Income Taxation

DEFINITIONS AND GENERAL

PRINCIPLES
Income defined
All wealth that
flows into the The amount of
taxpayer other money coming to
than as a mere a person within a
return of capital specific time,
(RR No. 2-40, Sec. 36) distinct from
principal or capital
(CIR v Japan Air Lines, G.R.
No. 60714, October 4, 1991)
 Income Capital
Denotes a flow of Fund or property
wealth during a existing at one
definite period of distinct point of time,
time w/c can be used to
produce goods or
services
CLASSIFICATION
OF
TAXPAYERS
Individuals

Corporations

Estate and Trusts

Partnerships
Individuals
CITIZENS ALIENS SPECIAL
• CLASS
Minimum Wage Earners
• Alien individuals and
• Resident • Resident Alien their Filipino
Citizen counterparts occupying
• Non-Resident managerial and/or
• Non-Resident Alien technical positions
employed by R/AHQ and
Citizen – ETB in the PH ROHQ of multi-national
– NETB in the PH companies, offshore
banking units, or
petroleum service
contractors or
subcontractors
 Corporations
DOMESTIC FOREIGN NON-
RESIDENT
FOREIGN
• Non-Resident
• Domestic • Resident Foreign Foreign
Corporations Corporations Corporation
• Special domestic • Special resident
• Special NRFC
corporations foreign corporations
– cinematographic
– International carriers
– Proprietary educational
– Offshore banking units film owners, lessors
institutions and non- authorized by the BSP or distributor
profit hospitals – Resident depositary banks – Vessels chartered
– GOCCs, agencies or – R/AHQ of multinational
instrumentalities
by PH nationals
companies
– Domestic depositary – ROHQ of mulitinational – Aircraft and other
banks companies equipment
Trusts and Partnerships
PARTNERSHI
TRUSTS PS
• Revocable Trust • General Professional
• Irrevocable Trust Partnership
• Taxable or Business
Partnership
• General Co-
Partnership
 Resident citizens from all
sources within and
without the Philippines

TAX ON Non resident citizens

INDIVIDUALS from sources within the
Philippines

Aliens from sources

within the Philippines,
regardless of its
residency
On Compensation Income

Inclusions
● Monetary compensation
○ Regular salary/wage
○ Separation pay/retirement benefit, not otherwise
exempt
○ Bonuses
○ 13th Month pay
○ Other benefits, not otherwise exempt
○ Director’s fees
● Non-monetary compensation
On Compensation Income
Exclusions
● Fringe benefit subject to tax
● De minimis benefits
● Benefits excluded from taxable
compensation income
● 13th month pay, other benefits, and
payments specifically excluded
● Gross benefits received by officials and
employees of public and private entities
On Compensation Income
MWE (Minimum Wage Earners)
Workers in the private sector paid the statutory
minimum wage; or employees in the public sector
with compensation income of not more than the
statutory minimum wage in the non-agricultural
sector where he/she is assigned

Who regulates the Statutory minimum wage?

Regional Tripartite Wage and Productivity Board (as
defined by the Bureau of Labor and Employment
On Business Income/Practice of
Profession

No Employer-
Employee
Relationship
between him
and his client
On Passive Income
Interest Income

Royalties

Prizes and winnings

On Passive Income
Interest Income

Amount of compensation paid for the

use of money from such use

GENERAL RULE: 20% ON FINAL

TAX
On Passive Income
Interest Income
EXCEPTIONS
○ If it is from (1) bank deposits or (2) loans
extended; provided the recipients are either a
foreign government, financing institutions
owned and controlled by foreign government,
or a regional or financial institution
established by foreign government
On Passive Income
Interest Income
EXCEPTIONS
○ Certificate of indebtedness received by any of
the above such as bonds or debentures
On Passive Income
Interest Income
EXCEPTIONS
○ Bank deposit maintained under an expanded
foreign currency deposit unit
■ 15% Final Tax
On Passive Income
Interest Income
EXCEPTIONS
○ Long term investments with maturity period
of five years or more
On Passive Income
Royalties
○ Cinematographic films

○ Footages and films used for radio or television

broadcasting

○ patents , trademarks, design, model, plan,

secret formula or processes, or for the use, or
the right to use, industrial, commercial or
scientific equipment, or for information
concerning industrial, commercial or scientific
On Passive Income
Royalties

● 20% Final tax

● 10% on literary and musical

compositions
On Passive Income
Prizes and Rewards
● 20% Final tax for the amount in excess of
P10,000.
○ Otherwise it would form part of the taxpayer’s
gross income.
On Passive Income
Prizes and Rewards

