INCOME TAXATION

Instructor: Ms. Janie Hazel Tan

Susan Ballada, CPA Author

Win Lu Ballada, CPA Co-Author
CHAPTER 1

BASIC PRINCIPLES
TAXATION
Definition, Nature and Basis of Taxation

Taxation - is the process or means by which the sovereign, through its lawmaking body,
raises income to defray the necessary expenses of the government. Taxation, as a power of
the State, is inherent in sovereignty. A government cannot continue to exist and operate
without financial means. This inherent power gives the government the right to tax citizens
and properties within its jurisdiction.

In the Philippines, the premier tax agency is the Bureau of Internal Revenue (BIR)
 Taxation is much more than just a means of raising
revenue for the government. It is also one of the
major means by which the national government
attempts to achieve various economic and social
objectives.

OBJECTIV This objective includes:

ES OF
TAXATION • shifting wealth from the rich to the poor
• maintaining price stability
• stimulating economic growth
• encouraging full employment
State of Taxation. The power of the state by which the sovereign
raises revenue to defray the necessary expenses of the
Powers government.
Eminent Domain. The power of the state to take private
property for public use upon payment of just compensation.

Police Power. The power of the state to enact laws to

promote public health, public morals, public safety and the
general welfare of the people.

Aspects Levying of the tax. The imposition of tax requires legislative

intervention. In the Philippines, it is congress that levies
of taxes; and
Taxation
Collection of the tax levied. This is essentially an
administrative function.
LIMITATIONS ON THE POWER OF
TAXATION

Constitutional Limitations are those

provided for in the constitution or
implied from its provisions while,

Inherent Limitations are restrictions

to the power to tax attached to its
nature.
 The
following
are the Purpose
inherent
limitations:

Situs of Taxation Territoriality

The situs of taxation is the place of taxation. The
rule is that the State may rightfully levy and
collect the tax where the subject being taxed has
a situs under its jurisdiction. International comity

Exemption

Non-delegation
Situs of taxation is determined by a number of The Persons – Residence of the taxpayer.
following
factors: situs of
taxation
1. Subject matter – or what is being taxed. He may apply:
Real property or tangible personal property –
be a person or it may be a property, an act, or an Location of the property.
activity;
2. Nature of tax – or which tax to impose. It may be
an income tax, an import duty, or a real property Intangible personal property – As a rule, situs
is the domicile of the owner unless he has
tax; acquired a situs elsewhere.
3. Citizenship of the taxpayer; and
4. Residence of the taxpayer. Income – Taxpayer’s residence or citizenship,
or place where the income was earned.

Business, occupation and transaction – Place

where business is being operated, occupation
being practiced and transaction completed.

Gratuitous transfer of property – Taxpayer’s

residence or citizenship, or location of the
property.
TAXES
Taxes are enforced
proportional contributions
from persons and property
levied by the lawmaking
body of the State of virtue
of its sovereignty for the
support of the
government and all public
needs.
Essential Characteristics
of a Tax
• It is an enforced contribution;
• It is levied by the lawmaking
body;
• It is proportionate in character;
• It is generally payable in money;
• It is imposed for the purpose of
raising revenue; and
• It is to be used for public
purpose.
 CLASSIFICATION OF TAXES

1. As to subject matter or object

• a. Personal, poll, or capitation – Example: community tax
• b. Property – Example: real estate tax
• c. Excise – Examples: estate tax, donor’s tax, income tax, value-added tax

2. As to whom bears the burden

• a. Direct – Examples: community tax, income tax, estate tax, donor’s tax
• b. Indirect –Examples: customs duties, value-added tax, some percentage taxes

3. As to the determination of the amount

• a. Specific – Examples: tax on distilled spirits, fermented liquors, cigars, wines, fireworks, etc
• b. Ad valorem – Examples: real estate tax, certain customs duties, excise taxes on cigarettes,
gasoline, and others
4. As to purpose

• General, fiscal, or revenue – Tax with no particular purpose or object for the
purpose or object for which the revenue is raised, but is simply raised for
whatever need may arise. Examples: income tax, and value-added tax.
• b. Special or regulatory – Tax imposed for a special purpose regardless of
whether revenue is raised or not, or is intended to achieve some social or
economic end. Example: protective tariffs or customs duties on certain
imported goods to protect local industries against foreign competition.

