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CHAPTER 1
GENERAL PRINCIPLES
FEATURES OF PHILIPPINE INCOME TAXATION
TAX SITUS
 Literally means the place of taxation, or the country that has
jurisdiction to levy a particular tax on persons, property, rights
or business
 The basis of tax situs is the symbiotic relationship—the state or
unit that gives protection has the right to demand support
SITUS OF PERSONS IN INCOME TAXATION
1. Nationality theory—a citizen of the Philippines is subject to
Philippine income tax on his worldwide income, if he resides in
the Philippines; or only on his income from sources within the
Philippines if he qualifies as a non-resident citizen—hence, his
income from sources outside the Philippines shall be exempt
from Philippine income tax
2. Domicillary theory—legal residence; an alien is subject to
Philippine income tax because of his residence in the Philippines
3. Source—place where the income is derived (based on activity)
PROGRESSIVE V. REGRESSIVE SYSTEM OF TAXATION
 Progressive system of taxation—rate of tax increases as the tax
base or bracket increases
 Regressive system—the rate of tax decreases as the tax base or
bracket increases
 Note that we don’t have any regressive taxes in the Philippines
GLOBAL V. SCHEDULAR SYSTEM OF TAXATION
 Individual income taxation adopted the schedular system of
taxation
 Global system—the total allowable deductions as well as
personal and additional exemptions, in the case of individuals or
the total allowable deductions only, in the case of corporations,
are deducted from the gross income to arrive at the net taxable
income subject to the graduated income tax rates, in the case of
individuals, or to the 2-tiered income tax rates, in the case of
MA. ANGELA LEONOR C. AGUINALDO
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
corporations (all items of gross income, deductions, and personal
and additional exemptions, if any, are reported in one income
tax return, and one set of tax rates are applied on the tax base)
Schedular system—a system employed where the income tax
treatment varies and made to depend on the kind or category of
the taxpayer’s taxable income
CHARACTERISTICS OF SCHEDULAR SYSTEM OF TAXATION
1. It accords different tax treatment on the income of the
individual taxpayer
2. It classifies income
GENERAL PRINCIPLES OF INCOME TAXATION
WHAT ARE THE GENERAL PRINCIPLES OF INCOME
TAXATION?
1. A citizen of the Philippines residing therein is taxable on all income
derived from sources within and without the Philippines;
2. A nonresident citizen is taxable only on income derived from sources
within the Philippines;
3. An individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable only
on income derived from sources within the Philippines: Provided,
That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;
4. An alien individual, whether a resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines;
5. A domestic corporation is taxable on all income derived from sources
within and without the Philippines; and
6. A foreign corporation, whether engaged or not in trade or business
in the Philippines, is taxable only on income derived from sources
within the Philippines.
SCOPE OF INCOME TAXATION
DEFINITION OF TERMS
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PERSONS
 It means an individual, a trust, estate or corporation.
CORPORATION
 It shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, but does not
include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium
agreement under a service contract with the Government.
"General professional partnerships" are partnerships formed by
persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business.
5.
likewise be treated as a nonresident 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 submit proof 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 for purpose of this Section.
RESIDENT ALIEN
 It means an individual whose residence is within the Philippines
and who is not a citizen thereof.
NON-RESIDENT ALIEN
 It means an individual whose residence is not within the
Philippines and who is not a citizen thereof.
DOMESTIC
 The term "domestic", when applied to a corporation, means
created or organized in the Philippines or under its laws.
RESIDENT FOREIGN CORPORATION
 The term applies to a foreign corporation engaged in trade or
business within the Philippines.
FOREIGN
 The term "foreign", when applied to a corporation, means a
corporation which is not domestic.
NON-RESIDENT FOREIGN CORPORATION
 The term applies to a foreign corporation not engaged in trade or
business within the Philippines.
NONRESIDENT CITIZEN
1. 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.
2. A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
3. 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.
4. A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines shall
FIDUCIARY
 The term means a guardian, trustee, executor, administrator,
receiver, conservator or any person acting in any fiduciary
capacity for any person.
MA. ANGELA LEONOR C. AGUINALDO
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WITHHOLDING AGENT
 The term means any person required to deduct and withhold
any tax under the provisions of Section 57.
SHARES OF STOCK
 The term shall include shares of stock of a corporation, warrants
and/or options to purchase shares of stock, as well as units of
participation in a partnership (except general professional
partnerships), joint stock companies, joint accounts, joint
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ventures taxable as corporations, associations and recreation or
amusement clubs (such as golf, polo or similar clubs), and
mutual fund certificates.
SHAREHOLDER
 The term shall include holders of a share/s of stock, warrant/s
and/or option/s to purchase shares of stock of a corporation, as
well as a holder of a unit of participation in a partnership
(except general professional partnerships) in a joint stock
company, a joint account, a taxable joint venture, a member of
an association, recreation or amusement club (such as golf, polo
or similar clubs) and a holder of a mutual fund certificate, a
member in an association, joint-stock company, or insurance
company.
TAXPAYER
 The term means any person subject to tax imposed by this Title.
INCLUDING OR INCLUDES
 The terms when used in a definition contained in this Title,
shall not be deemed to exclude other things otherwise within the
meaning of the term defined.