Refers to the amount of money in cash or in

kind received by chance or through luck are
generally taxable except if specifically
mentioned under the exclusion from
computation of gross income under Sec. 32
(B) of NIRC
 TAX ON
CORPORATIONS
Domestic Corporations
Inclusions
1.Partnership, no matter how
created or organized
2.Joint-stock companies
3.Joint accounts
4.Associations
5.Insurance companies
Domestic Corporations
Exclusions (not considered corporations
for tax)
1.GPPs
2.Joint ventures or consortium
a.Undertaking construction projects
b.Engaging in petroleum, coal, geothermal
and other energy operations
c.Pursuant to an operating or consortium
agreement under a service contract with
the government
 Normal Domestic and
Corporate Resident Foreign
Income Corporations

Tax Rate of 30%

Tax Base:
taxable income
Domestic and Minimum
Resident Foreign
Corporations
Corporate
Rate of 2%
Income
Tax Base: gross
Tax
income exempt
from income tax
and income
subject to final
Gross
Income Domestic and
Resident Foreign
Tax Corporations
Optional rate of
15%
Tax Base: Gross
income
Domestic,
Resident Foreign
Final Tax
Corporations and on Passive
Non-resident
Foreign Income
Corporations

Tax rate and

base have the
same rules as
Improperly
Accumulated
Earnings Tax Domestic and closely-
held Corporations
Rate of 10%
Tax Base: improperly
accumulated taxable
earnings
Resident Foreign
Corporations
Branch
Rate of 15% Profit
Tax Base: total Remittance
profit applied or Tax
earmarked for
remittance
without any
deduction for the
tax component
 Rate of 30%
Tax on
Tax Base:gross
Non-Resident
income received
Foreign from all sources
Corporations within the
Philippines
Amendments (Train)
Removed the exemption of the
PCSO and PAGCOR from paying
income taxes.
Amendments (Train)
Tax rate for interest income derived by a
domestic corporation from a depository bank
under the expanded foreign currency
deposit system has been increased from
7.5% to 15%
Amendments (Train)
Tax rate for capital gains obtained from the
sale or exchange of shares of stock not
traded in the stock exchange has been
increased to 15%
 What is the difference
between Capital and Income?

Capital – Tree
Income - Fruit
Under the TRAIN Law, what is
the Final Tax Rate on literary
and musical compositions?

10% Final Tax

Gross Income
 Gross Income

Inclusions and Exclusions

DEFINITION

Gross
Income
- It refers to
all income,
gain, or
profit subject
to tax.
 GROSS NET INCOME TAXABLE
INCOME INCOME
Gross income
All income, less the All pertinent
any deduction allowable items of gross
or exemption deductions income less
HOWnot
TO DETERMINE
yet TAXABLE INCOME deductions
As per TRAIN
applied Law, and/or
personal
STEP 1: GROSS INCOME – ALLOWABLE
and personal and
additional
DEDUCTIONS = NET INCOME
additional
exemptions
STEP 2: NET INCOME – PERSONAL AND exemptions
provided under
ADD’L EXEMPTIONS = TAXABLE (NET)Secs. 35 and
INCOME 79 (D), are now
REPEALED
HOW TO DETERMINE TAX DUE
 Gross COMPENSATION INTERESTS

Income ANNUITIES
GI FROM
PROFESSION,
TRADE, OR
It means RENT BUSINESS
PRIZES AND
gain, profit, WINNINGS
DIVIDEND
and all
PENSIONS
income GAINS FROM
DEALINGS IN PARTNER’S
derived PROPERTY SHARE IN THE
from ROYALTIES
NI OF THE GPP

whatever [NIRC, SEC. 32 (A)]

source,
 Gross COMPENSATION INTERESTS

Income ANNUITIES
GI FROM
PROFESSION,
• All remuneration TRADE, OR
for services
It means RENT BUSINESS

•gain,
Performed
profit, by an
PRIZES AND
WINNINGS
DIVIDEND
employee
and all to his
employer
income GAINS FROM
PENSIONS

• Under an
DEALINGS IN PARTNER’S
derived PROPERTY SHARE IN THE
employer-
from NI OF THE GPP
employee ROYALTIES
whatever [NIRC, SEC. 32 (A)]
relationship
source,
 When are
bonuses, 13th
month pay, and
other benefits
part of
compensation
income?

When
As perthe
TRAIN
bonuses,
Law, the
13ththreshold
month pay,amount
and
other
is increased
benefitsfrom
exceed
P82,000 theto threshold
P90,000.
amount
The excess
of P82,000,
of P90,000the
shall
excess
be subject
of which
to
shall
tax. be subject to tax.
[NIRC,
[R.A.
Sec.
10963]
32, (B) (7) (e)]
Are GSIS, SSS,
Medicare and
other
contributions
included in
compensation
income?

