Ingles - Tax 1

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Taxation One: Outline with Codals
Course Outline
Tax I
Based on Atty. Monteros outline, with integrated notes from Atty. Salvadors review class,
Reyes, some Mamalateo, and the various reviewers in school.
A. In General.........................................................................................................................1
B. General Principles...............................................................................................................1
C. Income Tax on Indiiduals...................................................................................................!
". "e#initions ......................................................................................................................1$
%. Income Tax &ates.............................................................................................................1'
(. Proprietar) %ducational Institutions and *ospitals..................................................................1+
G. GOCCs............................................................................................................................!,
*. Passie Income.................................................................................................................!1
I. -inimum Corporate Income Tax .-CIT/................................................................................!0
1. Income Tax on &esident (oreign Corporations........................................................................!2
3. Income Tax on 4on5resident (oreign Corporations.................................................................!+
6. Improperl) Accumulated %arnings Tax .IA%T/........................................................................0!
-. Tax5exempt Corporations...................................................................................................02
4. Taxa7le Income ...............................................................................................................0'
P. (ringe Bene#its Tax .(BT8 9hut up8/.....................................................................................2'
:. "eductions.......................................................................................................................;1
&. Capital Gains and 6osses .<ale or %xchange o# Propert)/.........................................................$0
<. "etermination o# Gain or 6oss #rom <ale or Trans#er o# Propert)..............................................$$
T. <itus o# Taxation...............................................................................................................'!
=. Accounting Periods and -ethods.........................................................................................'$
>. %states and Trusts.............................................................................................................+1
9. &eturns and Pa)ment o# Taxes...........................................................................................+2
9. 9ithholding Tax.............................................................................................................1,,
A. In General
Taxa7le Income
The essential di##erence 7etween capital and income is that capital is a #und? and
income is a #low. Capital is wealth@ while income is the serice o# wealth.
Propert) is a tree@ income is the #ruit. 6a7or is a tree@ income is the #ruit. Capital is a
tree@ income the #ruit.
Income means pro#its or gains. .-adrigal &a##ert)/
Income ma) 7e de#ined as the amount o# mone) coming to a person or corporation
within a speci#ied time@ whether as pa)ment #or serices@ interest or pro#it #rom
inestment.
o A mere adance in the alue o# propert) o# a person or a corporation in no
sense constitutes the AincomeB speci#ied in the law. <uch adance constitutes
and can 7e treated merel) as an increase in capital. .(isher Trinidad/
Cash diidends is taxed as income 7ecause it has 7een realiCedDreceied@ while stocE
diidends is not taxed as income 7ecause it is merel) inchoate as it is a mere
anticipation o# income .it 7ecomes income once )ou sell it/.
o One is an actual receipt o# pro#its? the other is a receipt o# a representation o#
the increased alue o# the assets o# a corporation. .(isher Trinidad/
When dealing with money or property, the questions you should as are!
o "s this capital or is this income#
o $as it %een reali&ed'received or is it merely inchoate#
B. General Principles
<%C. !0. General Principles o# Income Taxation in the Philippines. 5 %xcept when otherwise proided in this Code:
.A/ A citiCen o# the Philippines residing therein is taxa7le on all income deried #rom sources within and without
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the Philippines?
.B/ A nonresident citiCen is taxa7le onl) on income deried #rom sources within the Philippines?
.C/ An indiidual citiCen o# the Philippines who is worEing and deriing income #rom a7road as an oerseas
contract worEer is taxa7le onl) on income deried #rom sources within the Philippines: Proided@ That a seaman
who is a citiCen o# the Philippines and who receies compensation #or serices rendered a7road as a mem7er o#
the complement o# a essel engaged exclusiel) in international trade shall 7e treated as an oerseas contract
worEer?
."/ An alien indiidual@ whether a resident or not o# the Philippines@ is taxa7le onl) on income deried #rom
sources within the Philippines?
.%/ A domestic corporation is taxa7le on all income deried #rom sources within and without the Philippines? and
.(/ A #oreign corporation@ whether engaged or not in trade or 7usiness in the Philippines@ is taxa7le onl) on
income deried #rom sources within the Philippines.
9ho are taxa7le on income deried #rom all sources@ whether within or outside the
PhilippinesG Taxed worldwide8
1. &esident citiCens.
!. "omestic corporations.
The other Einds o# taxpa)ers are su7Hect to tax onl) on income deried #rom
Philippine sources.
Taxable Income Taxable Income
Citizenship & Residency Inside RP Outside RP
&esident CitiCen Ies Ies
4on5resident CitiCen Ies 4o
Oerseas Contract 9orEer Ies 4o
&esident Alien Ies 4o
4on5resident Alien Ies 4o
"omestic Corp Ies Ies
(oreign Corp Ies 4o
C. Income Tax on Indiiduals
(efinitions
&esident citiCens and resident aliens
<ection !! .(/ The term Jresident alienJ means an indiidual whose residence is within the Philippines and who is
not a citiCen thereo#.
&esident alien is an indiidual:
1. 9hose residence is within the Philippines
!. 9ho is not a citiCen
-ere ph)sical or 7od) presence is enough. 4ot intention to maEe the countr) oneBs
a7ode. .Garrison CA/
An alien actuall) present in the Philippines who is not a mere transient or soHourner is a
resident o# the Philippines #or purposes o# the income tax. 9hether he is a transient or
not is determined 7) his intentions with regard to the length and nature o# his sta).
o A mere #loating intention inde#inite as to time@ to return to another countr) is not
su##icient to constitute him a transient.
o I# he lies in the Philippines and has no de#inite intention as to his sta)@ he is a
resident. One who comes to the Philippines #or a de#inite purpose which in its
nature ma) 7e promptl) accomplished is a transient.
But i# his purpose is o# such a nature that an extended sta) ma) 7e
necessar) #or its accomplishment@ and to that end the alien maEes his
home temporaril) in the Philippines@ he 7ecomes a resident@ though it ma)
7e his intention at all times to return to his domicile a7road when the
purpose #or which he came has 7een consummated or a7andoned. .&& !/
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4on5resident citiCens
<ec !! .%/. The term Jnonresident citiCenJ means:
.1/ A citiCen o# the Philippines who esta7lishes to the satis#action o# the Commissioner the #act o# his ph)sical
presence a7road with a de#inite intention to reside therein.
.!/ A citiCen o# the Philippines who leaes the Philippines during the taxa7le )ear to reside a7road@ either as an
immigrant or #or emplo)ment on a permanent 7asis.
.0/ A citiCen o# the Philippines who worEs and deries income #rom a7road and whose emplo)ment thereat
reKuires him to 7e ph)sicall) present a7road most o# the time during the taxa7le )ear.
.2/ A citiCen who has 7een preiousl) considered as nonresident citiCen and who arries in the Philippines at an)
time during the taxa7le )ear to reside permanentl) in the Philippines shall liEewise 7e treated as a nonresident
citiCen #or the taxa7le )ear in which he arries in the Philippines with respect to his income deried #rom sources
a7road until the date o# his arrial in the Philippines.
.;/ The taxpa)er shall su7mit proo# to the Commissioner to show his intention o# leaing the Philippines to reside
permanentl) a7road or to return to and reside in the Philippines as the case ma) 7e #or purpose o# this <ection.
-eaning o# non5resident citiCen:
1. CitiCen who esta7lishes to the satis#action o# the Commissioner the #act o# his
ph)sical presence a7road with a de#inite intention to reside therein
!. CitiCen who leaes the Philippines during the taxa7le )ear to reside a7road@ either
as an immigrant or #or emplo)ment on a permanent 7asis
0. CitiCen who worEs and deries #rom a7road and whose emplo)ment thereat
reKuires him to 7e ph)sicall) present a7road most o# the time during the taxa7le
)ear
2. CitiCen who has 7een preiousl) considered as nonresident citiCen and who
arries in the Philippines at an) time during the taxa7le )ear to reside
permanentl) in the Philippines shall liEewise 7e treated as a nonresident citiCen
#or the taxa7le )ear in which he arries in the Philippines with respect to his
income deried #rom sources a7road until the date o# his arrial in the Philippines.