The terms shall be construed according to the method of
accounting upon the basis of which the net income is computed
under this Title.
TRADE OR BUSINESS
 The term includes the performance of the functions of a public
office.
SECURITIES
 The term means shares of stock in a corporation and rights to
subscribe for or to receive such shares. The term includes bonds,
debentures, notes or certificates, or other evidence or
indebtedness, issued by any corporation, including those issued
by a government or political subdivision thereof, with interest
coupons or in registered form.
DEALER IN SECURITIES
 The term means a merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place
of business, regularly engaged in the purchase of securities and
the resale thereof to customers; that is, one who, as a merchant,
buys securities and re-sells them to customers with a view to the
gains and profits that may be derived therefrom.
TAXABLE YEAR
 The term means the calendar year, or the fiscal year ending
during such calendar year, upon the basis of which the net
income is computed under this Title. 'Taxable year' includes, in
the case of a return made for a fractional part of a year under
the provisions of this Title or under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of
the commissioner, the period for which such return is made.
BANK
 The term means every banking institution, as defined in Section
2 of Republic Act No. 337, as amended, otherwise known as the
General banking Act. A bank may either be a commercial bank,
a thrift bank, a development bank, a rural bank or specialized
government bank.
FISCAL YEAR
 The term means an accounting period of twelve (12) months
ending on the last day of any month other than December.
NON-BANK FINANCIAL INTERMEDIARY
 The term means a financial intermediary, as defined in Section
2(D)(C) of Republic Act No. 337, as amended, otherwise known
as the General Banking Act, authorized by the Bangko Sentral
ng Pilipinas (BSP) to perform quasi-banking activities.
PAID OR INCURRED/PAID OR ACCRUED
QUASI-BANKING ACTIVITIES
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
The term means borrowing funds from twenty (20) or more
personal or corporate lenders at any one time, through the
issuance, endorsement, or acceptance of debt instruments of any
kind other than deposits for the borrower's own account, or
through the issuance of certificates of assignment or similar
instruments, with recourse, or of repurchase agreements for
purposes of relending or purchasing receivables and other
similar obligations: Provided, however, That commercial,
industrial and other non-financial companies, which borrow
funds through any of these means for the limited purpose of
financing their own needs or the needs of their agents or dealers,
shall not be considered as performing quasi-banking functions.
DEPOSIT SUBSTITUTES
 The term shall mean an alternative from of obtaining funds
from the public (the term 'public' means borrowing from twenty
(20) or more individual or corporate lenders at any one time)
other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrowers own account,
for the purpose of relending or purchasing of receivables and
other obligations, or financing their own needs or the needs of
their agent or dealer. These instruments may include, but need
not be limited to bankers' acceptances, promissory notes,
repurchase
agreements,
including
reverse
repurchase
agreements entered into by and between the Bangko Sentral ng
Pilipinas (BSP) and any authorized agent bank, certificates of
assignment or participation and similar instruments with
recourse: Provided, however, That debt instruments issued for
interbank call loans with maturity of not more than five (5) days
to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shall
not be considered as deposit substitute debt instruments.
ORDINARY INCOME
 The term includes any gain from the sale or exchange of
property which is not a capital asset or property described in
Section 39(A)(1). Any gain from the sale or exchange of property
which is treated or considered, under other provisions of this
Title, as 'ordinary income' shall be treated as gain from the sale
MA. ANGELA LEONOR C. AGUINALDO
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or exchange of property which is not a capital asset as defined in
Section 39(A)(1). The term 'ordinary loss' includes any loss from
the sale or exchange of property which is not a capital asset. Any
loss from the sale or exchange of property which is treated or
considered, under other provisions of this Title, as 'ordinary loss'
shall be treated as loss from the sale or exchange of property
which is not a capital asset.
RANK AND FILE EMPLOYEES
 The term shall mean all employees who are holding neither
managerial nor supervisory position as defined under existing
provisions of the Labor Code of the Philippines, as amended.
MUTUAL FUND COMPANY
 The term shall mean an open-end and close-end investment
company as defined under the Investment Company Act.
TRADE, BUSINESS OR PROFESSION
 The term shall not include performance of services by the
taxpayer as an employee.
REGIONAL OR AREA HEADQUARTERS
 The term shall mean a branch established in the Philippines by
multinational companies and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region
and other foreign markets.
REGIONAL OPERATING HEADQUARTERS
 The term 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
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support and maintenance; data processing and communications;
and business development.
LONG-TERM DEPOSIT OR INVESTMENT CERTIFICATES
 The term shall refer to certificate of time deposit or investment
in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments with a maturity period of not less than five (5)
years, the form of which shall be prescribed by the Bangko
Sentral ng Pilipinas (BSP) and issued by banks only (not by
nonbank financial intermediaries and finance companies) to
individuals in denominations of Ten thousand pesos (P10,000)
and other denominations as may be prescribed by the BS.
TAXPAYER
 Refers to any person subject to tax imposed by this Title.
PERSONS
 It means an individual, a trust, estate or corporation
“PERSONS LIABLE TO TAX”
CIR V. PROCTER AND GAMBLE
204 SCRA 378
FACTS:
PMC paid a 25-35% tax on its income for a relevant year. Thereafter,
deriving at its net income, it declared dividends for the benefit of PMCUSA. From this declared dividends, it paid a 25% tax, as per taxation
laws. The company did the same for the next few quarters. Then,
contending that it is the withholding agent for the tax paid on the
dividends paid to PMC-USA, it requested for the refund of its alleged
overpayments of taxes. The company was denied the refund and
coursing through the CTA, the latter ruled in its favor.
HELD:
The submission of the Commissioner of Internal Revenue that PMC-Phil.
is but a withholding agent of the government and therefore cannot claim
reimbursement of the alleged over paid taxes, is completely meritorious.
MA. ANGELA LEONOR C. AGUINALDO
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The real party in interest being the mother corporation in the United
States, it follows that American entity is the real party in interest, and
should have been the claimant in this case.
Closely intertwined with the first assignment of error is the issue of
whether or not PMC-U.S.A. is a non-resident foreign corporation under
Section 24(b)(1) of the Tax Code (the subsidiary of an American) a
domestic corporation domiciled in the United States, is entitled under
the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at
least the 20 percentage paid portion (of the 35% dividend tax) spared or
waived as otherwise considered or deemed paid by the government. The
law pertinent to the issue is Section 902 of the U.S. Internal Revenue
Code, as amended by Public Law 87-834, the law governing tax credits
granted to U.S. corporations on dividends received from foreign
corporations, which to the extent applicable reads:
SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN
FOREIGN CORPORATION.
(a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this
subject, a domestic corporation which owns at least 10 percent of the
voting stock of a foreign corporation from which it receives dividends in
any taxable year shall(1) to the extent such dividends are paid by such foreign corporation out
of accumulated profits [as defined in subsection (c) (1) (a)] of a year for
which such foreign corporation is not a less developed country
corporation, be deemed to have paid the same proportion of any income,
war profits, or excess profits taxes paid or deemed to be paid by such
foreign corporation to any foreign country or to any possession of the
United States on or with respect to such accumulated profits, which the
amount of such dividends (determined without regard to Section 78)
bears to the amount of such accumulated profits in excess of such income,
war profits, and excess profits taxes (other than those deemed paid); and
(2) to the extent such dividends are paid by such foreign corporation out
of accumulated profits [as defined in subsection (c) (1) (b)] of a year for
which such foreign corporation is a less-developed country corporation,
be deemed to have paid the same proportion of any income, war profits,
or excess profits taxes paid or deemed to be paid by such foreign
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corporation to any foreign country or to any possession of the United
States on or with respect to such accumulated profits, which the amount
of such dividends bears to the amount of such accumulated profits.
CHAPTER 2
CLASSIFICATION OF INCOME TAXPAYERS
xxx xxx xxx
INDIVIDUALS
(c) Applicable Rules
(1) Accumulated profits defined - For purpose of this section, the term
'accumulated profits' means with respect to any foreign corporation.
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains,
profits, or income computed without reduction by the amount of the
income, war profits, and excess profits taxes imposed on or with respect
to such profits or income by any foreign country.... ; and
CITIZENS
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains,
profits, or income in excess of the income, was profits, and excess profits
taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid,
treating dividends paid in the first 20 days of any year as having been
paid from the accumulated profits of the preceding year or years (unless
to his satisfaction shows otherwise), and in other respects treating
dividends as having been paid from the most recently accumulated gains,
profits, or earnings.
There is nothing in the aforecited provision that would justify tax return
of the disputed 15% to the private respondent. Furthermore, as ably
argued by the petitioner, the private respondent failed to meet certain
conditions necessary in order that the dividends received by the nonresident parent company in the United States may be subject to the
preferential 15% tax instead of 35%. Among other things, the private
respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the
dividends received from private respondent; (2) to present the income tax
return of its mother company for 1975 when the dividends were received;
and (3) to submit any duly authenticated document showing that the
U.S. government credited the 20% tax deemed paid in the Philippines.
MA. ANGELA LEONOR C. AGUINALDO
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Section 1. The following are citizens of the Philippines:
(1) Those who are citizens of the Philippines at the time of the adoption
of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who elect
Philippine Citizenship upon reaching the age of majority; and
(4) Those who are naturalized in the accordance with law.
Section 2. Natural-born citizens are those who are citizens of the
Philippines from birth without having to perform any act to acquire or
perfect their Philippine citizenship. Those who elect Philippine
citizenship in accordance with paragraph (3), Section 1 hereof shall be
deemed natural-born citizens.
NONRESIDENT CITIZEN
1. 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.
2. A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
3. 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.
4. A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines shall
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5.
likewise be treated as a nonresident 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 submit proof 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 for purpose of this Section.
ALIENS
Estate/trusts
Corporations
Depends
Domestic
Foreign
Resident
Nonresident
w/in, w/out
w/in
w/in
TAN V. CIR
GR L-109289, OCTOBER 3, 1994
NON-RESIDENT ALIEN
 It means an individual whose residence is not within the
Philippines and who is not a citizen thereof.
FACTS:
This case seeks to assail the constitutionality of Republic Act No. 7496,
also commonly known as the Simplified Net Income Taxation Scheme
("SNIT"), amending certain provisions of the National Internal Revenue
Code and, in G.R. No. 109446, the validity of Section 6, Revenue
Regulations No. 2-93, promulgated by public respondents pursuant to
said law.
GENERAL PROFESSIONAL PARTNERSHIP
 Are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
The several propositions advanced by petitioners revolve around the
question of whether or not public respondents have exceeded their
authority in promulgating Section 6, Revenue Regulations No. 2-93, to
carry out Republic Act No. 7496.
RESIDENT ALIEN
 It means an individual whose residence is within the Philippines
and who is not a citizen thereof.
Definition
Individuals
Citizens:
Aliens:
Residents
Nonresidents
Residents
Nonresidents
Sec. 22, E
Engaged in
trade
or
business
Not
engaged
GPP
Sec. 22, F
Section 25,
A
Source
rule
Within,
without
w/in
w/in
w/in
The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional
partnership (GPP) and the partners comprising the GPP are covered by
R. A. No. 7496. Thus, in determining the net profit of the partnership,
only the direct costs mentioned in said law are to be deducted from
partnership income. Also, the expenses paid or incurred by partners in
their individual capacities in the practice of their profession which are
not reimbursed or paid by the partnership but are not considered as
direct cost, are not deductible from his gross income.
The real objection of petitioners is focused on the administrative
interpretation of public respondents that would apply SNIT to partners
in general professional partnerships.
Sec. 22, B
It depends
HELD:
MA. ANGELA LEONOR C. AGUINALDO
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The Court, first of all, should like to correct the apparent misconception
that general professional partnerships are subject to the payment of
income tax or that there is a difference in the tax treatment between
individuals engaged in business or in the practice of their respective
professions and partners in general professional partnerships. The fact of
the matter is that a general professional partnership, unlike an ordinary
business partnership (which is treated as a corporation for income tax
purposes and so subject to the corporate income tax), is not itself an
income taxpayer. The income tax is imposed not on the professional
partnership, which is tax exempt, but on the partners themselves in
their individual capacity computed on their distributive shares of
partnership profits.
There is, then and now, no distinction in income tax liability between a
person who practices his profession alone or individually and one who
does it through partnership (whether registered or not) with others in
the exercise of a common profession. Indeed, outside of the gross
compensation income tax and the final tax on passive investment income,
under the present income tax system all individuals deriving income
from any source whatsoever are treated in almost invariably the same
manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we
were to consider Republic Act No. 7496 as an entirely independent, not
merely as an amendatory, piece of legislation. The view can easily
become myopic, however, when the law is understood, as it should be, as
only forming part of, and subject to, the whole income tax concept and
precepts long obtaining under the National Internal Revenue Code. To
elaborate a little, the phrase "income taxpayers" is an all embracing term
used in the Tax Code, and it practically covers all persons who derive
taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the taxpayer
(that renders citizens, regardless of residence, and resident aliens subject
to income tax liability on their income from all sources) and of the
generally accepted and internationally recognized income taxable base
(that can subject non-resident aliens and foreign corporations to income
tax on their income from Philippine sources). In the process, the Code
classifies taxpayers into four main groups, namely: (1) Individuals, (2)
MA. ANGELA LEONOR C. AGUINALDO
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Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable
Trusts (irrevocable both as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or
"exempt partnerships." Ordinarily, partnerships, no matter how created
or organized, are subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above categorization, are by law
assimilated to be within the context of, and so legally contemplated as,
corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not
intended or envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496, aforequoted, to
cover corporations and partnerships which are independently subject to
the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified
as corporations nor even considered as independent taxable entities for
income tax purposes. A general professional partnership is such an
example. 4 Here, the partners themselves, not the partnership (although
it is still obligated to file an income tax return [mainly for administration
and data]), are liable for the payment of income tax in their individual
capacity computed on their respective and distributive shares of profits.
In the determination of the tax liability, a partner does so as an
individual, and there is no choice on the matter. In fine, under the Tax
Code on income taxation, the general professional partnership is deemed
to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely
confirmed, the above standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all
individual income taxpayers on their non-compensation income. There is
no evident intention of the law, either before or after the amendatory
legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective
professions individually and of those who do it through a general
professional partnership.
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PAGE- 9 –
ESTATES AND TRUSTS
SEC. 60. Imposition of Tax. (A) Application of Tax. - The tax imposed by this Title upon individuals
shall apply to the income of estates or of any kind of property held in
trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and income
accumulated or held for future distribution under the terms of the will or
trust;
(2) Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is to
be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to
employee's trust which forms part of a pension, stock bonus or profitsharing plan of an employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is
impossible, at any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of the corpus or income
to be (within the taxable year or thereafter) used for, or diverted to,
purposes other than for the exclusive benefit of his employees: Provided,
That any amount actually distributed to any employee or distributee
shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.
(C) Computation and Payment. -
MA. ANGELA LEONOR C. AGUINALDO
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(1) In General. - The tax shall be computed upon the taxable income
of the estate or trust and shall be paid by the fiduciary, except as
provided in Section 63 (relating to revocable trusts) and Section 64
(relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the
case of two or more trusts, the creator of the trust in each instance is the
same person, and the beneficiary in each instance is the same, the
taxable income of all the trusts shall be consolidated and the tax
provided in this Section computed on such consolidated income, and such
proportion of said tax shall be assessed and collected from each trustee
which the taxable income of the trust administered by him bears to the
consolidated income of the several trusts.
SEC. 61. Taxable Income. - The taxable income of the estate or trust
shall be computed in the same manner and on the same basis as in the
case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable
income of the estate or trust the amount of the income of the estate or
trust for the taxable year which is to be distributed currently by the
fiduciary to the beneficiaries, and the amount of the income collected by
a guardian of an infant which is to be held or distributed as the court
may direct, but the amount so allowed as a deduction shall be included in
computing the taxable income of the beneficiaries, whether distributed to
them or not. Any amount allowed as a deduction under this Subsection
shall not be allowed as a deduction under Subsection (B) of this Section
in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during
the period of administration or settlement of the estate, and in the case
of income which, in the discretion of the fiduciary, may be either
distributed to the beneficiary or accumulated, there shall be allowed as
an additional deduction in computing the taxable income of the estate or
trust the amount of the income of the estate or trust for its taxable year,
which is properly paid or credited during such year to any legatee, heir or
beneficiary but the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary.
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(C) In the case of a trust administered in a foreign country,
deductions mentioned in Subsections (A) and (B) of this Section shall
be allowed: Provided, That the amount of any income included in
return of said trust shall not be included in computing the income of
beneficiaries.
the
not
the
the
SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of
the tax provided for in this Title, there shall be allowed an exemption of
Twenty thousand pesos (P20,000) from the income of the estate or trust.
SEC. 63. Revocable Trusts. - Where at any time the power to revest in
the grantor title to any part of the corpus of the trust is vested (1) in the
grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus
or the income therefrom, or (2) in any person not having a substantial
adverse interest in the disposition of such part of the corpus or the
income therefrom, the income of such part of the trust shall be included
in computing the taxable income of the grantor.
SEC. 64. Income for Benefit of Grantor.(A) Where any part of the income of a trust (1) is, or in the discretion of
the grantor or of any person not having a substantial adverse interest in
the disposition of such part of the income may be held or accumulated for
future distribution to the grantor, or (2) may, or in the discretion of the
grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the grantor, or (3)
is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income
may be applied to the payment of premiums upon policies of insurance on
the life of the grantor, such part of the income of the trust shall be
included in computing the taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor'
means in the discretion of the grantor, either alone or in conjunction with
any person not having a substantial adverse interest in the disposition of
the part of the income in question.
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors,
administrators, receivers, conservators and all persons or corporations,
MA. ANGELA LEONOR C. AGUINALDO
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acting in any fiduciary capacity, shall render, in duplicate, a return of
the income of the person, trust or estate for whom or which they act, and
be subject to all the provisions of this Title, which apply to individuals in
case such person, estate or trust has a gross income of Twenty thousand
pesos (P20,000) or over during the taxable year. Such fiduciary or person
filing the return for him or it, shall take oath that he has sufficient
knowledge of the affairs of such person, trust or estate to enable him to
make such return and that the same is, to the best of his knowledge and
belief, true and correct, and be subject to all the provisions of this Title
which apply to individuals: Provided, That a return made by or for one or
two or more joint fiduciaries filed in the province where such fiduciaries
reside; under such rules and regulations as the Secretary of Finance,
upon recommendation of the Commissioner, shall prescribe, shall be a
sufficient compliance with the requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. Trustees, executors, administrators and other fiduciaries are indemnified
against the claims or demands of every beneficiary for all payments of
taxes which they shall be required to make under the provisions of this
Title, and they shall have credit for the amount of such payments against
the beneficiary or principal in any accounting which they make as such
trustees or other fiduciaries.
CIR V. VISAYAS ELECTRIC
23 SCRA 715
FACTS:
Visayas Electric was given legislative franchise to operate and maintain
an electric light, heat, and power system in the City of Cebu, certain
municipalities in the Province of Cebu, and other surrounding places.
In a board of directors' meeting, respondent company established a
pension fund, known as the "Employees' Reserve for Pensions." Said fund
is for the benefit of its "present and future" employees, in the event of
retirement, accident or disability. Every month thereafter an amount has
been set aside for this purpose. It is taken from the gross operating
receipts of the company. This reserve fund was later invested by the
company in stocks of San Miguel Brewery, Inc., for which dividends have
been regularly received. But these dividends were not declared for tax
purposes.
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It was in a letter that the Auditor General gave notice that as the
company has retained full control of the fund, therefore, the dividends
are not tax exempt; but that such dividends may be excluded from gross
receipts for franchise tax purposes, provided the same are declared for
income tax purposes.
In pursuance of the above letter, the Provincial Auditor of Cebu allowed
the company the option to declare the dividends either as part of the
company's income for income tax purposes or as part of its income for
franchise tax purposes. The company elected the latter. However, as per
report of a revenue examiner, it was found out that the company was the
full custodian of the funds and thus, the corporate income tax was
imposed on the same.
HELD:
The disputed income are not receipts, revenues or profits of the company.
They do not go to the general fund of the company. They are dividends
from the San Miguel Brewery, Inc. investment which form part of and
are added to the reserve pension fund which is solely for the benefit of
the employees, "to be distributed among the employees."
Not escaping notice is that by the resolution of respondent company's
board and the setting aside of monthly amounts from its gross operating
receipts for that fund, said company was merely acting, with respect to
such fund, as trustee for its employees. For, indeed, the intention to
establish a trust in favor of the employees is clear. A valid express trust
has thus been created. And, for tax purposes, the employees' reserve fund
is a separate taxable entity. Respondent company then, while retaining
legal title and custody over the property, holds it in trust for the
beneficiaries mentioned in the resolution creating the trust, in the
absence of any condition therein which would, in effect, destroy the
intention to create a trust.
Given the fact that the dividends are returns of the trust estate and not
of the grantor company, we must say that petitioner misconceived the
import of the law when he assessed said dividends as part of the income
of the company. Similarly, the tax court should not have considered them
MA. ANGELA LEONOR C. AGUINALDO
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at all as the company's "receipts, revenues and profits" which are exempt
from income tax.
CIR V. CA, CTA, GCL RETIREMENT PLAN
207 SCRA 487
FACTS:
Private Respondent, GCL Retirement Plan (GCL, for brevity) is an
employees' trust maintained by the employer, GCL Inc., to provide
retirement, pension, disability and death benefits to its employees. The
Plan as submitted was approved and qualified as exempt from income
tax by Petitioner Commissioner of Internal Revenue in accordance with
Rep. Act No. 4917.
Respondent GCL made investsments and earned therefrom interest
income from which was witheld the fifteen per centum (15%) final
witholding tax imposed by Pres. Decree No. 1959.
Respondent GCL filed with Petitioner a claim for refund in the amounts
of P1,312.66 withheld by Anscor Capital and Investment Corp., and
P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed
a second claim for refund of the amount of P7,925.00 withheld by Anscor,
stating in both letters that it disagreed with the collection of the 15%
final withholding tax from the interest income as it is an entity fully
exempt from income tax as provided under Rep. Act No. 4917 in relation
to Section 56 (b)of the Tax Code.
The refund requested having been denied, Respondent GCL elevated the
matter to respondent Court of Tax Appeals (CTA). The latter ruled in
favor of GCL, holding that employees' trusts are exempt from the 15%
final withholding tax on interest income and ordering a refund of the tax
withheld.
HELD:
It is to be noted that the exemption from withholding tax on interest on
bank deposits previously extended by Pres. Decree No. 1739 if the
recipient (individual or corporation) of the interest income is exempt
from income taxation, and the imposition of the preferential tax rates if
the recipient of the income is enjoying preferential income tax treatment,
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 12 –
were both abolished by Pres. Decree No. 1959. Petitioner thus submits
that the deletion of the exempting and preferential tax treatment
provisions under the old law is a clear manifestation that the single 15%
(now 20%) rate is impossible on all interest incomes from deposits,
deposit substitutes, trust funds and similar arrangements, regardless of
the tax status or character of the recipients thereof. In short, petitioner's
position is that from 15 October 1984 when Pres. Decree No. 1959 was
promulgated, employees' trusts ceased to be exempt and thereafter
became subject to the final withholding tax.
To begin with, it is significant to note that the GCL Plan was qualified as
exempt from income tax by the Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917 approved on 17 June 1967. This law
specifically provided:
Sec. 1. Any provision of law to the contrary notwithstanding, the
retirement benefits received by officials and employees of private firms,
whether individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer shall be exempt from all taxes
and shall not be liable to attachment, levy or seizure by or under any
legal or equitable process whatsoever except to pay a debt of the official
or employee concerned to the private benefit plan or that arising from
liability imposed in a criminal action; . . . (emphasis ours).
In so far as employees' trusts are concerned, the foregoing provision
should be taken in relation to then Section 56(b) (now 53[b]) of the Tax
Code, as amended by Rep. Act No. 1983, supra, which took effect on 22
June 1957. This provision specifically exempted employee's trusts from
income tax and is repeated hereunder for emphasis:
Sec. 56. Imposition of Tax. � (a) Application of tax. � The taxes imposed
by this Title upon individuals shall apply to the income of estates or of
any kind of property held in trust.
sharing plan of an employer for the benefit of some or all of his
employees . . .
The tax-exemption privilege of employees' trusts, as distinguished from
any other kind of property held in trust, springs from the foregoing
provision. It is unambiguous. Manifest therefrom is that the tax law has
singled out employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the creation of
employees' trusts. Employees' trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which members
of the Plan may be exposed. It is an independent and additional source of
protection for the working group. What is more, it is established for their
exclusive benefit and for no other purpose.
The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in
order to encourage the formation and establishment of such private
Plans for the benefit of laborers and employees outside of the Social
Security Act.
It is evident that tax-exemption is likewise to be enjoyed by the income of
the pension trust. Otherwise, taxation of those earnings would result in a
diminution accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund. This would run afoul of
the very intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos regarding tax
exemption and preferential tax rates under the old law, therefore, can
not be deemed to extent to employees' trusts. Said Decree, being a
general law, can not repeal by implication a specific provision.
CORPORATIONS
xxx xxx xxx
SEC. 22. Definitions - When used in this Title:
(b) Exception. � The tax imposed by this Title shall not apply to
employee's trust which forms part of a pension, stock bonus or profit-
xxx
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(B) The term "corporation" shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, but does not include
general professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging
in petroleum, coal, geothermal and other energy operations pursuant to
an operating consortium agreement under a service contract with the
Government.
xxx
DOMESTIC CORPORATIONS
 Are those created or organized in the Philippines or under its
laws
AS DISTINGUISHED FROM CO-OWNERSHIP
 There is co-ownership whenever the ownership of an undivided
thing or right belongs to different persons. Contrary stipulation
is void. (CC)
FOREIGN CORPORATIONS
 Resident foreign corporation—It is a foreign corporation engaged
in trade or business within the Philippines
 Non-resident corporation—it is a foreign corporation not
engaged in trade or business within the Philippines.
OÑA V. CIR
45 SCRA 74
FACTS:
Petitioners were surviving heirs of Julia Bañales. An action for partition
of estate was instituted wherein Oña was appointed as the
administrator. He was also appointed as the guardian of the minor
children. No partition took place however. Instead, the funds and
properties were used to increase income. It was invested in many things.
The income derived was then divided equally among the petitioners.
This prompted the Commissioner to hold that there was a formed
unregistered partnership and subjected them to corporate income tax.
MA. ANGELA LEONOR C. AGUINALDO
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HELD:
The petitioners pose for our resolution the following questions: (1) Under
the facts found by the Court of Tax Appeals, should petitioners be
considered as co-owners of the properties inherited by them from the
deceased Julia Buñales and the profits derived from transactions
involving the same, or, must they be deemed to have formed an
unregistered partnership subject to tax under Sections 24 and 84(b) of