5. As to authority imposing the tax or scope

• National – Tax imposed by the national government. Examples: internal

revenue taxes, tariff and customs duties.
• Municipal or local – Tax imposed by municipal governments for specific
needs. Examples: real estate taxes, municipal licences.
6. As to graduation or rate
• Proportional – Tax based on a fixed percentage of the
amount of property income or other basis to be taxed.
Examples: value-added tax, percentage taxes, real estate
taxes.
• Progressive or graduated – Tax rate increases as the tax
base increases. Examples: income tax, estate tax, donor’s
tax.
• Regressive – Tax decreases as the tax base increases. There
is no regressive tax in the Philippines.
Tax Distinguished from Other Fees
1. From toll. Toll is a sum of money for the use of something,
generally applied to the consideration which is paid for the use of a
public road, bridge or the like.
2. From penalty. The penalty is any sanction imposed as a
punishment for violation of law or acts deemed as injuries. Violation
of tax laws may give rise to the imposition of penalties.
3. From special assessment. A special assessment is an enforced
proportional contribution from owners of lands for special benefits
resulting from public improvements.
4. From permit or license fee. Permit or license fee is a charge imposed under the police
power for the purposes of regulation.

5. From debt. A debt is generally based on contract, is assignable and may be paid in kind
while a tax is based on law, cannot generally be assigned and is generally payable in money.
A person cannot be imprisoned for non-payment of debt while he can be for non-payment
of tax (except poll tax).
6. From revenue. Revenue is broader than tax since it refers to all funds or income derived
by the government taxes included. Other sources of revenues are government services,
income from public enterprises and foreign loans.

7. From customs duties. Customs duties are taxes imposed on goods exported from or
imported to a country. Customs duties are actually taxes but the latter is broader in scope.
Tax Evasion Versus Tax Avoidance

Tax avoidance happens when the taxpayer minimizes his

tax liability by taking advantage of legally available tax
planning opportunities. This is otherwise known as tax
minimization; others call it tax planning. It is the process
of controlling one’s actions so as to avoid undesirable tax
consequences.

Tax evasion occurs when the taxpayer resorts to unlawful

means to lessen or get away with his tax liability. This is
also known as tax dodging. Examples of tax evasion are
under-declaration of sales, overstatement of expenses
and backdating an important document.
Tax evasion connotes the integration of three factors:

1. The end to be achieved (i.e., payment of less than the amount known by the
taxpayer to be legally due, or nonpayment of the tax when it is shown that a tax is
due);
2. An accompanying state of mind that is described as being in bad faith, willful, or
deliberate and not accidental; and
3. A course of action or failure of action that is unlawful (Commissioner of Internal
Revenue v. The Estate of Benigno P. Toda, Jr., GR No, 147188, Sept. 14, 2004).

TAX LAWS

Sources of Tax Authority

The three branches of the national government are:

• the Congress,
• the President and his administration,
• And the Courts.

Congress creates statutory law. The National Internal Revenue Code (NIRC) of 1997 is a
statutory law.
 Constitution;
Sources
of Tax Statutes and Presidential Decrees ;

Laws Revenue Regulations by the Department of Finance;

Rulings issued by the Commissioner of Internal Revenue and Opinions by

the Secretary of Justice;
Decisions of the Supreme Court and the Court of Tax Appeals;

Provincial, city, municipal, and barangay ordinances subject to limitations

set forth in the Local Government Code; and
Treaties or international agreements the purpose of which is to avoid or
minimize double taxation.
Philippine Tax Laws and Taxes

1. National Internal Revenue Code of 1997 (PD 1158, as

amended);
a. Income taxes (individual and corporate);
b. Estate and donor’s taxes;
c. value-added tax;
d. Other percentage taxes;
e. Excise tax; and
f. Documentary stamp tax
2. Tariff and Customs Code of 1978 (PD 1464, as amended);
a. Import duties; and
b. Export duties
3. Local Government Code of 1991 (RA 7160);
a. Real property tax;
b. Business taxes, fees and charges;
c. Professional tax;
d. Community tax; and
e. Tax on banks and other financial
institutions.

4. Special Laws
a. Motor Vehicle Law (RA 4136)
b. Private motor vehicle tax law (PD 1958)-
c. Philippine immigration act of 1940
d. Travel tax law
•BIR Rulings are the official position of the Bureau to
queries raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax laws.

•Revenue Bulletins (RBs) refer to periodic issuances,

notices, and official announcements of the
Commissioner of Internal Revenue that consolidate
the Bureau of Internal Revenue’s position on certain
specific issues of law or administration in relation to
the provisions of the Tax Code, relevant to tax laws
and other issuances for the guidance of the public.