NO, these are not included in

compensation income as these are
excluded from gross income.
[Sec. 32 (B)(7)(f), NIRC]
 The amount paid for
RENT the use or lease or
enjoyment of a
It refers to the property, whether real
amount or or personal property
compensation paid to owner of the
for the use or property.
enjoyment of a
thing or a right,
and implies a fixed
sum or property
amounting to a
fixed sum to be
paid at a stated
time for the use of
 What is the tax
treatment of
income received
from lease of real
property?

It shall be considered as conduct of

trade or business on the part of the
lessor, hence, the rental income
therefrom shall be considered as
business income which shall be
included in the computation of the
year-end gross income of the lessor,
and not as a passive investment income
 Are
improvements
made by the
lessees taxable as
income on the
part of the lessor?

YES, provided that such improvements

are not subject to the removal of the
lessee.
[Sec. 49, R.R. No. 2]
What is the tax
treatment of
advance rental
paid by the
lessee?

Prepaid or advance rental is taxable

income to the lessor in the year
received, if so received under a claim or
right and without restriction as to its use,
and regardless of method of accounting
employed.
 How about
security deposits?

Security deposit applied to the rental of

the terminal month or period of contract
must be recognized as income at the
time it is applied. If the security deposit
is merely to ensure compliance with
the contract, it is not income to the
lessor until the lessee violates any
Dividends refer Most
For thecommon form to
exception of
CASH
to any dividend,
apply, it isvalued at the
indispensable
distribution amount
that: of money
received
Generally by
EXEMPT the
from
made by a 1. There is redemption
stockholder.
income tax
or cancellation; EXCEPT
corporation to
STOCK cancellation
2. The
Dividends transaction
paid or
in
its shareholders It results ofor from the
redemption
involves
securities shares
stock
otherof
out of the distribution
stock
dividends; issuedby asa
property (other than its
unrestricted corporation
dividends,
3.
ownThe timethe
stock), in ofwhich
and all the
amount
mannerits
retained property
distributed
of the
earnings oforin assets in
a redemption
transaction
corporation
PROPERTY complete
earnings or
have been liquidation
cancellation
makes it shall areor
be
essentially
invested,
payable to its dissolution.
considered to theThe
equivalent
income to gain
taxable
recipients a
realized
income.
distribution
to the amount from the
of
of the fair
shareholders, transaction by the
LIQUIDATI [NIRC,value
taxable
market Sec. 73of(B)]
dividends. such
whether in stockholder,
NG [CIR vs. CA, GRwhether
property when
No.
money, property individual
108576 orby
Jan. 20, corporate
1999] is
DIVIDENDS
or stock.
receivable
taxable income.
individual
stockholders.
 GAINS
ORDINARY ASSETS FROM CAPITAL ASSETS

Subject to Income Tax DEALINGS Subject to Capital Gains Tax

IN
1. Stock in trade of PROPERTY Property held by the
the taxpayer or If the asset
2. Property
4.
3. Real property
held
used byin 2.
1.
3. Real property
Stocks
taxpayer,
4. Investment
Personal not
and
whether
or non-
other involved is
the inproperty
used trade of or
the taxpayer
trade a used
or notin properties,
securities
property,
business trade
held by
such
connected or
as
kind which would classified as
primarily
business forofof
salethe
toa business,
the such
with taxpayers
interest
such as
in other
his family
as trade a
or
car,
properly bewhich
included ordinary, the
customers
taxpayer,
character including
in the is residential
than
home or house
dealers
partnership
business which
appliances, in
stock
is
or
in the inventory of entire amount
ordinary
property
subject course
held
to for
of
the and lot,
securities.
investment.
not an
jewelries. idle
ordinaryor
the of the gain from
his taxpayer
rent.
allowance trade if for on
or vacant
asset. land or
hand at the close of the transaction
business.
depreciation. building.
the taxable year. shall be
included in Generally, they
the include:
computation
What is the importance of knowing
if an asset/income is capital or
ordinary?

