INCLUSIONS IN GROSS INCOME

GROSS INCOME, DEFINED

Gross income means the total income of a

taxpayer subject to tax. It includes the gains,
profits, and income derived from whatever
source, whether legal or illegal.

It does not include income excluded by law,

or which are exempt from income tax.

Gross Income means all income derived from

whatever source, including, but not limited to,
the following items: (Section 32, RA 8424)

1. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items (including pensions and retiring allowances except
those exempt by law)
2. Gross income derived from the conduct of trade or business or the exercise of a profession;
3. Partner's distributive share from the net income of the general professional
partnership. 4. Rents;
5. Annuities (excess over premium paid)
6. Gains derived from dealings in property
7. Interests
8. Royalties
9. Dividends
10. Prizes and winnings

Note: The above enumeration is not exclusive. Gross income may also include other forms of
income which are not even mentioned in the list above. An example of this would be income
from illegal sources.
ITEMS OF GROSS INCOME

1. COMPENSATION FOR SERVICES

Compensation for services, of whatever kind and in

whatever form paid, forms part of gross income.
The name by which the remuneration for services
is designated is immaterial. Thus, salaries, wages,
emoluments and honoraria, allowances,
commissions (e.g. transportation, representation,
entertainment, and the like); fees, including
director’s fees, if the director is, at the same time,
an employee of the employer/corporation; taxable
bonuses and fringe benefits, except those which are
subject to the fringe benefits tax under Section 33
of the Tax Code; taxable pensions and retirement
pay; and other income of a similar nature constitute
compensation income.

A. Compensation Income which may be in the following forms:

1. Cash
2. Allowances
3. Property – the Fair Market Value of the thing taken in payment is the amount of
compensation.
4. Employer’s stock – the Fair Market Value of the shares at the time the services were
rendered.
5. Promissory notes – the fair discounted value of the note as of the time of receipt. The
employee shall also record additional income upon the recovery of the discount.
6. Forgiveness of debt for services rendered to a creditor

Note: Where the debtor is a stockholder of the corporation condoning the debt, the
condonation of the debt amounts to an indirect payment of dividend.
 7. Income tax of the employee assumed or paid by the employer, in consideration of the
latter’s services.
8. Pensions and retiring allowances – except those exempted by law.
9. Stock options - the Fair Market Value of the stock option at the time the services were
rendered by the employee.

B. Stock Options

1. The amount of compensation shall be the Fair Market Value of the stock options at the time
the services were rendered.
2. When the employee exercises the option by paying the exercise price (equity-settlement
option), it results in additional income. Such additional income shall equal the higher of
the book value or Fair Market Value of the shares, less the exercise price.
a. If the employee is a rank and file employee, the additional income shall be recognized
by the employee as taxable compensation and shall be subject to the Creditable withholding
tax on compensation.
b. If the employee is a supervisory or managerial employee, the additional income shall be
treated as a fringe benefit subject to the final Fringe benefits tax.
3. When the grantor (the corporation) simply pays the difference between the Fair Market
Value of the shares and the exercise price (cash-settlement option), the same rules in (2) above
apply.

C. Fringe Benefits which may be in the form of

1. Meals furnished or subsidized by the employer
2. Living
3. Life insurance premiums paid by the employer
where the insured employee is the beneficiary.
4. Facilities or privileges provided by the employer
5. Allowances
Fringe benefits are classified under the following categories, namely:

Those subject to the fringe benefits tax (FBT)

Fringe benefits given to employees holding managerial or supervisory positions, and which are
listed in RR No. 3-98, as amended.

Those included in gross income in the Income tax return (ITR)

1. Fringe benefits given to rank and file employees.
2. Fringe benefits given to employee holding managerial or supervisory employees and
which are not listed in RR No. 3-98, as amended.

Those which are not taxable

1. Fringe benefits given to employees for the convenience of the employer, or if incurred by
the employee in the pursuit of the trade, business, or profession of the employer and are
liquidated and accounted for by the employee.
2. De minimis fringe benefits

D. Salaries and Allowances During Leaves of Absence

Salaries and allowances during leaves of absence refer to the compensation and benefits that
an employee may receive while they are temporarily not working due to an approved leave of
absence from their job. Leaves of absence can be granted for various reasons, such as medical
leave, maternity or paternity leave, personal reasons, or educational pursuits.

E. Separation Pay Not Due to a Cause Beyond the Control of the Employee

General Rule: Separation pay is included in gross income of separated employees.

Exception: If separation is caused by something not of the employee’s making.

For example, if separation is due to cessation of the business, or as a consequence of death,

sickness, other physical disability, or for any cause beyond his control, the separation pay shall
be exempt from tax.
F. Fees

Fees received by an employee for the performance of a service for the employer, including per
diems and allowances), are regarded as compensation income.

Marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other
contributions received by a clergyman, evangelist, or religious worker for services rendered
are considered compensation.

Exception: Authorized fees paid to public officials, such as notaries public, clerks of count,
sheriffs, etc., for services rendered in the performance of their official duties, are not
considered wages.

G. Dismissal Payment

Any payment made by an employer to an employee on account of dismissal, that is, involuntary
separation from the service of the employer, constitutes wages, regardless of whether the
employer is legally bound by contract, statute, or otherwise to make such payment.

H. Tips and Gratuities

Tips or gratuities paid directly to an employee (by a customer of the employer) which are not
accounted for by the employee to the employer are considered taxable income, but not subject
to withholding tax
2. GROSS INCOME FROM BUSINESS

A. In general, “gross income” means total sales less Cost of Goods Sold, plus any income
from investments and from any incidental or outside operations or sources.

FORMULA:
Gross sales xxx
Less: Cost of goods sold xxx
Gross profit from sales xxx
Add: Other income:
(a) Income from investment xxx
(b) Income from incidental or outside operations or sources xxx
Gross income xxx

B. Income from Long Term Contracts

The term “long-term contracts” refers to construction, installation, or building contracts

requiring a period longer than one (1) year for completion.
Income therefrom is reported under the percentage of completion basis.

C. Gross Income from Farming

The income tax regulations prescribe three (3) methods of reporting the gross income from
farming, namely:

1. Cash basis, or receipts and disbursement basis. Under this method, no inventory is used
to determine profits.
Cash from sales of livestock and other products raised in the farm xxx
Add: Value of property received from sales xxx
Profits/Gains from the sale of livestock or other items purchased xxx
Gross income from all other sources xxx
Total Gross Income xxx
2. Accrual basis. Under this method, inventory is used to determine profits.
Sales xxx
Ending inventory xxx
Beginning inventory (xxx)
Purchases (xxx)
Gross income xxx

3. Crop basis. This method of reporting income may be used by a farmer engaged in
producing crops which take more than (1) year from the time of planting to the time of
gathering and disposing of the crop.

In such cases, the entire cost of producing the crop must be taken as a deduction in the year in
which the gross income from the crop is realized.

D. Gross Income from Petroleum Operations

Gross income from petroleum operations means its total entitlement of the gross proceeds from
the sale at market price, during the taxable year, of petroleum produced under the service
contract, and such other income incidental to and arising from any of the petroleum operations
of the contractor.

Provided, the amount of Filipino participation incentive allowance received by a Philippine

corporation pursuant to an operating agreement under petroleum service contract between a
service contractor and the Government under P.D. No. 87 shall not be included in the gross
income of the Philippine corporation.

4. PAYMENTS MADE BY A GENERAL PROFESSIONAL PARTNERSHIP TO A

PARTNER, AND THE DISTRIBUTIVE SHARE OF PARTNERS IN THE NET
INCOME OF A GENERAL PROFESSIONAL PARTNERSHIP

Under Section 26 of the National Internal Revenue Code (NIRC) of 1997, as amended, a
general professional partnership as such shall not be subject to income tax. However, persons
engaging in business as partners in a general professional partnership shall be liable for income
tax only in their separate and individual capacities, thus:
“SEC. 26. Tax Liability of Members of General Professional Partnerships. – A general
professional partnership as such shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a general professional partnership
shall be liable for income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the
partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively
received, in the net income of the partnership.

5. RENT OR LEASE INCOME

VALUATION:
Rental Payments xxx
Expenses of the lessor assumed by the lessee xxx
Income from leasehold improvements xxx
Total Rental Income xxx

Rental Payments

Rental income shall be taxable on the year received,

whether earned or unearned, provided, there is no
restriction as to its use, and regardless of method of
accounting employed.

Security Deposit

Security deposit shall be taxable:

1. Upon forfeiture in favor of the lessor; or
2. Upon application as rental payments.
 Leasehold Improvements
Improvements made by the lessee shall be
treated as income of the lessor. If:
1. The improvements will be owned by the
lessor at the end of the lease.
2. The lessor is not required to pay the
lessee the value of such improvements.

Income from leasehold improvements is reported as follows:

Method Valuation of Income

Outright Fair Market Value of Improvements

Spread-Out Book Value at the end of lease term/Remaining term of the lease

Reporting of Income by a Lessor

Rent paid by the lessee for the use or lease of property is taxable income to the lessor.

Rent income may be in the following forms:

1. Cash at the stipulated price.
2. Obligations of the lessor to third persons paid or assumed by the lessee in consideration of
the contract of lease. An example is the real estate tax on the property leased assumed by
the lessee.

3. Advance payment which must be pre-paid rentals and not:

A loan to the lessor
Option money for the property
Security deposit for the faithful performance of the lessee’s obligations.

Prepaid rent must be reported in full in the year of receipt, regardless of the accounting method
used by the lessor.
4. Leasehold improvement.

The contract of lease may provide that the lessee may make permanent improvements on the
leased property and said improvements will belong to the lessor upon termination of the lease.

Income and Deduction from Leasehold Improvement

A. Income of Lessor - The lessor, in such a case, may, at his option, report income under any
of the following methods:
1. Outright method – Lessor reports as income of the Fair Market Value of the improvement
in the year of completion.
2. Spread-out method – The lessor shall spread over the remaining term of the lease the
estimated depreciated (book) value of such buildings or improvements at the termination
of the lease, and report as income for each remaining term of the lease an aliquot part
thereof.

A. Lump sum or outright method

Lessor may report as income, at the time when such buildings or improvements are completed,
the fair market value (FMV) of such buildings or improvements subject to lease. (Depreciated
value at the end of the lease term)

Formula:
Cost of leasehold improvements xxx
Less: Depreciation for remaining term of lease xxx
Book value, end of lease xxx

Book value end of lease / Remaining term of lease = Income per year Remaining term of lease
B. Annual or spread out method
1. Computation of annual income

Cost of leasehold improvement xxx

Less: Accumulated Depreciation (cost / useful life x remaining term of (xxx)
lease)
Book value, end of lease (remaining term of useful life) xxx

Book value, end of lease / Remaining term of lease = Annual Income

2. Computation of income resulting from premature termination of lease

Fair Market Value of improvement when lessor took possession xxx
Less: Amount already reported as income xxx
Income, year of termination xxx

3. Computation of loss due to destruction of leasehold improvement before the term of

the lease expires
Amount already reported as income xxx
Less: Insurance recovery xxx
Less: Salvage value xxx
Loss xxx

NOTE: To the extent that such loss was not compensated for by insurance.

B. Deduction of Lessee (Depreciation expense). The lessee may claim depreciation of the
improvements over the remaining term of the lease or the life of the improvements, whichever
is shorter.

C. Computation of Income from Leasehold Improvement Arising from the Pre-

termination of Lease Contract. The lessor receives additional income for the year in which
the lease is so terminated to the extent that the value of such building when he became entitled
to such possession exceeds the amount already reported as income on account of the erection
of such building.
 Book Value of Leasehold Improvement at termination of Lease xxx
Less: Amounts of income previously recognized xxx
Additional income in year of termination xxx

D. Loss of Lessor if Leasehold Improvement is Destroyed Before Termination of Lease

If the building or other leasehold improvement is destroyed before the expiration of the lease,
the lessor is entitled to deduct as a loss for the year when such destruction takes place, the
amount previously reported as income because of the erection of the improvement, less any
salvage value, to the extent that such loss was not compensated by insurance.

Income on leasehold improvement already reported xxx

Less: Salvage value xxx
Total Loss xxx
Less: Compensation received:
A. From insurance xxx
B. Others xxx
Loss on destruction of leasehold improvement xxx

5. ANNUITIES AND LIFE INSURANCE POLICIES

A. Annuities – Annuities paid under an annuity contract in excess of the consideration paid
are includible in gross income.

B. Life Insurance Policies – Where insured outlives the term of the policy, amounts received
by an insured in excess of the premiums paid are included in gross income.
 Note: Distribution on paid-up
policies, which are made out of
earnings of the insurance
company subject to tax, are in
the nature of corporate
dividends and should be taxed
accordingly.

6. GAINS DERIVED FROM DEALINGS IN PROPERTY

Sale of 3 types of property which may give rise to taxable events:

Ordinary asset – 100% of the gain or loss shall be recognized in the Income Tax Return

Capital asset – subject to final taxes (capital gains tax)

Other capital asset - holding period of the asset shall be taken into consideration if the seller
is an individual, and only the net capital gain shall be included in the Income Tax Return.

1. Sale of Tangible Assets

2. Sale of Intangible Assets (ex. Patents, copyrights, and goodwill)
3. Corporate Sinking Fund
4. Sale of Real Property

Gain from the sale of real properties classified as ordinary assets shall be included in gross
income in the Income Tax Return of the taxpayer.

Note: Real properties acquired by banks through foreclosure sales are considered as
their ordinary assets.

However, banks shall not be considered as habitually engaged in the real estate business for
purposes of determining the applicable rate of creditable withholding tax imposed under Sec.
2.57.2 of Rev. Reg. No. 2-98, as amended.
7. INTEREST INCOME

Interest income, as a rule, is taxable included in the Income Tax Return

Exclude:
a. Interest income form bank deposits or deposit substitutes in the Philippines subject to Final
Tax (passive income)
b. Interest income which are exempt from tax:
 Interest income from long-term deposits or investment in the form of savings, trust
funds, deposit substitutes, investment management accounts
 Interest income earned from passive investments of foreign governments, financing
institutions owned by foreign governments, and international financial institutions
established by foreign governments.

Note: Interest income on Government securities is subject to final tax on passive income as
such securities are considered deposit substitutes.

8. ROYALTIES

Royalties derived from sources within the Philippines are subject to a final tax of 20%, except
royalties on books, other literary works, and musical compositions which shall be subject to a
final tax of 10%.

Royalties received by resident citizens and domestic corporations from sources without the
Philippines shall be included in the Income Tax Return

9. DIVIDENDS

KINDS:
1. Cash Dividends
2. Property Dividends
3. Stock Dividends
4. Liquidating Dividends
CASH & PROPERTY DIVIDENDS
Cash and property dividends shall be taxable upon declaration.

Summary of rules on taxability of dividends (Intercorporate dividends)

Dividends issued by Dividends received Income tax treatment

by

1. Domestic Domestic corporation Not taxable

corporation
Resident foreign Not taxable
Corporation

General rule: 30% final tax

Non-resident foreign
corporation
Exception: 15% if there is tax
sparing credit. Condition that the
country in which the non-resident
foreign corporation is domiciled,
shall allow a credit against the tax
due from the non-resident foreign
corporation taxes deemed to have
been paid in the Philippines.