•The BIR also issues Revenue Audit Memorandum

Orders (RAMOs).
 the chief
officials of the
Bureau are the
Assessment and collection of all
Commissioner national internal revenue taxes, fees,
and four (4)
Deputy and charges;
Commissioners.
POWERS AND DUTIES OF Its powers and
THE BUREAU OF INTERNAL duties follow: Enforcement of all forfeitures,
REVENUE penalties, and fines;

Execution of judgments in all cases

decided in its favor by the Court of
Tax Appeals and ordinary courts; and

Administration of supervisory and

police powers conferred to it.
Powers of the Commissioner

• Interpret tax laws and decide tax cases;

• Obtain information, and summon, examine, and
take the testimony of persons;
• Make assessments and prescribe additional
requirements for tax administration and
enforcement.
Tax Incentives

•A pre-qualified adopting private entity which enters

into an Agreement with a public school shall be entitled
to the following tax incentives:

•Deduction from gross income of the amount of

contribution/donation that were actually, directly, and
exclusively incurred for the Program, subject to
limitations plus an additional amount equivalent to fifty
percent (50%) of such contributions/donation;

•Exemption of the assistance made by the donor from

payment of the donor’s tax.
INCOME AND
INCOME TAXES
Income Defined and Distinguished from Capital

•Income - means all wealth, which flows into the taxpayer other than a
mere return of capital. It is the return on money from one’s business,
labor, or capital invested e.g. gains, profits, salary, and wages.
•Income is also defined as the amount of money coming to a person or
corporation within a specified time, whether as payment for services,
interest, or profit from an investment. Unless otherwise specified, it
means cash or equivalent. Income may also be thought of as the flow
of the fruits of one’s labor.

•Capital - a fund or property existing at one distinct point in time.

Income on the other hand denotes wealth during a definite period of
time. While his wealth, income is the service of wealth.

•Income tax - is defined based on nature, either gross or net, realized

in one taxable year.
CHAPTE TAXATION OF
INDIVIDUALS
R2
 1. Citizen
a. Resident
b. Non-resident

Classificatio 2. Alien
a. Resident

n of b. Non-resident
1. Engaged in trade or business in the Philippines
Individual 2. Not engaged in trade or business in the Philippines

Income 3. Employed by
a. Regional or area headquarters and regional operating
Taxpayers headquarters of multinational entities in the Philippines
engaged in international trade.
that are

b. Offshore banking units.

c. Petroleum contractors and sub- contractors.
1. Citizen. The following shall be considered citizens of the Philippines:

 Those who are citizens of the Philippines at the time of the adoption of the
February 2, 1987 Constitution;
 Those whose fathers or mothers are citizens of the Philippines.
 Those born before January 17, 1973, the date of the adaptation of the 1973
Constitution, of Filipino mothers, who elect Philippines citizenship upon reaching the
age of majority; and
 Those who are naturalized in accordance with the law.

2. A resident citizen is a Filipino citizen who permanently resides in the Philippines.

3. Non- A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein.
resident citizen
means:
A citizen of the Philippines who leaves the Philippines during the taxable years to reside abroad,
either as an immigrant or for employment on a permanent basis.

A citizen of the Philippines who works and derives income from abroad and whose employment
thereat requires him to be physically present abroad most of the time during the taxable year. “Most
of the time” is interpreted to mean presence abroad for at least 183 days during the taxable year.
(BIR Ruling 128-99, Aug. 18, 1999)

A citizen who has been previously considered as non-resident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise
be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the date of his arrival in the Philippines.

The taxpayer shall prove to the Commissioner to show his intention of leaving the Philippines to
reside permanently abroad or to return to and reside in the Philippines, as the case may be.
• 4. Resident alien. This means an individual whose residence is within the Philippines
and who is not a citizen thereof. He is present in the Philippines and who is not a
mere transient or sojourner. But residence does not mean mere physical presence.
An alien is considered a resident or a non-resident depending on his intention
concerning the length and nature of his stay.
• 5. Non-resident alien. This means an individual whose residence is not within the
Philippines and who is not a citizen thereof.
• 6. Non-resident alien engaged in trade or business (NRA-ETB). This means that the
alien is carrying on a business in the Philippines. It connotes more than a single act
or isolated transactions. It involves some continuity of action. The term trade,
business, or profession shall not include the performance of services by the taxpayer
as an employee but it includes the performance of the functions of a public office. A
non-resident alien who has stayed in the Philippines for more than 180 days during
any calendar year shall be deemed doing business in the Philippines. If he stayed for
180 days or less, he is considered a non-resident alien not doing business in the
Philippines (NRA-NETB).
• Foreign currency deposit system (FCDS) shall refer to the conduct of banking
transactions whereby any person, whether natural or juridical, may deposit foreign
currencies forming part of the Philippine international reserves, in accordance with the
provisions of RA No. 6426 entitled “An Act Instituting a Foreign Currency Deposit
System in the Philippines, and For Other Purpose.”

