Income Taxation

TAXATION OF PARTNERSHIPS AND PARTNERS
Learning Objectives:
After studying this chapter, you should be able to:
1. Define partnership
2. Identify the classification of partnerships
3. Differentiate general professional partnership from general co-partnership
4. Discuss the tax liability of a professional partnership
5. Identify tax liability of partners in a general co-partnership.
In a contract of partnership, the partners agree to contribute money, property, or industry to a

common fund with the intention of dividing profits among themselves.
Classification of General Partnerships in Taxation

1. General professional partnership (GPP)
• A GPP is one formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or
business.
• This business arrangement is common among lawyers, accountants, architects and
engineers. Their standard investment is their talent or skills, and they are generally paid
based on the amount of time they spend in attending to their client’s needs and the end
result of their work.
• Sec. 26 of the NIRC states that such partnerships are not subject to income tax for
income earned in that capacity.
• Partner’s corresponding share in the partnership’s losses are as follows:
o Where the result of operation is a loss, the loss will be divided according to the
agreement of the partners.
o In the absence of an agreement on the distribution of losses, the losses shall be
distributed according to the profit sharing ratio.
o Such share in the losses may be taken up by the individual partners in ther
respective income tax returns.
• Section 26 of the NIRC provides that – “For the purposes of computing the distributive
share of the partners, the net income of the GPP shall be computed in the same manner
as a corporation”.
o A GPP may claim either the allowed itemized deductions or the optional
standard deduction (OSD) allowed to corporations in claiming the deductions.
• A GPP shall not be subject to the income tax but is required to file an annual income
tax/return for information about the share of each of the partner in the partnership.
• It does not pay national income taxes rather; it just serves as a conduit or pass-through
where its income is ultimately taxed to the partners comprising it.
• Each partner shall report as gross income his distributive share in the partnership,
actually or constructively received.
• In computing taxable income, all expenses which are ordinary and necessary, incurred
or paid for the practice of profession, are allowed as deduction.
• 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 taxable income.
2. General co-partnership (compania colectiva)

• is one which is not a general professional partnership.
• are considered as corporations and are taxed as corporations.
• Can claim allowable itemized deductions or OSD in determining its taxable income.
• Partners are considered stockholders.
• Profits distributed to partners are considered as dividends subject to a final tax of 10%.
Itemized Deductions or Optional Standard Deductions for GPPs
In computing taxable income defined under Sec. 31 of the NIRC, the following may be allowed
as deductions:
o Itemized expenses which are ordinary and necessary, incurred or paid in the
practice of profession; or
o Optional standard deduction (OSD) of 40% of the gross income.
The following rules shall govern the claim of the partners of deductions from their share in the net
income of the partnership.
Rule 1. If the GPP availed of the itemized deductions in computing its net income, the partners
may still claim itemized deductions from the said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same expenses already claimed by the GPP.
Partners may claim itemized deductions which were not claimed by the GPP which includes but
not limited to the following:
➢ Representation expenses incurred by the partner with receipts or invoices issued in his
name
➢ Travelling expenses while away from home which were not liquidated by the GPP
➢ Depreciation of a car used in the practice of profession where said car is registered in the
name of the partner
➢ Other similar expenses
If the GPP availed the itemized deductions, the partners are not allowed to claim OSD from their
share in the net income because the OSD is in lieu of all items of deductions allowed in computing
the taxable income.
Illustration:
For the taxable year 2019, Jay and Joy, partners of a general professional partnership agreed to
divide profits and losses 50:50, respectively. Both are married without qualified dependents. The
following are the details of the accounts:
Sales of service, GPP ₱ 2,500,000

Cost of services, GPP 875,000
Itemized deductions, GPP 825,000
Partner Jay Partner Joy

Travelling expenses (not liquidated by the GPP) ₱ 34,500 ₱ 16,500
Representation expenses (personal credit card of Partner used) 14,250 23,500
Cost of car, to be depreciated over 5 years (used in the practice,
registered under the Partner) 750,000 580,000
Salaries from the GPP 360,000 300,000
Lotto winnings 900,000
Interest on bank deposits 25,000 20,000
Book royalties 250,000
GPP
Sales of service ₱ 2,500,000
Less: Cost of services 875,000
Gross Income 1,625,000
Less: Itemized deductions 825,000
Distributable Net Income ₱ 800,000

Share of each partner in the GPP (50:50) ₱ 400,000 ₱ 400,000
Less: Additional Itemized deductions
Travelling expenses 34,500 16,500
Representation expenses 14,250 23,500
Depreciation 150,000 116,000
Net share of each partner 201,250 244,000
Add: Salaries from GPP 360,000 300,000
Taxable Income ₱ 561,250 ₱ 544,000
Income Tax Due

First 400,000 30,000 30,000
Excess (25% rate) 40,313 36,000
Total ₱ 70,313 ₱ 66,000
Taxable Income Bracket Tax Rate

Not over 250,000 0%
250,000 - 400,000 20%
400,000 - 800,000 30,000 + 25%
800,000 - 2,000,000 130,000 + 30%
2,000,000 - 8,000,000 490,000 + 32%
Over 8,000,000 2,410,000 + 35%
Rule 2. If the GPP avails of OSD in computing its net income, the partners comprising the GPP
can no longer claim further deduction from their share in net income for the following reasons:
• The partner’s distributive share in the GPP is treated as his gross income, and not his gross
sales/receipts, and the 40% OSD allowed to individuals is specifically mandated to be
deducted from his gross sales/receipts and not from his gross income.
• OSD deductions can only be claimed once, if claimed by the GPP, it can no longer be
claimed by the individual partner in determining the taxable income from the distributive
share.
Rule 3. If the partner also derives other gross income from trade, business, or practice of profession
apart and distinct from his share in the net income of the GPP, the deduction that he can claim
from his other gross income would be the same deduction availed of from his partnership income,
provided, however, the individual partner may still claim 40% OSD from his trade, business, or
practice of profession but not to include his share from the net income of GPP.
Illustration 2:
For the taxable year 2019, Jay and Joy, partners of a general professional partnership agreed to
divide profits and losses 50:50, respectively. Both are married without qualified dependents. The
following are the details of the accounts:
If the GPP availed OSD in computing for the net income.
GPP
Sales of service ₱ 2,500,000
Less: Cost of services 875,000
Gross Income 1,625,000
Less: OSD (40% of Gross income) 650,000
Distributable Net Income ₱ 975,000

Share of each partner in the GPP (50:50) ₱ 487,500 ₱ 487,500
Travelling expenses - -
Representation expenses - -
Depreciation - -
Net share of each partner 487,500 487,500
Add: Salaries from GPP 360,000 300,000
Taxable Income ₱ 847,500 ₱ 787,500
Income Tax Due

First 800,000 / 400,000 130,000 30,000
Excess (30% / 25% ) 14,250 96,875
Total ₱ 144,250 ₱ 126,875
Illustration 3:
Using the same example, if Partner Jay have the following information on his sole proprietorship
business:
Sole proprietorship data
Sales ₱ 1,500,000
Cost of sales 700,000
Buiness expenses 30,000
Compute the taxable income of the GPP and the partners if GPP uses
• Itemized deductions
• Optional standard deductions
GPP
If Itemized If OSD
Sales of service ₱ 2,500,000 ₱ 2,500,000
Less: Cost of services 875,000 875,000
Gross Income 1,625,000 1,625,000
Less: Optional Standard Deduction 650,000
Distributable Net Income ₱ 800,000 ₱ 975,000
If Itemized deduction If OSD

Partner Jay Partner Joy Partner Jay Partner Joy
Share of each partner in the GPP (50:50) ₱ 400,000 ₱ 400,000 ₱ 487,500 ₱ 487,500
Travelling expenses 34,500 16,500 - -
Representation expenses 14,250 23,500 - -
Depreciation 150,000 116,000 - -
Net share of each partner 201,250 244,000 487,500 487,500
Add: Salaries from GPP 360,000 300,000 360,000 300,000
Add: other taxable income 770,000 - 900,000 -
Total Taxable Income of Partners ₱ 1,331,250 ₱ 544,000 ₱ 1,747,500 ₱ 787,500
Taxable income from business

Sales 1,500,000 1,500,000
Less: Cost of sales 700,000 -
Gross Income 800,000 1,500,000
Less: Itemized Deduction 30,000
Less: OSD 600,000
Taxable income from business 770,000 900,000
Creditable Withholding Tax
RMC No. 3-2012 was issue to clarify certain tax issues involving GPPs. Under the NIRC, income
payments made to GPPs in consideration of its professional services are exempt from creditable
withholding tax (CWT). A GPP is not subject to income tax and, consequently, to CWT.
When the GPP itself makes income payments to the partners, either periodically or at the end of
the taxable year, the same are subject to CWT under the NIRC, as amended. These income
payments include drawings, advances, sharing, allowances, stipends, etc. The CWT is imposed at
the rate of 10% if the income payment to the partner for the current year exceeds ₱3,000,000 and
5% if otherwise.
Under the creditable withholding tax (CWT) system, the amount of tax withheld therein are merely
intended to equal or at least approximate the tax due of the item of income. The partner is still
required to file an income tax return to report the income and pay the difference between the tax
withheld and tax due, if any.
Under the final withholding tax (FWT) system, the amount withheld constitutes full and final
payment of the income tax due on the transaction. The liability for payment of the tax due rests
primarily on the payor as the withholding agent, and the payee is not required to file an income
tax return for this income item.
Illustration:
Ms. Cara is a partner of CAM & Co., a general professional partnership, who owns 35% therein.
For the taxable year 2018, the partnership distributed ₱10,000,000 income to its partners. For the
year 2018, how much is the creditable tax withheld for Ms. Cara?
Solution:
Distributed Income 10,000,000
x Profit share of Ms. Cara 35%
Income payments 3,500,000
x Withholding tax rate 10%
CWT 350,000
General Co-Partnerships
• Partnerships (other than GPPs), whether registered or not, are considered as corporations and
are therefore taxed as corporations.
• Consequently, the partners are considered as stockholders and therefore, profits distributed to
them by the partnership are considered as dividends.
• The share of an individual partner in a taxable partnership is subject to a final tax of 10%.
• The distributive share of a partner in the net income of partnership is equal to the distributive
share of the net income after deducting the corresponding corporate income tax.
• Such share shall be included in the individual returns of the partners, whether actually
distributed or not.
• If the partnership sustains a net operating loss, the partners shall be entitled to deduct their
respective shares in the net operating loss from their individual gross income.
Illustration:
Jerome is a partner in GR Partnership, a taxable partnership. Jerome for himself, derives income
from his profession as an architect. It is agreed upon that Partner Jerome is to receive 75% share
in the profit and loss of GR while Partner Angela, 25%. With the following pertinent data, compute
the tax due on Jerome’s share in the net income of the partnership and on his professional income
for the taxable year 2018.
Gross income of GR ₱ 1,000,000
Gross income of Jerome from profession 800,000
Income tax withheld on professional income 80,000
Expenses of GR 300,000
Expenses of Jerome in profession 200,000
Solution:
GR Partnership:
Gross income ₱ 1,000,000
Net Taxable Income 700,000
Less: Income tax due 210,000
Net Income after tax ₱ 490,000
Income tax due, whichever is higher

RCIT (30% of Taxable income) 210,000
MCIT (2% of Gross Income) 20,000
Partner Jerome
Final Tax:
Share in net income of GR Partnership (75%) ₱ 367,500
x Final Tax Rate 10%
Final Tax ₱ 36,750
Income Tax:
Gross income from profession ₱ 800,000
Less: Expenses 200,000
Taxable Income ₱ 600,000
Tax Due:
on 400,000 ₱ 30,000
on excess (200,000 x 25%) 50,000
Total tax due 80,000
Less: CWT 80,000
Tax still payable ₱ -
Practice Problem:
Mr. JMLH is a partner of AMBS & Co., a general professional partnership, and owns 25% interest.
The gross receipts of AMBS & Co. amounted to ₱10,000,000 for taxable year 2018. The recorded
cost of service and operating expenses of AMBS & Co. were ₱2,750,000 and ₱1,500,000,
respectively.
If AMBS & Co. availed itemized deduction, compute the income tax due of Mr. JMLH.
If AMBS & Co. availed OSD, compute the income tax due of Mr. JMLH.
Solution:
AMBS & Co: Itemized OSD
Gross receipts ₱ 10,000,000 ₱ 10,000,000
Less: Cost of services 2,750,000 2,750,000
Gross income ₱ 7,250,000 ₱ 7,250,000
Less: Itemized deductions 1,500,000
Less: OSD 2,900,000
Net income for distribution ₱ 5,750,000 ₱ 4,350,000
Partner JMLH: Itemized OSD