9ho are non5resident citiCensG .&& 15$+/
1. Immigrant F one who leaes the Philippines to reside a7road as an immigrant #or
which a #oreign isa has 7een secured
!. Permanent emplo)ee F one who leaes the Philippines to reside a7road #or
emplo)ment on a more or less permanent 7asis
0. Contract worEer F one who leaes the Philippines on account o# a contract o#
emplo)ment which is renewed #rom time to time under such circumstance as to
reKuire him to 7e ph)sicall) present a7road most o# the time .not less than 1'0
da)s/
4on5resident citiCens who are exempt #rom tax with respect to income deried #rom
sources outside the Philippines shall no longer 7e reKuired to #ile in#ormation returns
#rom sources outside the Philippines 7eginning !,,1. .&& ;5!,,1/
The phrase Lmost o# the timeM shall mean that the said citiCen shall hae sta)ed a7road
#or at least 1'0 da)s in a taxa7le )ear.
The same exemption applies to an OC9 7ut as such worEer@ the time spent a7road is
not material #or tax exemption purposes all that is reKuired is #or the worEerBs
emplo)ement contract to pass through and 7e registered with the PO%A. .BI& &uling
005!,,,/.
4on5resident aliens engaged in 7usiness in the Philippines
<ec !!. .G/ The term Jnonresident alienJ means an indiidual whose residence is not within the Philippines and
who is not a citiCen thereo#.
9ho are non5resident aliensG
1. An indiidual whose residence is not within the Philippines
!. 4ot a citiCen o# the Philippines
o "etermination is 7) his intention with regard to the length and nature o# his sta).
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.<ec ;@ && !/
6oss o# residence 7) alien
o An alien who has acKuired residence in the Philippines retains his status until he
a7andons the same and actuall) departs #rom the Philippines.
o A mere intention to change his residence does not change his status. An alien who
has acKuired a residence is taxa7le as a resident #or the remainder o# his sta) in the
Philippines. .<ec. N@ && !/

-inimum wage earner
<ec !!. .GG/ The term Astatutor) minimum wageB earner shall re#er to rate #ixed 7) the &egional Tripartite 9age
and Productiit) Board@ as de#ined 7) the Bureau o# 6a7or and %mplo)ment <tatistics .B6%</ o# the "O6%.
.**/ The term Aminimum wage earnerB shall re#er to a worEer in the priate sector paid the statutor) minimum
wage? or to an emplo)ee in the pu7lic sector with compensation income o# not more than the statutor) minimum
wage in the non5agricultural sector where heDshe is assigned.
(ixed 7) the &egional Tripartite 9age and Productiit) Board.
-inimum wage earner:
o Priate sector F paid the statutor) minimum wage
o Pu7lic sector F not more than the statutor) minimum wage in the non5
agricultural sector where heDshe is assigned
"ependent
<ec 0;. .B/ (or purposes o# this <u7section@ a JdependentJ means a legitimate@ illegitimate or legall) adopted
child chie#l) dependent upon and liing with the taxpa)er i# such dependent is not more than twent)5one .!1/
)ears o# age@ unmarried and not gain#ull) emplo)ed or i# such dependent@ regardless o# age@ is incapa7le o# sel#5
support 7ecause o# mental or ph)sical de#ect.
"ependent is aO
o 6egitimate@ illegitimate or legall) adopted child and liing with the taxpa)er
o 9ho must 7e:
4ot more than !1@
=nmarried@ and
4ot gain#ull) emplo)ed@ O& i# such@
"ependent@ regardless o# age@ is incapa7le o# sel#5support 7ecause o#
mental or ph)sical de#ect.
To summariCe@ indiidual taxpa)ers are classi#ied into:
1. CitiCens@ who are diided into:
o &esident citiCens F those citiCens whose residence is within the Philippines? and
o 4on5resident citiCens F those citiCens whose resident is not within the Philippines.
!. Aliens@ who are diided into:
o &esident aliens F those indiiduals whose residence is within the Philippines and
are not citiCens thereo#? and
o 4on5resident aliens F those indiiduals whose residence is not within the
Philippines 7ut temporaril) in the countr) and are not citiCens thereo#. The) are:
Those engaged in trade or 7usiness within the Philippines? and
Those who are not so engaged. .see <ec !05!;/
)inds of income and income ta* of individuals
Tax #ormula
<%C. !2. Income Tax &ates. 5
.A/ &ates o# Income Tax on Indiidual CitiCen and Indiidual &esident Alien o# the Philippines.
.1/ An income tax is here7) imposed:
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.a/ On the taxa7le income de#ined in <ection 01 o# this Code@ other than income su7Hect to tax under <u7sections
.B/@ .C/ and ."/ o# this <ection@ deried #or each taxa7le )ear #rom all sources within and without the Philippines
7e eer) indiidual citiCen o# the Philippines residing therein?
.7/ On the taxa7le income de#ined in <ection 01 o# this Code@ other than income su7Hect to tax under <u7sections
.B/@ .C/ and ."/ o# this <ection@ deried #or each taxa7le )ear #rom all sources within the Philippines 7) an
indiidual citiCen o# the Philippines who is residing outside o# the Philippines including oerseas contract worEers
re#erred to in <u7section.C/ o# <ection !0 hereo#? and
.c/ On the taxa7le income de#ined in <ection 01 o# this Code@ other than income su7Hect to tax under <u7sections
.7/@ .C/ and ."/ o# this <ection@ deried #or each taxa7le )ear #rom all sources within the Philippines 7) an
indiidual alien who is a resident o# the Philippines.
.!/ &ates o# Tax on Taxa7le Income o# Indiiduals. 5 The tax shall 7e computed in accordance with and at the
rates esta7lished in the #ollowing schedule: .Hust see chart 7elow@ itBs the same thing/
(or married indiiduals@ the hus7and and wi#e@ su7Hect to the proision o# <ection ;1 ."/ hereo#@ shall compute
separatel) their indiidual income tax 7ased on their respectie total taxa7le income: +rovided@ that i# an) income
cannot 7e de#initel) attri7uted to or identi#ied as income exclusiel) earned or realiCed 7) either o# the spouses@
the same shall 7e diided eKuall) 7etween the spouses #or the purpose o# determining their respectie taxa7le
income.
J+rovided@ That minimum wage earners as de#ined in <ection !! .**/ o# this Code shall 7e exempt #rom the
pa)ment o# income tax on their taxa7le income: +rovided@ further@ That the holida) pa)@ oertime pa)@ night shi#t
di##erential pa) and haCard pa) receied 7) such minimum wage earners shall liEewise 7e exempt #rom income
tax.
4ot oer P1,@,,, ;P
Oer P1,@,,, 7ut not oer P0,@,,, P;,, + 1,P o# the excess oer
P1,@,,,
Oer P0,@,,, 7ut not oer P$,@,,, P!@;,, + 1;P o# the excess oer
P0,@,,,
Oer P$,@,,, 7ut not oer P12,@,,, P'@;,, + !,P o# the excess oer
P$,@,,,
Oer P12,@,,, 7ut not oer P!;,@,,, P!!@;,, + !;P o# the excess oer
P12,@,,,
Oer P!;,@,,, 7ut not oer P;,,@,,, P;,@,,, + 0,P o# the excess oer
P!;,@,,,
Oer P;,,@,,, P1!;@,,, + 0!P o# the excess oer
P;,,@,,,
Gross Income
6ess: "eductions
Taxa7le Income
Tax &ate
Tax "ue
)now the ta* %ase and the ta* rate,
Onl) resident citiCens and domestic corporations are taxed on income deried #rom
a7road. 9orldwide taxa7le8
The tax is imposed upon taxa7le compensation or emplo)ment income@ 7usiness income@
and income deried #rom the practice o# pro#essions deried 7) citiCens and resident
aliens.
