockholder
or individual
4. The taxpayer making the charitable
contribution must be engaged in a trade,
profession, or business
5. The required Notice of Donation must be filed
with the BIR
Kinds of Contributions
A. Contributions subject to a limit
B. Contributions deductible in full
Limit
● Corporation (5%) - Taxable income w/o
benefit of deduction for contributions
● Individual (10%) - “” “”
Contributions Subect to a Limit
1. Donation for the use of the Gov’t of the PH, or
any of its agencies, or any political subdivision
thereof, exclusively for public purposes
2. Donations to accredited domestic corporations
or associations organized and operated
exclusively for the following purposes:
1. Religious
 2. Charitable
3. Scientific
4. Youth and sports development
5. Cultural
6. Educational
7. Rehabilitation of veterans
3. Donation to scoal welfare institutions
4. Donation to non-governmental organizations
Contributions Deductible in FUll
1. Donation to the Gov’t of the PH, or to any of
its agencies or political subdivisions, including
fully owned gov’t corp. Exclusively to finance,
to provide for, or to be used in undertaking
PRIORITY ACTIVITIES
1. Education
2. Health
3. Yout and sports development
4. Human settlements
5. Science and cutlre
6. economic development
2. Donation to Certain Foreign Institutions or
International Organizations
3. Donation under special laws (there is a list)
● Phil. Red Cross
● CCP
● Phil. Sports Commission
4. Donation to accredited non-government
organizations
Pension trust → trust established to provide financial
administration of a pension or retirement fund
Requisites for Deduction of Pension Trust
1. The employer must have established a pension
or retirement plan to provide for the payment
of reasonable pensions to his/her employees
2. The pension plan is reasonable and actuarially
sound
3. It must be funded by the employer
4. The amount must no longer subject to the
control and disposition of the employer
5. The payment has not yet been allowed as a
deduction
6. The deduction is appropriated in equal parts
over a period of 10 consecutive years
beginning with the year in which the transfer
of payment is made
Contributions or Payment Deductible
A. Present Service Cost/Normal Cost
Contribution during the taxable year
to cover the pension liability accruing during
the taxable year
● Tax treatment: Deductible in full Sec.
34(A)(1) as “expenses in general”
B. Past Service Cost
An amount in excess of Normal Cost
Contribution. It covers pension liability
pertaining to old employees that accrued
during the years previous to the establishment
of the pension trust.
● Tax treatment: See #6 in Requisites
Research and Development Cost → are cost of
materials, equipment, facilities, personnel, purchased
intangibles, contract services and a reasonable allocation
of indirect costs tjat are specifically related to research
and development activities and that have no alternative
future uses.
General Rule: Allowed as a deduction during the taxable
year when pair or incurred
Alternative Treatment: Amortized
1. Pair or incurred by the taxpayer in connect
with trade, business or profession
2. Not treated as expenses
3. Chargeable to capital account but not
chargeable to a property of a character which
is subject to depreciation or depletion
“Ratably distributed over a period of not less than 60
months”
Limitations on Deduction
1. Any expenditure for the acquisition or
improvement of land or for the improvement
of property to be used in connection with R
and D of a character which is subject to
depreciation and depletion
2. Any expenditure paid or incurred for the
purpose of ascertaining the existence, location,
extend or quality of any deposit of ore or other
mineral, including oil or gas
Optional Standard Deduction → is an optional
deduction at a standard rate of 40% which the taxpayer
may claim as a charge against his/her gross income in
lieu of the itemized deductions allowed under Sec.
34(A) to (J) of the Tax Code
 ● 40% → OSD

Reasons for choosing OSD

● Lack of substantiation requirement
● No or lesser actual expenses (tax avoidance)

Taxpayers allowed to claim OSD as a deduction

● Individuals
○ Resident citizen
○ Non-resident citizen
○ Resident alien - graduated tax table
○ Estate and trust - graduated tax table
● Corporations
○ Domestic corporations - RCIT
○ Resident Foreign Corporations -
RCIT
○ General Professional Partnership, in
computing its net income
distributable to partner

Rules on claiming OSD

For individuals:
● Accrual Basis: (Gross Sales + Other Taxable
Income) x 40%
● Cash Basis: (Gross Receipts + Other Taxable
Income) x 40%
○ Gross sale/receipts shall mean after
deduction for sales return, discount
and allowances
For corporations:
● (gross income + other taxable income) x 40%

Substitution: OSD in lieu of other deductions

For individuals:
● Cost of Sales/Services - OSD
● Itemized Deductions - OSD

For corporations:
● Itemized Deductions → OSD