Net income for distribution ₱ 5,750,000 ₱ 4,350,000
x Profit distribution rate 25% 25%
Share in distributive profit ₱ 1,437,500 ₱ 1,087,500
Tax Due:
on 800,000 ₱ 130,000 ₱ 130,000
on excess (30%) 191,250 86,250
Total tax Due ₱ 321,250 ₱ 216,250
CARD-MRI Development Institute, Inc.
Course Title Income Taxation

Course Description The course covers income tax system including tax policy objectives, statutory
interpretation, and case law. Major topics include the basic personal income tax
structure, taxation of intermediaries (overview only), income from a source, statutory
interpretation, taxing residents and non-residents, tax treatment of employment,
business, investments and capital gains, tax avoidance and the General Anti-Avoidance
Rule (GAAR), taxation of families and dependents, an overview of deductions and credits.
Course Learning At the end of the course, students are expected to:
Outcomes • Explain the sources, nature and purpose of taxation.
• Apply the basic principles and policies of the Philippine Income Tax Law.
• Describe the general structure of the Philippine Income Taxation system.
• Explain and contrast the manner in which different entities are taxed.
Topics (Coverage) Preliminary
1. Basic principles of taxation
2. Taxation of Individuals
3. Taxation of Corporations
4. Minimum Corporate Income Tax (MCIT), Improperly Accumulated
Earnings Tax (IAET), and Gross Income Tax (GIT)
Midterms
5. Taxation of Estates and Trusts
6. Taxation of Partnerships and Partners
7. Gross Income
8. Fringe Benefits
Pre-finals
9. Gains and Losses from Dealings in Property
10. Allowable Deductions
11. Withholding Taxes
12. Foreign Tax Credit
Finals
13. Penalties
14. Returns and Payment of Tax
15. Accounting Methods and Periods
16. Remedies
17. Compliance Requirements
Learning Time: 3 hours per week
Means for Learner Email Address:
Support arpheeb@gmail.com
cpa.daryldane@gmail.com
Period/Term Preliminary
Topic title: Basic Principles of Taxation
Time Allotment: 2 hours
Module No. 1
Module Learning Objectives:
1. Define taxation.
2. Describe the nature, basis and objectives of taxation.
3. Differentiate the three inherent powers of the State.
4. Explain the principles of a sound taxation system.
5. Identify and explain constitutional and inherent limitations.
6. Describe various sources of taxation laws.
7. Name and describe the situs of taxation and its application.
8. Define tax and describe its essential characteristics.
9. Identify and distinguish classification of taxes.
10. Have a fair knowledge of the sources of tax authority and the sources of tax laws.
11. Describe the powers of the Commissioner of Internal Revenue.
12. Distinguish between income and capital.
Learning Part
Taxation is the process or means by which the sovereign through its lawmaking body, raise income to
defray the necessary expenses of the government.
Purposes of Taxation
1. Primary purpose – to provide funds or property with which to promote the general welfare and
protection of its citizens and to enable it to finance its multifarious activities.
2. Secondary purpose
a. to strengthen anemic enterprises by giving tax exemptions.
b. to protect local industries against foreign competition through imposition of high custom
duties on imported goods.
c. to reduce inequalities in wealth and income by imposing progressively higher tax rates.
d. to prevent inflation by increasing taxes or ward off depression by decreasing them.
Theory and basis of taxation
Theory
1. The existence of the government is a necessity.

2. The government cannot continue without a means to pay its expenses.
3. The government has the rights to compel its citizens and property within its limits to contribute.
Basis – benefit-received principle
BASIC PRINCIPLE OF A SOUND TAX SYSTEM
1. Fiscal Adequacy – the sources of revenue should be sufficient to meet the demands of public
expenditures.
2. Equality or Theoretical Justice – The tax burden should be proportionate to the taxpayer’s ability
to pay.
3. Administrative feasibility – tax laws should be capable of convenient, just and effective
administration.
Nature or characteristics of the state’s power to tax
1. It is inherent in sovereignty – the power of taxation may be exercised by the state although not
expressly granted by the constitution.
2. Legislative in character – only legislatures can enact the tax laws.
3. Subject to constitutional and inherent limitations – so there are limitations. Taxation is not an
absolute power that can be exercised by the legislature anyway it pleases.
Limitations on the power of taxation
1. Constitutional limitations – restrictions that is found in the constitution or implied from its
provision.
2. Inherent limitations – those which restrict the power although they are not embodied in the
constitution.
CONSTITUTIONAL LIMITATIONS
1. Due process
2. Equal protection of the laws
3. Rule of uniformity and equity in taxation
4. Non-imprisonment for non-payment of poll tax
5. Non impairment of the obligation of contracts
6. Non-infringement of religious freedom
7. No appropriation for religious purposes
8. Exemption of religious, charitable or educational entities, non-profit cemeteries and churches from
taxation
9. Exemption of revenues and assets of non-stock, non-profit educational institutions and donations
for educational purposes from taxation
10. Concurrence by a majority of all the members of the Congress for the passage of a law granting
any tax exemption
11. Power of the president to veto any particular item or items in a revenue or tariff bill
12. Non-impairment of the jurisdiction of the supreme court in tax cases
INHERENT LIMITATIONS
1. Requirement that levy must be for a public purpose

2. Non-delegation of the legislative power to tax – you cannot delegate what has been delegated to
you but there is an exception to the rule.
a. Delegation to the president
b. Delegation to local governments
c. Delegation to administrative bodies
3. Exemption from taxation of government agencies
4. International comity
5. Territorial jurisdiction
Aspects of taxation
1. Levy
2. Collection
Taxes
The enforced proportional contributions from persons and property levied by the lawmaking body of the
state by virtue of its sovereignty for the support of the government and all public needs.
What are the essential elements of a tax?
1. Enforced contribution
2. Generally payable in money
3. Proportionate in character
4. Levied on persons, property or the exercise of a right or privilege
5. Levied by the state which has jurisdiction over the subject or object of taxation
6. Levied/imposed by the lawmaking body of the state
7. Levied for public purpose or purposes
Classification of taxes.
1. As to subject matter or object

a. Personal, poll or capitation
b. Property
c. Excise (privilege tax).
2. As to who bears the burden –
a. Direct
b. Indirect
3. As to determination of amount
a. Specific
b. Ad valorem
4. As to purpose
a. General, fiscal or revenue
b. Special or regulatory
5. As to authority imposing the same
a. National
b. Municipal or local
6. As to graduation or rate
a. Proportional
b. Progressive
c. Regressive
Inherent powers of the government
1. Eminent domain
2. Police power
3. Taxation
Double taxation
Double taxation – direct duplicate or direct double taxation, taxing twice for the same purpose, by the same
taxing authority, in the same jurisdiction, in the same period, same of the property in the territory. The
supreme court considers it not unconstitutional although obnoxious.
Revenues
It refers to all funds or income derived by the government, whether from tax or other source.
Situs of Taxation
It means the place of taxation.
Situs of taxation shall be as follows:
1. Business – Place where the business is conducted

2. Occupation – place where the occupation is practiced
3. Transaction - place where the transaction took place
4. Real and tangible personal property – location of the property
5. Intangible personal property – domicile of the owner unless the property has acquired a business
situs in another jurisdiction
6. Income – place where the income is earned, or citizenship or domicile of the owner
7. Gratuitous transfer of the property – residence or citizenship of the taxpayer or location of the
property
Forms of escape of taxation
These are means or methods by which the taxpayer saves the tax or escapes the burden of tax
payment.
Basic forms of escape from taxation:
A. Those that do not reduce the revenue collection of the government

a. Shifting
b. Capitalization
c. Transformation
B. Those that result in loss of revenue to the government
a. Tax evasion
b. Tax avoidance/tax minimization
c. Exemption from taxation
Tax Amnesty
Tax Amnesty – immunity from all criminal and civil obligations arising from nonpayment of taxes. General
pardon given to all taxpayers; it applies only to past periods, hence of retroactive application.
Sources of Tax Laws
1. The constitution
2. Statutory enactments
3. Administrative rulings and regulations
4. Judicial decisions
The Bureau of Internal Revenue
a. Powers, duties and functions of the bureau

a. Nature, powers and duties of BIR
i. BIR – administrative agency which is involve in the administration and collection
of national taxes. Under the supervision of DOF.
ii. Included with the revenue operations of DOF along with BoC, revenue service
and legal service
iii. Generally its powers and duties
1. Assessment and collection of all NATIONAL INTERNAL REVENUE TAXES,
FEES AND CHARGES
2. Enforcement of all forfeitures, penalties and fines connected therewith
3. Execution of judgments in all cases decided in favor by the court of tax
appeals and the ordinary courts
4. Give effect to and administer the supervisory and police powers
conferred to it by the NIRC or other laws
b. Powers and duties of the commissioner
Chief officials of the BIR
The bureau shall have a chief known as the Commissioner of Internal Revenue (the
Commissioner) and four assistant chiefs to be known as Deputy Commissioners. Each Deputy
Commissioner shall supervise one of the 4 groups which are as follows, Operations group,
Information Systems Group, Research Management Group and Legal and Enforcement Group.
Powers of the commissioner
1. Power of the Commissioner to interpret tax laws and to decide tax cases
2. Power of the Commissioner to Obtain information, and to summon, examine and take testimony
of Persons
3. Power of the Commissioner to make assessments and prescribe additional requirements for Tax
Administration and enforcement
4. Authority of the commissioner to delegate power
Power of the Commissioner to interpret tax laws and to decide tax cases
• The power to interpret the provisions of NIRC and other tax laws shall be under the exclusive and
original jurisdiction of the commissioner, and afterwards subject to review by the Secretary of
Finance.
o Exclusive jurisdiction – confined to a particular tribunal to the exclusion of all others
▪ Refers to power of a court to adjudicate a case to the exclusion of all other courts.
o Original jurisdiction – conferred on or inherent in a court or tribunal, in the first instance
4 types of jurisdiction
1. Exclusive jurisdiction – only federal courts have authority to hear, state courts
cannot.
2. Concurrent jurisdiction – federal and state courts could hear
3. Original jurisdiction – courts is the first one to hear case (power to hear a case for
the first time)
4. Appellate jurisdiction – court can only hear a case on appeal (has the power to
review a lower court’s decision)
o Thus, the Secretary of Justice is not empowered to issue a ruling on any case brought
before it which will pertain to interpretation of tax laws.
o The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under
the NIRC or other laws or portions thereof administered by the bureau is vested in the
Commissioner, subject to exclusive appellate jurisdiction if the CTA.
Power to examine books and other accounting records and obtain information
To be able to ascertain the correctness of any return, or in making a return when none has been made, or
in determining liability of a person for any internal revenue tax…. The commissioner is authorized:
1. Examine any book, paper, record or other data which may be relevant or material to such inquiry
2. To obtain on a regular basis any information from any person other than the person whose internal
revenue tax liability is subject to audit or investigation from any office or officer of the national and
local governments, government agencies and instrumentalities, including BSP and GOCCs.
3. To summon the person liable for tax or required to file a return, or any officer or employee of such
person, or any person having possession, custody, or care of the books of accounts and other
accounting records containing entries relating to the business of the person liable for tax, or any
other person, to appear before the Commissioner or his duly authorized representative at a time
and place specified in the summons and to produce such books, papers, records or other data, and
to give testimony.
4. To take testimony of the person concerned, under oath, as may be relevant or material to such
inquiry.
5. To cause revenue officers and employees to make a canvass from time to time of any revenue
district or region and inquire after and concerning all persons therein who may be liable to pay any
internal revenue tax, and all persons owning or having the care, management or possession of any
object with respect to which a tax is imposed.
Power to make assessments
1. To examine returns and determine tax due

2. To conduct inventory-taking, surveillance and to prescribe presumptive gross sales and receipts
3. To terminate taxable period
4. To prescribe real property values
5. To inquire into bank deposit accounts
6. To accredit and register tax agents
7. To prescribe additional procedural or documentary requirements
Bureau’s authority to inquire into bank deposits of taxpayers
General rule: All deposits of whatever nature with banks or banking institutions shall be considered as
absolutely confidential in nature and may not generally be examined, inquired or looked into by any person,
government official, bureau or office. (Based on the provisions of RA 1405 – Bank Secrecy Law)
The Commissioner is authorized to inquire into bank deposits in the following instances:
1. To determine the gross estate of the decedent