-arried indiiduals shall compute separatel) their indiidual income tax 7ased on their
respectie total taxa7le income.
o I# an) income cannot 7e de#initel) attri7uted to@ or identi#ied as income
exclusiel) earned or realiCed 7) either o# the spouses@ the same shall 7e diided
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eKuall) 7etween them #or the purpose o# determining their respectie taxa7le
income.
-inimum wage earners are exempt #rom the pa)ment o# income tax on their taxa7le
income. *olida) pa)@ oertime pa)@ night shi#t di##erential pa)@ and haCard pa) receied
7) them are liEewise exempt #rom income tax.
A non5resident alien indiidual engaged in trade or 7usiness in the Philippines is su7Hect
to the income tax in the same manner as an indiidual citiCen and a resident alien on
taxa7le income receied #rom sources within the Philippines.
(or non5resident aliens not so engaged@ the tax is
o !;P o# the entire or gross income receied #rom sources within the Philippines
and
o 1;P o# the gross income receied as compensation@ salaries@ and other
emoluments 7) reason o# his emplo)ment 7):
regional or area headKuarters and regional operating headKuarters o#
multinational corporations?
o##shore 7anEing units esta7lished 7) a #oreign corporation in the
Philippines? or
7) #oreign petroleum serice contractor or su7contractors operating in the
Philippines. .<ec !; .A5%//
-inal income ta* . interests, royalties, awards, dividends, capital gains on sale of shares,
realty
!ec "#. $B% Rate o& Tax on Certain Passie Income.
.1/ Interests@ &o)alties@ PriCes@ and Other 9innings. 5 A #inal tax at the rate o# twent) percent .!,P/ is here7)
imposed upon the amount o# interest #rom an) currenc) 7anE deposit and )ield or an) other monetar) 7ene#it
#rom deposit su7stitutes and #rom trust #unds and similar arrangements? ro)alties@ except on 7ooEs@ as well as
other literar) worEs and musical compositions@ which shall 7e imposed a #inal tax o# ten percent .1,P/? priCes
.except priCes amounting to Ten thousand pesos .P1,@,,,/ or less which shall 7e su7Hect to tax under
<u7section .A/ o# <ection !2? and other winnings .except Philippine Charit) <weepstaEes and 6otto winnings/@
deried #rom sources within the Philippines: Proided@ howeer@ That interest income receied 7) an indiidual
taxpa)er .except a nonresident indiidual/ #rom a depositor) 7anE under the expanded #oreign currenc) deposit
s)stem shall 7e su7Hect to a #inal income tax at the rate o# seen and one5hal# percent .$ 1D!P/ o# such interest
income: Proided@ #urther@ That interest income #rom long5term deposit or inestment in the #orm o# saings@
common or indiidual trust #unds@ deposit su7stitutes@ inestment management accounts and other inestments
eidenced 7) certi#icates in such #orm prescri7ed 7) the BangEo <entral ng Pilipinas .B<P/ shall 7e exempt #rom
the tax imposed under this <u7section: Proided@ #inall)@ That should the holder o# the certi#icate pre5terminate
the deposit or inestment 7e#ore the #i#th .;th/ )ear@ a #inal tax shall 7e imposed on the entire income and shall
7e deducted and withheld 7) the depositor) 7anE #rom the proceeds o# the long5term deposit or inestment
certi#icate 7ased on the remaining maturit) thereo#:

(our .2/ )ears to less than #ie .;/ )ears 5 ;P?
Three .0/ )ears to less than .2/ )ears 5 1!P? and
6ess than three .0/ )ears 5 !,P
.!/ Cash andDor Propert) "iidends 5 A #inal tax at the #ollowing rates shall 7e imposed upon the cash andDor
propert) diidends actuall) or constructiel) receied 7) an indiidual #rom a domestic corporation or #rom a
Hoint stocE compan)@ insurance or mutual #und companies and regional operating headKuarters o# multinational
companies@ or on the share o# an indiidual in the distri7uta7le net income a#ter tax o# a partnership .except a
general pro#essional partnership/ o# which he is a partner@ or on the share o# an indiidual in the net income a#ter
tax o# an association@ a Hoint account@ or a Hoint enture or consortium taxa7le as a corporation o# which he is a
mem7er or co5enturer:

<ix percent .NP/ 7eginning 1anuar) 1@ 1++'?
%ight percent .'P/ 7eginning 1anuar) 1@ 1+++? and
Ten percent .1,P 7eginning 1anuar) 1@ !,,,.
Proided@ howeer@ That the tax on diidends shall appl) onl) on income earned on or a#ter 1anuar) 1@ 1++'.
Income #orming part o# retained earnings as o# "ecem7er 01@ 1++$ shall not@ een i# declared or distri7uted on
or a#ter 1anuar) 1@ 1++'@ 7e su7Hect to this tax.
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.C/ Capital Gains #rom <ale o# <hares o# <tocE not Traded in the <tocE %xchange. 5 The proisions o# <ection
0+.B/ notwithstanding@ a #inal tax at the rates prescri7ed 7elow is here7) imposed upon the net capital gains
realiCed during the taxa7le )ear #rom the sale@ 7arter@ exchange or other disposition o# shares o# stocE in a
domestic corporation@ except shares sold@ or disposed o# through the stocE exchange.
4ot oer P1,,@,,,OOOOOOOOOOO........ ;P
On an) amount in excess o# P1,,@,,,OOOO 1,P
."/ Capital Gains #rom <ale o# &eal Propert). 5
.1/ In General. 5 The proisions o# <ection 0+.B/ notwithstanding@ a #inal tax o# six percent .NP/ 7ased on the
gross selling price or current #air marEet alue as determined in accordance with <ection N.%/ o# this Code@
whicheer is higher@ is here7) imposed upon capital gains presumed to hae 7een realiCed #rom the sale@
exchange@ or other disposition o# real propert) located in the Philippines@ classi#ied as capital assets@ including
pacto de retro sales and other #orms o# conditional sales@ 7) indiiduals@ including estates and trusts: Proided@
That the tax lia7ilit)@ i# an)@ on gains #rom sales or other dispositions o# real propert) to the goernment or an)
o# its political su7diisions or agencies or to goernment5owned or controlled corporations shall 7e determined
either under <ection !2 .A/ or under this <u7section@ at the option o# the taxpa)er.
.!/ %xception. 5 The proisions o# paragraph .1/ o# this <u7section to the contrar) notwithstanding@ capital gains
presumed to hae 7een realiCed #rom the sale or disposition o# their principal residence 7) natural persons@ the
proceeds o# which is #ull) utiliCed in acKuiring or constructing a new principal residence within eighteen .1'/
calendar months #rom the date o# sale or disposition@ shall 7e exempt #rom the capital gains tax imposed under
this <u7section: Proided@ That the historical cost or adHusted 7asis o# the real propert) sold or disposed shall 7e
carried oer to the new principal residence 7uilt or acKuired: Proided@ #urther@ That the Commissioner shall hae
7een dul) noti#ied 7) the taxpa)er within thirt) .0,/ da)s #rom the date o# sale or disposition through a
prescri7ed return o# his intention to aail o# the tax exemption herein mentioned: Proided@ still #urther@ That the
said tax exemption can onl) 7e aailed o# once eer) ten .1,/ )ears: Proided@ #inall)@ that i# there is no #ull
utiliCation o# the proceeds o# sale or disposition@ the portion o# the gain presumed to hae 7een realiCed #rom the
sale or disposition shall 7e su7Hect to capital gains tax. (or this purpose@ the gross selling price or #air marEet
alue at the time o# sale@ whicheer is higher@ shall 7e multiplied 7) a #raction which the unutiliCed amount 7ears
to the gross selling price in order to determine the taxa7le portion and the tax prescri7ed under paragraph .1/ o#
this <u7section shall 7e imposed thereon.