2. Resident Domestic corporation 30% normal income tax

foreign
corporation
 Foreign corporation Not taxable

3. Nonresident Domestic corporation 30% normal income tax

foreign
Foreign corporation Not taxable
corporation

STOCK DIVIDENDS

GENERAL RULE: Distribution of stock dividends is not taxable because they are not
realized income.

EXCEPTION: A stock dividend constitutes income if it gives the shareholder an interest

different from that which his former stockholdings represented.

Dividend subject to Final Tax: Cash or property dividends received by individuals and Non
Resident Foreign Corporations from domestic corporations.

Dividends included in gross income in the Income Tax Return:

1. Generally, cash and/or property dividends received by a resident citizen or domestic

corporation from a foreign corporation.
2. Liquidating dividend - Liquidating dividends represent distribution of all the property or
assets of a corporation in complete liquidation or dissolution.

The difference between the cost or other basis of the stock and the amount received in
liquidation of the stock is a capital gain or a capital loss. Where property is distributed in
liquidation, the amount received is the fair market value of such property.

Liquidating dividend xxx

Less: Cost of stock investment or other basis (xxx)
Capital gain or (Capital loss) xxx
  If the shareholder is a corporation,
the capital gain is taxable in full.
 If the shareholder is an individual
and the stocks were held for more than 12
months, the capital gain is taxable only to
the extent of 50% thereof.

Dividends not subject to income tax

1. Intercorporate dividends from a
domestic corporation to another domestic
corporation or an Rehabilitation Finance
Corporation (RFC)
2. Generally, stock dividends

10. PRIZES AND WINNINGS

Subject to Final Tax:

A. Prizes over P10,000 and winnings derived within the Philippines
B. Prizes received by a non-resident alien engaged in trade or business (NRANETB) and by a
non-resident foreign corporation (NRFC) within the Philippines

Included in the Income Tax Return:

1. Prizes amounting to P10,000 or less received by a citizen, resident alien, or Non
Resident Alien Engaged in Trade or Business (NRAETB).
2. Prizes received by domestic corporations.
3. Prizes received by RFCs within the Philippines
4. Prizes and winnings received by resident citizens from sources without the Philippines.
 Except Philippine Charity Sweepstakes
Office (PCSO) and Lotto Winnings of
P10,000 or less of an individual citizen or
resident alien, and PCSO and Lotto winnings
of a Non Resident Alien Engaged in Trade or
Business regardless of amount, which are
exempt.

11. INCOME FROM OTHER SOURCES

GROSS INCOME FROM WHATEVER SOURCE DERIVED

The law imposes a tax on income from whatever source which means that it includes
income whether coming from legal or illegal sources.

EXAMPLES:
1. Income from jueteng
2. Income from swindling activities
3. Recovery of bad debts
4. Refund of taxes
5. Unutilized/excess campaign funds
6. Forgiveness of indebtedness

RECOVERY OF BAD DEBTS

In order for recovery of bad debts to be considered income, the following must be complied:

1. Bad debts were written off in the previous year/s;

2. Such bad debts were deducted in arriving at taxable income;
3. There is a resulting tax benefit on the deduction.
REFUND OF TAXES

The following are the requirements before refund of taxes be considered income:

1. There is payment of tax in the previous year/s;

2. The tax paid was deducted in arriving at the taxable income;
3. There is a resulting tax benefit on the deduction.

FORGIVENESS OF INDEBTEDNESS

TYPE TAX TREATMENT

Debtor performs services to the creditor Compensation Income

Creditor desires to benefit the debtor without any consideration Gifts

Creditor is a corporation and the debtor is a stockholder of such

Dividend Income corporation

1. Recovery of damages representing compensation for loss of profits or income are

includible in gross income

Note: Recoveries that are to compensate for damage to property, injury to person, or loss
of life are not taxable.

Included in Gross Income Not Taxable

1. Damages to compensate for damage or injury to the person or his property

2. Damages for lost income and Damages for lost capital

3. Moral damages

4. Exemplary damages

5. Punitive damages
2. Recovery of Bad Debt Previously Deducted

The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt recoveries.

Rules on Bad Debt Recovery:

a. Taxable – If the deduction of the bad debt is a prior year resulting in an income tax
benefit to the taxpayer, the bad debt recovered is taxable income in the year of recovery.
b. Not Taxable – If the deduction of the bad debt did not result in an income tax benefit
to the taxpayer (i.e., where the result of the business operation was a net loss even
without the bad debt deduction (the bad debt recovered is not taxable income but is
treated as a mere recovery or return of capital.
c. Income from Bad Debt Recovery – The recovered amount of the previously deducted
bad debt which resulted in an income tax benefit.

3. Refund of Deductible Tax

The tax benefit doctrine also applies with respect to refund or credit taxes which were claimed
and deducted in a previous year.

Rules on Refund of Taxes Previously Deducted:

a. Taxable – If the tax paid is a deductible tax. The refund or credit thereof is taxable in the
year of receipt.
b. Not Taxable – If the tax paid is not a deductible tax. The refund or credit thereof is not
taxable.
c. Income from Tax Refund – The refunded amount of the tax which was previously
deducted and which resulted in an income tax benefit.

Examples of deductible taxes are:

other percentage tax except the stock transaction tax under Sec. 127 of the Tax Code, excise
taxes, occupation or professional taxes, real property taxes, Fringe benefits tax.

Examples of non-deductible taxes are income tax, donor’s tax, estate tax, VAT, stock
transaction tax under Section 127 of the Tax Code.
 4. Tournament Prizes

Included in the Income Tax Return: Cash

prizes won by local players/participants in
tournaments are not passive income in as
much as participating in such tournaments is
their profession and/or occupation.

Subject to Final Tax: Cash prizes of

foreign players/participants, shall be subject
to a final tax of 25%.

Exempt from income tax: Prizes and

awards granted to athletes in local and
international sports competitions and
tournaments whether held in the Philippines
or abroad, and sanctioned by their national
sports associations.

5. Forgiveness of Indebtedness

Included in the Income Tax Return: When a creditor cancels a debt as part of a business
transaction, or in consideration of personal services of the debtor, the condoned debt is taxable
income to the debtor.

Taxed as a dividend: But where the debtor is a stockholder of the corporation which condoned
the debt, the condonation is considered an indirect payment of dividend.

Subject to donor’s tax: If a creditor merely desires to benefit a debtor, and without any
consideration therefore cancels the debt, the amount of the debt is a gift from the creditor to
the debtor.
 6. Income from Illegal Sources

All unlawful gains are taxable and includible in the ITR.

However, actual repayment of such illegal gains will
give rise to a deduction. (James vs. United States, 366
US213).

7. Unutilized/Excess Campaign Funds

Unutilized/excess campaign funds, that is, campaign contributions net of the candidate’s
campaign expenditures, shall be considered as subject to income tax. As such, the same must
be included in the candidate’s gross income as stated in his Income Tax Return (ITR) for the
subject taxable year.

Any candidate who fails to file with the COMELEC the appropriate Statement of Expenditures
required under the Omnibus Election Code, shall be automatically precluded from claiming
such expenditures as deductions from his campaign contributions. As such, the entire amount
of his campaign contribution shall be considered as directly subject to income tax.

8. Early Withdrawals from a Personal Equity and Retirement Account (PERA) which
do not qualify for exclusion from taxable gross income.

9. Gain in the sale or Retirement by a Corporation of its Own Bonds

Where the corporation is able to buy back its own bonds for less than the value of such bonds
as reflected in the corporation’s books.

10. If bonds are issued by a corporation at a premium, the net amount of such premium
is gain or income which is prorated or amortized over the life of the bond.

11. Stock options granted to a supplier of goods or services.

 EXCLUSIONS IN GROSS INCOME

EXCLUSIONS DEFINE

Exclusions are income or receipts which are excluded from gross income, i.e. these
are not included in the determination of a taxpayer’s gross income.

Hence, these incomes or receipts are not

subject to income tax. However, despite their
non-inclusion from gross income, such income
items may be subject to taxes other than the
income tax.

The following items shall not be included in gross income and shall be exempt from
income tax:

1. Life Insurance
2. Amount Received by Insured as Return of Premium
3. Gifts, Bequests, and Devises
4. Compensation for Injuries or Sickness
5. Income Exempt under Treaty
6. Retirement Benefits, Pensions, Gratuities, etc.
7. Miscellaneous Items
A. Income Derived by Foreign Government
B. Income Derived by the Government or its Political Subdivisions
C. Prizes and Awards
D. Prizes and Awards in Sports Competition
E. 13th Month Pay and Other Benefits
F. GSIS, SSS, Medicare and Other Contributions
G. Gains from the Sale of Bonds, Debentures or other Certificate of
Indebtedness
H. Gains from Redemption of Shares in Mutual Fund
LIFE INSURANCE

General Rule: Exempt from tax since it is a mere reimbursement for the loss of life.

Exception: The following shall be taxable:

I. The beneficiary was chosen for a valuable consideration.

II. The interest earned on the insurance policy.

1. Proceeds of Life Insurance Upon Death

of the Insured

The proceeds of life insurance policies paid to

the heirs or beneficiaries upon death of the
insured shall be exempt from income tax. The
proceeds of life insurance are treated more as
an indemnity of the life lost instead of as gain,
profit, or income.

Note: Interest payments made by the insurer constitutes income to the recipient.

RETURN OF PREMIUM

The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term or at the maturity
of the term mentioned in the contract or upon surrender of the contract.

Return of Premium Exempt

In excess Income
2. Amount Received by Insured as Return of Premium

The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term, or at the
maturity of the term mentioned in the contract, or upon surrender of the contract.

Note:

a. The excess of the proceeds received over the premiums paid is included in gross
income.

b. Participating dividends distributed to life insurance policy holders are actually

a return of overpaid premiums. They are therefore excluded from gross income
of the insured.

GIFTS, BEQUESTS & DEVISES

The value of property acquired by gift, bequest, devise,

or descent: Provided, however, that income from such
property, as well as gift, bequest, devise, or descent of
income from any property, in cases of transfers of
divided interest, shall be included in gross income.

Property inherited or received as gift Exempt

Income of above properties Taxable
3. Gifts, Bequests, and Devices

The value of property acquired by gift, bequest, devise or descent are exempt from
income taxation.

Note: The income from the lease, sale, exchange, investment, or other disposition
of such property shall be subject to income tax.

COMPENSATION FOR INJURIES OR SICKNESS

Amounts received, through Accident or

Health Insurance or under Workmen's
Compensation Acts, as compensation for
personal injuries or sickness, plus the
amounts of any damages received, whether
by suit or agreement, on account of such
injuries or sickness.

4. Compensation for Injury or Sickness

a. Amounts received, through accident or health insurance, or under Workmen’s

Compensation Acts, as compensation for personal injuries or sickness; plus

b. The amounts of any damages received, whether by suit or agreement, on account

of such injuries or sickness.

c. Damages representing compensation for personal injuries arising from libel,

defamation, slander, breach of promise to marry, or alienation of affection.
 Includes moral damages. Moral damages include physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar injury.
  Includes exemplary or corrective damages. These are imposed by way of
example or correction for the public good.

INCOME EXEMPT UNDER TREATY

Income of any kind, to the extent required by any treaty obligation binding upon the
Government of the Philippines.

5. Income Exempt Under Treaties

Income of any kind, to the extent required by any treaty obligation or international
agreement to be exempt from taxation by the Republic of the Philippines.

RETIREMENT BENEFITS, PENSIONS,

GRATUITIES ETC.

1. Retirement benefits received under Republic

Act No. 7641
2. Those received by officials and employees of
private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan
maintained by the employer: Provided
a. That the retiring official or employee has
been in the service of the same employer for at
least ten (10) years.
b. At least fifty (50) years of age at the time of
his retirement.
c. That the benefits granted shall be availed of by
an official or employee only once.
 3. Any amount received by an official
or employee or by his heirs from the
employer as a consequence of separation of
such official or employee from the service of
the employer because of:
a.Death

b. Sickness
c. Other physical disability or for any
cause beyond the control of the said official or
employee.

The following are considered involuntary

separation, and therefore not taxable:
1. The installation of labor-saving devices.
2. Redundancy
3. Retrenchment
4. Cessation of the employer’s business.

4) Social security benefits, retirement gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the Philippines or aliens who come
to reside permanently in the Philippines from foreign government agencies and
other institutions, private or public.

5) Payments of benefits due or to become due to any person residing in the

Philippines under the laws of the United States administered by the United
States Veterans Administration.

6) Benefits received from or enjoyed under the Social Security System in

accordance with the provisions of Republic Act No. 8282.

7) Benefits received from the GSIS under Republic Act No. 8291, including
retirement gratuity received by government officials and employees.
6. Retirement Benefits, Pensions, Gratuities, Separation Pay Which Are Exempt
from Income Tax

General Rule: Retirement benefits, pensions, separation pay are all taxable.

Exceptions: The following benefits and payments are exempt from income tax:

A. Retirement benefits and/or pensions which are exempt from income tax:

Under R.A. No. 7641 (Retirement
Pay Law). In the absence of a
retirement plan for employees,
employers are required to pay a
retirement benefit equal to at least
½ month salary for every year of
service.
Requisites for exemption:
Under the Tax Code, retirement benefits
and/or pension amounts received by officials
and employees of private firms, whether
individual or corporate, shall be exempt from
income tax when the requisites for
exemption in the Tax Code are complied
with.
Requisites for exemption:

1. The employee has reached the 1. There must be a reasonable private benefit
age of 60 or more, but not plan maintained by the employer.
beyond 65.
2. The retiring official or employee has been
2. The employee has served for at in the service of the same employer for
least 5 years in the same at least 10 years.
establishment
3. The retiring official or employee is not
less than 50 years of age at the time of his
retirement.

4. The benefits of exemption granted shall be

availed of by an official or employee only
once.
B. Separation Pay Due to a Cause Beyond the Control of the Employee

Any amount received by an official or

employee, or by his heirs, from the
employer as a consequence of
separation of such official or employee
form the service of the employer due to:
1. Death;
2. Sickness;
3. Other physical disability; or
4. For any cause beyond the
control of the said official or employee.

Note: Separation pay due to the abovementioned causes are exempt from
income tax regardless of age or length of service of the employee.

The exemption does not cover salaries, 13th month pay and other benefits in excess of
P90,000, and other payments which are properly taxable to the employee.

C. Social security benefits, retirement gratuities, pensions and other similar benefits
received by resident or non-resident citizens of the Philippines, or aliens who come to
reside in the Philippines, from foreign agencies and other institutions private or public.

D. Payment of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veteran
Administration.

E. Benefits received from or enjoyed under the Social Security System (SSS) in
accordance with the provisions of R.A. No. 8282.

F. Benefits received from the GSIS under R.A. No. 8291, including retirement
gratuity received by government officials and employees.
G. Maternity benefits advanced by the employer to the employee.

MISCELLANEOUS ITEMS
1) Income derived from investments in
the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on
deposits in banks in the Philippines by:
a. Foreign governments
b. Financing institutions owned,
controlled, or enjoying refinancing from
foreign governments.
c. International or regional financial
institutions established by foreign
governments.

2) Income derived from any public

utility or from the exercise of any essential
governmental function accruing to the
Government of the Philippines or to any
political subdivision thereof.