2. When the taxpayer applies for a compromise of his tax liability by reason of financial incapacity
Authority of the Commissioner to compromise taxes
Compromise – is a contract whereby the parties by reciprocal concessions avoid litigation or put an end to
one already commenced
Tax Compromise – it is an agreement whereby the taxpayer offers to pay something less than what is due
and the government accepts it as a full settlement of his tax liability. Under the law, only the commissioner
of internal revenue can enter into tax compromises.
The Commissioner may compromise the payment of any internal revenue tax on the following grounds:
1. Reasonable doubt as to the validity of the claim against the taxpayer exists
2. The financial position of the taxpayer demonstrates clear inability to pay the assessed tax.
The following are the minimum amounts for compromise settlement:
1. For cases of financial incapacity – a minimum compromise rate equivalent to 10% of basic assessed
tax
2. For other cases – a minimum compromise rate equivalent to 40% of basic assessed tax
3. When the basic assessed tax involved exceeds 1 million or where settlement offered is less than
the prescribed minimum rates, the approval of the commissioner and the 4 deputy commissioners
shall be required.
All criminal violations may be compromised, except:
Those already filed in court or those involving fraud.
The commissioner is the only official vested with the power and discretion to enter into compromise of
criminal and civil cases. This power to compromise or abate is a power that cannot be delegated by the
Commissioner, except in the following cases:
1. Assessments issued by the regional offices involving basic deficiency taxes of 500,000 or less
2. Minor criminal violations (Sec 7 ( c) )
Abatement(reduction) or cancellation of tax liability
The commissioner may abate or cancel tax liability when:
1. The tax or any portion thereof appears to be unjustly or excessively assessed

2. The administration and collection costs involved do not justify the collection of the amount due
Non-delegable powers of the Commissioner
The commissioner may delegate powers, provided, however, that the following powers of the
commissioner shall not be delegated:
1. The power to recommend the promulgation of rules and regulations by the Secretary of Finance
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 and abate, except when assessments issued by regional court involving
500,000 or less deficiency tax and minor criminal violations
4. The power to assign or reassign internal revenue officers to establishments where articles subject
to excise tax are produced or kept.
Refund or credit of taxes
A tax credit is a claim for issuance of a tax credit certificate, showing an amount owing from the
government to the taxpayer whom the latter is legally authorized to credit or offset against national internal
taxes payable by him, except withholding taxes.
A refund is a claim for the payment of cash for taxes erroneously or illegally paid by the taxpayer
to the government.
The Commissioner may credit or refund taxes erroneously or illegally received or penalties imposed
without authority.
The following guidelines are applicable on tax credit or refund:
1. The taxpayer files in writing with the Commissioner a claim for credit or refund;
2. A return filed showing an overpayment shall be considered as a written claim for credit or refund;
3. No tax refund be given resulting from availment of incentives granted pursuant to special laws for
which no actual payment was made; and
4. The claim must be filed within 2 years after the payment of the tax or penalty.
The following procedure must be observed by the taxpayer in claiming refund of the tax paid:
1. File a claim for refund with the Commissioner of Internal Revenue within 2 years from the date
of payment
a. If the tax is paid in installments or only in part, the period is counted from the date of
the last or final installment until the whole or entire tax liability is fully paid
b. Where a corporation paid quarterly corporate income taxes in any of the first 3
quarters during the taxable year but incurs a net loss during the taxable year, the two-
year period for the filing of claim for refund or credit shall be counted from the date
of the filing of the annual corporate income tax return
2. Within 30 days from receipt of the Commissioner’s decision denying the claim, and within 2
years from the date of paying the tax, the taxpayer can appeal the decision to the Court of Tax
Appeals.
However, where the two-year period is about to lapse, the taxpayer may appeal to the
CTA without waiting for the decision of the Commissioner.
Within 15 days from receipt of the decision of the CTA, he can file an appeal with the Supreme Court.
Source: Income Taxation by Ballada & Ballada, 2019 Issue 17th Edition
Topic title: Taxation on Individuals
Module No. 2
1. Identify the individual income taxpayers.

2. Define the individual taxpayers and the related terms used.
3. Illustrate the different classification of individual taxpayers.
4. State the sources of income of individual taxpayers.
5. Recognize the categories of income and state the tax rates to be used by each type of individual
taxpayer.
6. List the sources of passive income and state the final tax rates to be used by each type of
individual taxpayer.
7. Discuss the treatment of passive income in the computation of taxable income from
compensation or business/professional income.
8. Define the allowable deductions from gross income.
9. Identify the kinds of personal exemptions.
10. Discuss the guidelines on change of status.
11. Define and compute taxable income and tax due for each type of individual taxpayer depending
on income category.
12. Be familiar with individual taxpayers exempt from income tax.
Learning Part
Classification of Individual Income Taxpayers
1) Citizen
a) Resident
b) Non-resident
2) Alien
a) Resident
b) Non-resident
i) Engaged in trade or business in the Philippines
ii) Non engaged in trade or business in the Philippines
iii) Employed by
(1) Regional area headquarters (RHQs) and regional operating headquarters (ROHQs) of
multinational entities in the Philippines that are engaged in international trade with
affiliates and subsidiary branch offices in the Asia-Pacific region.
(2) Offshore banking units
(3) Petroleum contractors and sub-contractors.
Sources of Income
Source of income is not a place but the property, activity or service that produced the income. It
is important to know the source of income of an individual taxpayer – whether from within the
Philippines or without – because not all individual taxpayers are taxed on all their income. The following
rules apply:
1) Resident citizens are taxable on all income derived from sources within and without.
2) Non-resident citizens and alien individuals (resident and non-resident) are taxable only on
income derived from sources within the Philippines. An overseas contract worker is taxable
only on his income from sources within.
Individual Source of Income

Within the Phils. Without the Phils.
1. Resident Citizen ✓ ✓
2. Non-resident Citizen ✓
3. Resident Alien ✓
4. Non-resident Alien ✓
Summary of Income Tax Rates on Individual Citizen and Resident Alien under the TRAIN Law
Graduated & subject 8% and not subject

to VAT or PT to VAT or PT
1. Purely compensation income earner ✓ 
2. Self-employed
If subject to VAT ✓ 
If subject to Percentage Tax
>subject to 3% PT ✓ ✓
>subject to OPT ✓ 
3. Both compensation income earner and self-employed
If subject to VAT ✓ 
If subject to Percentage Tax
>subject to 3% PT ✓ ✓
>subject to OPT ✓ 
CATEGORIES OF INCOME AND TAX RATES
1) Compensation income. In general, the term compensation means all remuneration for services
performed by an employee for his employer under an employer-employee relationship, unless
specifically excluded by the Code. If a taxpayer is receiving compensation income from two or
more employers, he/she must combine all compensation income received from all employers
for a particular calendar year. Taxed at the graduated rates from 5% to 32% (revised Section
24(A) per R.A. 9504).
2) Business income. Business income arises from self-employment or practice of profession. This
shall not include income from performance of services by the taxpayer as an employee. Taxed
at graduated rates from 5% to 32% (revised Section 24(A) per R.A. 9504). Note that the same
graduated tax schedule is used for individual taxpayers earning compensation income,
business/professional income or both.
3) Passive income. Passive income are subject to a separate and final tax. Final tax imposed or
gain shall no longer be included as taxable income subject to the graduated rates.
4) Capital gains from sale of shares of stock, not traded through the local stock exchange. Taxed
at 5% and 10% final taxes on a per transaction basis.
5) Capital gains from sale of real property. Taxes at 6% final tax on the gross selling price or current
fair market value at the time of sale, whichever is higher.
6) Fringe benefits. Any good, service, or other benefit furnished or granted by an employer in
cash or in kind in addition to basic salaries, to an individual employee (except rank-and-file
employee) under an employer-employee relationship.
Allowable Deductions
Allowable deductions are items or amounts, which the law allows to be deducted from gross
income in order to arrive at the taxable income.
1) From compensation income

a) Basic personal and/or additional exemptions
b) Premium payments on health and/or hospitalization insurance
2) From business income
a) Basic personal and/or additional exemptions
b) Premium payments on health and/or hospitalization insurance
c) Itemized deductions under the Tax Code
d) Optional standard deduction
Note: Under the TRAIN Law, basic personal and/or additional exemptions are no longer allowed as
deductions from compensation income and business income.
Individual Taxpayers Allowed Personal Exemptions
1) Citizens
2) Resident Alien
3) Non-resident alien
4) Estates and trusts, which are, for purposes of personal exemptions, treated as a single
individual.
Taxable Income and Tax Due per Revenue Regulation 8 – 2018 implementing TRAIN
Individual citizen and individual resident alien of the Philippines. In general, the income tax on the
individual’s taxable income shall be computed based on the following schedules as provided under Sec.
24(A)(2)(a) of the Tax Code, as amended.
a) Income Tax Rates

Effective January 1, 2018 until December 31, 2022:
Range of Taxable Income Tax Due
Over Not over Basic Amount Additional Rate Of excess over
0 250,000 0 0% 0
250,000 400,000 0 20% 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 0 2,410,000 35% 8,000,000
Effective January 1, 2023 and onwards:

Range of Taxable Income Tax Due
Over Not over Basic Amount Additional Rate Of excess over
0 250,000 0 0% 0
250,000 400,000 0 15% 250,000
400,000 800,000 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 0 2,202,500 35% 8,000,000
b) Individuals Earnings Purely Compensation Income

Income shall be taxed based on the income tax rates prescribed under subsection (A) hereof.
Taxable income for compensation earners is as follow:
Gross compensation income (xx)

Less: Nontaxable income/benefits
13th month pay xx
Other benefits (Sec. 6 (G)(e)) xx
De minimis benefits xx
Employee’s share in SSS, GSIS, PHIC, HDMF & Union Dues xx
Others xx (xx)
Taxable income (xx)
Husband and wife shall compute their individual income tax separately based on their respective
taxable income; if any income cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be divided equally between the spouses
for the purpose of determining their respective taxable income.
Minimum wage earners shall be exempt from the payment of income tax based on their statutory
minimum wage rates. The holiday pay, overtime pay, night shift differential pay and hazard pay
received by such earner are likewise exempt.
c) Self-employed Individuals Earning Income Purely from Self-employment or Practice of Profession

Individuals earning income purely from self-employment and/or practice of profession whose gross
sales/receipts and other non-operating income does not exceed the value-added tax (VAT)
threshold as provided under Section 109 (BB) of the Tax Code, as amended, shall have the option
to avail of:
i) The graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended;
ii) An 8% tax on gross sales or receipts and other non-operating income in excess of
₱250,000 in lieu of the graduated income tax rates under Section 24(A) and the
percentage tax under Section 116 all under the Tax Code, as amended.
d) Individuals Earning Income Both from Compensation and from Self-employment (business or
practice of profession)
For mixed income earners, the income tax rates applicable are:
(1) The compensation income shall be subject to the tax rates prescribed under Section
24(A)(2)(a) of the Tax Code, as amended; and
(2) The income from business or practice of profession shall be subject to the following:
(a) If the gross sales/receipts and other non-operating income do not exceed the VAT
threshold, the individual has the option to be taxed at:
(i) Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code,
as amended; or
(ii) 8% income tax rate based on gross sales/receipts and other non-operating income
in lieu of the graduated income tax rates and percentage tax under Section 116 of
the Tax Code, as amended.
(b) If the gross sales/receipts and other non-operating income exceeds the VAT threshold,
the individual shall be subject to the graduated income tax rates prescribed under
Section 24(A)(2)(a) of the Tax Code, as amended.
TAXABLE INCOME AND TAX DUE
Taxable income is defined as the pertinent items of gross income less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income, by the Tax Code or other
special laws. Taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax
due. Depending on the taxpayer involved, taxable income may refer to either one of the following:
1) Net compensation income. Computation for resident citizen and resident alien earning purely
compensation income is as follow:
Gross compensation income xx
Basic personal exemption xx
Add: Additional exemptions xx
Total exemptions xx
Add: Premium paid on Health and/or Hospitalization Insurance xx
Less: Total Exemptions and Premium Payment xx
Net compensation income xx
Tax due (Sec. 24(A)) xx
2) Gross compensation income. The gross compensation income derived by aliens including Filipinos
employed by regional and area headquarters and regional operating headquarters of multinational
companies, by offshore banking units, or by foreign petroleum service contractors and sub-contractors.
To compute:
Gross compensation income xx
Multiply by tax rate 15%
Tax Due xx
3) Net income. The income arrived at after subtracting from the gross income (from business or
profession including compensation income) of a citizen, resident alien, and non-resident alien if the
latter is engaged in trade or business in the Philippines the deductions of the taxpayer, including the
basic personal and additional exemptions, if any.
4) Entire or gross income. The entire or gross income (from business or profession including
compensation income) without any deduction with respect to non-resident aliens not engaged in trade
or business in the Philippines.
INDIVIDUALS EXEMPT FROM INCOME TAX
a) Non-resident citizen who is:

i) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite intention to reside therein.
ii) 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.
iii) A citizen of the Philippines who works and derives income from abroad and whose employment
thereat requires him to be physically present abroad most of the time during the taxable year.
iv) A citizen who has been previously considered as a non-resident citizen and who arrives in the
Philippines at any time during the year to reside permanently in the Philippines will likewise be
treated as a non-resident citizen during the taxable year in which he arrives in the Philippines,
with respect to his income derived from sources abroad until the date of his arrival in the
Philippines.
b) Overseas contract worker, including overseas seaman
c) Barangay Micro Business Enterprises (RA 9178 or BMBE Law)
d) Expanded Senior Citizens Act of 2010
e) Personal Equity and Retirement Account Act of 2008 (RA 9505)
Topic title: Taxation on Corporations
Module No. 3
1) Identify the income taxpayers other than individuals.