The tax treatment will vary depending on the

nature of the asset. For example, if real property is
a capital asset, the gain from the sale thereof shall
be subject to the final capital gains tax of 6%. If it
is an ordinary asset, any gain from the sale thereof
shall form part of the ordinary income which shall
be subject income tax.
 A sale of royalty on a
These are any payment Rateregular
Tax of on basis for a
any kind received as consideration is considered
Royalty: 20%an active business and any
consideration for the use of
except books,
gain therefrom shall be
or right to use any patent,
trademark, design
otheror
literary
subject to the normal
works, corporate income tax (RMC
model, secret formula or and
musical 77-2003). Where a person
process, industrial
pays royalty to another for
composition:
commercial or scientific the use of its intellectual
equipment, information10%property, such royalty is
concerning industrial, passive income of the
commercial or scientific
ROYALTI
experience.
owner and is therefore
subject to final withholding
It is the amount of Examples of interests
compensation paid for which are included in the
the use of money, computation of gross
income:
goods, or credit or
forbearance from such
a. Interest income from
use. Interests may be
long-term deposits by
derived from bank corporations (not issued
deposits
Unless or loans.
exempted by by banks nor within the
law, interest income coverage of deposit
received by the substitutes);
taxpayer, whether b. Compound interest;
usurious or not, is c. Usurious interests
subject to income tax. earned by a loan shark;
NTERESTS d. Unconscionable
interest income (even if
GI FROM PROFESSION, TRADE, OR BUSINESS
PROFESSIONAL It includes the fees derived from
INCOME engaging in an endeavor requiring
special training as a professional as
It refers to fees a means of livelihood, which
received by a includes, but is not limited to, the
professional from that fees of CPAs, doctors, lawyers,
practice of his engineers
Professionaland thevs.
Income likes. [R.R. No.
Compensation
profession provided 2-98] Income
that there is no
employer-employee The existence or absence of an
relationship between employer-employee relationship
determines whether the income shall be
him and his clients.
treated as one or the other. ER-EE
relationship = COMPENSATION Income,
whereas NO ER-EE relationship =
GI FROM PROFESSION, TRADE, OR BUSINESS
BUSINESS INCOME

It refers to any income

derived from doing
“DOING BUSINESS” Tax Treatment on Business
business. Income Tax
The term implies a continuity of
commercial dealings and The treatment on
arrangements, and contemplates, business tax shall depend
on the kind of taxpayer
to that extent, the performance of
which incurred such
acts or works or the exercise of
business income. Such as
some functions normally incident non-resident alien
to, and in progressive prosecution engaged in trade or
of, the purpose and object of its business within the PH,
organization NRANETB, and resident
PRIZES AND WINNINGSAmount of money in cash or
in kind received by chance
a. Prizes derived from
or through luck are generally
sources within the
taxable, except if specifically
Philippines which do not
excluded. Only the prizes
exceed Php. 10,000;
and winnings that are not
subject to final tax are
b. Prizes and winnings
properly includible in the
derived from sources
computation of gross
outside the Philippines,
income.
regardless of amount;
and