<ec !! .I/ The term /deposit su%stitutes/ shall mean an alternatie #rom o# o7taining #unds #rom the pu7lic .the
term Qpu7licQ means 7orrowing #rom twent) .!,/ or more indiidual or corporate lenders at an) one time/ other
than deposits@ through the issuance@ endorsement@ or acceptance o# de7t instruments #or the 7orrowers own
account@ #or the purpose o# relending or purchasing o# receia7les and other o7ligations@ or #inancing their own
needs or the needs o# their agent or dealer. These instruments ma) include@ 7ut need not 7e limited to 7anEersQ
acceptances@ promissor) notes@ repurchase agreements@ including reerse repurchase agreements entered into
7) and 7etween the BangEo <entral ng Pilipinas .B<P/ and an) authoriCed agent 7anE@ certi#icates o# assignment
or participation and similar instruments with recourse: Proided@ howeer@ That de7t instruments issued #or
inter7anE call loans with maturit) o# not more than #ie .;/ da)s to coer de#icienc) in reseres against deposit
lia7ilities@ including those 7etween or among 7anEs and Kuasi57anEs@ shall not 7e considered as deposit
su7stitute de7t instruments.
Tax Rate on Certain Passie Income on Citizens and Resident
Aliens
'inal Tax
1. Interest under the expanded #oreign currenc) deposit s)stem .see &&
1,5+' 7elow/ 0onresident citi&ens! e*empt
$.;P .s exempt
#or nonresident
aliens engaged in
tradeD7iC/
!. &o)alt) #rom 7ooEs@ literar) worEs@ R musical compositions 1,P
0. &o)alt) other than a7oe !,P
2. Interest on an) current 7anE deposit@ )ield or other monetar) 7ene#its
#rom deposit su7stitute@ trust #und R similar arrangement
!,P
;. PriCe exceeding P1,@,,, !,P
N. Other winnings@ except Phil Charit) <weepstaEes R 6otto !,P
$. "iidend #rom a domestic corp@ or #rom a Hoint stocE compan)@
insurance or mutual #und compan)@ R regional operating headKuarters o#
multinational compan) or share in the distri7utie net income a#ter tax o
a partnership .except a general pro#essional partnership/@ Hoint stocE or
Hoint enture or consortium taxa7le as a corporation
But what a%out dividends from foreign corporations for citi&ens
1,P .s !,P #or
non5resident aliens
engaged in
tradeD7iC/
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1not resident aliens2# 9ell@ the income here enters into the
computation #or <ec !2 .a/ tax calendar. (or resident aliens@ the)
are not taxed since itBs income deried #rom a7road.
'. Interest on long5term deposit or inestment in 7anEs .with maturit) o#
; )ears or more/
exempt
PriCe F the result o# an e##ort .liEe a priCe in a 7eaut) contest/
9inning F the result o# a transaction where the outcome depends upon
chance .liEe 7etting/
"eposit su7stitute F a means o# 7orrowing mone) #rom the pu7lic .!, or
more indiidual or corporate lenders/ other than 7) wa) o# deposit with
7anEs through the issuance o# de7t instruments .liEe 7anEerBs
acceptances@ promissor) notes@ repurchase agreements@ certi#icates o#
assignment or participation/
Tax Rate on Interest Income &rom 'orei(n Currency )eposit $RR
*+,-.%
1. Interest income actuall) receied 7) a resident citiCen or resident alien
#rom (C"
$.;P #inal
withholding tax
!. I# it was deposited 7) an OC9 or seaman or nonresident citiCen %xempt
0. I# it was in a 7anE account in the Hoint names o# an OC9 and his
spouse .who is a resident/
;,P exemptD
;,P #inal
withholding tax
o# $.;P
2. Interest income actuall) receied 7) a domestic corporation or
resident #oreign corporation #rom (C"
$.;P #inal
withholding tax
Interest income which is actuall) or constructiel) receied 7) a resident citiCen o# the
Philippines or 7) a resident alien indiidual #rom a #oreign currenc) 7anE deposit will 7e
su7Hect to a #inal withholding tax o# $.;P. The depositor) 7anE will withhold and remit
the tax. I# a 7anE account is Hointl) in the name o# a non5resident citiCen@ ;,P o# the
interest income #rom such 7anE deposit will 7e treated as exempt while the other ;,P
will 7e su7Hect to a #inal withholding tax o# $.;P. The &egulations will appl) on taxa7le
income deried 7eginning 1anuar) 1@ 1++' pursuant to the proisions o# <ection ' o# &A
'2!2. In case o# deposits which were made in 1++$@ onl) that portion o# interest which
was actuall) or constructiel) receied 7) a depositor starting 1anuar) 1@ 1++' is
taxa7le. .&& 1,5+'/
Tax Rate on Capital Gains
1. On sale o# shares o# stocE o# a domestic corporation 034
listed and 034 traded thru a local stocE exchange held as
a capital asset@
o Capital gains not oer P1,,@,,,
o Capital gains in excess o# P1,,@,,, .see && N5!,,'
7elow/
;P o# the net capital gains
1,P o# the net capital gains
!. On sale o# real propert) in the Philippines held as a capital
asset .see && '5+' 7elow/ NP o# the gross selling
price@ or the current marEet
alue at the time o# sale@
whicheer is higher
Tax Rate on Income &rom !ale/ Barter/ 0xchan(e or
other )isposition o& !hares o& !toc1 $RR 2,"++.%
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I# shares o# stocE are listed and traded through the local
stocE exchange
S o# 1P .or .,,;P/ o# the
gross selling price or gross
alue in mone) o# the
shares o# stocE
I# shares not traded through the local stocE exchange
o Capital gains in excess o# P1,,@,,,
9ho are lia7leG
1. Indiidual taxpa)er@ whether citiCen or alien?
!. Corporate taxpa)er@ whether domestic or #oreign?
0. Other taxpa)ers not #alling under .1/ and .!/ a7oe@ such as estate@ trust@ trust
#unds and pension #unds@ among others.
9ho are exemptG
1. "ealers in securities
!. Inestors in shares o# stocE in a mutual #und compan)@ as de#ined in <ec !! .BB/@
and <ection !.s/ o# these &egulations@ in ocnnection with the gains realiCed 7) said
inestor upon redemption o# said shares o# stocE in a mutual #und compan)l and
0. All other persons@ whether natural or Huridical@ who are speci#icall) exempt #rom
national internal reenue taxes under existing inestment incenties and other
special laws.