2) Define corporation.
3) Identify the classification of corporate taxpayers.
4) State the sources of income of corporate taxpayers.
5) Recognize the categories of income and state the tax rates to be used by each type of corporate
taxpayer.
6) List the sources of passive income and state the final tax rates to be used by each type of corporate
taxpayer.
7) Show the pro-forma computation of the normal income tax of domestic, resident and non-resident
foreign corporations, in general.
8) Identify the special corporations for tax purposes and be able to provide the relevant tax rates.
9) Define the allowable deductions from gross income.
10) Define and compute taxable income and tax due for each type of corporate taxpayer depending on
income category.
11) List the corporate taxpayers exempt from income tax.
12) Compute the quarterly corporate income tax.
Learning Part
Classification of Income Taxpayers (Other than Individuals)
1. Corporations
a. Domestic. Those created or organized under and by virtue of Philippine laws.
i. Domestic corporation, in general
ii. Government-owned and -controlled corporations
iii. Taxable partnerships
iv. Proprietary educational institutions
v. Non-profit hospitals
b. Foreign. Those organized in accordance with laws of their respective countries.
i. Resident. Those engaged in trade or business within the Philippines.
ii. Non-resident. Those not engaged in trade or business within the Philippines.
2. General professional partnership
3. Estates and trusts
Sources of Income
The following rules shall apply for the corporation:
1. Domestic corporations are taxable on income from sources within and without the Philippines.
2. Foreign corporation whether resident or non-resident, are taxable only on income from Philippine
sources.
Note: A partnership other than a general professional partnership is considered a corporation and is taxable
as such.
Source of Income
Corporation Within the Philippines Without the Philippines
1. Domestic ✓ ✓
2. Foreign ✓ 
Categories of Income and Tax Rates
1. Business income. Generally, business income earned by a corporation is taxed at 30%. The table
below shows the specific tax rates on business income of corporate taxpayers (domestic and
resident foreign):
Description Tax Rate Tax Base
Domestic Corporation
1. a. In General 30% Taxable income from all sources
1. b. Minimum Corporate Income Tax 2% Gross income
1. c. Improperly Accumulated Earnings 10% Improperly accumulated taxable income
2. Proprietary Educational Institution 10% Taxable income from all sources
3. Non-stock, non-profit hospital 10% Taxable income from all sources
4. GOCC, Agencies & Instrumentalities See 1a to 1b
5. National Government & LGUs See 1a to 1b
6. Taxable Partnership See 1a to 1b
7. a. Exempt Corporation on exempt activities 0% Taxable income
7. b. Exempt Corporation on taxable activities See 1a
8. General professional partnerships Exempt
9. Corporation covered by special laws Rate specified under the respective special laws
Resident Foreign Corporation
Taxable income from within the
1. a. In General 30%
Philippines
1. b. Minimum Corporate Income Tax 2% Gross income
1. c. Improperly Accumulated Earnings 10% Improperly accumulated taxable income
2. International Carriers 2.50% Gross Philippine billings
3. Regional Operating Headquarters 10% Taxable income
4. Corporation covered by special laws Rate specified under the respective special laws
10% Gross taxable income on foreign
currency transaction
5. Offshore Banking Units (OBUs)
30% On taxable income other than foreign
10% Gross taxable income on foreign
6. Foreign Currency Deposit Units (FCDU)
30% On taxable income other than foreign
2. Passive Income. Passive income is subject to a separate and final tax. These are taxed at fixed rates
ranging from 5% to 20%. Passive income is not to be included in gross income computations.
Passive Income Domestic Resident Foreign
Interests 20% 20%
Interests under foreign currency deposit system 7.50% 7.50%
Income under foreign currency deposit system 10% 10%
Royalties 20% 20%
Dividends from a domestic corporation Exempt Exempt
Capital gains from sale of shares of stocks not traded in
stock exchange
Not over ₱100,000 5% 5%
Amount in excess of ₱100,000 10% 10%
Capital gains on sale of land/buildings treated as capital 6%
assets, the higher value between gross selling price and
fair market value as determined by the Commissioner
Computation of Income Tax
Domestic and Resident Foreign Corporations, In General
Pro-forma computation of the normal income tax of domestic and resident foreign corporations follows:
Gross Income xx
Less: Allowable Deductions xx
Net Income xx
Multiply by: Tax Rate xx
Tax Due xx
Domestic Corporations, In Particular
a) Real Estate Investment Trust (REIT). Per Republic Act 9856 and Revenue Regulations 13-2011, is a
stock corporation established in accordance with the Corporation Code of the Philippines and the
rules and regulations promulgated by the SEC, principally for the purpose of owning income-
generating real estate assets. For the tax purposes, a REIT is considered a taxpayer engaged in the
real estate business. Hence, real properties owned by a REIT are considered ordinary assets.
To qualify for the tax incentives under Section 5 of RR 13-2011, a REIT must:
(a) be a public company and maintain its status as a public company.
(b) for the DST incentive on transfer of real property provided for under Section 6 of RR
13-2011, enlist with an Exchange within 2 years from the date of initial availment of
DST incentive and maintain the listed status of the investor securities on the Exchange
and the registration of the investor securities by the SEC; and
(c) distribute at least 90% of its distributable income.
To be deductible, the dividends distributed should be at lease 90% of REIT’s distributable income
for the taxable year, and actually paid to the shareholders not later than the last day of the 5th
month from the close of the taxable year. Dividends distributed by a REIT from its distributable
income after the close of a taxable year and on or before the last day of the 5 th month following
the close of the taxable year shall be considered as paid on the last day of such taxable year.
Sec. 10 of RR 13-2011 mandates that the income tax collectible from the dividends deducted from
gross income should be placed in escrow in favor of the BIR with an authorized agent bank. By the
end of the 3rd year from its listing, at the latest and thereafter, the REIT shall maintain the 67%
minimum public ownership. Otherwise, dividend payment shall not be allowed as a deduction from
its taxable income.
In general, cash or property dividends paid by a REIT shall be subject to a final tax of 10%, unless:
a) the dividends are received by a non-resident alien individual or a non-resident foreign

corporation entitled to claim a preferential withholding tax rate of less than 10% pursuant to
an applicable tax treaty; or
b) the dividends are received by a domestic corporation or resident foreign corporation, or an
overseas Filipino investor in which case, they are exempt from income tax or any withholding
tax. In the case of overseas Filipino investors, they are exempt from the dividends tax for 7
years from the effectivity of the RR 13-2011.
All income payments to a REIT shall be subject to a lower creditable withholding tax of one percent.
REITs shall not be subject to the minimum corporate income tax. Other incentives include reduced
documentary stamp tax (DST) for transfers of real property and shares of stock to the REIT and
exemption of REIT securities from the initial public offering (IPO) tax.
b) Proprietary Non-profit Educational Institutions and Hospitals. The 10% tax on the taxable income
is subject to limitation. If the gross income from unrelated trade, business or other activity exceeds
fifty percent of the total gross income derived from all sources, the tax prescribed under Section
27(A) shall be imposed on the entire taxable income. (Insert example)
c) Government-owned or -controlled Corporations, Agencies or Instrumentalities (GOCCs). Subject to
the provisions of existing special laws or general laws, all corporations, agencies, or
instrumentalities owned and controlled by the Government shall pay such rate of tax upon their
taxable income as are imposed by the Code upon corporations or associations engaged in similar
business, industry or activity. The following are exempt:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health and Insurance Corporation (PHIC)
4. Local Water Districts
d) Power Sector Assets and Liabilities Management Corporation (PSALM). RMC 11-2012 clarifies the
income tax consequences of transactions of the PSALM, they are as follows:
i) No income and WT are due from the sale of the National Power Corporation (NPC) generation
assets and other real properties to winning bidders.
ii) The rental income of PSALM from the NPC generation assets and other real properties, prior
to its sale to winning bidders, is subject to income tax.
iii) Any income to be derived by PSALM from the operation of the generation facilities is subject
to income tax and withholding tax.
iv) Other income or receipts from miscellaneous activities, such as forfeiture of performance
bonds, interest income from persons other than the winning bidders, and from other activities
not related to PSALM’s mandate are subject to all applicable taxes under the Tax Code.
e) Mutual Life Insurance Companies. These companies are not subject to the regular corporate
income tax rates.
f) Homeowners’ Association. Association or condominium dues, membership fees and other
asssessments or charges, which are held in trust by the condominium corporation to be used solely
for administrative expenses, are excluded from the condominium corporation’s gross income,
hence, not subject to income and withholding tax.
g) Recreational Clubs. RMC 35-2012 clarifies the taxability of clubs organized and operated exclusively
for pleasure, recreation, and other non-profit purposes. Income from whatever source, including
but not limited to membership fees, assessment dues, rental income and service fees, of clubs
organized and operated exclusively for pleasure, recreation, and other non-profit purposes, are
subject to income tax.
Resident Foreign Corporations, In Particular
1) International Carrier. Per Republic Act 10378 and Revenue Regulations 15-2013, an international
carrier doing business in the Philippines shall pay a tax of 2.50% on its Gross Philippine Billings (GPB) as
follows:
a) International Air Carrier. GBP refers to the amount of gross revenue derived from passage of
persons, excess baggage, cargo, and mail, originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the
passage documents.
b) International Shipping. GBP means gross revenues whether for passenger, cargo or mail originating
from the Philippines up to final destination, regardless of the place of sale or payments of the
passage or freight documents.
2) Offshore Banking Units (OBUs). Income derived by OBUs authorized by the BSP, from foreign currency
transactions with local commercial banks, including branches of foreign banks that may be authorized
by the BSP to transact business with OBUs, including any interest income derived from foreign currency
loans granted to residents, shall be subject to a final income tax at 10% of such income.
3) Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax
of 15% which shall be based on the total profits applied or earmarked for remittance without deduction
for the tax component thereof (except those activities which are registered with the Philippine
Economic Zone Authority).
4) Regional Operating Headquarters (ROHQs). A branch established in the Philippines by multinational
companies which are engaged in any of the services listed below. ROHQs shall pay a tax of 10% of their
taxable income.
a) General administration and planning
b) Business planning and coordination
c) Sourcing and procurement of raw materials, and components
d) Corporate finance advisory services
e) Marketing control and sales promotion
f) Training and personnel management
g) Logistics services
h) Research and development services and product development
i) Technical support and maintenance
j) Data processing and communication
k) Business development
5) 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 Asia-Pacific Region and other foreign markets. RHQs as such shall not be subject to income tax.
Non-resident Foreign Corporation, In General
The basis of tax for non-resident foreign corporation is gross income from sources within the Philippines,
such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital
gains.
The pro-forma computation of the income tax of non-resident foreign corporations follows:
Gross income xx
Multiply by: Tax rate 30%
Tax Due xx
Under Section 42(A)(3) of the Tax Code, income from services is considered derived from sources within
the Philippines only if the services are performed in the Philippines. Hence, income from services
performed by a non-resident foreign corporation entirely outside the Philippines is exempt from Philippine
income tax.
Non-resident Foreign Corporation, In Particular
1) Non-resident Cinematographic Film Owner, Lessor or Distributor. Taxed at 25% of gross income.
2) Non-resident Owner or Lessor of Vessels Chartered by Philippine Nationals. Taxed at 4,50% of gross
rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved
by the Maritime Industry Authority.
3) Non-resident Owner or Lessor of Aircraft, Machinery and Other Equipment. Taxed at 7.50% of gross
rentals, charters and other fees.
Passive Income of Non-Resident Foreign Corporation (see Tax Code)
Items or amounts which the law allows to be deducted from gross income in order to arrive at the taxable
income. A domestic or resident foreign corporation may deduct from its business income, itemized
deductions under the Tax Code. Or, these corporations may elect a standard deduction in an amount not
exceeding 40% of its gross income. Non-resident foreign corporations are not allowed deductions from
gross income.
Corporations Exempt from Income Tax (Please see Section 30 of NIRC)
Topic title: Minimum Corporate Income Tax, Improperly Accumulated Earnings Tax and Gross Income Tax
Time Allotment: 2 Hours
Module No. 4
1) Discuss the concept of minimum corporate income tax.