c. Prizes and winnings of

corporations, whether
 PARTNER’S DISTRIBUTIVE SHARE IN THE
NET INCOME OF A GENERAL
PROFESSIONAL
GPP shall not PARTNERSHIP
be subject GPP shall not be subject to income tax
to income tax since it is since it is the individual partners who
the individual partners shall be subject to income tax in their
who shall be subject to separate and individual capacities.
income tax in their Each partner shall report as gross
separate and individual income his distributive share, actually
capacities. Each partner or constructively received, in the net
shall report as gross income of the partnership.
income his distributive (RMC No. 3-2012)
share, actually or
constructively received,
in the net income of the
partnership.
[RMC No. 3-2012]
SITUS OF TAXATION SOURCE is ascribed to the place
wherein the income is earned. It is
Income from governed by the situs of
whatever sources taxation. This classification of
refers to all income not income is necessary to determine
expressly excluded or whether such income is subject to
exempted from the CLASSIFICATION
tax or not. OF SOURCES OF
class of taxable INCOME
income, irrespective of
the voluntary or
1. Income from sources within
involuntary action of the Philippines
the taxpayer in 2. Income from sources outside
producing the income. the Philippines
(Gutierrez v. CIR, G.R. 3. Income from sources partly
No. L-19537, May 20, within and partly outside the
1965)
Philippines
SITUS OF TAXATION
Income from Income from Income from
The following items of gross
sources within sources outside sources partly
income shall be treated
within asand
grosspartly
the Philippines the Philippines
income from sources within the the
outside
All kinds of Only resident Philippines
Philippines:
taxpayers are citizens
1. Interest and
subject to income domestic Taxable income
2. Dividends attributable to
tax on income corporations are
3. Services sources within
derived from liable to income the Philippines
sources within tax 4. Rentals
on and Royalties
income may be determined
the Philippines. 5. Sale of Real
derived fromProperties
by processes or
6. Sale of
sources Personalformulas
without Properties
of general
[NIRC, Sec. 42 (A)] the Philippines. apportionment
[NIRC, Sec. 42 (C)] prescribed by the
Secretary of
 INCOME
1.
6.
4.
3.
5.
FROM
2. DIVIDENDS
paid
sale
the
in
INTEREST
SALE
SALE
RENTALS
6.SERVICES
SALE
The
SALE
Income
a.
b.
If
c.
the
by
the
Income
OF
OF
a
OF
OF PERSONAL
from
PERSONAL
PERSONAL
exception
REAL
foreign
Personal
Purchase
property
Shares
without
from
Philippines,
gains from
place
service) country
of
services are performed.
the Philippines
taxpayer
of
to
the
within
the
or
stock
when
the
where
PROPERTY
AND ROYALTIES
thePROPERTY
PROPERTY
services
corporation
propertypersonal
PROPERTY
Generally, a dividend has its source
The source of an
general rule that dividends
isproduced
sourced
interest
sale in of
a are
real
the Philippines
sale of shares
of residence gain
the
of theoror
real
in
property
interest is
domestic
the
from
(in country
sources
whole
located
property
income
or
within
payment or
(place of performance of the
is Philippines,
a foreign corporation
in
is
where
part)
and
is
used
and soldofwithout
purchase
property
of stock
person is is
the
without
the
sourced
corporation by
its
derives
personal
treated as
located.
of aobligated
domestic
in–
or
in the country where the corporation
SOURCES
50%
produced
property of its(in gross
wholeand
without income
or in
its from
part)
sale by
within sources
the taxpayer
the within the-
without
Philippines
income
Thus, it
corporation from
is sources
income
are treated within
within thethe Philippines.
Philippines
as(residence-of-the-
derived if
entirelythe real
from
to
and
any make
Thus,
sold
Philippines
payingincome
it is
that
within
the
income
for apayment
the
dividend
shall be
within
Philippines
three-year
treated
the is –
period the income
ending
incorporated.
as
Philippines derived
if the entirely
service is
shall
with be
the
from
performed
property
sources
(location
treated
close as is located
within of partly
derived the in thefromPhilippines.
Philippines
property
sourcesorwithin It isand
regardless
interestincome of
in
party
in the of its taxable
obligor/debtor
sources within
Philippines.the year
country
It is preceding
rule).
income in which
without the
sold.
the declaration
Philippines if it of
is
without
where
from
its if
the
sources
dividends.
performed the real
said property
(residence of the corporation paying
such property) shares are sold.
without.
abroad. is located abroad.
the dividend)
WITHIN THE
The term “exclusions” refers to items
that are not included in the
determination of gross income
because:
1. They represent return of capital or
are not income, gain or profit (life
insurance)
2. They are subject to another kind of
internal revenue tax (gifts,
bequests, devices)
3. They are income, gain or profits
that are expressly exempt from
income tax under the Constitution,
tax treaty, Tax Code, or general or
special law. (PEZA)
EXCLUSIONS FROM GROSS INCOME
Rationale for Exclusions
Some receipts are excluded from
gross income because they are not
income. Even if they are by definition
income, the exclusions are not subject
to tax because of policy considerations
such as to avoid the effects of double
taxation or to provide incentives for
certain socially desirable activities.
 EXCLUSION VS. DEDUCTION
EXCLUSION
Flow of wealth to the taxpayer
which is not treated as part of
gross income because it is
exempted or it does not come
within the definition of income
Pertain to the computation of
gross income
Exclusions are something
received or earned by the
taxpayer but which do not form
part of gross income
Not income
DEDUCTIONS
Amounts which the law allows to
be subtracted from gross income
in order to arrive at net income
Pertains to computation of
taxable income
Deductions are something spent
or paid in earning gross income
Part of income
 Items of Exclusions Representing Return of
Capital
a. Amount of capital is b. It may also related to indemnities,
generally recovered through such as proceeds of life insurance
deduction of the cost or paid to the insured’s beneficiaries and
adjusted basis of the return of premiums paid by the
property sold from the gross insurance company to the insured
selling price or under a life insurance, endowment or
consideration, or through annuity contract.
the deduction from gross
income of depreciation
c. Damages, in certain
relating to the property
used in trade or business instances, may also be exempt
before it is sold. because they represent return
of capital.
 Items of Exclusion Because it is Subject to
Another Internal Revenue Tax
The value of property
acquired by gift, bequest,
devise or descent is exempt
from income tax on the part
of the recipient because the
receipt of such property is
already subject to transfer
taxes (estate tax or donor’s
tax).
 Items of Exclusions Because they are
Expressly exempt From Income Tax
1. Under the
Constitution
2. Under a Tax Treaty
3. Under Special Laws
1. UNDER THE CONSTITUTION
Income derived by the
government or its
political subdivisions
from the exercise of
Also,
any all assets and
essential
revenues
governmentalof function
a non-
stock, non-profit private
educational institution
used directly, actually
and exclusively for
private educational
purposes shall be
exempt from taxation.
UNDER THE TAX CODE a. Proceeds of life insurance
policies.—
General rule: The proceeds of
life insurance policies paid to
his estate or to any
beneficiary (but not a
transferee for a valuable
consideration), directly or in
Exception: If the amounts trust, upon the
received by death of the
the insured
(when added to the amountsinsured, are received
already excludedbefore
from
the taxable year under the such gross income
contract) of the
exceed the
beneficiary. paid (whether or
aggregate premiums or considerations
not paid during the taxable year), then the excess shall
be included in gross income.
UNDER THE TAX CODE
b. Return of premium paid.—
General rule: 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 ifcontract
However, is a returnare
such amounts of
capital and not income.held by the insurer under an
agreement to pay interest
thereon, the interest payments
received by the insured shall be
included in gross income. The
interest income shall be taxed at
the graduated income tax rates.
UNDER THE TAX CODE
c. Amounts received
under life insurance,
endowment or annuity
contracts.— Amounts
received (other than
amounts paid by reason But if such amounts (when added
of the death of the to amounts already received
before the taxable year under
insured and interest
such contract) exceed the
payments on such aggregate premiums of
amounts) under a life considerations paid (whether or
insurance, endowment or not paid during the taxable year),
annuity contracts are then the excess shall be included
excluded from gross in gross income.
income.
UNDER THE TAX CODE d. Value of property acquired by
gift, bequest, devise or descent.
—
Gifts, bequests and devises
(which are subject to estate or
gift taxes) are excluded from
gross income, BUT not the
income from such property. If
the amount received is on
account of services rendered,
whether constituting a
demandable debt or not, or the
use or opportunity to use of
capital, the receipt is income.
(Pirovano v. Commissioner, G.R. No. L-
19865, July 31, 1965)
UNDER THE TAX CODE