3o4 to determine the tax base o& disposition
o& stoc1 $RR 2,"++.%
'air 5ar1et 6alue
<ales o# stocE listed and traded through the 6<% (-> is the actual selling price
<ales o# stocE listed 7ut not traded through the
6<%
(-> is the closing price on the da)
when the shares were sold@ trans#erred@
etc .i# no sale was made on that da) in
the 6<%@ then the closing price on the
da) nearest to the date o# sale@
trans#er@ or exchange o# the said
shares/
<ales o# stocE not listed and not traded through
the 6<%
(-> is the 7ooE alue o# the shares o#
stocE as shown in the #inancial
statements dul) certi#ied 7) an
independent CPA nearest to the date o#
sale
'inal Tax Rate on !ales/ 0xchan(es/ or Trans&ers or Real
Properties Classi&ied as Capital Assets $RR .,-.%
<ale o# real propert) in the Philippines NP o# the gross selling
price@ or the current
marEet alue at the time
o# sale@ whicheer is
higher
I# sale was made to the goernment or to GOCCs %ither NP o# the gross
selling priceDcurrent
marEet alue or under
the normal income tax
rate@ taxpa)erBs option
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Creditable 7ithholdin( Tax on !ales/ 0xchan(es or
Trans&ers o& Real Properties classi&ied as Ordinary Assets
$RR .,-.%
1. I# the seller is ha%itually engaged in the real estate 7usiness
o <elling price is less than P;,,@,,,
o <elling price is P;,,@,,, to P!m
o <elling price is a7oe P!m
1.;P
0P
;P o# gross selling
priceDcurrent marEet
alue@ whicheer is
higher
!. I# the seller is not ha7ituall) engaged in the real estate
7usiness
$.;P o# gross selling
alue@ whicheer is
higher
0. I# the seller is exempt #rom credita7le withholding tax as per
&& !5+'
0xempt
Conditions to be exempt &rom capital (ains tax o& 28 on the sale/ exchan(e/ or
disposition o& a principal residence $RR *9,--%
1. The proceeds #rom the sale@ exchange@ or disposition o# his principal residence must
7e #ull) utiliCed in acKuiring or construing a new principal residence within 1'
months. There must 7e proo#.
!. This can onl) 7e aailed o# O46I O4C% eer) 1, )ears
0. The historical cost o# his old principal residence shall 7e carried oer to the cost 7asis
o# his new residence
2. I# there is no #ull utiliCation@ he shall 7e lia7le #or the de#icienc) capital gains tax o#
the utiliCed portion
;. I# the principal residence is disposed in exchange #or a condo@ and i# it is used as his
new residence@ then he is exempt
N. The NP capital gains tax otherwise due must 7e deposited in escrow with an
authoriCed agent 7anE@ and can onl) 7e released when su##icient proo# is shown that
the proceeds hae 7een #ull) utiliCed within 1' months.
9hat is the principal residence an)wa)G .RR *#,"+++%
o It is the dwelling house@ where the hus7and or wi#e or unmarried indiidual
resides? actual occupanc) is not interrupted or a7andoned 7) temporar) a7sence
due to trael@ studies@ or worE a7road
o I# the ownership o# the land and the dwelling house 7elong to di##erent persons@
onl) the dwelling house shall 7e treated as principal residence
Pa)ment o# capital gains tax on #oreclosure o# mortgaged propert) .RR #,--%
o I# the mortgagor exercises his right o# redemption within 1 )ear F no capital gains
tax 7ecause none has 7een deried and no trans#er o# propert) was realiCed
In case o# non5redemption@ the capital gains will 7e due 7ased on the 7id price o# the
highest 7idder

Personal and Additional %xemptions
!0C. 9:. Allowance of Personal Exemption for Individual Taxpayer. -
$A% In General. 5 (or purposes o# determining the tax proided in <ection !2 .A/ o# this Title@ there shall 7e
allowed a 7asic personal exemption amounting to P;,@,,, #or each indiidual taxpa)er.
In the case o# married indiiduals where onl) one o# the spouses is deriing gross income@ onl) such spouse shall
7e allowed the personal exemption.
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$B% Additional Exemption for Dependents. 5 There shall 7e allowed an additional exemption o# twent) #ie
thousand pesos .P!;@,,,/ #or each dependent not exceeding #our .2/.
The additional exemption #or dependent shall 7e claimed 7) onl) one o# the spouses in the case o#
married indiiduals.
In the case o# legall) separated spouses@ additional exemptions ma) 7e claimed onl) 7) the spouse who
has custod) o# the child or children: Proided@ That the total amount o# additional exemptions that ma) 7e
claimed 7) 7oth shall not exceed the maximum additional exemptions herein allowed.
(or purposes o# this <u7section@ a JdependentJ means a legitimate@ illegitimate or legall) adopted child
chie#l) dependent upon and liing with the taxpa)er i# such dependent is not more than twent)5one .!1/ )ears o#
age@ unmarried and not gain#ull) emplo)ed or i# such dependent@ regardless o# age@ is incapa7le o# sel#5support
7ecause o# mental or ph)sical de#ect. .Amended 7) &A +;,2/
Personal and additional exemption &or indiidual taxpayer
Basic personal exemption #or each indiidual taxpa)er
o I# married and onl) one o# the spouses is deriing gross income@
onl) such spouse shall 7e allowed the personal exemption.
P;,@,,,
Additional exemption #or each dependent@ not exceeding #our .2/
o Claimed 7) onl) one spouse in case o# married indiiduals
o I# legall) separated@ additional exemptions claimed onl) 7)
spouse who has custod)? should not exceed maximum
additional exemptions allowed
P!;@,,, per
dependent
%xemption statutes are not retroactie. .Pensacola CI&/
"iscounts #or senior citiCens is now treated as tax deductions@ as per &A +!;$. This
sucEs #or the taxpa)er 7ecause he doesnBt get the Lpeso #or pesoM 7ene#it which he
would hae gotten i# it were considered a tax credit as 7e#ore. .-.%. *oldings Corp CI&
R CTA/
<enior CitiCens are
o &esident citiCens
o At least N, )ears old
The) are not exempt #rom income taxes unless the) are considered
minimum wage earners. .&A +++2@ which also tooE out the preious
PN,@,,, reKuirement/
Change o# status
!ec 9:. $C% Chan(e o& !tatus. 5 I# the taxpa)er marries or should hae additional dependent.s/ as de#ined
a7oe during the taxa7le )ear@ the taxpa)er ma) claim the corresponding additional exemption@ as the case ma)
7e@ in #ull #or such )ear.
I# the taxpa)er dies during the taxa7le )ear@ his estate ma) still claim the personal and additional
exemptions #or himsel# and his dependent.s/ as i# he died at the close o# such )ear.
I# the spouse or an) o# the dependents dies or i# an) o# such dependents marries@ 7ecomes twent)5one
.!1/ )ears old or 7ecomes gain#ull) emplo)ed during the taxa7le )ear@ the taxpa)er ma) still claim the same
exemptions as i# the spouse or an) o# the dependents died@ or as i# such dependents married@ 7ecame twent)5
one .!1/ )ears old or 7ecame gain#ull) emplo)ed at the close o# such )ear.
Personal exemption allowa7le to nonresident alien indiiduals
!ec. 9: $)% Personal 0xemption Allo4able to ;onresident Alien Indiidual. 5 A nonresident alien
indiidual engaged in trade@ 7usiness or in the exercise o# a pro#ession in the Philippines shall 7e entitled to a
personal exemption in the amount eKual to the exemptions allowed in the income tax law in the countr) o# which
he is a su7Hect 5 or citiCen@ to citiCens o# the Philippines not residing in such countr)@ not to exceed the amount
#ixed in this <ection as exemption #or citiCens or resident o# the Philippines: Proided@ That said nonresident alien
should #ile a true and accurate return o# the total income receied 7) him #rom all sources in the Philippines@ as
reKuired 7) this Title.
Personal 0xemptions allo4able to
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nonresident alien indiiduals
I# engaged in trade@ 7usiness or in the exercise o#
a pro#ession
%ntitled to a personal exemption in the
amount eKual to the exemptions
allowed in the income tax law o# his
countr) #or (ilipinos@ 7ut it shouldnBt
exceed the amount #ixed here #or
exemptions
I# not engaged in trade@ 7usiness or in the exercise
o# a pro#ession
4one@ 7ecause <ec !; .B/ states that
he will 7e taxed upon his entire
income.