2) Compute gross income for merchandising/manufacturing concerns and gross income for service
concerns.
3) Enumerate the items that comprise the gross receipts and costs of services of selected industries.
4) Compute MCIT for service, merchandising and manufacturing concerns.
5) Describe the mechanics in handling the excess of MCIT.
6) Discuss improperly accumulated earnings tax.
7) Discuss the nature of gross income tax.
MINIMUM CORPORATE INCOME TAX (MCIT)
A minimum corporate income tax (MCIT) of 2% of the gross income as of the end of the taxable year is
imposed upon any domestic corporation beginning the 4th taxable year (whether calendar or fiscal year,
depending on the accounting period employed) immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed whenever:
1) such corporation has zero or negative taxable income; or

2) the amount of minimum corporate income tax is greater than the normal income tax due from such
corporation.
In 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.
Relief from the MCIT under certain conditions
The Secretary of Finance, upon recommendation of the Commissioner, may suspend the imposition of the
MCIT upon submission of proof by the applicant-corporation, duly verified by the Commissioner’s
authorized representative, that the corporation sustained substantial losses on account of a prolonged
labor dispute or because of “force majeure” or because of legitimate business reserves.
Period subject to MCIT
For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in
which the domestic corporation registered with the BIR. Firms which were registered with the BIR in 1994
and earlier years shall be covered by the MCIT beginning Jan. 1, 1998. Firms which were registered with
BIR in any month in 1998 shall be covered by the MCIT in 2002 after the lapse of three calendar years from
1998.
The reckoning point for firms using the fiscal year shall also be 1998.
Accounting Treatment of Excess MCIT Paid
Any amount paid as excess MCIT shall be recorded in the corporation’s books as an asset under account
title Deferred Charges – MCIT. This asset account shall be carried forward and may be credited against the
normal income tax due for a period not exceeding 3 taxable years immediately succeeding the taxable
year/s in which the same has been paid.
Any amount of the excess MCIT which has not or cannot be so credited against the NIT due for the 3-year
reglementary period shall lose its creditability. Such amount shall be removed and deducted from Deferred
Charges – MCIT account by a debit entry to Retained Earnings account and a credit entry to Deferred
Charges – MCIT account since this tax is not allowable as deduction from gross income it being an income
tax.
Pro-forma journal entry for the accounting treatment of excess MCIT paid will be as follow:
First Year
Provision for income tax xx
Income tax payable xx
To record income tax liability using the NIT rate.
Deferred charges – MCIT xx

To record excess MCIT.

Cash in bank xx
To record payment of income tax due for the first year.
Second Year
To record income tax liability using NIT rate.

To record application of excess MCIT against NIT liability for
second taxable year.

Cash in bank xx
To record payment of income tax due.
Third Year
Retained earnings xx
Deferred Charges – MCIT xx
To record the expired portion of Deferred Charges – MCIT.
Domestic Corporations not subject to MCIT
The MCIT shall apply only to domestic corporations subject to NIT. Accordingly, the MCIT shall not be
imposed upon any of the following:
a) Domestic corporations operating as proprietary educational institutions subject to tax at 10% on

their taxable income; or
b) Domestic corporation engaged in hospital operations which are non-profit subject to tax at 10% on
their taxable income; and
c) Domestic corporations engaged in business as depository banks under the expanded foreign
currency deposit system, on their income from foreign currency transactions with local commercial
banks, including branches of foreign currency deposit system units and other depository banks
under the foreign currency deposit system, including their interest income from foreign currency
loans granted to residents of the Philippines under the expanded foreign currency deposit system,
subject to final income tax at 10% of such income.
d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916
and 7227.
e) Real estate investment trusts in accordance with RA 9856 and RR 13-2011.
Suspension of the MCIT
In order that cessation of business activities as a result of being placed under involuntary receivership may
be a basis for the recognition of the suspension of the MCIT, such a situation should be properly defined
and included in the regulations. Pending such inclusion, the same cannot yet be invoked.
A minimum corporate income tax (MCIT) of 2% of the gross income from sources within the Philippines is
imposed upon any resident foreign corporation, beginning on the 4th taxable year (whether calendar or
fiscal year, depending on the accounting period employed) immediately following the taxable year in which
the corporation commenced its business operations, whenever the amount of the MCIT is greater than the
NIT due for such year.
In computing for the MCIT due from a resident foreign corporation, the rules prescribed on domestic
corporations apply provided that only the gross income from sources within the Philippines shall be
considered for such purposes.
Resident Foreign Corporations not subject to MCIT
The MCIT shall only apply to resident foreign corporations which are subject to NIT. Accordingly, the MCIT
shall not apply to the following resident foreign corporations:
i) Resident foreign corporations engaged in business as “international carrier” subject to tax at
2.50% of their “gross Philippine billings.”
ii) Resident foreign corporations engaged in business as OBUs on their income from foreign
currency transactions with local commercial banks, including branches of foreign banks,
authorized by the BSP to transact business with OBUs, including interest income from foreign
currency loans granted to residents of the Philippines, subject to a final income tax at 10% of
such income
iii) Resident foreign corporations engaged in business as regional operating headquarters subject
to a tax at 10% of their taxable income
iv) Firms that are taxed under a special income tax regime such as those in accordance with RA
7916 and 7227.
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
In addition to other taxes imposed under Title II if the Tax Code of 1997, there is imposed for each taxable
year a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed
of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any
other corporation, by permitting the earnings and profits of the corporation to accumulate instead of
dividing them among or distributing them to the shareholders.
The rationale is that if the earnings and profits were distributed, the shareholders would then be liable to
income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect
to the undistributed earnings and profits of the corporation. Thus, a tax is being imposed in the nature of
a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to
the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed
to them by the corporation.
The IAET shall not apply to the following corporations:
(1) Banks and other non-bank financial intermediaries

(2) Insurance companies
(3) Publicly-held corporations
(4) Taxable partnerships
(5) General professional partnerships
(6) Non-taxable joint ventures
(7) Enterprises duly registered with the PEZA
Tax Base of Improperly Accumulated Earnings Tax
The proper computation of the IAET, as follows:
Taxable income for the year xx

Add:
Income subjected to final tax xx
Net operating loss carryover (NOLCO) xx
Income exempt from tax xx
Income excluded from gross income xx xx
xx
Less:
Income tax paid xx
Dividends declared/paid xx xx
Total
Add: Retained earnings from previous year xx
Accumulated earnings, end of the year xx
Less: Amount that may be retained (100% of paid-up capital,
end of the year) xx
Improperly accumulated taxable income xx
IAET rate 10%
Improperly accumulated earnings tax xx
Gross Income Tax for Corporations
The President, upon the recommendation of the Secretary of Finance, may allow corporations to be taxed
at 15% of gross income, effective Jan. 1, 2000 after the following conditions have been satisfied:
(a) A tax effort ratio of 20% of GNP

(b) A ratio of 40% of income tax collection to total tax revenues
(c) A VAT tax effort of 4% of GNP
(d) A 0.9% ratio of the Consolidated Public Sector Financial Position to GNP
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales
to gross sales or receipts from all sources does not exceed 55%. The election of the gross income tax option
by the corporation shall be irrevocable for 3 consecutive taxable years during which the corporation is
qualified under the scheme.
Resident foreign corporations engaged in trade or business within the Philippines have the option to be
taxed at 15% of gross income under the same conditions required of domestic corporations.
Gross Income and Tax Due
The computation of gross income and tax due for a trading/merchandising concern and manufacturing
concern follows:
Gross sales xx
Less: Sales returns xx
Sales discounts xx
Sales allowances xx xx
Net sales xx
Less: Cost of goods/manufactured sold xx
Gross income xx
Multiply by 15%
Gross income tax due xx
Classification of Incoet Taxpayetss (Othts than Individaals
1. Corporations
a. Domestic. Those created or organized under and by virtue
of Philippine laws.
i. Domestic corporation, in general
ii. Government-owned and -controlled corporations
iii. Taxable partnerships
iv. Proprietary educational institutions
v. Non-proft hospitals
b. Foreign. Those organized in accordance with laws of their
respective countries.
i. Resident. Those engaged in trade or business within
the Philippines.
ii. Non-resident. Those not engaged in trade or business
within the Philippines.
2. General professional partnership
3. Estates and trusts
Soascts of Incoet
The following rules shall apply for the corporation:
1. Domestic corporations are taxable on income from sources
within and without the Philippines.
2. Foreign corporation whether resident or non-resident, are
taxable only on income from Philippine sources.
Note: A partnership other than a general professional partnership is
considered a corporation and is taxable as such.
Source of Income
Corporatio Within the Without the

n Philippines Philippines
1.  
Domestic
2. Foreign  
Cattgosits of Incoet and Tax Ratts

1. Business income. Generally, business income earned by a corporation
is taxed at 30%. The table below shows the specifc tax rates on
business income of corporate taxpayers (domestic and resident foreign):
Dtscsiption Tax Ratt Tax Bast
Doetstic
Cosposation
1. a. In General 30% Taxable income from all

sources
1. b. Minimum 2% Gross income

Corporate Income Tax
1. c. Improperly 10% Improperly accumulated

Accumulated Earnings taxable income
2. Proprietary 10% Taxable income from all

Educational Institution sources
3. Non-stock, non- 10% Taxable income from all

proft hospital sources
4. GOCC, Agencies & See 1a to 1b

Instrumentalities
5. National See 1a to 1b
Government & LGUs
6. Taxable Partnership See 1a to 1b
7. a. Exempt 0% Taxable income

Corporation on
exempt activities
7. b. Exempt See 1a
Corporation on
taxable activities
8. General Exempt
professional
partnerships
9. Corporation Rate specifed under

covered by special the respective
laws special laws
Rtsidtnt Fostign
Cosposation
1. a. In General 30% Taxable income from

within the Philippines
1. b. Minimum 2% Gross income

Corporate Income Tax
1. c. Improperly 10% Improperly accumulated

Accumulated Earnings taxable income
2. International 2.50% Gross Philippine billings

Carriers
3. Regional Operating 10% Taxable income

Headquarters
4. Corporation Rate specifed under

covered by special the respective
laws special laws
5. Ofshore Banking 10% Gross taxable income on

Units (OBUs) foreign currency
transaction
30%
On taxable income other
than foreign currency
transaction
6. Foreign Currency 10% Gross taxable income on

Deposit Units (FCDU) foreign currency
transaction
30%
On taxable income other
than foreign currency
transaction
2. Passive Income. Passive income is subject to a separate and fnal tax.