e. Amount received through accident or health insurance

(Compensation for damages).—
As a rule, amounts received through accident or health
insurance or under workmen’s compensation acts, as
compensation for personal injuries or sickness, plus the
amount of any damages received, whether by suit or
agreement, on account of such injuries or sickness are
excluded from gross income.
UNDER THE TAX CODE
g. Retirement benefits,
pensions, gratuities, etc..—
These are:
1. Retirement benefits
under RA 7641, RA
4917, and Section 60(B)
of the NIRC;
2. Terminal pay;
3. Retirement Benefits
from foreign government
agencies
Fringe Benefits
What is a Fringe Benefit?
• “Any good, service, or other benefit
furnished or granted by an employer,
in cash or in kind, in addition to basic
salaries, to an individual employee
(except rank and file).”
– Sec. 33 (B), NIRC
 Tax Treatment
• Fringe Benefits are subject to FRINGE
BENEFITS TAX of 35%
• Final Withholding Tax
• Imposed on the Grossed-Up Monetary
Value of the FB furnished, granted, or
paid by the employer
 NON TAXABLE Fringe Benefits
• Exempt Benefits;
• Employer contributions to retirement and
hospitalization benefit plans;
• Benefits given to rank and file;
• De minimis benefits
• those required by the nature of, or necessary to
the trade, business, or profession of the
employer, or when the fringe benefit is for the
convenience or advantage of the employer
 COVERAGE
• Only benefits extended to supervisory and
managerial employees
• But what about those extended to rank and file
employees?
– Taxable compensation, subject to graduated scale
• But what about those extended to board director,
who is neither an employee of the company?
– Taxable compensation, subject to graduated scale
– Reason: no E-E relationship, and is not
supervisory/managerial
COMPUTATION
 COMPUTATION
• Determine the Grossed-Up monetary
value of the fringe benefit.
– Simply the monetary value of the benefit
divided by 65% (TRAIN Law)
• Compute the fringe benefit tax by
multiplying the grossed-up monetary
value of the fringe benefit by 35% (TRAIN
Law)
 COMPUTATION
• Example:
– X, the CFO of San Miguel Corp., availed
of the company’s car plan; X shouldered
only 50% of the cost of the car
amounting to Php 450,000
• Grossed-up monetary value (450,000 / 65%)
= 692,307.69
• Fringe Benefit Tax (692,307.69 x 35%) =
242,307.69
 COMPUTATION
Grossed-
up Fringe
Monetary x 35% = Benefit
Value Tax
/
65%
450,000 692,307
692,307 242,307
.69 x
/ 0.65 .69 .69
0.35
Deductions
 DEDUCTIONS
Optional Standard Deduction
Itemized Deductions
Premium payments on health and/or
hospitalization insurance
Personal exemptions
 NOT DEDUCTIONS
Personal, living, or family expenses
Capital expenditures
Amounts expended to restore property or
in making good the exhaustion thereof
for which an allowance is or has been
made
Premiums on “key-man” insurance
 NOT DEDUCTIONS
• Losses from sales or exchanges of property
• Interest expenses
• Bad debts
• Between related taxpayers:
– Members of a family
– Individual and a corp. more than 50% in value of the
outstanding stock of which is owned by or for such
individual
– Between grantor and fiduciary of another trust, if the
same person is grantor with respect to each trust;
– Between fiduciary of trust and beneficiary of such trust
DEDUCTIONS….NO MORE
TRAIN Law repealed certain
deductions:
- Personal Exemption of Php 50,000
- Additional Exemption of Php 25,000 per
dependent child
- Premium for Health and Hospitalization
Insurance of Php 2,400 per annum
Itemized Deductions - Overview
Business Expenses
Interest • Define
Taxes
NOLCO
• Summarize
Bad Debts • Substantiat
Depreciation
Charitable and other e
contributions
R&D • Legal Basis
Pension Trust
O.S.D.
 BUSINESS EXPENSES