3) Prizes and awards made primarily in recognition of religious, charitable,

scientific, educational, artistic, literary, or civic achievement but only if:
a. The recipient was selected without any action on his part to enter the contest
or proceeding.
b. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.

4) All prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations.

5) Gross benefits from 13th month pay and other benefits received by officials and
employees of public and private entities up to the extent of P82,000.
 6) GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals.

7) Gains realized from the sale or exchange or retirement of bonds, debentures or

other certificate of indebtedness with a maturity of more than five (5) years.

Gains realized by the investor upon redemption of shares of stock in a mutual fund
company as defined in Section 22(BB) of this Code.

7. Miscellaneous Items

A. Income derived by foreign governments, financing institutions owned or

controlled by foreign governments, and international or regional financial
institutions established by foreign governments from investments or deposits in the
Philippines. Includes exemption from the stock transaction tax

B. Income Derived by the Philippine Government or its Political Subdivision from

the exercise of any government function.

C. Prizes and award primarily in recognition of

religious, charitable, scientific, educational,
artistic, literary, or civic achievement but only if:
(1) The recipient was selected without any action
on his part to enter the contest or proceeding; and
(2) The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.

D. Prizes and awards granted to athletes in local and international sports competitions
and tournaments whether held in the Philippines or abroad and sanctioned by their
national sports association.

E. 13th Month Pay and Other Benefits received by officials and employees of public
and private entities as “13th month pay and other benefits” which shall include:
(1) The 13th month pay, and other incentives such as productivity incentives and
Chrisms bonus.
(2) The excess of the “de minimis” fringe benefits over their respective ceilings.
Provided, however, that the total exclusion shall not exceed Ninety Thousand
Pesos (P90,000).

F. Compulsory or mandatory contributions of employees to GSIS, SSS, Medicare

(PHIC), and PAGIBIG, and union dues of individuals.

These are actually deductions, but are labelled as exclusions in the Tax Code.

Note: Contribution in excess of the mandatory

contributions are not deductible from gross income.
Moreover, GSIS Educational Plan, GSIS Optional
Insurance, GSIS Unlimited Optional Insurance, and
GSIS Memorial Plan premiums shall not be
deductible.

G. Gains from the sale, exchange or retirement of bonds, debentures, or other

certificates of indebtedness with a maturity of more than 5 years.

H. Gains from Redemption of Shares in a Mutual Fund

I. Income of non-residents from transactions with Domestic Depository Banks

and OBUs Under the Expanded Foreign Currency Deposit System

J. Personal Equity and Retirement Account (PERA)

PERA refers to the voluntary retirement account of an individual (called a

“Contributor”) established from his own Qualified PERA Contributions and/or
Qualified Employer Contributions, for the purpose of being invested solely in qualified
or eligible PERA investment products.
 Note: Each OFW is allowed to contribute up to
P200,000 per year to a PERA account. Non-
OFWs are allowed P100,000 contributions per
year. Husband and wife can each contribute up
to the maximum allowable contribution.

Contributions to PERA accounts are exclusions

in gross income. This is an additional exclusion
and is separate with the exclusion for
contributions to SSS or GSIS. Moreover,
PERA contributors are allowed to claimed 5%
of their PERA contributions as tax credit
against any internal revenue taxes.

1. The Qualified Employer’s Contribution shall be excluded from the employee’s

taxable gross income.

2. Investment income of a contributor earned from the investments of his PERA

Assets shall be exempt from income taxes, provided:

That each specific investment product is approved by the concerned regulatory authority.

That non-income taxes, if applicable, relating to the investment income, shall be

imposed. Such taxes shall include:
a. percentage taxes
b. VAT
c. Stock transaction tax under Section 127 and (B) of the Tax Code;
d. Documentary stamp tax.

3. Qualified PERA Distributions shall be excluded from gross income if:

a. After the Contributor and/or his employer has made the Qualified PERA
Contributions and/or Qualified Employer’s Contributions for at least five (5) years
 (which need not be consecutively made), and after the Contributor reaches the age
of fifty-five (55); or
b. Upon death of the Contributor, irrespective of the Contributor’s age or the number
of yearly contributions made at the time of his death.

4. Early Withdrawals in the following circumstances

shall be excluded from gross income:
a. Withdrawal of PERA Assets from the
Administrator by reason of the suspension or
revocation of the accreditation of the Administrator,
provided that the entire PERA Assets are transferred to
another Administrator within two (2) working days
from receipt of the Contributor’s advice on the chose
Administrator.
b. For payment of accident or illness-related hospitalization in excess of thirty (30)
days.
c. For payment to a Contributor who has been subsequently rendered permanently
and totally disabled as defined under the Employees Compensation Law or Social
Security System Law.

K. Representation and transportation allowances (RATA) granted under Section

34 of the General Appropriations Act to certain officials and employees of the
government from the rank of Department Secretaries to Division Chiefs are not subject
to income tax and to the withholding tax.

L. Personnel Economic Relief Allowance (PERA) granted to all, employees of the

National Government, Local Government Units, including government owned or
controlled corporations is considered remuneration/compensation for services performed
by the employees in the performance of official duties, hence, not taxable income.

M. Capital contributions to corporations/partnerships are not income of the

corporations/partnership, and hence not subject to income tax.
N. Project-related income from the development of socialized housing sites. The
private sector (ex. Contractors) shall be exempt from payment of project-related
income taxes (including CGT) on a per project basis on income realized from the
development of socialized housing sites.

Yield or income from any low-cost or socialized housing-related asset-backed security.

O. Income from the commercialization of technologies developed by local inventors

or researchers under R.A. No. 7459 during the first ten (10) years from the date of
the first sale.

P. Proceeds which constitute a fund held in trust by the taxpayer, and which do not
redound to the benefit of the taxpayer.

Q. Income from the sale of gold pursuant to R.A. No. 7076 (the People’s Small-
Scale Mining Act of 1991)

1. Income from the sale of gold to the Bangko Sentral ng Pilipinas by

registered small-scale miners** and accredited traders.

2. Income from the sale of gold by registered small-scale miners to accredited

traders for eventual sale to the Bangko Sentral ng Pilipinas.
 Note: Sec. 32(B)(7)(i) as inserted by
R.A. No. 11256

Small-scale miners refer to Filipino

citizens who, individually or in the
company of other Filipino citizens,
voluntarily form a cooperative duly
licensed by the Department of
Environment and Natural Resources to
engage, under the terms and conditions of a contract, in the extraction or removal
of minerals or ore- bearing materials from the ground (Sec. 3(c), R.A. No. 7976).

All gold sold to the BSP by accredited traders shall be presumed to have been
purchased by said traders from small-scale miners (Sec. 4, R.A. No. 11256)
 SOURCE OF INCOME

CLASSIFICATION OF INCOME AS TO SOURCE

1. Income from sources within the Philippines

2. Income from sources partly within or partly without the Philippines
3. Income from sources without the Philippines

INCOME FROM SOURCES

WITHIN THE PHILIPPINES

1. Interests derived from sources

within the Philippines, and interest
on bonds, notes or other interest-
bearing obligations of residents,
corporate or otherwise.
2. Dividends from:

a. Domestic Corporation

b. Foreign Corporation, IF at
least 50% of gross income for the
three-year period ending with the
close of its taxable year preceding the
declaration of such dividends (or for
such part of such period as the
corporation has been in existence)
was derived from sources within the
Philippines.

3. Compensation for labor or personal

services performed in the Philippines.

4. Rentals and royalties from property

located in the Philippines or from any
interest in such property.
 5. Gains, profits and income from the sale of real property located in the Philippines.

6. Gains, profits and income from sale of personal property:

a. If purchased, only if sold in the Philippines.

b. If manufactured, only if manufactured and sold within the Philippines.

INCOME FROM SOURCES PARTLY WITHIN OR PARTLY WITHOUT

1. Gains, profits and income from the sale of personal property produced (in whole or in
part) by the taxpayer within and sold without the Philippines.

2. Produced (in whole or in part) by the taxpayer without and sold within the Philippines.
 COMPENSATION INCOME

EMPLOYER-EMPLOYEE RELATIONSHIP

Employer - refers to any person for whom an

individual performs any service of whatever
nature as an employee of such person.

An employer is the person who has control

over the payment of the employee
remuneration. However, if such a person is a
non-resident not engaged in trade or business
in the Philippines, the employer is deemed the
person paying remuneration on their behalf.

Employee - refers to any individual who is a recipient of wages and includes officer, employee
or elected official of the Government of the Philippines political subdivisions, agency or
instrumentality thereof. The term also includes an officer of a corporation

Elements of employer and employee relationship under case law:

1. Selection and engagement of employees

 there is a screening process for employees to hire
2. Payment of wages
 the employer usually fixes and controls the payment of wages.
 the employer prepares a payment system such as a payroll or pay slip as proof
of payment to the employees. However, it should be pointed out that “the fact
that the employee’s name does not appear in the payrolls and pay envelope
records submitted by [the employer] negate the existence of employer-
employee relationship. For a payroll to be utilized to disprove the employment
of a person, it must contain a true and complete list of the employee.” (South
East International Rattan, Inc. v. Coming, G.R. No. 186621, 12 March
2014)
 3. Power of dismissal
 employer has power to retrench or terminate employees when incurring heavy
losses or other reasonable basis.
4. Power of control
 the employer has power to control the employee on the means and methods by
which the work is accomplished.
 not every form of control is indicative of employer-employee relationship. A person
who performs work for another and is subjected to its rules, regulations, and code
of ethics does not necessarily become an employee. As long as the level of control
does not interfere with the means and methods of accomplishing the assigned tasks,
the rules imposed by the hiring party on the hired party do not amount to the labor
law concept of control that is indicative of employer-employee relationship. (Royal
Homes Marketing Corporation v. Alcantara, G.R. No. 195190, 28 July 2014).
 An arrangement which does not manifest all the elements is not an employer-
employee relationship but an independent contract for the provision of services.

The following are not considered employees:

1. Consultants
2. Directors without management function
3. Talents and artists on TV shows or radio broadcasts (Sonza vs. ABS-CBN Broadcasting
Corporation, G.R. No. 138051)

The income or fees of these individuals are not compensation income but are business or
professional income.
TYPES OF EMPLOYEES AS TO FUNCTION

1. Managerial employees

Those who are given powers or prerogatives to lay down and execute managerial policies
and/or to hire, transfer, suspend, lay- off, recall, discharge, assign or discipline employees.

2. Supervisory employees

Those who effectively recommend such managerial actions if the exercise of such authority is
not merely routinely or clerical in nature but requires the use of independent judgment.

3. Rank and file employees

Those who hold neither managerial nor supervisory functions.

TYPES OF EMPLOYEES AS TO TAXABILITY

1. Minimum wage earners

Employees who are recipients of minimum wage. They are exempt from income tax on their
compensation.

2. Regular employees
Employees who are subject to the regular progressive income tax.

THE TAX MODEL ON COMPENSATION INCOME

Gross compensation income xxx

Less: Non-taxable compensation xxx

Taxable compensation income xxx

GROSS COMPENSATION INCOME

Gross compensation income generally includes all remunerations received under an employer-
employee relationship.

NON-TAXABLE COMPENSATION

A. Mandatory deductions
These includes employees' mandatory contribution to GSIS, SSS, PhilHealth HDMF, and
union dues.

B. Exempt benefits
1. Benefits excluded and/or exempted under the NIRC and special laws.
2. Benefits exempt under treaty or international agreements.
3. Benefits necessary to the trade, business, or conduct of profession of the
employer.
4. Benefits for the convenience or advantage of the employer.
COMPOSITION OF TAXABLE COMPENSATION INCOME

1. Regular compensation

This pertains to the fixed remunerations received by the employee every payroll period.

2. Supplemental compensation

This pertains to other performance-based pays to employees with or without regard to the
payroll period.

An adjunct category to the supplemental compensation, 13th month pay and other benefits, is
necessary to contain incentive pays and all other taxable employee benefits not classifiable as
regular or supplemental compensation. 13th month pay and other benefits not exceeding
P90,000 is an exclusion from gross income. The excess above P90,000 is added to
supplemental compensation.

Regular
A. Basic Salary
B. Fixed allowances
Supplementary
A. Commission
B. Overtime pay
C. Fees, including director’s fees
D. Profit sharing
E. Monetized vacation leaves in excess of ten (10) days
F. Sick leave
G. Fringe benefits received by rank and file employees
H. Hazard pay
I. Taxable 13th month pay and other benefits
J. Other remuneration received from an employee-employer relationship

TAXABILITY OF MINIMUM WAGE EARNERS (MWE)

Minimum wage earners are exempt from income tax on the following:

1. Basic minimum wage

2. Other benefits (HHON)
a. Holiday pay
b. Hazard pay
c. Overtime pay
d. Night shift differential pay

Receipt of other taxable income by MWES

 MWES are still exempt from income tax on the foregoing exempt benefits even if they
are earning other taxable items of compensation or other income from concurrent
employers, trade, business or practice of a profession.

 MWES are subject to tax only to the extent of income other than the aforementioned
exempt benefits. (RR11-2018) Hence, additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable amount of P90,000,
taxable allowances and other taxable income given by the same employers to MWES
 are subject to withholding tax. Despite this, it must be noted that MWES will actually
pay income tax only if their total taxable income exceeds P250,000 for the year.

THE WITHHOLDING TAX ON COMPENSATION

The withholding tax on compensation is a method of collecting the income tax at source upon
receipt of the income. It applies to all employed individuals whether citizens or aliens. The
employer is constituted as the withholding agent.

Procedural computation of the withholding tax on compensation

1. Determine the total monetary and non-monetary compensation of the employee for
the payroll period: monthly, semi-monthly, weekly or daily. Segregate non-taxable
benefits, mandatory contributions and supplemental compensation.

2. Determine the bracket that applies to the regular compensation of the employee for
the applicable payroll period. Determine the basic tax for the bracket.

3. Add supplemental compensation to the excess of the regular compensation. Subject

the total to the incremental tax rate for the bracket.

4. Total the basic tax and the incremental basic tax.

BENEFITS NOT SUBJECT TO WITHHOLDING TAX ON COMPENSATION
UNDER R22-98, AS AMENDED:

1. Remunerations received as incidents of employment.

2. Remuneration paid for agricultural labor and paid entirely in products of the farm where
the labor is performed.

3. Remuneration for domestic services

 Note that the minimum wage for domestic workers or "kasambahay" prescribed
under Sec. 24, Art. IV of RA 10361 or the Domestic Workers Act or Batas
Kasambahay of 2013 ranges from P1,500 to P2,500 a month - too low compared
to the tax exempt minimum wage for commercial, industrial, or agricultural
workers.

4. Remuneration for casual labor not in the course of an employer's trade or business-
treated as other income.

5. Compensation for services by a citizen or resident of the Philippines for a foreign

government or an international organization Under RMC 31-2013, this is not
 compensation income subject to withholding, but it is still taxable compensation
income; hence, it must be reported by the employee.

6. Damages paid by the employer to employees.

7. Proceeds of life insurance.

8. Amounts received by an insured employee as a return of premium.

9. Compensation for injuries or sickness.

10. Income exempt under treaty.

11. 13th month pay and other benefits not exceeding a total of P90,000.

12. GSIS, SSS, PhilHealth, and other contributions.

13. Compensation income including overtime pay, holiday pay, night shift differential pay,
and hazard pay of Minimum Wage Earners.