These are taxed at fxed rates ranging from 5% to 20%. Passive income
is not to be included in gross income computations.
Passivt Incoet Doets Rtsidt

tic nt
Fostign
Interests 20% 20%
Interests under foreign currency deposit system 7.50% 7.50%
Income under foreign currency deposit system 10% 10%
Royalties 20% 20%
Dividends from a domestic corporation Exempt Exempt
Capital gains from sale of shares of stocks not

traded in stock exchange
Not over ₱100,000
5% 5%
Amount in excess of ₱100,000
10% 10%
Capital gains on sale of land/buildings treated as 6%

capital assets, the higher value between gross
selling price and fair market value as determined by
the Commissioner
Coepatation of Incoet Tax

Doetstic and Rtsidtnt Fostign Cosposations, In Gtntsal
Pro-forma computation of the normal income tax of domestic and
resident foreign corporations follows:
Gross Income xx
Less: Allowable xx
Deductions
Net Income xx
Tax Due xx
Coepatation of Incoet Tax

Doetstic and Rtsidtnt Fostign Cosposations, In Gtntsal
Pro-forma computation of the normal income tax of domestic and
resident foreign corporations follows:
Salts 120,000 Salts 120,000
Ltss: Salts discoant 20,000 Ltss: Sdiscoant 20,000
Ntt Salts 100 NtSalts
100,000
Ltss: Cost of Goods sold 50,000 Ltss: Cost of
Goods sold 50,000
Gsoss Incoet 50,000 Gsoss Incoet
50,000
Ltss: Allowablt dtdactions 30,000 x MCIT satt
2%
Ntt Incoet 20,000 Incoet Tax
Dat 1,000
x Tax Ratt (Gtntsal 30%
Incoet Tax Dat 6,000
Gross Income xx
Less: Allowable xx
Deductions
Net Income xx
Tax Due xx
Iepsoptslye Accaealattd Easnings

Balanct Shttt
Ytas 1. Capital Stock 10,000,000 Ytas 1. IAE - ztso
Rttaintd Easnings 7,000,000
Ytas 3. Capital Stock 10,000,000 Ytas 3. IAE = RE -
Capital
Rttaintd Easnings 15,000,000 =
15,000,000 - 10,000,000 = 5,000,000 x IEA tax satt of 10% =
IAET 500,000
Ytas3 In Gtntsal - 6,000

In MCIT - 1,000
whichtvts is hights 6,000
plas IAET 500,0000
total tax dat = 506,000
Iepsoptslye Accaealattd Easnings - txaeplt 2

Balanct Shttt
Ytas 2. Capital Stock 15,000,000 Ytas 2. IAE = capital
stock > Rttaintd tasnings = 0
Ytas 3. Capital Stock 15,000,000 Ytas 3. IAE = RE =
Capital = 0
Ytas 4. Capital Stock 15,000,000 Ytas 4. IAE =
16,000,000 - 15,000,000 = 1,000,000 x IAET of 10% = IAET of
100,000
Rttaintd tasnings 16,000,000
Ytas 5. Capital Stock of 15,000,000 Ytas 5. IAE =
18,000,000 - 15,000,000 = 3,000,000 x IAER of 10% = IAET of
300,000
Rttaintd tasnings btginning 16,000,0000
Ntt incoet dasing tht yetas 5,000,000
Dividtnds dtclastd of 3,000,000
Rttaintd Easning tnding (btginning + ntt incoet -
dividtnds 18,000,000
Capital stock 15,000,000 paschast back - tstasasye shasts
Aathosiztd and issatd 15,000,000
Ltss: Tstasasye shast of 1,000,000
Capital stock issatd and oatstanding = 14,000,000
Doetstic Cosposations, In Pasticalas

1. Rtal Estatt Invtstetnt Tsast (REIT . Per Republic Act 9856 and
Revenue Regulations 13-2011, is a stock corporation established in
accordance with the Corporation Code of the Philippines and the rules
and regulations promulgated by the SEC, principally for the purpose of
owning income-generating real estate assets. For the tax purposes, a
REIT is considered a taxpayer engaged in the real estate business.
Hence, real properties owned by a REIT are considered ordinary assets.
To qualify for the tax incentives under Section 5 of RR 13-2011, a REIT
must:
 be a public company and maintain its status as a public company.
 for the DST incentive on transfer of real property provided for under
Section 6 of RR 13-2011, enlist with an Exchange within 2 years from the
date of initial availment of DST incentive and maintain the listed status
of the investor securities on the Exchange and the registration of the
investor securities by the SEC; and
 distribute at least 90% of its distributable income.
To be deductible, the dividends distributed should be at lease 90%

of REIT’s distributable income for the taxable year, and actually paid
to the shareholders not later than the last day of the 5th month from
the close of the taxable year. Dividends distributed by a REIT from
its distributable income after the close of a taxable year and on or
before the last day of the 5th month following the close of the
taxable year shall be considered as paid on the last day of such
taxable year.
Sec. 10 of RR 13-2011 mandates that the income tax collectible
from the dividends deducted from gross income should be placed in
escrow in favor of the BIR with an authorized agent bank. By the
end of the 3rd year from its listing, at the latest and thereafter, the
REIT shall maintain the 67% minimum public ownership. Otherwise,
dividend payment shall not be allowed as a deduction from its
taxable income.
In general, cash or property dividends paid by a REIT shall be
subject to a fnal tax of 10%, unless:
1. the dividends are received by a non-resident alien individual or a
non-resident foreign corporation entitled to claim a preferential
withholding tax rate of less than 10% pursuant to an applicable tax
treaty; or
2. the dividends are received by a domestic corporation or resident
foreign corporation, or an overseas Filipino investor in which case, they
are exempt from income tax or any withholding tax. In the case of
overseas Filipino investors, they are exempt from the dividends tax for 7
years from the efectivity of the RR 13-2011.
All income payments to a REIT shall be subject to a lower creditable

withholding tax of one percent. REITs shall not be subject to the
minimum corporate income tax. Other incentives include reduced
documentary stamp tax (DST) for transfers of real property and
shares of stock to the REIT and exemption of REIT securities from
the initial public ofering (IPO) tax.
2. Psopsittasye Non-psofit Edacational Institations and
Hospitals. The 10% tax on the taxable income is subject to limitation. If
the gross income from unrelated trade, business or other activity
exceeds ffty percent of the total gross income derived from all sources,
the tax prescribed under Section 27(A) shall be imposed on the entire
taxable income. (Insert example)
3. Govtsnetnt-owned or -controlled Corporations, Agencies or
Instrumentalities (GOCCs). Subject to the provisions of existing special
laws or general laws, all corporations, agencies, or instrumentalities
owned and controlled by the Government shall pay such rate of tax
upon their taxable income as are imposed by the Code upon
corporations or associations engaged in similar business, industry or
activity. The following are exempt:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health and Insurance Corporation (PHIC)
4. Local Water Districts
4. Powts Stctos Asstts and Liabilitits Managtetnt Cosposation
(PSALM . RMC 11-2012 clarifes the income tax consequences of
transactions of the PSALM, they are as follows:
1. No income and WT are due from the sale of the National Power
Corporation (NPC) generation assets and other real properties to winning
bidders.
2. The rental income of PSALM from the NPC generation assets and
other real properties, prior to its sale to winning bidders, is subject to
income tax.
3. Any income to be derived by PSALM from the operation of the
generation facilities is subject to income tax and withholding tax.
4. Other income or receipts from miscellaneous activities, such as
forfeiture of performance bonds, interest income from persons other
than the winning bidders, and from other activities not related to
PSALM’s mandate are subject to all applicable taxes under the Tax Code.
5. Mataal Lift Insasanct Coepanits. These companies are not
subject to the regular corporate income tax rates.
6. Hoetowntss’ Association. Association or condominium dues,
membership fees and other asssessments or charges, which are held in
trust by the condominium corporation to be used solely for
administrative expenses, are excluded from the condominium
corporation’s gross income, hence, not subject to income and
withholding tax.
7. Rtcstational Clabs. RMC 35-2012 clarifes the taxability of clubs
organized and operated exclusively for pleasure, recreation, and other
non-proft purposes. Income from whatever source, including but not
limited to membership fees, assessment dues, rental income and service
fees, of clubs organized and operated exclusively for pleasure,
recreation, and other non-proft purposes, are subject to income tax.
Rtsidtnt Fostign Cosposations, In Pasticalas

1. Inttsnational Cassits. Per Republic Act 10378 and Revenue
Regulations 15-2013, an international carrier doing business in the
Philippines shall pay a tax of 2.50% on its Gross Philippine Billings (GPB)
as follows:
1. Inttsnational Ais Cassits. GBP refers to the amount of gross
revenue derived from passage of persons, excess baggage, cargo, and
mail, originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment
of the passage documents.
2. Inttsnational Shipping. GBP means gross revenues whether
for passenger, cargo or mail originating from the Philippines up to fnal
destination, regardless of the place of sale or payments of the passage
or freight documents.
2. Offshost Banking Unnits (OBUns . Income derived by OBUs
authorized by the BSP, from foreign currency transactions with local
commercial banks, including branches of foreign banks that may be
authorized by the BSP to transact business with OBUs, including any
interest income derived from foreign currency loans granted to
residents, shall be subject to a fnal income tax at 10% of such income.
3. Bsanch Psofits Rteittancts. Any proft remitted by a branch
to its head ofce shall be subject to a tax of 15% which shall be based
on the total profts applied or earmarked for remittance without
deduction for the tax component thereof (except those activities which
are registered with the Philippine Economic Zone Authority).
4. Rtgional Optsating Htadqaasttss (ROHQs . A branch
established in the Philippines by multinational companies which are
engaged in any of the services listed below. ROHQs shall pay a tax of
10% of their taxable income.
1. General administration and planning
2. Business planning and coordination
3. Sourcing and procurement of raw materials, and components
4. Corporate fnance advisory services
5. Marketing control and sales promotion
6. Training and personnel management
7. Logistics services
8. Research and development services and product development
9. Technical support and maintenance
10. Data processing and communication
11. Business development
5. Rtgional os Asta Htadqaasttss (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 afliates, subsidiaries, or branches in the Asia-Pacifc Region and
other foreign markets. RHQs as such shall not be subject to income tax.
Non-stsidtnt Fostign Cosposation, In Gtntsal

The basis of tax for non-resident foreign corporation is gross income
from sources within the Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums), annuities,
emoluments or other fxed or determinable annual, periodic or casual
gains, profts and income, and capital gains.
The pro-forma computation of the income tax of non-resident foreign
corporations follows:
Gross income xx
Multiply by: Tax 30%
Rate
Tax due xx
Under Section 42(A)(3) of the Tax Code, income from services is

considered derived from sources within the Philippines only if the
services are performed in the Philippines. Hence, income from services
performed by a non-resident foreign corporation entirely outside the
Philippines is exempt from Philippine income tax.
Non-stsidtnt Fostign Cosposation, In Pasticalas

1. Non-stsidtnt Cinteatogsaphic File Ownts, Ltssos os
Distsibatos. Taxed at 25% of gross income.
2. Non-stsidtnt Ownts os Ltssos of Vtsstls Chasttstd bye
Philippint Nationals. Taxed at 4,50% of gross rentals, lease or charter
fees from leases or charters to Filipino citizens or corporations, as
approved by the Maritime Industry Authority.
3. Non-stsidtnt Ownts os Ltssos of Aiscsaft, Machintsye and
Othts Eqaipetnt. Taxed at 7.50% of gross rentals, charters and other
fees.
Passivt Incoet of Non-Rtsidtnt Fostign Cosposation (see Tax

Code)
Allowablt Dtdactions
Items or amounts which the law allows to be deducted from gross
income in order to arrive at the taxable income. A domestic or resident
foreign corporation may deduct from its business income, itemized
deductions under the Tax Code. Or, these corporations may elect a
standard deduction in an amount not exceeding 40% of its gross
income. Non-resident foreign corporations are not allowed deductions
from gross income.
Cosposations Extept fsoe Incoet Tax (Please see Section 30 of
NIRC)
Soasct: Incoet Taxation bye Ballada & Ballada, 2019 Issat

17th Edition
MINIMUM CORPORATE INCOME TAX (MCIT)
A minimum corporate income tax (MCIT) of 2% of the gross income as of
the end of the taxable year is imposed upon any domestic corporation
beginning the 4th taxable year (whether calendar or fscal year,
depending on the accounting period employed) 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
 the amount of minimum corporate income tax is greater than the
normal income tax due from such corporation.
In 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.
Relief from the MCIT under certain conditions
The Secretary of Finance, upon recommendation of the Commissioner,
may suspend the imposition of the MCIT upon submission of proof by the
applicant-corporation, duly verifed by the Commissioner’s authorized
representative, that the corporation sustained substantial losses on
account of a prolonged labor dispute or because of “force majeure” or
because of legitimate business reserves.
Period subject to MCIT
For purposes of the MCIT, the taxable year in which business operations
commenced shall be the year in which the domestic corporation
registered with the BIR. Firms which were registered with the BIR in
1994 and earlier years shall be covered by the MCIT beginning Jan. 1,
1998. Firms which were registered with BIR in any month in 1998 shall
be covered by the MCIT in 2002 after the lapse of three calendar years
from 1998.
The reckoning point for frms using the fscal year shall also be 1998.
Accounting Treatment of Excess MCIT Paid
Any amount paid as excess MCIT shall be recorded in the corporation’s
books as an asset under account title Deferred Charges – MCIT. This
asset account shall be carried forward and may be credited against the
normal income tax due for a period not exceeding 3 taxable years
immediately succeeding the taxable year/s in which the same has been
paid.
Any amount of the excess MCIT which has not or cannot be so credited
against the NIT due for the 3-year reglementary period shall lose its
creditability. Such amount shall be removed and deducted
from Deferred Charges – MCIT account by a debit entry to Retained
Earnings account and a credit entry to Deferred Charges – MCIT account
since this tax is not allowable as deduction from gross income it being
an income tax.
Pro-forma journal entry for the accounting treatment of excess MCIT
paid will be as follow:
First Year

Income tax payable
xx
To record income tax liability using the NIT rate.