the National Internal Revenue Code? (2) Assuming they have formed an
unregistered partnership, should this not be only in the sense that they
invested as a common fund the profits earned by the properties owned by
them in common and the loans granted to them upon the security of the
said properties, with the result that as far as their respective shares in
the inheritance are concerned, the total income thereof should be
considered as that of co-owners and not of the unregistered partnership?
And (3) assuming again that they are taxable as an unregistered
partnership, should not the various amounts already paid by them for
the same years 1955 and 1956 as individual income taxes on their
respective shares of the profits accruing from the properties they owned
in common be deducted from the deficiency corporate taxes, herein
involved, assessed against such unregistered partnership by the
respondent Commissioner?
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limit themselves to holding the properties inherited
by them. Indeed, it is admitted that during the material years herein
involved, some of the said properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the
purchase and sale of corporate securities. It is likewise admitted that all
the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the
inheritance. In these circumstances, it is Our considered view that from
the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oña as a common fund in
undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes to a common fund and,
in effect, they thereby formed an unregistered partnership within the
purview of the above-mentioned provisions of the Tax Code.
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It is but logical that in cases of inheritance, there should be a period
when the heirs can be considered as co-owners rather than unregistered
co-partners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs,
obviously, without them becoming thereby unregistered co-partners, but
it does not necessarily follow that such status as co-owners continues
until the inheritance is actually and physically distributed among the
heirs, for it is easily conceivable that after knowing their respective
shares in the partition, they might decide to continue holding said shares
under the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis. Withal, if
this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b)
of the National Internal Revenue Code.
EVANGELISTA V. COLL
102 PHIL 140
FACTS:
Petitioners borrowed money from their father and with collective effort
bought several real properties and then leased the same. They derived
income from it and divided it amongst themselves. Thereafter, they were
assessed for payment of corporate tax. They assail the said assessment
by saying that they are not a partnership but mere co-owners.
HELD:
To begin with, the tax in question is one imposed upon "corporations",
which, strictly speaking, are distinct and different from "partnerships".
When our Internal Revenue Code includes "partnerships" among the
entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in
the technical sense of the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax "duly registered general
partnerships which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of
said Code, "the term corporation includes partnerships, no matter how
created or organized." This qualifying expression clearly indicates that a
MA. ANGELA LEONOR C. AGUINALDO
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joint venture need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax on
corporations. Again, pursuant to said section 84(b), the term
"corporation" includes, among other, joint accounts, (cuentas en
participation)" and "associations," none of which has a legal personality
of its own, independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to the
existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general copartnerships"
which are possessed of the
aforementioned personality
have been expressly excluded by law
(sections 24 and 84 [b] from the connotation of the term "corporation" It
may not be amiss to add that petitioners' allegation to the effect that
their liability in connection with the leasing of the lots above referred to,
under the management of one person even if true, on which we express
no opinion tends to increase the similarity between the nature of their
venture and that corporations, and is, therefore, an additional argument
in favor of the imposition of said tax on corporations.
For purposes of the tax on corporations, our National Internal Revenue
Code, includes these partnerships
with the exception only of duly
registered general copartnerships
within the purview of the term
"corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned and are
subject to the income tax for corporations.
PASCUAL V. CIR
166 SCRA 560
FACTS:
Petitioner bought several parcels of land and afterwards, sold the same
to incur profits. They were later on assessed by the Commissioner for
deficiency corporate taxes to which they opposed, averring that they are
merely co-owners and not an unregistered partnership or joint venture,
to be taxed as a corporation.
HELD:
In the present case, there is no evidence that petitioners entered into an
agreement to contribute money, property or industry to a common fund,
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 15 –
and that they intended to divide the profits among themselves.
Respondent commissioner and/ or his representative just assumed these
conditions to be present on the basis of the fact that petitioners
purchased certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners
purchased twenty-four (24) lots showing that the purpose was not limited
to the conservation or preservation of the common fund or even the
properties acquired by them. The character of habituality peculiar to
business transactions engaged in for the purpose of gain was present.
The sharing of returns does not in itself establish a partnership whether
or not the persons sharing therein have a joint or common right or
interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the
individual partners, and the freedom of each party to transfer or assign
the whole property.
In the present case, there is clear evidence of co-ownership between the
petitioners. There is no adequate basis to support the proposition that
they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few
years thereafter did not thereby make them partners. They shared in the
gross profits as co- owners and paid their capital gains taxes on their net
profits and availed of the tax amnesty thereby. Under the circumstances,
they cannot be considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets that
can be held liable for said deficiency corporate income tax, then
petitioners can be held individually liable as partners for this unpaid
obligation of the partnershipIn the instant case, petitioners bought two
(2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of
land from one seller. It was only 1968 when they sold the two (2) parcels
of land after which they did not make any additional or new purchase.
The remaining three (3) parcels were sold by them in 1970. The
MA. ANGELA LEONOR C. AGUINALDO
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transactions were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not present.
AFISCO INSURANCE CORPORATION V. CIR
GR 112675, JANUARY 25, 1999
302 SCRA 1
FACTS:
The petitioners are 41 non-life insurance corporations, organized and
existing under the laws of the Philippines. Upon issuance by them of
Erection, Machinery Breakdown, Boiler Explosion and Contractors' All
Risk insurance policies, the petitioners entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a
non-resident foreign insurance corporation. The reinsurance treaties
required petitioners to form a pool. Accordingly, a pool composed of the
petitioners was formed on the same day.
The pool submitted its financial statements and they were accordingly
assessed for deficiency corporate taxes to which they tried to opposed but
unfortunately was denied.
HELD:
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as unregistered
partnerships and associations. Parenthetically, the NIRC's inclusion of
such entities in the tax on corporations was made even clearer by the tax
Reform Act of 1997.
In the case before us, the ceding companies entered into a Pool
Agreement or an association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty 31 and
surplus reinsurance treaty with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the
NIRC:
(1) The pool has a common fund, consisting of money and other valuables
that are deposited in the name and credit of the pool. 33 This common
fund pays for the administration and operation expenses of the pool.
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(2) The pool functions through an executive board, which resembles the
board of directors of a corporation, composed of one representative for
each of the ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any
insurance policy; however, its work is indispensable, beneficial and
economically useful to the business of the ceding companies and Munich,
because without it they would not have received their premiums. The
ceding companies share "in the business ceded to the pool" and in the
"expenses" according to a "Rules of Distribution" annexed to the Pool
Agreement.
CHAPTER 3
TAX BASE AND TAX RATES
Income
Source of income
TAX BASE AND TAX RATES: INDIVIDUALS
Tax rates
Additional information
Resident Citizens and Resident Aliens
Taxable
Income
Liability for income tax
1. Resident citizen—within and without
the Philippines
2. Non-resident citizen including OFWs—
within
3. Resident alien—within
Husband and wife, subject to the provision of
Section 51 (D) hereof, shall compute separately
their individual income tax based on their
respective total taxable income.
As of January 2000, graduated rate
of 5%-32%
If any income cannot be definitely attributed to or
identified as income exclusively earned or
realized by either of the spouses, the same shall
be divided equally between the spouses for the
purpose of determining their respective taxable
income.
N.B: given a basket of income, if it doesn't fall
within the passive income, then it is taxable
income and the graduated rate of 5-32% will be
applied accordingly.
For example, a resident citizen derives interest
income from his bank deposit abroad.
The
interest income shall be treated as regular
income. The interest income contemplated in
passive income is interest earned in bank
deposits in the Philippines.
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Passive Income
Interests, Royalties, Prizes and other
winnings
1. Interest on any currency bank deposit,
yield or other monetary benefits from
deposit substitute, trust fund and
similar arrangement
2. Royalties in general
3. Prize exceeding P10,000
4. Other winnings except PCSO and lotto
sweepstakes
Royalty from books, literary works, and
musical compositions
Prize less than P10,000
Interest under the expanded foreign
currency deposit system
Dividends:
Dividend from a domestic corporation or
from a joint stock company, insurance or
mutual fund company, and regional
operating headquarters of multinational
company, or share in the distributable net
income after tax of a partnership (except a
general professional partnership), joint
stock or joint venture or consortium taxable
as a corporation
Capital gains on shares of stock
On sale of shares of stock of a domestic
corporation not listed and traded through a
local stock exchange, held as capital asset
MA. ANGELA LEONOR C. AGUINALDO
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*there is emphasis on the holding period and not
the maturity period.
Final tax of 20%
Final tax of 10%
Regular income
Final tax of 7 ½ %
1998: 6%
1999: 8%
Current: Final tax of 10%
On the net capital gain:
Not over P100,000---------------final
tax of 5%
On any amount in excess of
P100,000-----------------------------------------------final tax of 10%
There is a preference to promote the increase in
foreign exchange reserves
Dividend income from a foreign corporation doing
business in the country is considered as regular
income and would be taxed with the
corresponding graduated rate.
*Dividends don't stop with those coming from
shares of stock.
Sale of shares of stock of a domestic corporation
through a local stock exchange or thru initial
public offering pays the stock transaction tax and
other percentage taxes, and having paid this tax,
shall not be subject to the rules on income tax
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Capital gains on real property
On sale of real property in the Philippines
held as capital asset
Art. 415. The following are immovable
property:
(1) Land, buildings, roads and constructions
of all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while
they are attached to the land or form an
integral part of an immovable;
(3) Everything attached to an immovable in
a fixed manner, in such a way that it
cannot be separated therefrom without
breaking the material or deterioration of
the object;
(4) Statues, reliefs, paintings or other
objects for use or ornamentation, placed in
buildings or on lands by the owner of the
immovable in such a manner that it reveals
the intention to attach them permanently
to the tenements;
(5) Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which
may be carried on in a building or on a
piece of land, and which tend directly to
meet the needs of the said industry or
works;
Non-Resident Alien
Engaged in
Taxable
income—from
trade or
Philippines
business in the
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
within
the
On the gross selling price, or the
current fair market value at the
time of sale, whichever is higher--final tax of 6%
~@~
(6) Animal houses, pigeon-houses,
beehives, fish ponds or breeding
places of similar nature, in case
their owner has placed them or
preserves them with the intention
to have them permanently attached
to the land, and forming a
permanent part of it; the animals in
these places are included;
(7) Fertilizer actually used on a
piece of land;
(8) Mines, quarries, and slag
dumps, while the matter thereof
forms part of the bed, and waters
either running or stagnant;
(9) Docks and structures which,
though floating, are intended by
their nature and object to remain at
a fixed place on a river, lake, or
coast;
(10) Contracts for public works, and
servitudes and other real rights
over immovable property. (334a)
Uniform rules of 5%-32%
Exemption—capital gain from the sale or
disposition of a principal residence of a natural
person, which is fully utilized in acquiring or
constructing a new principal residence, provided:
1. The proceeds of the sale or disposition is
utilized within 18 months from the date of
sale or disposition
2. The Commissioner of Internal Revenue is
notified by the taxpayer within 30 days from
the date of sale or disposition
3. Can avail of exemption once every 10 years
4. A deposit is made of the 6% capital gain tax
withheld by the buyer, in cash or manager’s
check, in interest bearing account with an
AAB, under an Escrow agreement between
the taxpayer and BIR that the same shall be
released to the seller when the proceeds of
the sale shall have been utilized as intended
Disposition of real property to the government:
you have option to be subjected to final tax of 6%
or graduated rate of 5-32%
*The 180 days for one to be considered to be
engaged in trade or business is counted with
respect to each calendar year (Section 24 and 25)
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 19 –
Philippines
Passive income—
1. Interest
2. Royalties in general
3. Prize exceeding P10,000
4. Other winnings except PCSO
5. Dividends from a domestic corporation,
or from a joint stock company,
insurance or mutual fund company,
and regional operating headquarters of
multinational company, or share in the
distributable net income after tax of a
partnership
(except
general
professional partnership), joint stock or
joint venture or consortium taxable as
a corporation
6. Royalties from books, literary works
and musical compositions
Final tax of 10%
7.
Not engaged in
trade or
business
Special aliens
Gross income from the Philippines
from cinematographic films and similar
works
8. Interest under the expanded foreign
currency deposit system
9. Interest on long-term deposit or
investment in banks (with maturity of
5 years or more)
Gross income from within the Philippines
Final tax of 20%
Final tax of 25%
Exempt
They are not allowed any personal exemptions
Final tax of 25%
1.
2.
3.
Alien Individual Employed by Regional
or Area Headquarters and Regional
Operating
Headquarters
of
Multinational Companies.
Alien Individual Employed by Offshore
Banking Units.
Alien
Individual
Employed
by
Petroleum Service Contractor and
Subcontractor.
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
Final tax of 15% of such gross
income
On all taxable income—5%-32% as
a non-resident alien in the
Philippines
The
preferential
15%
rate
refers
to
compensation/wages related to their employment.
Other than this compensation or wages, the
applicable rates would be the 5-32%.
There is an option available to a Filipino
occupying the same position as foreigner expat.
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 20 –
TAX BASE AND TAX RATES: CORPORATIONS
Domestic Corporations
Net income within and without the Philippines
In general
Taxable income derived from within and
without the Philippines
Proprietary educational institutions and
non-profit hospital—on all taxable income
from all sources
Special
corporations
Normal tax of 35%
Beginning 2009, 30%
But beginning with the 4th year of
operations, whichever is higher of—
The normal tax of 35% and the
Minimum corporate income tax of
2%
10%
Resident international carrier—on gross
Philippine billings
2 ½%
Non-resident owner or lessor of vessel—
gross income from the Philippines
4 ½%
Non-resident cinematographic film owner,
lessor or distributor—gross income from the
Philippines
25%
Non-resident lessor of aircraft, machinery
and other equipment
7 ½% on gross rentals, charges, and
other fees from Philippine sources
Regional
operating
headquarters
multinational corporation
10% on taxable income
GOCCs (they follow
requirements as well)
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
SEC
of
registration
Same rate as those engaged in
similar business, industry, or
activity
The normal income tax is computed for each of
the first 3 quarters of the year. In an annual
return, the normal tax and the minimum
corporate income tax are computed.
If the unrelated income exceeds 50%, then this
premium wouldn't be applicable
Except the GSIS, SSS, PHIC, and PCSO
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 21 –
Interests and royalties
Interest under the expanded
currency deposit system
Passive income
foreign
Interest on any currency bank deposit,
yield or other monetary benefit from
deposit substitute, trust fund and similar
arrangement, and royalties
Dividends
Dividend from domestic corporation—
intercompany dividend
Capital gains
On sale of shares of stock of a corporation
not listed and traded through the local
stock exchange held as capital assets
On sale of land and/or building held as
capital asset
Resident foreign corporation—within the Philippines
In general
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
Final tax of 7 ½%
Final tax of 20%
Depositor bank deposits with another bank’s
FCDU and it will earn interest income. This is
exempt.
Depositary bank who holds money from
depositors and invests it to another as foreign
loans or whatnot is subject to 10%
Exempt
On the net capital gain—
Not over P100000—final tax of 5%
Over P100000—final tax of 10%
Sale of shares of stock of a domestic corporation
through a local stock exchange or thru initial
public offering pays the stock transaction tax and
other percentage taxes, and having paid this tax,
shall not be subject to the rules on income tax
On the gross selling price or current
fair market value prevailing at the
time of sale, whichever is higher—
final tax of 10%
2005-2008—35%
2008-after—30%
Has the option of being taxed with 15% gross
income tax
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 22 –
International carriers
2 ½% on gross Philippine billings
Offshore banking units
Including any interest derived from foreign
currency loan granted to residents
10% of such interest income
Regional or area headquarters and
regional operating headquarters
(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.
Special foreign
corporations
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
(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
port 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.
Any income of nonresidents, whether individuals
or corporations, from transactions with said
offshore banking units shall be exempt from
income tax.
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 23 –
Any profit remitted by a branch to its head
office
Branch profit
remittance tax
Interest
Interest under the expanded
currency deposit system
Passive income
Subsidiary v.
Branch of
foreign
corporation
foreign
Interest under any current bank deposit,
yield or other monetary benefit from
deposit substitute, trust fund and other
similar arrangement, royalties
Dividends
Dividend from domestic corporation—
intercompany dividend
Capital gains
On sale of shares of stock of a domestic
corporation not listed and traded through a
local stock exchange, held as capital assets
Subsidiary
Entity separate and distinct from its
stockholders (separate entity concept)
Tax treatment is that of a domestic
corporation
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.
Final tax of 7 ½ %
Final tax of 20%
Exempt
On net capital gain—
Not over P100000—final tax of 5%
Over P100000—final tax of 10%
32% on net income from within and
without
Stockholders are liable only to the extent of their
subscription (parent company is the sole
stockholder)
If subsidiary remits to parent, subject to the 15%
(conditional) link—parent company
Parent may not be held liable for damages filed
against subsidiary
MA. ANGELA LEONOR C. AGUINALDO
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INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 24 –
Branch
Merely an extension of the foreign head
office (single entity concept)
Tax treatment
corporation
is
that
of
a
32% on net income from within
The link is between the head office and home
office
If the branch remits to the head office, it is
subject to the branch profit remittance tax
foreign
Home is liable for all liabilities of the branch
Subject to the 10% improperly accumulated
earnings
Home office
Parent (NRFC)
BPRT=15%
Dividend=15%
Branch
RFC
35% TI (within)
Subsidiary
DC
35% TI (within/without)
Non-resident foreign corporations
Within the Philippines
In general
Foreign corporation not engaged in trade or
business in the Philippines
Special nonresident
Passive income
35%
Non-resident cinematographic film owner,
lessor, or distributor
Non-resident owner or lessor of vessels
chartered by Philippine nationals
Non-resident owner or lessor of aircraft,
machineries, and other equipment
Interest on foreign loans
Dividend from domestic corporations
25%
On sale of shares of stock of a domestic
corporation not listed or traded through a
local stock exchange, held as capital assets
On net capital gain—
Not over P100000—5%
Over P100000—10%
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
Filipino industry would like to be protected
4 ½%
7 ½%
Final tax of 20%
Final tax of 15%
Conditioned at showing of proof of a tax pairing
provision.
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 25 –
IDENTIFY TAX TREATMENT
(INTEREST INCOME EXERCISE)
Mr. Juan
dela Cruz
1
2
3
Interest
Income
received
from a
Peso
Savings
Account
in Metro
Bank
Interest
Income
received
from a
Peso
Savings
Account
in Bank
of Tokyo
Interest
Income
received
from a
Peso
Savings
Mr.
Pedro
Peduko
Capt.
John
Smith
Mr. Mori
Tanaka
Mr.
Shijeru
Takeshi
Metrobank
RBU
(Peso)
Resident
Citizen
NonResident
Citizen
Resident
Alien
NonResident
Alien
Engaged
NonResdient
Alien
Not
Engaged
20% FT
20% FT
20% FT
20% FT
25% FT
20% FT
20% FT
20% FT
20% FT
25% FT
20%
FT
5 - 32% RT
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(income
w/o)
35%
RT
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
FCDU
(Foreign
Currency)
Domestic
Corporation
Bank of Tokyo
RBU
(Peso)
FCDU
OBU
Boston
Bank
Resident Foreign Corporation
NonReside
nt
Foreig
n
Corpor
ation
20% FT
35% FT
35% FT
exempt
(incom
e w/o)
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 26 –
Account
in Boston
Bank
4
5
6
7
Interest
Income
received
from a $
Savings
Account
in Metro
Bank
Interest
Income
received
from a $
Savings
Account
in Bank
of Tokyo
Interest
Income
received
from a $
savings
Account
in Boston
Bank
Interest
Income
received
from
money
(pesos)
lent in
the
7.5% FT
exempt
[Sec
27(D)(3)
/ Sec
2.27 (c)
RR 1098]
exempt
[Sec
27(D)(3)
/ Sec
2.27 (c)
RR 1098]
7.5% FT
exempt
(Sec 2.24
RR 1098)
7.5% FT
exempt
[Sec
27(D)(3)
/ Sec
2.27 (c)
RR 1098]
exempt
[Sec
27(D)(3)
/ Sec
2.27 (c)
RR 1098]
5 - 32% RT
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(income
w/o)
35%
RT
5 - 32% RT
5 - 32%
RT
5 - 32%
RT
5 - 32%
RT
25% FT
35%
RT
7.5% FT
exempt
(Sec 2.24
RR 1098)
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
exempt
[Sec
28(A)(7)(a
)
exempt
[Sec
28(4)]
exempt
[Sec
28(A)(7
)(b)]
exempt
[Sec
28(A)(7)(b)]
exempt
[Sec
27(D)(3)]
exempt
[Sec
27(D)(3
)]
exempt
(incom
e w/o)
35% RT
exempt
(income
w/o)
exempt
(income
w/o)
35% FT
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 27 –
Philippin
es
8
9
10
Interest
Income
received
from
money
(pesos)
lent
abroad
Interest
Income
received
from
money
(dollar)
lent in
the
Philippin
es
Interest
Income
received
from
money
(dollar)
lent
abroad
Domestic
Corporations
5 - 32% RT
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(income
w/o)
5 - 32% RT
5 - 32%
RT
5 - 32%
RT
5 - 32%
RT
25% FT
10%
5 - 32% RT
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(income
w/o)
10%
Tax Base
Gross income
exempt
(incom
e w/o)
35%
RT
exempt
(incom
e w/o)
35% FT
exempt
(income
w/o)
exempt
(income
w/o)
exempt
(incom
e w/o)
MINIMUM CORPORATE INCOME TAX (MCIT)
Tax Rate
Notes
2%
*During the past, there are entities which have always reported a loss. They do
something about their operations and thus, there came a mechanism which assured
collection.
Beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum income tax is
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 28 –
greater than the tax computed under Subsection (A) of this Section for the taxable
year.
Carry Forward of Excess Minimum Tax
 Any excess of the minimum corporate income tax over the normal tax shall
be carried over and credited against the normal tax for the three
immediately succeeding taxable years. In the year to which carried
forward, the normal tax should be higher than the MCIT.
Relief from the Minimum Corporate Income Tax Under Certain Conditions.
 The Secretary of Finance is hereby authorized to suspend the imposition of
the minimum corporate income tax on any corporation which suffers losses
on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.
 The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and regulation
that shall define the terms and conditions under which he may suspend
the imposition of the minimum corporate income tax in a meritorious case.
Gross income
 Shall mean gross sales less sales returns, discounts and allowances and
cost of goods sold.
Cost of goods sold—shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.
 For a trading or merchandising concern, "cost of goods sold' shall include
the invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
 For a manufacturing concern, cost of "goods manufactured and sold" shall
include all costs of production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the
factory or warehouse.
 In the case of taxpayers engaged in the sale of service, 'gross income' means
gross receipts less sales returns, allowances, discounts and cost of services.
 Cost of services—shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients
including
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 29 –
Salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and
o Cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies:
Provided, however, That in the case of banks, "cost of services"
shall include interest expense.
Under the same conditions
o
Resident
foreign
corporations
Non-resident
foreign
corporations
Gross income
2%
Exempt
Tax base
Improperly
accumulated
earnings
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
Tax Rate
Notes
10%
The improperly accumulated earnings tax imposed in the preceding Section shall
apply to every corporation formed or availed for the purpose of avoiding the income
tax with respect to its shareholders or the shareholders of any other corporation, by
permitting earnings and profits to accumulate instead of being divided or
distributed.
Exceptions—
a. Publicly-held corporations;
b. Banks and other nonbank financial intermediaries; and
c. Insurance companies.
Evidence of purpose to avoid incomec tax—
(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company
or investment company shall be prima facie evidence of a purpose to avoid the tax
upon its shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by the clear preponderance of
evidence, shall prove to the contrary.
Improperly Accumulated Taxable Income means taxable income adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
MA. ANGELA LEONOR C. AGUINALDO
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INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 30 –
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year basis, the
accumulated earnings under tax shall not apply on improperly accumulated income
as of December 31, 1997. In the case of corporations adopting the fiscal year
accounting period, the improperly accumulated income not subject to this tax, shall
be reckoned, as of the end of the month comprising the twelve (12)-month period of
fiscal year 1997-1998.
Taxable income for the year
Add: income exempt from taxes
Exclusions
Income subject to final tax
NOLCO (net operating loss carry-over)
Pxxx
xxx
xxx
xxx
P xxx
xxx
Deduct: income tax for the year
Dividends paid
Reserves
Inappropriate accumulated earnings
Pxxx
xxx
xxx
xxx
Pxxx
RESIDENT FOREIGN CORPORATIONS
BRANCH PROFIT REMITTANCE TAX
NV REEDERIT AMSTERDAM V. COMMISSIONER
162 SCRA 487
MARUBENI CORPORATION V. COMMISSIONER
177 SCRA 500
FACTS:
FACTS:
HELD:
HELD:
BANK OF AMERICA NT AND SA V. CA AND CIR
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 31 –
234 SCRA 302
HELD:
FACTS:
IMPROPERLY ACCUMULATED EARNINGS TAX
HELD:
COMPANIA GENERAL DE TABACOS V. CTA
CTA 4451, AUGUST 23, 1993
MANILA WINE MERCHANTS V. CIR
127 SCRA 483
FACTS:
FACTS:
HELD:
HELD:
NON-RESIDENT FOREIGN CORPORATION
CIR V. TUASON JR.
173 SCRA 397
FACTS:
COMMISSIONER V. PROCTER AND GAMBLE
160 SCRA 560, 204 SCRA 377
HELD:
FACTS:
CYANAMID V. CA
322 SCRA 639
HELD:
FACTS:
COMMISSIONER V. WANDER PHILS.
160 SCRA 573
HELD:
FACTS:
CHAPTER 4
INCOME
HELD:
MARUBENI CORPORATION V. COMMISSIONER
177 SCRA 500
FACTS:
MA. ANGELA LEONOR C. AGUINALDO
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TAXABLE INCOME
 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.
 Section 36-38, Regulations 2
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 32 –
DIFFERENCE BETWEEN CAPITAL AND INCOME
(As held in Madrigal v. Rafferty, 38 Phil 14)
 The spouses were married and were governed by the conjugal
partnership regime. The husband then filed an income tax
return and then later tried to make it to be as income tax return
of him and his wife.
Income
Flow
A flow of services rendered by that
capital by the payment of money
from it or any other benefit
rendered by a fund of capital in
relation to such fund through a
period of time
Wealth
Service of wealth
*not all money flow can be considered as income
2.
Capital
Fund
Fund of property existing at an
instant of time
REQUISITES FOR INCOME TO BE TAXABLE
1. There is income, gain, or profit
a. Income tax only applies when there is income, gain or
profits
b. Income means all wealth that flows into the taxpayer
other than a return of capital
2. The income, gain, or profit is received or realized during the
taxable year
a. Income is realized through the sale, exchange, or other
disposition of property
b. As a general rule, a mere increase in the value of
property is not income but merely an unrealized
increase in capital
3. The income, gain, or profit is not exempt from income tax
TESTS
IN
DETERMINING
INCOME/DOCTRINE
ON
DETERMINATION OF TAXABLE INCOME
1. Realization test
a. There is no taxable income until there is a separation
from capital of something of exchangeable value,
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
3.
4.
thereby supplying the realization or transmutation
which would result in the receipt of income (as held in
Eisner v. Macomber)
Claim of right doctrine
a. A taxable gain is conditioned upon the presence of a
claim of right to the alleged gain and in the absence of a
definite unconditional obligation to return or repay that
which would otherwise constitute a gain.
b. If a taxpayer obtains earnings under a claim of right
and without restriction as to its disposition, he has
received income which he is required to include in his
ax return, even though it may be claimed that he is not
entitled to retain the money, and even though he may
still be adjudged liable to restore its equivalent
Income from whatever source
a. All income not expressly excluded or exempted from the
class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the
income, and regardless of the source of income, is
taxable (as held in Gutierrez v. Collector)
Economic benefit test
a. Any economic benefit to the employee that increase his
net worth, whatever may have been the mode by which
it is effected, is taxable
b. Thus, in stock options, the difference between the fair
market value of the shares at the time of the option is
exercised and the option price constitutes additional
compensation income to the employee at the time of the
exercise
GROSS INCOME
GENERAL DEFINITION
 Except when otherwise provided in this Title, gross income
means all income derived from whatever source, including (but
not limited to) the following items:
o Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items;
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 33 –
o
o
o
o
o
o
o
o
o
o
Gross income derived from the conduct of trade or
business or the exercise of a profession;
Gains derived from dealings in property;
Interests;
Rents;
Royalties;
Dividends;
Annuities;
Prizes and winnings;
Pensions; and
Partner's distributive share from the net income of the
general professional partnership. (CGIR2D2AP3)
COMPENSATION
 All renumeration for services performed by an employee for his
employer under a employee-employer relationship
 The name by which renumeration for services is designated is
immaterial
 The basis upon which the renumeration is paid is immaterial in
determining
whether
the
renumeration
constitutes
compensation
 Renumeration for services constitutes compensation even if the
relationship of employer and employee doesn't exist any longer
at the time when payment is made between the person in whose
employ the services had been performed and the individual who
has performed them
 RR 2-98, Section 2.78.1
Compensation paid in kind
 Compensation may be paid in money or some other medium
than money, as for example, stocks, bonds, or other forms of
property
 If services are to be paid for in a medium other than money, the
fair market value of the thing taken in payment is the amount
to be included as compensation subject to withholding
 If services are rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be presumed to be the
fair market value of the renumeration received
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010


If a corporation transfers to its employees its own stock as
renumeration for services rendered by the employee, the amount
of such renumeration is the fair market value of the stock at the
time the services were rendered
Where compensation is paid in property other than money, the
employer shall make necessary arrangements to ensure that the
amount of tax required to be withheld is available for payment
to the Commissioner
Living Quarters or Meals
 If a person receives a salary as renumeration for services
rendered, and in addition thereto, living quarters or meals are
provided, the value to such person of the quarters and meals so
furnished shall be added to the renumeration paid for the
purposes of determining the amount of compensation subject to
withholding
 However, if living quarters or meals are furnished to the
employee for the convenience of the employer, the value thereof
need not be included as part of the compensation income
Facilities and Privileges of a Relatively Small Value
 Ordinarily, facilities and privileges otherwise known as de
minimis benefits, furnished or offered by an employer to
employees are not considered as compensation subject to income
tax and consequently to withholding, if such facilities and
privileges are of relatively small value and are offered or
furnished by the employer merely as a means of promoting the
health, goodwill, contentment, or efficiency of his employees
Tips and Gratuities
 Paid directly to the employee by the customer of the employer,
which are not accounted for by the employer are considered
taxable income but not subject to withholding
Pensions, Retirement and Separation pay
 Subject to withholding except those which are according to the
following requirements—
o The plan is reasonable
o The benefit plan must be approved by the Bureau
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 34 –
o
o
The retiring official or employees must be in the service
of the employer for at least 10 years and isn’t less than
50 years of age at the time of retirement
The retiring official or employee shouldn't have
previously availed of the privilege under the retirement
benefit plan of another employer
Fixed or Variable Transportation, Representation, and other
Allowances
 In general, is subject to withholding, provided however, that
representation and transportation allowance granted to public
officers and employees under the General Appropriations Act
and the Personal Economic Relief Allowance which essentially
constitute reimbursement for expenses incurred in the
performance of government personnel’s official duties shall not
be subject to income tax and consequently to withholding tax
o Provided further that Additional Compensation
Allowance given to government personnel shall not be
subject to withholding tax pending its formal
integration into the basic pay
o Consequently, and effective for the taxable year 2000,
ACA shall be classified as part of the other benefits
under the Tax Code which are excluded from gross
compensation income provided the total amount of such
benefits doesn't exceed P30000
 Any amount paid specifically either as advances or
reimbursements for traveling, representation, and other bona
fide ordinary and necessary expenses incurred or reasonably
expected to be incurred by the employee in the performance of
his duties are not compensations subject to withholding, if the
following conditions are met
o It is for ordinary and necessary traveling and
representation and entertainment expenses paid or
incurred by the employee in the pursuit of the trade,
business, or profession
o The employee is required to account/liquidate for the
foregoing expenses in accordance with the specific
requirements of substantiation for each category of
expenses pursuant to Section 34 of the Code. The
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
excess of advances made over actual expenses shall
constitute taxable income if such amount is not
returned to the employer. Reasonable amounts of
reimbursements/advances
for
traveling
and
entertainment expenses which are precomputed on a
daily basis and are paid to an employee while is on as
assignment or duty need not be subject to the
requirement of substantiation and to withholding
Vacation and Sick Leave Allowances
 Paid to the employee are considered compensation
 Salary of an employee on vacation or sick leave are considered
compensation notwithstanding absence from work
 However, the monetized value of unutilized vacation leave
credits of 10 days or less, which are paid to private employees
during the year and the monetized value of leave credits paid to
government officials and employees shall not be subject to
income tax and consequently to withholding tax
Deductions Made By Employer From Compensation Of Employee
 Any amount which is required to be deducted from the
compensation of the employee by the employer including the
withheld tax, is considered a part of employee’s compensation
and is deemed to be paid to the employee as compensation at the
time deduction was made
Renumeration for Services As Employee of a Nonresident Alien
Individual or Foreign Entity
 Any person paying compensation on behalf of a non-resident
alien individual or partnership or foreign corporation, which is
not engaged in trade or business within the Philippines is
subject to all provisions of law and regulations applicable to an
employer
Compensation For Services Performed Outside The Philippines
 Renumeration for services provided outside the Philippines by a
resident citizen for a domestic or a resident foreign corporation
or partnership, or for a non-resident corporation or partnership
or for a non-resident foreign individual not engaged in trade or
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 35 –


business in the Philippines shall be as compensation which is
subject to tax
A non-resident citizen as defined in the regulations is taxable on
income derived from sources within the Philippines.
In general, the situs of the income whether within or without
the Philippines is determined by the place where the place is
rendered
Fringe Benefits, Defined
 Any good, service or other benefit furnished or granted in cash
or in kind by an employer to an individual employee (except
rank and file employees as defined herein) such as, but not
limited to, the following:
o Housing;
o Expense account;
o Vehicle of any kind;
o Household personnel, such as maid, driver and others;
o Interest on loan at less than market rate to the extent
of the difference between the market rate and actual
rate granted;
o Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or
other similar organizations;
o Expenses for foreign travel;
o Holiday and vacation expenses;
o Educational assistance to the employee or his
dependents; and
o Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
Fringe Benefits, Imposition of Tax
 A final tax of 34% effective January 1, 1998, 33% effective
January 1, 1999, and 32% effective January 1, 2000 and
thereafter
 Tax base: grossed-up monetary value of fringe benefit furnished
or granted to the employee (except rank and file employees as
defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010



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)
The tax herein imposed is payable by the employer which tax
shall be paid in the same manner as provided for under Section
57 (A) of this Code.
The grossed-up monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe
benefit by 66% effective January 1, 1998; 67% effective January
1, 1999 and 68% effective January 1, 2000 and thereafter:
Provided, however, That fringe benefit furnished to employees
and taxable under Subsections (B), (C), (D) and (E) of Section 25
shall be taxed at the applicable rates imposed thereat: Provided,
further, That the grossed -Up value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe
benefit by the difference between one hundred percent (100%)
and the applicable rates of income tax under Subsections (B),
(C), (D), and (E) of Section 25.
Determination of the Amount Subject to Fringe Benefit Tax
 In general, valuation of the benefit granted and determination of
the proportion or percentage of the benefit, which is subject to
the fringe benefit tax
 In cases where the fringe benefits entail joint benefits for both the
employer and employee, the portion which shall be subject to the
fringe benefits tax and the guidelines for the valuation of fringe
benefits are defined as follows—
What was granted
If money or directly granted by the
employer
Property other than money and
ownership is transferred to the
employee
Property other than money but
ownership isn’t transferred to the
employee
Value to be considered
Value is the amount granted or
paid for
Fair market value of the property
as determined by the authority of
the Commissioner
Depreciation value of the property
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 36 –
Taxation of Fringe Benefit Received by a Non-Resident Alien
Individual Who Is Not Engaged in Trade or Business in the
Philippines
 A fringe benefit tax of 25% of the grossed up monetary value of
the fringe benefit
 Shall be computed by dividing the monetary value of the fringe
benefit by 75%
Taxation of fringe benefit received by:
a. An alien individual employed by regional or area
headquarters of a multinational company or by regional
operating headquarters of a multinational company
Fringe benefit
granted
Housing
Conditions
If the employer leases residential
property for the use of his employee
and said property is the usual place
of business
If the employer owns the residential
property and is assigned for the use
of the employee as his usual place of
business
If the employer purchases the
residential property on installment
basis and allows his employee to use
the same as his usual place of
residence
If
the
employer
purchases
residential property and transfers
ownership to the employee
If the employer purchases a
residential property and transfers
ownership to the employee at a
lesser value than the acquisition
cost
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
b.
c.
d.
Alien individual employed by an offshore banking unit of a
foreign bank established in the Philippines
An alien individual employed by a foreign service contractor
or foreign service contractor engaged in petroleum
operations in the Philippines
Any of their Filipino individual employees who are employed
and occupying the same position as those aforementioned by
alien employees
 FBT of 15% shall be imposed on the grossed up monetary value
of the fringe benefit which in turn shall be computed by dividing
the monetary value of the fringe benefit by 85%
FRINGE BENEFITS TAX
Value of the benefit
Monetary value of the
fringe benefit
Amount of rental paid by 50% of the value of the benefit
the employer
Annual value shall be
5% of the market value
or
zonal
value,
whichever is higher, of
the
land
and
improvement
Annual value of the
benefit shall be 5% of the
acquisition cost exclusive
of interest
50% of the value of the benefit
Acquisition cost or zonal
value,
whichever
is
higher
Fair market value or
zonal value, which ever
is higher minus the cost
to the employee
100% of value
50% of the value of the benefit
100% of value
Notes
MV=[5% x FMV or zonal value]
x 50%
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 37 –
Expense account
Motor vehicle
Housing
privilege
to
military
officials of the AFP
Housing unit situated inside or
adjacent to premises of a business or
factory
Temporary housing for an employee
who stays in a housing unit for 3
months or less
In general (expenses incurred by
employee but paid for by the
employer)
Expenses paid for by the employee
but reimbursed by the employer
Shall not be treated as fringe benefit
Personal expenses of the employee
and his family
Representation and transportation
allowances which are fixed in
amounts and are regularly received
as part of compensation income
Employer purchases vehicle for
employee
Provides employee cash for purchase
of vehicle
Employer purchases the vehicle on
installment basis and ownership in
the name of employee
Employer shoulders a portion of the
amount
and
ownership
is
transferred to employee
Employer owns a fleet of motor
vehicles for the use of the business
and the employees
Taxable fringe benefits
Employer leases a fleet of motor
vehicles for the use of the business
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
Shall not be treated as fringe benefit
Shall not be treated as fringe benefit
Taxable fringe benefits
Not applicable when ttthe
expenditures are duly receipted
for and in the name of the
employer and don't partake as
personal
expenses
of
the
employee
Taxable fringe benefits
Not taxable as fringe benefits but instead are considered
as taxable compensation income
Acquisition cost
100% of value
Amount of cash received
100%
Acquisition
cost
exclusive of interest,
divided by 5 years
Amount shouldered by
the employer
100%
Acquisition cost of all
vehicles not usually used
for the sales, freight,
delivery
service
and
other non-personal use,
divided by 5 years
Rental cost of all vehicles
not usually used for the
50% of the value
100%
50% of the vvalue
Regardless of whether
personal use or partly
benefit of employer
for
for
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 38 –
and the employees
Use
of
aircraft
owned
maintained by the employer
and
Use of yacht owned and maintained
or leased by the employer
Household expenses
Employer lends money at less than
12%
sales, freight, delivery
service and other nonpersonal use
Business usage
Not subject to fringe benefit tax
Depreciation of the yacht
at an estimated useful
life of 20 years
Interest forgone or
Difference of the interest assumed by the employee and
12%
Interest on loan
less than the
market rate
Shall apply only to installment
payments or loans with interest
rate lower than 12% starting
January 1998
Membership
dues, fees, and
other expenses
borne by the
employer for the
employee, in
social or athletic
clubs or other
similar
organizations
100%
Reasonable business expense for the
purpose of attending business
meetings or conventions
Expenses for
foreign travel
Benchmark interest of 12%
shall remain in order until
further amended by regulation
Inland travel expenses except
lodging cost in a hotel or similar
establishments to an average of
$300 or less per day
Cost of economic and business class
tickets
MA. ANGELA LEONOR C. AGUINALDO
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Shall not be subject to
fringe benefit tax
Expenses
should
be
well
documented proving the actual
occurrence of the meetings or
conventions
In the absence of documentary
evidence showing that the
employee’s travel abroad was in
connection
with
business
meetings or conventions, the
entire cost of the ticket,
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 39 –
First class airplane tickets
30% of the value of the
ticket
Travelling expenses which are paid
by the employer for the benefit of the
family of the employee
Taxable fringe benefits
Costs of educational assistance to
the employee, in general
Scholarship grant, if the education
or study involved is directly
connected to the trade and business
or profession of the employer, and
there is a written contract between
them that the employee is under
obligation to remain in the employ of
the employer for period of time that
they have mutually agreed upon
Cost of educational assistance to
dependents
Taxable fringe benefit
including
cost
of
hotel
accommodations
and
other
expenses, shall be treated as
taxable fringe benefits
Holiday and
vacation
expenses
Educational
assistance to the
employee or his
dependents
Not
taxable
benefit
fringe
Taxable fringe benefit
Except
under
competitive
scheme under a scholarship
program of the company
Except the following—
1. Contributions
for
the
benefit of the employer for
his employee for SSS, GSIS
or similar contributions
arising form the provisions
of law
2. Cost of premiums borne by
the employer for the group
insurance of his employees
Life or health
insurance and
other non-life
insurance
premiums or
similar amounts
in excess of what
the law allows
Fringe Benefits Not Taxable
1. Fringe benefits which are authorized and exempted from tax
under special laws;
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
2.
Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 40 –
3.
4.
Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not; and
De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation
of the Commissioner.
De Minimis Benefits Not Subject To Withholding Tax on
Compensation Income of Both Managerial and Rank and File
Employees (As provided for in RR 8-2000)
*The amount of the de minimis benefits conforming to the ceiling shall
not be considered in determining the P30,000 ceiling or other benefits
provided under the Code. However, if the employer pays more than the
ceiling prescribed by these regulations, the excess shall be taxable to the
employee receiving the benefits only if such excess is beyond P30,000
ceiling. Provided further, that any amount given by the employer as
benefits to his employees whether classified as de minimis or fringe
benefits, shall constitute deductible expense for the employer.
a. Monetized unused vacation leave credits of employees not
exceeding 10 days during the year
b. Medical cash allowance to dependents of employees not
exceeding P750 per semester or P125 per month
c. Rice subsidy of P1000 or one sack of 50-kg. rice per month
amounting to not more than P1000
d. Uniforms given to employees by the employer not exceeding
P3000 per annum
e. Actual medical benefits given to the employees by the employer
not exceeding P10,000 per annum
f. Laundry allowance not exceeding P300 per month
g. Employee achievement awards, e.g for the length of service or
safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificate, with an
annual monetary value not exceeding P10,000 received by the
employee under an established written plan which doesn't
discriminate in favor of highly paid employees
h. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per annum
i. Flowers, fruits, books or similar items given to the employees
under special circumstances—on account of illness, marriage,
birth of child, etc. not exceeding 25% of the basic minimum wage
MA. ANGELA LEONOR C. AGUINALDO
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j.
Daily meal allowance for overtime work not exceeding 25% of
the basic minimum wage
Basic Rules on Fringe Benefits and Fringe Benefits Tax
1. Fringe benefits given to a rank and file employee is not subject
to the fringe benefit tax
2. Fringe benefit given to a supervisory or managerial employee is
subject to the fringe benefit tax
3. De minimis benefit, whether given to a rank-and-file employee
or a supervisory or managerial employee is not subject to the
fringe benefit tax
a. Note that de minimis benefits shall be limited to
facilities and privileges furnished or offered by an
employer to his employees that are relatively small in
value and are offered or furnished by the employer
merely as a means of promoting the health, goodwill
and contentment, or efficiency of his employees
Convenience of the Employer Rule
 When a fringe benefit is solely given for the convenience of the
employer, the fringe benefit is exempt from the fringe benefit
tax
 The employee will not recognize income from the benefit
Computation of the Tax
 Determine first the grossed-up monetary value of the fringe
benefit by dividing the monetary value of the benefit with 68%
 Compute then the fringe benefit tax by multiplying the grossedup monetary value by 32%
Deduction For The Employer
a. If the fringe benefit is given to a rank-and-file employee or to a
supervisory or managerial employee, not subject to fringe
benefit tax, the deduction for the employer is the monetary
value of the fringe benefit
b. If the fringe benefit is given to a supervisory or managerial
employee, and is subject to fringe benefit tax, the deduction for
the employer is the grossed-up monetary value of the fringe
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 41 –
benefit divided into two components of fringe benefit expense
and fringe benefit tax

Income for the Employee
 Note: exempt from income tax are gross benefits received by
officials and employees of public and private firms to the extent
of P30000

Withholding and Remittance of Tax
 Final tax that should be paid and withheld by the employer on
or before the 10th day of the month following the calendar
quarter in which the fringe benefit was granted.
COLLECTOR V. HENDERSON
1 SCRA 649
FACTS:
HELD:
CIR V. CASTANEDA
203 SCRA 72
FACTS:
HELD:
INCOME FROM BUSINESS OR EXERCISE OF PROFESSION
Gross Income From Business
 In the case of manufacturing, merchandising aor mining
business, gross income means the total sales, less the cost of
goods sold, plus any income from investments and from
incidental or operations or sources
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
In determining the gross income, subtractions shouldn't be made
for depreciation, depletion, selling expenses or losses, or for
items not ordinarily used in computing the cost of goods sold
In case of sellers of services, their gross income is computed by
deducting all direct costs and expenses as prescribed in RR 42003
Long Term Contracts
 Building, installing, or construction contracts covering a period
in excess of one year
 Income from long-term contracts is taxable for the period in
which the income is determined, such determination depending
upon the nature and terms of the particular contract
 Persons whose income is derived in whole or in part from such
contracts shall report their income on the basis of percentage of
completion
 There should be deducted from such gross income all
expenditures made during the taxable year on account of the
contract, account being taken of the materials and supplies for
use in connection with the work under the contract but not yet
so applied
 These contracts are generally adopted for construction contracts
as well as for real estate development projects
Gross Income of Farmers
 A farmer reporting on the basis of cash receipts and
disbursements (in which no inventory to determine profits is
used) shall include in his gross income for the taxable year—
o The amount of cash or the value of merchandise or
other property received from the sale of livestk and
produce which were raised during the taxable year or
prior years
o The profits from the sale of any livestock or other items
which were purchased
o Gross income from all other sources
 The profit from the sale of livestock or other items which were
purchased is to be ascertained by deducting the cost from the
sale price in the year in which the sale occurs, except that in the
case of sale of animals purchased as draft or work animals, or
INCOME TAX REVIEWER AND CASE DIGESTS
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

solely for breeding or dairy purposes and not for resale, the
profit shall be the amount of any excess of the sale price over
the amount representing the difference between the cost and
the depreciation therefor sustained and allowed as a deduction
in computing net income
In case of a farmer reporting on the accrual basis—in which an
inventory is used his gross profits are ascertained by adding to
the inventory value of livestock and products on hand at the
end of the year the amount received from the sale of livestock
and products, and miscellaneous receipts for hire of farm
machinery, and the like, during the year, and deducting from
the sum of inventory value of livestock and products on hand at
the beginning of the year and the cost of the livestock and
products purchased during the year. In such cases, all livestock
raised or purchased for sale shall be included in the inventory
at their proper valuation determined in accordance with the
method authorized and adopted for that purpose.
Also, livestock acquired for drafts, breeding, or dairy products
and not for sale may be included in the inventory, instead of
being treated as capital assets subject to depreciation, subject to
depreciation, provided such practice is followed consistently by
the taxpayer. In case of the sale of any livestock included in an
inventory, their cost must not be taken as an additional
deduction in the return of income, as such deduction will be
reflected in the inventory
Sale of Patents and Copyrights
 A taxpayer disposing of patents and copyrights by sale should
determine the profit or loss arising therefrom by computing the
difference between the selling price and the cost or adjusted
basis
 The taxable income in the case of patents or copyrights should
be ascertained in accordance with the provisions of section 136
of these regulations. The profits or loss thus ascertained should
be increased or decreased, as the case may be, by the amounts
deducted on account of depreciation of such patents or
copyrights since the date of acquisition
Sale of Goodwill
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010



Gain or loss from a sale of goodwill results only when the
business, or a part of it, to which the goodwill attaches is sold, in
which case the gain or loss will be determined by comparing the
sale price with the cost or other basis of the assets, including
goodwill.
If specific payment was not made for goodwill, there can be no
deductible loss with respect thereto, but gain may be realized
from the sale of goodwill built up through expenditures, which
have been currently deducted
It is immaterial that goodwill may never have been carried on
the books as an asset, but the burden of proof is on the taxpayer
to establish the cost or fair market value of the goodwill sold
RENTS
 Rental income on personal property located in the Philippines
paid to a non-resident alien or non-resident foreign corporation
shall be subject to the 25% or 32% final withholding tax,
respectively
 Rental income on the lease of personal property located in the
Philippines and paid to a non-resident taxpayer shall be taxed
as follows
Vessel
Aircraft, machineries,
and other equipment
Other assets
NON-RESIDENT
CORPORATION
4.5%
7.5%
NON-RESIDENT
ALIEN
25%
25%
32%
25%
GAINS DERIVED FROM DEALINGS IN PROPERTY
 Sale of real property—location of the real property: if the real
property is located within the Philippines, the gain is considered
as income from the Philippines
 Sale of personal property—
o Personal property produced in whole or in part by the
taxpayer within the Philippines and sold without the
Philippines or produced in whole or in part by the
taxpayer without and sold within the Philippines—any
gain, profit, income shall be treated as derived partly
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 43 –
o
from sources within and partly from sources without
the Philippines
Purchase of personal property within and its sale
without the Philippines, or purchase of personal
property without and sale within the Philippines—any
gain, profit or income shall be treated as derived
entirely from sources within the country in which sold.
Ordinary Gains and Losses
(Section 22,Z)
(Z) The term "ordinary income" includes any gain from the sale or
exchange of property which is not a capital asset or property described in
Section 39(A)(1). Any gain from the sale or exchange of property which is
treated or considered, under other provisions of this Title, as 'ordinary
income' shall be treated as gain from the sale or exchange of property
which is not a capital asset as defined in Section 39(A)(1). The term
'ordinary loss' includes any loss from the sale or exchange of property
which is not a capital asset. Any loss from the sale or exchange of
property which is treated or considered, under other provisions of this
Title, as 'ordinary loss' shall be treated as loss from the sale or exchange
of property which is not a capital asset.
Capital Gains and Losses
(Section 39)
SEC. 39. Capital Gains and Losses. (A) Definitions. - As used in this Title (1) Capital Assets. - The term "capital assets" means property held by the
taxpayer (whether or not connected with his trade or business), but does
not include 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, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or
business, or property used in the trade or business, of a character which
is subject to the allowance for depreciation provided in Subsection (F) of
Section 34; or real property used in trade or business of the taxpayer.
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
(2) Net Capital Gain. - The term "net capital gain" means the excess of
the gains from sales or exchanges of capital assets over the losses from
such sales or exchanges.
(3) Net Capital Loss. - The term "net capital loss" means the excess of the
losses from sales or exchanges of capital assets over the gains from such
sales or exchanges.
(B) Percentage Taken Into Account. - In the case of a taxpayer, other
than a corporation, only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset shall be taken
into account in computing net capital gain, net capital loss, and net
income:
(1) One hundred percent (100%) if the capital asset has been held for not
more than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than
twelve (12) months;
(C) Limitation on Capital Losses. - Losses from sales or exchanges of
capital assets shall be allowed only to the extent of the gains from such
sales or exchanges. If a bank or trust company incorporated under the
laws of the Philippines, a substantial part of whose business is the
receipt of deposits, sells any bond, debenture, note, or certificate or other
evidence of indebtedness issued by any corporation (including one issued
by a government or political subdivision thereof), with interest coupons
or in registered form, any loss resulting from such sale shall not be
subject to the foregoing limitation and shall not be included in
determining the applicability of such limitation to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a
corporation, sustains in any taxable year a net capital loss, such loss (in
an amount not in excess of the net income for such year) 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 twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts
received by the holder upon the retirement of bonds, debentures, notes or
certificates or other evidences of indebtedness issued by any corporation
(including those issued by a government or political subdivision thereof)
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 44 –
with interest coupons or in registered form, shall be considered as
amounts received in exchange therefor.
(F) Gains or Losses From Short Sales, Etc. - For purposes of this Title -
D
E
F
I
N
I
T
I
O
N
(1) Gains or losses from short sales of property shall be considered as
gains or losses from sales or exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or
options to buy or sell property shall be considered as capital gains or
losses.
ORDINARY ASSETS
CAPITAL ASSETS
The term "ordinary assets" means property held by the taxpayer
which
includes (a) 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, or (b) property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or (c)
property used in the trade or business, of a character which is
subject to the allowance for depreciation provided in Subsection
(F) of Section 34; or (d) real property used in trade or business
of the taxpayer.
The term "capital assets" means property held by the taxpayer (whether or not connected
with his trade or business), but does not include 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, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation provided in
Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.
Real Property
Real Property
Shares of Stock
Other Assets
Type of
Asset
All
types of
Real
Propert
ies
Land
&
Buildi
ng
Only
Shares of Stock
Othe
rs
Other Assets
of
a
Domestic
Corporation
of
Corporation
other
than
Domestic
Corporation
Individ
ual
Corporat
ion
Individ
ual
Corporat
ion
Individ
ual
Corporat
ion
Individ
ual
Corporation
Individ
ual
Corporat
ion
Individ
ual
Corporat
ion
Individ
ual
Corporat
ion
RT 532%
RT 35%
RT 532%
RT 35%
RT 532%
RT 35%
FT 6%
FT
6%
FT 5% /
10%
FT 5% /
10%
RT 5 32%
RT 35%
RT 5 32%
RT 35%
Taxpayer
Income
Taxabilit
y
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
RT
35%
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 45 –
Applicabi
lity of
Holding
Period
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
applica
ble
n/a
applica
ble
n/a
Ordinary Gain
n/a
n/a
Capit
al
Gain
Net
Gain
Net
Gain
Capital
Gain
Capital
Gain
Capital
Gain
Capital
Gain
Ordinary Loss
n/a
n/a
Capit
al
Loss
n/a
n/a
Capital
Loss
Capital
Loss
Capital
Loss
Capital
Loss
Net Operating Loss Carry Over (NOLCO) under Sec 34 (D)
n/a
n/a
n/a
n/a
n/a
Net
Capital
Loss
Carry
Over
n/a
Net
Capital
Loss
Carry
Over
n/a
Gain
Loss
Applicabi
lity of
Net Loss
Carry
Over
Real Property: Ordinary v. Capital Assets
 Ordinary assets—if the property sold is classified as an ordinary
asset, income tax due is the normal corporate income tax of 32%
of its net taxable income or the graduated income tax ranging
from 5%-32% applied on his net taxable income
 Capital assets—in general, if the real property is classified as a
capital asset, the income tax due is the capital gains tax
computed at 6% of the actual consideration or fair market value
of the real property sold as determined by the Commissioner,
whichever is higher
Recognition of Gains and Losses
SEC. 40. Determination of Amount and Recognition of Gain or Loss. (A) Computation of Gain or Loss. - The gain from the sale or other
disposition of property shall be the excess of the amount realized
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
therefrom over the basis or adjusted basis for determining gain, and the
loss shall be the excess of the basis or adjusted basis for determining loss
over the amount realized. The amount realized from the sale or other
disposition of property shall be the sum of money received plus the fair
market value of the property (other than money) received;
(B) Basis for Determining Gain or Loss from Sale or Disposition of
Property. - The basis of property shall be (1) The cost thereof in the case of property acquired on or after March 1,
1913, if such property was acquired by purchase; or
(2) The fair market price or value as of the date of acquisition, if the same
was acquired by inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if
it would be in the hands of the donor or the last preceding owner by whom
it was not acquired by gift, except that if such basis is greater than the
fair market value of the property at the time of the gift then, for the
purpose of determining loss, the basis shall be such fair market value; or
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 46 –
(4) If the property was acquired for less than an adequate consideration
in money or money's worth, the basis of such property is the amount paid
by the transferee for the property; or
(5) The basis as defined in paragraph (C)(5) of this Section, if the
property was acquired in a transaction where gain or loss is not
recognized under paragraph (C)(2) of this Section.
(C) Exchange of Property. (1) General Rule. - Except as herein provided, upon the sale or exchange
or property, the entire amount of the gain or loss, as the case may be, shall
be recognized.
(2) Exception. - No gain or loss shall be recognized if in pursuance of a
plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is a party to
the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to
the merger or consolidation, solely for the stock of another corporation
also a party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely for
stock or securities in such corporation, a party to the merger or
consolidation.
No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for stock or unit of participation in
such a corporation of which as a result of such exchange said person,
alone or together with others, not exceeding four (4) persons, gains
control of said corporation: Provided, That stocks issued for services shall
not be considered as issued in return for property.
(3) Exchange Not Solely in Kind. (a) If, in connection with an exchange described in the above exceptions,
an individual, a shareholder, a security holder or a corporation receives
not only stock or securities permitted to be received without the
recognition of gain or loss, but also money and/or property, the gain, if
any, but not the loss, shall be recognized but in an amount not in excess
of the sum of the money and fair market value of such other property
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
received: Provided, That as to the shareholder, if the money and/or other
property received has the effect of a distribution of a taxable dividend,
there shall be taxed as dividend to the shareholder an amount of the gain
recognized not in excess of his proportionate share of the undistributed
earnings and profits of the corporation; the remainder, if any, of the gain
recognized shall be treated as a capital gain.
(b) If, in connection with the exchange described in the above exceptions,
the transferor corporation receives not only stock permitted to be
received without the recognition of gain or loss but also money and/or
other property, then (i) if the corporation receiving such money and/or
other property distributes it in pursuance of the plan of merger or
consolidation, no gain to the corporation shall be recognized from the
exchange, but (ii) if the corporation receiving such other property and/or
money does not distribute it in pursuance of the plan of merger or
consolidation, the gain, if any, but not the loss to the corporation shall be
recognized but in an amount not in excess of the sum of such money and
the fair market value of such other property so received, which is not
distributed.
(4) Assumption of Liability. (a) If the taxpayer, in connection with the exchanges described in the
foregoing exceptions, receives stock or securities which would be
permitted to be received without the recognition of the gain if it were the
sole consideration, and as part of the consideration, another party to the
exchange assumes a liability of the taxpayer, or acquires from the
taxpayer property, subject to a liability, then such assumption or
acquisition shall not be treated as money and/or other property, and
shall not prevent the exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the
liabilities to which the property is subject exceed the total of the adjusted
basis of the property transferred pursuant to such exchange, then such
excess shall be considered as a gain from the sale or exchange of a capital
asset or of property which is not a capital asset, as the case may be.
(5) Basis (a) The basis of the stock or securities received by the transferor upon the
exchange specified in the above exception shall be the same as the basis
of the property, stock or securities exchanged, decreased by (1) the money
received, and (2) the fair market value of the other property received, and
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 47 –
increased by (a) the amount treated as dividend of the shareholder and
(b) the amount of any gain that was recognized on the exchange:
Provided, That the property received as "boot" shall have as basis its fair
market value: Provided, further, That if as part of the consideration to
the transferor, the transferee of property assumes a liability of the
transferor or acquires form the latter property subject to a liability, such
assumption or acquisition (in the amount of the liability) shall, for
purposes of this paragraph, be treated as money received by the
transferor on the exchange: Provided, finally, That if the transferor
receives several kinds of stock or securities, the Commissioner is hereby
authorized to allocate the basis among the several classes of stocks or
securities.
(b) The basis of the property transferred in the hands of the transferee
shall be the same as it would be in the hands of the transferor increased
by the amount of the gain recognized to the transferor on the transfer.
purpose "substantially all" and for the proper implementation of this
Section.
INTEREST
 In general, interests received or credited to the account of the
depositor or investor are included in their gross income, unless
they are exempt from tax or subject to final tax at preferential
rate under the Tax Code or under applicable tax treaty
1.
(6) Definitions. (a) The term "securities" means bonds and debentures but not "notes" of
whatever class or duration.
(b) The term "merger" or "consolidation", when used in this Section, shall
be understood to mean: (i) the ordinary merger or consolidation, or (ii)
the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock: Provided, That for a
transaction to be regarded as a merger or consolidation within the
purview of this Section, it must be undertaken for a bona fide business
purpose and not solely for the purpose of escaping the burden of taxation:
Provided, further, That in determining whether a bona fide business
purpose exists, each and every step of the transaction shall be considered
and the whole transaction or series of transaction shall be treated as a
single unit: Provided, finally , That in determining whether the property
transferred constitutes a substantial portion of the property of the
transferor, the term 'property' shall be taken to include the cash assets of
the transferor.
(c) The term "control", when used in this Section, shall mean ownership
of stocks in a corporation possessing at least fifty-one percent (51%) of
the total voting power of all classes of stocks entitled to vote.
(d) The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to issue rules and regulations for the
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
2.
3.
4.
5.
Income interest from Philippine currency deposits and deposit
substitutes—gross income from Philippine currency deposits and
yield or other monetary benefit from deposit substitutes and
from trust funds and similar arrangements are subject to the
20% final withholding tax except if the depositor is a nonresident alien, then the final withholding tax rate shall be 25%
in accordance with the pertinent provision of the Tax Code. If
the depositor is an employee trust fund or accredited retirement
plan, such interest income, yield or monetary benefit shall be
exempted from the final withholding tax
Interest income on foreign currency deposits—gross interest
income from foreign currency deposits with an OBU or FCDU in
the Philippines is subject to the final withholding tax of 7.5%. If
the deposit is with a bank located outside the Philippines, it
shall be subjected to the graduated income tax rates ranging
from 5%-32% or the normal corporate income tax rate.
Interest income from long-term deposits or investments of
individuals is exempt (general rule)
Interest income on traditional loans is not subject to final or
creditable withholding tax
Interest on foreign loans—interest on foreign loans extended by
non-resident foreign corporations is subject to the 20% final
withholding tax unless a lower tax rate is provided for in atreaty
ROYALTIES
 Location of the property or interest in such property
 If the property or interest is located within the Philippines, the
gain is considered as income from the Philippines
DIVIDENDS
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 48 –



Comprise any distribution whether in cash or other property in
the ordinary course of business, even though extraordinary in
amount made by a domestic corporation, joint stock company,
partnership, joint account, association, or insurance company to
the shareholders or members out of its earnings or profits
In general, dividends are included in the gross income of the
stockholder unless they are exempt from tax or subject to final
withholding tax as may be provided for by the Tax Code
Remember that any type of dividend must come from the
unappropriated retained earnings of the corporation
(D) Net Income of a Partnership Deemed Constructively Received by
Partners. - The taxable income declared by a partnership for a taxable
year which is subject to tax under Section 27 (A) of this Code, after
deducting the corporate income tax imposed therein, shall be deemed to
have been actually or constructively received by the partners in the same
taxable year and shall be taxed to them in their individual capacity,
whether actually distributed or not.
CIR V. CA, CTA & ANSCOR
GR 108576, JANUARY 30, 1999
SEC. 73. Distribution of dividends or Assets by Corporations. -
FACTS:
(A) Definition of Dividends. - The term "dividends" when used in this
Title means any distribution made by a corporation to its shareholders
out of its earnings or profits and payable to its shareholders, whether in
money or in other property.
HELD:
Where a corporation distributes all of its assets in complete
liquidation or dissolution, the gain realized or loss sustained by the
stockholder, whether individual or corporate, is a taxable income or a
deductible loss, as the case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of
surplus to capital account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a dividend at such time
and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution
of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the
extent that it represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently
Accumulated Profits. - Any distribution made to the shareholders or
members of a corporation shall be deemed to have been made form the
most recently accumulated profits or surplus, and shall constitute a part
of the annual income of the distributee for the year in which received.
EISNER V. MACOMBER
252 US 89
FACTS:
HELD:
ANNUITIES

PRIZE AND WINNINGS

PENSIONS

PARTNER’S
DISTRIBUTIVE
SHARE
PROFESSIONAL PARTNERSHIP
IN
A
GENERAL
SEC. 26. Tax Liability of Members of General Professional Partnerships.
- A general professional partnership as such shall not be subject to the
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 49 –
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.
(4) 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.
(5) Income Exempt under Treaty. - Income of any kind, to the extent
required by any treaty obligation binding upon the Government of the
Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
INCOME FROM WHATEVER SOURCES

EXCLUSIONS FROM GROSS INCOME
(B) Exclusions from Gross Income. - The following items shall not be
included in gross income and shall be exempt from taxation under this
title:
(1) Life Insurance. - The proceeds of life insurance policies paid to
the heirs or beneficiaries upon the death of the insured, whether in a
single sum or otherwise, but if such amounts are held by the insurer
under an agreement to pay interest thereon, the interest payments shall
be included in gross 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.
(3) Gifts, Bequests, and 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.
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
(a) Retirement benefits received under Republic Act No. 7641 and
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, That the retiring official or
employee has been in the service of the same employer for at least ten
(10) years and is not less than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or employee only once. For
purposes of this Subsection, the term 'reasonable private benefit plan'
means a pension, gratuity, stock bonus or profit-sharing plan maintained
by an employer for the benefit of some or all of his officials or employees,
wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and
wherein its is provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
(b) 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 death sickness or
other physical disability or for any cause beyond the control of the said
official or employee.
(c)
The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement gratuities, pensions
and other similar benefits received by resident or nonresident citizens of
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 50 –
the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions,
private or public.
(d) 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.
(e) Benefits received from or enjoyed under the Social Security
System in accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government officials and
employees.
(7) Miscellaneous Items. (a) Income Derived by Foreign Government. - 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 (i) foreign governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign governments, and (iii)
international or regional financial institutions established by foreign
governments.
(b)
Income Derived by the Government or its Political
Subdivisions. - 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.
(c) Prizes and Awards. - Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part
to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
(d) Prizes and Awards in Sports Competition. - 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.
(e) 13th Month Pay and Other Benefits. - Gross benefits received
by officials and employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph shall not
exceed Thirty thousand pesos (P30,000) which shall cover:
(i) Benefits received by officials and employees of the national
and local government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order No. 28, dated
August 13, 1986;
(iii) Benefits received by officials and employees not covered
by Presidential decree No. 851, as amended by Memorandum Order No.
28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and
Christmas bonus: Provided, further, That the ceiling of Thirty thousand
pesos (P30,000) may be increased through rules and regulations issued
by the Secretary of Finance, upon recommendation of the Commissioner,
after considering among others, the effect on the same of the inflation
rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS,
Medicare and Pag-ibig contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate
of Indebtedness. - Gains realized from the same or exchange or
retirement of bonds, debentures or other certificate of indebtedness with
a maturity of more than five (5) years.
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 51 –
(h) Gains from Redemption of Shares in Mutual Fund. - 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.
SEC
2.78.1
(B)
RR
2-98—WITHHOLDING
TAX
ON
COMPENSATION
 The withholding of tax on compensation income 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,
deriving income from compensation for services rendered in the
Philippines.
 The employer is constituted as the withholding agent
Compensation Income Defined
 In general, the term “Compensation” means all renumeration for
services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by
the tax code
DE MINIMIS BENEFITS
1. Monetized unused vacation leave credits not exceeding 10 days
during the year
2. Medical cash allowance to dependents of employees not
exceeding P750/employee per semester; or P125 per month
3. Rice subsidy of P1000 or one sack of 50kg rice/month amounting
to not more than P1000
4. Uniforms and clothing allowance not exceeding P3000/year
5. Actual medical benefits not exceeding P10,000/annum
6. Laundry allowance not exceeding P300/month
7. Employee achievement awards, e.g for length of service, or
safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificates, with an
annual monetary value not exceeding P10,000 received by the
employee under an established written plan which doesn't
discriminate in favor of highly paid employees
8. Gifts given during Christmas and major anniversary
celebrations not exceeding P5000/employee per annum
9. Flowers, fruits, and books of similar items given to employees
under certain circumstances
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
10. Daily meal allowances for overtime work not exceeding 25% of
the basic minimum wage
CIR V. CASTANEDA
 Terminal leave pay of government employees are not subject to
income tax
BIR RULING 219-3 DATED MAY 17, 1993
 This refers to the letter stating that Lawrence was awarded
unpaid salaries and commission, plus moral and exemplary
damages and attorney’s fees in a labor case. The award has
become final and executory, and the respondent is willing to pay
the award less the withholding tax thereon, and that it is the
belief of your client that the unpaid salaries and commission are
subject to withholding tax but the damages which consist of
moral and exemplary damages and attorney’s fees are not
subject to withholding tax to which the respondent disagrees
 The amounts received as damages are not taxable income. The
legal expenses incurred in court proceedings, where the
taxpayer was awarded moral damages are not deductible from
gross income. On the other hand, attorney’s fees awarded to
your client as part of the damages shall not be subject to income
tax, the same being merely a reimbursement of his
expenses/advances in the course of the hearing of his case.
 The award of damages and attorney’s fees are not subject to
income tax and therefore are not subject to withholding tax
I-DRAWING NATIN… 
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 52 –
(3) Services. - Compensation for labor or personal services performed in
the Philippines;
INCOME FROM SOURCES WITHIN AND WITHOUT THE
PHILIPPINES
SEC. 42. Income from Sources Within the Philippines.(A) Gross Income From Sources Within the Philippines. - The following
items of gross income shall be treated as gross income from sources
within the Philippines:
(1) Interests. - Interests derived from sources within the Philippines, and
interests on bonds, notes or other interest-bearing obligation of residents,
corporate or otherwise;
(2) Dividends. - The amount received as dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than fifty percent (50%) of the
gross income of such foreign corporation 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 as
determined under the provisions of this Section; but only in an amount
which bears the same ration to such dividends as the gross income of the
corporation for such period derived from sources within the Philippines
bears to its gross income from all sources.
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
(4) Rentals and Royalties. - Rentals and royalties from property located
in the Philippines or from any interest in such property, including
rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any
copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial,
commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge
or information;
(d) The supply of any assistance that is ancillary and subsidiary to, and
is furnished as a means of enabling the application or enjoyment of, any
such property or right as is mentioned in paragraph (a), any such
equipment as is mentioned in paragraph (b) or any such knowledge or
information as is mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. - Gains, profits and income from the sale of real
property located in the Philippines; and
(6) Sale of Personal Property. - Gains; profits and income from the sale of
personal property, as determined in Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines. (1) General Rule. - From the items of gross income specified in
Subsection (A) of this Section, there shall be deducted the expenses,
INCOME TAX REVIEWER AND CASE DIGESTS
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losses and other deductions properly allocated thereto and a ratable part
of expenses, interests, losses and other deductions effectively connected
with the business or trade conducted exclusively within the Philippines
which cannot definitely be allocated to some items or class of gross
income: Provided, That such items of deductions shall be allowed only if
fully substantiated by all the information necessary for its calculation.
The remainder, if any, shall be treated in full as taxable income from
sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall
be allowed from the item of gross income specified in subsection (A)
unless indebtedness was actually incurred to provide funds for use in
connection with the conduct or operation of trade or business in the
Philippines.
(C) Gross Income From Sources Without the Philippines. - The following
items of gross income shall be treated as income from sources without
the Philippines:
(1) Interests other than those derived from sources within the
Philippines as provided in paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the
Philippines as provided in
paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the
Philippines;
(4) Rentals or royalties from property located without the Philippines or
from any interest in
such property including rentals or royalties for the use of or for the
privilege of using
without the Philippines, patents, copyrights, secret processes and
formulas, goodwill,
trademarks, trade brands, franchises and other like properties; and
(5) Gains, profits and income from the sale of real property located
without the Philippines.
(D) Taxable Income From Sources Without the Philippines. - From the
items of gross income specified in Subsection (C) of this Section there
shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any expense, loss
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
or other deduction which cannot definitely be allocated to some items or
classes of gross income. The remainder, if any, shall be treated in full as
taxable income from sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without the
Philippines.- Items of gross income, expenses, losses and deductions,
other than those specified in Subsections (A) and (C) of this Section, shall
be allocated or apportioned to sources within or without the Philippines,
under the rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner. Where items of gross income
are separately allocated to sources within the Philippines, there shall be
deducted (for the purpose of computing the taxable income therefrom)
the expenses, losses and other deductions properly apportioned or
allocated thereto and a ratable part of other expenses, losses or other
deductions which cannot definitely be allocated to some items or classes
of gross income. The remainder, if any, shall be included in full as
taxable income from sources within the Philippines. In the case of gross
income derived from sources partly within and partly without the
Philippines, the taxable income may first be computed by deducting the
expenses, losses or other deductions apportioned or allocated thereto and
a ratable part of any expense, loss or other deduction which cannot
definitely be allocated to some items or classes of gross income; and the
portion of such taxable income attributable to sources within the
Philippines may be determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance. 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, or produced (in
whole or in part) by the taxpayer without and sold within the
Philippines, shall be treated as derived partly from sources within and
partly from sources without the Philippines.
Gains, profits and income derived from the purchase of personal property
within and its sale without the Philippines, or from the purchase of
personal property without and its sale within the Philippines shall be
treated as derived entirely form sources within the country in which sold:
Provided, however, That gain from the sale of shares of stock in a
domestic corporation shall be treated as derived entirely form sources
within the Philippines regardless of where the said shares are sold. The
transfer by a nonresident alien or a foreign corporation to anyone of any
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 54 –
share of stock issued by a domestic corporation shall not be effected or
made in its book unless: (1) the transferor has filed with the
Commissioner a bond conditioned upon the future payment by him of any
income tax that may be due on the gains derived from such transfer, or
(2) the Commissioner has certified that the taxes, if any, imposed in this
Title and due on the gain realized from such sale or transfer have been
paid. It shall be the duty of the transferor and the corporation the shares
of which are sold or transferred, to advise the transferee of this
requirement.
(F) Definitions. - As used in this Section the words "sale" or "sold" include
"exchange" or "exchanged"; and the word "produced" includes "created",
"fabricated", "manufactured", "extracted", "processed", "cured" or "aged".
CHAPTER 5
DEDUCTIONS
DEDUCTIONS TO GROSS INCOME
REQUISITES
LIMITATIONS/
CONDITIONS/
CEILINGS
OTHERS
ITEMIZED DEDUCTIONS
 Available to all kinds of taxpayers engaged in trade or business or in the exercise of profession in the Philippines
1. It must be ordinary and necessary
Ceiling on Representation Expense
Examples Of Business Expenses
1. Sellers of goods are allowed to deduct 1. Commission expenses
An expense is ordinary when it connotes a
a .5% of their net sales
2. Compensation for personal services
payment, which is normal in relation to 2. Sellers of services are allowed to
the business of the taxpayer and the
deduct a 1% of their net revenues
Reasonableness of Compensation
surrounding circumstances.
3. If taxpayer derives from both
 Test of deductibility is whether thjey
services and goods, it shall be
are reasonable and are, in fact,
An expense is necessary where the
determined through a apportionment
payments purely for service
Ordinary And
expenditure is appropriate or helpful in
formula
 Allowance for compensation paid
Necessary
the development of the taxpayer’s
may not exceed what is reasonable in
Expenses
business or that the same is proper for the
all the circumstances
purpose of realizing a profit or minimizing
 Those to be taken in consideration
a loss.
are those existing at the date when
the contract for services was made,
2. It must be paid or incurred during the
not those existing at the date when
taxable year
the contract is questioned
3. It must paid or incurred in carrying
on or which are directly attributable
3. Bonuses to employees
to the development, management,
4. Compensation for injuries
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ATENEO LAW 2010
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4.
5.
6.
1.
operation and/or conduct of the trade,
business or exercise of profession
It must be supported by adequate
invoices or receipts
It is not contrary to law, public policy,
or morals
The tax required to be withheld on the
expense paid or payable is shown to
have been remitted to the BIR
There must be an indebtedness
Indebtedness—something owed by one
who is unconditionally obliged or bound to
pay
2.
3.
Interest
4.
5.
6.
7.
The indebtedness must be that of the
taxpayer
The interest must be legally due and
stipulated in writing
The interest expense must be paid or
incurred during the taxable year
The indebtedness must be paid or
incurred during the taxable year
The indebtedness must be connected
with the taxpayer’s trade, business or
exercise of profession
The interest is not expressly
disallowed by law to be deducted from
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
5.
6.
A deduction shall be allowed even if
no withholding tax was made,
provided that:
1. The payee reported the income and
pays the tax thereon and the
withholding agent pays the tax,
including interest and surcharges
2. The payee failed to report the income
on the due date thereof but the
withholding agent pays the tax
3. The withholding agent accidently
under-withheld the tax but pays the
difference between the tax due and
tax paid
If both the taxpayer and the person
to whom the interest payment has
been made or is to be made are
“Related” persons, the interest
payment isn’t deductible—
1. Between members of the family—
shall include his brothers or sisters,
whether by whole or half-blood,
spouse, ascendants and lineal
descendants
2. Between an individual and a
corporation more than 50% in value
of the outstanding capital stock of
which
is
owned,
directly
or
indirectly, by or for such individual
3. Except in the case of distributions in
liquidation,
between
two
corporations more than fifty percent
(50%) in value of the outstanding
7.
8.
9.
10.
11.
12.
13.
14.
Cost of materials
Club dues—where a corporation requires
its officers to be members of social clubs to
promote the business, and the club dues
are paid by the corporation, such are
deductible
Expenses of farmers
Expenses of professionals
Expenses partly for business purposes—
shall be apportioned appropriately
Pre-operating expenses
Professional fees
Rentals
Repair and maintenance
Representation
and
entertainment
expenses
Optional Treatment of Interest Expense:
 At the option of the taxpayer
 Interest incurred to acquire property
used in trade, business, or exercise of
profession may be allowed as an
deduction or treated as a capital
expenditure
 Interest paid or incurred by the taxpayer
on all unpaid business-related taxes shall
be fully deductible from gross income and
shall not be subject to the limitation on
deduction. Thus such interest expense
incurred or paid shall not be diminished
by the percentage of interest income
earned which had been subjected to final
withholding tax
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 56 –
8.
the taxpayer’s gross income
The amount of interest deducted from
gross income doesn't exceed the limit
set forth by law
4.
5.
6.
stock of which is owned, directly or
indirectly, by or for the same
individual if either one of such
corporations, with respect to the
taxable year of the corporation
preceding the date of the sale of
exchange was under the law
applicable to such taxable year, a
personal holding company or a
foreign personal holding company;
Between the grantor and a fiduciary
of any trust; or
Between the fiduciary of and the
fiduciary of a trust and the fiduciary
of another trust if the same person is
a grantor with respect to each trust;
or
Between a fiduciary of a trust and
beneficiary of such trust.
Rules on deductibility of interest
expense paid or incurred by
taxpayer by virtue of a bank loan—
interest expense – (n% x interest income)
*The entire interest expense by virtue of
a bank loan is not deductible and is
subject to the above formula.
*January 1998—41%; January 1999—
39%; January 2000 and therafter—38%
*But this was amended by a subsequent
law which provided for 42%
Not Deductible—
1. Interest on unpaid salaries and
bonuses
2. Interest on indebtedness incurred or
continued to purchase bonds and
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ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
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other securities
Interest paid to “related” persons
Interest deducted in advance on loan
of an individual on cash basis (shall
be allowed as a deduction during the
year the indebtedness is paid)
5. Interest on loan incurred to finance
petroleum
operation
in
the
Philippines
6. Interest on preferred shares
Limitation on credit for foreign
taxes—
1. Shall not exceed the same proportion
of the tax against which such credit
is taken, which the taxpayers’ net
income from sources within such
country taxable bears to his entire
net income for the same taxable year
2. The total amount of the credit shall
not exceed the same proportion of
the tax against which such credit is
taken, which the taxpayer’s net
income from sources within the
Philippines bears to his entire net
income for the same taxable year
(apples where the resident citizen or
domestic corporation derives income
from more than 1 country)
3.
4.
1.
2.
3.
Taxes
4.
Payments must be for taxes
Taxes are imposed by law upon the
taxpayer
Taxes must be paid or accrued during
the taxable year in connection with
the taxpayer’s trade, business, or
profession
Taxes are not specifically excluded by
law from being deducted from the
taxpayer’s gross income
Taxes not deductible—
1. Philippine income tax
2. Foreign income tax
3. Estate and donor’s tax
4. Special assessments on real
property
5. Electric energy consumption tax
under BP36
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
No deduction is allowed for amounts
representing
interest,
surcharges,
or
penalties incident to delinquency.
Ways to avoid double or multiple
taxation—
 There is a strong possibility that the
income from sources outside the
Philippines must have already been
subjected to income tax by the foreign
government where the source of income is
located
 The Philippine government generally
adopts either the -o Exemption method—avoids or
totally
eliminates
double
taxation by tax exemption in the
resident state
o Tax credit method—prevents or
partly
eliminates
double
taxation in the resident state
through the grant of credit for
taxes paid in the source State
Analysis of credit for taxes—
If the taxpayer signifies in his return his
desire to claim a credit for taxes, in the case
of a Philippine citizen, whether resident or
non-resident, and the case of domestic
INCOME TAX REVIEWER AND CASE DIGESTS
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corporations, is as follows—
1. The amount of any federal or national
income, war-profits, and excess-profits
taxes paid or accrued during the taxable
year to any foreign country
2. An individuals’ proportionate share of
any such taxes of which is a partner or of
an estate or trust of which he is the
beneficiary paid or accrued during the
taxable year to a foreign country, if his
distributive share of the income of suchj
partnership or trust is reported as income
under the pertinent provisions of the tax
code
1.
2.
Losses
3.
4.
5.
Loss must be of the taxpayer
The loss is actually sustained and
charged off within the taxable year
The loss is evidenced by a closed and
complete transaction
The loss is not as deduction for estate
tax purposes
The loss is not compensated for by
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
NOLCO shall be allowed only if there
has been no substantial change in
the ownership of the business or
enterprise in that—
1. Not less than 75% in nominal value
of outstanding issued shares if the
business is in the name of the
corporation is held by or on behalf of
Conditions for allowance of credits—
 If the taxpayer signifies in his return his
desire to claim credit for income, warprofits, or excess-profit taxes paid other
than to the Philippines, the income tax
return must be accompanied by the
appropriate form prescribed by the
Commissioner.
 If credit is sought for taxes already paid
the form must have attached to it the
return on which such accrued tax was
based.
 In case of a credit sought for taxes
accrued
but
not
yet
paid,
the
Commissioner may require as a condition
precedent a bond from the taxpayer.
Bad debt theory—
 Under this theory, loss from theft or
embezzlement occurring in the year and
discovered in another year is ordinary
deductible for the year in whiuch
sustained
 In a case however where the taxpayer
had no means of determining the actual
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 59 –
6.
7.
insurance or otherwise
In the case of an individual, the loss
must be connected with his trade,
business or profession, or incurred in
any transaction entered into for profit
though not connected with his trade,
business, or profession
In the case of casualty loss, it has
been reported to the BIR within 45
days from date of occurence of the loss
2.
the same persons
Not less than 75% of the paid up
capital of the corporation if the
business is in the name of the
corporation, is held by or on behalf of
the same persons
General principles of NOLCO—
1. Limited only to net operating losses
accumulated
beginning
January
1998
2. Shall be allowed a deduction from
gross income of the same taxpayer
who sustained the accumulated the
net operating losses regardless of the
change in its ownership. This shall
also apply in the case of a merger
where the taxpayer is the surviving
entity.
3. NOLCO of the taxpayer shall not be
transferred
to
another
person
whether directly or indirectly, such
as, but not limited to, the transfer or
assignment
thereof
through
a
merger, consolidation or any form of
business combination off such
taxpayer with another person
4. An individual who claims the 10%
OSD shall not be allowed to claim
deduction of NOLCO—three-year
period shall continue to run despite
the use of the OSD
5. NOLCO shall be in a first in-first out
basis
6. To be availed of by individuals and
domestic
and
resident
foreign
corporations
Wash sales of stocks or securities
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010

date of the embezzlement, a loss was
sustained in the year of discovery
The above has been modified in such a
way that since the embezzlement of funds
creates a debtor-creditor relationship, the
loss is deductible as bad debt in the year
when the right of recovery is worthless
Voluntary removal of buildings
 As an incident to renewals or
replacements is deductible as loss during
the taxable year
 However, when a taxpayer buys real
estate upon which a building is located,
which he proceeds to raze with a view to
erecting another building, it will be
considered that the taxpayer has
sustained no deductible expense on
account of the cost of such removal, the
value of the real estate, exclusive of old
improvements, being presumably equal to
the purchase price of the land and
building plus the cost of removing the
useless building
Net Operating Loss
 Excess of allowable deductions over gross
income of the business in a taxable year
Net Operating Loss Carry-Over (NOLCO)
 The net operating loss of the business or
enterprise
for
any
taxable
year
immediately preceding the current
taxable year which had not been
previously offset as deduction from gross
income shall be carried over as a
deduction from gross income for the next
3
CONSECUTIVE
taxable
years
immediately following the year of such
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 60 –


1.
2.
3.
Bad debts
4.
There
must
be
an
existing
indebtedness due to the taxpayer,
which must be valid and legally
demandable
The same must be connected with the
taxpayer’s trade, business, or practice
of profession
The same must not be sustained in a
transaction entered into between
related parties enumerated above
The
same
must
be
actually
ascertained to be worthless and
uncollectible as well as actually
charged off the books of accounts of
the taxpayer as of the end of the
taxable year
In the case of loss claimed to have
been sustained from any sale of or
other disposition of shares of stock or
securities where it appears that
within the period beginning 30 days
before the date of such sale or
disposition and ending 30 days, after
such date, the taxpayer has
acquired, or has entered into
contract or option to so acquire,
substantially identical stock or
securities, then no deduction for the
loss shall be allowed under Section
34
Not applicable if the claim is made
by a dealer in stock or securities with
respect to a transaction made in the
ordinary course of the business of
such debtor

loss
Any net loss incurred during the taxable
year shall not be allowed as a deduction
For mines other than oil and gas wells…
 Net operating loss incurred in any of the
first 10 years of operation may be carried
over as a deduction from taxable income
for the next 5 years immediately
following the year of such loss
 The entire amount of the loss shall be
carried over the first 5 taxable years
following the loss and any portion of such
loss which exceeds the taxable income of
such 1st year shall be deducted in like
manner from the taxable income of the
next remaining four years
Bad Debts
 Refers to those debts resulting from the
worthlessness or uncollectibility in whole
or in par, of amounts due to the taxpayer
by others, arising from money lent or
from uncollectible amounts of income
from goods sold or services rendered
Securities becoming worthless
 The loss therefrom resulting shall be
considered as a loss from the sale or
exchange of capital asset made on the
last day of the taxable year
 This rule is however not true for banks or
trust companies incorporated under the
laws of the Philippines
Tax benefit rule
 Bad debts claimed during the preceding
year but subsequently recovered shall be
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
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1.
2.
3.
Depreciation
4.
5.
included as part of the taxpayer’s gross
income for the year of such recovery to
the extent of the income tax benefit of
said deduction
Reasonable deduction may be made in
addition to depreciation for obsolescence, in
accordance with the facts obtaining with
respect to each item of property concerning
which a claim for obsolescence is made.
Allowance for depreciation must be
reasonable
It must be for property arising out of
its use in the trade or business, or out
of its not being used temporarily
during the year
It must be charged off during the
taxable year from the taxpayer’s
books of accounts
The person who sustains an economic
loss from the decrease in property
value due to depreciation gets the
deduction
Depreciation cannot go beyond the
acquisition cost of property and
cannot be based on appraisal value
Intangibles may be the subject of depreciation
allowance.
Depletion
1.
Charitable and
other
contributions
2.
3.
4.
5.
The charitable contribution must
actually be paid or made to the
Philippine government or any political
subdivision thereof exclusively for
public purposes, or any of the
accredited domestic corporation or
association specified in the tax code
It must be made within the taxable
year
It must not exceed 10% (individual) or
5% (corporation) of the taxpayer’s
taxable income before charitable
contributions
It must be evidenced by adequate
receipts and records
The
amount
of
charitable
contributions of property other than
money shall be based on the
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
Donations to the Government.
 Donations to the Government of the
Philippines or to any of its agencies
or political subdivisions, including
fully-owned
government
corporations, exclusively to finance,
to provide for, or to be used in
undertaking priority activities in
education, health, youth and sports
development, human settlements,
science and culture, and in economic
development according to a National
Priority Plan determined by the
National Economic and Development
Authority (NEDA), In consultation
with
appropriate
government
agencies, including its regional
development councils and private
Subject to such terms and conditions as may
be prescribed by the Secretary of Finance, the
term "utilization" means:
a. Any amount in cash or in kind
(including administrative expenses)
paid or utilized to accomplish one or
more purposes for which the
accredited
nongovernment
organization
was
created
or
organized.
b. Any amount paid to acquire an asset
used (or held for use) directly in
carrying out one or more purposes for
which the accredited nongovernment
organization
was
created
or
organized.
An amount set aside for a specific project
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 62 –
acquisition cost of such property
Limited Deductibility
 Contributions or gifts actually paid or
made within the taxable year to, or
for the use of the Government of the
Philippines or any of its agencies or
any political subdivision thereof
exclusively for public purposes, or to
accredited domestic corporation or
associations organized and operated
exclusively for religious, charitable,
scientific,
youth
and
sports
development, cultural or educational
purposes or for the rehabilitation of
veterans, or to social welfare
institutions, or to non-government
organizations, in accordance with
rules and regulations promulgated by
the Secretary of finance, upon
recommendation of the Commissioner,
no part of the net income of which
inures to the benefit of any private
stockholder or individual in an
amount not in excess of ten percent
(10%) in the case of an individual, and
five percent (%) in the case of a
corporation, of the taxpayer's taxable
income derived from trade, business
or profession as computed without the
benefit of this and the following
subparagraphs.
Full Deductibility
1. Donations to the government
2. Donations
to
certain
foreign
institutions
or
international
organizations
3. Donations
to
accredited
non-
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010

philantrophic
persons
and
institutions
Provided, That any donation which is
made to the Government or to any of
its agencies or political subdivisions
not in accordance with the said
annual priority plan shall be subject
to the limitations prescribed in
paragraph (1) of this Subsection;
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
Donations to Accredited Nongovernment
Organizations.
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
inures 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
nongovernment
organizations taxable year in which
contributions are received, makes
which comes within one or more purposes of
the accredited nongovernment organization
may be treated as a utilization, but only if at
the time such amount is set aside, the
accredited nongovernment 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.
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government organizations
3.
4.
Research and
Development
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
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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;
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; and
The assets of which, in the even of
dissolution, would be distributed to
another
nonprofit
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.
Shall not apply—
1. 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
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,
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capital account. The expenditures so
treated shall be allowed as deduction
during the taxable year when paid or
incurred.
2.
subject to depreciation and depletion;
and
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.
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
91) 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.
Pension trust
An employer establishing or maintaining
a pension trust to provide for the payment
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Premium
payments on
health and
hospitalization
OPTIONAL
STANDARD
DEDUCTION
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.
The amount of premiums not to exceed
Two thousand four hundred pesos (P2,400)
per family or Two hundred pesos (P200) a
month paid during the taxable year for
health and/or hospitalization insurance
taken by the taxpayer for himself,
including his family, shall be allowed as a
deduction from his gross income: Provided,
That said family has a gross income of not
more than Two hundred fifty thousand
pesos (P250,000) for the taxable year:
Provided, finally, That in the case of
married taxpayers, only the spouse
claiming the additional exemption for
dependents shall be entitled to this
deduction.
1.
2.
Available only to citizens and
resident aliens
The standard deduction is only
optional
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Notwithstanding the provision of the
preceding Subsections, The Secretary of
Finance, upon recommendation of the
Commissioner, after a public hearing shall
have been held for this purpose, may
prescribe by rules and regulations, limitations
or ceilings for any of the itemized deductions
under Subsections (A) to (J) of this Section:
Provided, That for purposes of determining
such ceilings or limitations, the Secretary of
Finance shall consider the following factors:
(1) adequacy of the prescribed limits on the
actual expenditure requirements of each
particular industry; and (2) effects of inflation
on expenditure levels: Provided, further, That
no ceilings shall further be imposed on items
of expense already subject to ceilings under
present law.
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3.
4.
5.
Such election, if made by a
qualified taxpayer, is irrevocable
for a year in which it is made,
however, he can change to
itemized deductions in succeeding
years
The
amount
of
standard
deduction is limited to the 10% of
taxpayer’s gross income
Proof of actual expenses is not
required
SPECIAL DEDUCTIONS
In addition to the expenses allowable as
deductions under this Chapter, a private
educational institution, referred to under
Section 27 (B) of this Code, may at its
Private
option elect either: (a) to deduct
educational
expenditures otherwise considered as
institutions
capital outlays of depreciable assets
incurred during the taxable year for the
expansion of school facilities or (b) to
deduct allowance for depreciation thereof
under Subsection (F) hereof.
(A) Special Deduction Allowed to Insurance Companies. - In the case of insurance companies, whether domestic or foreign doing
business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other
than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, That
the released reserve be treated as income for the year of release.
Insurance
Companies,
Whether
domestic or
foreign
(B) Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability and mutual workmen's compensation and
mutual casualty insurance companies requiring their members to make premium deposits to provide for losses and expenses, said
companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable
income all income received by them from all other sources plus such portion of the premium deposits as are retained by the companies
for purposes other than the payment of losses and expenses and reinsurance reserves.
(C) Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include in their return of gross income, gross
premiums collected and received by them less amounts paid to policyholders on account of premiums previously paid by them and
interest paid upon those amounts between the ascertainment and payment thereof.
(D) Assessment Insurance Companies.- Assessment insurance companies, whether domestic or foreign, may deduct from their gross
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income the actual deposit of sums with the officers of the Government of the Philippines pursuant to law, as additions to guarantee or
reserve funds.
Under the Omnibus Investments Code or EO 226
(a) Income Tax Holiday.
(1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be
fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the
income tax exemption will be extended for another year in each of the following cases:
i. the project meets the prescribed ratio of capital equipment to number of workers set by the Board;
ii. utilization of indigenous raw materials at rates set by the Board;
iii. the net foreign exchange savings or earnings amount to at least US$500,000.00 annually during the first three (3) years of
operation.
The preceding paragraph notwithstanding, no registered pioneer firm may avail of this incentive for a period exceeding eight (8) years.
Incentives
granted to
registered
enterprises
(2) For a period of three (3) years from commercial operation, registered expanding firms shall be entitled to an exemption from income
taxes levied by the National Government proportionate to their expansion under such terms and conditions as the Board may
determine; Provided, however, That during the period within which this incentive is availed of by the expanding firm it shall not be
entitled to additional deduction for incremental labor expense.
(3) The provision of Article 7 (14) notwithstanding, registered firms shall not be entitled to any extension of this incentive.
(b) Additional Deduction for Labor Expense. For the first five (5) years from registration a registered enterprise shall be allowed an
additional deduction from the taxable income of fifty percent (50%) of the wages corresponding to the increment in the number of direct
labor for skilled and unskilled workers if the project meets the prescribed ratio of capital equipment to number of workers set by the
Board: Provided, That this additional deduction shall be doubled if the activity is located in less developed areas as defined in Art. 40.
(c) Tax and Duty Exemption on Imported Capital Equipment. Within five (5) years from the effectivity of this Code, importations of
machinery and equipment and accompanying spare parts of new and expanding registered enterprise shall be exempt to the extent of
one hundred percent (100%) of the customs duties and national internal revenue tax payable thereon: Provided, That the importation of
machinery and equipment and accompanying spare parts shall comply with the following conditions:
(1) They are not manufactured domestically in sufficient quantity, of comparable quality and at reasonable prices;
(2) They are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products, unless prior
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approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof
or the proportionate taxes and duties are paid on the specific equipment and machinery being permanently used for non-registered
activities; and
(3) The approval of the Board was obtained by the registered enterprise for the importation of such machinery, equipment and spare
parts.
In granting the approval of the importations under this paragraph, the Board may require international canvassing but if the total cost
of the capital equipment or industrial plant exceeds US$5,000,000, the Board shall apply or adopt the provisions of Presidential Decree
Numbered 1764 on International Competitive Bidding.
If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts without prior approval of the
Board within five (5) years from date of acquisition, the registered enterprise and the vendee, transferee, or assignee shall be solidarily
liable to pay twice the amount of the tax exemption given it.
The Board shall allow and approve the sale, transfer or disposition of the said items within the said period of five (5) years if made:
(aa) to another registered enterprise or registered domestic producer enjoying similar incentives;
(bb) for reasons of proven technical obsolescence; or
(cc) for purposes of replacement to improve and/or expand the operations of the registered enterprise.
(d) Tax Credit on Domestic Capital Equipment. A tax credit equivalent to one hundred percent (100%) of the value of the national
internal revenue taxes and customs duties that would have been waived on the machinery, equipment and spare parts, had these items
been imported shall be given to the new and expanding registered enterprise which purchases machinery, equipment and spare parts
from a domestic manufacturer: Provided, That (1) That the said equipment, machinery and spare parts are reasonably needed and will
be used exclusively by the registered enterprise in the manufacture of its products, unless prior approval of the Board is secured for the
part-time utilization of said equipment in a non-registered activity to maximize usage thereof; (2) that the equipment would have
qualified for tax and duty-free importation under paragraph (c) hereof; (3) that the approval of the Board was obtained by the registered
enterprise; and (4) that the purchase is made within five (5) years from the date of effectivity of the Code. If the registered enterprise
sells, transfers or disposes of these machinery, equipment and spare parts, the provisions in the preceding paragraph for such
disposition shall apply.
(e) Exemption from Contractor's Tax. The registered enterprise shall be exempt from the payment of contractor's tax, whether national
or local.
(f) Simplification of Customs Procedure. Customs procedures for the importation of equipment, spare parts, raw materials and supplies,
and exports of processed products by registered enterprises shall be simplied by the Bureau of Customs.
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(g) Unrestricted Use of Consigned Equipment. Provisions of existing laws notwithstanding, machinery, equipment and spare part
consigned to any registered enterprises shall not be subject to restrictions as to period of use of such machinery, equipment and spare
parts Provided, that the appropriate re-export bond is posted unless the importation is otherwise covered under subsections (c) and (m)
of this Article. Provided, further, that such consigned equipment shall be for the exclusive use of the registered enterprise.
If such equipment is sold, transferred or otherwise disposed of by the registered enterprise the related provision of Article 39 (c) (3)
shall apply. Outward remittance of foreign exchange covering the proceeds of such sale, transfer or disposition shall be allowed only
upon prior Central Bank approval.
(h) Employment of Foreign Nationals. Subject to the provisions of Section 29 of Commonwealth Act Number 613, as amended, a
registered enterprise may employ foreign nationals in supervisory, technical or advisory positions for a period not exceeding five (5)
years from its registration, extendible for limited periods at the discretion of the Board: Provided, however, That when the majority of
the capital stock of a registered enterprise is owned by foreign investors, the position of president, treasurer and general manager or
their equivalents may be retained by foreign nationals beyond the period set forth herein.
Foreign nationals under employment contract within the purview of this incentive, their spouses and unmarried children under twentyone (21) years of age, who are not excluded by Section 29 of Commonwealth Act Numbered 613, as amended, shall be permitted to enter
and reside in the Philippines during the period of employment of such foreign nationals.
A registered enterprise shall train Filipinos as understudies of foreign nationals in administrative, supervisory and technical skills and
shall submit annual reports on such training to the Board.
(i) Exemption on Breeding Stocks and Genetic Materials. The importation of breeding stocks and genetic materials within ten (10)
years from the date of registration or commercial operation of the enterprise shall be exempt from all taxes and duties: Provided, That
such breeding stocks and genetic materials are (1) not locally available and/or obtainable locally in comparable quality and at
reasonable prices; (2) reasonably needed in the registered activity; and (3) approved by the Board.
(j) Tax Credit on Domestic Breeding Stocks and Genetic Materials. A tax credit equivalent to one hundred percent (100%) of the value
of national internal revenue taxes and customs duties that would have been waived on the breeding stocks and genetic materials had
these items been imported shall be given to the registered enterprise which purchases breeding stocks and generic materials from a
domestic producer: Provided, 1) That said breeding stocks and generic materials would have qualified for tax and duty free importation
under the preceding paragraph; 2) that the breeding stocks and genetic materials are reasonably needed in the registered activity; 3)
that the approval of the board has been obtained by the registered enterprise; and 4) that the purchase is made within ten (10) years
from date of registration or commercial operation of the registered enterprise.
(k) Tax Credit for Taxes and Duties on Raw Materials. Every registered enterprise shall enjoy a tax credit equivalent to the National
Internal Revenue taxes and Customs duties paid on the supplies, raw materials and semi-manufactured products used in the
manufacture, processing or production of its export products and forming part thereof, exported directly or indirectly by the registered
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enterprise: Provided, however, that the taxes on the supplies, raw materials and semi- manufactured products domestically purchased
are indicated as a separate item in the sales invoice.
Nothing herein shall be construed as to preclude the Board from setting a fixed percentage of export sales as the approximate tax credit
for taxes and duties of raw materials based on an average or standard usage for such materials in the industry.
(l) Access to Bonded Manufacturing/Trading Warehouse System. Registered export oriented enterprises shall have access to the
utilization of the bonded warehousing system in all areas required by the project subject to such guidelines as may be issued by the
Board upon prior consultation with the Bureau of Customs.
(m) Exemption from Taxes and Duties on Imported Spare Parts. Importation of required supplies and spare parts for consigned
equipment or those imported tax and duty free by a registered enterprise with a bonded manufacturing warehouse shall be exempt
from customs duties and national internal revenue taxes payable thereon, Provided, However, That at least seventy percent (70%) of
production is exported; Provided, further, that such spare parts and supplies are not locally available at reasonable prices, sufficient
quantity and comparable quality; Provided, finally, That all such spare parts and supplies shall be used only in the bonded
manufacturing warehouse of the registered enterprise under such requirements as the Bureau of Customs may impose.
(n) Exemption from Wharfage Dues and any Export Tax, Duty, Impost and Fee. The provisions of law to the contrary notwithstanding,
exports by a registered enterprise of its non- traditional export products shall be exempted of its non-traditional export products shall
be exempted from any wharfage dues, and any export tax, duty, impost and fee.
PERSONAL AND ADDITIONAL EXEMPTIONS
PERSONAL EXEMPTIONS
STATUS
Single
ALLOWABLE DEDUCTION
P20,000
P32,000
Married
P25,000
Head of family
MA. ANGELA LEONOR C. AGUINALDO
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NOTES
In the case of married individuals where only one
of the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption.
Head of family—
 An unmarried or legally separated man or
woman with one or both parents, or with one
or more brothers or sisters, or with one or
more legitimate, recognized natural or legally
adopted children living with and dependent
upon him for their chief support, where such
brothers or sisters or children are not more
than twenty-one (21) years of age, unmarried
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ADDITIONAL EXEMPTIONS
P8,000/dependent
and not gainfully employed or where such
children, brothers or sisters, regardless of age
are incapable of self-support because of
mental or physical defect.
 Also includes one who is the benefactor of a
qualified senior citizen—a senior citizen is
any resident citizen of the Philippines of at
least 60 years old, including those w2ho have
retired from government offices or private
enterprises, and has an income of not more
than P60,000 per annum subject to the
review of the NEDA every 3 years
Dependent—
 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) years of age, unmarried
and not gainfully employed or if such
dependent, regardless of age, is incapable of
self-support because of mental or physical
defect.
The additional exemption for dependent shall be
claimed by only one of the spouses in the case of
married individuals.
In the case of legally separated spouses,
additional exemptions may be claimed only by the
spouse who has custody of the child or children:
Provided, That the total amount of additional
exemptions that may be claimed by both shall not
exceed the maximum additional exemptions
herein allowed.
Additional Notes on Personal and Additional Exemptions—
Change of Status Rule—
1. If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the
corresponding additional exemption, as the case may be, in full for such year.
2. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as
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3.
if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed
during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents
married, became twenty-one (21) years old or became gainfully employed at the close of such year.
Status-At-The-End-Of-The-Year Rule
 Whatever the status of the taxpayer at the end of the calendar year shall be used for purposes of determining his personal and additional exemptions
 A change of status of the taxpayer during the taxable year generally benefits the taxpayer but doesn't prejudice him
For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty
ESTATES AND TRUSTS
thousand pesos (P20,000) from the income of the estate or trust.
ITEMS NOT DEDUCTIBLE
1. Bribes, Kickbacks and Other Similar Payments. - No deduction
from gross income shall be allowed under Subsection (A) hereof
for any payment made, directly or indirectly, to an official or
employee of the national government, or to an official or
employee of any local government unit, or to an official or
employee of a government-owned or -controlled corporation, or to
an official or employee or representative of a foreign
government, or to a private corporation, general professional
partnership, or a similar entity, if the payment constitutes a
bribe or kickback.
2. Personal, living or family expenses;
3. Capital Expenditures—Any amount paid out for new buildings
or for permanent improvements, or betterments made to
increase the value of any property or estate; or for any amount
expended in restoring property or in making good the
exhaustion thereof for which an allowance for depreciation
expended for securing a copyright and plates, which remain the
property of the person making the payments, are investments of
capital.
4. Any amount expended in restoring property or in making good
the exhaustion thereof for which an allowance is or has been
made; or
5. Premiums paid on any life insurance policy covering the life of
any officer or employee, or of any person financially interested in
any trade or business carried on by the taxpayer, individual or
MA. ANGELA LEONOR C. AGUINALDO
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6.
corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
In computing net income, no deductions shall in any case be
allowed in respect of losses from sales or exchanges of property
directly or indirectly –
a. Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole or
half-blood), spouse, ancestors, and lineal descendants;
or
b. Except in the case of distributions in liquidation,
between an individual and corporation more than fifty
percent (50%) in value of the outstanding stock of which
is owned, directly or indirectly, by or for such
individual; or
c. Except in the case of distributions in liquidation,
between two corporations more than fifty percent (50%)
in value of the outstanding stock of which is owned,
directly or indirectly, by or for the same individual if
either one of such corporations, with respect to the
taxable year of the corporation preceding the date of the
sale of exchange was under the law applicable to such
taxable year, a personal holding company or a foreign
personal holding company;
d. Between the grantor and a fiduciary of any trust; or
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e.
f.
Between the fiduciary of and the fiduciary of a trust
and the fiduciary of another trust if the same person is
a grantor with respect to each trust; or
Between a fiduciary of a trust and beneficiary of such
trust.
CHAPTER 6
ACCOUNTING PERIODS AND ACCOUNTING METHODS
ACCOUNTING PERIODS
TAXABLE YEAR
 The calendar year, or the fiscal year ending during such
calendar year, upon the basis of which the net income is
computed under this Title
 This includes, in the case of a return made for a fractional part
of a year under the provisions of this Title or under rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the commissioner, the period for which such
return is made.
CALENDAR YEAR
FISCAL YEAR
 Means an accounting period of twelve (12) months ending on the
last day of any month other than December
ACCOUNTING METHODS
CASH BASIS
 Method of accounting whereby all items of gross income received
during the year shall be accounted for in such taxable year and
that only expenses actually paid shall be claimed as deductions
during the year
 Income is realized upon constructive or actual receipt of cash or
its equivalent, and expenses are deductible only upon actual
payment thereof, regardless of the taxable year when the service
is performed or the expense is incurred
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ACCRUAL METHOD
 Method of accounting for income in the period it is earned,
regardless of whether it has been received or not
 Expenses are accounted for in the period they are incurred and
not in the period they are paid
Notes—
1. Income is recognized when earning process is complete and
exchange has taken place
2. All events test—this is followed for expense; an expense is
deductible for the taxable year in which all the events had
occurred which determined the fact of the liability and the
amount thereof could be determined with reasonable accuracy
3. Deduction for contingent liability is not allowed
LONG-TERM CONTRACTS
 Are building, installation or construction contracts covering a
period in excess of one (1) year. Persons whose gross income is
derived in whole or in part from such contracts shall report such
income upon the basis of percentage of completion—
o The costs incurred under the contract as of the end of
the taxable year are compared with the estimated total
to be performed
o The work performed on the contract as of the end of the
tax year are compared with the estimated work to be
performed
 The return should be accompanied by a return certificate of
architects or engineers showing the percentage of completion
during the taxable year of the entire work performed under
contract. There should be deducted from such gross income all
expenditures made during the taxable year on account of the
contract, account being taken of the material and supplies on
hand at the beginning and end of the taxable period for use in
connection with the work under the contract but not yet so
applied. If upon completion of a contract, it is found that the
taxable net income arising thereunder has not been clearly
reflected for any year or years, the Commissioner may permit or
require an amended return.
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INSTALLMENT METHOD
 Is a method considered appropriate when collections of the
proceeds of sales and income extend over relatively long periods
of time and there is strong possibility that full collection will not
be made
 Generally, income from sale of property on the installment basis
may be reported as the payments are received—if the
installment method is elected for qualifying sales, the gain
reported for any taxable year is the proportion of the installment
payment received in that year which the gross profit, realized or
to be realized when payment is complete bears to the total
contract price
Sale of personal property
 A person who regularly sells or disposes of personal property on
the installment plan, whether or not title remains in the vendor
until the payment is fully paid for, may return as income
therefrom in any taxable year that proportion of the installment
payments actually received in that year which the total or gross
profit realized or to be realized when the property is paid for,
bears top the total contract price
 No payment received in the taxable year shall be excluded in
computing the amount of income to be returned on the ground
that they were received under a sale of total profit from which
the change by the taxpayer to the installment basis of returning
income
 Deductible items are not allowed to be allocated to the years in
which the profits from the sales of a particular year are to be
returned as income, but must be deducted for the taxable year in
which the items are paid or incurred or paid or accrued
Sale of real property
 Under the tax code, deferred payment sales of property
include—
o Agreements of purchase and sale which contemplate
that a conveyance is not to be made at the outset but
only after all or a substantial portion of the selling
price has been paid
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Sales in which there is an immediate transfer of tiotle,
the vendor being protected by mortgage or other lien as
deferred payments
The above fall into two classes when considered with respect to
the terms of sales as follows—
o Sales of property on installment plan—sales in which
the cash or property, other than evidence of
indebtedness of the purchaser, received in payment
during the taxable year in which the sale is made don't
exceed 25% of the selling price
o Deferred payment sales not on the installment plan
In case of mortgaged property, the amount of the mortgage,
whether the property is merely taken subject to the mortgage,
or whether the mortgage is assumed by the purchaser, shall be
included as part of the selling price but the amount of the
mortgage, to the extent that it doesn't exceed the basis to the
vendor of the property sold, shall be considered as a part of the
initial payments or of the total contract price
o


SEC. 49. Installment Basis. (A) Sales of Dealers in Personal Property. - Under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells or otherwise disposes of
personal property on the installment plan may return as income
therefrom in any taxable year that proportion of the installment
payments actually received in that year, which the gross profit realized
or to be realized when payment is completed, bears to the total contract
price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a
casual sale or other casual disposition of personal property (other than
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), for a price
exceeding One thousand pesos (P1,000), or (2) of a sale or other
disposition of real property, if in either case the initial payments do not
exceed twenty-five percent (25%) of the selling price, the income may,
under the rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, be returned on the basis and
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in the manner above prescribed in this Section. As used in this Section,
the term "initial payments" means the payments received in cash or
property other than evidences of indebtedness of the purchaser during
the taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. An individual who sells or disposes of real property, considered as capital
asset, and is otherwise qualified to report the gain therefrom under
Subsection (B) may pay the capital gains tax in installments under rules
and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to
the benefits of Subsection (A) elects for any taxable year to report his
taxable income on the installment basis, then in computing his income
for the year of change or any subsequent year, amounts actually received
during any such year on account of sales or other dispositions of property
made in any prior year shall not be excluded.

Under Section 51, Revenue Regulations 2—gains, profits, and
income are to be included in the gross income for the taxable
year in which they are received by the taxpayer, unless they are
included when they accrue to him in accordance with the
approved method of accounting followed by him. If a person
sues in one year on a pecuniary claim or for property, and money
or property is reconciled on a judgment therefore in a later year,
income is realized in that year, assuming that the money or
property would have been income in the earliest year if then
received. This is true of a recovery for patent infringment. Bad
debts or accounts charged off subsequent to March 1, 1913,
because of the fact that they were determined to be worthless,
which are subsequently recovered, whether or not by suit,
constitute income for the year in which recovered, regardless of
the date when amounts were charged off
CHAPTER 7
RETURNS AND PAYMENTS OF TAX
MA. ANGELA LEONOR C. AGUINALDO
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INDIVIDUALS
SEC. 51. Individual Return.
(A) Requirements. (1) Except as provided in paragraph (2) of this Subsection, the following
individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income
from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines.
(2) The following individuals shall not be required to file an income tax
return;
(a) An individual whose gross income does not exceed his total personal
and additional exemptions for dependents under Section 35: Provided,
That a citizen of the Philippines and any alien individual engaged in
business or practice of profession within the Philippine shall file an
income tax return, regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, as defined in
Section 32 (A)(1), derived from sources within the Philippines, the
income tax on which has been correctly withheld under the provisions of
Section 79 of this Code: Provided, That an individual deriving
compensation concurrently from two or more employers at any time
during the taxable year shall file an income tax return: Provided,
further, That an individual whose compensation income derived from
sources within the Philippines exceeds Sixty thousand pesos (P60,000)
shall also file an income tax return;
(c) An individual whose sole income has been subjected to final
withholding tax pursuant to Section 57(A) of this Code; and
(d) An individual who is exempt from income tax pursuant to the
provisions of this Code and other laws, general or special.
(3) The forgoing notwithstanding, any individual not required to file an
income tax return may nevertheless be required to file an information
return pursuant to rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
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(4) The income tax return shall be filed in duplicate by the following
persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the
Philippines;
(c) A resident alien - on his income derived from sources within the
Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines on his income derived from sources within the Philippines.
(B) Where to File. - Except in cases where the Commissioner otherwise
permits, the return shall be filed with an authorized agent bank,
Revenue District Officer, Collection Agent or duly authorized Treasurer
of the city or municipality in which such person has his legal residence or
principal place of business in the Philippines, or if there be no legal
residence or place of business in the Philippines, with the Office of the
Commissioner.
file one return, each spouse may file a separate return of income but the
returns so filed shall be consolidated by the Bureau for purposes of
verification for the taxable year.
(C) When to File. -
(G) Signature Presumed Correct. - The fact that an individual's name is
signed to a filed return shall be prima facie evidence for all purposes that
the return was actually signed by him.
(1) The return of any individual specified above shall be filed on or
before the fifteenth (15th) day of April of each year covering income for
the preceding taxable year.
(E) Return of Parent to Include Income of Children. - The income of
unmarried minors derived from properly received from a living parent
shall be included in the return of the parent, except (1) when the donor's
tax has been paid on such property, or (2) when the transfer of such
property is exempt from donor's tax.
(F) Persons Under Disability. - If the taxpayer is unable to make his own
return, the return may be made by his duly authorized agent or
representative or by the guardian or other person charged with the care
of his person or property, the principal and his representative or
guardian assuming the responsibility of making the return and incurring
penalties provided for erroneous, false or fraudulent returns.
SEC. 56. Payment and Assessment of Income Tax for Individuals
and Corporation. -
(2) Individuals subject to tax on capital gains;
(A) Payment of Tax. (a) From the sale or exchange of shares of stock not traded thru a
local stock exchange as prescribed under Section 24(c) shall file a return
within thirty (30) days after each transaction and a final consolidated
return on or before April 15 of each year covering all stock transactions of
the preceding taxable year; and
(b) From the sale or disposition of real property under Section
24(D) shall file a return within thirty (30) days following each sale or
other disposition.
(D) Husband and Wife. - Married individuals, whether citizens, resident
or nonresident aliens, who do not derive income purely from
compensation, shall file a return for the taxable year to include the
income of both spouses, but where it is impracticable for the spouses to
MA. ANGELA LEONOR C. AGUINALDO
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(1) In General. - The total amount of tax imposed by this Title shall
be paid by the person subject thereto at the time the return is filed. In
the case of tramp vessels, the shipping agents and/or the husbanding
agents, and in their absence, the captains thereof are required to file the
return herein provided and pay the tax due thereon before their
departure. Upon failure of the said agents or captains to file the return
and pay the tax, the Bureau of Customs is hereby authorized to hold the
vessel and prevent its departure until proof of payment of the tax is
presented or a sufficient bond is filed to answer for the tax due.
(2) Installment of Payment. - When the tax due is in excess of Two
thousand pesos (P2,000), the taxpayer other than a corporation may elect
to pay the tax in two (2) equal installments in which case, the first
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installment shall be paid at the time the return is filed and the second
installment, on or before July 15 following the close of the calendar year.
If any installment is not paid on or before the date fixed for its payment,
the whole amount of the tax unpaid becomes due and payable, together
with the delinquency penalties.
(3) Payment of Capital Gains Tax. - The total amount of tax imposed
and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed
by the person liable thereto: Provided, That if the seller submits proof of
his intention to avail himself of the benefit of exemption of capital gains
under existing special laws, no such payments shall be required :
Provided, further, That in case of failure to qualify for exemption under
such special laws and implementing rules and regulations, the tax due
on the gains realized from the original transaction shall immediately
become due and payable, subject to the penalties prescribed under
applicable provisions of this Code: Provided, finally, That if the seller,
having paid the tax, submits such proof of intent within six (6) months
from the registration of the document transferring the real property, he
shall be entitled to a refund of such tax upon verification of his
compliance with the requirements for such exemption.
(1) The amount by which the tax imposed by this Title exceeds the
amount shown as the tax by the taxpayer upon his return; but the
amount so shown on the return shall be increased by the amounts
previously assessed (or collected without assessment) as a deficiency, and
decreased by the amount previously abated, credited, returned or
otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this return,
or if no return is made by the taxpayer, then the amount by which the
tax exceeds the amounts previously assessed (or collected without
assessment) as a deficiency; but such amounts previously assessed or
collected without assessment shall first be decreased by the amounts
previously abated, credited returned or otherwise repaid in respect of
such tax.
SEC. 74. Declaration of Income Tax for Individuals. -
(B) Assessment and Payment of Deficiency Tax. - After the return is
filed, the Commissioner shall examine it and assess the correct amount
of the tax. The tax or deficiency income tax so discovered shall be paid
upon notice and demand from the Commissioner.
(A) In General. - Except as otherwise provided in this Section, every
individual subject to income tax under Sections 24 and 25(A) of this Title,
who is receiving self-employment income, whether it constitutes the sole
source of his income or in combination with salaries, wages and other
fixed or determinable income, shall make and file a declaration of his
estimated income for the current taxable year on or before April 15 of the
same taxable year. In general, 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 proprietor or by a
partnership of which he is a member. Nonresident Filipino citizens, with
respect to income from without the Philippines, and nonresident aliens
not engaged in trade or business in the Philippines, are not required to
render a declaration of estimated income tax. The declaration shall
contain such pertinent information as the Secretary of Finance, upon
recommendation of the Commissioner, may, by rules and regulations
prescribe. An individual may make amendments of a declaration filed
during the taxable year under the rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title, the
term "deficiency" means:
(B) Return and Payment of Estimated Income Tax by Individuals. - The
amount of estimated income as defined in Subsection (C) with respect to
In case the taxpayer elects and is qualified to report the gain by
installments under Section 49 of this Code, the tax due from each
installment payment shall be paid within (30) days from the receipt of
such payments.
No registration of any document transferring real property shall be
effected by the Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been
reported, and the tax herein imposed, if any, has been paid.
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which a declaration is required under Subsection (A) shall be paid in four
(4) installments. The first installment shall be paid at the time of the
declaration and the second and third shall be paid on August 15 and
November 15 of the current year, respectively. The fourth installment
shall be paid on or before April 15 of the following calendar year when
the final adjusted income tax return is due to be filed.
(C) Definition of Estimated Tax. - In the case of an individual, the term
"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 sum of the credits allowed under this
Title against the said tax. If, during the current taxable year, the
taxpayer reasonable expects to pay a bigger income tax, he shall file an
amended declaration during any interval of installment payment dates.
CORPORATIONS
SEC. 52. Corporation Returns. (A) Requirements. - Every corporation subject to the tax herein imposed,
except foreign corporations not engaged in trade or business in the
Philippines, shall render, in duplicate, a true and accurate quarterly
income tax return and final or adjustment return in accordance with the
provisions of Chapter XII of this Title. The return shall be filed by the
president, vice-president or other principal officer, and shall be sworn to
by such officer and by the treasurer or assistant treasurer.
(B) Taxable Year of Corporation. - A corporation may employ either
calendar year or fiscal year as a basis for filing its annual income tax
return: Provided, That the corporation shall not change the accounting
period employed without prior approval from the Commissioner in
accordance with the provisions of Section 47 of this Code.
(C) Return of Corporation Contemplating Dissolution or Reorganization.
- Every corporation shall, within thirty (30) days after the adoption by
the corporation of a resolution or plan for its dissolution, or for the
liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by
the Securities and Exchange Commission, or for its reorganization,
MA. ANGELA LEONOR C. AGUINALDO
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render a correct return to the Commissioner, verified under oath, setting
forth the terms of such resolution or plan and such other information as
the Secretary of Finance, upon recommendation of the commissioner,
shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by
the Securities and Exchange Commission of the Certificate of Dissolution
or Reorganization, as may be defined by rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner,
secure a certificate of tax clearance from the Bureau of Internal Revenue
which certificate shall be submitted to the Securities and Exchange
Commission.
(D) Return on Capital Gains Realized from Sale of Shares of Stock not
Traded in the Local Stock Exchange. - Every corporation deriving capital
gains from the sale or exchange of shares of stock not traded thru a local
stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2),
28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days
after each transactions and a final consolidated return of all transactions
during the taxable year on or before the fifteenth (15th) day of the fourth
(4th) month following the close of the taxable year.
SEC. 56. Payment and Assessment of Income Tax for Individuals
and Corporation. (A) Payment of Tax. (1) In General. - The total amount of tax imposed by this Title shall
be paid by the person subject thereto at the time the return is filed. In
the case of tramp vessels, the shipping agents and/or the husbanding
agents, and in their absence, the captains thereof are required to file the
return herein provided and pay the tax due thereon before their
departure. Upon failure of the said agents or captains to file the return
and pay the tax, the Bureau of Customs is hereby authorized to hold the
vessel and prevent its departure until proof of payment of the tax is
presented or a sufficient bond is filed to answer for the tax due.
(2) Installment of Payment. - When the tax due is in excess of Two
thousand pesos (P2,000), the taxpayer other than a corporation may elect
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to pay the tax in two (2) equal installments in which case, the first
installment shall be paid at the time the return is filed and the second
installment, on or before July 15 following the close of the calendar year.
If any installment is not paid on or before the date fixed for its payment,
the whole amount of the tax unpaid becomes due and payable, together
with the delinquency penalties.
(3) Payment of Capital Gains Tax. - The total amount of tax imposed
and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed
by the person liable thereto: Provided, That if the seller submits proof of
his intention to avail himself of the benefit of exemption of capital gains
under existing special laws, no such payments shall be required :
Provided, further, That in case of failure to qualify for exemption under
such special laws and implementing rules and regulations, the tax due
on the gains realized from the original transaction shall immediately
become due and payable, subject to the penalties prescribed under
applicable provisions of this Code: Provided, finally, That if the seller,
having paid the tax, submits such proof of intent within six (6) months
from the registration of the document transferring the real property, he
shall be entitled to a refund of such tax upon verification of his
compliance with the requirements for such exemption.
In case the taxpayer elects and is qualified to report the gain by
installments under Section 49 of this Code, the tax due from each
installment payment shall be paid within (30) days from the receipt of
such payments.
No registration of any document transferring real property shall be
effected by the Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been
reported, and the tax herein imposed, if any, has been paid.
(B) Assessment and Payment of Deficiency Tax. - After the return is
filed, the Commissioner shall examine it and assess the correct amount
of the tax. The tax or deficiency income tax so discovered shall be paid
upon notice and demand from the Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title, the
term "deficiency" means:
(1) The amount by which the tax imposed by this Title exceeds the
amount shown as the tax by the taxpayer upon his return; but the
amount so shown on the return shall be increased by the amounts
previously assessed (or collected without assessment) as a deficiency, and
decreased by the amount previously abated, credited, returned or
otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this return,
or if no return is made by the taxpayer, then the amount by which the
tax exceeds the amounts previously assessed (or collected without
assessment) as a deficiency; but such amounts previously assessed or
collected without assessment shall first be decreased by the amounts
previously abated, credited returned or otherwise repaid in respect of
such tax.
SEC. 75. Declaration of Quarterly Corporate Income Tax. - Every
corporation shall file in duplicate a quarterly summary declaration of its
gross income and deductions on a cumulative basis for the preceding
quarter or quarters upon which the income tax, as provided in Title II of
this Code, shall be levied, collected and paid. The tax so computed shall
be decreased by the amount of tax previously paid or assessed during the
preceding quarters and shall be paid not later than sixty (60) days from
the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal year.
SEC. 76. Final Adjustment Return. - Every corporation liable to tax
under Section 27 shall file a final adjustment return covering the total
taxable income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year, the
corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
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(C) Be credited or refunded with the excess amount paid, as the case
may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its
final adjustment return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no application
for cash refund or issuance of a tax credit certificate shall be allowed
therefor.
SEC. 77. Place and Time of Filing and Payment of Quarterly
Corporate Income Tax. (A) Place of Filing. - Except as the Commissioner other wise permits, the
quarterly income tax declaration required in Section 75 and the final
adjustment return required in Section 76 shall be filed with the
authorized agent banks or Revenue District Officer or Collection Agent or
duly authorized Treasurer of the city or municipality having jurisdiction
over the location of the principal office of the corporation filing the return
or place where its main books of accounts and other data from which the
return is prepared are kept.
(B) Time of Filing the Income Tax Return. - The corporate quarterly
declaration shall be filed within sixty (60) days following the close of each
of the first three (3) quarters of the taxable year. The final adjustment
return shall be filed on or before the fifteenth (15th) day of April, or on or
before the fifteenth (15th) day of the fourth (4th) month following the
close of the fiscal year, as the case may be.
(C) Time of Payment of the Income Tax. - The income tax due on the
corporate quarterly returns and the final adjustment income tax returns
computed in accordance with Sections 75 and 76 shall be paid at the time
the declaration or return is filed in a manner prescribed by the
Commissioner.
ESTATES AND TRUSTS
MA. ANGELA LEONOR C. AGUINALDO
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SEC. 65. Fiduciary Returns. - Guardians, trustees, executors,
administrators, receivers, conservators and all persons or corporations,
acting in any fiduciary capacity, shall render, in duplicate, a return of
the income of the person, trust or estate for whom or which they act, and
be subject to all the provisions of this Title, which apply to individuals in
case such person, estate or trust has a gross income of Twenty thousand
pesos (P20,000) or over during the taxable year. Such fiduciary or person
filing the return for him or it, shall take oath that he has sufficient
knowledge of the affairs of such person, trust or estate to enable him to
make such return and that the same is, to the best of his knowledge and
belief, true and correct, and be subject to all the provisions of this Title
which apply to individuals: Provided, That a return made by or for one or
two or more joint fiduciaries filed in the province where such fiduciaries
reside; under such rules and regulations as the Secretary of Finance,
upon recommendation of the Commissioner, shall prescribe, shall be a
sufficient compliance with the requirements of this Section.
GENERAL PROFESSIONAL PARTNERSHIPS
SEC. 55. Returns of General Professional Partnerships. - Every general
professional partnership shall file, in duplicate, a return of its income,
except income exempt under Section 32 (B) of this Title, setting forth the
items of gross income and of deductions allowed by this Title, and the
names, Taxpayer Identification Numbers (TIN), addresses and shares of
each of the partners.
CHAPTER 8
WITHHOLDING TAXES
WITHHOLDING TAXES ON WAGES
SEC. 78. Definitions. - As used in this Chapter:
(A) Wages. - The term 'wages' means all remuneration (other than fees
paid to a public official) for services performed by an employee for his
employer, including the cash value of all remuneration paid in any
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medium other than cash, except that such term shall not include
remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where
the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or
business, or
(4) For services by a citizen or resident of the Philippines for a
foreign government or an international organization.
If the remuneration paid by an employer to an employee for services
performed during one-half (1/2) or more of any payroll period of not more
than thirty-one (31) consecutive days constitutes wages, all the
remuneration paid by such employer to such employee for such period
shall be deemed to be wages; but if the remuneration paid by an
employer to an employee for services performed during more than one half (1/2) of any such payroll period does not constitute wages, then none
of the remuneration paid by such employer to such employee for such
period shall be deemed to be wages.
(B) Payroll Period. - The term 'payroll period' means a period for which
payment of wages is ordinarily made to the employee by his employer,
and the term "miscellaneous payroll period" means a payroll period other
than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semiannual, or annual period.
(C) Employee. - The term 'employee' refers to any individual who is the
recipient of wages and includes an officer, employee or elected official of
the Government of the Philippines or any political subdivision, agency or
instrumentality thereof. The term "employee" also includes an officer of a
corporation.
(D) Employer. - The term "employer" means the person for whom an
individual performs or performed any service, of whatever nature, as the
employee of such person, except that:
MA. ANGELA LEONOR C. AGUINALDO
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(1) If the person for whom the individual performs or performed any
service does not have control of the payment of the wages for such
services, the term "employer" (except for the purpose of Subsection (A)
means the person having control of the payment of such wages; and
(2) In the case of a person paying wages on behalf of a nonresident
alien individual, foreign partnership or foreign corporation not engaged
in trade or business within the Philippines, the term "employer" (except
for the purpose of Subsection (A) means such person.
SEC. 79. Income Tax Collected at Source.(A) Requirement of Withholding. - Every employer making payment of
wages shall deduct and withhold upon such wages a tax determined in
accordance with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner:
Provided, however, That no withholding of a tax shall be required where
the total compensation income of an individual does not exceed the
statutory minimum wage, or five thousand pesos (P5,000.00) per month,
whichever is higher.
(B) Tax Paid by Recipient. - If the employer, in violation of the
provisions of this Chapter, fails to deduct and withhold the tax as
required under this Chapter, and thereafter the tax against which such
tax may be credited is paid, the tax so required to be deducted and
withheld shall not be collected from the employer; but this Subsection
shall in no case relieve the employer from liability for any penalty or
addition to the tax otherwise applicable in respect of such failure to
deduct and withhold.
(C) Refunds or Credits. (1) Employer. - When there has been an overpayment of tax under
this Section, refund or credit shall be made to the employer only to the
extent that the amount of such overpayment was not deducted and
withheld hereunder by the employer.
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(2) Employees. -The amount deducted and withheld under this
Chapter during any calendar year shall be allowed as a credit to the
recipient of such income against the tax imposed under Section 24(A) of
this Title. Refunds and credits in cases of excessive withholding shall be
granted under rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall
be returned or credited within three (3) months from the fifteenth (15th)
day of April. Refunds or credits made after such time shall earn interest
at the rate of six percent (6%) per annum, starting after the lapse of the
three-month period to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the Commissioner or by
his duly authorized representative without the necessity of countersignature by the Chairman, Commission on Audit or the latter's duly
authorized representative as an exception to the requirement prescribed
by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order
No. 292, otherwise known as the Administrative Code of 1987.
(D) Personal Exemptions. (1) In General. - Unless otherwise provided by this Chapter, the
personal and additional exemptions applicable under this Chapter shall
be determined in accordance with the main provisions of this Title.
(c) Use of Certificates. - The certificates filed hereunder shall be
used by the employer in the determination of the amount of taxes to be
withheld.
(d) Failure to Furnish Certificate. - Where an employee, in
violation of this Chapter, either fails or refuses to file a withholding
exemption certificate, the employer shall withhold the taxes prescribed
under the schedule for zero exemption of the withholding tax table
determined pursuant to Subsection (A) hereof.
(E) Withholding on Basis of Average Wages. - The Commissioner may,
under rules and regulations promulgated by the Secretary of Finance,
authorize employers to:
(1) estimate the wages which will be paid to an employee in any
quarter of the calendar year;
(2) determine the amount to be deducted and withheld upon each
payment of wages to such employee during such quarter as if the
appropriate average of the wages so estimated constituted the actual
wages paid; and
(3) deduct and withhold upon any payment of wages to such
employee during ;such quarter such amount as may be required to be
deducted and withheld during such quarter without regard to this
Subsection.
(2) Exemption Certificate. (a) When to File. - On or before the date of commencement of
employment with an employer, the employee shall furnish the employer
with a signed withholding exemption certificate relating to the personal
and additional exemptions to which he is entitled.
(b) Change of Status. - In case of change of status of an employee
as a result of which he would be entitled to a lesser or greater amount of
exemption, the employee shall, within ten (10) days from such change,
file with the employer a new withholding exemption certificate reflecting
the change.
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
(F) Husband and Wife. - When a husband and wife each are recipients of
wages, whether from the same or from different employers, taxes to be
withheld shall be determined on the following bases:
(1) The husband shall be deemed the head of the family and proper
claimant of the additional exemption in respect to any dependent
children, unless he explicitly waives his right in favor of his wife in the
withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the wife in accordance
with the schedule for zero exemption of the withholding tax table
prescribed in Subsection (D)(2)(d) hereof.
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 83 –
(G) Nonresident Aliens. - Wages paid to nonresident alien individuals
engaged in trade or business in the Philippines shall be subject to the
provisions of this Chapter.
(H) Year-End Adjustment. - On or before the end of the calendar year
but prior to the payment of the compensation for the last payroll period,
the employer shall determine the tax due from each employee on taxable
compensation income for the entire taxable year in accordance with
Section 24(A). The difference between the tax due from the employee for
the entire year and the sum of taxes withheld from January to November
shall either be withheld from his salary in December of the current
calendar year or refunded to the employee not later than January 25 of
the succeeding year.
SEC. 80. Liability for Tax. (A) Employer. - The employer shall be liable for the withholding and
remittance of the correct amount of tax required to be deducted and
withheld under this Chapter. If the employer fails to withhold and remit
the correct amount of tax as required to be withheld under the provision
of this Chapter, such tax shall be collected from the employer together
with the penalties or additions to the tax otherwise applicable in respect
to such failure to withhold and remit.
(B)
Employee. - Where an employee fails or refuses to file the
withholding exemption certificate or willfully supplies false or inaccurate
information thereunder, the tax otherwise required to be withheld by the
employer shall be collected from him including penalties or additions to
the tax from the due date of remittance until the date of payment. On the
other hand, excess taxes withheld made by the employer due to:
(1) failure or refusal to file the withholding exemption certificate; or
(2) false and inaccurate information shall not be refunded to the
employee but shall be forfeited in favor of the Government.
SEC. 81. Filing of Return and Payment of Taxes Withheld. - Except as
the Commissioner otherwise permits, taxes deducted and withheld by
the employer on wages of employees shall be covered by a return and
paid to an authorized agent bank; Collection Agent, or the duly
authorized Treasurer of the city or municipality where the employer has
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
his legal residence or principal place of business, or in case the employer
is a corporation, where the principal office is located.
The return shall be filed and the payment made within twenty-five (25)
days from the close of each calendar quarter: Provided, however, That
the Commissioner may, with the approval of the Secretary of Finance,
require the employers to pay or deposit the taxes deducted and withheld
at more frequent intervals, in cases where such requirement is deemed
necessary to protect the interest of the Government.
The taxes deducted and withheld by employers shall be held in a special
fund in trust for the Government until the same are paid to the said
collecting officers.
SEC. 82. Return and Payment in Case of Government Employees. - If the
employer is the Government of the Philippines or any political
subdivision, agency or instrumentality thereof, the return of the amount
deducted and withheld upon any wage shall be made by the officer or
employee having control of the payment of such wage, or by any officer or
employee duly designated for the purpose.
SEC. 83. Statements and Returns. (A) Requirements. - Every employer required to deduct and withhold a
tax shall furnish to each such employee in respect of his employment
during the calendar year, on or before January thirty-first (31st) of the
succeeding year, or if his employment is terminated before the close of
such calendar year, on the same day of which the last payment of wages
is made, a written statement confirming the wages paid by the employer
to such employee during the calendar year, and the amount of tax
deducted and withheld under this Chapter in respect of such wages. The
statement required to be furnished by this Section in respect of any wage
shall contain such other information, and shall be furnished at such
other time and in such form as the Secretary of Finance, upon the
recommendation of the Commissioner, may, by rules and regulation,
prescribe.
(B) Annual Information Returns. - Every employer required to deduct
and withhold the taxes in respect of the wages of his employees shall, on
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 84 –
or before January thirty-first (31st) of the succeeding year, submit to the
Commissioner an annual information return containing a list of
employees, the total amount of compensation income of each employee,
the total amount of taxes withheld therefrom during the year,
accompanied by copies of the statement referred to in the preceding
paragraph, and such other information as may be deemed necessary.
This return, if made and filed in accordance with rules and regulations
promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, shall be sufficient compliance with the requirements of
Section 68 of this Title in respect of such wages.
(C) Extension of time. - The Commissioner, under such rules and
regulations as may be promulgated by the Secretary of Finance, may
grant to any employer a reasonable extension of time to furnish and
submit the statements and returns required under this Section.
WITHHOLDING TAX ON SOURCE
1. Final withholding tax—the amount of income tax withheld by
the withholding agent is constituted to be the full and final
payment of the income tax due from payee on the said income
a. The liability for payment of the tax rests primarily on
the payor as withholding tax agent
b. Finality of the withholding tax is limited only to the
payee’s other tax liability on said income, such as when
the said income is further subject to a percentage tax,
such as gross receipts tax in the case of a bank
SEC. 57. Withholding of Tax at Source. (A) Withholding of Final Tax on Certain Incomes. - Subject to rules and
regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed by
Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B),
25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on
specified items of income shall be withheld by payor-corporation and/or
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
person and paid in the same manner and subject to the same conditions
as provided in Section 58 of this Code.
2.
Creditable withholding tax/Expanded withholding tax—taxes
withheld on certain income payments are intended to equal or at
least approximate the tax due of the payee on said income
SEC. 57. Withholding of Tax at Source. (B) Withholding of Creditable Tax at Source. - The Secretary of Finance
may, upon the recommendation of the Commissioner, require the
withholding of a tax on the items of income payable to natural or
juridical
persons,
residing
in
the
Philippines,
by
payorcorporation/persons as provided for by law, at the rate of not less than
one percent (1%) but not more than thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the taxpayer
for the taxable year.
RETURNS AND PAYMENTS
SEC. 58. Returns and Payment of Taxes Withheld at Source. (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes
deducted and withheld under Section 57 by withholding agents shall be
covered by a return and paid to, except in cases where the Commissioner
otherwise permits, an authorized Treasurer of the city or municipality
where the withholding agent has his legal residence or principal place of
business, or where the withholding agent is a corporation, where the
principal office is located.
The taxes deducted and withheld by the withholding agent shall be held
as a special fund in trust for the government until paid to the collecting
officers.
The return for final withholding tax shall be filed and the payment made
within twenty-five (25) days from the close of each calendar quarter,
while the return for creditable withholding taxes shall be filed and the
payment made not later than the last day of the month following the
close of the quarter during which withholding was made: Provided, That
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 85 –
the Commissioner, with the approval of the Secretary of Finance, may
require these withholding agents to pay or deposit the taxes deducted or
withheld at more frequent intervals when necessary to protect the
interest of the government.
(B) Statement of Income Payments Made and Taxes Withheld. - Every
withholding agent required to deduct and withhold taxes under Section
57 shall furnish each recipient, in respect to his or its receipts during the
calendar quarter or year, a written statement showing the income or
other payments made by the withholding agent during such quarter or
year, and the amount of the tax deducted and withheld therefrom,
simultaneously upon payment at the request of the payee, but not late
than the twentieth (20th) day following the close of the quarter in the
case of corporate payee, or not later than March 1 of the following year in
the case of individual payee for creditable withholding taxes. For final
withholding taxes, the statement should be given to the payee on or
before January 31 of the succeeding year.
(C) Annual Information Return. - Every withholding agent required to
deduct and withhold taxes under Section 57 shall submit to the
Commissioner an annual information return containing the list of payees
and income payments, amount of taxes withheld from each payee and
such other pertinent information as may be required by the
Commissioner. In the case of final withholding taxes, the return shall be
filed on or before January 31 of the succeeding year, and for creditable
withholding taxes, not later than March 1 of the year following the year
for which the annual report is being submitted. This return, if made and
filed in accordance with the rules and regulations approved by the
Secretary of Finance, upon recommendation of the Commissioner, shall
be sufficient compliance with the requirements of Section 68 of this Title
in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any
withholding agent a reasonable extension of time to furnish and submit
the return required in this Subsection.
(D) Income of Recipient. - Income upon which any creditable tax is
required to be withheld at source under Section 57 shall be included in
the return of its recipient but the excess of the amount of tax so withheld
over the tax due on his return shall be refunded to him subject to the
provisions of Section 204; if the income tax collected at source is less than
the tax due on his return, the difference shall be paid in accordance with
the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its
implementing rules and regulations are hereby considered trust funds
and shall be maintained in a separate account and not commingled with
any other funds of the withholding agent.
(E) Registration with Register of Deeds. - No registration of any
document transferring real property shall be effected by the Register of
Deeds unless the Commissioner or his duly authorized representative
has certified that such transfer has been reported, and the capital gains
or creditable withholding tax, if any, has been paid: Provided, however,
That the information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, shall be annotated by the Register of Deeds in the
Transfer Certificate of Title or Condominium Certificate of Title:
Provided, further, That in cases of transfer of property to a corporation,
pursuant to a merger, consolidation or reorganization, and where the law
allows deferred recognition of income in accordance with Section 40, the
information as may be required by rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the Commissioner,
shall be annotated by the Register of Deeds at the back of the Transfer
Certificate of Title or Condominium Certificate of Title of the real
property involved: Provided, finally, That any violation of this provision
by the Register of Deeds shall be subject to the penalties imposed under
Section 269 of this Code.
INTEGRATION PROBLEM
INDIVIDUALS
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 86 –
Taxable Year: 2007
Taxpayer: Atty. Posporo Palito
Classification: Natural-Born Filipino Citizen
A. Identify Tax Treatment of every line item
B. Compute for the following:
1
Personal and Additional Exemption
2
Income Subject to Fringe Benefits Tax
3
Fringe Benefits Tax
4
Taxable Compensation (subj to regular tax)
5
Non-Taxable Compensation
6
Income Subject to Final Tax (not including FBT)
7
Final Tax Rate
8
Final Tax
9
Income Exempt from Final Tax
10
Taxable Income from General Professional Partnership
11
As Freelance Lawyer: Allowable Depreciation
12
As Freelance Lawyer: Allowable Deductions
13
As Freelance Lawyer: Non-Deductible Expenses
14
As Freelance Lawyer: Taxable Income
15
As sole owner of XYZ Trading: Gross Income
16
As sole owner of XYZ Trading: Deductible Interest Expense
17
As sole owner of XYZ Trading: Deductible Taxes
18
As sole owner of XYZ Trading: Non-Deductible Taxes
19
As sole owner of XYZ Trading: Capital gains on capital assets not subj to FT
20
As sole owner of XYZ Trading: Capital loss on capital assets not subj to FT
21
As sole owner of XYZ Trading: Net Capital Gain
22
As sole owner of XYZ Trading: Allowable Net Loss Carry Over
23
As sole owner of XYZ Trading: Taxable Income
24
Total Taxable Income of Atty Posporo Palito
25
Income Tax Due
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 87 –
GIVEN:
Taxable Year: 2007
Taxpayer: Atty. Posporo Palito (Natural-born Filipino)
Status: Married
Children:
AA born with cerebral palsy in 1984
B1 twin of B2 born in 1986
B2 twin of B1 born in 1986, married in June 1, 2006
CC born in 1989, died in Nov 1, 2007
DD born in 1997, a famous child actress
EE born in 2004
FF born in Dec 31, 2007
As Employee:
Compensation Income of as President and Board Member of XYZ Corporation
Basic Salary
Transportation Allowance
Housing Privilege (rental)
Directors Fees
Travel Incentive for the family
13th month pay
Rice Subsidy
Club Membership
Clothing Allowance
300,000
120,000
120,000
60,000
50,000
30,000
24,000
20,000
3,000
As Partner of a Law Firm:
Atty Posporo Palito has 2 partners (equal sharing)
Gross Income of the Partnership
Expenses of the Partnership
1,000,000
400,000
As Partner of a ABC Trading Co.:
Atty Posporo Palito is holding 25% share in the partnership
Gross Income of ABC Trading
5,000,000
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 88 –
Expenses of ABC Trading
As a Freelance Lawyer:
Gross consultancy income
Expenses
Salaries of staff
Cost of Computer Equipment
Cost of Law Books & Reference Materials
Tuition fee of child EE
Office Supplies
Household Grocery
Business Communication Expense
Depreciation Factor: 5 years straight line method
As sole owner of XYZ Trading:
Gross Sales
Cost of Goods Sold
Expenses
Interest Expense
Salaries of Staff
Depreciation
Donation to Gov't for NEDA certified priority activity
Minor Repairs of machineries
Facilitation expense given to fast track transaction at BOC
Donor's Tax
Local Taxes & Mayor's Permit
Donation given to beggars in front of Quiapo Church
Other Income
Interest on sales on account (receivables)
Interest on Bank Deposits in Metrobank of XYZ Trading
Gain on sale of old office building
Selling Price
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
3,750,000
200,000
60,000
50,000
50,000
30,000
25,000
20,000
15,000
1,000,000
800,000
60,000
50,000
40,000
12,000
5,000
5,000
3,600
2,000
1,000
15,000
20,000
1,000,000
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 89 –
BookValue
Fair Market Value
300,000
1,200,000
Transaction involving Capital assets
Capital Gains from sale of capital asset
Held more than 12 months
Held in 6 months
Capital Losses from sale of capital asset
Held in 8 months
Net Loss carry over from prior year
Net capital loss from prior year
Net income of XYZ Trading for taxable year 2006
Sale of Shares of Stock
Selling Price
Cost of Stocks
Sale of Real Property
Selling Price
Cost of Real Property
Fair Market Value (Zonal Valuation)
200,000
100,000
60,000
25,000
15,000
1,000,000
850,000
10,000,000
3,000,000
12,000,000
Other Income of Atty Posporo Palito:
Interest Income from deposit substitute
Interest Income from long term investment
Prizes/Winnings
From Lotto
Prize from Talent Contest
From game show "Whammy"
Royalty on book "Every Day Law" by Atty Posporo Palito
200,000
120,000
1,000,000
8,000
500,000
50,000
Taxable Year: 2007
Taxpayer: Atty. Posporo Palito (Natural-born Filipino)
Notes/Remarks
Status:
Married: PE = 32,000
Married
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 90 –
Children:
AA born with cerebral palsy in 1984
B1 twin of B2 born in 1986
B2 twin of B1 born in 1986, married in June 1, 2006
CC born in 1989, died in Nov 1, 2007
DD born in 1997, a famous child actress
EE born in 2004
FF born in Dec 31, 2007
23 yrs old: AE = 8,000
21 yrs old AE = 8,000
21 yrs old, married: No AE
18 yrs old: AE = 8,000
10 yrs old, employed: No AE
3 yrs old: AE = 8,000
new born, excess of 4: No AE
As Employee: Compensation Income as President & Board Member of XYZ
Corporation
Basic Salary
300,000
Transportation Allowance
120,000
Housing Privilege (Rental Value)
120,000
Director's Fees
60,000
Travel Incentive for the family
50,000
13th month pay
30,000
Rice Subsidy
24,000
Club Membership
20,000
Clothing Allowance
3,000
RT 5-32%
RT 5-32%
FBT *50%/68%*32%
RT 5-32%
FBT /68%*32%
Exclusion
di minimis 1,000/mon excess FBT/68%*32%
FBT /68%*32%
di minimis
As Partner of an all Law Partnership:
Atty Posporo Palito has 2 partners (equal sharing)
Gross Income of the Partnership
Expenses of the Partnership
1,000,000
400,000
Gross Income less Exp = Net Income divide by 3
RT 5-32%
As Partner of a ABC Trading Co.:
25% share in the partnership
Gross Income of ABC Trading
Expenses of ABC Trading
5,000,000
3,750,000
GI - Exp = Taxable Income
25% share after tax FT 10%
200,000
RT 5-32%
60,000
50,000
50,000
Deductible
Non-deduct but subj to depreciation
Non-deduct but subj to depreciation
As a Freelance Lawyer:
Gross consultancy income
Expenses
Salaries of staff
Cost of Computer Equipment
Cost of Law Books & Reference Materials
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 91 –
Tuition fee of child EE
Office Supplies
Household Grocery
Business Comm Expense
Depreciation Factor: 5 years straight line
As sole owner of XYZ Trading:
Gross Sales
Cost of Goods Sold
Expenses
Interest Expense
Salaries of Staff
Depreciation
Minor Repairs of machineries
Facilitation expenses to BOC
Local Taxes & Mayor's Permit
Donor's Tax
Donation to Gov't for NEDA certified priority activity
Donation given to beggars in front of Quiapo Church
Other Income
Interest on sales on account (receivables)
Interest on Bank Deposits in MetroBank of XYZ
Trading
Gain on sale of old office building
Selling Price
BookValue
Fair Market Value
Transaction involving Capital assets
Capital Gains from sale of capital asset
Held more than 12 months
Held in 6 months
Capital Losses from sale of capital asset
Held in 8 months
Net Loss carry over from prior year
Net capital loss from prior year
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
30,000
25,000
20,000
15,000
Non-deductible
Deductible
Non-deductible
Deductible
1,000,000
800,000
RT 5-32%
Deduction to get Gross Income
60,000
50,000
40,000
5,000
5,000
2,000
3,600
12,000
1,000
Deduct / limit (Int Inc FT * 42%)
Deductible
Deductible
Deductible
Non-deductible
Deductible
Non-deductible
Fully deductible
Non-deductible
15,000
RT 5-32%
20,000
FT 20%
1,000,000
300,000
1,200,000
Gain = SP less BV RT 5-32%
200,000
100,000
RT 5-32% Taxable * 50%
RT 5-32% Taxable * 100%
60,000
Deductible only against cap gains
25,000
Deductible only to the extent of 15,000
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 92 –
Net income of XYZ Trading for taxable year 2002
Sale of Shares of Stock
Selling Price
Cost of Stocks
Sale of Real Property
Selling Price
Cost of Real Property
Fair Market Value (Zonal Valuation)
Other Income of Atty Posporo Palito:
Interest Income from deposit substitute
Interest Income from long term investment
Prizes/Winnings
From Lotto
Prize From Talent Contest
From game show "Whammy"
Royalty on book "Every Day Law" by Atty Posporo Palito"
1
2
3
Personal and Additional Exemption
Married
Children
AA
B1
B2
CC
DD
EE
FF
Total Personal & Additional Exemption
15,000
1,000,000
850,000
FT on gain 5% / 10%
10,000,000
3,000,000
12,000,000
FT on SP or FMV w/c ever is higher 6%
200,000
120,000
FT 20%
Exempt
1,000,000
8,000
500,000
50,000
Exempt
RT 5-32%
FT 20%
FT 10%
32,000
8,000
8,000
0
8,000
0
8,000
0
32,000
64,000
Income Subject to Fringe Benefits Tax
Fringe Benefits Tax
Travel Incentive for the Family
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
Actual
Value
50,000
Factor
=
Monetary
Value
50,000
Gross-up
Value (/68%)
73,529.41
FBT
23,529.41
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 93 –
Housing Privilege (Rental)
Excess Rice Sub (24,000 - 12,000)
Club Membership
Total Income Subj
to FBT / FBT
120,000
12,000
20,000
202,000
4
Taxable Compensation (subj to regular tax)
Basic Salary
300,000
Director's Fee
60,000
Transportation Allowance
120,000
Total
Taxable
480,000
Compensation
5
Non-Taxable Compensation
13th month pay
Rice subsidy
Clothing allowance
Total Non-Taxable Compensation
6
7
8
* 50%
=
=
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
88,235.29
17,647.06
29,411.76
28,235.29
5,647.06
9,411.76
66,823.53
Income / Tax
Base
Final
Rate
30,000
12,000
3,000
45,000
Income Subject to Final Tax (not including FBT)
Final Tax Rate
Final Tax
Partner's
Distributive Share
Gross Income
Less:
Expenses
Taxable
Income
32%
income
tax
Tax
Due
Net
Income
After Tax
25%
60,000
12,000
20,000
5,000,000
3,750,000
1,250,000
* 35%
437,500
812,500
* 25 %
Tax
Final Tax
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 94 –
share
Distributive
share
Interest on Bank Deposits of XYZ
Trading
Capital Gains on Shares of Stock
Selling Price
Less:
Cost
Gain
Capital Gains on Real Property
Transaction
Selling Price
Zonal
Valuation
Interest income from deposit substitute
Winnings from game show "Whammy"
Royalty from books - "Every Day Law"
Total Final Taxes
9
10
11
Income Exempt from Final Tax
Interest Income from long term Investments
Winnings from Lotto
Total
Income
Exempt from FT
203,125
203,125
10%
20,313
20,000
20%
4,000
150,000
150,000
5% / 10%
10,000
10,000,000
12,000,000
12,000,000
6%
720,000
200,000
500,000
50,000
20%
20%
10%
40,000
100,000
5,000
899,313
1,000,000
850,000
120,000
1,000,000
1,120,000
Taxable Income from General Professional Partnership
Gross Income
Less: Expenses
Net Income
1,000,000
400,000
600,000
Share of Atty Posporo Palito: 1/3
200,000
As Freelance Lawyer: Allowable Depreciation
Cost
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
Life
Depreciation
(using
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 95 –
Computer Equipment
Law Books & Reference Materials
Total Depreciation
12
13
14
15
50,000
50,000
5 yrs
5 yrs
As Freelance Lawyer: Allowable Deductions
Salaries of staff
Office Supplies
Business Communication Expense
Depreciation Expense
Total Allowable Deductions
60,000
25,000
15,000
20,000
120,000
As Freelance Lawyer: Non-Deductible Expenses
Household grocery
Tuition Fee of child EE
Cost of Computer equipment
Cost of Law Books & Reference Materials
Total Non-Deductible Expense
20,000
30,000
50,000
50,000
150,000
As Freelance Lawyer: Taxable Income
Gross Consultancy Income
Less: Allowable Deductions
Salaries of staff
Office Supplies
Business Communication Expense
Depreciation Expense
Total
Deductions
Taxable Income
As sole owner of XYZ Trading: Gross Income
Gross Sales
Less: Cost of Goods Sold
Gross Income from
Trading
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
straight
method)
10,000
10,000
20,000
line
but subj to depreciation
but subj to depreciation
200,000
60,000
25,000
15,000
20,000
120,000
80,000
1,000,000
800,000
200,000
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 96 –
Add: Other Income
Interest on sales on account
(receivables)
Gain on sale of old office building
Selling Price
Less: Book Value
Gain
Net Capital
Gain
Capital Gain
Capital Loss
Net Capital Gain
Less: Allowable Net Capital Loss Carry
Over
Net Capital Gain
Total Other
Income
Gross Income from all sources (XYZ
Trading)
16
17
18
18
15,000
1,000,000
300,000
700,000
200,000
60,000
140,000
15,000
125,000
840,000
1,040,000
As sole owner of XYZ Trading: Deductible Interest Expense
Actual Interest Expense
Interest Income subj to FT
20,000
Less: Limit to Interest Expense
(20,000 * 42%)
Deductible Interest
Expense
As sole owner of XYZ Trading: Deductible Taxes
Local Taxes & Mayor's Permit
2,000
As sole owner of XYZ Trading: Non-Deductible Taxes
Donor's Tax
3,600
As sole owner of XYZ Trading: Total Non-Deductible Expenses
Disallowed Interest
Expenses
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
60,000
8,400
51,600
8,400
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 97 –
Non-deductible
Taxes
Non-deductible
Donation
Non-deductible
Facilitation Fee
Total
NonDeductible
Expenses
3,600
1,000
5,000
18,000
19
As sole owner of XYZ Trading: Capital gains on capital assets not subj to FT
Held for more than 12 months
200,000
*50%
100,000
Held for 6 months
100,000
*100%
100,000
Capital gains on
200,000
capital assets
20
As sole owner of XYZ Trading: Capital loss on capital assets not subj to FT
Held in 8 months
60,000
*100%
Capital losses on capital assets
60,000
60,000
As sole owner of XYZ Trading: Net Capital Gain
Capital Gains
Less: Capital Losses
Net Capital Gain
200,000
60,000
140,000
As sole owner of XYZ Trading: Allowable Net Loss Carry Over
Actual Net Loss Carry Over
Net Income of the previous year (2006)
Net Capital Gains this year (2007)
25,000
15,000
140,000
21
22
Allowable Net Loss Carry Over
23
15,000
As sole owner of XYZ Trading: Taxable Income
Gross Income from all sources (XYZ Trading)
Less: Allowable Expenses
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
1,040,000
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 98 –
Interest
Expense
Salaries
Staff
51,600
of
50,000
40,000
Depreciation
Minor Repairs of machineries
Local Taxes & Mayor's Permit
Donation to Gov't for NEDA
certified priority activity
Total Allowable Expense
Net Income of XYZ
Trading
24
25
Total Taxable Income of Atty Posporo Palito
Tax Due
Taxable
Compensation
Income
Taxable
Income
from GPP
Taxable Income from Consultancy
(Freelance Lawyer)
Taxable Income from XYZ Trading
Other Income
Prize from a Talent Contest
Total Income
Less:
Personal and Additional
Exemption
Total Taxable Income of Atty Posporo
Palito
Tax Due
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
5,000
2,000
12,000
160,600
879,400
480,000
200,000
80,000
879,400
8,000
1,647,400
64,000
1,583,400
471,688
INCOME TAX REVIEWER AND CASE DIGESTS
PAGE- 99 –
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010