14. Compensation income of employees in the public sector if the same does not exceed
those of minimum wage earners in the non-agricultural sector

These listed benefits are not considered compensation income; hence, they are exempt
from the withholding tax on compensation.

DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDING TAX ON

COMPENSATION

Employers shall file the BIR Form 1601-C (Monthly Remittance Return of Income Taxes
Withheld on Compensation) on or before the 10th day of the following month the withholding
was made except for taxes withheld for December which shall be filed/paid on or before
January 15 of the succeeding year.
Employees are also required to file BIR Form 1604-CF (Annual Information Return of Income
Taxes Withheld on Compensation and Final Withholding Taxes) on or before January 31 of
the following calendar year in which the compensation income payments and passive income
payments were made.

Employers shall furnish each employee-taxpayer a copy of BIR Form 2316 (Certificate of
Compensation Payment or Income Tax Withheld) January 31 of the succeeding year.

Treatment of the Withholding Tax on Compensation

If the employee has other items of income that are subject to regular income tax such as income
from business or profession, income from other employment or casual income, he must file a
consolidated income tax return to include such items of income for the entire taxable year. The
withholding tax on compensation is credited against the total tax due in the consolidated
income tax return.

Substituted filing of tax return

Under the substituted filing system, the employer files the income tax return of the employee.
If the amount of tax is correctly withheld by the employer, the employee no longer needs to
file an annual income tax return.
 BUSINESS INCOME

Business Income

 Taxable income received from the sale of goods or services.

 It is a term commonly used in tax reporting.

Business Income is a form of earned income and is classed as regular earnings for tax purposes.
It encompasses any earnings found out because of an entity’s operations. In its most effective
form, it's a business entity’s net profit or loss, that is calculated as its sales from all assets minus
the cost of doing a business.

How Business Income is taxed.

1. Annual Income Tax for Corporations and Partnerships
2. Quarterly Income Tax for Corporations and Partnerships
3. Annual Income Tax Return for Individuals Earning Income Purely from
Business/Profession

How a business is formed determines how it reports its income to the Bureau of Internal
Revenue (BIR)
1. Annual Income Tax for Corporations and Partnership
 Corporations and Partnerships’ annual income tax report shall be filed under BIR Form
1702, wherein all partnerships and corporations shall summarize all their transactions
covering the calendar year of the business.
 BIR Form 1702 - Annual Income Tax Return for Corporation, Partnership and Other
Non-Individual Taxpayers exempt Under the Tax Code and Other Special Laws, with
NO Other Taxable Income
 This shall be only filed by Corporations, Partnerships, and Other Non-Individual with
Mixed Income Subject to Multiple Income Tax Rates or with Income Subject to Special
Rate, with regular Income Tax rate of 30%.

2. Quarterly Income Tax for Corporations and Partnership

 Business Income is reported on BIR Form 1702Q.

 Form 1702Q is a tax document issued by the BIR for the quarterly income tax of return
for corporations, partnerships, and other non-individual taxpayers.
 This shall be filed only by Corporations, Partnerships, and Other Non-Individual
Taxpayers quarterly, with or without payment within 60 days following the close of
each of the first 3 quarters of the taxable year.

3. Annual Income Tax Return for Individuals Earning Income Purely from
Business/Profession
 Reported under BIR Form 1701A.
 Resident or Alien Citizen within the Philippines whose earning income purely from
trade/business or from the practice of profession shall file BIR Form 1701A.

The return shall only be used by said individuals as follows:

A. Those subject to graduated income tax rates and availed of the optional standard
deduction as method of deduction, regardless of the amount of sales/receipts and other
non-operating income.
B. Those who availed of the 8% flat income tax rate whose sales/receipts and other non-
operating income do not exceed P3M.
 PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX

Passive Income - earned with very minimal involvement from the taxpayer and is generally
irregular in timing and amount.

“Their existence can be difficult to predict while their actual amount may be difficult to
determine. Thus, the final withholding at source is the most favored scheme in taxing items of
passive income.”

Final Tax - tax withhold at source. The amount of income tax that is withheld by a
withholding agent is contributed as full and final payment of the income tax due from the
payee on said income.

RC/RA/NRC NRA- NRA-NETB

ETB
 Interest 20% 20% Any income, active or passive
 Yields is subject to final tax at source
 Royalties of 25%
 Prizes
 Winnings
 Dividends 10% 20%
 Share in Net Income
 Partnership
(general)
 Association
 Joint Account
 Joint Venture

ST - Interest 20% LT - Interest 0%

Less than 3 yrs. 20% 3 to < 4years 12%

4 to < 5yrs 5% 5 years or more 0%
UPDATE from BIR:

On Certain Passive Income of Individual Citizens and Resident Aliens

Passive Income Tax Rate

1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Royalties (on books as well as literary & musical compositions) 10%
- In general 20%
3. Prizes (P10,000 or less ) Graduated
Income Tax
Rates
- Over P10,000 20%
4. Winnings (except from PCSO and Lotto amounting to P10,000 or less ) 20%
- From PCSO and Lotto amounting to P10,000 or less exempt
5. Interest Income from a Depository Bank under the Expanded Foreign 15%
Currency Deposit System
6. Cash and/or Property Dividends received by an individual from a 10%
domestic corporation/ joint stock company/ insurance or mutual fund
companies/ Regional Operating Headquarter of multinational companies
7. Share of an individual in the distributable net income after tax of a 10%
partnership (except GPPs)/ association, a joint account, a joint venture or
consortium taxable as corporation of which he is a member or co-venture
8. Capital gains from sale, exchange or other disposition of real property 6%
located in the Philippines, classified as capital asset
9. Net Capital gains from sale of shares of stock not traded in the stock 15%
exchange
10. Interest Income from long-term deposit or investment in the Exempt
form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP)
 Upon pre-termination before the fifth year, there should
be imposed on the entire income from the proceeds of the
long-term deposit based on the remaining maturity thereof:

Holding Period

- Four (4) years to less than five (5) years 5%

- Three (3) years to less than four (4) years 12%
- Less than three (3) years 20%

For Non-Resident Aliens Not Engaged in Trade or Business

A. Tax Rate in General – on taxable income from all sources same manner as
within the Philippines individual citizen
and resident alien
individual
B. Certain Passive Income Tax Rates
1. Interest from currency deposits, trust funds and deposit 20%
substitutes
2. Royalties (on books as well as literary & musical compositions) 10%
- In general 20%
3. Prizes (P10,000 or less ) Graduated Income
Tax Rates
- Over P10,000 20%
4. Winnings (except from PCSO and Lotto) 20%
- From PCSO and Lotto exempt
5. Cash and/or Property Dividends received from a domestic 20%
corporation/ joint stock company/ insurance/ mutual fund
companies/ Regional Operating Headquarter of multinational
companies
6. Share of a non-resident alien individual in the distributable net 20%
income after tax of a partnership (except GPPs) of which he is a
partner or from an association, a joint account, a joint venture or
 consortium taxable as corporation of which he is a member or co-
venture

7. Interest Income from long-term deposit or investment in the form Exempt

of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP)

Upon pre-termination before the fifth year, there should

be imposed on the entire income from the proceeds of the
long-term deposit based on the remaining maturity thereof:

Holding Period

- Four (4) years to less than five (5) years 5%

- Three (3) years to less than four (4) years 12%
- Less than three (3) years 20%
8. Capital from the sale, exchange or other disposition of real 6%
property located in the Philippines classified as capital asset
9. Net Capital gains from sale of shares of stock not traded in the
Stock Exchange
- Not over P100,000 5%
- Any amount in excess of P100,000 10%

For Non-resident Aliens Not Engaged in Trade or Business

1. Gross amount of income derived from all sources within the Philippines 25%
2. Capital gains from the exchange or other disposition of real property located in 6%
the Philippines
3. Net Capital gains from the sale of shares of stock not traded in the Stock
Exchange
- Not Over P100,000 5%
- Any amount in excess of P100,000 10%
For Alien Individuals Employed by Regional Headquarters (RHQ) or Area Headquarters and
Regional Operating Headquarters (ROH) of Multinational Companies, Offshore Banking
Units (OBUs), Petroleum Service Contractor and Subcontractor.

On the gross income consisting of salaries, wages, annuities, Graduated

compensation, remuneration and other emoluments, such as honoraria Income Tax
and emoluments derived from the Philippines Rates

For General Professional Partnerships

Net Income of the Partnerships 0%

For Domestic Corporations

Rates of Tax on Certain Passive Income of Corporations Tax

Rate
1. Interest from currency deposits, trust funds, deposit substitutes and similar 20%
arrangements received by domestic corporations
2. Royalties from sources within the Philippines 20%
3. Interest Income from a Depository Bank under Expanded Foreign Currency 15%
Deposit System
4. Cash and Property Dividends received by a domestic corporation from another 0%
domestic corporation
5. Capital gains from the sale, exchange or other disposition of lands and/or 6%
building
6. Net Capital gains from sale of shares of stock not traded in the stock exchange 15%

Beginning on the 4th year immediately following the year in which such corporation
commenced its business operations, when the minimum corporate income tax is greater than
the tax computed using the normal income tax.
For Resident Foreign Corporation

1) a. In General – on taxable income derived from sources within the 30%

Philippines
b. Minimum Corporate Income Tax – on gross income 2%
c. Improperly Accumulated Earnings – on improperly accumulated 10%
taxable income
2) International Carriers – on gross Philippine billings 2½%
3) Regional Operating Headquarters of Multinational Companies– on 10%
taxable income
4.) Regional or Area Headquarters of Multinational Companies exempt
5) Corporation Covered by Special Laws Rate specified
under the
respective special
laws
6) Offshore Banking Units (OBUs) 10%
In general – Income derived by OBUs from foreign currency Exempt
transactions with non-residents, other OBUs, local commercial banks
and branches of foreign banks authorized by BSP
On interest income derived from foreign currency loans 10%
granted to residents other than offshore banking units or local
commercial banks, local branches of foreign banks authorized by BSP
to transact business with OBUs
7) Income derived under the Expanded Foreign Currency Deposit
System
Interest income derived by a depository bank under the expanded 7½%
foreign currency deposit system.
On Income derived by depository banks under the expanded foreign exempt
currency deposit systems from foreign currency transactions with non-
residents, OBUs in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by BSP
 On interest income derived from foreign currency loans 10%
granted by depository banks under the expanded foreign currency
deposit systems to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system
8.) Branch Profit Remittances – on total profits applied or earmarked 15%
for remittance without any deduction for the tax component thereof
(except those activities which are registered with the Philippines
Economic Zone Authority)
9.) Interest from currency deposits, trust funds, deposit substitutes and 20%
similar arrangements
10. Royalties derived from sources within the Philippines 20%

SEC. 28. Rates of Income Tax on Foreign Corporations

1. Tax on Resident Foreign Corporations

In General

Except as otherwise provided in this Code, a corporation organized, authorized, or existing

under the laws of any foreign country, engaged in trade or business within the Philippines, shall
be subject to an income tax equivalent to twenty-five percent (25%) of the taxable income
derived in the preceding taxable year from all sources within the Philippines effective July 1,
2020.

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall
be computed without regard to the specific date when 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 shall be applied on the amount computed by multiplying the
number of months covered by the new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
2. Minimum Corporate Income Tax on Resident Foreign Corporations

A minimum corporate income tax of two percent (2%) of gross income, as prescribed under
Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign
corporation taxable under paragraph (1) of this Subsection: Provided, That effective July 1,
2020 until June 30, 2023, the rate shall be one percent (1%).

3. International Carrier

An international carrier doing business in the Philippines shall pay a tax of two and one-half
percent (21/2 %) on its ‘Gross Philippine Billings’ as defined hereunder:

a. International Air Carrier

‘Gross Philippine Billings’ refers to the amount of gross revenue derived from carriage 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
ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the passenger boards
a plane in a port or point in the Philippines: Provided, further, That for a flight which originates
from the Philippines, but transshipment of passenger takes place at any part outside the
Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding
to the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings.
b. International Shipping

‘Gross Philippine Billings’ means gross revenue

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.

Provided, That international carriers doing business

in the Philippines may avail of a preferential rate or
exemption from the tax herein imposed on their
gross revenue derived from the carriage of persons
and their excess baggage on the basis of an
applicable tax treaty or international agreement to
which the Philippines is a signatory or on the basis of reciprocity such that an international
carrier, whose home country grants income tax exemption to Philippine carriers, shall likewise
be exempt from the tax imposed under this provision.

4. Tax on Branch Profits Remittances

Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%)
which shall be based on the total profits applied or earmarked for remittance without any
deduction for the tax component thereof (except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner
as provided in Sections 57 and 58 of this Code: Provided, that interests, dividends, rents,
royalties, including remuneration for technical services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits, income
and capital gains received by a foreign corporation during each taxable year from all sources
within the Philippines shall not be treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the Philippines.
5. Regional or Area Headquarters and Regional Operating Headquarters of Multinational
Companies

a. Regional or area headquarters as defined in Section 22(DD) shall not be subject to income
tax.

b. Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent
(10%) of their taxable income: Provided, That effective January 1, 2022, regional operating
headquarters shall be subject to the regular corporate income tax.

6. Tax on Certain Incomes Received by a Resident Foreign Corporation

a. Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes,
Trust Funds and Similar Arrangements and Royalties

Interest from any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties derived from sources
within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%)
of such interest: Provided, however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of fifteen percent (15%) of such interest income.

b. Income Derived under the Expanded Foreign Currency Deposit System

Income derived by a depository bank under the expanded foreign currency deposit system from
foreign currency transactions with nonresidents, offshore banking units in the Philippines, local
commercial banks including branches of foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, and
other depository banks under the expanded foreign currency deposit system shall be exempt
from all taxes, except net income from such transactions as may be specified by the Secretary
of Finance, upon recommendation by the Monetary Board to be subject to the regular income
tax payable by banks: Provided, however, That interest income from foreign currency loans
granted by such depository banks under said expanded system to residents other than offshore
banking units in the Philippines or other depository banks under the expanded system shall be
subject to a final tax at the rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from transactions with

depository banks under the expanded system shall be exempt from income tax.

c. Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange

A final tax at the rate of fifteen percent (15%) is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition of shares
of stock in a domestic corporation except shares sold or disposed of through the stock exchange.

d. Intercorporate Dividends

Dividends received by a resident foreign corporation from a domestic corporation liable to tax
under this Code shall not be subject to tax under this Title.

7. Offshore Gaming Licensees

The provisions of existing special or general laws to the contrary notwithstanding, the non-
gaming revenues derived within the Philippines of foreign-based offshore gaming licensees as
defined and duly licensed by the Philippine Amusement and Gaming Corporation or any
special economic zone authority or tourism zone authority or free port authority shall be subject
to an income tax equivalent to twenty-five percent (25%) of the taxable income derived during
each taxable year.

B. Tax on Nonresident Foreign Corporation

1. In General

Except as otherwise provided in this Code, a foreign corporation not engaged in trade or
business in the Philippines, effective January 1, 2021, shall pay a tax equal to twenty-five
percent (25%) of the gross income received during each taxable year from all 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, except capital gains subject to tax under
subparagraph 5(c).

2. Nonresident Cinematographic Film Owner, Lessor or Distributor

A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent
(25%) of its gross income from all sources within the Philippines.

3. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals

A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent
(4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry Authority.

5. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment

Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and
other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals
or fees.

6. Tax on Certain Incomes Received by a Nonresident Foreign Corporation

a. Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is
hereby imposed on the amount of interest on foreign loans contracted on or after August 1,
1986.

b. Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is
hereby imposed on the amount of cash and/or property dividends received from a domestic
corporation, which shall be collected and paid as provided in Section 57(A) of this Code,
subject to the condition that the country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the nonresident foreign corporation
taxes deemed to have been paid in the Philippines equivalent to fifteen percent (15%), which
represents the difference between the regular income tax and the fifteen percent (15%) tax on
dividends as provided in this subparagraph: Provided, That effective July 1, 2020, the credit
against the tax due shall be equivalent to the difference between the regular income tax rate
provided in Section 28(B)(1) of this Code and the fifteen percent (15%) tax on dividends.

c. Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange

A final tax at the rate of fifteen percent (15%) is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition of shares
of stock in a domestic corporation, except shares sold, or disposed of through the stock
exchange.
 CAPITAL GAINS

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller
from the sale, exchange, or other disposition of capital assets located in the Philippines,
including pacto de retro sales and other forms of conditional sale.

INCOME TAX OF CORPORATE TAXPAYERS

 The applicable income tax of a corporation depends on the type of the corporation and
the income subject to tax.

Capital Gains subject to Capital Gains Tax (CGT)

1. Sale of Shares of closely held Domestic Corporations.

2. Sale of Real Property in the Philippines.

Ordinary Assets? (Under Tax Code of the Philippines)

1. Stock in Trade of the taxpayer or

other property of a kind which would
properly be included in the inventory of
the taxpayer if on hand at the close of
the taxable year.

2. Property used in trade or business

subject to depreciation.

3. Real property held by the taxpayer

primarily for sale to customers in the
ordinary course of trade or business.

4. Real property used in trade or

business of the taxpayer.
Capital Assets? (Under Tax Code of the Philippines)

Capital Assets include all other property held by the taxpayer (whether or not connected with
his trade or business) under Sec. 39(A)(1) of the Code. [Sec. 2(a) of RR No. 7-2003]

Sale of Capital Assets Subject to CGT:

1. Shares of Stocks (15% CG - DC); if applicable in Foreign Corporation, Old Rating should
be used.
2. Real Properties ( 6% SP or FMV - DC) ; not applicable in Foreign Corporations.

Real Estate Terms:

1. Real Property:
Defined as per the Civil Code of the Philippines,
encompassing land, buildings, and related assets.
2. Real Estate Dealer:
Buys and sells properties, acting as a principal,
engaging in real estate transactions as a business.
3. Real Estate Developer:
Engaged in the business of developing real
properties, creating subdivisions, constructing
residential or commercial units for sale or lease.
4. Real Estate Lessor:
Leases or rents properties to others, making it
available for use in exchange for payment.
5. Engaged in Real Estate Business:
Encompasses real estate dealers, developers, and
lessors actively involved in real estate
transactions.
6. Not Engaged in Real Estate Business:
Individuals or entities not falling under the
categories of dealers, developers, or lessors.
Classification of Real Properties:
Capital Assets: Include real properties
acquired by real estate entities, excluding
specific exemptions.
Ordinary Assets: Encompass properties
used in business activities or those not in
use for more than two years.
Change of Business: properties retained
but no longer used in the real estate
business remain ordinary assets.
Involuntary Transfers: Classification
remains unaffected, regardless of the
circumstances of the sale.

Determining Capital Gains:

Valuation: Based on selling price, fair market value, or zonal value, selecting the higher of
these figures.
Net Capital Gains: Calculated as the excess of gains from sales or exchanges of capital
assets over related losses.

Shares of Stocks Transactions:

Determination of Selling Price: Involves various
scenarios such as cash sales, partial payment in kind,
or exchanges.
Fair Market Value: Determined using methods
defined by regulations, essential for accurate
valuation.
Gain/Loss Calculation: Difference between amount
realized from the sale and the basis or adjusted basis.

Capital Gains Tax Rates (Effective April 11,

2021):
Real Properties: Subject to a 6% tax rate, applied to the higher value between selling price
and fair market value.
Shares of Stocks (Unlisted): Individuals and corporations are taxed at a flat rate of 15% for
unlisted shares.

Exemptions from Final Capital Gains Tax:

 Exempt Entities: Includes dealers in securities, entities enjoying specific investment
incentives, and government entities.
 Conditional Exemptions: Apply to transactions like primary residence sales under
defined conditions, encouraging home ownership.

Applicable tax rates of Capital Gains Tax (CGT) under the National Internal Revenue
Code of 1997, as amended by Republic Act No. 10963/ TRAIN Law?

A. For Real Properties - Six percent (6%)

B. For Shares of Stocks Not Traded in the Stock Exchange:

NOTE: The option of the taxpayers to be taxed either at 6% CGT or basic tax is not
applicable to corporate taxpayers. All of taxpayers is subject to CGT of Shares of Stocks
(Domestic Corporations only)
 DEDUCTIONS FROM GROSS INCOME

Deductions from Gross Income

These deductions are items allowed to be

deducted from Gross Income to determine
Taxable Inco me.

A. For tax purposes, such deductions partake

the nature of tax exemptions, hence, only those
explicitly provided by existing laws are
allowed to be deducted from Gross Income.

B. Other pertinent rules:

Matching Principle

Deductions must match the income for the current taxable year; deductions must be paid or
incurred in connection with the taxpayer's business or practice of profession during that year.

Deductions may be allowed only within the limits provided by law, hence, if a taxpayer
fails to deduct all of his allowable expenses during the taxable year, he cannot anymore claim
them as deduction in the succeeding taxable year.

Substantiation Rule
Deductions must be supported by receipts and invoices duly prescribed and allowed by
the Bureau of Internal Revenue (BIR)

This rule, however, does not apply to taxpayer’s claiming Optional Standard Deduction
(OSD) or those expressly excluded by laws.
 Disallowance of deductions in relation to withholding taxes

Deductions from gross income may be disallowed to a withholding agent if it is shown

that the tax required to be deducted and withheld from the expenses incurred was not
paid and remitted to the BIR;

C. Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB) and Non-Resident

Foreign Corporation (NRFC) cannot avail of any deductions from Gross Income since any
income derived from sources within the Philippines are already subject to final tax;

Hence, only NRA-ETB, Resident Foreign Corporation (RFC), Resident Alien, Resident and
Non-Resident Citizens are allowed deductions from Gross Income unless otherwise stated by
law.

Itemized Deductions
1. Business Expenses
2. Interest
3. Taxes
4. Losses
5. Bad Debts
6. Depreciation
7. Depletion
8. Charitable and Other Contributions
9. Research and Development
10. Pension Trust Contribution

1. Ordinary and Necessary Trade, Business and Professional Expenses Requisites for
Deductibility:
a. Paid or incurred during the taxable year.
b. Duly substantiated.
c. Incurred in trade or business carried on by the taxpayer.
d. Reasonable, ordinary and necessary.
Reasonable – not excessive under the circumstances especially if not necessary for the
business (e.g. representation expense is allowed only at 0.5% of net sales for seller of goods
and 1% of net revenues for provider of services)

Necessary – those useful for the furtherance of the purpose of the business and those which
incurred to minimize losses or augment profits.

Extraordinary expenses – are capitalized and amortized over periods where economic benefit
from the said expense is expected to be derived or amortized over the life of the asset which
the said expense intends to increase in value.

Capital expenditures (CAPEX) – are not deductible in the taxable year they are paid or
incurred because they do not increase income when incurred. Instead, they are capitalized and
amortized. The amortization, therefore, is the one deductible for income tax purposes.

e. Not contrary to law, public policy or morals.

f. The withholding tax, if any, is paid and remitted to the BIR.

Other pertinent rules

Cohan Rule – if expense has been incurred

but the exact amount thereof cannot be
ascertained due to the absence or lack of
proof to substantiate it, the BIR has the
power to compute or make an estimate of the
deduction to be taken from the Gross
Income.

Expenses paid or incurred on passive investments are not deductible from any passive
income earned (e.g. interest or dividends) because they do not fall under the purview of
carrying on any trade or business; expenses incurred partly for the taxpayer's trade or business
and in part for other purposes shall be apportioned correspondingly.
Kinds of Business Expenses

A. Compensation for Personal Service

Includes salaries, wages, commissions, professional fees, vacation leave pay, retirement pay,
bonuses, contributions to pension trust created for the benefit of the employees including
contributions under the SSS Act, premiums and compensation for injury of employee if not
compensated by insurance, and the grossed up monetary value of fringe benefits (any amount
given by the employer as benefits to its employees, whether classified as de minimis or fringe
benefits, shall constitute as deductible expense to the said employer).

B. Travelling/Transportation Expenses

Must be, in addition to the requisites of

deductibility discussed above, incurred or paid
while away from home, hence:
• Transportation expenses from the main office to
its branch are deductible but not transportation
expenses from home to the main office and vice
versa.
• Gasoline spent in bringing a car utilized for
business and personal use shall be allowed as a
deduction in proportion to its use.

C. Lease Related Expenses

Allowed deductions to lessor

Ordinary and necessary expenses paid or incurred during the taxable year attributable to the
earning of income such as but not limited to repair and maintenance, salaries and wages,
interest payments and property taxes.
Allowed deductions to lessee

Amount of rent paid or accrued, other expenses which the lessee is obliged to pay to or pay for
the account of the lessor, and depreciation/amortization of the cost of leasehold improvements
introduced by the lessee. The costs borne by the lessee in introducing structures over the
leasehold are capital investments and not deductible as business expenses.

D. Entertainment, Amusement and Recreation

Expenses

Includes representation expenses incurred by a

taxpayer in providing amusement or
entertainment to guest/ prospective clients/
customers or in meeting with guest/ prospective
clients/ customers at restaurants, country clubs,
concerts, plays, sporting events etc., as well as the
depreciation or rental expenses incurred in
relation to entertainment facilities
(condominiums, yachts, vacation home or
equipment used for entertainment purposes) used
in connection thereof; Similar expenses incurred
for the benefit of employees, managers, partners,
officers, directors or stockholders are not included
in this category of expense.

Representation expense limit

0.5% of net sales for seller of goods and 1% of net revenues for provider of services; if taxpayer
is engaged in both sales of goods and services, the limit is determined using the apportionment
formula below:

Apportionment Formula
Net Sales or Revenues
Total Sales and Revenues x Representation Expense
 Hence, if net sales is 200,000, net revenues is 100,000 and representation expense
incurred is 3,000 then the allowable representation expense is 2,000.

A. Representation expense based on net sales

200,000
300,000 x 3,000 = 2,000

However, limit is 200,000 x 0.5% = 1,000, hence, 1,000 is the only amount allowed
out of the 2,000 apportioned representation expense based on net sales.

B. Representation expense based on net revenues

100,000
300,000 x 3,000 = 1,000

Limit is 100,000 x 1% = 1,000, hence, 1,000 is the amount allowed and coincidentally
equal to the 1,000 apportioned representation expense based on net revenues; Thus,
1,000 + 1,000 = 2,000 total allowable representation expense. The excess 1,000 is not
deductible. Any findings of improper classification of expense to avoid the limitation
prescribed by the tax code shall be disallowed in entirety.

E. Cost of Materials and Supplies

Deductible only to the extent they are actually spent or consumed in operation during the
taxable year.

F. Expenses of Professionals

Includes cost of supplies used in the practice of

profession, transportation expense in relation to vehicle
used in making professional calls including the repair
and maintenance thereof, dues to professional societies,
subscription to professional journals, rent of office
space and equipment, utilities, salaries of employees,
and cost of book, furniture and professional equipment.
 G. Repair Expenses

Minor or ordinary repairs deductible if it:

A. Improve the efficiency of the property’s
normal operating conditions.
B. Do not materially add to the value of the
property repaired or appreciably prolong
its life.
C. Do not increase the amount of the
related fixed asset account.
 major or extraordinary repairs
– not deductible but capitalized and added
to the cost of the asset repaired.

H. Advertising Expense

Those incurred to stimulate current sales are deductible, however, those incurred to stimulate
future sales are not deductible outright but are spread out and amortized over a reasonable
period of time;
Advertising to promote sales of shares of stock or to create a favorable image are not deductible
(unless it can be shown that the image being developed would augment sales/profit).

1. Interest – in order for the compensation for the use or forbearance of money is allowed to
be deductible the following requisites must be observed, to wit:
a. Indebtedness must be that of the taxpayer and results from a true creditor-debtor
relationship.

b. The forbearance of money is made in connection to the trade or business of the

taxpayer.

c. Interest expense must have been paid or incurred during the taxable year.

d. The interest must be legally due and not treated as a capital expenditure.
 e. The payment of interest must have been stipulated in writing- otherwise,
unenforceable.

f. Interest must be paid within the limits provided by law (e.g Interest Arbitrage Rule).

As a general rule, the entire amount of interest expense may be allowed as a deduction from
Gross Income. However, to discourage tax arbitrage wherein back to back loan is used to take
advantage of the lower tax rate on interest income and a higher tax rate on interest expense
deduction, the taxpayer’s allowable deduction for interest expense is reduced by 33% of the
interest income subjected to final tax;

The 33% is computed as follows

30% Net Income Tax – 20% Final Tax

30% Net Income Tax = 33%

Illustration: CDE Bank granted Company B with a loan of 600,000 at 10% annual interest,
which was later placed in a local bank. Without the aforementioned limitations, the taxpayer
would easily receive a tax benefit of 30% or 18,000 from the interest expense of 60,000, whilst
the interest income of 60,000, being a passive income, would only be subject to 20% final
withholding tax or 12,000. There will be a net benefit of 6,000. However, if the limitation is in
place, the 60,000 in interest expense is reduced by 33%, resulting in a 40,000 allowed
deduction. The tax benefit will be 12,000 (40,000 x 30%), which is now equal to the final tax
paid on the interest income of 12,000.

Other pertinent rules

a. Interest paid or incurred on unpaid business-related taxes/ delinquent taxes shall be fully
deductible from Gross Income and shall not be subject to the same limitation above.

b. Interest incurred to finance petroleum operations are not deductible; they are capitalized as
deferred exploration cost.

c. Interest incurred between related taxpayers is, likewise, not deductible.

d. The taxpayer has the option to treat the interest incurred to acquire property to be used in
the business or trade of the taxpayer as an interest expense or as a capital expenditure where it
is added to the cost of the property and subsequently depreciated; the two options, however,
are mutually exclusive.

3. Taxes
In order for taxes to be deductible the
following requisites must be observed, to
wit:

a. Payments must only be for taxes not for

surcharges, penalties, fines or interest.

b. Paid or incurred during the taxable

year in connection with the taxpayer’s
business or practice of profession.

c. Must be imposed by law, payable by

the taxpayer, and not excluded as a
deduction bylaw.

Generally, all taxes, whether national or local, shall be allowed as deduction except the
following:
a. Philippine Income tax
b. Foreign Income Tax, provided taxpayer avails of tax credit, otherwise, the tax paid
may be claimed as a deduction from Gross Income.
c. Estate and Donor’s Tax
d. Special Assessments
e. Final Tax
f. Capital Gains Tax

The obligation to deduct from contingent tax liabilities arises only when the tax is finally
determined.
Taxes are deductible only from the Gross Income of persons upon whom the tax are imposed
by law.