Income tax payable
xx
To record excess MCIT.

Cash in bank
xx
To record payment of income tax due for the frst year.
Second Year

Income tax payable
xx
To record income tax liability using NIT rate.

Deferred charges – MCIT
xx
To record application of excess MCIT against NIT liability
for second taxable year.

Cash in bank
xx
To record payment of income tax due.
Third Year
Retained earnings xx
Deferred Charges – MCIT
xx
To record the expired portion of Deferred Charges –

MCIT.
Domestic Corporations not subject to MCIT

The MCIT shall apply only to domestic corporations subject to NIT.
Accordingly, the MCIT shall not be imposed upon any of the following:
1. Domestic corporations operating as proprietary educational
institutions subject to tax at 10% on their taxable income; or
2. Domestic corporation engaged in hospital operations which are
non-proft subject to tax at 10% on their taxable income; and
3. Domestic corporations engaged in business as depository banks
under the expanded foreign currency deposit system, on their income
from foreign currency transactions with local commercial banks,
including branches of foreign currency deposit system units and other
depository banks under the foreign currency deposit system, including
their interest income from foreign currency loans granted to residents of
the Philippines under the expanded foreign currency deposit system,
subject to fnal income tax at 10% of such income.
4. Firms that are taxed under a special income tax regime such as
those in accordance with RA 7916 and 7227.
5. Real estate investment trusts in accordance with RA 9856 and
RR 13-2011.
Suspension of the MCIT

In order that cessation of business activities as a result of being placed
under involuntary receivership may be a basis for the recognition of the
suspension of the MCIT, such a situation should be properly defned and
included in the regulations. Pending such inclusion, the same cannot yet
be invoked.
A minimum corporate income tax (MCIT) of 2% of the gross income from
sources within the Philippines is imposed upon any resident foreign
corporation, beginning on the 4th taxable year (whether calendar or
fscal year, depending on the accounting period employed) immediately
following the taxable year in which the corporation commenced its
business operations, whenever the amount of the MCIT is greater than
the NIT due for such year.
In computing for the MCIT due from a resident foreign corporation, the
rules prescribed on domestic corporations apply provided that only the
gross income from sources within the Philippines shall be considered for
such purposes.
Resident Foreign Corporations not subject to MCIT
The MCIT shall only apply to resident foreign corporations which are
subject to NIT. Accordingly, the MCIT shall not apply to the following
resident foreign corporations:
1. Resident foreign corporations engaged in business as
“international carrier” subject to tax at 2.50% of their “gross Philippine
billings.”
2. Resident foreign corporations engaged in business as OBUs on
their income from foreign currency transactions with local commercial
banks, including branches of foreign banks, authorized by the BSP to
transact business with OBUs, including interest income from foreign
currency loans granted to residents of the Philippines, subject to a fnal
income tax at 10% of such income
3. Resident foreign corporations engaged in business as regional
operating headquarters subject to a tax at 10% of their taxable income
4. Firms that are taxed under a special income tax regime such as
those in accordance with RA 7916 and 7227.
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

In addition to other taxes imposed under Title II if the Tax Code of 1997,
there is imposed for each taxable year a tax equal to 10% of the
improperly accumulated taxable income of corporations formed or
availed of for the purpose of avoiding the income tax with respect to its
shareholders or the shareholders of any other corporation, by permitting
the earnings and profts of the corporation to accumulate instead of
dividing them among or distributing them to the shareholders.
The rationale is that if the earnings and profts were distributed, the
shareholders would then be liable to income tax thereon, whereas if the
distribution were not made to them, they would incur no tax in respect
to the undistributed earnings and profts of the corporation. Thus, a tax
is being imposed in the nature of a penalty to the corporation for the
improper accumulation of its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividends
tax on the earnings distributed to them by the corporation.
The IAET shall not apply to the following corporations:
 Banks and other non-bank fnancial intermediaries
 Insurance companies
 Publicly-held corporations
 Taxable partnerships
 General professional partnerships
 Non-taxable joint ventures
 Enterprises duly registered with the PEZA
Tax Base of Improperly Accumulated Earnings Tax
The proper computation of the IAET, as follows:
Taxable income for the year xx
Add:
Income subjected to fnal tax
xx
Net operating loss carryover (NOLCO)
xx
Income exempt from tax
xx
Income excluded from gross income
xx xx
xx
Less:
Income tax paid
xx
Dividends declared/paid
xx xx
Total
Add: Retained earnings from previous year xx
Accumulated earnings, end of the year xx
Less: Amount that may be retained (100% of paid-up xx

capital, end of the year)
Improperly accumulated taxable income xx
IAET rate 10%
Improperly accumulated earnings tax xx
Gross Income Tax for Corporations

The President, upon the recommendation of the Secretary of Finance,
may allow corporations to be taxed at 15% of gross income, efective
Jan. 1, 2000 after the following conditions have been satisfed:
 A tax efort ratio of 20% of GNP
 A ratio of 40% of income tax collection to total tax revenues
 A VAT tax efort of 4% of GNP
 A 0.9% ratio of the Consolidated Public Sector Financial Position to GNP
The option to be taxed based on gross income shall be available only to
frms whose ratio of cost of sales to gross sales or receipts from all
sources does not exceed 55%. The election of the gross income tax
option by the corporation shall be irrevocable for 3 consecutive taxable
years during which the corporation is qualifed under the scheme.
Resident foreign corporations engaged in trade or business within the
Philippines have the option to be taxed at 15% of gross income under
the same conditions required of domestic corporations.
Gross Income and Tax Due

The computation of gross income and tax due for a
trading/merchandising concern and manufacturing concern follows:
Gross sales xx
Less: Sales returns xx
Sales discounts
xx
Sales allowances
xx xx
Net sales xx
Less: Cost of xx
goods/manufactured sold
Gross income xx
Multiply by 15%
Gross income tax due xx
The rules in taxation of individuals generally apply to estates and trusts. The
taxable income of an estate or trust shall be computed in the same manner
and on the same basis as in the case of an individual. Estates and trusts are
allowed a personal exemption of ₱20,000. The income tax rates for individual
taxpayers likewise apply. The taxable year of estates and trusts shall be the
calendar year. Just like individuals, estates and trusts are required to fle a
declaration of estimated income for the current taxable year on or before
April 15 of the same taxable year.
Definition of terms
Estate or inheritance. Refers to all the properties, rights and obligations of
a person which are not extinguished by his death and also those which have
accrued thereto since the opening of the succession.
Trust is an agreement created by will or an agreement under which title to
property is passed to another for conservation or investment with the income
therefrom and ultimately the corpus or principal to be distributed in
accordance with the directives of the creator as expressed in the governing
instrument.
Trustor or grantor is the person who establishes a trust.
Beneficiary is the person for whose beneft the trust has been created, A
benefciary has equitable title to the property transferred to the trust,
including, generally, the possession and use of the property.
Fiduciary is the general term which applies to all persons or corporations
that occupy positions of peculiar confdence towards others, such as
trustees, executors, guardians, or administrators, receivers, or conservators.
For income tax purposes, a fduciary is any person or corporation that holds
in trust an estate of another person or persons.
Taxable Estates
When an individual is alive, income on his or her property (e.g., interest
income on bonds, dividend income on stocks, rental income on an apartment
complex) is taxed to that individual. When the individual dies, future income
on that property will be taxed to those who will inherit the property. When
the individual dies, future income on that property will be taxed to those who
inherit the property. However, income on property is taxable to the heirs
only after they received the property. The receipt of the property itself is
excluded from income. Often there is considerable time lag between the
time a person dies and when fnal settlement of the estate occurs. Thus, a
relevant question to ask is who is taxed on income realized from the
decedent’s property during this interval. The answer provided by the Code is
that the estate itself is taxed. Estates are legal entities that exist for the
purpose of managing and distributing the deceased person’s property to the
heirs. While this property is in the estate, the property might earn some
income. The income will be taxed to the estate.
Taxable estates are estates of deceased persons under judicial settlement.
Taxation of an estate begins from the time of death. Hence, any income
received after the death shall form part of the income of the estate. Income
of estates not under judicial settlement are not taxable to the estate. In this
case, a co-ownership is created and the co-owners, after actual or
constructive receipt of the income are the ones liable to income tax in their
individual capacities.
Taxable Trusts
An individual may want another family member, such as a son or daughter,
to become the owner of some particular piece of the individual’s property
(e.g., stocks, rental property). However, the individual may feel that the son
or daughter is not capable of managing the property. In this situation, the
individual could transfer the property to a trustee in order to have the
trustee manage the property for the beneft of the son or daughter. This
legal arrangement is known as a trust, and the son or daughter would be
called the benefciaries of the trust.
Trusts are a unique form of legal entity, being neither pure taxpayer nor pure
conduit. For taxpayers such as corporations, all income is taxed to the
income-earning organization. For conduits such as general professional
partnerships, no income is taxed to the income-earning organization. Rather,
income is taxed to the owners of the partnership when earned, regardless of
whether that income is distributed to them. The taxation of trusts and their
benefciaries falls between these two extremes, having elements in common
with the tax treatments of both taxpayers and conduits.
Pre-tax income earned by a trust may be either retained by the trust or
distributed to the trust’s benefciary. If retained by the trust, the income is
taxed to the trust itself, not the benefciary. If the income is distributed, the
trust is allowed a deduction in determining its taxable income, and the
benefciary must include the receipt of the distribution as taxable income at
the individual level. All of the current income on trust property is taxed to
either the trust or the benefciary, depending on which party has current
possession of the income.
For a trust to be taxable, it must be irrevocable, meaning it cannot be
changed by recall or cancellation, both as to corpus or principal and income.
In a revocable trust where title to income may be revested in the grantor,
the trust itself is not subject to income tax. It is the grantor who is taxable. In
case of trust where the income may be held or distributed for the beneft of
the grantor, such income is likewise taxable directly to the grantor.
Gross Income
The items of gross income of estates and trusts are the same items of gross
income of individuals as provided in the Tax Code. They include:
1. Income accumulated in trust for the beneft of unborn or unascertained
person or person with contingent interests, and income accumulated or held
for future distribution under the terms of the will or trust.
2. Income which is to be distributed currently by the fduciary to the
benefciaries, and income collected by a guardian of an infant which is to be
held or distributed as the court may direct.
3. Income received by estates of deceased persons during the period of
administration or settlement of the estate.
4. Income which, in the discretion of the fduciary, may be either
distributed to the benefciaries or accumulated.
Estate or trust is allowed a personal exemption of ₱20,000. This is regardless
of the number of trusts a benefciary may receive income from. Aside from
the personal exemption of ₱20,000 allowed, income of trust or estate may be
deductible from gross income.
Income which is to be distributed currently by the fduciary to the
benefciaries; and income collected by a guardian of an infant which is to be
held or distributed as the court may direct, are deductible from gross income
of the fduciary. This is so because such income is taxable directly to the
benefciary, whether distributed or not.
Income received by estates of deceased persons during the period of
administration or settlement of the estate; and income which, in the
discretion of the fduciary, may be either distributed to the benefciaries or
accumulated, are taxable either to the fduciary or benefciary, depending on
the amounts paid or credited to the legatee, heir or benefciary.
If taxable to the fduciary (meaning no income has been distributed to the
benefciary), the income is not deductible from the gross income of the
fduciary. But if taxable to the benefciary, such income shall form part of the
gross income of the fduciary and is deductible from such gross income. The
income thus distributed is to be included in the gross income of the
benefciary. The deductions just discussed shall not be allowed in the case of
a trust administered in a foreign country.
Illustration. Ms. Red Butterfy died on August 14, 2014. Her estate is now
under judicial settlement. The estate had ₱1,500,000 gross income from
August 14 to December 31, 2014. Expense related to this income was
₱400,000. There was no distribution of income among the Heirs. How much
was the tax due for the year?
1,500,0
Gross income
00
400,0
Less: Deductions
00
Personal 20,00
420,000
exemptions 0
1,080,0
Taxable income
00
Tax due:
On 500,000 125,000
580,000 185,000
310,600
Illustration. Mr. Henry Argos created an irrevocable trust designating his

two daughters, aged 3 and 1 as benefciaries. Under the terms of the trust,
only half of the income shall be distributed to the benefciaries. The other
half shall be left to accumulate and be distributed when the benefciaries
reach 21 years of age. For the year 2014, income of the trust was ₱500,000.
Compute for the tax due.
₱500,0
Gross income
00
₱250,0
Less: Deductions (50%)
00
Personal 270,00
20,000
exemption 0
₱230,0
Taxable income
00
Tax due:
₱22,50
On ₱140,000
0
90,000 at 25% 22,500
₱45,00
0
Consolidation of Income of Two or More Trusts