• Foreign currency deposit unit (FCD) shall refer to that unit of a local bank or a local
branch of a foreign bank authorized by the Bangko Sentral ng Pilipinas (BSP) to engage
in foreign currency-denominated transactions, pursuant to the provisions of R.A. No.
6426, as amended. A local bank shall refer to a thrift bank or a commercial bank
organized under the law of the Republic of the Philippines. A local branch of a foreign
bank shall refer to a branch of a foreign bank doing business in the Philippines,
pursuant to the provisions of R.A. No. 337, as amended.
• Offshore banking system shall refer to the conduct of banking transactions in foreign
currencies involving the receipt of funds principally from external and internal sources and the
utilization of such funds under Presidential Decree No. 1034 as implemented by Central Bank
(now Bangko Sentral ng Pilipinas (BSP)) circular No. 1389, as amended.

• Offshore banking unit (OBU) shall mean a branch, subsidiary, or affiliate of a foreign banking
corporation that is duly authorized by the BSP to transact offshore banking business in the
Philippines in accordance with the provisions of Presidential Decree No. 1034 as implemented
by Central Bank (now BSP) Circular No. 1389, as amended.

• Deposits shall mean funds in foreign currencies that are accepted and held by an Offshore
Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the
obligation to return an equivalent amount to the owner thereof, with or without interest.
 Rules Apply:
Non-resident citizens and alien
individuals – resident and non-resident
Resident citizen are taxable on all
– are taxable only on income derived
income derived from sources within and
from sources within the Philippines. An
without.
overseas contract worker is taxable only
on his income from sources within.
 the property, activity or service that
produced the income.

Sources of
Income
It is important to know the sources of
income of an individual taxpayer – whether
from within the Philippines or without –
because not all individual taxpayers are
taxed on all their income.
Categories of Income and Tax
Rates
1. Compensation Income - In general, the term “compensation” means all
remuneration for services performed by an employee for his employer
under an employer-employee relationship, unless specially excluded by the
Code.

2. Business Income - arises from self-employment or practice of a

profession. This shall not include income from the performance of services
by the taxpayer as an employee.

3. Passive Income - is subjected to a separate and final tax. These are taxed
at fixed rates ranging from 5% to 25%.
Examples: interest, royalties, prizes, winnings and dividends.
Categories of Income and Tax
Rates
4. Capital gains from the sale of shares of stock, not traded through the
stock exchange - taxed at 5% and 10% final taxes on a per transaction basis.

5. Capital gains from sales of real property - taxed at 6% final tax on the
gross selling price or current fair market value at the time of sale,
whichever is higher.

6. Fringed benefits - means any goods, 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 in file employee) under an employer-
employee relationship.
Categories of Income and Tax
Rates
7. Passive Income - is subject to a separate and final tax rate ranging from
5% to 25%. They are not included in the computation of taxable income
from compensation or business/professional income.

8. Allowable Deductions – these are items or amounts, which the law

allows to be deducted from gross income in order to arrive at taxable
income.

9. Personal Exemptions - are arbitrary amounts allowed as deductions

from the gross income of the individual taxpayer from compensation,
business (self-employment), or practice of a profession. A personal
exemption is a sense representing the personal, living, or family expenses
of the taxpayer.
 Basic personal exemption - This
exemption is allowed on
account of the civil status of the
Kinds of Personal taxpayer.
Exemptions
Additional exemption - This
exemption is further allowed to
the taxpayer by reason of his
qualified dependent children.
 Head of the family - is an individual who
supports and maintains in one household one or
more individuals, who are closely connected with
him by a blood relationship, relationship by
marriage, or by adoption, and whose right to
exercise family control and provide for these
dependent individuals is based upon some moral
or legal obligation.