Tax credits are tax paid or accrued to a foreign country which reduce a taxpayer’s tax liability;
proof of credits must be shown prior to their availment as tax credit.

Limitations on availing tax credit:

Limit A:
Per country limitation Taxable income (foreign country)
Taxable income (all sources) x Philippine Income Tax

Limit B:
Overall limitation Taxable income (outside country)
Taxable income (all sources) x Philippine Income Tax

Application

If one foreign country is involved, the allowed tax credit is the one lower between the result of
Limit A and the foreign income tax paid or accrued.

If two or more foreign countries are involved, determine first the one lower between the result
of Limit B and the total foreign income taxes paid or accrued, then compare the results with
Limit A, the lower amount is the allowed credit.

Surcharges, interest fines and penalties are not deductible, however, interest on deficiency taxes
may be allowed as deduction.

4. Losses

In order for losses to be deductible the following requisites must be observed, to wit:
a. Loss must be that of the taxpayer; the loss of the parent company cannot be deducted
by its subsidiary. But the loss of the branch, within or outside the Philippines, is
 deductible from the Gross Income of the main office located in the Philippines – single
entity principle; losses are, likewise, personal and not transferable.

b. Loss must be evidenced by a closed and complete transaction; The taxpayer’s failure
to record in his books the alleged loss proves that the loss has not been suffered, hence,
not deductible; likewise, if the loss is due to market fluctuation then the loss is not
deductible until the related asset is finally disposed of or realized.

c. Not claimed as a deduction for estate tax purposes as double benefits arising from
the same loss is frowned upon.

d. Actually, sustained and charged off during the taxable year.

e. Not compensated for by insurance or other form of indemnity.

f. Loss must be connected to the taxpayer’s trade, business or any transaction entered
for profit although not connected to his trade or business.

g. In case of casualty loss, a sworn declaration of loss must be filed with the BIR within
45 days from its occurrence or discovery.

Casualty losses are those incurred by properties connected with the taxpayer’s trade or business
as against ordinary losses which are incurred as a result of the taxpayer’s pursuit of his trade
or business.

Net Operating Loss Carry Over (NOLCO)

A. NOLCO shall be allowed as a deduction from the Gross Income of the taxpayer who
sustained or accumulated the net operating losses regardless of the change in its ownership.
This rule shall also apply in case of a merger where the taxpayer is the surviving entity.

B. The three (3) year reglementary period for claiming NOLCO will continue to run despite
the fact that the taxpayer paid income tax under the MCIT or availed of the Optional Standard
Deduction (OSD)
C. NOLCO is deducted on a first in, first out basis.

D. The net operating loss incurred by a taxpayer in the year in which a substantial change in
ownership occurs shall not be affected by such change in ownership.

E. NOLCO shall be allowed as a deduction in computing the taxpayer’s income taxes per
quarter and annual final adjustment income tax return.

E. A taxpayer who claims the forty percent (40%), OSD shall not simultaneously claim
deduction of the NOLCO.

5. Bad Debts

In order for bad debts to be deductible the following requisites must be observed, to wit:

a. There must be an existing, valid and

legally demandable indebtedness due to
the taxpayer.

b. Must have been reported as

receivables in the income tax return of
the current or prior years.
c. Actually, ascertained to be worthless
and uncollectible as of the end of the
taxable year.

d. Must not be sustained in a transaction

entered into between related parties.
e. Must be connected to the taxpayer’s
trade or business.

Before a debt can be considered worthless, the taxpayer must diligently show proof that it
cannot be collected anymore as well as in the future.
Tax Benefit Rule

The recovery of bad debts previously allowed as deduction in the preceding year/s shall be
included as part of the taxpayer’s Gross Income in the year of such recovery to the extent of
the income tax benefit of said deduction.

6. Depreciation

In order for depreciation expense to be deductible the following requisites must be observed,
to wit:
a. The allowance for depreciation must be for the property use in the trade or business
of the taxpayer.

b. The allowance for depreciation must be reasonable and charged off within the taxable
year.

c. Statement on the allowance must be attached to the return.

d. For non-resident alien and foreign corporation, property subject to depreciation must
be located within the Philippines.

If the property is being used partly for personal and partly for business, depreciation expense
must be prorated and only the portion attributable to business use is deductible.

Depreciation commences at the time of the acquisition of the property.

Methods of computing depreciation

a. Straight line method.

b. Sum of the year’s method.

c. Declining balance method using rate not exceedingly twice the rate which would have been
used under straight line method.
Depreciation shall be based on acquisition cost less salvage value without adjustment for
revaluation losses or increments.

The following rules on the deductibility of depreciation of vehicles shall be observed,

otherwise, depreciation including the maintenance expense thereof shall be disallowed:

a. Taxpayer must substantiate the purchase of the vehicle with sufficient evidence.

b. Only one vehicle for land transport is allowed for the use of an official or employee,
the value of which should not exceed 2.4 million pesos.

c. No depreciation shall be allowed for yachts, helicopters, aircrafts and land vehicles
with value exceeding 2.4 million pesos, unless the taxpayer’s main line of business is
transport operations or lease of transportation equipment and the vehicles purchased are
used in the said operations.

7. Depletion

The provision of allowance for depletion is based on the theory that the extraction of minerals
gradually exhausts the capital investment in the mineral deposit. The purpose of the depletion
deduction is to permit the owner of a capital interest in minerals in place tax free recovery of
that depleting capital asset.

The total accumulated exploration and development expenses is divided by the number of
recoverable units to arrive at a per unit depletion cost.

8. Charitable and Other Contributions

In order for charitable contributions to be deductible the following requisites must be observed,
to wit:
a. Contributions must be given to organizations specified by law.

b. The contribution or gift must be actually paid within the taxable year.
 c. Must be substantiated with adequate receipts or records.
Donation is recognized as a deduction only when it was actually paid or made, not in
the year the deed of donation was perfected.

Kinds of contributions

Ordinary/Partially Deductible Contributions

Recipient of which may be the Government of the Philippines or any of its agencies or political
subdivisions exclusively for public purpose, accredited domestic corporations or associations
organized and operated exclusively for religious, charitable, scientific, youth and sports
development, educational, rehabilitation of veterans, cultural or social welfare, and non-
government organizations (NGOs).

Limit on the Amount Deductible:

Corporate Taxpayer – 5% of taxable income before contributions

Contributions to non-qualified retirement plans are deductible only in the year paid to
employees and not at the time the contributions were made.

Requisite of a Reasonable Retirement Benefit Plan:

a. There is a written program that sets forth the provisions essential for its qualification.

b. It must be permanent and a continuing program.

c. Coverage:

Percentage basis – must cover at least 70% of all officials and employees; if the plan
provides for eligibility requirements and 70% was met by the officers and employees
of the company then at least 80% of those who qualified must be covered.

Classification basis – the employer may limit the coverage of the retirement plan by
providing classification to its employees and officers that is not discriminatory.
d. The employer and the employees or both should contribute to the fund.

e. the income of the trust fund must not be used or diverted to any purpose other than
the exclusive benefit of the said officials or employees.

f. There must be no discrimination in favor of officials and employees who are highly
compensated by the company.

g. Upon the termination of the plan, the rights of each official or employee are non-
forfeitable.

h. The plan must expressly provide that forfeiture must not be applied to increase the
benefits of any employee.

I. The fund must be administered by a trust.

 ITEMIZED DEDUCTIONS

Itemized Deduction

There shall be allowed as deduction from gross income all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on or which are directly attributable to, the
development, management, operation and/or conduct of the trade, business or exercise of a
profession.

Specific expenses and other items that are deductible from gross income. Under Section .34 of
the Tax Code, it consists of the following items

A. Expenses

In the taxable year, a deduction is allowed for all

ordinary and necessary expenses incurred
directly related to the development,
management, operation, or conduct of a trade,
business, or profession. This includes; salaries,
wages, travel expenses, rentals, and
entertainment, amusement, and recreation
expenses.

The deduction is allowed if the final tax imposed under Section 33 has been paid. However,
expenses contrary to law, morals, public policy, or public order cannot be allowed as a
deduction. The deduction is based on the needs and character of the taxpayer's industry, trade,
business, or profession.

B. Interest

Interest expense on indebtedness in a taxable year can be deducted from gross income, but the
deduction must be reduced by twenty percent (20%) of the interest income subjected to final
tax. The reduction rate will be adjusted based on the prescribed standard formula by the
Secretary of Finance and the Commissioner of Internal Revenue.

1. Exceptions. - No deduction shall be allowed in respect of interest under the succeeding

subparagraphs:

A. If within the taxable year an individual taxpayer reporting income on the cash basis incurs
an indebtedness on which an interest is paid in advance through discount or otherwise:
Provided, That such interest shall be allowed as a deduction in the year the indebtedness is
paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of the principal amortized or paid during
the year shall be allowed as deduction in such taxable year;
B. If both the taxpayer and the person to whom the payment has been made or is to be made
are persons specified under Section 36 B
C. If the indebtedness is incurred to finance petroleum exploration.

2. Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred
to acquire property used in trade business or exercise of a profession may be allowed as a
deduction or treated as a capital expenditure.

DIGESTED CASE

CIR vs. Consuelo L. VDA. De Prieto G.R. No. L-13912 September 30, 1960

Facts:

On December 4, 1945, the respondent conveyed by

way of gifts to her four children, namely, Antonio,
Benito, Carmen and Mauro, all surnamed Prieto,
real property with a total assessed value of
P892,497.50.
After the filing of the gift tax returns on or about February 1, 1954, the petitioner Commissioner
of Internal Revenue appraised the real property donated for gift tax purposes at P l,231,268.00,
and assessed the total sum of PI 17,706.50 as donor's gift tax, interests and compromises due
thereon. Of the total sum of PI 17,706.50 paid by respondent on April 29, 1954, the sum of
P55,978.65 represents the total interest on account of delinquency.

This sum of P55,978.65 was claimed as deduction, among others, by respondent in her 1954
income tax return.

Petitioner, however, disallowed the claim and as a consequence of such disallowance assessed
respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid
P55,978.65, including interest up to March 31, 1957, surcharge and compromise for the late
payment.

Issue:

Whether or not such interest was paid

upon an indebtedness within the
contemplation of section 30 (b) (1) of
the Tax Code.

Ruling:

Under the law, for interest to be deductible, it must be shown that there be an indebtedness,
that there should be interest upon it, and that what is claimed as an interest deduction should
have been paid or accrued within the year. It is here conceded that the interest paid by
respondent was in consequence of the late payment of her donor's tax, and the same was paid
within the year it is sought to be deducted. The only question to be determined, as stated by the
parties, is whether or not such interest was paid upon an indebtedness within the contemplation
of section 30 (b) (1) of the Tax Code, the pertinent part of which reads:
"SEC. 30. Deductions from gross income. In computing net income there shall be allowed as
deductions
The term "indebtedness" as used in the Tax Code of the United States containing similar
provisions as in the above-quoted section has been defined as an unconditional and legally
enforceable obligation for the payment of money. (Federal Taxes Vol. 2, p. 13,019, Prentice-
Hall, Inc.; Mertens' Law of Federal Income Taxation, Vol. 4, p. 542.) Within the meaning of
that definition, it is apparent that a tax may be considered an indebtedness.

It follows that the interest paid by herein respondent for the late payment of her donor's tax is
deductible from her gross income under section 30 (b) of the Tax Code above quoted.
The above conclusion finds support in the established jurisprudence in the United States after
whose laws our Income Tax Law has been patterned. Thus, under sec. 23 (b) of the Internal
Revenue Code of 1939, as amended, which contains similarly worded provisions as sec. 30 (b)
of our Tax Code, the uniform ruling is that interest on taxes is interest on indebtedness and is
deductible.

C. Taxes

Income tax and taxes incurred within the

taxable year are eligible for deductions,
except for;

Income tax provided under Title, income

taxes imposed by foreign authorities, estate
and donor's taxes, and taxes assessed against
local benefits to increase property value.

D. Losses
Losses sustained during the taxable year, not compensated for by insurance, are allowed as
deductions.
These losses may arise from casualty, robbery, theft, or embezzlement, and are not allowed if
they were incurred in trade, profession, or business.
The Secretary of Finance can prescribe the time limit for submitting a declaration of loss, but
no loss can be allowed if it has been claimed as a deduction for estate tax purposes.
1. In General

Losses actually sustained during the taxable year and not compensated for by insurance or other
forms of indemnity shall be allowed as deductions:

A. If incurred in trade, profession or business.

B. Losses related to property in trade, business, or profession are deductible if arising from
fires, storms, shipwrecks, or other casualties, or from robbery, theft, or embezzlement.

C. The Secretary of Finance, based on the Commissioner's recommendation, can establish rules
for declaring losses from casualty or crime, with a submission timeframe of 30 to 90 days from
the incident's discovery.

D. Losses claimed for estate tax deduction cannot be deducted under this provision.

2. Proof of Loss

For nonresident alien individuals or foreign corporations in the Philippines, deductible losses
must be incurred in local business activities during the taxable year and remain uncompensated
by insurance. The Secretary of Finance, upon the Commissioner's recommendation, can create
rules specifying the time and method for taxpayers to declare losses from casualty, robbery,
theft, or embezzlement. The submission timeframe, as outlined in the regulations, should be
between thirty (30) and ninety (90) days from the discovery date of the incident causing the
loss.

3. Net Operating Loss Carry-Over

Unutilized net operating losses from the preceding taxable year, not previously deducted from
gross income, can be carried over as a deduction for the next three consecutive taxable years.
However, losses incurred in a tax-exempt year are ineligible for this deduction. Moreover, a
net operating loss carry-over is only permissible if there has been no substantial change in the
ownership of the business or enterprise during this period.
I. Not than seventy-five percent (75%) in nominal value of outstanding issued shares., if the
business is in the name of a corporation, is held by or on behalf of the same persons.

II. Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the
business is in the name of a corporation, is held by or on behalf of the same persons.

For purposes of this subsection, the term 'net operating loss' shall mean the excess of allowable
deduction over gross income of the business in a taxable year.

Provided, that for mines other than oil and gas wells, a net operating loss without the benefit
of incentives provided for under Executive Order No. 226, as amended, otherwise known as
the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation
may be carried over as a deduction from taxable income for the next five (5) years immediately
following the year of such loss. The entire amount of the loss shall be carried over to the first
of the five (5) taxable years following the loss, and any portion of such loss which exceeds the
taxable income of such first year shall be deducted in like manner form the taxable income of
the next remaining four (4) years.

4. Capital Losses

A. Limitations

Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in
Section 39.

B. Securities Becoming Worthless

If securities as defined in Section 22 (T) become worthless during the taxable year and are
capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a
loss from the sale or exchange, on the last day of such taxable year, of capital assets.

5. Losses from Wash Sales of Stock or Securities

Losses from 'wash sales' of stock or securities as provided in Section 38.
6. Wagering Losses
Losses from wagering transactions shall be allowed only to the extent of the gains from such
transactions.

7. Abandonment Losses

A. If a contract area for petroleum operations is abandoned, whether partially or wholly, all
accumulated exploration and development expenditures related to that area can be deducted.
However, for expenditures incurred before January 1, 1979, they are deductible only from any
income derived from the same contract area. Notice of abandonment must be filed with the
Commissioner in all cases.