"e 6eon states that nonresident aliens are not entitled to additional e*emptions #or
dependents. .P. 10;@ (undamentals o# Taxation !,,+/
Optional <tandard "eduction
!ec. 9# $<% Optional !tandard )eduction. 5 In lieu o# the deductions allowed under the preceding
<u7sections@ an indiidual su7Hect to tax under <ection !2@ other than a nonresident alien@ ma) elect a standard
deduction in an amount not exceeding #ort) percent .2,P/ o# his gross sales or gross receipts@ as the case ma)
7e. In the case o# a corporation su7Hect to tax under section !$.A/ and !'.A/.1/@ it ma) elect a standard
deduction in an amount not exceeding #ort) percent .2,P/ o# it gross income as de#ined in <ection 0! o# this
Code. =nless the taxpa)er signi#ies in his return his intention to elect the optional standard deduction@ he shall 7e
considered as haing aailed himsel# o# the deductions allowed in the preceding <u7sections. <uch election when
made in the return shall 7e irreoca7le #or the taxa7le )ear #or which the return is made: Proided@ That an
indiidual who is entitled to and claimed #or the optional standard shall not 7e reKuired to su7mit with his tax
return such #inancial statements otherwise reKuired under this Code: Proided@ #urther@ That except when the
Commissioner otherwise permits@ the said indiidual shall Eeep such records pertaining to his gross sales or
gross receipts@ or the said corporation shall Eeep such records pertaining to his gross income as de#ined in
<ection 0! o# this Code during the taxa7le )ear@ as ma) 7e reKuired 7) the rules and regulations promulgated 7)
the <ecretar) o# (inance@ upon recommendation o# the Commissioner.
Optional standard deduction is the deduction which an indiidual other than a non5
resident alien@ or a corporation@ su7Hect to income tax@ ma) elect in an amount not
exceeding 2,P o# his gross sales or gross receipts@ as the case ma) 7e@ or a
corporation@ in an amount not exceeding 2,P o# its gross income@ in lie o# taEing
itemiCed deductions.
The O<" ma) 7e aailed o# 7):
o A citiCen@ whether resident or non5resident
o &esident alien@ and
o Taxa7le estate and trust.
A non5resident alien cannot claim O<".
The O<" allowed to indiidual taxpa)er shall 7e a maximum o# 2,P o# gross sales or
gross receipts during the taxa7le )ear.
o I# one uses the accrual 7asis o# accounting #or his income and deductions@ the
O<" shall 7e 7ased on the gross sales during the taxa7le )ear.
o I# one uses the cash 7asis@ the O<" shall 7e 7ased on his gross receipts during
the taxa7le )ear.
o The law is speci#ic that #or indiidual taxpa)ers the 7asis o# the 2,P O<" shall 7e
gross sales or gross receipts@ not gross income@ #or which reason the Lcost o#
salesM and the Lcost o# sericesM are not allowed to 7e deducted #or purposes o#
determining the 7asis o# the O<".
o (or other indiidual taxpa)ers allowed 7) law to report their income and
deductions under a di##erent method o# accounting@ the gross sales or gross
receipts shall 7e determined in accordance with the said accepta7le method o#
accounting.
%xample:
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o <uppose a retailer o# goods@ an indiidual@ whose accounting method is under the
accrual 7asis has a gross sales o# P1m with a cost o# sales amounting to P',,E.
the computation o# the O<" shall 7e determined as #ollows:
Gross <ales P1@,,,@,,,
5ess! 6o7S 88888888888888
Basis o# the O<" P1@,,,@,,,
* 3S( Rate 1ma*2 .2,
O<" Amount P2,,@,,,
I# the taxpa)er opts to use the O<" in lieu o# the itemiCed deductions allowed
under <ec 02 o# the Tax Code@ his net taxa7le income shall 7e as #ollows:
Gross <ales P1@,,,@,,,
5ess! 6o7S 888888888888
Gross <alesDGross InomeP1@,,,@,,,
5ess! 3S( 1ma*2 2,,@,,,
4et Income PN,,@,,,
Premium pa)ments on health andDor hospitaliCation insurance
!ec. 9# $5% Premium Payments on Health andor Hospitali!ation Insurance of an Individual
Taxpayer. 8 The amount o# premiums not to exceed Two thousand #our hundred pesos .P!@2,,/ per #amil) or
Two hundred pesos .P!,,/ a month paid during the taxa7le )ear #or health andDor hospitaliCation insurance
taEen 7) the taxpa)er #or himsel#@ including his #amil)@ shall 7e allowed as a deduction #rom his gross income:
+rovided, That said #amil) has a gross income o# not more than Two hundred #i#t) thousand pesos .P!;,@,,,/ #or
the taxa7le )ear: +rovided, finally@ That in the case o# married taxpa)ers@ onl) the spouse claiming the additional
exemption #or dependents shall 7e entitled to this deduction.
The taxpa)er is allowed a deduction o# P!@2,,D#amil) or P!,,Dmonth #or health andDor
hospitaliCation insurance premiums@ proided:
o <aid #amil)Bs gross income is not more than P!;,@,,, #or the taxa7le )ear.
I# married@ onl) the spouse claiming the additional exemption #or dependents can aail
o# this.
%xclusions and deductions .discussion #rom "e 6eonBs 7ooE@ see also <ec N15N2 o# && !/
%xclusions are incomes that are exempt #rom the tax. The) are not to 7e included in the
tax return unless in#ormation regarding it is speci#icall) called #or.
o %xamples:
6i#e insurance proceeds paid to 7ene#iciaries upon the death o# the
insured.
>alue o# the propert) acKuired 7) inheritance or donation@ 7ecause it is
su7Hect to estate or donorBs tax.
&etirement 7ene#its@ pensions@ etc@ receied 7) goernment o##icials and
emplo)ees #rom the G<I< and <<< in recognition o# their serices. <o with
retirement 7ene#its o# priate #irms@ under certain conditions.
PriCes and awards made primaril) in recognition o# religious@ charita7le@
scienti#ic@ educational@ artistic@ etc@ competitions and tournaments.
Christmas 7onus@ 10
th
month pa)@ productiit) incenties@ and other
7ene#its receied up to a max o# P0,@,,,.
Gains #rom the sale or retirement o# 7onds or other certi#icates o#
inde7tedness with a maturit) o# more than ; )ears.
"eductions are items or amounts which the law allows to 7e deducted under certain
conditions #rom the gross income o# a taxpa)er in order to arrie at the taxa7le income.
Both reduce actual gross income although exclusions are not included in the income tax
return.
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<ome general principals goerning deductions include:
o The taxpa)er seeEing a deduction must point to some speci#ic proision o# the
statute authoriCing the deduction? and
o *e must 7e a7le to proe that he is entitled to the deduction authoriCed or
allowed.
The) are allowed onl) where there is a clear proision in the statute #or the
deduction claimed.
Taxa7le gross income is a##ected 7) exclusions 7ecause the latter are omitted #rom the
#ormer and are not reported on the income tax return 7ut is not a##ected 7) deductions
7ecause the) are su7tracted a#ter gross income is determined and are reported on the
return.
3inds o# deductions:
1. "eductions #rom compensation income.
!. "eductions #rom 7usinessDpro#essional income.
0. "eductions #rom corporate income.
2. <pecial deductions
;. "eductions allowed 7) special laws.
Tax on non5resident aliens
4on5resident aliens engaged in 7usiness in the Philippines
!0C. ":. Tax on "onresident Alien Individual. 8
$A% "onresident Alien En#a#ed in trade or $usiness %ithin the Philippines. 8
.1/ "n 7eneral. 5 A nonresident alien indiidual engaged in trade or 7usiness in the Philippines shall 7e su7Hect to
an income tax in the same manner as an indiidual citiCen and a resident alien indiidual@ on taxa7le income
receied #rom all sources within the Philippines. A nonresident alien indiidual who shall come to the Philippines
and sta) therein #or an aggregate period o# more than one hundred eight) .1',/ da)s during an) calendar )ear
shall 7e deemed a Qnonresident alien doing 7usiness in the PhilippinesQ. <ection !! .G/ o# this Code
notwithstanding.