Kinds of Personal Head of the family means an unmarried or legally

separated man or woman with:
Exemptions a) One or both parents, or
b) One or more brothers or sisters whether of
whole or half blood, or
c) One or more legitimate or illegitimate
recognized natural or legally adopted children
who meet the following qualifications:
 A senior citizen is any
resident citizen of the
Philippines of at least
sixty (60) years old,
including those who have Chief support means
The term head of the
retired from both principal or main support
family also includes an
government offices and (such as paying for the
unmarried or legally
private enterprises, and rent and spending for the
separated man or
has an income of not food of the dependent).
woman who is the
more than sixty thousand It is more than one half
benefactor of a senior
pesos (P60,000.00) per of the support required
citizen.
annum subject to the by the dependent.
review of the National
Economic Development
Authority (NEDA) every
three years.
Additional Exemption There should be allowed an additional exemption of
eight thousand pesos (P8,000.00) for each dependent child not exceeding
four (4) children.

A dependent means a legitimate, illegitimate, or legally adopted child chiefly

dependent upon and living with the taxpayer if such dependent is not more
than twenty-one (21) of age, and is incapable of self-support because of a
mental or physical defect.

In the case of married individuals, the additional exemption for dependents

shall be claimed by only one of the spouses. The husband shall be deemed
the proper claimant of the additional exemption unless he waives his right in
favor of his wife. But if the spouse of the employee is unemployed or is a
non-resident citizen deriving income from foreign sources, the employed
spouse within the Philippines shall be automatically entitled to claim the
additional exemptions for children.
In the case of legally separated spouses, additional exemptions may be claimed only by
the spouse who has custody of the child or children. The total amount of additional
exemptions that may be claimed by both shall not exceed the maximum additional
exemptions allowed for four (4) children.

If the taxpayer dies during the taxable year, his

death shall not affect the amount of personal and
additional exemptions his estate may claim. It is as
if he died at the end of such a year.

Rules on If the taxpayer marries or should have additional

dependents during the taxable year, he may claim
Changing the personal exemption of a married individual for
such a year.
Status I the spouse dies or any of the dependents dies or
becomes twenty-one years of age, or gets gainfully
employed during the taxable year, the taxpayer
may still claim the same exemption as if the change
occurred at the end of the year.
 Taxable income is defined as the pertinent items of gross income less
the deductions and/or personal and additional exemptions, if any,
authorized for such types of income, by the Tax Code or other special
laws. Taxable income is the amount of tax upon which tax rate is applied
to arrive at the tax due.

Taxable Depending on the taxpayer involved, taxable income may refer to either
of the following:

Income and 1. Net compensation income. The compensation income is arrived at

after subtracting from gross compensation income derived by

Tax Due resident citizens or resident aliens, basic personal and additional
exemptions; and premium payments, if any, on health and
hospitalization insurance under certain conditions.
2. Gross compensation income. The gross compensation income
derived by aliens including Filipinos employed by regional and area
headquarters and regional operating headquarters of multinational
companies, by offshore banking units, or by foreign petroleum
service contractors and sub-contractors.
 3. Net income. The income arrived at after
subtracting from the gross income (from business
or profession including compensation income) of
a citizen, resident alien, and non-resident alien if
the latter is engaged in trade or business in the
Taxable Philippines the deductions of the taxpayer,
including the basic personal and additional
Income and exemptions, if any.
Tax Due
4. Entire or gross income. The entire or gross
income (from business or profession, including
compensation income) without any deduction
with respect to non-resident aliens not engaged
in trade or business in the Philippines.
Declaration of Income Tax for
Individuals
Self-employed and professionals are required to file a declaration of their
estimated income for the current taxable year on or before April 15 of the
same taxable year. Generally, self-employment income consists of the
earnings derived by the individual from the practice of profession or
conduct of trade or business carried on by him as a sole proprietorship or by
a partnership of which he is a member. This estimated tax shall be paid in
four installments a follows:
Installment Date
First April 15
Second August 15
Third November 15
Fourth April 15
The final adjusted income tax return is supposed to be filed and paid in time
for the fourth installment on or before April 15 of the following calendar
year.
Estimated tax means the amount which the individual declared as
income tax in his final adjusted and annual income tax return for the
preceding taxable year minus the credits allowed. If during the taxable
year, the taxpayer reasonably expects to pay a bigger income tax, he
shall file an amended declaration during any interval of installment
payment dates. The return shall be filed and the income tax shall be paid
in the accredited bank in the city or municipality where the principal
place of business is located.

Non-resident Filipino citizens, with respect to income from without the

Philippines, and non-resident aliens not engaged in trade or business in
the Philippines, are not required to render a declaration of estimated
income tax.
 Non-resident citizen who is:
1. A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite

Individual
intention to reside therein.