B. If a producing well is abandoned, the un-amortized costs and the un-depreciated costs of
equipment directly used in that well can be deducted in the year of abandonment. However, if
the abandoned well is re-entered, and production resumes, or if the equipment or facility is
restored into service, the costs are included as part of gross income in the year of resumption
or restoration. Subsequently, these costs may be amortized or depreciated, depending on the
circumstances.

E. Bad Debts

1. In General
Debts owed to the taxpayer that are determined to be worthless and written off within the
taxable year are deductible, except those unrelated to the taxpayer's profession, trade, or
business and those arising from transactions specified in Section 36(B). However, if previously
deducted bad debts are recovered, the recovered amount is included as gross income in the year
of recovery, up to the income tax benefit previously received.

2. Securities Becoming Worthless.

If securities, defined in Section 22(T), are deemed worthless and written off within the taxable
year and qualify as capital assets, the resulting loss is considered a loss from the sale or
exchange of capital assets on the last day of the taxable year. This applies to taxpayers other
than banks or trust companies primarily engaged in deposit receipt, for the purposes outlined
in the tax code.
F. Depreciation

1. General Rule

A reasonable deduction for the exhaustion, wear and tear, and obsolescence of property used
in trade or business is permitted. For property held by one person for life with remainder to
another, the deduction is calculated as if the life tenant were the absolute owner. In the case of
trust-held property, the deduction is apportioned between income beneficiaries and trustees
based on the trust instrument or, in its absence, on the trust income allocated to each.

2. Use of Certain Methods and Rates.

The term 'reasonable allowance' as used in the preceding paragraph shall include, but not
limited to, an allowance computed in accordance with rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, under any of the following
methods:

A. The straight-line method

B. Declining-balance method, using a rate not exceeding twice the rate which would have been
used had the annual allowance been computed under the method described in Subsection.
C. The sum-of-the-years-digit method; and
D. Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner.

3. Agreement as to Useful Life on Which Depreciation Rate is Based

A written agreement on the useful life and depreciation rate, made between the taxpayer and
the Commissioner under prescribed rules, is binding. Changes in the agreed rate are not
effective for prior taxable years unless both parties are notified in writing.

4. Depreciation of Properties Used in Petroleum Operations

Properties directly related to petroleum production may be depreciated using the straight-line
or declining-balance method at the contractor's option. The useful life is ten years or as
permitted by the Commissioner. Properties not directly used in petroleum production are
depreciated straight-line over five years.

5. Depreciation of Properties Used in Mining Operations

An allowance for depreciation in respect of all properties used in mining operations other than
petroleum operations, shall be computed as follows:

A. At the normal rate of depreciation if the expected life is ten (10) years or less; or
B. Depreciated over any number of years between five (5) years and the expected life if the
latter is more than ten (10) years, and the depreciation thereon allowed as deduction from
taxable income: Provided, That the contractor notifies the Commissioner at the beginning of
the depreciation period which depreciation rate allowed by this Section will be used.

6. Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or

Resident Foreign Corporations

Nonresident aliens engaged in trade or business and resident foreign corporations can deduct a
reasonable allowance for property deterioration only if the property is located in the
Philippines.

G. Depletion of Oil and Gas Wells and Mines

1. In General

A reasonable allowance for depletion or amortization, following the cost-depletion method, is

granted for oil and gas wells or mines. The Secretary of Finance, upon the Commissioner's
recommendation, will prescribe rules and regulations. Depletion allowance ceases when it
equals the capital invested. After commercial production begins, certain intangible exploration
and development drilling costs may be deductible in the year incurred for non-producing wells
or mines. Alternatively, they may be deducted in full in the year paid or incurred, or at the
taxpayer's election, capitalized and amortized for producing wells or mines in the same contract
area. Intangible costs in petroleum operations are necessary for drilling and well preparation,
with no salvage value, but do not apply to property subject to depreciation.
2. Election to Deduct Exploration and Development Expenditures

For mining operations, the taxpayer can choose to deduct exploration and development
expenditures, either accumulated as cost or adjusted basis for cost depletion as of the
prospecting date, and those paid or incurred during the taxable year. The deductible amount for
these expenditures is capped at 25% of net income from mining operations, without tax
incentives. Any excess is carried forward until fully deducted. The election is irrevocable and
binds in succeeding taxable years.

Net income from mining operations deducts mining-related expenses and depreciation,
excluding expenditures for property subject to depreciation. This provision doesn't apply to oil
and gas exploration and development.

3. Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual
or Foreign Corporation

In the case of a nonresident alien individual engaged in trade or business in the Philippines or
a resident foreign corporation, allowance for depletion of oil and gas wells or mines under
paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines
located within the Philippines.

H. Charitable and Other Distribution

1. In General

Contributions or gifts paid within the taxable year to the Philippine government, its agencies,
political subdivisions, accredited domestic corporations, religious, charitable, scientific, youth
and sports development, cultural or educational organizations, rehabilitation of veterans, social
welfare institutions, or non-government organizations are deductible. The deduction is subject
to rules set by the Secretary of Finance, recommended by the Commissioner. The deductible
amount should not exceed 10% for individuals or 5% for corporations of the taxpayer's taxable
income from trade, business, or profession, calculated without considering this provision and
subsequent subparagraphs.
2. Contributions Deductible in Full

Notwithstanding the provisions of the preceding subparagraph, donations to the following

institutions or entities shall be deductible in full:

A. Donations to the Government

Donations made for priority activities in education, health, youth and sports development,
human settlements, science and culture, and economic development are deductible. The
priority areas are determined by a National Priority Plan established by the National Economic
and Development Authority (NEDA) in consultation with government agencies, regional
development councils, and private philanthropic entities. Donations not aligned with the annual
priority plan are subject to limitations specified in paragraph (1) of this Subsection.

B. Donations to Certain Foreign Institutions or International Organizations

Donations to foreign institutions or international organizations which are fully deductible in

pursuance of or in compliance with agreements, treaties, or commitments entered into by the
Government of the Philippines and the foreign institutions or international organizations or in
pursuance of special laws.

C. Donations to Accredited Non-Government Organizations

The term 'nongovernment organization' means a non-profit domestic corporation:

1. Organized and operated exclusively for scientific, research, educational, character-building

and youth and sports development, health, social welfare, cultural or charitable purposes, or a
combination thereof, no part of the net income of which insures to the benefit of any private
individual.
2. Which, not later than the 15th day of the third month after the close of the accredited non-
government organizations taxable year in which contributions are received, makes utilization
directly for the active conduct of the activities constituting the purpose or function for which it
is organized and operated, unless an extended period is granted by the Secretary of Finance in
accordance with the rules and regulations to be promulgated, upon recommendation of the
Commissioner.
3. The level of administrative expense of which shall, on an annual basis, conform with the
rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses.
4. The assets of which, in the event of dissolution, would be distributed to another non-profit
domestic corporation organized for similar purpose or purposes, or to the state for public
purpose, or would be distributed by a court to another organization to be used in such manner
as in the judgment of said court shall best accomplish the general purpose for which the
dissolved organization was organized.

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the
term 'utilization' means:

I. Any amount in cash or in kind (including administrative expenses) paid or utilized to

accomplish one or more purposes for which the accredited non-government organization was
created or organized.
II. Any amount paid to acquire an asset used (or held for use) directly in carrying out one or
more purposes for which the accredited non-government organization was created or
organized.

An amount set aside for a specific project which comes within one or more purposes of the
accredited non-government organization may be treated as a utilization, but only if at the time
such amount is set aside, the accredited non-government organization has established to the
satisfaction of the Commissioner that the amount will be paid for the specific project within a
period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is
one which can be better accomplished by setting aside such amount than by immediate payment
of funds.
 3. Valuation

The amount of any charitable contribution of

property other than money shall be based on the
acquisition cost of said property.

4. Proof of Deductions

Contributions or gifts shall be allowable as

deductions only if verified under the rules and
regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.

I. Research and Development

1. In General

A taxpayer may treat research or development expenditures which are paid or incurred by him
during the taxable year in connection with his trade, business or profession as ordinary and
necessary expenses which are not chargeable to capital account. The expenditures so treated
shall be allowed as deduction during the taxable year when paid or incurred.
2. Amortization of Certain Research and Development Expenditures

At the election of the taxpayer and in accordance with the rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the Commissioner, the following
research and development expenditures may be treated as deferred expenses:

A. Paid or incurred by the taxpayer in connection with his trade, business or profession;
B. Not treated as expenses under paragraph (1) hereof; and
C. Chargeable to capital account but not chargeable to property of a character which is subject
to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction ratably
distributed over a period of not less than sixty (60) months as may be elected by the taxpayer
(beginning with the month in which the taxpayer first realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year beginning
after the effectivity of this Code, but only if made not later than the time prescribed by law for
filing the return for such taxable year. The method so elected, and the period selected by the
taxpayer, shall be adhered to in computing taxable income for the taxable year for which the
election is made and for all subsequent taxable years unless with the approval of the
Commissioner, a change to a different method is authorized with respect to a part or all of such
expenditures. The election shall not apply to any expenditure paid or incurred during any
taxable year for which the taxpayer makes the election.

3. Limitations on Deduction

This Subsection shall not apply to:

A. Any expenditure for the acquisition or improvement of land, or for the improvement of
property to be used in connection with research and development of a character which is subject
to depreciation and depletion; and
B. Any expenditure paid or incurred for the purpose of ascertaining the existence, location,
extent, or quality of any deposit of ore or other mineral, including oil or gas.

J. Pension Trust

An employer establishing or maintaining a pension trust to provide for the payment of

reasonable pensions to his employees shall be allowed as a deduction (in addition to the
contributions to such trust during the taxable year to cover the pension liability accruing during
the year, allowed as a deduction under Subsection (A)(1) of this Section) a reasonable amount
transferred or paid into such trust during the taxable year in excess of such contributions, but
only if such amount (1)has not theretofore been allowed as a deduction, and (2) is apportioned
in equal parts over a period of ten (10) consecutive years beginning with the year in which the
transfer or payment is made.
Election of Deduction: Itemized Deduction or OSD
The 1st Quarter of the initial quarter of the taxable
year after the commencement of the new
business/practice of profession. Once the election
is made it must be consistently applied to all
succeeding quarterly returns and in the final
income tax return for the taxable year. Individual
taxpayers choose their tax regime, deciding
whether to apply an 8% or 0-35% graduated rate,
and how to deduct from gross receipts, either
itemized or optional standard deduction.
Individual taxpayers can choose to deduct
business-related expenses, such as salaries and
rentals, from their net income through itemized
deductions, note that the conditions of
deductibility under the tax rules apply to such
expenses. By choosing itemized deduction, this
may result in a net loss rather than a net income.

Who May Claim Itemized Deduction?

1. Individual citizens, resident aliens, and non-resident aliens engaged in trade or business,
under the graduate rates.
2. Domestic corporation and business partnership.
3. Proprietary educational institutions and hospitals which are non-profit.
4. Government owned and controlled corporations, agencies and instrumentalities.
5. Resident foreign corporation.

General Professional Partnership shall be allowed the same deductions for the purposes of
computing the distributive share of its partners.
 ITEMS NOT DEDUCTIBLE

Items not deductible for income tax purposes, with references from a 2021 Supreme Court
decision and a 2021 issuance of the Bureau of Internal Revenue (BIR).

Items Not Deductible for Income Tax Purposes (2021)

The accurate understanding of non-deductible items for income tax purposes is essential for
taxpayers to comply with tax laws and regulations. This research explores common non-
deductible items, referring to a 2021 Supreme Court decision and a 2021 BIR issuance to
provide the latest insights.

II. Common Non-Deductible Items

A. Personal Expenses

Personal expenses, such as groceries, clothing, and personal entertainment, are generally not
deductible as they are considered unrelated to income generation (Supreme Court Decision,
XYZ vs. Commissioner of Internal Revenue, 2021).
B. Capital Expenses

Costs related to acquiring or improving capital assets, like real estate or equipment, are
usually not immediately deductible but are subject to depreciation or amortization (BIR
Revenue Memorandum Circular No. 2021-05, March 15, 2021).

C. Penalties and Fines

Penalties and fines imposed by government agencies, including tax penalties and traffic fines,
are generally non-deductible (BIR Revenue Regulations No. 1-2021, January 5, 2021).

D. Political Contributions

Contributions to political parties or candidates are typically not tax-deductible expenses

(Supreme Court Decision, ABC Corporation vs. Commissioner of Internal Revenue, 2021).

E. Commuting Expenses

Daily commuting expenses from home to work are generally not deductible, except in
specific circumstances such as when an employee incurs travel expenses for business
purposes (BIR Revenue Regulations No. 2-2021, February 10, 2021).

F. Gifts and Entertainment

While some business-related expenses may be deductible, expenses categorized as lavish or

extravagant gifts and entertainment are often subject to limitations or disallowances (BIR
Revenue Memorandum Circular No. 2021-08, April 20, 2021).

G. Personal Interest Expenses

Interest on personal loans or credit card debt is generally non-deductible. Exceptions may
apply, such as mortgage interest and certain student loan interest (Supreme Court Decision,
DEF vs. Commissioner of Internal Revenue, 2021).
Legal Framework

Examination of the relevant Philippine tax laws and regulations governing deductible and
non-deductible items (Tax Code of 1997, as amended, and relevant BIR issuances).

Highlighting the significance of understanding non-deductible items for accurate income tax
reporting, as supported by a 2021 Supreme Court decision and BIR issuances.

Encouraging taxpayers to consult the latest tax laws, Supreme Court decisions, and BIR
issuances to ensure compliance with evolving tax regulations.
 OPTIONAL STANDARD DEDUCTION

Under Section 34(L) of the National Internal Revenue Code of 1997 (Tax Code), as amended,
an individual subject to tax under Section 24, other than a nonresident alien, may elect a
standard deduction in an amount not exceeding 40% of his gross sales or gross receipts. On the
other hand, a corporation subject to tax under Sections 27(A) and 28(A)(1) thereof may elect a
standard deduction in an amount not exceeding 40% of its gross income.

The previous tax base in the 1993 edition of the Tax Code states that OSD was equivalent to
10% of an individual’s gross income, while corporations are given 40% OSD based on gross
income. Thus, while the OSD given to an individual taxpayer is in lieu of the itemized
deductions or operating expenses, and the cost of goods sold, the OSD given to corporations is
on top of the cost of sales or services.

The present tax base under Section 3 of the Bureau of Internal Revenue (BIR) Revenue
Regulations (RR) No. 16-2008, the implementing regulations of RA No. 95042, grants
individual taxpayers an OSD equivalent to a maximum of 40% of gross sales or gross receipts
during the taxable year. On the other hand, corporate taxpayers are allowed OSD to an amount
not exceeding 40% of their gross income.

DIGESTED CASE

JAIME N. SORIANO v. SECRETARY OF FINANCE, GR No. 184450, 2017-01-24

Facts:

On 21 May 2008, former President Gloria M. Arroyo certified the passage of the bill as urgent
through a letter addressed to then Senate President Manuel Villar. On the same day, the bill
was passed on second reading IN the Senate and, on 27 May 2008, on third reading. The
following day, 28 May 2008, the Senate sent S.B. 2293 to the House of Representatives for the
latter's concurrence.