.!/ Cash andDor Propert) "iidends #rom a "omestic Corporation or 1oint <tocE Compan)@ or Insurance or
-utual (und Compan) or &egional Operating *eadKuarters or -ultinational Compan)@ or <hare in the
"istri7uta7le 4et Income o# a Partnership .%xcept a General Pro#essional Partnership/@ 1oint Account@ 1oint
>enture Taxa7le as a Corporation or Association.@ Interests@ &o)alties@ PriCes@ and Other 9innings. 5 Cash andDor
propert) diidends #rom a domestic corporation@ or #rom a Hoint stocE compan)@ or #rom an insurance or mutual
#und compan) or #rom a regional operating headKuarters o# multinational compan)@ or the share o# a nonresident
alien indiidual in the distri7uta7le net income a#ter tax o# a partnership .except a general pro#essional
partnership/ o# which he is a partner@ or the share o# a nonresident alien indiidual in the net income a#ter tax o#
an association@ a Hoint account@ or a Hoint enture taxa7le as a corporation o# which he is a mem7er or a co5
enturer? interests? ro)alties .in an) #orm/? and priCes .except priCes amounting to Ten thousand pesos
.P1,@,,,/ or less which shall 7e su7Hect to tax under <u7section .B/.1/ o# <ection !2/ and other winnings
.except Philippine Charit) <weepstaEes and 6otto winnings/? shall 7e su7Hect to an income tax o# twent) percent
.!,P/ on the total amount thereo#: +rovided, however, that ro)alties on 7ooEs as well as other literar) worEs@
and ro)alties on musical compositions shall 7e su7Hect to a #inal tax o# ten percent .1,P/ on the total amount
thereo#: +rovided, further@ That cinematographic #ilms and similar worEs shall 7e su7Hect to the tax proided
under <ection !' o# this Code: +rovided, furthermore@ That interest income #rom long5term deposit or inestment
in the #orm o# saings@ common or indiidual trust #unds@ deposit su7stitutes@ inestment management accounts
and other inestments eidenced 7) certi#icates in such #orm prescri7ed 7) the BangEo <entral ng Pilipinas .B<P/
shall 7e exempt #rom the tax imposed under this <u7section: +rovided, finally, that should the holder o# the
certi#icate pre5terminate the deposit or inestment 7e#ore the #i#th .;
th
/ )ear@ a #inal tax shall 7e imposed on the
entire income and shall 7e deducted and withheld 7) the depositor) 7anE #rom the proceeds o# the long5term
deposit or inestment certi#icate 7ased on the remaining maturit) thereo#:
, (our .2/ )ears to less than #ie .;/ )ears 5 ;P?
, Three .0/ )ears to less than #our .2/ )ears 5 1!P? and
, 6ess than three .0/ )ears 5 !,P.
.0/ 6apital 7ains. 5 Capital gains realiCed #rom sale@ 7arter or exchange o# shares o# stocE in domestic
corporations not traded through the local stocE exchange@ and real properties shall 7e su7Hect to the tax
prescri7ed under <u7sections .C/ and ."/ o# <ection !2.
A nonresident alien engaged in trade or 7usiness in the Philippines is su7Hect to the
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same income tax rate as citiCens and resident aliens@ on taxa7le income receied #rom
all sources within the Philippines.
A nonresident alien who sta)s in the Philippines #or an aggregate period o# more than
1', da)s shall 7e deemed as nonresident alien doing 7usiness in the Philippines.
Tax Rate on Certain Passie Income on ;onresident Aliens
0n(a(ed in Trade/ Business or 0xercisin( a Pro&ession
'inal Tax
1. Interest under the expanded #oreign currenc) deposit s)stem exempt
!,P
9hat a7out diidends #rom #oreign corpsG %xempt. 4onresident
aliens are not taxed worldwide.
!,P .compare
with citiCens and
resident aliens/
'. Gross income #rom cinematographic #ilms R similar worEs !;P
+. Interest on long5term deposit or inestment in 7anEs .with maturit) o#
; )ears or more/
exempt
Tax Rate on Capital Gains $same 4ith residents/ and
nonresident aliens not en(a(ed in business%
!. On sale o# shares o# stocE o# a domestic corporation 034
a capital asset@
asset NP o# the gross selling
whicheer is higher
4on5resident aliens not engaged in 7usiness in the Philippines
!ec. ": $B% "onresident Alien Individual "ot En#a#ed in Trade or $usiness %ithin the Philippines. 8
There shall 7e leied@ collected and paid #or each taxa7le )ear upon the entire income receied #rom all sources
within the Philippines 7) eer) nonresident alien indiidual not engaged in trade or 7usiness within the
Philippines as interest@ cash andDor propert) diidends@ rents@ salaries@ wages@ premiums@ annuities@
compensation@ remuneration@ emoluments@ or other #ixed or determina7le annual or periodic or casual gains@
pro#its@ and income@ and capital gains@ a tax eKual to twent)5#ie percent .!;P/ o# such income. Capital gains
realiCed 7) a nonresident alien indiidual not engaged in trade or 7usiness in the Philippines #rom the sale o#
shares o# stocE in an) domestic corporation and real propert) shall 7e su7Hect to the income tax prescri7ed under
<u7sections .C/ and ."/ o# <ection !2.
4onresident aliens not engaged in 7usiness are taxed !;P o# their entire income within
the Philippines.
That means the) hae no deductions8
Their capital gains are the same with nonresident aliens engaged in 7usiness .see ta7le
a7oe8/
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<pecial aliens
!ec. ": $C% Alien Individual Employed &y 'e#ional or Area Head(uarters and 'e#ional )peratin#
Head(uarters of *ultinational +ompanies. 5 There shall 7e leied@ collected and paid #or each taxa7le )ear
upon the gross income receied 7) eer) alien indiidual emplo)ed 7) regional or area headKuarters and
regional operating headKuarters esta7lished in the Philippines 7) multinational companies as salaries@ wages@
annuities@ compensation@ remuneration and other emoluments@ such as honoraria and allowances@ #rom such
regional or area headKuarters and regional operating headKuarters@ a tax eKual to #i#teen percent .1;P/ o# such
gross income: +rovided, however@ That the same tax treatment shall appl) to (ilipinos emplo)ed and occup)ing
the same position as those o# aliens emplo)ed 7) these multinational companies. (or purposes o# this Chapter@
the term Qmultinational compan)Q means a #oreign #irm or entit) engaged in international trade with a##iliates or
su7sidiaries or 7ranch o##ices in the Asia5Paci#ic &egion and other #oreign marEets.
."/ Alien "ndividual 9mployed %y 3ffshore Baning :nits. 5 There shall 7e leied@ collected and paid #or each
taxa7le )ear upon the gross income receied 7) eer) alien indiidual emplo)ed 7) o##shore 7anEing units
esta7lished in the Philippines as salaries@ wages@ annuities@ compensation@ remuneration and other emoluments@
such as honoraria and allowances@ #rom such o##5shore 7anEing units@ a tax eKual to #i#teen percent .1;P/ o#
such gross income: +rovided, however, That the same tax treatment shall appl) to (ilipinos emplo)ed and
occup)ing the same positions as those o# aliens emplo)ed 7) these o##shore 7anEing units.
.%/ Alien "ndividual 9mployed %y +etroleum Service 6ontractor and Su%contractor. 5 An Alien indiidual who is a
permanent resident o# a #oreign countr) 7ut who is emplo)ed and assigned in the Philippines 7) a #oreign serice
contractor or 7) a #oreign serice su7contractor engaged in petroleum operations in the Philippines shall 7e lia7le
to a tax o# #i#teen percent .1;P/ o# the salaries@ wages@ annuities@ compensation@ remuneration and other
emoluments@ such as honoraria and allowances@ receied #rom such contractor or su7contractor: +rovided,
however, That the same tax treatment shall appl) to a (ilipino emplo)ed and occup)ing the same position as an
alien emplo)ed 7) petroleum serice contractor and su7contractor.