Exempt 2. A citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant or of employment
on a permanent basis.

from 3. A citizen of the Philippines who works and drives income from abroad

Income and whose employment the

reat requires him to be physically present abroad most of the time during
the taxable year.

Tax 4. A citizen who has been previously considered as a non-resident citizen

and who arrives in the Philippines at any time during the year to reside
permanently in the Philippines will likewise be treated as a non-resident
citizen during the taxable year in which he arrives in the Philippines, with
respect to his income derived from sources abroad until the date of his
arrival in the Philippines.
 Overseas Contact Worker, Including Overseas Seaman

An individual citizen of the Philippines who is working

Individual Exempt and deriving income from abroad as an overseas
contract worker is taxable only to income from sources
from Income Tax within the Philippines. A seaman who is a citizen of the
Philippines and who receives compensation for services
rendered abroad as a member of the complement of a
vessel engaged exclusively in international trade will be
treated as an overseas contact worker.

Note that a Filipino employed as a Philippine Embassy/Consulate service

personnel of the Philippine Embassy/consulate is not to be treated as a
non-resident citizen, hence his income is taxable.
 Barangay Micro Business Enterprises (RA 9178 or BMBE

Individual
Law)

BMBEs refer to any business enterprise engaged in the

Exempt production, processing, or manufacturing of products or
commodities, including agro-processing, trading, and

from services, whose total assets including those arising from

loans but exclusive of the land on which the particular
business entity’s office, plant and equipment are situated,
Income should not be more than P3 million. Services shall exclude
the practice of a licensed profession.

Tax It is believed that BMBEs like small sari-sari stores,

bakeries, and handicraft shops will boost the economic
development of the country, hence, BMBEs are grated
incentives and benefits. One incentive is the exemption
from income tax on income arising from the discounts
derived from loans by credit institutions to BMBEs from
the gross receipts tax (GRT).
CHAPTER 3

TAXATION OF CORPORATION
 1. Corporations
CLASSIFICATION A. Domestic - Those created or organized under and
OF INCOME by virtue of Philippine laws.
• 1. Domestic corporations, in general
TAXPAYERS (other • 2. Government-owned and –controlled
corporations
than individuals) • 3. Taxable partnership
• 4. Proprietary educational institutions
• 5. Non-profit hospitals
B. Foreign - Those organized in accordance with the
laws of their respective countries.
• 1. Resident - Those engaged in trade or business
within the Philippines.
• 2. Non-resident - Those not engaged in trade or
business within the Philippines.

2. General professional partnership

3. Estates and trusts

 Corporation
It includes partnerships, no matter how created or
organized, joint stock companies, joint accounts,

DEFINITI associations, or insurance companies, but does not

include general professional partnership and a joint
venture or consortium formed for the purpose of
ON OF undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations

TERMS:
pursuant to an operating or consortium agreement under
a service contract with the Government.

Domestic
When applied to a corporation, means created or
organized in the Philippines or under its law.
 Foreign
When applied to a corporation, means a corporation that is

DEFINITI
not domestic.

Resident Foreign Corporation

ON OF Applies to a foreign corporation engaged in trade or business
within the Philippines.

TERMS: Non-Resident Foreign Corporation

This applies to a foreign corporation not engaged in trade or
business within the Philippines.
CATEGORIES OF
INCOME AND TAX
RATES
Business Income
Generally, business income earned by a corporation is taxed at the
following rates:
• Year Tax Rate
• 1997 35%
• 1998 34%
• 1999 33%
• 2000-2004 32%
• 2005 35%
• 2009 30%
 Description Tax Rate Tax Base

DOMESTIC CORPORATION
1.
a. In general 35% Taxable Income from all sources
b. Minimum Corporate Income Tax 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accum. Taxable Income

Specific tax rates on 2. Proprietary Educational Institution 10% Taxable Income from all sources
the business income
of domestic 3. Non-stock, Non-profit Hospital 10% Taxable Income from all sources

corporate taxpayers 4. Exempt Corporation

a. On Exempt Activities 0% Taxable Income

5. General Professional Partnerships 0%

6. Corporation covered by Special Laws Rate specified under the respective

special laws.
 RESIDENT FOREIGN CORPORATION

1.
a. In general 35% Taxable Income from all sources
b. Minimum Corporate Income Tax 2% Gross Income
c. Improperly Accumulate Earnings 10% Improperly Accum. Taxable Income
2. International Carriers 25% Gross Philippine Billings
Specific tax rates on
the business income 3. Regional Operating Headquarters 10% Taxable Income

of resident foreign 4. Corporation Covered by Special Laws Rate specified under the respective special
corporate taxpayers 5. Offshore Banking Units (OBUs) 10%
laws