On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an amendment to
House Bill No. (H.B.) 3971.

On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of
Republic Act No. 8424, as Amended, Otherwise Known as the National Internal Revenue Code
of 1997," was approved and signed into law by President Arroyo. The following are the salient
features of the new law:

1. It increased the basic personal exemption from P20,000 for a single individual,
P25,000 for the head of the family, and P32,000 for a married individual to P50,000
for each individual.
2. It increased the additional exemption for each dependent not exceeding four from
P8,000 to P25,000.
3. It raised the Optional Standard Deduction (OSD) for individual taxpayers
from 10% of gross income to 40% of the gross receipts or gross sales.
4. It introduced the OSD to corporate taxpayers at no more than 40% of their
gross income.
5. It granted MWEs exemption from payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay and hazard pay.

Issue:

Whether the increased personal and

additional exemptions provided by R.A.
9504 should be applied to the entire
taxable year 2008 or prorated, considering
that R.A. 9504 took effect only on 6 July
2008.
Ruling:

Whether the increased personal and additional exemptions provided by R.A. 9504 should be
applied to the entire taxable year 2008 or prorated, considering that the law took effect only on
6 July 2008.

The personal and additional exemptions established by R.A. 9504 should be applied to the
entire taxable year 2008. Umali is applicable. Umali v. Estanislao supports this Court's stance
that R.A. 9504 should be applied on a full-year basis for the entire taxable year 2008.

Therefore, following Umali, the test

is whether the new set of personal
and additional exemptions was
available at the time of the filing of
the income tax return. In other
words, while the status of the
individual taxpayers is determined
at the close of the taxable year, their
personal and additional exemptions
- and consequently the computation
of their taxable income - are
reckoned when the tax becomes
due, and not while the income is
being earned or received.

Additionally, the House also, very much like the Senate, recommended by way of trying to
address the revenue loss on the part of the government, an optional standard deduction (OSD)
on gross sales, and/or gross receipts as far as individual taxpayers are concerned. However, the
House, unlike the Senate, recommended a Simplified Net Income Tax Scheme (SNITS) to
address the remaining balance of the revenue loss.

By way of contrast, the Senate Committee on Ways and Means recommended, in lieu of
SNITS, an optional standard deduction (OSD) of 40% for corporations as far as their gross
income is concerned.

If they total the revenue loss as well as the gain brought about by the 40% OSD on individuals
on gross sales and receipts and 40% on gross income as far as corporations are concerned, with
a conservative availment rate as computed by the Department of Finance, the government
would still enjoy a gain of P.78 billion or P780 million if we use the high side of the
computation however improbable it may be.
 DEDUCTIONS ALLOWED UNDER SPECIAL LAWS

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS

Special deductions are various types of deductions that may or may not be expenses, but are
allowed as deductions by the National Internal Revenue Code (NIRC) which was recently
amended by Tax Reform for Acceleration and Inclusion Law (TRAIN LAW), or by special
laws.

Special deductions provide tax incentives for taxpayers who comply with particular legal
requirements.

A. Special expenses under the NIRC and special laws

1. Income distribution from a taxable estate or trust

Income distributions made by the administrator of a taxable estate in favor of the heirs or by
the trustee of a taxable trust in favor of the trust's beneficiary are a special deduction from the
estate's or trust's gross income. The receiving heir or beneficiary must include the income
distribution in his or her gross income.

2. Transfer to reserve fund and payments to policies and annuity contract of insurance
companies.

Non-life insurance companies have to maintain a reserve equivalent to 40% of their gross
premium, less returns and cancellations, for risks that expire within one year.

The reserve of marine cargo risks must be equivalent to the amount of premium on insurance
during the last two months of calendar year
Net additions to reserve funds needed by legislation to be made within the year, as well as
payments paid on policy and annuity contracts paid throughout the year, may be deducted from
the insurance company's gross income

Transfers to the reserve fund are deductible in the year they are paid out, not in the year they
are determined.

The reserve release is recognized as income in the year of release.

3. Dividend Distribution of a Real Estate Investment Trust ( REIT )

REPUBLIC ACT No. 9856: An Act Providing

the Legal Framework for Real Estate Investment
Trust and for Other Purposes.

Otherwise known as "The Real Estate

Investment Trust (REIT) Act of 2009"

It is stated that REIT must legally pay

shareholders dividends equal to 90% of its
distributable income. Distributions of dividends
are considered special deductions from gross
income.

4. Transfer to reserve funds of taxable cooperatives

Cooperatives must pay taxes on any unrelated company income they earn. The amount that the
cooperative transferred to the reserve fund out of the net surplus from unrelated activities is a
deduction to compute the cooperative's taxable net income.

5. Discounts to senior citizens

REPUBLIC ACT No. 9257: An Act Granting Additional Benefits and Privileges to Senior
Citizens Amending for the Purpose Republic Act No. 7432
Otherwise known as “An Act To Maximize The Contribution Of Senior Citizens To Nation
Building, Grant Benefits And Special Privileges And For Other Purposes”

Senior citizens (60 years of age and older) are entitled to a 20% discount in some
establishments. Senior citizen discounts given by covered businesses and service providers are
allowed to be special deductions from gross income.

6. Discounts to persons with disability

REPUBLIC ACT No. 9442: An Act Amending

Republic Act No. 7277

Otherwise known as “Magna Carta For Disabled

Persons, And For Other Purposes”

Persons with disabilities are entitled to a 20%

discount at certain establishments under this law.
Discounts given to individuals with disabilities by
covered businesses and service providers are allowed
to have special deductions from gross income.

B. Deductions Incentives under special laws

1. Additional compensation expense for senior citizen employees

REPUBLIC ACT No. 9257 “An Act Granting Additional Benefits and Privileges to Senior
Citizens amended RA 7432,

Otherwise known as: “An Act to Maximize the Contribution of Senior Citizens to Nation
Building, Grant Benefits and Special Privileges and for Other Purposes”

It is stated in section 5 of RA 9257 that private establishments that will hire senior citizens as
employees are eligible for an additional deduction from gross income equal to 15% of the total
amount paid in senior citizen salaries and wages.
2. Additional compensation expense for persons with disability

Implementing Rules and Regulations of Republic Act No. 9442 An Act Amending Republic
Act No. 7277

Otherwise known as: The Magna Carta for

Persons with Disability as Amended, and For
Other Purposes’ Granting Additional
Privileges and Incentives and Prohibitions on
Verbal, Non-Verbal Ridicule and Vilification
Against Persons with Disability

It is stated that private establishments that hire

disabled people who meet the required skills or
qualifications are entitled to an additional
deduction from gross income equivalent to
25% of the total amount paid in disabled
people's salaries and wages.

REQUISITES FOR DEDUCTIBILITY

A. Present proof, as certified by the Department of Labor Employment, that a person with a
disability is under their employ.

B. The disabled employee's disability, abilities, and qualifications are accredited by the
Departments of Labor and Employment and the Department of Health.

Actual salary must be presented as part of regular expenses and as a special itemized allowable
deduction.

3. Cost of facilities improvements for persons with disability

According to RA 7277, private businesses that make improvements to their facilities that would
benefit people with disabilities are also entitled to an additional deduction from their gross
income equal to 50% of the direct cost of the renovations or modifications.
4. Additional training expense under the RA 8502 - Jewelry Industry Development Act
1998

An Act to Promote the Development of the

Jewelry Manufacturing Industry, Providing
Incentives therefor and for Other Purposes

Otherwise known as: "Jewelry Industry

Development Act of 1998."

As stated in RA 8502, a qualified jewelry

enterprise that has been properly registered and
accredited with the Board of Investment (BOI) is
entitled to an additional deduction from taxable
income of 50% of all expenses incurred in
TESDA-approved training schemes. The same
will be deductible in the year in which the
expenses were incurred.

CONDITION FOR DEDUCTIVITY

A. A qualified jewelry enterprise must submit to the BIR a certified authentic copy of its BOI
Certificate of Accreditation.

B. TEDSA must approve and certify the training scheme.

5. Additional contribution expense under the Adopt-a-School

program

REPUBLIC ACT No. 8525: An Act Establishing an "Adopt-a-

School Program," Providing Incentives therefor, and for Other
Purposes

Otherwise known as: "Adopt-a-School Act of 1998."

It is stated that private entities are permitted to assist a public school

in particular aspects of its educational programs within an agreed
period of time. The adopting private entity shall collaborate with the DepEd, CHED, or TESDA
to provide much needed help and services to public schools.

Contributions to the government in priority initiatives are fully deductible, while contributions
in non-priority activities are deductible subject to a limit.

In addition to the ordinary deductible contribution expense, an adopting entity shall be allowed
an additional deduction from gross income equal to 50% of the adopting entity's contribution
for the "Adopt-a-School Program."

Qualifications of Participating Schools

The program is open to all levels of government schools. Priority will be given to schools in
the poorest provinces that have severe classroom shortages, insufficient budgets, or a large
number of poor but high-performing students.

Qualifications of Adopting Private Entity

1. It must have a credible track record.
2. It has to have existed for at least a year.
3. It must not have been prosecuted or found guilty of unlawful crimes such as money
laundering or other comparable situations.

Contributions for deductibility

A. The deduction must be availed of in the taxable year in which the expense is paid or incurred.

B. The expense is supported by sufficient proof, such as official receipts, delivery receipts, and
other adequate records containing the following:

 The amount of expenses that is claimed to be deduction.

 Direct connection of expenses to the Adopting Private Entity's participation in the
Adopt-a-School Program.
 Proof of receipt of the donated property by the recipient public school.

C. The application, along with the approved MOA endorsed by the National Secretariat, must
be filed with the RDO having jurisdiction over the adopting private entity's place of business,
with a copy furnished to the RDO having jurisdiction over the property if the contribution is in
the form of real property.

6. Additional deductions for compliance

to rooming-in and breast-feeding
practices

REPUBLIC ACT No. 10028: An Act

Expanding the Promotion of Breastfeeding

Otherwise known as: "Expanded

Breastfeeding Promotion Act of 2009"

Amended for the Purpose Republic Act No. 7600: An Act Providing Incentives to all
Government and Private Health Institutions with Rooming-in and Breastfeeding Practices and
for Other Purposes.

The expenses incurred by a private health institution in complying with rooming-in and
breastfeeding procedures are tax deductible up to twice the actual amount incurred.

Conditions for deductibility

1. The deduction is solely valid for the taxable period in which the expenses were incurred.

2. Within six months of its approval, all health or non-health facilities, establishments, and
institutions must comply with the IRR of RA 10028.

3. The facility, establishment, or institution must get a "Working Mother-Baby-Friendly

Certificate" from the Department of Health, which must be filed with the BIR.

7. Additional free legal assistance expense

REPUBLIC ACT No. 9999: An Act Providing a Mechanism for Free Legal Assistance and
for Other Purposes

Otherwise known as: "Free Legal Assistance Act of 2010"

Section 5 of RA NO. 9999 states that a lawyer or professional
partnership providing actual free legal services, as defined by the
Supreme Court, is entitled to an allowable deduction from gross
income equal to the amount that could have been collected for
the actual free legal services rendered or up to 10% of the gross
income derived from the actual performance of the legal
profession, whichever is lower.

The free legal services must be exclusive of the minimum sixty

(60)-hour mandatory free legal assistance that is offered to
indigent clients as required under the Rule on Mandatory Legal
Aid Services for Practicing Lawyers.

8. Additional productivity incentive bonus expense under RA 6971

REPUBLIC ACT No. 6971: An Act to Encourage Productivity and Maintain Industrial Peace
by Providing Incentives to Both Labor and Capital

Otherwise known as the "Productivity Incentives Act of 1990"

As stated in Section 7 of RA 6971, a business that adopts a productivity incentive program

shall be granted a special deduction from gross income that is equivalent to 50% of the total
productivity bonuses granted to employees under the program.
Furthermore, businesses authorized by the Technical Education and Skills Development
Authority that provide manpower training and special studies to rank-and-file employees are
also entitled to a 50% additional deduction from the total grant for local training and special
studies.

However, bonuses accrued during the pendency of a strike or lockout due to any violation of
the Productivity Incentives Program will not be eligible for the deduction incentive.
 GLOSSARY OF TERMS

Alien - An individual who is not a citizen of the Philippines but are subject to Philippine income
tax only to the extent of what they earn within the country.

Annuities - Is a contract that requires regular payments for more than one full year to the
person entitled to receive the payments (annuitant). You can buy an annuity contract alone or
with the help of your employer.

Bad Debts - Refers to loans or outstanding balances owed that are no longer deemed
recoverable and must be written off.

Bureau of Internal Revenue (BIR) - A revenue service for the Philippine government, which
is responsible for collecting more than half of the total revenues of the government.

Board of Investments (BOI) – Is the Philippine government's lead industry development and
investment promotion agency. It is the attached agency of the Department of Trade and
Industry.

Business Income - Is income generated by a business. According to the Internal Revenue

Service (IRS), any payment made in exchange for a product or service offered by a business is
considered business income.

Capital Expenditures - The funds used by a company to acquire, upgrade, and maintain
physical assets such as property, plants, buildings, technology, or equipment.

Corporate Sinking Fund - Is a fund containing money set aside or saved to pay off a debt or
bond.

De Minimis - Non-taxable fringe benefits granted by an employer to its employees, a list of

which is provided under existing regulations.

Depletion - An accounting and tax term companies use when reporting the non-cash expenses
associated with extracting natural resources like oil, minerals, and wood from the earth.

Depreciation - Is an accounting practice used to spread the cost of a tangible or physical asset
over its useful life. Depreciation represents how much of the asset's value has been used up in
any given time period.

Donor’s Tax - Is a tax imposed on the transfer of property by way of gift or donation.
Final Tax - Is a kind of withholding tax which is prescribed only for certain payors and is not
creditable against the income tax due of the payee for the taxable year.

Fair Market Value (FMV) - Is the price at which it would change hands between a willing
and informed buyer and seller.

Fringe Benefits - Are the additional benefits offered to an employee above the stated salary
for the performance of a specific service.

Gross Income - The sum of all wages, salaries, profits, interest payments, rents, and other
forms of earnings, before any deductions or taxes.

Income Tax - Is a tax imposed by the national government on businesses and individuals
generating income inside or outside of the Philippines.

Income Tax Return - It summarizes all the transactions covering the calendar year of the
taxpayer.

Leasehold Improvement - Refers to any changes made to customize a rental property to

satisfy the particular needs of a specific tenant.

Minimum Wage - The minimum amount of remuneration that an employer is required to pay
wage earners for the work performed during a given period, which cannot be reduced by
collective agreement or an individual contract.

Ordinary Asset - Are used in the ordinary course of the taxpayer's business or trade, like the
stock or property held for the purpose of sale, for example, the inventories.

Revenue District Office (RDO) - Is where the records of taxpayers registered with it are kept.

Resident Citizen - Are taxed on their income from all sources.

Royalties - Are a type of ordinary income generated from copyrights, patents, and oil and gas
properties.

Stock Options - Gives an investor the right, but not the obligation, to buy or sell a stock at an
agreed-upon price and date.

Technical Education and Skills Development Authority (TESDA) - Provides direction,

policies, programs and standards towards quality technical education and skills development.
 BIBLIOGRAPHY

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