• Is it an Ordinary and Necessary

expense?
• Is it a current expense or a capital
investment?
• Is it incurred for business purposes,
or for personal reasons?
 Travel Expenses
• Reasonable and Necessary
• Expenses Incurred while
away from home
• Expense must be in pursuit
of business
– Direct connection between
expense and the carrying on
of the trade or business of
taxpayer or his employer
• Necessary, appropriate to
the trade
 CIR v General Foods
• The company spent 9M to hire
advertising firms for the boosting of its
orange juice mix “Tang”, and the
government disallowed the deduction
claiming it is an ordinary expense
• HELD: It is a CapEx. Considering the
amount, and only for one product, such
is not in the normal course of business.
 Ordinary and Necessary Expenses

• Must be incurred in the carrying on of

trade, business or exercise of
profession
• Must qualify as ordinary and
necessary
 Taxes
• Foreign Tax Credits • Remedies double
– Available only to
resident citizens and
domestic corporations
– Applies only when there
is a foreign source
income, and an income
tax on that source paid in
a different jurisdiction
taxation
– Sec. 34 (C)(3), subject
to the limitations
outlined in (4)
– Allowing foreign taxes
paid as deduction
against income tax
– Provided for by income
tax treaties
 NOLCO
• Losses may be carried over as a
deduction for the next three taxable
years
• Limitation: PICOP v CA
 BAD DEBTS
• No hard and fast rule
• Must be determined according to
facts of the case
• Phil. Refining Co. v CA – Saying it’s a
“Bad Debt” doesn’t make it a bad
debt
 DEPRECIATION
• “The Useful Life” of an object
• Allocation of the cost of an asset to
periods, in which the asset is
expected to be used.
• A question of Fact
Charitable Contributions, and Others

• Donations to National Gov’t

– Agencies
– Subdivisions
– Fully owned GOCCs
• Donations to certain foreign institutions
– Must be deductible in existing treaties
• Accredited NGOs
 SEC. 31 OF NIRC
• Taxable Income Defined. -
The term taxable income
means the pertinent items
of gross income specified in
this Code, less the
deductions and/or personal
and additional exemptions, if
any, authorized for such
types of income by this Code
or other special laws.
 Under TRAIN Law
• SEC. 31. Taxable Income Defined. -
The term taxable income means the
pertinent items of gross income
specified in this Code, less the
deductions and/or personal and
additional exemptions, if any,
authorized for such types of income
by this Code or other special laws.