Gross Taxable Income on Foreign Currency

Transaction
35% On Taxable Income Other than Foreign
Currency Transaction

6. Foreign Currency Deposit Units 10% Gross Taxable Income on Foreign Currency
(FCDU) Transaction
35% On Taxable Income Other than Foreign
Currency Transaction
 On Passive Income Domestic Resident
Foreign
Interests
Interest from deposits and yield or any
other monetary benefit from deposit
substitutes and from trust funds and 20% 20%
similar arrangements.
Interest income from a depository bank 7 ½% 7 ½%
under the expanded foreign currency Passive Income
deposit system.
Passive income is subject to a separate and final tax.
These are taxed at fixed rates ranging from 5% to 20%.
Income derived by a depository bank Passive income is not to be included in gross income
under the expanded foreign currency computation.
deposit system from foreign currency
transactions with local commercial
banks, including branches of foreign
banks that may be authorized by the 10% 10%
Bangko Sentral ng Pilipinas (BSP),
including interest income from foreign
currency loans.

Royalties 20% 20%

Dividends
Dividends received by a
domestic/resident foreign corporation Exempt Exempt
from a domestic corporation.
Capital Gains
On the net capital gain from sale,
exchange or other disposition of
shares of stock in a domestic
corporation not traded in the stock 5% 5%
exchange 10% 10% Note that the income tax treatments for domestic and
Not over P 100,000 resident foreign corporations are almost the same. But
Amount in excess of P 100,000 remember that resident foreign corporations are taxed
only on their income within the Philippines.
On the capital gain presumed to
have been realized on the sale,
exchange or disposition of lands
and/or buildings not actually used in
the business and treated as capital 6%
assets, the higher value between
Gross selling price, and Fair market
value as determined by the
Commissioner
Domestic and Resident Foreign Corporations, in General
Generally, the Pro-forma computation of the normal income tax of domestic and resident foreign corporations
follows:
Gross Income xxx
Less: Allowable Deductions xxx
Net Income xxx
Multiply by: Tax rate (2000) 32%
Tax Due xxx
For domestic and resident corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when specific sales, purchases, and other transactions occur.
Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each
month of the period. The reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve, or

Taxable income x No. of months covered by new tax rates x New tax rates = Income tax payable
12

Domestic Corporations, in Particular

Proprietary Educational Institutions and Non-Profit Hospitals. The 10% tax on the taxable income is subject to
limitation. If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the
total gross income derived from all sources, the tax prescribed under Section 27A shall be imposed on the entire
taxable income.
Unrelated trade, business, or other activity means any trade, business, or other
activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital of its primary purpose or
function.
•A primary educational institution is any private school maintained and administered
by private individuals or groups with an issued permit to operate from the Department
of Education, Culture and Sports (DECS), the Commission on Higher Education (CHED),
or the Technical Education and Skills Development Authority (TESDA), as the case may
be, in accordance with existing laws and rules and regulations.

Government-Owned or Controlled Corporations, Agencies, or Instrumentalities.

•Subject to the provisions of existing special laws or general laws, all corporations,
agencies, or instrumentalities owned or controlled by the Government shall pay such
rate of tax upon their taxable income as are imposed by the Code upon corporations or
associations engaged in a similar business, industry, or activity. The following are
exempt:
• Government Service Insurance System (GSIS)
• Social Security System (SSS)
• Philippine Health and Insurance Corporation (PHIC)
• Philippine Charity Sweepstakes Office (PCSO)
• Philippine Amusement and Gaming Corporation (PAGCOR). Note that PAGCOR is no
longer exempt from income tax effective 2005 (RA 9337).

Mutual Life Insurance Companies. These companies are now subject to regular
corporate income tax rates.
International Shipping. Gross Philippine billings in the case of international shipping 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.

Offshore Banking Units. Income derived by offshore banking units authorized by the BSP, from foreign
currency transactions with local commercial banks, including branches of foreign banks that may be
Resident Foreign
authorized by the BSP to transact business with offshore banking units, including any interest income
derived from foreign currency loans granted to residents, shall be subject to a final income tax at ten Corporations, In
Particular
percent (10%) of such income.

Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of
fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance
without deductions for the tax component thereof (except those activities which are registered with
Philippine Economic Zone Authority).