When two or more trusts are created by the same grantor and the
benefciary in both trusts is the same, the taxable income of all the trusts
shall be consolidated and the tax computed on such consolidated income.
Consolidated gross income xx

Less: Consolidated deductions xx
Consolidated taxable income xx
Less: Personal exemption xx
Taxable income xx
Multiply by: Tax rate in Sec. 24(A) xx
Amount of income tax on consolidated
xx
taxable income
Each trustee shall compute his share of the income tax on the consolidated
taxable income based on the formula below:
Illustration. Mr. Anilov maintains two irrevocable trusts that name his three
children, all minors, as common benefciaries. The terms of the trusts provide
that no income shall be distributed to the benefciaries until the youngest
should become 25 years of age. Following are data relative to the trusts:
Trust 1 Trust 2
Gross income ₱450,000 ₱600,000
Deductions 150,000 200,000
The share of each trust on the income tax on consolidated taxable income in
2014 is computed below:
Consolidated gross
₱1,050,000
income
Less: Consolidated
350,000
deductions
Consolidated taxable
700,000
income
Less: Personal exemption 20,000
Taxable income 680,000
Tax due on consolidated taxable income:

On ₱500,000 ₱125,000
180,000 at 32% 57,600
₱182,600
Trust 1: ₱78,257 = (300,000/700,000) * 182,600
Trust 2: ₱104,343 = (300,000/700,000) * 182,600
Practical Application of Taxation on Corporations
Domestic and Resident Foreign Corporations, In General
Generally, the pro-forma computation of the normal income tax of domestic and resident foreign
corporations follows:
Gross income xx
Less: Allowable deductions xx
Net income xx
Tax Due xx
For domestic and resident corporations adopting the fiscal-year accounting period, the taxable income
shall be computed without regard to the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned
and spent equally for each month of the period.
The corporate income tax rate of 35% became effective beginning Nov. 1, 2005 (RA 9337). This law
presented a scenario where the months of January to October 2005 are under the rate of 32%.
Regardless of the taxable year (calendar or fiscal) followed, the formula determining the total tax due for
the year shall be as follows (RMC 16-06, Feb. 21, 2006):
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑥 𝑁𝑜. 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑐𝑜𝑣𝑒𝑟𝑒𝑑 𝑏𝑦 32%
[ ] 𝑥 32% = ₱𝑥𝑥𝑥
12
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑥 𝑁𝑜. 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑐𝑜𝑣𝑒𝑟𝑒𝑑 𝑏𝑦 35%
[ ] 𝑥 35% = ₱𝑦𝑦𝑦
12
₱𝑥𝑥𝑥 + ₱𝑦𝑦𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑥 𝐷𝑢𝑒 𝑝𝑒𝑟 𝐼𝑇𝑅
Illustration. Warranty Corporation’s fiscal year ended Mar. 31, 2006. It has a taxable income of ₱600,000
for the fiscal year, its second year of operations. The income tax payable for the fiscal year-ended Mar.
31, 2006 is computed below:
April – Oct. 2005:

(₱600,000 𝑥 7 𝑚𝑜𝑛𝑡ℎ𝑠)
[ ] 𝑥 32% = ₱112,000
12
Nov. 2005 – Mar. 2006:
(₱600,000 𝑥 5 𝑚𝑜𝑛𝑡ℎ𝑠)
[ ] 𝑥 35% = ₱87,500
12
Total Tax Due per ITR
₱112,000 + ₱87,500 = ₱199,500

Effective Jan. 1, 2000, the President upon the recommendation of the Secretary of Finance is allowing
corporations to be taxed at fifteen percent (15%) of gross income on certain conditions.
Domestic Corporations, In Particular

1. Proprietary Non-Profit Educational Institutions and Hospitals
The 10% tax on the taxable income is subject to limitation. If the gross income from unrelated trade,
business or other activity exceeds fifty percent of the total gross income derived from all sources, the
tax prescribed under Section 27(A) shall be imposed on the entire taxable income.
Illustration 1. SGB University, a proprietary educational institution, has a gross income for the taxable
year 2014 of ₱15 million. Of the total gross income, ₱5 million was derived from unrelated trade or
business. Total deductions amount to ₱3 million.
Gross income ₱15,000,000

Less: Allowable deductions 3,000,000
Net income ₱12,000,000
Tax Due ₱1,200,000
The 10% tax rate applies because the gross income from unrelated trade or business did not exceed
the 50% limit of the total gross income (only 33.33% or ₱5,000,000/₱15,000,000).
Illustration 2. In the preceding illustration, maintain all assumptions except that the institution’s gross
income derived from unrelated trade or business is ₱9 million. How much is the tax due?
Gross income ₱15,000,000

Less: Allowable deductions 3,000,000
Net income ₱12,000,000
Tax Due ₱3,600,000
The gross income from unrelated trade or business is more than 50% of the total gross income. It is
actually 60% (₱9 million/₱15 million). Hence, the tax rate that applies is the tax rate prescribed in
Section 27(A).
Notes:
Unrelated trade, business or other activity means any trade, business or other activity, the conduct of
which is not substantially related to the exercise or performance by such educational institution or
hospital of its primary purpose or function.
A proprietary educational institution is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and rules
and regulations.
Declaration of Quarterly Corporate Income Tax
Every corporation shall file in duplicate a quarterly summary declaration of its gross income and
deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax shall
be levied, collected and paid. The income tax computed decreased by the amount of tax previously paid
or assessed during the preceding quarters shall be paid and the return filed not later than sixty (60) days
from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal. A
return showing the cumulative income and deductions shall still be filed even if the operations for the
quarter and the preceding quarters yielded no tax due.
Every taxable corporation is likewise required to file a final adjustment return covering the total taxable
income of the corporation for the preceding calendar or fiscal year, which is required to be field and paid
on or before April 15, or on or before the 15th day of the 4th month following the close of the fiscal year,
as the case may be.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax
due on the entire taxable income of that year, the corporation shall either:
a. Pay the balance of tax still due; or

b. Carry over the excess credit; or
c. Be credited or refunded with the excess amount paid.
Illustration. The result of operations of a corporation for 2014 whose taxable year is on a calendar year
basis, is as follows:
Gross Income Deduction Net Income

1st Quarter (Jan.1 - Mar. 31) 500,000.00 300,000.00 200,000.00
2nd Quarter (Apr. 1 - Jun. 30) 600,000.00 350,000.00 250,000.00
3rd Quarter (Jul. 1 - Sept. 30) 700,000.00 400,000.00 300,000.00
4th Quarter (Oct. 1 - Dec. 31) 800,000.00 450,000.00 350,000.00
Tax Credit for overpaid income tax for the preceding year is ₱50,000.
The tax return to be filed for the 1st quarter follows:
Gross income this quarter 500,000.00

Less: Deductions 300,000.00
Taxable income 200,000.00
Income tax due

(200,000 x 30%) 60,000.00
Less: Tax credit 50,000.00
Balance of Tax to be paid this quarter 10,000.00
The return for the second quarter to be filed follows:

Add: Gross income for 1st quarter 500,000.00
Gross income for 1st and 2nd quarters 1,100,000.00
Less: Deductions
1st quarter 300,000.00
2nd quarter 350,000.00 650,000.00
Income tax due

(450,000 x 30%) 135,000.00
Less: Tax due for previous quarter
Income tax due this quarter 75,000.00
The return to be filed for the 3rd quarter is shown below:

Add: Gross income for previous quarters
2nd quarter 600,000.00 1,100,000.00
Gross income for 1st, 2nd and 3rd quarters 1,800,000.00
Less: Deductions
2nd quarter 350,000.00
3rd quarter 400,000.00 1,050,000.00
Income tax due

(750,000 x 30%) 225,000.00
Less: Income tax due for previous quarters
2nd quarter 75,000.00 135,000.00
Income tax due this quarter 90,000.00
The final adjustment return shall be filed and the tax due thereon paid on or before April 15 of the
following year. Computation follows:
Gross income, 4th quarter 800,000.00
Add: Gross income for previous quarters
3rd quarter 700,000.00 1,800,000.00
Gross income for the year 2,600,000.00
Less: Deductions
3rd quarter 400,000.00
4th quarter 450,000.00 1,500,000.00
Taxable income 1,100,000.00
Income tax due

(1,100,000 x 30%) 330,000.00
Less: Income tax due for previous quarters
3rd quarter 95,000.00 225,000.00
Income tax due, 4th quarter 105,000.00
Note at this point that the computation and the payment of MCIT, shall likewise apply at the time of filing
the quarterly corporate income tax. Thus, in the computation of the tax due for the taxable quarter, if the
computed quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such
taxable quarter at the time of filing the quarterly corporate income tax return shall be the MCIT (which is
two percent (2%) of the gross income as of the end of the taxable quarter).
In the payment of said quarterly MCIT, excess MCIT from the previous taxable year/s shall not be allowed
to be credited. Expanded WT, quarterly corporate income tax payments under the normal income tax,
and the MCIT paid in the previous taxable quarter/s are allowed to be applied against the quarterly MCIT
due (RR 12-2007).

Income Taxation

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Income Taxation

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TAXATION OF PARTNERSHIPS AND PARTNERS

In a contract of partnership, the partners agree to contribute money, property, or industry to a

Classification of General Partnerships in Taxation

2. General co-partnership (compania colectiva)

Sales of service, GPP ₱ 2,500,000

Partner Jay Partner Joy

Partner Jay Partner Joy

Income Tax Due

Taxable Income Bracket Tax Rate

If the GPP availed OSD in computing for the net income.

Partner Jay Partner Joy

Income Tax Due

If Itemized deduction If OSD

Taxable income from business

Income tax due, whichever is higher

Partner JMLH: Itemized OSD

Course Title Income Taxation

Topic title: Basic Principles of Taxation

Time Allotment: 2 hours

Module Learning Objectives:

Theory and basis of taxation

1. The existence of the government is a necessity.

BASIC PRINCIPLE OF A SOUND TAX SYSTEM

Nature or characteristics of the state’s power to tax

Limitations on the power of taxation

1. Requirement that levy must be for a public purpose

What are the essential elements of a tax?

1. As to subject matter or object

Inherent powers of the government

It means the place of taxation.

Situs of taxation shall be as follows:

1. Business – Place where the business is conducted

Forms of escape of taxation

Basic forms of escape from taxation:

A. Those that do not reduce the revenue collection of the government

Sources of Tax Laws

The Bureau of Internal Revenue

a. Powers, duties and functions of the bureau

Chief officials of the BIR

Power to make assessments

1. To examine returns and determine tax due

Bureau’s authority to inquire into bank deposits of taxpayers

1. To determine the gross estate of the decedent

The following are the minimum amounts for compromise settlement:

All criminal violations may be compromised, except:

Those already filed in court or those involving fraud.

Abatement(reduction) or cancellation of tax liability

The commissioner may abate or cancel tax liability when:

1. The tax or any portion thereof appears to be unjustly or excessively assessed

Non-delegable powers of the Commissioner

Refund or credit of taxes

The following guidelines are applicable on tax credit or refund:

Topic title: Taxation on Individuals

Time Allotment: 2 hours

Module Learning Objectives:

1. Identify the individual income taxpayers.

Classification of Individual Income Taxpayers

Individual Source of Income

Graduated & subject 8% and not subject

CATEGORIES OF INCOME AND TAX RATES

1) From compensation income

Individual Taxpayers Allowed Personal Exemptions

a) Income Tax Rates

Effective January 1, 2023 and onwards: