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Taxation One: Outline with Codals
Course Outline
Tax I
Based on Atty. Montero’s outline, with integrated notes from Atty. Salvador’s review class, Reyes, some
Mamalateo, some CoUntian and the various reviewers in school.
A. In General .......................................................................................................... 1
B.
General
Principles .............................................................................................. 2
C.
Income
Tax
on
Individuals ................................................................................. 2
D.
Definitions
........................................................................................................ 17
E. Income Tax Rates
............................................................................................. 19
F.
Proprietary
Educational
Institutions and Hospitals ........................................... 21
G.
GOCCs
.............................................................................................................. 22
H.
Passive
Income
................................................................................................ 22
I. Minimum Corporate Income Tax
(MCIT) ........................................................... 25
J. Income Tax on Resident Foreign Corporations
.................................................. 26
K. Income Tax on Non-resident Foreign Corporations
........................................... 30
L.
Improperly
Accumulated
Earnings
Tax
(IAET)
.................................................. 33
M.
Tax-exempt
Corporations
................................................................................. 36
N.
Taxable
Income
................................................................................................ 40
P. Fringe Benefits Tax (FBT! Whut
up!) ................................................................. 50
Q.
Deductions
....................................................................................................... 53
R. Capital Gains and Losses (Sale
or Exchange of Property) ................................. 76
S. Determination of Gain or Loss from Sale
or Transfer of Property ...................... 81
T.
Situs
of
Taxation
............................................................................................... 86
U.
Accounting
Periods
and
Methods ...................................................................... 91
V.
Estates
and
Trusts
............................................................................................ 97
W. Returns and Payment of Taxes
...................................................................... 101
W.
Withholding
Tax
............................................................................................ 107
A. In General
Taxable Income
• The essential difference between capital and income is that capital is a fund; and income is a flow.
Capital is wealth, while income is the service of wealth.
• Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a tree, income the
fruit.
• Income means profits or gains. (Madrigal v Rafferty)
• Income may be defined as the amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment.
o A mere advance in the value of property of a person or a corporation in no sense constitutes the
‘income’ specified in the law. Such advance constitutes and can be treated merely as an increase
in capital. (Fisher v Trinidad)
• Cash dividends is taxed as income because it has been realized/received, while stock dividends is not
taxed as income because it is merely inchoate as it is a mere anticipation of income (it becomes income
once you sell it).
o One is an actual receipt of profits; the other is a receipt of a representation of
the increased value of the assets of a corporation. (Fisher v Trinidad)
• When dealing with money or property, the questions you should ask are:
o Is this capital or is this income? o Has it been realized/received
or is it merely inchoate?
2012 – Mickey)
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Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
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Taxation One: Outline with Codals
B. General Principles SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this
Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A
nonresident citizen is taxable only on income derived from sources within the Philippines; (C) 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; (D) An
alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A
domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) 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.
Who are taxable on income derived from all sources, whether within or outside the Philippines? Taxed
worldwide!
1. Resident citizens. 2.
Domestic corporations.
• The other kinds of taxpayers are subject to tax only on income derived from Philippine sources.
Taxable Income Taxable Income Citizenship &
Residency Inside RP Outside RP Resident Citizen Yes Yes Non-resident Citizen Yes No
Overseas Contract Worker Yes No Resident Alien Yes No Non-resident Alien Yes No Domestic
Corp Yes Yes Foreign Corp Yes No
C. Income Tax on Individuals Definitions Resident citizens and resident aliens Section 22 (F) The term "resident
alien" means an individual whose residence is within the Philippines and who is not a citizen thereof.
• Resident alien is an individual: 1. Whose residence is
within the Philippines
o Must be actually present in the Philippines for more than 12 months from his
arrival 2. Who is not a
citizen
• Mere physical or body presence is enough. Not intention to make the country one’s abode. (Garrison v CA)
• An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the
Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with
regard to the length and nature of his stay.
o A mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute him a transient. o If he lives in the Philippines and has no definite intention as to his
stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may
be promptly accomplished is a transient.
▪ But if his purpose is of such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his
2012 – Mickey)
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
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Taxation One: Outline with Codals
home temporarily in the Philippines, he becomes a resident, though it may be his intention
at all times to return to his domicile abroad when the purpose for which he came has been
consummated or abandoned. (RR 2)
Non-resident citizens Sec 22 (E). The term "nonresident citizen" means: (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 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. (5) 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.
• Meaning of non-resident citizen:
1. Citizen who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein 2. Citizen who leaves the Philippines
during the taxable year to reside abroad, either
as an immigrant or for employment on a permanent basis 3. Citizen who works and derives from abroad
and whose employment thereat requires him to be physically present abroad most of the time during
the taxable year 4. 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
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.
• Who are non-resident citizens? (RR 1-79)
1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for
which a foreign visa has been secured 2. Permanent employee – one who leaves the Philippines to reside
abroad for
employment on a more or less permanent basis 3. Contract worker – one who leaves the Philippines on
account of a contract of employment which is renewed from time to time under such circumstance as
to require him to be physically present abroad most of the time (not less than 183 days)
• Non-resident citizens who are exempt from tax with respect to income derived from sources outside the
Philippines shall no longer be required to file information returns from sources outside the Philippines beginning
2001. (RR 5-2001)
• The phrase “most of the time” shall mean that the said citizen shall have stayed abroad for at least 183 days
in a taxable year.
• The same exemption applies to an OCW but as such worker, the time spent abroad is not material for tax
exemption purposes all that is required is for the worker’s employement contract to pass through and be
registered with the POEA. (BIR Ruling 33-2000).
Non-resident aliens engaged in business in the Philippines
Sec 22. (G) The term "nonresident alien" means an individual
whose residence is not within the Philippines and who is not a citizen thereof.
2012 – Mickey)
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Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
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Taxation One: Outline with Codals
• Who are non-resident aliens? 1. An individual whose residence is not within the Philippines 2. Not a citizen
of the Philippines o Determination is by his intention with regard to the length and nature of his stay.
(Sec 5, RR 2) o Alien
can either:
• Be deriving income in the Philippines, or
• Stays in the Philippines for more than 180 days during any calendar year (deemed to be a nonresident alien engaged in the Philippines)
• Loss of residence by alien o An alien who has acquired residence in the Philippines retains his status until
he
abandons the same and actually departs from the Philippines. o A mere intention to change his residence
does not change his status. An alien who has acquired a residence is taxable as a resident for the
remainder of his stay in the Philippines. (Sec. 6, RR 2)
Minimum wage earner Sec 22. (GG) The term ‘statutory minimum wage’ earner shall refer to rate fixed by the Regional Tripartite Wage
and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE.
(HH) The term ‘minimum wage earner’ shall refer to a worker in the private sector paid the statutory minimum wage; or to an employee in the
public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.
• Fixed by the Regional Tripartite Wage and Productivity Board.
• Minimum wage earner:
o Private sector – paid the statutory minimum wage o Public sector – not more than the statutory
minimum wage in the nonagricultural sector where he/she is assigned
Dependent Sec 35. (B) For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) 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.
• Dependent is a...
o Legitimate, illegitimate or legally adopted child, living with the taxpayer, and
chiefly dependent upon the taxpayer o Who must
be:
▪ Not more than 21,
▪ Unmarried, and
▪ Not gainfully employed, OR
▪ Dependent, regardless of age, is incapable of self-support because of mental or physical
defect.
To summarize, individual taxpayers are classified into: 1.
Citizens, who are divided into:
o Resident citizens – those citizens whose residence is within the Philippines; and o Non-resident citizens –
those citizens whose resident is not within the Philippines. 2. Aliens, who are divided into:
o Resident aliens – those individuals whose residence is within the Philippines and
are not citizens thereof; and
2012 – Mickey)
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Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
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Taxation One: Outline with Codals
o Non-resident aliens – those individuals whose residence is not within the
Philippines but temporarily in the country and are not citizens thereof. They are:
▪ Those engaged in trade or business within the Philippines; and
▪ Those who are not so engaged. (see Sec 23-25)
Kinds of income and income tax of individuals Tax formula SEC. 24. Income Tax Rates. - (A) Rates of Income Tax on
Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in
Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year
from all sources within and without the Philippines be every individual citizen of the Philippines residing therein; (b) On the taxable income
defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines
including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of
this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources
within the Philippines by an individual alien who is a resident of the Philippines. (2) Rates of Tax on Taxable Income of Individuals. - The tax
shall be computed in accordance with and at the rates established in the following schedule: (just see chart below, it’s the same thing)
For married individuals, the 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: Provided, that 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. "Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be
exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.
Not over P10,000 5% Over P10,000 but not over P30,000 P500 + 10% of the excess over
P10,000 Over P30,000 but not over P70,000 P2,500 + 15% of the excess over
P30,000 Over P70,000 but not over P140,000 P8,500 + 20% of the excess over
P70,000 Over P140,000 but not over P250,000 P22,500 + 25% of the excess over
P140,000 Over P250,000 but not over P500,000 P50,000 + 30% of the excess over
P250,000 Over P500,000 P125,000 + 32% of the excess over
P500,000
Gross Income Less:
Deductions Taxable
Income Tax Rate
Tax Due
Know the tax base and the tax rate!
2012 – Mickey)
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Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
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Taxation One: Outline with Codals
• Only resident citizens and domestic corporations are taxed on income derived from abroad. Worldwide
taxable!
• The tax is imposed upon taxable compensation or employment income, business income, and income derived
from the practice of professions derived by citizens and resident aliens.
• Married individuals shall compute separately their individual income tax based on their respective total
taxable income.
o 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 them for the purpose of determining
their respective taxable income.
• Minimum wage earners are exempt from the payment of income tax on their taxable income. Holiday pay,
overtime pay, night shift differential pay, and hazard pay received by them are likewise exempt from income tax.
• A non-resident alien individual engaged in trade or business in the Philippines is subject to the income tax in
the same manner as an individual citizen and a resident alien on taxable income received from sources within
the Philippines.
• For non-resident aliens not so engaged, the tax is
o 25% of the entire or gross income received from sources within the Philippines
and o 15% of the gross income received as compensation, salaries, and other
emoluments by reason of his employment by:
▪ regional or area headquarters and regional operating headquarters of multinational
corporations;
▪ offshore banking units established by a foreign corporation in the Philippines; or
▪ by foreign petroleum service contractor or subcontractors operating in the Philippines. (Sec
25 (A-E))
Final income tax – interests, royalties, awards, dividends, capital gains on sale of shares, realty
Sec 24. (B) Rate of
Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which
shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be
subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived
from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident
individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in
the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the longterm deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%; Three (3)
years to less than (4) years - 12%; and Less than three (3)
years - 20%
(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or
constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a
partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after
2012 – Mickey)
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
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tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10% beginning January 1,
6
2000.
Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained
earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final
tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.
Not over P100,000......................................... 5% On any amount in excess of P100,000............ 10%
(D) Capital Gains from Sale of Real Property. - (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent
(6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is
higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the
government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either
under Section 24 (A) or under this Subsection, at the option of the taxpayer. (2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal
residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18)
calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided,
That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or
acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale
or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said
tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this
purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the
unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this
Subsection shall be imposed thereon.
Sec 22 (Y) The term "deposit substitutes" 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.
Tax Rate on Certain Passive Income on Citizens and Resident Aliens
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
Final Tax
1. Interest under the expanded foreign currency deposit system (see RR 10-98 below) Nonresident citizens:
exempt
7.5% (vs exempt for nonresident aliens engaged in trade/biz) 2. Royalty from books, literary works, & musical compositions
10% 3. Royalty other than above 20% 4. Interest on any current bank deposit, yield or other monetary benefits
20%
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from deposit substitute, trust fund & similar arrangement 5. Prize exceeding P10,000 20% 6. Other winnings,
except Phil Charity Sweepstakes & Lotto 20% 7. Dividend from a domestic corp, or from a joint stock company,
insurance or mutual fund company, & regional operating headquarters of multinational company or share in the
distributive net income after tax o a partnership (except a general professional partnership), joint stock or joint
venture or consortium taxable as a corporation
• But what about dividends from foreign corporations for citizens (not resident aliens)? Well, the income here
enters into the computation for Sec 24 (a) tax calendar. For resident aliens, they are not taxed since it’s income
derived from abroad.
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
10% (vs 20% for non-resident aliens engaged in trade/biz)
8. Interest on long-term deposit or investment in banks (with maturity of 5 years or more)
exempt
Prize – the result of an effort (like a prize in a beauty contest) Winning – the result of a transaction where the
outcome depends upon chance (like betting) Deposit substitute – a means of borrowing money from the public
(20 or more individual or corporate lenders) other than by way of deposit with banks through the issuance of
debt instruments (like banker’s acceptances, promissory notes, repurchase agreements, certificates of
assignment or participation)
• The sources above are derived within the Philippines.
• Note the situs rules:
o For aliens, the royalties and stuff must come from within the Philippines since
they are only taxed here. o For resident citizens, the passive income that come from outside the Philippines
goes into their gross income. Tax Rate on Interest Income from Foreign Currency Deposit (RR 10-98) 1.
Interest income actually received by a resident citizen or resident alien from FCD
7.5% final withholding tax 2. If it was deposited by an OCW or seaman or nonresident citizen Exempt 3. If it
was in a bank account in the joint names of an OCW and his spouse (who is a resident)
50% exempt/ 50% final withholding tax of 7.5% 4. Interest income actually received by a domestic corporation
or resident foreign corporation from FCD
7.5% final withholding tax
• Interest income which is actually or constructively received by a resident citizen of the Philippines or by a
resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%.
The depository bank will withhold and remit the tax. If a bank account is jointly in the name of a non-resident
citizen, 50% of the interest income from such bank deposit will be treated as exempt while the other 50% will be
subject to a final withholding tax of 7.5%. The Regulations will apply on taxable income derived beginning January
1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only
that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is
taxable. (RR 10-98)
Tax Rate on Capital Gains
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Taxation One: Outline with Codals
1. On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange
held as a capital asset, o Capital gains not over P100,000
5% of the net capital gains o Capital gains in excess of P100,000 (see RR 6-2008
10% of the net capital gains below) 2. On sale of real property in the Philippines held as a capital asset (see
RR 8-98 below) 6% of the gross selling price, or the current market value at the time of sale, whichever is
higher
Tax Rate on Income from Sale, Barter, Exchange or other Disposition of Shares of Stock (RR 6-2008) If
shares of stock are listed and traded through the local stock exchange
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
1⁄2 of 1% (or .005%) of the gross selling price or gross value in money of the shares of stock If shares not
traded through the local stock exchange
o Capital gains not over P100,000 o Capital gains in excess of P100,000
5% of the net capital gains 10% of the net capital gains
• Who are liable? 1. Individual taxpayer, whether citizen or alien; 2. Corporate taxpayer, whether domestic or
foreign; 3. Other taxpayers not falling under (1) and (2) above, such as estate, trust, trust
funds and pension funds, among others.
• Who are exempt? 1. Dealers in securities 2. Investors in shares of stock in a mutual fund company, as
defined in Sec 22 (BB), and Section 2(s) of these Regulations, in ocnnection with the gains realized by said
investor upon redemption of said shares of stock in a mutual fund companyl and 3. All other persons, whether
natural or juridical, who are specifically exempt from national internal revenue taxes under existing investment
incentives and other special laws.
How to determine the tax base of disposition of stock (RR 6-2008)
Fair Market Value
Sales of stock listed and traded through the LSE FMV is the actual selling price Sales of stock listed but not
traded through the LSE
FMV is the closing price on the day when the shares were sold, transferred, etc (if no sale was made on that
day in the LSE, then the closing price on the day nearest to the date of sale, transfer, or exchange of the said
shares) Sales of stock not listed and not traded through the LSE
FMV is the book value of the shares of stock as shown in the financial statements duly certified by an independent
CPA nearest to the date of
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Taxation One: Outline with Codals
sale
Final Tax Rate on Sales, Exchanges, or Transfers or Real Properties Classified as Capital Assets (RR 898) Sale of real property in the Philippines 6% of the gross selling price, or the current market value at the time
of sale, whichever is higher If sale was made to the government or to GOCCs Either 6% of the gross selling
price/current market value or under the normal income tax rate, taxpayer’s option
Creditable Withholding Tax on Sales, Exchanges or Transfers of Real Properties classified as Ordinary
Assets (RR 8-98) 1. If the seller is habitually engaged in the real estate business
o Selling price is less than P500,000 o Selling price is P500,000 to P2m o Selling price is above P2m
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
1.5% 3% 5% of gross selling price/current market value, whichever is higher 2. If the seller is not habitually
engaged in the real estate business
7.5% of gross selling price/current market value, whichever is higher 3. If the seller is exempt from creditable
withholding tax as per RR 2-98
Exempt
• Conditions to be exempt from capital gains tax of 6% on the sale, exchange, or disposition of a
principal residence (RR 13-99) 1. The proceeds from the sale, exchange, or disposition of his principal
residence must be fully utilized in acquiring or construing a new principal residence within 18 months. There
must be proof. 2. This can only be availed of ONLY ONCE every 10 years 3. The historical cost of his old
principal residence shall be carried over to the cost basis
of his new residence 4. If there is no full utilization, he shall be liable for the deficiency capital gains tax of
the utilized portion 5. If the principal residence is disposed in exchange for a condo, and if it is used as his
new residence, then he is exempt 6. The 6% capital gains tax otherwise due must be deposited in escrow with
an authorized agent bank, and can only be released when sufficient proof is shown that the proceeds have
been fully utilized within 18 months.
• What is the principal residence anyway? (RR 14-2000)
o It is the dwelling house, where the husband or wife or unmarried individual resides; actual occupancy is not
interrupted or abandoned by temporary absence due to travel, studies, or work abroad
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Taxation One: Outline with Codals
o If the ownership of the land and the dwelling house belong to different persons,
only the dwelling house shall be treated as principal residence o It is not
necessarily the “family home.”
• Payment of capital gains tax on foreclosure of mortgaged property (RR 4-99)
o If the mortgagor exercises his right of redemption within 1 year – no capital gains tax because none
has been derived and no transfer of property was realized
• In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder.
o Who pays the capital gains?
▪ If the mortgagee is a bank, then it is the mortgagee bank that pays it, not the seller.
Personal and Additional Exemptions
SEC. 35. Allowance of Personal
Exemption for Individual Taxpayer. (A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall be allowed a basic personal
exemption amounting to P50,000 for each individual taxpayer.
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. (B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of twenty five thousand pesos
(P25,000) for each dependent not exceeding four (4).
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.
For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and
living with the taxpayer if such dependent is not more than twenty-one (21) 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. (Amended by RA 9504)
Personal and additional exemption for individual taxpayer Basic personal
Additional exemption for each dependent, not exceeding four (4) o C
exemption for each individual taxpayer
one
spouse in case of married individuals o If legally separated, add
o If married and only one of the spouses is deriving gross
income,
exemptions claimed only by spouse who has custody; should not exc
only such spouse shall be allowed the personal exemption.
additional exemptions allowed
P25,000 per
dependent
• Exemption statutes are not retroactive. (Pensacola v CIR)
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
2012 – Mickey)
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P50,000
• Discounts for senior citizens is now treated as tax deductions, as per RA 9257. This sucks for the taxpayer
because he doesn’t get the “peso for peso” benefit which he would have gotten if it were considered a tax credit
as before. (M.E. Holdings Corp v CIR & CTA)
• Senior Citizens are
o Resident citizens o At
least 60 years old
▪ They are not exempt from income taxes unless they are considered minimum wage earners.
(RA 9994, which also took out the previous P60,000 requirement)
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Taxation One: Outline with Codals
Change of status Sec 35. (C) Change of Status. - 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.
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 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.
Personal exemption allowable to nonresident alien individuals
Sec. 35 (D) Personal Exemption Allowable to Nonresident
Alien Individual. - A nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be
entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens
or resident of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him
from all sources in the Philippines, as required by this Title.
Personal Exemptions allowable to nonresident alien individuals If engaged in trade, business or in the
exercise of
Entitled to a personal exemption in the a profession
amount equal to the exemptions allowed in the income tax law of his country for Filipinos, but it shouldn’t
exceed the amount fixed here for exemptions If not engaged in trade, business or in the exercise of a
profession
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
None, because Sec 25 (B) states that he will be taxed upon his entire income.
• De Leon states that nonresident aliens are not entitled to additional exemptions for dependents. (P. 135,
Fundamentals of Taxation 2009)
Optional Standard Deduction Sec. 34 (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding
Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not
exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under
section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined
in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be
considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be
irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional
standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further,
That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross
receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the
taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
• Optional standard deduction is the deduction which an individual other than a non- resident alien, or a
corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts,
as the case may be, or a corporation, in an amount not exceeding 40% of its gross income, in lie of taking itemized
deductions.
• The OSD may be availed of by:
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Taxation One: Outline with Codals
o A citizen, whether resident or non-resident o
Resident alien, o Domestic corp, o Resident foreign
corp, o Partnerships, and o Taxable estate and trust.
▪ A non-resident alien cannot claim OSD.
• The OSD allowed to individual taxpayer shall be a maximum of 40% of gross sales or gross receipts during
the taxable year.
o If one uses the accrual basis of accounting for his income and deductions, the
OSD shall be based on the gross sales during the taxable year. o If one uses the cash basis, the OSD
shall be based on his gross receipts during
the taxable year. o The law is specific that for individual taxpayers the basis of the 40% OSD shall be
gross sales or gross receipts, not gross income, for which reason the “cost of sales” and the “cost of
services” are not allowed to be deducted for purposes of determining the basis of the OSD. o For
other individual taxpayers allowed by law to report their income and deductions under a different
method of accounting, the gross sales or gross receipts shall be determined in accordance with the
said acceptable method of accounting. o No need to substantiate with receipts!
• Example:
o Suppose a retailer of goods, an individual, whose accounting method is under the accrual basis has
a gross sales of P1m with a cost of sales amounting to P800k. the computation of the OSD shall be
determined as follows: Gross Sales P1,000,000 Less: CoGS -------------- Basis of the OSD P1,000,000
x OSD Rate (max) .40 OSD Amount P400,000
If the taxpayer opts to use the OSD in lieu of the itemized deductions allowed under Sec 34 of the
Tax Code, his net taxable income shall be as follows: Gross Sales P1,000,000 Less: CoGS ----------- Gross Sales/Gross InomeP1,000,000 Less: OSD (max) 400,000 Net Income P600,000
Premium payments on health and/or hospitalization insurance
Sec. 34 (M) Premium Payments on Health and/or
Hospitalization Insurance of an Individual Taxpayer. - 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.
• The taxpayer is allowed a deduction of P2,400/family or P200/month for health and/or hospitalization
insurance premiums, provided:
o Said family’s gross income is not more than P250,000 for the taxable year.
2012 – Mickey)
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
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Taxation One: Outline with Codals
o It must be taken by the taxpayer for himself and his family.
• If married, only the spouse claiming the additional exemption for dependents can avail of this.
Exclusions and deductions (discussion from De Leon’s book, see also Sec 61-64 of RR 2)
• Exclusions are incomes that are exempt from the tax. They are not to be included in the tax return unless
information regarding it is specifically called for.
o Examples:
▪ Life insurance proceeds paid to beneficiaries upon the death of the insured.
▪ Value of the property acquired by inheritance or donation, because it is subject to estate or
donor’s tax.
▪ Retirement benefits, pensions, etc, received by government officials and employees from the
GSIS and SSS in recognition of their services. So with retirement benefits of private firms, under
certain conditions.
▪ Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, etc, competitions and tournaments.
▪ Christmas bonus, 13th month pay, productivity incentives, and other benefits received up to a
max of P30,000.
▪ Gains from the sale or retirement of bonds or other certificates of indebtedness with a
maturity of more than 5 years.
• Deductions are items or amounts which the law allows to be deducted under certain conditions from the
gross income of a taxpayer in order to arrive at the taxable income.
• Both reduce actual gross income although exclusions are not included in the income tax return.
• Some general principals governing deductions include:
o The taxpayer seeking a deduction must point to some specific provision of the
statute authorizing the deduction; and o He must be able to prove that he is entitled to the deduction
authorized or
allowed.
• They are allowed only where there is a clear provision in the statute for the deduction claimed.
• Taxable gross income is affected by exclusions because the latter are omitted from the former and are not
reported on the income tax return but is not affected by deductions because they are subtracted after gross
income is determined and are reported on the return.
• Kinds of deductions:
1. Deductions from compensation income. 2. Deductions
from business/professional income. 3. Deductions from
corporate income. 4. Special deductions 5. Deductions
allowed by special laws.
Tax on non-resident aliens Non-resident aliens engaged in business in the
Philippines SEC. 25. Tax on Nonresident Alien Individual. - (A) Nonresident Alien Engaged in
trade or Business Within the Philippines. (1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same
manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during
any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.
2012 – Mickey)
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9,
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Taxation One: Outline with Codals
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional
Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash
and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a
regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net income after
tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the
net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer;
interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax
under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an
income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and
royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That
cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest
income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or
investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%; Three (3) years to less than four (4) years - 12%; and Less than three (3) years - 20%. (3)
Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local
stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.
• A nonresident alien engaged in trade or business in the Philippines is subject to the same income tax rate as
citizens and resident aliens, on taxable income received from all sources within the Philippines.
• A nonresident alien who stays in the Philippines for an aggregate period of more than 180 days shall be
deemed as nonresident alien doing business in the Philippines.
Tax Rate on Certain Passive Income on Nonresident Aliens Engaged in Trade, Business or Exercising a
Profession
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
Final Tax
1. Interest under the expanded foreign currency deposit system exempt 2. Royalty from books, literary works,
& musical compositions 10% 3. Royalty other than above 20% 4. Interest on any current bank deposit, yield or
other monetary benefits from deposit substitute, trust fund & similar arrangement
20%
5. Prize exceeding P10,000 20% 6. Other winnings, except Phil Charity Sweepstakes & Lotto 20% 7. Dividend
from a domestic corp, or from a joint stock company, insurance or mutual fund company, & regional operating
headquarters of multinational company or share in the distributive net income after tax o a partnership (except
a general professional partnership), joint stock or joint venture or consortium taxable as a corporation
• What about dividends from foreign corps? Exempt. Nonresident aliens are not taxed worldwide.
20% (compare with citizens and resident aliens)
8. Gross income from cinematographic films & similar works 25% 9. Interest on long-term deposit or investment
in banks (with maturity of 5 years or more)
exempt
Tax Rate on Capital Gains (same with residents, and nonresident aliens not engaged in business) 2. On
sale of shares of stock of a domestic corporation NOT
15
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Taxation One: Outline with Codals
listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over P100,000
5% of the net capital gains o Capital gains in excess of P100,000
10% of the net capital gains 2. On sale of real property in the Philippines held as a capital asset 6% of the
gross selling price, or the current market value at the time of sale, whichever is higher
Non-resident aliens not engaged in business in the Philippines Sec. 25 (B) Nonresident Alien Individual Not Engaged in
Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income
received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines
as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other
fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of
such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of
shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of
Section 24.
• Nonresident aliens not engaged in business are taxed 25% of their entire income within the Philippines.
• That means they have no deductions!
• Their capital gains are the same with nonresident aliens engaged in business (see table above!)
Special aliens Sec. 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien
individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational
companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such
regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided,
however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by
these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross
income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to
fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying
the same positions as those of aliens employed by these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a
foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor
engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor:
Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by
petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof
shall be subject to the pertinent income tax, as the case may be, imposed under this Code.
Special Aliens
Mickey Ingles
16 Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
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Taxation One: Outline with Codals
1. Employed by regional or area headquarters & regional
15% on gross income operating headquarters established in the Philippines by multinational; 2. Employed by
offshore banking units 15% on gross income 3. Permanent resident of a foreign country but who is employed
and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in
petroleum operations in the Philippines
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
15%
• Provided the same tax shall apply to Filipinos employed and occupying the same position as these aliens.
• These apply only to positions of a highly technical or highly managerial nature. (Atty. Montero)
• All income earned from all other sources within the Philippines by the special alien employees shall be
subject to the pertinent income tax imposed by the Code.
Tips on answering Thought process in answering problems:
1. Is this income? If not, then it’s not really a income tax problem. 2. Who’s the taxpayer? And what’s the
source? Refer to Sec 23! 3. What’s the specific rate? See sec 24-25!
For example, what is the tax rate of on income derived from dividends from foreign corporations for 1. Resident
citizens 2. Resident aliens and 3. Nonresident aliens engaged in trade or business?
1. Resident citizens
a. Yes, it’s income. b. The source is outside the Philippines. Are they liable for sources from outside
the Philippines? Yes! Citizens are taxed worldwide! c. What’s the specific tax rate? Hmm... since it’s not in any
of the charts, but they still have to be taxed, then the income they derive from dividends from foreign
corporations will be considered in computing the tax rate based on the tax calendar of Sec 24(a) 2. Resident
aliens
a. Yes, it’s income. b. The source is outside the Philippines. Are they liable for sources from outside
the Philippines? No! They aren’t taxed worldwide. 3. Nonresident aliens engaged in trade or business
a. Yes, my dear, it’s income. b. The source is outside the Philippines. Are they liable for source from outside
the Philippines? No! They aren’t taxed worldwide either.
D. Definitions
• Section 22, Tax Code
Definition of corporations Sec 22 (B) The term "corporation" shall include partnerships, no matter how created or organized, jointstock 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.
17
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Taxation One: Outline with Codals
• Corporations include:
o Partnerships, no matter how created or organized o Joint-stock companies o Joint accounts o
Associations o Insurance companies
• It does not include
o General professional partnerships; o 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 or consortium agreement under a service contract with the government. (The JV should NOT be
incorporated.)
• Remember your partnership lessons! (AFISCO and Pascual cases)
• All co-owernships are not deemed unregistered partnerships.(Obillos v CIR)
• The moment inheritance shares are used as part of the common assets to be used in making profits, it is
considered part of the taxable income of an unregistered partnership. (Ona v CIR)
• Requisites of a JV: 1. Contribution by each party 2. Profits are shared among the parties 3. There is joint
right of mutual control over the subject matter 4. There is a single business transaction rather than a general or
continuous transaction (BIR Ruling 317-92, in this case, the first agreement of the two parties to construct the
6750 Bldg was not taxable because they had not derived income/profits from it. the construction of the building
was mere return of the capital which they shelled out. However, once the two corporations were placed under
one sole management to operate the business affairs of the two, the JV was taxable separate from the two
corporations comprising it. The distribution by the JV to the two constituent corporations was not taxable
because it was considered intra-corporate dividends.)
On partnerships
• Two kinds of partnership, for income tax purposes:
o Partnerships NOT subject to income tax, ie
▪ General professional partnership
▪ Joint venture or consortium agreement formed for the purpose of
• undertaking construction projects
• engaging in petroleum, coal, geothermal and other energy operations
o pursuant to an operating or consortium agreement under a
service contract with the government o Partnerships subject to tax
▪ Usually, those whose income is derived from trade or business
• Differences
NON TAXABLE TAXABLE business partnership
• With regard to DISTRIBUTIVE SHARE
o Distributive share is a partner’s computed and ascertained share in the net
profits of the partnership,
▪ Whether actually distributed to the partners or not
• will form part of partner’s gross
Partner’s distributive share in the net income in the ITR subject to the
income is subject to a final tax of 10% graduated income tax rates
(resident citizens, non-resident citizens,
• will be subjected to a creditable
OCWs, or resident aliens) or 20% (for
Mickey Ingles
18 Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
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Taxation One: Outline with Codals
withholding tax of 15% (if income
NRAETB) payments exceed P720,000 for the current year) or 10% (if income payments do NOT exceed
P720,000 for the current year) to be withheld and paid by the partnership to the BIR
With regard to PARTNER’S SHARE IN NET LOSS OF THE PARTNERSHIP May be claim as a deductible
expense in his personal income tax return
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
Not deductible since subject to final tax
With regard to HOW THE PARTNERSHIP is TAXED Still required to file an annual information return on their
incomes and expenses for the purpose of ascertaining the partners’ taxable shares
Deemed and treated as corporations subject to the corporate income tax rate
• When co-ownership becomes taxable:
o Income of the co-ownership is invested in other income-producing properties or
income-producing activities o When there is NO attempt to divide the inherited property for more than 10 years
and the said property was not under any administration proceedings nor held in trust (thus deemed an
unregistered partnership)
E. Income Tax Rates SEC. 27. Rates of Income tax on Domestic Corporations. (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable
income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B)
of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective
January 1, 2009, the rate of income tax shall be thirty percent (30%). In the case of corporations adopting the fiscal-year accounting period,
the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their
income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The corporate
income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal
year by the taxable income of the corporation for the period, divided by twelve. Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent
(15%) of gross income as defined herein, after the following conditions have been satisfied: (1) A tax effort ratio of twenty percent (20%) of
Gross National Product (GNP); (2) A ratio of forty percent (40%) of income tax collection to total tax revenues; (3) A VAT tax effort of four
percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all
sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the
corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall be equivalent to 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.
19
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Taxation One: Outline with Codals
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 and
discounts.
Tax rate of Domestic Corporations 30% of taxable income from all sources within
and outside the Philippines, or 2% of gross income if MCIT
applies, or 15% of gross income if the following conditions
are met:
1. tax effort ratio of 20% of GNP 2. ratio of 40% of
income tax collection to
total tax revenues 3. VAT tax effort of 4% of GNP; and 4. .9% ratio of the Consolidated Public Sector
Financial Position (CPSFP) to GNP (this last one has
yet to be implemented)
• Option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not exceed 55%
• Election of the gross income tax option by the corporation shall be irrevocable for 3 consecutive
taxable years
• Domestic corporations are subject to any or some of the following:
• Capital gains tax
• Final tax on passive income
• Normal tax
• Minimum corporate income tax (MCIT)
• Gross income tax (GIT)
• Improperly accumulated earnings tax (IAET)
Gross Income Computation Gross Sales Less: Sales Returns
Discounts Allowances CoGS (all business expenses directly incurred to produce the merchandise and bring
them to their present location or use) Total Gross Income
CoGS for a Trading or Merchandise Concern Invoice cost of goods sold Import duties
Freight in transporting the goods to the place where the goods are actually sold Insurance while
the goods are in transit
CoGS for a Manufacturing Concern All costs of production of finished goods such as raw materials, direct
labor & manufacturing overhead Freight cost Insurance premiums Other costs incurred to bring the raw
materials to the factory or warehouse
Gross Income Computation for a Service Concern Gross
Sales
2012 – Mickey)
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Taxation One: Outline with Codals
Less: Sales Returns
Discounts Allowances Cost of Services (all direct costs & expenses necessarily incurred to provide the services
required by the customers & clients including:
• Salaries & employee benefits of personnel, consultants & specialists directly rendering the service
• Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment use &
cost of supplies
• If it’s a bank, interest expense is included Total Gross income of a service concern
F. Proprietary Educational Institutions and Hospitals (B) Proprietary Educational Institutions and Hospitals. - Proprietary
educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered
by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of
the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall
be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any
trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. A "Proprietary educational institution" is any private school maintained and
administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports
(DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the
case may be, in accordance with existing laws and regulations.
• Proprietary educational institution is:
o Any private school maintained & administered by private individuals or groups o With an issued permit to
operate from the DECS or CHED or TESDA
Tax rate of proprietary educational
10% on their taxable income (except for passive institutions and hospitals
income), or 30% on their entire taxable income if the gross income from unrelated trade, business or other
activity exceeds 50% of the total gross income of the institution
• In computing this 30% on the entire taxable income scenario, include:
o Income subject to tax o Income which are exempt
• Unrelated trade, business or other activity means
o Any trade, business or other activity o The conduct of which is not substantially related to the exercise or
performance
by such its institution of its primary purpose or function.
• For non-stock, non-profit educational institutions, all revenues use actually, directly and exclusively for
educational purposes are exempt.
o Their exemption refers only to revenues derived from assets used actually,
directly and exclusively for educational purposes. o Income from cafeterias, canteens & bookstores are also
exempt if they are owned & operated by the educational institution and are located within the school premises.
o However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the
conduct of which is not related to the exercise or performance by such educational institutions of their
educational purposes or functions, i. e. rental payment from their building/premises. (RR 76-2003)
• For non-stock, non-profit corporations who are exempt, they are still liable for taxes on:
Mickey Ingles
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Taxation One: Outline with Codals
o Income derived from any of their real properties (rental payment form their
building premises) o Any activity conducted from profit regardless of disposition thereof o Interest income
from any bank deposits or yield on deposit substitutes (final tax
of 20%) o If its foreign currency deposit, final tax of 7.5% (Dep Order 149-95, 1995) o They shall also be
withholding agents for their employee’s compensation income
subject to withholding tax (RR 76-2003)
• For private educational institutions, they are exempt from VAT, but they must be accredited with either
DECS or CHED.
o However, income derived from trade, business or other activity is still taxable. o Their bank
deposits and foreign currency deposits are exempt from withholding taxes but they must show proof
that such income is used to fund proposed projects for their institution’s improvement. o They shall
also be the withholding agents for their employee’s compensation
income subject to withholding tax.
G. GOCCs Sec. 27 (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing
special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the
Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity.
• GOCCs are taxed on the same rate upon their taxable income upon corporations or associations engaged in
similar business, industry, or activity.
o Exempt GOCCs:
▪ GSIS
▪ SSS
▪ PHIC
▪ PCSO
▪ As per RA 9337, PAGCOR was deleted from the list of exempt GOCCs.
H. Passive Income Sec. 27 (D) Rates of Tax on Certain Passive
Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements,
and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7 1/2%) of such interest income. (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:
Not over P100,000................................ 5% Amount in excess of P100,000................. 10% (3) Tax on Income Derived under the Expanded
Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system shall be
exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by
the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency
loans granted by such depository
2012 – Mickey)
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Taxation One: Outline with Codals
banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the
expanded system shall be subject to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall
be exempt from income tax
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed
on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the
business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance
with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.
Tax Rate on Passive Income of Domestic Corporations Final Tax 1. Interest under the expanded foreign
currency deposit system 7.5% 2. Royalty of all types within the Philippines
o Royalty from abroad? Enters the taxable income 30% tax rate
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
20%
3. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund &
similar arrangement
20%
4. Dividend from domestic corporations (inter-corporate dividend) exempt
Tax Rate on Capital Gains (same as individuals) 3. On sale of shares of stock of a domestic corporation
NOT listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over
P100,000 o Capital gains in excess of P100,000
5% of the net capital gains 10% of the net capital gains 2. On sale of real property in the Philippines held as a
capital asset 6% of the gross selling price, or the current market value at the time of sale, whichever is higher
Tax Rate of BANKS on Income Derived under the Expanded FCD System
Final Tax
1. Income derived by a depository BANK from foreign currency transactions with non-residents, OBUs, etc
exempt
2. Interest income from foreign currency loans granted by a bank to residents other than OBUs
10%
• Income of non-residents (individuals or corporations) from transactions with depository bank under the
expanded FCD system are exempt.
What are deposit substitutes? (Y) The term "deposit substitutes" 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.
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Taxation One: Outline with Codals
• A deposit substitute is a means of borrowing money from the public (20 or more individual or corporate lenders)
other than by way of deposit with banks through the issuance of debt instruments.
Sale of shares Tax Rate on Income from Sale, Barter, Exchange or other Disposition of Shares of Stock
(RR 6-2008) If shares of stock are listed and traded through the local
1⁄2 of 1% (or .005%) of the stock exchange
gross selling price or gross value in money of the shares of stock If shares not traded through the local stock
exchange
o Capital gains not over P100,000 o Capital gains in excess of P100,000
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
5% of the net capital gains 10% of the net capital gains
• Implications on shares of stock listed and traded in the stock exchange from those that are not:
o Those listed and traded is subject to the final percentage tax of 1⁄2 of 1% on the
GROSS SELLING PRICE.
▪ Hence, imposed whether there was a gain or not. o Those NOT listed and traded, the net capital gain is
subject to the final capital
gains tax rates of 5/10%.
▪ Subject to tax only if it results into a gain.
• Final percentage tax on sale or exchange of shares of stock through IPO:
o Gross selling price or gross value in money in proportion of the shares of stock
sold or exchanged to the total outstanding shares of stock after the listing at the stock exchange:
▪ Up to 25%: 4%
▪ Over 25% but not over 33 1/3%: 2%
▪ Over 33 1/3%: 1% FCDU
• Income of non-residents (individuals or corporations) from transactions with depository bank under the
expanded FCD system are exempt.
Intercorporate dividends
• Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.
o Why? Law assumes that the dividends received will be injected to the capital, which will eventually be taxed
when the corporation gets income from the use of the capital.
Sale of realty Final Tax Rate on Sales, Exchanges, or Transfers or Real Properties Classified as Capital
Assets (RR 8-98) Sale of real property in the Philippines 6% of the gross selling price, or the current market
value at the time of sale, whichever is higher If sale was made to the government or to GOCCs Either 6% of the
gross selling price/current market value or under the normal income tax
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Taxation One: Outline with Codals
rate, taxpayer’s option
Creditable Withholding Tax on Sales, Exchanges or Transfers of Real Properties classified as Ordinary
Assets (RR 8-98) 1. If the seller is habitually engaged in the real estate business
o Selling price is less than P500,000 o Selling price is P500,000 to P2m o Selling price is above P2m
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
1.5% 3% 5% of gross selling price/current market value, whichever is higher 2. If the seller is not habitually
engaged in the real estate business
7.5% of gross selling price/current market value, whichever is higher 3. If the seller is exempt from creditable
withholding tax as per RR 2-98
Exempt
• If the mortgagor exercises his right of redemption within 1 year, no capital gains tax.
• In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder. (RR 499)
I. Minimum Corporate Income Tax (MCIT) Sec 27 (E) Minimum Corporate Income Tax on Domestic Corporations. – (1)
Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate
income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the
normal income tax for the three (3) immediately succeeding taxable years. (3) 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. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E)
hereof, the term '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 (A) salaries and employee benefits of personnel, consultants and specialists directly
rendering the service and (B) 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.
• Beginning with the fourth year of operations, a domestic corporation is taxed by whichever is higher:
o Normal tax of 30%, or o Minimum corporate income tax of 2%
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Taxation One: Outline with Codals
• The minimum corporate income tax is 2% of gross income (compare with the normal tax which has taxable
income as its tax base)
• Any excess of the MCIT over the normal tax of a year shall be carried forward and credited against the
normal tax for the three immediately succeeding taxable years.
o For the carry forward to apply, the normal tax should be higher than the
minimum corporate income tax. o Usually follows the first-in, first-out (FIFO) method (Atty. Montero) o So,
you usually compute both first, then apply either the MCIT or Normal Tax,
whichever is higher.
Example
Year 4 Year 5 Year 6 Year 7 MCIT 200 400 100 100
Normal 100 200 300 200
Income tax 200 400 0 200 Excess MCIT (100) (100) ubos na yung year 4 excess
(200)
• MCIT is implemented on domestic and resident foreign corporations whenever they have zero or negative
taxable income, or when the MCIT is greater than the normal income tax due. (RR 9-98)
• The following are exempted from the MCIT:
o Resident foreign corporations engaged in business as international carriers (see
below for more discussion) o Resident foreign corporations engaged in business as offshore banking units
o Resident foreign corporations engaged in business as regional operating
headquarters o Firms that are taxed under a special income tax regime (like those under PEZA or
other economic zones) o Proprietary Education
Institutions o Non-profit hospitals o Depositary
banks under the FCDU o REIT (Real Estate
Investment Trusts) o Nonresident foreign
corporations
• When can you apply for relief from the MCIT?
o Losses on account of prolonged labor dispute (more than 6 months) o Force
majeure o Legitimate business reverses
J. Income Tax on Resident Foreign Corporations Sec 28(A)
Tax on Resident Foreign Corporations. –
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate
of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January
1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date
when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and
spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of
2012 – Mickey)
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months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided,
however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the
same conditions, as provided in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income,
as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under
paragraph (1) of this Subsection.
A foreign corporation is one which is not domestic (ie organized/incorporated here). It may be a resident or
non-resident corporation.
• A resident corporation is a foreign corporation engaged in business in the Philippines.
o A foreign corporation can engage in business in the Philippines only after it had registered with, and had been
allowed by, the regulatory agencies of the Philippine government to engage in business in the Philippines.
Tax rate of Foreign Resident
30% of taxable income from all sources within the Corporations
Philippines, or 2% of gross income if MCIT applies, or 15% of gross income (again, the GIT has yet to be
implemented)
Tax Rate on Passive Income of Foreign Resident Corporations Final Tax 1. Interest under the expanded
foreign currency deposit system 7.5% 2. Royalty of all types within the Philippines
o Royalty from abroad? Exempt. (remember, only taxed from
sources within the Philippines)
•
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
20%
3. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund &
similar arrangement
20%
4. Dividend from domestic corporations (inter-corporate dividend) exempt
Tax Rate on Capital Gains 4. On sale of shares of stock of a domestic corporation NOT listed and NOT traded
thru a local stock exchange held as a capital asset, o Capital gains not over P100,000 o Capital gains in
excess of P100,000
5% of the net capital gains 10% of the net capital gains 2. On sale of real property in the Philippines No
provision for capital
gains for sale of realty. Atty. Montero says that you apply it to the normal corporate tax of 30%
International Carrier Sec 28 (A) (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of
two and one- half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder: (a) International Air Carrier. - "Gross Philippine
Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from
the Philippines, but transshipment of passenger takes place at any 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.
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Taxation One: Outline with Codals
(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.
• Tax rate for international carriers is 2.5% of Gross Philippine Billings
• Gross Philippine Billings refers to
o Gross revenue derived from carriage of persons, excess baggage, cargo and mail o Originating
from the Philippines in a continuous and uninterrupted flight o Irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document
• In CIR v BOAC, British Overseas Airways did not have any landing rights here nor did they have license to
operate here. They also did not carry passengers or cargo to or from the Philippines. They did, however, have a
general sales agent which sold BOAC tickets. They were taxed for the sale of the tickets (because of the situs of
taxation principle), even if the service to be rendered was outside the Philippines. They weren’t liable for carrier’s
tax though.
o Doing business has no specific criterion. As long as there was a continuity of conduct and intention
to establish a continuous business and not one of a temporary character, then you are doing business
in the Philippines. (Remember your corp!)
• An offline airline which has a branch/agent in the Philippines and sells passage documents to cover offline
flights of its principal or other airlines is NOT considered engaged in business as an international air carrier in the
country and is NOT subject to the GPB nor to the 3% common carrier’s tax.
• If the airline has flights which originate from any point in the Philippines, it is subject to the 2.5% GPB tax
unless it is subject to a different tax rate under a tax treaty to which the Philippines is a signatory.
• In a nutshell, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the
rate of 2.5% GPB while international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country will be taxed at the rate of 32% (now 30%) of such
income. (South African Airways, Feb 16, 2010)
• What is included in computing the GPB?
o Gross revenue from passage of persons (actual amount as reflected in the tax
coupon part of the plane ticket) o Excess baggage o Cargo and mail originating from the Philippines in a
continuous and uninterrupted
flight
• To compute the GPB: (monthly average net fare of all the tax coupons of plane tickets per point of final
destination, per class of passage, per classification of passenger) MULTIPLIED by the (total number of
passengers flown for the month as declared in the flight manifest)
• In case of passengers’ flights from any point in the Philippines and back, that portion of revenue pertaining to
the return trip to the Philippines is NOT included as part of the GPB. (RR 15-2002)
Offshore Banking Units (4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by
offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any
interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent
(10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units
shall be exempt from income tax.
2012 – Mickey)
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Taxation One: Outline with Codals
• Tax rate of offshore banking units authorized by the BSP (including any interest income foreign currency
loans granted to residents) is 10% final tax.
• Income of nonresidents from transactions with OBUs shall be exempt from income tax.
• An offshore banking unit is a branch of a foreign bank whish is authorized by the BSP to transact offshore
banking business in the Philippines.
• A foreign currency deposit unit is a department of a local bank or an inexisting local branch of a foreign bank
which is authorized by the BSP to operated under the expanded foreign currency deposit system.
• Gross onshore income covers all income arising from transactions allowed by the BSP conducted by and
between an offshore bank with another offshore bank or with an FCDU or with a non-resident. (RR 10-76)
• The following are included in computing the gross onshore income of OBUs and FCDUs?
o Gross interest income arising from foreign currency loans and advances and
investments with residents o Fees, commissions and other charges which are integral parts of the income
from foreign currency loan transactions are EXEMPT. They are not to be included in computing the final tax.
(RR 14-77) o Tax Rate on Interest Income from Foreign Currency Deposit (RR 10-98) 1. Interest income
actually received by a resident citizen or resident alien from FCD
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
7.5% final withholding tax 2. If it was deposited by an OCW or seaman or nonresident citizen Exempt 3. If it
was in a bank account in the joint names of an OCW and his spouse (who is a resident)
50% exempt/ 50% final withholding tax of 7.5% 4. Interest income actually received by a domestic corporation
or resident foreign corporation from FCD
7.5% final withholding tax
Branch Profit Remittance Tax (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be
subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and
paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the
Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the
Philippines.
• Any profit remitted by a branch to its head office shall be subject to a tax of 15%, except those registered
with PEZA (they have their own tax rules as incentives)
• What’s the base for the BPRT?
o It’s the total profits applied for remittance or earmarked for remittance without
any deduction for the tax component, not the profit actually remitted abroad. o If it is a foreign corporation, the
following are not included:
▪ Interests
▪ Dividends
▪ Rents
▪ Royalties
▪ Payment for technical services
▪ Salaries and wage premiums
▪ Annuities, emoluments, or other fixed or determinable casual gains
▪ Profits, income & capital gains
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Taxation One: Outline with Codals
▪ Except if the above are connected with the conduct of its business in the Philippines.
• Passive income is not included in computing for the BPRT. It is subject to a final tax. (Compania General de
Tabacos v CIR)
o Except when it arises from business activity in which the corporation is engaged
or connected with the conduct of its business in the Philippines.
• Dividends from a local corporation to a non-resident foreign corporation is not subject to BPT but to final
withholding tax. (Marubeni v CIR, 1990)
Regional or Area Headquarters and ROHQs Sec 22(DD) The term "regional or area headquarters" 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. (EE) The term "regional operating headquarters" shall mean a branch established in the Philippines by
multinational companies which are engaged in any of the following services: general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales
promotion; training and personnel management; logistic services; research and development services and product development; technical
support and maintenance; data processing and communications; and business development.
• Regional or Area Headquarters is a branch established in the Philippines by multi- nationals and which
headquarters:
o Do NOT earn or derive income from the Philippines, and o Which act as supervisory,
communications and coordinating center for their
affiliates, subsidiaries or branches in the Asia-Pacific Regions.
▪ They are EXEMPT from income tax.
• Regional Operating Headquarters is a branch established in the Philippines by multi- nationals which are
engaged in any of the following services:
o General admin and planning o Business planning and coordination; o
Sourcing and procurement of raw materials and components; o Corporate
finance advisory services; o Marketing control and sales promotion; o Training
and personnel management; o Logistic services; o Research and
development services and product development; o Technical support and
maintenance; o Data processing and communications; and o Business
development.
▪ They are taxed 10% on taxable income.
K. Income Tax on Non-resident Foreign Corporations In general (B) Tax on Nonresident Foreign Corporation. - (1) In
General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a
tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph
5(c) Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)
• Non-resident foreign corporations are subject to 30% income tax on the gross income derived during each
taxable year from all sources within the Philippines only
o Special corporations (seen below) are subject to a different tax rate
• When the foreign corporation transacts business in the Philippines independently of its branch in the country,
the principal agent relationship is set aside. The transaction becomes that of the foreign corporation, not of the
branch, hence, the corporation is
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considered a foreign non-resident corporation for that isolated and independent transaction. (Marubeni v CIR)
• A casual activity in the Philippines by a foreign corporation does not amount to engaging in trade or business
in the Philippines for income tax purposes. In order that a foreign corporation may be considered engaged in
trade or business, its business transactions must be continuous. (NV Reederij v CIR)
Special non-resident foreign corporations (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A
cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the
Philippines. (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall
be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry Authority. (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other
Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject
to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.
SPECIAL CORPORATIONS
Tax Rate Tax Base Non-resident owner of lessor of
4.5% Gross rentals, lease and vessel
charter fees from the Phil Non-resident cinematographic film owner, lessor, or distributor
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
25% Gross income from the Phil
Non-resident lessor of aircraft, machinery and other equipment
7.5% Gross rentals, charges and
other fees from Phil sources Proprietary educational institution and non-profit hospital
10% Taxable income from all
sources Resident international carrier 2.5% Gross Philippine billings Regional operating headquarters of
multinational corporation
10% Philippine Taxable income
• There’s no MCIT for special corporations
Tax rate on certain incomes of non-resident foreign corporations (5) Tax on Certain Incomes Received by a Nonresident
Foreign Corporation. - (a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the
amount of interest on foreign loans contracted on or after August 1, 1986; (b) Intercorporate Dividends. - A final withholding tax at the rate of
fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall
be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign
corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in
the Philippines equivalent to twenty percent (20%), which represents the deifference between the regular income tax of 35% and the 15% tax
on dividends as provided in this subparagaprh: Provided, that effective January 1, 2009, the credit against the tax due shall be equivalent to
15%, which represents the difference between the regular income tax of 30% and the 15% tax on dividends. (As amended by RA 9337) (c)
Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock
exchange: Not over P100,000..........................................5% On any amount in excess of P100,000............ 10%
Tax Rate on Passive Income of Foreign Non-Resident Corporations
Final Tax
1. Interest on foreign loans Non-resident lends to a domestic corporation
20%
2. Dividend from domestic corporations (inter-corporate dividend)
• This is subject to the condition that the country in which the non- resident foreign corporation is domiciled
allows a credit against
15%
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the tax due from the non-resident foreign corp taxes deemed to have been paid in the Philippines equivalent to
15%. If they don’t, the dividends will be taxed at 30%.
Tax Rate on Capital Gains (same as foreign resident corporations) 5. On sale of shares of stock of a
domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, o Capital
gains not over P100,000
5% of the net capital gains o Capital gains in excess of P100,000
10% of the net capital gains 2. On sale of real property in the Philippines No provision for capital
gains for sale of realty. Atty. Montero says that you apply it to the normal corporate tax of 30%
On inter-corporate dividends (CIR v Procter and Gamble Philippine Manufacturing, 1991)
• The ordinary 35% (now 30%) tax rate applicable to dividend remittances to non- resident corporate
stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder
corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines”,
applicable against the tax payable to the domiciliary country by the foreign stockholder corporation.
• In CIR v PG (PMC) (1991), Procter and Gamble Philippines declared dividends to its parent company, P&GUSA. It deducted 35% withholding tax, but now claimed for a refund, stating that the reduced 15% dividend tax
rate should apply.
o The SC said that the reduced 15% dividend tax rate is applicable if the USA “shall allow” to P&G-USA a tax
credit for “taxes deemed paid in the Philippines” applicable against the US taxes of P&G-USA. o The NIRC
specifies that such tax credit for “taxes deemed paid in the Philippines” must, as a minimum, reach an amount
equivalent to 20% (now 15%) which represents the difference between the regular 35% (now 30%) dividend tax
rate and the preferred 15% dividend tax rate. It is important to note that Sec. 24(b)1 (now Sec. 28 (B) (5) (b) of
the NIRC does not require that the US must give a “deemed paid” tax credit for the dividend tax (20% points)
waived by the Philippines in making applicable the preferred dividend tax rate of 15%. o In other words, our
NIRC does not require that the US tax law deem the parent-corporation to have paid the 20% points of dividend
tax waived by the Philippines. The NIRC only requires that the US “shall allow” P&G-USA a “deemed paid” tax
credit in an amount equivalent to the 20% points waived by the Philippines.
• CIR v Wander Philippines had the same facts as CIR v P&GPMC. But in Wander, the country at issue was
Switzerland and it did not even impose any income tax on the dividends received by Swiss corporations from
foreign corporations.
o THE SC said that the condition of “taxes deemed paid” was already complied
with since no income tax was imposed on the dividends in the first place.
• In both cases, the taxpayers were entitled to a refund.
Income covered by tax treaties
• In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up
a part of the tax in the expectation that the tax given up for this
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particular investment is not taxed by the other country. There would be some incentives on the part of the
foreigners to invest in the Philippines because the rates of tax are lowered and at the same time, they are
credited against the domestic tax abroad a figure higher than what was collected in the Philippines.
o Thus, if the rates of tax are lowered here, there should be a concomitant commitment on the part of
the state of residence (of the foreign corp) to grant some form of tax relief, whether this be in the form
of a tax credit or exemption. Otherwise, the tax which would have been collected here will simply be
collected by another state, defeating the object of the tax treaty since the tax burden imposed would
remain unrelieved. o The purpose of the most favored nation clause is to establish the principle of
equality of international treatment by providing that citizens of the contracting nations may enjoy the
privileges accorded by either party to those of the most favored nation. This allows the taxpayer in one
state to avail of more liberal provisions granted to another tax treaty to which his country or residence
is also a party. However, the use of the most favored nation clause is subject to the rationale of tax
treaties. o If the state of residence does not grant some form of tax relief to the investor (the foreign
non-resident corp), no benefit would redound to the Philippines. (CIR v SC Johnson and Son, wherein
the issue was with the payment of taxes on royalties. SC Johnson wanted tax credit based on the USRP tax treaty which had a “most favored nation clause.” The Germany-RP treaty was more beneficial
because it allowed a 10% rate on royalties. However, the Germany-RP treaty also allowed for 20%
matching credit for royalties. The US-RP tax treaty did NOT have this 20% matching credit. So the SC
said that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes
paid to the Philippines on royalties as allowed under the RP- Germany Tax Treaty, SC Johnson cannot
be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no
payment of taxes on royalties under similar circumstances.)
• Based on RMC 46-2002 (affirmed by Golden Arches v CIR, CTA Case 6862, 2007), the 10% rate of withholding
tax on royalties remitted to residents of the US may now be availed of because of the RP-China tax treaty which
has the basically the same provisions of the RP-US tax treaty. So, the MFN of the RP-US tax treaty can refer to
the RP-China tax treaty (as compared to the RP-Germany treaty which were essentially not the same).1
L. Improperly Accumulated Earnings Tax (IAET)
1
Article 23 of the RP-US tax treaty and Article 23 of the RP-China tax treaty, though differently worded, plainly reveal a
similarity in the provisions on relief from or avoidance of double taxation to their respective residents. Thus, the tax on royalty payments to
residents of US and China are paid under similar circumstances, i.e., the amount of royalty income tax paid or accrued to the Philippines
under the respective tax treaties is available as tax credit against the income tax payable in their respective countries. US residents may,
therefore, invoke the preferential tax rate of 10% on royalties, accruing beginning January 1, 2002, arising in the Philippines "from the use
of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, . . ., or for information concerning industrial,
commercial or scientific experience" under the RP-China tax treaty, pursuant to the "most-favored-nation" clause of the RP-US tax treaty. It
bears stressing, however, that there are two important requirements that should be complied with before the 10% rate of withholding tax on
royalties remitted to a resident of US and China may be availed of, to wit: 1. It is necessary that there be an agreement or a contract
whereby the royalties paid to the US must originate from the use of, or the right to use any patent, trade mark, design or model, plan, secret
formula or process, or from the use, or the right to use, industrial, commercial or scientific experience; and 2. For as long as the contract or
agreement is subject to approval under Philippine law, the same must be duly approved by the Philippine competent authorities. All internal
revenue officers, employees and others concerned are enjoined to give this Circular the widest publicity possible.
2012 – Mickey)
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SEC. 29. Imposition of Improperly Accumulated Earnings Tax. - (A) In General. - In addition to other taxes imposed by this Title, there is
hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof,
an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. - (1) In General. - 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. (2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held
corporations; (b) Banks and other nonbank financial intermediaries; and (c) Insurance companies.
(C) Evidence of Purpose to Avoid Income 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.
(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated taxable income' means
taxable income' adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (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.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably
anticipated needs of the business.
• An improperly accumulated earnings tax of 10% of improperly accumulated taxable income is imposed on
corporations which permit earnings and profits to accumulate instead of being divided or distributed.
• Who are covered?
o All domestic corporations which are classified as closely held corporations? o A closely-held
corporation are those at least 50% in value of the outstanding capital stock or at least 50% of the total
combined voting power of all classes of stock is owned directly or indirectly by not more than 20
individuals. (RR 2-01)
▪ How do you determine if a corporation is a closely-held one? Look at stock-ownership!
• If stock not owned by individuals, it will be considered to be owned proportionately
by its shareholders.
• If it’s a family & partnership ownership, an individual shall be considered to own
the stock for his family members or partners.
• If there’s an option to acquire stocks, it shall be considered as being owned by the
person with the option. (BIR Ruling 25-02)
• Who are not covered?
1. Publicly-held corporations 2. Banks and other
financial institutions 3. Insurance companies 4.
Taxable partnerships
2012 – Mickey)
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5. General professional partnerships 6. Non-taxable joint ventures 7. Enterprises registered with PEZA
or with the BCDA or with other special economic
zones (the last four are based on RR 2-01)
• What’s prima facie evidence of IAE?
o The fact that any corporation is a mere holding company or investment company
▪ Holding company: practically no activities except holding property, collection income
therefrom, and investing therein
▪ Investment company: holding company that buys and sells stocks, securities, real estate, etc o The
fact that the earnings or profits of a corporation are permitted to accumulate
beyond the reasonable needs of the business o Investment of substantial earnings in unrelated business
or in stock or securities
of an unrelated business o Investment in bonds and other long term securities o Accumulation of
earnings in excess of 100% of paid up capital (the last three are
based on RR 2-01)
• How do you compute for the improperly accumulated taxable income?
Taxable Income,
INCREASED BY:
Income exempt from tax Income excluded from gross income Income
subject to final tax The amount of net operating loss carry over (NOLCO)
DEDUCTED BY:
Dividends actually or constructively paid Income tax paid for the taxable year Amount
reserved for reasonable needs of the business emanating from the covered year’s
taxable income (from Reyes, p. 71) EQUALS: Improperly accumulated taxable
income X 10% (IAET) What you have to pay
• “Reasonable needs” means the immediate needs of the business. If the corporation can not prove this, then
it is not an immediate need. In order to determine whether profits are accumulated for the reasonable needs of
the business as to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is
manifested at the time of accumulation, not subsequently declared intentions which are merely the product of
afterthought. (Manila Wine Merchants v CIR)
o This is the immediacy test in RR 2-01.
▪ Reasonable needs means the immediate needs of the business including reasonably
anticipated needs. The burden of proof is with the corporation.
• The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of
the accumulation. So, if the failure to pay dividends were for the purpose of using the undistributed earnings and
profits for the reasonable needs of the business, that purpose would not fall within the interdiction of the statute.
(CIR v Tuason)
• The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders, could, in turn, be taxed. When corporations do not
declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders.
(Cyanamid v CTA)
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• What are considered reasonable?
a. Allowance for the increase of accumulated earnings up to 100% of the paid-up
capital b. Earnings reserved for building, plant, or equipment acquisitions as approved by
the Board of Directors (expansion, improvement, and repairs) c. Earnings reserved for compliance with any
loan or obligation established under a
legitimate business agreement (debt retirement) d. In case of subsidiaries of foreign corporations in the
Philippines, all undistributed
earnings intended or reserved for investments in the Philippines e. Earnings required
by law to be retained (RR 2-01) f. Anticipated losses or reverses in business
(Reyes, p. 70)
M. Tax-exempt Corporations SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for
profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating fort he exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized
by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its
members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member,
organizer, officer or any specific person; (F) Business league chamber of commerce, or board of trade, not organized for profit and no part of
the net income of which inures to the benefit of any private stock-holder, or individual; (G) Civic league or organization not organized for profit
but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational
institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
• The following organizations are INCOME tax-exempt, providing they are not organized for profit: 1. Labor,
agricultural and horticultural organizations 2. Mutual savings bank without capital stock represented by shares
& cooperative
banks without capital stock 3. A beneficiary society, order or association operating for the exclusive benefit
of the members (like a frat operating under the lodge system, a mutual aid association, a non-stock
corporation organized by employees providing for the payment of life, sickness, or other benefits exclusive
to its members) 4. Cemetery company owned & operated exclusively for the benefit of its members 5. Nonstock corporations or associations organized and operated exclusively for religious, charitable, scientific,
athletic or cultural purposes or for the rehab of veterans, no part of its net income or asset shall belong to
or inures to the benefit of any member or specific person 6. Business league chamber of commerce or
board of trade, no part of its income inures
to any individual
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7. Civic league or organization operated exclusively for the promotion of social welfare 8. A non-stock and
non-profit educational institution 9. Government educational institution 10. Farmers’ or other mutual
typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organizations or a purely local character, the income of which consists solely of dues,
assessments & fees collected from members for the sole purpose of meeting its expenses 11. Farmers’,
fruit growers’ or like associations organized and operated as sales agent for the purpose of marketing the
products of its members & turning back to them the proceeds less expenses
• They are not subject to income tax on income received by them from undertakings which are essential to or
necessarily connected with the purposes for which they were organized and operated.
o But they are subject to income tax on income of whatever kind and character from any of their
properties (real or personal), or from any of their activities (unrelated) conducted for profit, regardless of
the disposition made of such income.
• Some stuff from the Omnibus Investment Code of 1987 (Art 39, EO 226 - Incentives to Registered
Enterprises under the Investment Priorities Plan) – these are activity-driven incentives:
o Income Tax Holiday
▪ For pioneer firms – 6 years from commercial operation
▪ For non-pioneer firms – 4 years from commercial operation
▪ For newly registered firms – fully exempt from income taxes
▪ Extension of tax exemption for more than 1 year:
• If the project meets the prescribed ratio of capital equipment to number of works
set by the Board
• If the utilization of indigenous raw materials are at rates set by the Board
• If the net foreign exchange savings or earnings amount to at least $5m annually
during the first 3 years of operation
o But no registered firm may avail of this incentive for a
period exceeding 8 years
▪ Exemption for registered expanding firms:
• For a period of 3 years form commercial operation, registered expanding firms are
entitled to tax-exemption proportionate to their expansion, but if it availed of this
incentive during this period, it is NOT entitled to additional deduction for incremental
labor expense
• This incentive cannot be extended beyond 3 years o Additional
deduction for labor expense
▪ For the first 5 years from registration, a registered enterprise is allowed an additional deduction
of 50% of the wages corresponding to the increment in the number of DIRECT labor for skilled
and unskilled labors if the project meets the prescribed ratio of capital equipment to number of
workers set by the Board
• This exemption shall be doubled if the activity is located in less developed areas o Tax & Duty
exemption on imported capital equipment
▪ Within 5 years from the effectivity of this code (until 1992), importations of machinery and
equipment and spare parts of registered enterprises shall be 100% exempt of customs duties
and revenue tax, but the importation must comply with the following conditions:
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• They are not manufactured domestically in sufficient quantity of comparable quality
and at reasonable prices
• They are reasonably needed and will be used exclusively by the registered
enterprise in the manufacture of its products
• The approval of the Board was obtained for such importation o Tax credit for
domestic capital equipment
▪ A tax credit of 100% of the value of the revenue tax and customs duties that would have been waived
on the machinery and equipment had these been imported is given to registered enterprises which
purchase them from a domestic manufacturer o Exemption from contractor’s tax
▪ The registered enterprise is exempt from contractor’s tax
• Some stuff from the Bases Conversion and Development Act of 1992 and Special Economic Zone Act of 1995
(RA 7916, Sec 23-25) – these are activity- and location- driven incentives.
o Fiscal Incentives
▪ Businesses operating within the ECOZONES shall be entitled to fiscal incentives as per PD
66 (EPZA) or with EO 226.
▪ Exporters using local materials as inputs shall get tax credits same as those provided in the Export
Development Act of 1994 o Exemption from Taxes under the NIRC
▪ No taxes (local & national) shall be imposed on businesses operating within the ECOZONEs
▪ In lieu of taxes, 5% of the gross income shall be remitted to the national government o Applicable
national taxes
▪ All income derived by persons and all services establishments in the ECOZONE are subject
to taxes under the Tax Code
• Income derived from inside the zones should not be more than 30% of its total income. (RR 2-2005)
o Note: RA 9400 has restored tax privileges to Clark Air Base, Camp John Hay,
Poro Point and Morong Special Eco Zone
▪ In John Hay v Lim, the SC said that Camp John Hay was not afforded tax privilegs. But RA
9400 has restored it.
• Some stuff from the Jewelry Industry Development Act of 1998 (RA 8502) and RR 1-99
o Qualified jewelry enterprises2:
Exempted from excise tax of manufactured and produced jewelries, if shown to have
been purchased from a qualified jewelry enterprise; and
▪ Have additional deduction of 50% for training expenses incurred by qualified jewelry
enterprises.
▪ Jewelry enterprises availing of incentives shall still be eligible to incentives provided by other
special laws such as Republic Act No. 7844 (Export Development Act of 1994), Republic Act
No. 7916 (Special Economic Zone Act of 1995), Executive Order 226 (BOI Omnibus
Investments Code), among others: Provided, That the activity is export-oriented and that there
is no double availment of the same incentives.
2
Sec. 4. Eligibility for government assistance. — To qualify for the assistance, counselling and other incentives
envisioned in this Act, jewelry enterprises availing of the same must be duly registered with the appropriate government agencies as
presently provided by law.
Jewelry enterprise as used in this Act shall refer to any enterprise engaged in any aspect in the manufacture of goods commonly or
commercially known as fine and imitation jewelry including those producing, cutting and polishing, shaping, refining, forming or fabricating
real or imitation pearls, precious and semi-precious stones and imitations thereof, goods made of precious metal and imitations thereof, and
other raw materials and parts used in the manufacture of jewelry.
2012 – Mickey)
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• Some stuff from the Cooperative Code of the Philippines (RA 6983) and RR 20-2001
o Cooperatives which transact only with its members are exempt from:
▪ Income tax
▪ Value-Added Tax (VAT) under Section 109 pars. (r), (s), (t) and (u)3
▪ 3% Percentage Tax
▪ Donor’s tax to accredited exempt
▪ Excise tax
▪ DST • But the other party not exempt has to pay the DST
▪ Annual registration fee of P500 under Sec 236 (B) o If it deals with members and outsiders, see
footnote.4 o Note: All income of the cooperative not related to its main/principal business/es shall be
subject to all the appropriate taxes under the Tax Code of 1997. This is applicable to all types of
cooperatives, whether dealing purely with members or both members and non-members. o
Cooperatives are NOT exempt from
▪ final taxes on deposits, interest income and capital gains tax,
▪ DST if dealing with nonmembers and cooperative exceeding P10m,
▪ VAT billed on certain purchases5
3
Sec 109, (r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members
as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their
produce; (s) Sales by electric cooperatives duly registered with the Cooperative Development authority or National Electrification
Administration, relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including
spare parts, which shall be directly used in the generation and distribution of electricity; (t) Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered with the Cooperative Development Authority whose lending operation is limited to their members;
(u) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority:
Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the
aggregate capital and net surplus ratably distributed among the members; 4 For cooperatives with accumulated reserves and
undivided net savings of not more than Ten Million Pesos (P10,000,000.00) a. Exemption from all national internal revenue taxes for
which they are directly liable, as enumerated under Sec. 3.1 of these Regulations. II. For cooperatives with accumulated reserves and
undivided net savings of more than Ten Million Pesos (P10,000,000.00) — a. Exemption from income tax for a period of ten (10) years from
the date of registration with the CDA, provided, that at least twenty-five percent (25%) of the net income of the cooperative is returned to the
members in the form of interest and/or patronage refund. For cooperatives whose exemptions were removed by Executive Order No. 93, the
ten-year period shall be reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997). After the lapse of the
above ten-year period, they shall be subject to income tax at the full rate on the amount allocated for interests on capital, provided that the
same is not consequently imposed on interest individually received by members; The tax base for all cooperatives liable to income tax shall
be the net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds as
provided for in the Cooperative Code and other laws. b. Exemption from VAT under Section 109 (r), (s), (t) and (u), 3% percentage tax under
Section 116, and the P500.00 annual registration fee imposed under Section 236 (B), all of the Tax Code of 1997; c. Subject to all other
internal revenue taxes unless otherwise provided by law; and d. Entitled to limited or full deductibility from the gross income of amount
donated to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of
operation of the cooperative. 5 e) VAT billed on purchases of goods and services, except the VAT on the importation by
agricultural cooperatives of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and
exclusively in the production and/or processing of their produce, and importation by electric cooperatives of machineries and equipment,
including spare parts, which shall be directly used in the generation and distribution of electricity,
2012 – Mickey)
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o The exemption of the cooperatives does not extend to their individual members. Thus, members of
cooperatives are liable to pay all the necessary internal revenue taxes under the National Internal
Revenue Code, including the tax on earnings derived from their capital contribution.
▪ Provided, however, that interests received by members of a cooperative with accumulated
reserves and undivided net savings greater than Ten Million Pesos (P10,000,000.00), after the
lapse of the ten-year exemption, shall no longer be taxable in the hands of such members.
• Some stuff from the Barangay Micro Business Enterprises (BMBEs) (RA 9178 and Dept Order 17-04)
o BMBEs6 are exempt from income tax.
▪ But not from final taxes on deposits, interest income, capital gains tax, royalties, etc
• Some stuff from the Tourism Act of 2009 (RA 9593 and its IRR)
o Income tax holiday
▪ New enterprises in Greenfield and Brownfield Tourism Zones – 6 years from start of
business operations
▪ Existing enterprises in Brownfield Tourism Zones – 6 years from time of completion of
expansion or upgrade
▪ The income tax holiday can be extended but note more than 6 years provided the facilities are
upgraded to at least 50% of the original investment
▪ Special NOLCO rule: carried over for the next 6 consecutive years from year of loss, provided loss
has not been previously offset as a deduction o Gross income taxation: 5% gross income tax, in lieu
of all national internal
revenue taxes and local taxes, impost, assessments, fees and licenses
N. Taxable Income SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross income
specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this
Code or other special laws.
Gross Income Less: deductions
Less: Personal exemptions
Taxable income
O. Gross Income SEC. 32. Gross Income. - (A) 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: (1) Compensation for services in whatever form
paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade
or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests;
pursuant to Section 109 (r) and (s) of the Tax Code of 1997 but which are not available locally as certified by the Department of Trade and
Industry. All tax-free importations shall not be transferred to any person until five (5) years, otherwise, the cooperative and the transferee or
assignee shall be solidarily liable to pay twice the amount of the tax and/or the duties thereon; 6 "Barangay Micro Business Enterprise,"
hereinafter referred to as BMBE, refers to any business entity or enterprise engaged in the production, processing or
manufacturing of products or commodities, including agro-processing, trading and services, whose total assets including those arising from
loans but exclusive of the land on which the particular business entity's office, plant and equipment are situated, shall not be more than
Three Million Pesos (P3,000,000.00) The Above definition shall be subjected to review and upward adjustment by the SMED Council, as
mandated under Republic Act No. 6977, as amended by Republic Act No. 8289
2012 – Mickey)
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(5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's
distributive share from the net income of the general professional partnership.
• Gross income means ALL INCOME derived from WHATEVER SOURCE. This includes, but is not limited to,
the enumeration in the codal.
• In answering problems, the first thing you should ask is “Is this gross income?”, and then you ask “is this
excludible?” (that’s the thought process to follow!)
Compensation
• Compensation for services in whatever form paid, including, but not limited to:
o fees, o salaries, o
wages, o commissions,
o and similar items.
• Compensation earners are not allowed to deduct any other deductions from their salary o but they may
have deductions applied to income earned from other sources.
• High-ranking executive was given an apartment where he would host parties for the clients of his company.
He would also travel abroad with his wife to go on meetings. Are these rental allowances and travel allowances
part of the gross income?
o NO. o Convenience of the employer rule: No part of these redounded to the executive’s personal
benefit, nor were such amounts retained by him. These bills were paid directly by the employercorporation. These expenses are COMPANY EXPENSES, not income by employees which are
subject to tax. (Henderson v Collector)
• PERA7 contributions from an employer to an employee do NOT form part of his gross income. (RR 17-2011
and RA 9505)
• What about RATA?
o Rata of private employees:
• GR: taxable as part of gross compensation
• EX: it is exempt if:
o Expenses are ordinary and necessary in pursuit of trade or
biz, and o Employee must account and liquidate o RATA of gov’t:
• Considered reimbursement of expenses and are exempt
• No need to substantiate or liquidate
• What about additional compensation allowance (ACA) of gov’t?
o Considered as “other benefits” o Only excess of
P30,000 is subject to the tax
Business income
• Gross income derived from the conduct of trade or business or the exercise of a profession
• In the case of manufacturing, merchandising or other business, gross income means:
7
"Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement account established by and for the
exclusive use and benefit of the Contributor for the purpose of being invested solely in PERA investment products in the Philippines. The
Contributor shall retain the ownership, whether legal or beneficial, of funds placed therein, including all earnings of such funds.
2012 – Mickey)
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Total Sales Less: cost of goods sold Add: all income from
incidental and outside sources Gross Income
Gains
• Gains derived from dealings in property
• Gain or loss on sale or exchange of property is recognized when the property received in exchange is
essentially different from the property disposed and the property received has market value.
• In sale or exchange of real or personal property, distinguish first between ordinary versus capital assets
because capital assets have special rules governing them.
• See R and S for more details
Interests
• Income from interests are also to be included in computing for the gross income
• Read with Sec 50 of the NIRC: In the case of 2 or more organizations, trades or businesses (whether organized
& incorporated here or not) are owned or controlled DIRECTLY or INDIRECTLY by the same interests, the CIR
is authorized to distribute, apportion or allocate gross income or deductions between or among such orgs, trades
or businesses, if the CIR determines that such is necessary in order to prevent tax evasion.
o This is called “transfer pricing” or “imputed interest” o The standard to determine the fairness of
related party transactions is the arm’s
length standard.
▪ It means that there should be no intimacy between the two.
▪ It means that the corporation should deal with the related corporation in the same manner it would
with an uncontrolled taxpayer. o If a member of a group of controlled entities makes a loan or
advances directly or indirectly to another member of such group and does NOT charge any interest or
charges interest not equal to an arm’s length, the CIR may make appropriate allocations to reflect
arm’s length interest rate. o The arm’s length interest rate shall be:
▪ The same rate of interest which would have been charged at the time the indebtedness arose
in an independent transaction between unrelated parties under similar circumstances, or
▪ The Bank Reference rate by the BSP (RMO 63-99) o But note CIR v FILINVEST (July, 2011): here,
the SC said that the CIR cannot
impose interest rates on its own. (from Atty Montero’s bar powerpoint)
▪ Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross
income under (now) Section 50 of the Tax Code, the same does not include the power to impute
theoretical interests even with regard to controlled taxpayers’ transactions. This is true even if
the CIR is able to prove that interest expense (on FDC’s own loans) was in fact claimed by FDC.
▪ The term in the definition of gross income that even those income “from whatever source
derived” is covered still requires that there must be actual or at least probable receipt or
realization of the item of gross income sought to be apportioned, distributed, or allocated.
Finally, the rule under the Civil Code that “no interest shall be due unless expressly stipulated
in writing” was also applied in this case.
▪ The Court also ruled that the instructional letters, cash and journal vouchers qualify as loan
agreements that are subject to DST.
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Rents
• Rents are included in the gross income
• But what about improvements by lessees? (Section 49, RR 2)
o When a lessee erects a building or makes improvements per agreement with the lessor, the lessor
may report the income therefrom upon either of the follow, at his option:
▪ At the time when such building or improvements are completed, the fair market value of such
building or improvement (outright method)
▪ The lessor may spread over the life of the lease the estimated depreciated value of such building or
improvement at the termination of the lease and report the income for each of the adequate part.
(spread out method) o If the lease is terminated, and it is not through purchase by the lessor, so that
the lessor comes into possession of the property prior to the time originally fixed, the lessor is
considered to receive additional income for that year (if the value of the building exceeds the amount
already reported as income)
▪ No appreciation value due to causes other than premature termination of the lease shall be included.
o If the building is destroyed before the expiration of the lease, the lessor is entitled to deduct as loss
for the year when such destruction occurred the amount previously reported as income, less any
salvage value to the extent that such loss was not compensated by insurance. o If useful life is less
than remaining term of lease, lessor will not repost any
income, since he’ll get it fully depreciated anyway. o Obligations of lessor to third parties are
assumed and paid by the lessee. (?) o What about advanced rentals?
Royalties
• Royalties are any payment of any kind received as consideration for the use of or right to use: 1. Any patent,
trademark, design or model 2. Secret formula or process 3. Industrial, commercial or scientific equipment 4.
Information concerning industrial, commercial or scientific experience.
Dividends
• Dividends are any distribution whether in cash or in other property in the ordinary course of business even if
extraordinary in amount, made by:
o A domestic or resident foreign corporation o A joint
stock corporation o A partnership o A joint account o
An association o An insurance company
▪ To the shareholders or members out of its earnings or profits.
• Tidbits:
o When the corporation receives dividends which are tax-fee (like intercorporate dividends), it
becomes taxable as dividends when it distributes the same to its shareholders. o When the dividend
is paid by a domestic corporation to a non-resident foreign
corporation, it is taxable in full. (Sec 28 (5b) of NIRC)
• General rule: Cash and property dividends are taxable. Stock dividends are not taxable.
• Property dividends (or securities other than its own stock) (Section 251, RR 2)
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o These are considered income in the amount of the full market value as when
received by the stockholder. o They are taxed 10%. (or 20% if NRAEB) o If it was paid in stock of another
corporation, it is not considered a stock
dividend. o The valuation is the market value at the time the dividend becomes payable. (For shares of
stock of another corporation given as dividends, it is the market value when the shares of stock are
received)
• Stock dividends
o They are not taxable.
▪ EXCEPT when the stock dividend causes change in the corporate identity or a change in the
nature of the shares issued whereby the proportional interest of the stockholders after the
distribution is essentially different from his former interest. (Section 252, RR 2)
• A stock dividend constitutes income if it gives the shareholder an interest different
from that which his former stock represented.
• When a stockholder receives a stock dividend which is taxable income, the measure
of income is the fair market value of the shares of stock received.
• Sale of stock received as dividends (Section 253, RR 2)
o Once the recipient sells the stock dividend, he may realize gain or loss. This gain
or loss is treated as arising form the sale or exchange of a capital asset. o Computation of gain or loss
(the new basis per share is used in computing any
gain or loss upon any subsequent sale of the shares):
▪ When stock dividend is the same character as the stock upon which it is paid:
Cost: Old Shares / (total number of old and new shares)
• When stock dividend materially differs from stock upon which it is paid:
Cost: Cost of shares of 1 class / number of shares in that class
• When stock was purchased at different times and at different prices so that the identity
cannot be determined:
Cost: Presumed to be from stock issued with respect to earliest purchased
stock
• Stock declaration and subsequent redemption
o If after the stock dividend declaration, a corporation cancels or redeems the same in such time and
manner as to make the distribution/redemption essentially equivalent to a distribution of a taxable
dividend, the amount received shall be considered as a taxable dividend (10% final tax for individuals).
(Section 254, RR 2)
▪ Why do corporations do this?
• So that the shareholder will avoid paying tax. Remember, stock dividends are not
taxable, but cash dividends are subject to 10% final tax for individuals (remember your
passive income charts!). So corporations declare stock dividends, and then redeem
them (by giving their shareholders cash) to go around the tax. But because of the law,
their subsequent redemptions are now taxable.
• The issuance of stock dividends and its subsequent redemption must be separate,
distinct, and not related, for the redemption to be considered a legitimate tax scheme.
o Depending on each case, the exempting provision of Sec 83(b) of the 1939
Code (now, Sec 254, RR2), may not be applicable if the redeemed shares
were issued with bona fide business purpose, which is judged after each and
every
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step of the transaction have been considered and the whole transaction does
not amount to a tax evasion scheme. o It is in the issuance of the stocks
which are subsequently redeemed that must have a bona fide business
purpose, not the redemption. The existence of legitimate business purposes
in support of the redemption of stock dividends is immaterial in income
taxation. The test of taxability under the exempting clause is whether income
was realized through the redemption of stock dividends. (CIR v CA &
Anscor)
▪ In other words, if there was a legitimate business purpose in issuing
the shares, ANSCOR wouldn’t have been taxed for the redemption.
But, they failed to show any business purpose, their actuations were
mere afterthought.
• Sources of distribution
o Every distribution is made out of earnings or profits. o Determine them to be coming from the
earnings or profits of the taxable year. If
not, then to the past taxable years. (Section 255, RR 2)
• Distribution in liquidation
o When a corporation distributes all its properties or assets in complete liquidation,
the gain realized from this is taxable. o Computation is based on Sec 34 (b) or (c) of the Tax Code
(Section 256, RR 2)
▪ When a corporation distributes all of its assets in complete dissolution and liquidation, there is
no dividend income to the shareholder receiving the liquidating dividend. There is, instead, a
sale or exchange of property. Any gain realized or loss sustained by the stockholder, whether
individual or corporate, is taxable income or deductible loss, as the case may be.
▪ When a corporation was dissolved and in process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in question to them in exchange, a transaction
took place, which was no different in its essence from a sale of the same stock to a third party
who paid therefore. (Wise v Meer)
• In other words, the gain or loss one incurs when a corporation liquidates goes into
your ordinary income (schedular rate for individuals, 30% for resident corporations.)
o The 12-month 50%/100% of gains threshold applies (see
below)
• That’s the difference between redeemed shares (taxed at 10%) and liquidating
shares (schedular rate for individuals, or 30% for resident corporations)
• For a trading company that is in the process of liquidation, and whose stockholders are to receive liquidating
dividends in excess of their investment, the gain is taxable because the shareholders will realize capital gain or
loss.
o Such gain is the difference between the fair market value of the liquidating dividends and the adjusted
cost to the stockholders of their respective shareholdings. (BIR Ruling 322-87)
▪ But because of Section 34 (b) of the tax code,
• If the shareholder held his shares for more than 12 months, only 50% of the capital
gains is taxable.
• If less than 12 months, the entire 100% of the capital gains is taxable.
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Annuities
• An annuity is a sum of money payable yearly or at regular intervals.
• Annuities are tax-exempt.
Prizes and Winnings
• Prizes and winnings are generally taxable (they are similar to gains derived from labor)
o EXCEPT: (these are not taxable) 1. If the recipient was selected without any action on his part to
enter the contest and he was not required to render substantial future services as a condition for
receiving the prize or award 2. Those granted to athletes are exempt 3. Those that are in the nature of
gifts
Pensions
• A pension is a gratuity granted as a favor or reward or one paid under given conditions to a person following
retirement from service or to surviving dependents
• Pensions are tax-exempt
Share in GPP’s Income SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership
as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the
distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.
• The GPP is tax-exempt, but the income of the individual partners are subject to tax.
o Professional partnerships of real estate brokers are included in this exemption
(Ruling 294-88, July 5, 1988)
• Each partner shall report as gross income his distributive share in the net income of the partnership.
From whatever source
• Cancellation or forgiveness of debt may amount to
o Payment of income – that’s taxable. (a person performs service for a creditor
who cancels his debt) o A capital transaction – that’s taxable (a corporation forgives the debt of a
stockholder, that’s like paying a dividend) o A gift – that’s exempt. (a creditor merely wants to benefit a
debtor by canceling
the debt without any consideration) (Section 50, RR 2)
• Acquisition by the Government of private properties expropriation, said properties being JUSTLY
compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds
should be included in the gross compensation. (Gutierrez v Collector, 101 Phil 743)
o Note the doctrine of involuntary dealings.
• Damages:
o Compensation for loss of income and exemplary damages which represent loss of
capital: taxable o Moral damages, reimbursement for hospital bills, return of capital/property:
exempt
• Refunds & Tax Credits
o Taxes which were previously claimed and allowed as deductions but subsequently was refunded or
granted as tax credit should be declared as part of the gross
2012 – Mickey)
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income of that year. The purpose of this is put you back in equilibrium – to bring your gross income
back up. o EXCEPT:
▪ Estate and donor’s tax
▪ Income, war-profit and excess profit taxes imposed by a foreign country
▪ Estate and gift taxes
▪ Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed
▪ Stock transaction tax
▪ Energy tax
▪ Taxes which are not allowable as deductions under the law
• When refunded, they are not declarable as gross income because they are not
allowable as deductions.
• Special tax credits
o Sales, compensating and specific taxes paid on supplies and raw materials
imported by a registered export producer? That’s given as tax credit. o When a registered BOI & Tourism
enterprise assumes payment of taxes withheld due from the foreign lender on interest payments on
foreign loans, that’s given as a tax credit too. (RMC 13-80) o When a PERA Contributor contributes,
he is given a tax credit of 5% of the total
PERA contribution. (RA 9505)8
Exclusions Section 32 (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. (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.- (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.
8
SEC. 8. Tax Treatment of Contributions. - The Contributor shall be given an income tax credit equivalent to five percent
(5%) of the total PERA contribution: Provided, however: That in no instance can there be any refund of the said tax credit arising from the
PERA contributions. If the Contributor is an overseas Filipino, he shall be entitled to claim tax credit from any tax payable to the national
government under the National Internal Revenue Code of 1997, as amended.
2012 – Mickey)
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(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 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. (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. (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.
• The following are tax-exempt and are NOT included in gross income: 1. Life insurance (except if the
proceeds are held by the insurer under an agreement to
pay interest thereon. The interest payments only are included in the gross income) 2. Amount received by
insured as return of premium 3. Gifts, bequests, devises or descents (but the income from such property
acquired by
these which shall be included in gross income) 4. Compensation for income personal injuries or sickness
(plus the amounts of any
damages received on account of such) 5. Income exempt under any treaty 6. Benefits received from the
US Veterans Administration 7. Retirement benefits, pensions, gratuities (provided, the retiring person has
been in the service of the same employer for at least 10 years and is not less than 50 years
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of age at the time of his retirement. This benefit can only be availed of once) [RA 4917] 8. Separation pay,
caused by death, sickness or other disability beyond the control of
the employee (RA 4917)9
• Like redundancy, etc
▪ If fault or conduct of employee is to blame, not exempted 9. Social security benefits, retirement gratuities,
pensions and similar benefits from
foreign government agencies 10. SSS
benefits 11. GSIS benefits
• Miscellaneous tax-exempt items: 1. Income earned by foreign governments in the Philippines from
deposits/investments 2. Income earned by the Phil government or its political subdivisions (like public
utilities) 3. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational,
artistic, literary or civic achievement – but only if he was selected without any action on his part to enter the
contest and he is not required to render substantial future services as a condition to receiving the prize or
award 4. Prizes and awards in sports competitions sanctioned by the national sports
associations 5. 13th month pay, Christmas bonus, productivity incentives, and other benefits (but
exemptions apply only to the first P30,000) [RA 7833] 6. GSIS, SSS, Medicare, Pag-ibig union dues and
other contributions 7. Gains from sale of bonds, debentures or other certificate of indebtedness with
maturities of more than 5 years 8. Gains from redemption of shares in mutual funds 9. Interest received by
a non-resident individual or a non-resident corp from deposits
with depository banks under the expanded FCDU 10. Intercompany dividends
(resident/domestic corps from domestic corps) 11. De minimis benefits received by a
managerial or supervisor 12. Those under special laws (PCSO and lotto winnings!)
• Minimum wage earners shall be exempt from the payment of income tax too. Holiday pay, overtime pay, night
shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from
income tax.
• Income from employees’ trusts are exempt from ALL kinds of taxes, including final withholding tax on
interest income. (CIR v CA & GCL)
9
Section 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, garnishment, 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: 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 years of age at the time of his retirement: Provided, further, That the benefits granted under this Act shall be availed of by
an official or employee only once: Provided, finally, That in case of separation of an official or employee from the service of the employer due
to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by
him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided. As used in
this Act, 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 and employees, wherein contributions are made by such employer or officials and employees, or
both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it 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.
2012 – Mickey)
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• Terminal leave pay is not part of gross salary. It is a retirement benefit and is tax exempt. (CIR v CA &
Castaneda, and Request of Atty. Zialcita)
• If the employee is separated from a previous employer, but is not employed by another employer, he shall be
refunded or credited the taxes withheld on his exempt 13th month pay and other benefits by his present employer.
• If the employee is separated but has no present job, he shall claim his refund with the BIR. (RR 295 & RMC 36-94)
Income derived by foreign government from deposits/investments
• For it to be exempt, the income should be received by:
• By foreign governments
• By financing institutions owned, controlled or enjoying re-financing from foreign governments
• By international or regional financial institutions established by foreign governments
P. Fringe Benefits Tax (FBT! Whut up!) SEC. 33. Special Treatment of Fringe Benefit.- (A) Imposition of Tax.- A final tax of
thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%)
effective January 1, 2000 and thereafter, is hereby imposed on the 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 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 sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January
1, 1999; and sixty-eight percent (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. (B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means 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: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and
others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6)
Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar
organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his
dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. (C)
Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) fringe benefits which are authorized and
exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or
not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into
account the peculiar nature and special need of the trade, business or profession of the employer.
• Note: the FBT is paid by the employer.
• It is a FINAL INCOME TAX:
▪ Imposed on the managerial/supervisory employee,
2012 – Mickey)
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▪ Withheld by the employer who files the return and remits the tax within 25 days from close of each calendar
quarter
• Fringe benefit is any good, service, or other benefit granted in cash or in kind by an employer to an
employee (except rank & file) such as: 1. Housing 2. Expense account 3. Vehicle of any kind 4. Household
personnel, like maids and drivers 5. Interest on loan at less than market rate, to the extent of the difference
between the
market rate and the actual rate granted 6. Membership fees, dues & other expenses in social & athletic clubs or
similar orgs 7. Expenses for foreign travel 8. Holiday and vacation expenses 9. Educational assistance to the
employee or his dependents 10. Life or health insurance & other non-life premiums
▪ This list is not exclusive.
• Fringe benefit tax? A final tax of 32% on the grossed up monetary value of fringe benefits will be imposed.
o The fringe benefit tax on the taxable fringe benefit is computed as follows:
i. Determine the grossed-up monetary value of the fringe benefit. This is the
monetary value of the benefit divided by 68% ii. Compute the fringe benefit tax by multiplying the grossed-up
monetary
value of the fringe benefit by 32% Actual Monetary Value/68% = Grossed-up Monetary Value Grossed-up
Monetary Value x 32% = FBT
Special Cases for FBT FBT Received by non-resident alien not engaged
25% in trade or business Received by alien or Filipino employed by a ROHQ or RAHQ
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
15%
Received by employees in a special economic zone
25 % or 15% (depends)
• The FBT is also an expense which is deductible from the employer’s gross income.
o The deduction for the employer is the grossed-up monetary value of the fringe
benefit.
• The following fringe benefits are not subject to the FBT: 1. Those that are necessary or required by the trade
& business of the employer 2. Those for the convenience or advantage of the employer 3. Those exempt under
special laws 4. Contributions to retirement, insurance and hospitalization benefit plans 5. De minimis benefits
(these are of relatively small value & are furnished merely as a means of promoting the health, goodwill of the
employees. See RR 8-00 for examples) 6. Those given to rank & file employees (those who are holding neither
managerial nor
supervisory positions)
• Clarifications from RR 3-98 (a bit malabo, so check the Reyes book and that excel reviewer thing) On
housing privileges Monetary Value If employer leases a residential property for the use of the employee 50%
of the
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and the property is the usual place of residence of the employee monthly rental
paid If the employer purchases a residential property on installment basis
(Acquisition cost x and allows the employee to use it as his usual place of residence
5%) x 50% If the employer purchases a residential property and transfers ownership to the employee
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
Too complicated, won’t come out in the bar10 Housing of military officials Exempt Housing which is situated
inside or adjacent to the premises of a business or factory (within 50 meters)
Exempt
Temporary housing for employee who stays for not more than 3 months
Exempt
Expense Account Subject to FBT or
not? If the expense was duly receipted for and in the name of the employer, and the expense is not in the
nature of a personal expense attributable to the employee
Nope.
If these are personal expenses such as groceries, paid for or reimbursed by the employer, even if these are duly
receipted for in the name of the employer
Yup.
RATA which are fixed in amount & regularly given as part of monthly compensation
Nope, but to be treated as income of the employee. Exempt if: Ordinary & necessary, and Employee liquidates
Motor Vehicles Monetary Value If employer purchases vehicle in the name of the employee, regardless of
usage of the vehicle
100% of the value (acquisition cost) If employer shoulders a portion of the amount of the purchase price of a
vehicle owned by the employee
Amount shouldered by the employer If employer owns & maintains a fleet of vehicles for the use of the
business and the employees
50% of the value
Use of aircraft owned & maintained by the employer Exempt Use of yacht Value based on
depreciation
Expenses for Foreign Travel Monetary Value If it is reasonable for the purpose of attending business
meetings or conventions
Exempt
If it’s for local travel expenses not more than US$300 per day (not including lodging)
Exempt
Cost of plane ticket if economy or business class Exempt Cost of plane ticket if first class 30% of the value
Travel expense of family members of the employee 100% of the value
10 ER:
acquisition cost or FMV, whichever is higher. If less than ER’s cost: FMV-EE’s acquisition cost
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Educational Assistance Monetary Value IF the employee was granted a scholarship by the employer and the
Exempt education or study is directly connected to the trade or business of the employer, and there is a written
contract that the employee must remain in employ for a period of time If the assistance was extended to the
employee’s dependents and was provided through a scholarship program of the company
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
Exempt
Life or Health Insurance, etc Premiums in Excess of What the Law Allows
Monetary Value
If the contribution is pursuant to existing law such as to the GSIS or SSS
Exempt
If it is for the group insurance of the employees Exempt
• For the others (household expenses, membership fees & other expenses in social & athletic clubs, holiday &
vacation expenses), these monetary value will be 100% of the value of the benefit received.
• The following are considered de minimis benefits of ALL types of employees. These are exempt from tax.
(RR 8-00) 1. Monetized unused vaction leave, not exceeding 10 days per year 2. Medical cash allowance to
dependents of employees not exceeding P750/employee
per sem or P125/month 3. Rice subsidy of P1500 or 1 sack of 50 kg rice per month (sarap!) (RR 5-2008) 4.
Uniforms and clothing allowance not exceeding P4,000/month (ubos sa Zara!) (RR 52011) 5. Actual yearly medical benefits not exceeding P10,000/month 6. Laundry allowance not exceeding
P300/month 7. Employee achievement awards for length of service or safety achievement in the
form of tangible property with value not exceeding P10,000 8. Flowers, fruits, books given under special
circumstances like illness, marriage, birth
of baby 9. Gifts given during Christmas & major anniversaries not exceeding P5,000/year 10. Daily meal
allowance for overtime work, not exceeding 25% of the basic minimum
wage
• The amount of de minimis benefits is not computed in determining the P30,000 ceiling of “other benefits”
provided in Sec 32(b) of the Tax Code (see exclusions),
o but if the employer pays MORE than the ceilings prescribed above, the excess is
taxable to the employee ONLY if it is beyond the P30,000 ceiling. o In other words, when a benefit is de
minimis with a ceiling, the benefit exempt from the fringe benefit tax is up to the ceiling. Any excess over the
ceiling shall be part of the benefits which are exempt (exclusions from gross income) up to P30,000.
• Any amount given by the employer as benefits, whether de minimis or others, shall be deductible as
business expense. Remember this! (RR 10-00)
• To recap:
o Fringe benefit given to rank and file employee is not subject to the fringe benefit
tax. o Fringe benefit given to a supervisory or managerial employee is subject to the
fringe benefit tax. o De minimis benefit, whether given to rank and file employee or to supervisory or
managerial employee, is not subject to the fringe benefit tax.
Q. Deductions
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SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under
an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in
computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed
the following deductions from gross income;
• Deductions are amounts allowed by law to reduce the gross income to taxable income.
• These amounts are allowed to taxpayers by legislative grace and the taxpayer claiming them must prove
compliance with the provisions of the law authorizing the deductions.
• The following are the deductions from gross income:
o For individuals with gross compensation income (from employer-employee
relationship) only:
i. Premium payments on health and/or hospitalization insurance (PHHI)
(provided family gross income is not more than 250,000). ii. Personal exemptions o For
individuals with gross income from business or practice of profession:
i. Optional standard deduction (OSD), or ii. Itemized
deductions, iii. PHHI, iv. Personal exemptions. o For
corporations:
i. Optional standard deduction (OSD), or ii.
Itemized deductions
• Itemized deductions are expenses and losses related to trade or business or the practice of a profession.
o Itemized deductions are what Sec. 34 talks about, and these do not apply to taxpayers earning
compensation income from an employer-employee relationship.
• The following are the itemized deductions: 1.
Expenses 2. Interest 3. Taxes 4. Losses 5. Bad debts
6. Depreciation 7. Depletion 8. Charitable and other
contributions 9. Research and development 10.
Pension trusts
Expenses, in general (A) Expenses. - (1) Ordinary and Necessary Trade, Business or Professional Expenses.- (a) In General. - There
shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying
on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a
profession, including:
(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including
the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed
under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or
profession;
(iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession,
for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no
equity other than that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly
connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to
or in furtherance of the conduct of his or its trade,
2012 – Mickey)
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business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon
recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry,
trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary
to law, morals public policy or public order shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other adequate records:
(i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development,
management, operation and/or conduct of the trade, business or profession of the taxpayer.
(c) 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) Expenses Allowable to Private Educational Institutions. - 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 option elect either: (a) to deduct expenditures otherwise
considered as 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.
• The codal considers as deductions all ordinary and necessary expenses in carrying on the development,
management, and operation of a trade, business or profession, including a reasonable allowance for: 1.
Salaries, wages, and other forms of compensation including fringe benefits 2. Travel expenses, here and
abroad, in pursuit of trade and business 3. Rentals and others which are required for the continued use of
property 4. Entertainment, amusement and recreation expenses that are directly connected to the trade,
business, or profession (but should not be contrary to law, morals, etc)
• According to the codal, these are the requirements for deductible claims: 1. Sufficient evidence (like official
receipts) 2. A direct connection of the expense to the development, management, operation,
and/or conduct of the trade, business or profession
• Payments of bribes & kickbacks are not deductible.
• Jurisprudence expounded on the requirements with the following requisites for the deductibility of ordinary
and necessary trade, business, or professional expenses (CIR v Isabela): 1. Expense must be ordinary and
necessary 2. Must have been paid or incurred during the taxable year 3. Must have been paid or incurred in
carrying on the trade/business 4. Must be supported by receipts, records or other pertinent papers
• A taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year
but failed to do so cannot deduct the same for the next year.
• It is ordinary when it is normal in relation to the business of the taxpayer. It need not be recurring.
• It is necessary when it is appropriate and helpful in the development of the taxpayer’s business. See if it is
intended to minimize losses, or to maximize profits.
• Regarding advertising expenses (CIR v General Foods):
o Advertising is generally of two kinds:
i. To stimulate the current sale of merchandise or use of services ii. To stimulate the future sale of
merchandise or use of services o The second type involves expenditures incurred, in whole or in part,
to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or
profession of which the taxpayer is a member.
2012 – Mickey)
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o If it’s the first kind, it’s definitely deductible as a business expense, the only
question to be answered is if it’s reasonable or not. o If it’s the second kind, normally they should be
spread out over a reasonable
time. o In the case, the amount was not only huge (ie unreasonable), but was also used to protect the
brand franchise. The Supreme Court said that it was analogous to the maintenance of goodwill or title
to one’s property. Thus, it was a capital expenditure which should have been spread out over a
reasonable period of time. It was akin to the acquisition of capital assets and therefore expenses
related thereto were not to be considered as business expenses but as capital expenditures.
• Expenses paid to advertising firms to promote sale of capital stock for acquisition of additional capital is not
deductible from taxable income. Efforts to establish reputation are akin to acquisition of capital assets, and
therefore, expenses related thereto are not business expense but capital expenditures. (Atlas Consolidated v
CIR)
• Litigation expenses incurred in defense of title to property is capital in nature and not deductible. (Atlas)
• Bonuses to employees made in good faith and as additional compensation for the services actually rendered
by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed
a reasonable compensation for the services rendered. (Kuenzle v CIR)
o Bonus given to corporate officers out of sale of corporate land not deductible as an ordinary
business expenses in the absence of showing what role said officers performed to effectuate said sale.
The taxpayer must show that personal services had been rendered and that the amount was
reasonable. (Aguinaldo Industries v CIR) o For income tax purposes, the employer cannot legally
claim such bonuses as deductible expenses unless they are shown to be reasonable. The conditions
precedent to the deduction of bonuses are: 1. The payment of the bonuses is in fact compensation 2. It
must be for personal services actually rendered, and 3. The bonuses, when added to the salaries, are
reasonable when measured by the amount and quality of the services performed with relation the
business of the taxpayer. (CM Hoskins v CIR)
• Contributions to a private entity that gives dividends to stockholders not deductible because the net income
of the recipient inures to the benefit of its stockholders.
o Contributions to a government entity is deductible when used exclusively for
public purposes (Roxas v CTA)
• Payment for police protection is illegal as it is a compensation given by the petitioner to the police for the
performance by the latter of the functions required of them to be rendered by law. (Calanoc v CIR)
• For cost of materials, taxpayers carrying materials and supplies on hand should include in expenses the
charges of materials and supplies only to the amount that they are actually consumed and used in operation
during the year for which the return is made, provided that the cost of such materials and supplies has not been
deducted in determining the net income for any previous year.
o If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is
kept or of which physical inventories at the beginning and end of the year are not taken, it will be
permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of
such supplies and materials as were purchased during the year for which the return is made, provided
the net income is clearly reflected by this method. (Sec 67, RR 2)
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• For repairs, the cost of incidental repairs which neither materially add to the value of the property nor
appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense,
provided the plant or property account is not increased by the amount of such expenditure.
o Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably
prolong the life of the property should be charged against the depreciation reserves if such account is
kept. (Sec 68, RR 2)
• For lease agreement expenses, the following are allowed deductions (Sec 74, RR 2):
o Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take
deduction in his return for an aliquot part of such sum each year, based on the number of years the
lease will run; o Taxes paid by a tenant to or for a landlord for business property are additional rent
and constitute a deductible item to the tenant and taxable income to the landlord; the amount of the tax
being deductible by the latter. o The cost of leasehold improvements are NOT considered business
expenses since
they are capital investments.
i. In order to return to such taxpayer his investment of capital, an annual deduction may be
made from gross income of an amount equal to the cost of such improvements divided by the
number of years remaining of the term of the lease, and such deduction shall be in lieu of a
deduction for depreciation. If the remainder of the term of lease is greater than the probable life
of the building erected, or of the improvements made, this deduction shall take the form of an
allowance for depreciation.
• For professional expenses, the following are allowed deductions (Sec 69, RR 2):
o Cost of supplies o Expenses paid in the operation and repair of transportation equipment used in
making professional class o Due to professional societies and subscriptions to professional
journals
i. So bar review tuition fees and bar examination fees paid are not
deductible o Rent paid for offices o Expenses for utilities on offices o Expenses for hiring of
office assistants o Books, furniture and professional instruments and equipment with a SHORT
useful life
i. Those with a permanent character are NOT allowable
• Professional expenses are deductible in the year the professional services are rendered, not in the year they
are billed. (Mamalateo)
• For farmer who operates for a profit, they can deduct necessary expenses all amounts actually expended in
the carryon on of the business of farming.11
11
The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The
cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not
including the value of farm produce grown upon the far, or the laborer of the taxpayer. Where a farmer is engaged in producing crops which
take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the
crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm
machinery, equipment, and farm buildings represents a capital investment and is not allowable deduction as an item of expense. Amounts
expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as
investments of capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and may be
depreciated unless such animals are included in an inventory in accordance with section 149 of these regulations. The purchase price of
transportation equipment if used wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital.
The cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an
expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be
apportioned according to the extent of the use for
2012 – Mickey)
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• Private educational institutions have special deductibles.: 1. They are allowed to deduct expenditures
otherwise considered as capital outlays of
depreciable assets incurred for the expansion of school facilities, or 2. They are allowed to capitalize the
expenditure, and claim deduction by way of
depreciation.
Representation, amusement, recreation expenses and entertainment facilities (RR 10-02)
• Representation expenses are expenses incurred in connection with the conduct of one’s trade, business or
profession in:
o Entertaining, providing amusement & recreation to, or meeting with guests o At a dining place,
place of amusement, country club, theater, concert, play,
sporting event & similar places
i. If the taxpayer is the registered member of a country, golf, or sports club, the presumption is
that the expenses are fringe benefits subject to the FBT unless the taxpayer can prove that
these are actually representation expenses.
• Entertainment facilities refer to a yacht, vacation home or condominium & similar items of real or personal
property used by the taxpayer primarily for entertainment, amusement, or recreation of guests or employees.
o It must be owned or form part of the taxpayer’s trade, biz, or profession for
which he claims a rental expense. o A yacht is considered an entertainment facility if its use is not
restricted to specified officers or employees. If it was restricted to them, it would be a fringe benefit,
subject to the FBT.
• The following are not considered entertainment, amusement & recreation expenses: 1. Those that are
treated as compensation for fringe benefits 2. Expenses for charitable & fund-raising events 3. Expenses for
bona fide meeting of stockholders, partners or directors 4. Expenses for attending or sponsoring an employee
to a business league or
professional org meeting 5. Expenses for events organized for promotion, marketing & advertising
including
concerts, conferences, seminars, workshops, conventions, etc 6. Other
expenses of a similar nature
o BUT! These may still be qualified as deductions under other provisions of Section
34. o Possible legal implication? They won’t be subject to the ceiling of representation
expenses (my opinion lang ah!)
• Requisites of deductibility for entertainment, amusement, and recreational expense:
1. Paid or incurred during the taxable year 2. Must be directly connected to the development, management &
operation of the trade, biz or profession of the taxpayer; or directly related to or in furtherance of, his or its
trade, biz or exercise of profession 3. Not be contrary to blah blah blah 4. Not been paid to an official of the
government as a bribe or kickback 5. Must be substantiated by adequate proof 6. Must been withheld, if
applicable, and paid to the BIR, if subject to final tax Ceiling for Representation, Entertainment and
Amusement Expenses
purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is
deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses
incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in
rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction.
2012 – Mickey)
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Taxpayers engaged in sale of goods or properties 0.5% of net sales Taxpayers engaged in sale of services,
including exercise of
1% of net revenue profession and use or lease of properties
• For constructive dividends, see footnote.12
o Sorry, pagod na!
Interests (B) Interest.- (1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with
the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's
otherwise allowable deduction for interest expense shall be reduced by 42% of the interest income subject to final tax: Provided, that
effective January 1, 2009, the percentage shall be 33%. (2) Exceptions. - No deduction shall be allowed in respect of interest under the
succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness
on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a a deduction in the year
the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which
corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both
the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or (c)If the
indebtedness is incurred to finance petroleum exploration. (3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest
incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital
expenditure.
•
o
Interests paid on debts are allowed as deductions but:
These must be incurred in connection with the taxpayer’s profession, trade or biz
o
The allowable deduction
is reduced by 33% of the interest income subject to final
tax. (more on this below)
• Requisites for deductibility of interest expense (RR 13-00): 1. There must be an indebtedness 2. There
should be an interest expense paid or incurred upon the indebtedness
(incurred meaning that it was due and demandable)
12
Sec. 70, RR-2 Sec. 70. Compensation for personal services.— Among the ordinary and necessary expenses paid or incurred in carrying
on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for
service. This test and its practical application may be further stated and illustrated as follows: (1) Any amount paid in the form of
compensation, but not in fact as the purchase price services, is not deductible. (a) an ostensible salary paid by a corporation may be a
distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw
salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or
bear a close relationship to the stockholder of the officers or employees, it would seem likely that the salaries are not paid wholly for services
rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for
property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service
of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute
payment for the transfer of their business. (2) The form or method of fixing compensation is not decisive as to the deductibility. While any
form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a
continent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if
contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered,
not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of
the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the
amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not exceed what is reasonable in all the
circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like
services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the
contract for services was made, not those existing at the date when the contract is questioned.
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3. The indebtedness must be that of the taxpayer 4. It must be connected with the taxpayer’s trade, biz or
profession 5. The interest expense must have been paid or incurred during the taxable year 6. The interest
must have been stipulated in writing 7. The interest must be legally due 8. The interest payment
arrangement must not be between related taxpayers 9. The interest must not be incurred to finance
petroleum operations 10. In case the interest was incurred to acquire property used in trade, biz or
profession,
it was not treated as capital expenditure. o In cases like this, the axpayer has the
option to treat it as either
i. interest expense deductible in full or ii. as a capital expenditure and claim as deduction only
the periodic
amortization/depreciation. o But he can only choose one, or else double deduction, that ain’t
allowed. (Sec 34 (B.3), and Picop V CA where the SC allowed interest expense on a loan to buy
machinery as deductible.)
• Interest is not deductible if:
o Both the taxpayer and the person to whom interest was paid are related
taxpayers, meaning:
i. Members of a family ii. An individual and a corp where more than 50% of the outstanding
stock of
the corp is owned by the individual iii. Two corps where more than 50% of the outstanding stock of each is
owned
by the other or by the same individual iv. Between grantor and fiduciary of any trust v. Between fiduciary of
a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust vi. Between
fiduciary of a trust and the beneficiary
• If an individual is on the cash basis of accounting, interest paid in advance, through discount or otherwise,
shall be allowed as deduction not in the year that the interest was paid in advance, but in the year that the
indebtedness was paid.
o But if the indebtedness is payable in periodic amortization, the amount of the interest which
corresponds to the amount of the principal amortized or paid during the year shall be allowed as
deduction in such taxable year.
• Late payment of tax is considered a debt, and therefore interest on taxes is interest on indebtedness and is
thus deductible. (CIR v de Prieto)
o But surcharges or penalties are NOT deductible.
• If a taxpayer has interest income subject to final tax, the otherwise allowable deduction for interest expense
shall be reduced by an amount equal to 33% of interest income subjected to final tax. This 33% rule will only
apply if there is interest income subject to final tax. If none, then you can deduct in full.
• The law assumes that the money borrowed is used to reinvest, legitimate business purpose is irrelevant.
(Atty. Montero)
• The law effectively cancelled out the tax arbitrage advantage. Corporations before would borrow money and
use the interest they had to pay as a deduction, even if they reinvested the money elsewhere and got interest
income. For example, Juan borrowed money from BPI. It had an interest expense of P8,000. He then deposited
the money that he borrowed with HSBC, and it had an interest income on it of P9000 (net already of the 20%
final tax). How much is his deducible interest expense? (p. 209, Reyes)
Interest expense, unadjusted P8,000 Less: Adjustment for interest
Income subject to final tax
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(33% of P9,000) 2,970 Adjusted balance, deduction for interest expense
P5,030
o But interest paid or accrued on taxes related to business or practice of profession can be deducted
in full (it is not subject to this rule on downward adjustment)
• Interest paid by the taxpayer on a REM of which he is the RE’s legal or equitable owner is deductible, even
though the taxpayer is not directly liable on the debt.
• When interest expense NOT deductible:
o Interest paid in advance by one reporting on cash basis o Between
family members and related interests o Debt to finance petroleum
explorations
Taxes (C) Taxes.- (1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or
business, shall be allowed as deduction, except (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of
any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any
extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d)
Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under
this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax
benefit of said deduction. (2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the
Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only
if and to the extent that they are connected with income from sources within the Philippines. (3) Credit Against Tax for Taxes of Foreign
Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be
credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of
income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such
individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes
of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive
share of the income of such partnership or trust is reported for taxation under this Title. An alien individual and a foreign corporation shall not
be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. (4) Limitations on Credit. - The amount
of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax
paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's
taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) 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 taxable
income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. (5)
Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any
tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year
or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not
paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties
satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of
any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the
Commissioner may require. (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option
of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the
foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to
take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the
same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.
2012 – Mickey)
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(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of
the Commissioner the following: (a) The total amount of income derived from sources without the Philippines; (b) The amount of income
derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined
under rules and regulations prescribed by the Secretary of Finance; and (c) All other information necessary for the verification and
computation of such credits.
• Taxes paid or accrued within the taxable year in connection with the taxpayer’s trade or business or exercise
of a profession are deductible from gross income.
o EXCEPT: (Sec 82-83, RR 2)
i. Philippine income tax (but the grossed-up monetary value of the fringe
benefit tax can be deducted!) ii. Estate tax iii. Donor’s tax iv. Special assessment (see footnote) 13 v.
Income tax imposed by a foreign country for income sourced outside the Philippines (but it
shall be allowed if the taxpayer does not signify his desire to enjoy any benefits of the tax
credit for taxes paid to foreign countries) vi. Stock transaction tax vii. VAT on business (last
two exceptions cited by Reyes, p. 212)
• Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country (including the
United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his
return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for
taxes of foreign countries. (Sec 82, RR 2)
• With regard to tax credits, only resident citizens and domestic corporations are affected by this, because they
are only ones taxed worldwide. When a taxpayer is qualified for a credit, he has the option of either:
o Deducting the foreign income tax from his gross income, or o Claiming
the tax credit.
i. Note: members of the GPP and beneficiaris of estates/trusts can also avail
of tax credits
• How do we determine the amount of tax to be credited? Just follow the formulas below, and choose which of
them is lower!
1. Net income from foreign country x Taxes paid in the RP = ______
Net income worldwide
2. Foreign income tax paid = __________
Example Blessings had a taxable income from the Philippines of P300,000 and from the US of P100,000. An
income tax of P40,000 was paid to the US. If Blessings chose to take a tax credit for the income tax paid to the
States, how much tax does he have to pay the Philippine government after the tax credit would have been
computed?
13
A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited.
Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those
levied for the general public welfare, by the proper taxing authorities at a like rate against all property in the territory over which such
authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may
deduct assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his
business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of
capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs,
the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made,
none of the amounts so paid is deductible.
2012 – Mickey)
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Line everything up and know the taxable income worldwide and the total taxes paid here! Taxable
income before tax credit, USA P100,000 Taxable income before tax credit, Phil P300,000 Taxable
income, worldwide P400,000 Corporate income tax of 30% P120,000 Less: Tax credit for foreign tax
Plug in the values! (100,000/400,000) x 120,000 = P30,000 Foreign income tax paid = P40,000
Choose what’s lower! Allowed tax credit P 30,000 Philippine income tax still due P 90,000
What would Blessings bring home if they chose to do the tax credit? Taxable
income, worldwide P400,000
P 90,000
P310,000
If Blessings chose to deduct, this is what would have happened: Taxable
income worldwide P400,000 Deduction for foreign income tax paid 40,000
Taxable income P360,000 Income tax at 30% P108,000 Income after tax
(what Blessings takes home) P152,000
• It’s pretty obvious that you should go for a tax credit. You end up with more cash in your pockets at the end of
the day! As Atty. Montero said, you get 100% benefit, as compared to deductions where all expenses benefit to
the extent only of 30% (for corporations).
• Can you deduct fines and penalties paid to the BIR because of late payment of taxes? NO! (Gutierrez v
Collector, 14 SCRA 33)
Losses (D) Losses. - (1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other
forms of indemnity shall be allowed as deductions: (a) If incurred in trade, profession or business; (b) Of property connected with the trade,
business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. The
Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing,
among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery,
theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall
not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement
giving rise to the loss. (c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has
been claimed as a deduction for estate tax purposes in the estate tax return. (2) Proof of Loss. - In the case of a nonresident alien individual
or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a
profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The
Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing,
among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery,
theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than
thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the
loss; and
2012 – Mickey)
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• Losses actually sustained during the taxable year and not compensated by insurance or other form of
indemnity are deductible from gross income:
o If incurred in trade, biz or profession; o Of property connected with trade, biz or profession, if the
loss arises from fire,
storm, shipwreck or other casualty, or from robbery, theft or embezzlement. o Declaration of loss is
needed within 30-90 days from time of loss
• For non-resident individuals and foreign corporations, the losses should be those actually sustained during
the taxable year, incurred in trade, biz or profession conducted within the Philippines.
• If the loss has already been claimed as deduction for estate tax purposes, it is no longer deductible from
gross income.
• Casualty means the complete or partial destruction of property resulting from an identifiable event of a sudden,
unexpected or unusual nature. The taxpayer bears the burden of proof. (RR 12-77)
• Special rules on losses:
o Voluntary removal of buildings (Sec 97, RR 2):
i. Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery,
equipment, etc., incident to renewals and replacements will be deductible from gross income.
(demolition for practical reasons life safety) ii. When a taxpayer buys real estate upon which is located
a building, which he proceeds to raze with a view to erecting thereon 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. (demolition with
intention to construct a new building) o Loss of useful value of assets (Sec 98, RR 2):
i. When through some change in business conditions, the usefulness in the business of some
or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business
or discards such assets permanently from use of such business, he may claim as deduction the
actual loss sustained.
• In determining the amount of the loss, adjustment must be made, however, for
improvements, depreciation and the salvage value of the property.
• This exception to the rule requiring a sale or other disposition of property in order to
establish a loss requires proof of some unforeseen cause by reason of which the
property has been prematurely discarded, as, for example, where an increase in the
cost or change in the manufacture of any product makes it necessary to abandon such
manufacture, to which special machinery is exclusively devoted, or where new
legislation directly or indirectly makes the continued profitable use of the property
impossible.
• This exception does NOT extend to a case where the useful life of property
terminates solely as a result of those gradual processes for which depreciation
allowance are authorized. It does not apply to inventories or to other than capital
assets. The exception applies to buildings only when they are permanently abandoned
or permanently devoted to a radically different use, and to machinery only when its use
as such is permanently abandoned. Any loss to
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be deductible under this exception must be charged off in the books and fully explained in returns of
income. o Shrinkage in value of stocks (Sec 99, RR 2):
i. A person possessing stock of a corporation can not deduct from gross income any amount
claimed as a loss merely on account of shrinkage in value of such stock through fluctuation of
the market or otherwise.
• The loss allowable in such case is that actually suffered when the stock is disposed of. ii. If
stock of a corporation becomes worthless, its cost or other basis determined in accordance
with these regulations may be deducted by the owner in the taxable year in which the stock
became worthless, provided a satisfactory showing of its worthlessness be made, as in the
case of bad debts.
NOLCO (3) Net Operating Loss Carry-Over. - 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 three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any
net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this
Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the
ownership of the business or enterprise in that - (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if
the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of
the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. For
purposes of this subsection, the term "not operating loss" shall mean the excess of allowable deduction over gross income of the business in
a taxable year. Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under
Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10)
years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such
loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such
loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four
(4) years.
• Net operating loss is the excess of allowable deduction over gross income of the business in a taxable year.
o NOLCO: The net operating loss of the business which has not been previously offset as deduction
shall be carried over as deduction from gross income for the next 3 consecutive years immediately
following the year of such loss o This is allowed if there has been no substantial change in ownership
of the
business, meaning
i. Where not less than 75% of outstanding shares in the business is in the
name of a corporation held by the same persons, or ii. Where not less than 75% of the paid-up capital of
the corporation is held
by the same persons o For mines other than oil and gas wells, a net operating loss without the
benefit of incentives provided for by the Omnibus Investments Code may be carried over as deduction
for the next 5 years immediately following the year of loss
• NOLCO is allowed regardless of the change in the ownership of a company in case of a merger where the
taxpayer who accumulated the NOLCO is the surviving entity
• Basically: as long as 75% is still held by the same persons, NOLCO can still be used.
• NOLCO is not transferable or assignable to another person EXCEPT if there has been no substantial change
in the ownership of the business in that not less than 75% of the paid-up capital of the business is held by the
same folk
2012 – Mickey)
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• An individual who claims the 40% OSD cannot claim deduction of NOLCO simultaneously. Even if the NOLCO
was not claimed, the 3 year period shall continue to run.
• If the taxpayer paid its income tax under the MCIT computation, the 3 year period still runs. (RR 14-01)
• Who aren’t qualified to NOLCO? 1. OBUs for a foreign banking corporation and FCDU of a domestic
banking corp 2. Enterprise registered with the BOI enjoying the Income Tax Holiday Incentive 3. PEZAregistered enterprise 4. SBMA-registered enterprise 5. Foreign corp engaged in international shipping or air
carriage business in the
Philippines 6. Any person, natural or juridical, enjoying exemption from income tax
Example of NOLCO
2005 2006 2007 2008 2009 Gross Income 500 600 700 500 800
Less:deductions 900 500 750 420 450 Net loss 400 50 Net income 100 80 350 Less: Nolco From
2005 100 80 From 2007 50 Taxable income 0 0 0 0 300
(4) Capital Losses. - (a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section
39. (b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital
assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of
such taxable year, of capital assets. (5) Losses From Wash Sales of Stock or Securities. - Losses from "wash sales" of stock or securities as
provided in Section 38. (6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such
transactions. (7) Abandonment Losses. - (a) In the event a contract area where petroleum operations are undertaken is partially or wholly
abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That
accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from
the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner. (b) In case a producing well is
subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be
allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is
reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross
income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.
Forex losses
• When foreign currency is acquired in connection with the regular course of biz, ordinary gain or loss results
from the fluctuations. Such loss is deductible only in the year that it is sustained. But since loans have not actually
been paid yet, therefore the losses have not yet been realized and are not deductible yet. (BIR Ruling 206-90)
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• Annual increase in value of an asset is not taxable income because such increase has not yet been realized.
The increase in value can only be taxed when such is disposed and there was a gain. The same is true of
decrease in value. It is only when the decrease is realized, before it is allowed to be deducted. (BIR Ruling
144-85) Wagering loses
• Allowed only to the extent of gains from such transactions
Abandonment loses
• When a petroleum operation is partially or wholly abandoned, all accumulated exploration and development
expenses shall be allowed as a deduction
Bad debts (E) Bad Debts. - (1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the
taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties
mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years
shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (2) Securities
Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the taxable year and
are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the
laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss
from the sale or exchange, on the last day of such taxable year, of capital assets.
• Bad debts are debts resulting from worthlessness or uncollectibility of amounts due the taxpayer by others,
arising from money lent or from uncollectible amounts of income from goods sold or services rendered.
• Bad debts are deductible provided that:
o There is an existing indebtedness due to the taxpayer which is valid and legally
demandable (and not losses from investments, as in Hermanos v CIR) o They are connected with trade,
biz or profession of the taxpayer o They are actually ascertained to be worthless, uncollectible, and
charged off
within the taxable year o The taxpayer must show that it its uncollectible even in the future (Phil Refining v
CTA) o They are not sustained between related parties o If they are recovered, they should be included
as part of gross income in the year
of recovery (this is the tax benefit rule)
• Losses or bad debts must be ascertained to be so and written off during the taxable year. They are therefore
deductible in full or not at all. There’s no partial deductions. (Hermanos v CIR)
• Its worthless-ness depends on the particular facts of each case. It can’t be considered worthless just
because of its doubtful value or difficulty to collect.
• If it’s a bank, the BSP is the one that will ascertain the worthlessness and uncollectibility of the bad debts.
• If the receivable is from an insurance company, it cannot be claimed as bad debt unless the insurance
company has been declared closed or insolvent by the Insurance Commish
• Securities become worthless are considered to be a loss from sale of capital assets on the last day of the
taxable year except for a bank or trust company.
• Illustration of the tax benefit rule for bad debts
o 2010 taxable income before bad debts: P100,000 o Bad
debts in 2010: P170,000 o Bad debts recovered in 2011:
P130,000
• How much do I report in 2011 as gross income, ie, how much did I benefit from the bad
debt I recorded as a deduction in 2010?
• P100,000. That’s how much I benefited from the debts being written off. I benefited
from it because I didn’t have to pay the
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P100,000 since the bad debt as a deduction covered it fully. (It would be a different
amount if the bad debts were less than the taxable income before bad debs.) So,
I have to include this amount in the computation in the gross income.
• What happens to the P30,000? It’s non-taxable.
• Worthless debts arising from unpaid wages, salaries, rents, and similar items of TAXABLE INCOME can only
be deducted if these amounts were included in the ITR as INCOME for the year when such bad debt was sought,
or the previous year.
Depreciation (F) Depreciation. - (1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the
exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of
property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute
owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned
between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the
absence of such provisions, on the basis of the trust income allowable to each. (2) Use of Certain Methods and Rates. - The term
"reasonable allowance" as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules
and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: (a)
The straight-line method; (b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the
annual allowance been computed under the method described in Subsection (F) (1); (c) The sum-of-the-years-digit method; and (d) any
other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. (3) Agreement as to Useful
Life on Which Depreciation Rate is Based. - Where under rules and regulations prescribed by the Secretary of Finance upon
recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing
with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national
Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The
responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in
the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the
taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the
agreement: Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed
the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly
authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset
shall be considered binding for purposes of this Subsection. (4) Depreciation of Properties Used in Petroleum Operations. - An allowance for
depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed
under the straight-line or declining-balance method of depreciation at the option of the service contractor. However, if the service contractor
initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line method. The useful life of properties used
in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. Properties not
used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five
(5) years. (5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties used in mining
operations other than petroleum operations, shall be computed as follows: (a) At the normal rate of depreciation if the expected life is ten (10)
years or less; or (b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10)
years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at
the beginning of the depreciation period which depreciation rate allowed by this Section will be used. (6) Depreciation Deductible by
Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a nonresident alien individual engaged
in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or
employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines.
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• Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear
and normal obsolescence
• A reasonable allowance for depreciation is deductible
• Some methods to determine reasonable allowance can be found in the codal.
o If the taxpayer and the CIR come to an agreement of the useful life on which
depreciation will be based, this agreement will be considered binding.
• Depreciation is allowed on tangible property and intangible property.
• A company has the right to claim depreciation, but the law does not allow depreciation beyond its acquisition
cost. (Basilan v CIR)
• Amortization of intangibles is the periodic process of allocating cost of an intangible (goodwill, right of lease,
patent, trademark, zombie rights) and is deductible.
Certain cases of depreciation Properties used directly in production of petroleum 10 years (straightline/declining
method) Properties used indirectly in production of
5 years (straight-line) petroleum Properties used in mining operations If expected life is 10 years or less,
normal rate of depreciation If expected life is more than 10 years, notify the CIR, bro. For non-resident aliens
engaged in trade, or business here, or resident foreign corporations
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
A reasonable rate is allowed only on properties located in the Philippines
Depletion (G) Depletion of Oil and Gas Wells and Mines. - (1) In General. - In the case of oil and gas wells or mines, a reasonable
allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations
to be prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the allowance for depletion
shall equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has
commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures
are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the
taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area.
"Intangible costs in petroleum operations" refers to any cost incurred in petroleum operations which in itself has no salvage value and which
is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall
not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances
for depreciation on such property shall be deductible under this Subsection. Any intangible exploration, drilling and development expenses
allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost
basis for the purpose of computing allowable cost depletion. (2) Election to Deduct Exploration and Development Expenditures. - In
computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures
accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid
or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed
twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws.
The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried
forward to the succeeding years until fully deducted. The election by the taxpayer to deduct the exploration and development expenditures is
irrevocable and shall be binding in succeeding taxable years. "Net income from mining operations", as used in this Subsection, shall mean
gross income from operations less "allowable deductions" which are necessary or related to mining operations. "Allowable deductions" shall
include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This
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paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for
depreciation. In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and
gas. The term "exploration expenditures" means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent
or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit.
The term "development expenditures" means expenditures paid or incurred during the development stage of the mine or other natural
deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown
to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. (3) Depletion of Oil
and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. - In the case of a nonresident alien individual
engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under
paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines.
• Oil & gas wells or mines are allowed a reasonable allowance for depletion or amortization computed using
the cost-depletion method
• When the allowance for depletion equals the capital invested, no further allowance shall be granted
• After production in commercial quantities has started, certain intangible exploration & drilling costs will be
deducted in the eyar incurred if such were incurred for non- producing wells or mines, or these may be capitalized
& amortized if such were incurred for producing wells or mines in same contract area
• If it was a non-resident alien or a resident foreign corporation, the allowance for depletion is limited to oil
wells & mines in the Philippines
• The formula for rate of depletion is (cost of mine property)/(estimated ore deposit) (Consolidated Mines v
CTA)
• Buzzword: cost of a WASTING ASSET
Charitable and other Contributions (H) Charitable and Other Contributions. - (1) In General. - 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. (2)
Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or
entities shall be deductible in full; (a) Donations to the Government. - Donations 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 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; (b) Donations to Certain Foreign Institutions or
International Organizations. - Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in
compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or
international organizations or in pursuance of special laws; (c) Donations to Accredited Nongovernment Organizations. - The term
"nongovernment organization" means a non profit domestic corporation: (1) Organized and operated exclusively for scientific, research,
educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination
thereof, no part of the net income of which 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 utilization
directly for the active conduct of
2012 – Mickey)
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the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the
Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; (3) The
level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary
of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and (4) 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. Subject to such terms
and conditions as may be prescribed by the Secretary of Finance, the term "utilization" means: (i) Any amount in cash or in kind (including
administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was
created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which
the accredited nongovernment organization was created or organized. An amount set aside for a specific project 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. (3) Valuation. - The amount of any charitable contribution of property other than
money shall be based on the acquisition cost of said property. (4) Proof of Deductions. - Contributions or gifts shall be allowable as
deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
• Donations to the following are partially deductible: 1. To the government, exclusively for public purposes 2.
To accredited domestic corporations or associations which are organized and operated exclusively for
religious, charitable, scientific, youth & sports development, cultural or educational purposes, or for the
rehabilitation of veterans 3. To social welfare institutions 4. To non-accredited NGOs
o The amount that can be deducted should not exceed:
i. 10% (individuals), or ii. 5%
(corporations)
• of the taxpayer’s taxable income derived from trade, biz or profession before the
deduction for contributions and donations.
• So, look at two things: 1. your charitable contributions and 2. 10% or 5% (as the
case may be) of your taxable income, and then see what’s lower. That amount is what
your allowed to deduct.
• Donations to the following are fully deductible: 1. To the government, exclusively to finance activities in
education, youth, health, sports development, human settlements, science and culture, and in economic
development according to the NEDA Plan (in other words, government priority activities) 2. To certain foreign
institutions or international organizations (treaty-based, etc) 3. To accredited NGOs 4. Via special laws
• NGO’s are non-profit domestic corporations organized and operated exclusively for scientific research,
educational, character-building and youth & sports development, etc, where no part of the net income inures to
the benefit of any private individual or stockholder. Their level of admin expenses cannot exceed 30% of the total
expenses, and they must utilize contributions not later than 15th day of the 3rd month... (see codal!)
• GPPs are not subject to tax BUT can deduct contributions in full for computing net income.
2012 – Mickey)
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o The limits will be claimed by the individual professional partnets in proportion to
their interests in the partnetship.
Research and Development (I) Research and Development.- (1) In General. - a taxpayer may treat research or development
expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and
necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the
taxable year when paid or incurred. (2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer
and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
the following research and development expenditures may be treated as deferred expenses: (a) Paid or incurred by the taxpayer in
connection with his trade, business or profession; (b) Not treated as expenses under paragraph 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. (3) Limitations on Deduction. - This
Subsection shall not apply to: (a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in
connection with research and development of a character which is subject to depreciation and depletion; and (b) Any expenditure paid or
incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.
• Expenses for R&D can be treated as ordinary and necessary expenses provided that: 1. It is incurred
during the taxable year 2. It is incurred in connection with his trade or business
• The taxpayer can either fully deduct it or amortize the deductions.
• This is not applicable to the expenses: 1. for the acquisition or improvement of land or property to be used in
connection with
R&D (these are subject to depreciation or depletion) 2. incurred for the purpose of ascertaining the
existence, location, extent or quality of
any deposit of minerals & oil.
Pension trusts (J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of reasonable
pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the
pension liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this Section) a reasonable amount transferred
or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowed as
a deduction, and (2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or
payment is made.
• Two kinds of deduction for employer:
o Under Subsection (A) (1): contributions to such trust to cover the pension liability
during the year o Under this Section: reasonable amount paid to the trust in excess of such
contributions
• The employer who established the pension trust for his employee’s benefit can deduct it but: o The
amount paid to the trust is reasonable
o It must not have been previously allowed for deduction (double deduction)
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o Must be apportioned in equal parts over a period of 10 consecutive years,
beginning with the year in which the payment is made.
• See Sec 118, RR 2 for more details14
• When an employer makes a contribution to his employee’s Personal Equity and Retirement Account (PERA),
the employer can claim this amount as a deduction but only to the extent of the employer’s contribution that would
complete the maximum allowable PERA contribution of an employee. (RR 2011-17, with RA 9505).
Additional requirements for deductibility (K) Additional Requirements for Deductibility of Certain Payments. - Any amount
paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization
may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld
therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code
• If the item to be deducted is from gross income is depreciated or amortized, it must be proven to have been
withheld and paid to the BIR, otherwise it won’t be allowed ot be deducted.
• Taxes which were not originally withheld & paid, but were only paid during audit are deductible in these
conditions:
o No withholding tax was made, but the payee reported the income and the
withholding agent pays during the audit (with penalties) o No withholding tax was made and the payee did
not report the income, but the
withholding agent pays it during the audit o The withholding agent erroneously underwithheld the tax but
pays the difference
during the audit o When shown that payee reported the income, and paid the income tax (no need
to pay withholding, nabayaran na eh)
Optional Standard Deduction (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding
Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not
exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under
section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in
Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be
considered as having
14
SECTION 118. Payments to employees' pension trusts. — An employer who adopts or has adopted a reasonable pension
plan, actuarially sound, and who establishes, or has established, and maintains a pension trust for the payment of reasonable pensions to his
employees shall be allowed to deduct from gross income reasonable amounts paid to such trust, in accordance with the pension plan
(including any reasonable amendment thereof), as follows: (a) If the plan contemplates the payment to the trust, in advance of the time when
pensions are granted, of amounts to provide for future pensions payments, then (1) reasonable amounts paid to the trust during the taxable
year representing the pension liability applicable to such year, determined in accordance with the plan, shall be allowed as a deduction for
such year as an ordinary and necessary business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the
trust during the taxable year to cover in whole or in part the pension liability applicable to the years prior to the taxable year, or so transferred
or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding
taxable years. (b) If the plan does not contemplate the payment to the trust, in advance of the time when pensions are granted, of amounts to
provide for future pension payments, then (1) reasonable amounts paid to the trust during the taxable year representing the present value of
the expected future payments in respect of pensions granted to employees retired during the taxable year shall be allowed as deduction for
such year as an ordinary and necessary business expense, and in addition (2) one tenth of a reasonable amount transferred or paid to the
trust during the taxable year to cover in whole or in part the present value of the expected future payments in respect of pensions granted to
employees retired prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a
deduction for the taxable year and for each of the nine succeeding taxable years.
2012 – Mickey)
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availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the
taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be
required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the
Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said
corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be
o The
taxpayer, except a non-resident alien, can choose to just have the OSD of 40% of his gross income/sales (as
the case may be), instead of going with the itemized deductions.
required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
Imposition of Ceilings by the Sec of Finance 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.
• The Sec of Finance can impose ceilings on the deductions after a public hearing
o Ceiling won’t apply to OSD
Non-deductible expenses SEC. 36. Items Not Deductible.- (A) General Rule. - In computing net income, no deduction shall in any
case be allowed in respect to - (1) Personal, living or family expenses; (2) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any property or estate; This Subsection shall not apply to intangible drilling and
development costs incurred in petroleum operations which are deductible under Subsection (G) (1) of Section 34 of this Code. (3) Any
amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4)
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 corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. (B)
Losses from Sales or Exchanges of Property. - 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 - (1) 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 (2)
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 (3) 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; (4)
Between the grantor and a fiduciary of any trust; or (5) 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 (6) Between a fiduciary of a trust and beneficiary of such trust.
• The following are not deductible: 1. Personal, living or family expenses 2. Any amount paid for new buildings
or for permanent improvements made to increase
the value of any property or estate 3. Any amount spent in restoring property or in making good the
exhaustion thereof for
which an allowance has been made 4. Premiums paid on any life insurance policy covering the life of any
officer, or
employee if the taxpayer is directly or indirectly a beneficiary under the policy.
• No deductions shall be allowed for: 1. Losses from sales or
exchanges of property; or
2012 – Mickey)
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2. Interest expense; or 3.
Bad debts
o Where the transaction (either of 1, 2 or 3) is between related taxpayers15.
• The following personal expenses are not deductible either: 1. Insurance paid on a dwelling owned &
occupied by the taxpayer 2. Premiums paid for life insurance 3. When a professional man rents a property for
residential purposes but receives clients in connection with his work, no part of the rent is allowable as
business expense. (But if he uses part of his house as an office, that portion is considered business expense,
thus deductible) 4. Allowance given by daddy to kids 5. Alimony or allowance paid under a separation
agreement
• The following capital expenses are not deductible: 1. New buildings, permanent improvements, or any
amount spent in restoring property 2. Cost of defending or perfecting title to property 3. Architect’s services 4.
Expense for administration of estate, court costs, attorney’s fees and executor’s
commissions 5. Amount assess & paid under an agreement between bondholders & shareholders of a
corp, to be used in the reorganization of the corp (Sec 119-122, RR 2)16
15
SECTION 122. Losses from sales or exchanges of property. — No deduction is allowed in respect of losses from sales or
exchanges of property, directly or indirectly — (a) Between members of a family. As used in Section 31, the family of an individual shall
include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; (b) Except in the case
of distributions in liquidation, between an individual and a corporation more than fifty per centum in value of the outstanding stock of which is
owned, directly or indirectly, by or for such individual; (c) Except in the case of distributions in liquidation, between two corporations more
than 50 per cent in value of the outstanding stock of each 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 or exchange was, under the law
applicable to such taxable year, a personal holding company or a foreign personal holding company; (d) Between a grantor and a fiduciary of
any trust; (e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or (f)
Between a fiduciary of a trust and a beneficiary of such trust.
16
SECTION 119. Personal, living, and family expenses. — Personal,
living, and family expenses are not deductible. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense
and not deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a professional man who rents a
property for residential purposes, but incidentally receives his clients, patients, or callers in connection with his professional work (his place of
business being elsewhere), no part of the rent is deductible as a business expense. If however, he uses part of the house for his office, such
portion of the rent as is properly attributable to such office is deductible. Where the father is legally entitled to the services of his minor
children, any allowances which he gives them, whether said to be in consideration of services or otherwise, are not allowable deductions in
his return of income. Alimony, and an allowance paid under a separation agreement are not deductible from gross income. SECTION 120.
Capital expenditures. — No deduction from gross income may be made for any amounts paid out for new buildings or for permanent
improvements or betterments made to increase the value of the taxpayer's property, or for any amount expended in restoring property or in
making good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is or has been made. Amounts
expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. The
cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. The amount
expended for architect's services is part of the cost of the building. Commissions paid in purchasing securities are a part of the cost of such
securities. Commissions paid in selling securities are an offset against the selling price. Expenses of the administration of an estate, such as
court costs, attorney's fees, and executor's commissions, are chargeable against the "corpus" of the estate and are not allowable deductions.
Amounts to be assessed and paid under an agreement between bondholders or shareholders of a corporation, to be used in a reorganization
of the corporation, are investments of capital and not deductible for any purpose in return of income. In the case of a corporation, expenses
for organization, such as incorporation fees, attorney's fees and accountants' charges, are ordinarily capital expenditures; but where such
expenditures are limited to purely
2012 – Mickey)
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• Margin levies are not deductible. (Esso v CIR)
R. Capital Gains and Losses (Sale or Exchange of Property) Capital Assets 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. (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) 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 - (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.
• First of, what is a sale or exchange?
o There is a sale or exchange of property when there is an effective and actual transfer of ownership
of the property to another as would divest the transferors of the benefits accruing from the ownership
of the property, for a valuable consideration. o What is important is when the sale or exchange is
consummated, not perfected. o Thus, it includes:
i. Forced sales ii. Distribution in complete liquidation o
NOT sale or exchange:
i. Assignment by Joh Corp of a country club share to Mr. John with Mr. John signing a
declaration of trust that Joh Corp is the owner of the share (since no transfer of ownership, only
beneficial ownership was transfered)
incidental expenses, a taxpayer may charge such items against income in the year in which they are incurred. A holding company which
guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new capital for the subsidiary
and increasing the value of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its net
income, but such payments may be added to the cost of its stock in the subsidiary. SECTION 121. Premiums on life insurance of
employees. — Any amounts paid for premiums on any life insurance policy covering the life of an officer or employee or of any person
financially interested in the business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy are not
deductible.
2012 – Mickey)
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ii. Conveyance of the common areas of a condominium from the developer to the condominium
corporation (since no consideration and conveyance is merely for the management of the
common areas)
• It is important to know whether the asset sold or exchanged was held as ordinary asset or capital asset
because of the different rules which apply to each.
• So, what are capital assets? Well, we know what they AREN’T.
• Capital assets are property held by the taxpayer (whether or not connected with his trade or business) but
does NOT include: 1. Stock in trade of the taxpayer, 2. Other property of a kind which would properly be
included in the inventory of the
taxpayer if on hand at the close of the year 3. Property held by the taxpayer primarily for sale to customers
in the ordinary course
of his trade or business 4. Property used in trade or business of a character which is subject to allowance
for
depreciation, 5. Real property used in trade or
business.
• The codal enumerates what are ordinary assets. All assets other than ordinary assets are capital assets.
• Property initially classified as capital asset may later become an ordinary asset and vice versa. (Calasanz v
CIR, wherein inherited land was developed into a subdivision, changing it from capital to ordinary asset)
• Shares of stock would be ordinary assets only to a dealer in securities or a person engaged in the purchase
and sale of, or an active trader in, securities. (China Bank v CA)
• RR 7-2003 has also given guidelines in determining whether real property is a capital or ordinary asset, to
wit (yun eh! To wit raw eh!)
o For those engaged in real estate business, the following are ordinary assets:
i. All real properties acquired by the real estate dealer ii. All real properties acquired by the
real estate developer, whether
developed or undeveloped iii. All real properties held for sale or lease in the ordinary course of business
or which would be properly be included in the inventory iv. All real properties acquired for lease/rent v. All
real properties acquired in the ordinary course of business by a
taxpayer habitually engaged in the sale of real estate o Will the property
change nature from ordinary to capital asset?
i. Changing from real estate business to a non-real estate business: NO ii. Ceasing operations of the
real estate business: NO iii. The properties acquired by the real estate business are abandoned: NO
iv. The properties acquired by the real estate business become idle: NO v. Real estate business
transfers the property to an ordinary person: YES o The nature of the property CAN change in the
hands of the buyer/transferee. o In case of involuntary transfer (like expropriation or foreclosure), the
involuntary nature shall have NO effect on the classification in the hands of the involuntary seller. o
For those NOT engaged in the real estate business, real property being used or
have been used in the trade or business are considered ordinary assets.
i. Can these change into capital assets?
• YES, provided they show proof that the same have not been used in business for more than 2 years
(prior to the taxable transaction) o For EXEMPT corporations, real property used in exempt
transactions shall not be
considered for business purposes, and thus are CAPITAL assets.
• The rules on capital gains and losses are the following: (See Sec 132-135, RR 2)
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1. First, keep me in mind that these rules do not apply to: a. Real property with a capital
gain tax, and b. Shares of stock of a domestic corporation with a capital gain tax,
i. These two kinds of capital assets have their own rates. (Remember the capital gains tax! The whole 6%,
5%/10% rates! Any capital gain subject to the capital gain tax shall not be included in the computation of
the taxable income and income tax at the end of the year.) 2. Next, the transaction on the capital asset
should be a sale or exchange 3. In the case of a taxpayer other than a corporation (for individuals only),
the following percentages of the gain or loss shall be taken into account in computing net capital gain, net
capital loss and net income:
a. 100% of the gain/loss, if the asset has been held for not more than 12
months b. 50% of the gain/loss, if the asset has been held for more than 12 months. o For corporations,
capital gains and losses are always considered at 100%. 4. Losses from sales or exchanges of capital
assets shall be allowed only to the extent of the gains from such sales or exchanges (limitation on capital
loss) (see example below), o If the taxpayer incurs net capital loss, such loss cannot be deducted from his
ordinary income because the loss can be deducted only to the extent of capital gains. 5. 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 (taxable income) of such year, shall be treated in the succeeding year as a loss
from a sale or exchange of a capital asset held for not more than twelve months (meaning, 100% of the
loss). This is what you call the net capital loss carry over. o Corporations don’t have net capital loss carryover.
Example Mao is in the buy and sell business, and he had ordinary income of P20,000, capital gains of P5,000
(from the sale of his personal art collection, which he held for 3 years), and capital losses of P3,000 (from the
sale of his yacht, which he held for 2 years.
Ordinary net income P20,000 Gains from sale of capital asset P5,000 But held
for 3 years! so 50% P2,500 Loss from sale of capital asset P3,000 But held for
2 years! so 50% P1,500 Net taxable gain P1,000 Taxable Income P21,000
Same facts, but Mao had capital gains of P2,000, and capital losses of P7,000.
Ordinary net income P20,000 Gains from sale of capital asset P2,000 50% only! P1,000 Loss from sale of
capital asset P7,000 50% only! P3,500 Net capital loss P2,500 Taxable income P20,000 You can’t deduct the
capital loss of P2,500 because you can only deduct to the extent of your capital gains.
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• GR: Net capital gain shall be reported in the ITR subject to the graduated income tax rates in addition to
the net income from other sources
o EXCEPT:
▪ Capital gains from the sale of real property (subject to final tax)
▪ Capital gains from sale of shares of stock that are not listed and traded at the stock
exchange (subject to final tax)
▪ Percentage tax on the sale or exchange of shares of stock that are listed and traded at
the stock exchange (based on gross selling price)
▪ Percentage tax on the sale or exchange though IPO at the stock exchange
• These exceptions have their own special tax returns.
• Examples of properties classified as capital assets:
o Personal property not used in trade or business
▪ Movables in one’s residence, vehicles, appliances, furniture, jewelry o Real property not
used in trade or business
▪ Residential house and lot, idle land not used in business operations
• Limitations on the capital asset transactions of corporations: o Holding period
rules not applicable, always 100% o Capital losses are allowed only to the extent of
capital gains o Net capital loss carry-over is not applicable.
• Transactions considered capital transactions even if there is no sale of capital asset, hence resulting
into capital gains or losses:
o Worthless shares of stock o Worthless bonds o Retirement of bonds with
interest coupons or in registered form o Option gains and losses o Liquidating
dividends o Liquidation of partnership o Short sales
• Computation of gain or loss of a partner when partnership is dissolved:
o Take note of the holding period k.
▪ Return on investment upon liquidation
• Less: investment on partnership
• Less: share in undistributed net income
▪ Equals: Gain (loss) on partnership liquidation o See problem
in p 104 of Co Untian.
• Following sales or exchanges result into taxable gain but NO LOSS recognition:
o Sales or exchanges between related parties o Wash sales, except those
made by dealers in securities o Exchanges NOT solely in kind in mergers
and consolidations o Illegal transactions o Sales or exchanges in general
which are NOT at arm’s length
• Note: businessman sold building where he opened his supermarket.
o Ordinary asset yan, so get the gains/loss.
• BIR Ruling 27-02 gives some steps to determine the tax in real estate transactions
o First, determine the character of property being sold.
• If property is not used in business of seller, then it’s a capital asset and the gain of the seller
is subject to 6% capital gains tax based on gross selling price or fair market value.
• If the property is used in the business of the seller, it is treated as ordinary asset, so the
withholding tax rates below shall apply. These rates will depend on:
• Whether the seller is exempt or taxable
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• Whether the seller is engaged in real estate business or not
• If he is engaged in real estate business, what was the gross selling price?
Different Scenarios of Sale of Real Property (seller not exempt and real property is ORDINARY asset)
Seller Buyer Tax Treatment Corp engaged in real
Corp engaged in real estate business (sells
estate business 6 parcels of land within a year)
Mickey Ingles Ateneo Law 2012 Atty. Montero and some stuff from Atty. Salvador (Last updated: November 9, 2012 – Mickey)
Creditable withholding tax based on gross selling price or fair market value is deducted by the buyer (to be
credited to the seller) If selling price is P500,000 or less 1.5% If it’s P500,000 to P2M 3% If its above P2m 5%
Corp engaged in real estate business
Corp NOT engaged in real estate business
Same as above
Corp NOT engaged in real estate business
Corp engaged in real estate business
If property considered ordinary asset 6% creditable withholding If property considered capital asset 6% final tax
Corp engaged in real estate business
Individual NOT engaged in trade or business
If on installment basis, no withholding tax on periodic installments, it will be withheld on the last payment
If on cash basis or deferred payment, buyer withholds the tax on the first installment Corp engaged in real
estate business
Individual engaged in trade or business
If on installment, tax withheld by the buyer on EVERY installment
If it was on cash or deferred payment, buyer withholds the tax on the first installment
• Installment plan: where the total payment in the year of sale DOES NOT exceed 25% of the total selling
price
• Deferred payment plan: where the total payment in the year of sale exceeds 25% of the total selling price
On mortgage and redemption of a capital asset
• If the mortgagor exercises his right of redemption within 1 year, no capital gains tax.
• In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder. (RR 499)
Remember the conditions for exemption from capital gains tax from the sale or exchange of the principal
residence (See Sec 24 (d) (2), all the way near the start of this reviewer)
Ordinary income Sec 22 (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.
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