Regional Operating Headquarters shall mean a branch established in the Philippines by multinational
companies which are engaged in any of the following services: general administration and planning;
business planning and coordination; sourcing and procurement of raw materials, and components;
corporate finance advisory services; marketing control and sales promotion; training and personnel
management; logistic services; research and development services and product development; technical
support and maintenance; data processing and communication; and business development. Regional
operating headquarters shall pay a tax of ten percent (10%) of their taxable income.
ALLOWABLE DEDUCTIONS
•Allowable deductions are items or amounts which the law allows to be deducted from gross
income to arrive at taxable income. A domestic or resident foreign corporation may deduct
from its business income, itemized deductions under the Tax Code. Non-resident foreign
corporations are not allowed deductions from gross income.

TAXABLE INCOME AND TAX DUE

•In the case of corporations, taxable income is the pertinent item of gross income less the
deductions authorized for such types of income. Taxable income is the amount of tax base
upon which tax rate is applied to arrive at the tax due. Depending on the taxpayer involved
and for purposes of computing the income tax liability of a corporation, taxable income may
refer to either one of the following:

Net income. The income is arrived at after subtracting from the gross income from the
business the deductions of the taxpayer. For domestic and resident foreign corporations, in
general; and other corporations from whose gross income deductions are allowed.
• Gross Income xxx
• Less: Allowable deductions xxx
• Net Income xxx
• Multiply by Tax rate x%
• Tax Due xxx
2. Gross Income. The entire or gross income from the
business without any deduction.
• For domestic and resident foreign corporations
subject to the MCIT; non-resident foreign corporations
are not subject to the normal income tax rate.

• Gross Income xxx

• Multiply by tax rate x%
• Tax Due xxx

Note: in computing the taxable income, a fraction of a peso is

disregarded. For the tax due, a fraction amounting to fifty
centavo or more is rounded off to a peso while a fraction
amounting to less than fifty centavos is disregarded.
 • Labor, agricultural or horticultural organization not organized principally
for profit;
• Mutual savings banks not having a capital stock represented by shares
and cooperative banks without capital stock organized and operated for
mutual purposes and without profit;
• A beneficiary society, order of association, operating for the exclusive
benefit of the members such as a fraternal organization operating under
the lodge system, a mutual aid association, or a non-stock corporation
organized by employees providing for the payment of life, sickness,
CORPORATIONS EXEMPT FROM
accident, or other benefits exclusively to the members of such society,
INCOME TAX order, or association, or non-stock corporation or their dependents;
• Cemetery company owned and operated exclusively for the benefit of
its members;
• Non-stock corporation or association organized and operated exclusively
for religious, charitable, scientific, athletic, or cultural purposes, or for
the rehabilitation of veterans, no part of its net income or asset shall
belong to or inure to the benefit of any member, organizer, officer, or
any specific person;
• Business league, chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures to the
benefit of any private stockholder or individual;
 • Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
• A non-stock and non-profit educational institution;
• Government educational institution;
• Farmers’ or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative telephone
company, or like the organization of a purely local character, the
CORPORATIONS EXEMPT FROM income of which consists solely of assessment, dues, and fees
INCOME TAX collected from members for the sole purpose of meeting its
expenses; and
• Farmers’, fruit growers’, or like associations organized and operated
as sales agents for the purpose of marketing the products of its
member and turning back to them the proceeds of sales, less the
necessary selling expenses based on the quantity of produced
finished by them.
• Corporations may also be declared exempt from income tax or any
other tax under special laws.
DECLARATION OF QUARTERLY CORPORATE
INCOME TAX

•Every corporation shall file in duplicate a quarterly summary declaration of its gross income
and deductions on a cumulative basis or the preceding quarter/s upon which the income
shall levied, collected and paid. The income tax computed decreased by the amount of tax
previously paid or assessed during the preceding quarters shall be paid and the return filed
not later than 60 days from the close of each of the first three quarters of the taxable years,
whether calendar or fiscal.

•A return showing the cumulative income and deductions shall still be filed even if the
operation for the quarter and the preceding quarters yielded no tax due.

•Every taxable corporation is likewise required to file a final adjustment return covering the
total taxable income of the corporation for the preceding calendar or fiscal year, which is
required to be filed and paid on or before April 15, or on or before the 15 th day of the fourth
month following the close of the fiscal year, as the case may be. If the sum of the quarterly
tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable income of that year, the corporation shall either:
• Pay the balance of tax still due; or
• Carry over the excess credit; or
• Be credited or refunded with the excess amount paid.