PERSONAL AND
ADDITIONAL EXEMPTIONS
ARE DELETED
NON- DEDUCTIBLE ITEMS
REASONS FOR NON-DEDUCTIBILITY

1. Personal expenses
2. Capital expenditures
3. Items not normally subject to
income tax and therefore are not
deductible.
4. Items taken advantage of by the
taxpayer to avoid payment of
income tax.
 SPECIFIC ITEMS (SEC. 36, NIRC)

1. Personal, living or family

expenses
2. Amount paid out for new
buildings or for permanent
improvements
3. Premiums paid on any life
insurance
4. Losses from sales or exchanges
of property between related
taxpayers.
 TAX CONSEQUENCES
The following are NOT deductible:
Interest expense [Sec. 34 (B)(2)]
Bad debts [Sec. 34 (E)(1)]
Losses from sales or exchanges of
property [Sec 36 (B)]
 INTEREST EXPENSE
SEC. 34 (B)(2)
(a) Indebtedness with
interest paid in advance
(b) Interest paid on
indebtedness between
related taxpayer
(c) To finance petroleum
exploration
INTEREST EXPENSE
SEC. 34 (B)(2)
(d) Interest on preferred stock
(dividend)
(e) Interest on unpaid salaries and
bonuses
(f) Interest calculated for cost
keeping on account of capital or surplus
invested in business

(g) Interest paid when there is no

stipulation for the payment
thereof
 BAD DEBTS
Sec. 34 (E)(1)
 Worthless
 Charged-off within the taxable year
EXCEPT:
• those not connected with profession,
trade or business;
• those sustained in transaction entered
into between parties in Sec. 36(B)
 BAD DEBTS
Sec. 34 (E)(1)
Requisites for Deductibility:
1. Existing indebtedness
2. Connected with the taxpayer's trade, business or
practice of profession;
3.Must not be sustained in a transaction entered
into between related parties;
4. Actually ascertained to be worthless and uncollectible
5. Actually charged off in the books of accounts of the
taxpayer as of the end of the taxable year.
Rules on Capital Gains and
Losses
ORDINARY ASSET CAPITAL ASSET
ORDINARY ASSETS CAPITAL ASSETS
 Stock in trade or other All other properties not
properties of a kind which
would properly be included in
classified as ordinary
the inventory (e.g. supplies asset
on hand);
 Property held primarily for
sale to customers in the
ordinary course of trade or
business (e.g. subdivision
lots by a real estate
developer);
 Property used in the trade or
business subject to
depreciation (e.g. delivery
truck);
Treatment of Capital Gains and Losses

• Sale of shares of stocks of a

domestic corporation not Other capital assets
listed and not traded not subject to CGT
through stock exchange;
and
• Sale of real property in the
Philippines held as capital
Determination of the Amount to Tax:

Sale of shares of stock subject to CGT

 Coverage:
Sale of shares of stock of a domestic corporation not
listed and not traded in the stock exchange by a non-
dealer in securities

 CGT Rate:
• Flat rate of 15% of net capital gains, as amended
by TRAIN Law
Determination of the Amount to Tax:

Sale or other disposition of real

property subject to CGT
 CGT Rate and Tax Base:
6% on the gross selling price or zonal value or
the FMV as shown in the schedule of values of
the provincial and city assessors, whichever is
the highest
• Other capital assets not subject to CGT
 Coverage:
• Involves sale or exchange or one considered as equivalent to a
sale or exchange or property classified as capital asset except:
– Unlisted shares of stock of a domestic corporation; and
– Real property in the Philippines held as capital asset
 Tax Treatment and Rate:
Included in the gross income subject to the regular income tax
rates
 Tax Base:
Net capital gains
 Special Rules on
Capital Gains or Losses from
Disposition of Property
Holding period
– 100% - short-term assets
– 50% - long-term assets

Loss Limitation Rule

– capital losses are allowed only to the extent of capital gains

Net Capital Loss Carry-Over (NELCO)

– if any taxpayer, other than a corporation, sustains in any
taxable year a net capital loss, such loss shall be treated in
the succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more than 12 months
Rules on Exchanges of
Property
 Requisites:
1. The property is received is different from
property disposed of
2. The property received has market value
General Rule:
Upon the sale or
exchange of
property, the
entire amount of
the gain or loss,
as the case may
be, shall be
recognized (NIRC,
Sec 40(C)(1))
Exceptions:
1.Gain recognized but loss
not recognized in
transactions between
related parties
2.Exchanges solely in kind /
tax-free exchanges
3.Gain recognized but loss
not recognized where the
exchange is not solely in
kind
Tax-Free Exchanges

Income Tax

Capital Gains Tax

Value Added Tax

 Tax-Free Exchanges
1.Merger or Consolidation

2.Property is transferred to a
corporation by a person in exchange
for stock in such corporation, as a
result, said person gains control of
corporation (Estate Planning)
Merger or Consolidation
Property for Stock
Stock for Stock
Security for Stock
Estate Planning

A and B transfer real property

in payment for X Corp stocks.

A and B gained control of X Corp.

NO GAIN OR LOSS
ATTY. NICASIO C. CABANEIRO, CPA

TAXATION REVIEW

INCOME TAX