An) income earned #rom all other sources within the Philippines 7) the alien emplo)ees re#erred to under
<u7sections .C/@ ."/ and .%/ hereo# shall 7e su7Hect to the pertinent income tax@ as the case ma) 7e@ imposed
under this Code.
!pecial Aliens
1. %mplo)ed 7) regional or area headKuarters R regional
operating headKuarters esta7lished in the Philippines 7)
multinational?
1;P on gross income
!. %mplo)ed 7) o##shore 7anEing units 1;P on gross income
0. Permanent resident o# a #oreign countr) 7ut who is emplo)ed
and assigned in the Philippines 7) a #oreign serice contractor or
7) a #oreign serice su7contractor engaged in petroleum
operations in the Philippines
1;P
Proided the same tax shall appl) to (ilipinos emplo)ed and occup)ing the same position
as these aliens.
These appl) onl) to positions o# a highly technical or highly managerial nature. .Atty.
Montero2
All income earned #rom all other sources within the Philippines 7) the special alien
emplo)ees shall 7e su7Hect to the pertinent income tax imposed 7) the Code.
Tips on answering
Thought process in answering pro7lems:
1. Is this incomeG I# not@ then itBs not reall) a income tax pro7lem.
!. 9hoBs the taxpa)erG And whatBs the sourceG &e#er to <ec !08
0. 9hatBs the speci#ic rateG <ee sec !25!;8
(or example@ what is the tax rate o# on income deried #rom diidends #rom #oreign
corporations #or 1. CitiCens !. &esident aliens and 0. 4onresident aliens engaged in trade or
7usinessG
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1. CitiCens
a. Ies@ itBs income.
7. The source is outside the Philippines. Are the) lia7le #or sources #rom outside
the PhilippinesG Ies8 CitiCens are taxed worldwide8
c. 9hatBs the speci#ic tax rateG *mmO since itBs not in an) o# the charts@ 7ut
the) still hae to 7e taxed@ then the income the) derie #rom diidends #rom
#oreign corporations will 7e considered in computing the tax rate 7ased on the
tax calendar o# <ec !2.a/
!. &esident aliens
a. Ies@ itBs income.
7. The source is outside the Philippines. Are the) lia7le #or sources #rom outside
the PhilippinesG 4o8 The) arenBt taxed worldwide.
0. 4onresident aliens engaged in trade or 7usiness
a. Ies@ m) dear@ itBs income.
7. The source is outside the Philippines. Are the) lia7le #or source #rom outside
the PhilippinesG 4o8 The) arenBt taxed worldwide either.
). )e&initions
<ection !!@ Tax Code
"e#inition o# corporations
!ec "" $B% The term JcorporationJ shall include partnerships@ no matter how created or organiCed@ Hoint5stocE
companies@ Hoint accounts .cuentas en participacion/@ association@ or insurance companies@ 7ut does not include
general pro#essional partnerships and a Hoint enture or consortium #ormed #or the purpose o# undertaEing
construction proHects or engaging in petroleum@ coal@ geothermal and other energ) operations pursuant to an
operating consortium agreement under a serice contract with the Goernment. JGeneral pro#essional
partnershipsJ are partnerships #ormed 7) persons #or the sole purpose o# exercising their common pro#ession@ no
part o# the income o# which is deried #rom engaging in an) trade or 7usiness.
Corporations include:
o Partnerships@ no matter how created or organiCed
o 1oint5stocE companies
o 1oint accounts
o Associations
o Insurance companies
It does not include
o General pro#essional partnerships?
o 1oint enture or consortium #ormed #or the purpose o# undertaEing construction
proHects@ or engaging in petroleum@ coal@ geothermal and other energ) operations
pursuant to an operating or consortium agreement under a serice contract with
the goernment.
&emem7er )our partnership lessons8 .A(I<CO and Pascual cases/
All co5owernships are not deemed unregistered partnerships..O7illos CI&/
The moment inheritance shares are used as part o# the common assets to 7e used in
maEing pro#its@ it is considered part o# the taxa7le income o# an unregistered
partnership. .Ona CI&/
&eKuisites o# a 1>:
1. Contri7ution 7) each part)
!. Pro#its are shared among the parties
0. There is Hoint right o# mutual control oer the su7Hect matter
2. There is a single 7usiness transaction rather than a general or continuous transaction
.BI& &uling 01$5+!@ in this case@ the #irst agreement o# the two parties to construct the
N$;, Bldg was not taxa7le 7ecause the) had not deried incomeDpro#its #rom it. the
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construction o# the 7uilding was mere return o# the capital which the) shelled out.
*oweer@ once the two corporations were placed under one sole management to operate
the 7usiness a##airs o# the two@ the 1> was taxa7le separate #rom the two corporations
comprising it. The distri7ution 7) the 1> to the two constituent corporations was not
taxa7le 7ecause it was considered intra5corporate diidends./
0. Income Tax Rates
!0C. "=. 'ates of Income tax on Domestic +orporations. -
.A/ In General. 5 %xcept as otherwise proided in this Code@ an income tax o# thirt)5#ie percent .0;P/ is here7)
imposed upon the taxa7le income deried during each taxa7le )ear #rom all sources within and without the
Philippines 7) eer) corporation@ as de#ined in <ection !!.B/ o# this Code and taxa7le under this Title as a
corporation@ organiCed in@ or existing under the laws o# the Philippines: Proided@ That e##ectie 1anuar) 1@ !,,+@
the rate o# income tax shall 7e thirt) percent .0,P/.
In the case o# corporations adopting the #iscal5)ear accounting period@ the taxa7le income shall 7e computed
without regard to the speci#ic date when speci#ic sales@ purchases and other transactions occur. Their income and
expenses #or the #iscal )ear shall 7e deemed to hae 7een earned and spent eKuall) #or each month o# the
period.
The corporate income tax rates shall 7e applied on the amount computed 7) multipl)ing the num7er o# months
coered 7) the new rates within the #iscal )ear 7) the taxa7le income o# the corporation #or the period@ diided
7) twele.
Proided@ #urther@ That the President@ upon the recommendation o# the <ecretar) o# (inance@ ma) e##ectie
1anuar) 1@ !,,,@ allow corporations the option to 7e taxed at #i#teen percent .1;P/ o# gross income as de#ined
herein@ a#ter the #ollowing conditions hae 7een satis#ied:
.1/ A tax e##ort ratio o# twent) percent .!,P/ o# Gross 4ational Product .G4P/?
.!/ A ratio o# #ort) percent .2,P/ o# income tax collection to total tax reenues?
.0/ A >AT tax e##ort o# #our percent .2P/ o# G4P? and
.2/ A ,.+ percent .,.+P/ ratio o# the Consolidated Pu7lic <ector (inancial Position .CP<(P/ to G4P.
The option to 7e taxed 7ased on gross income shall 7e aaila7le onl) to #irms whose ratio o# cost o# sales
to gross sales or receipts #rom all sources does not exceed #i#t)5#ie percent .;;P/.
The election o# the gross income tax option 7) the corporation shall 7e irreoca7le #or three .0/
consecutie taxa7le )ears during which the corporation is Kuali#ied under the scheme.
(or purposes o# this <ection@ the term Qgross incomeQ deried #rom 7usiness shall 7e eKuialent to gross
sales less sales returns@ discounts and allowances and cost o# goods sold. JCost o# goods soldJ shall include all
7usiness expenses directl) incurred to produce the merchandise to 7ring them to their present location and use.
(or a trading or merchandising concern@ Jcost o# goodsJ sold shall include the inoice cost o# the goods
sold@ plus import duties@ #reight in transporting the goods to the place where the goods are actuall) sold@
including insurance while the goods are in transit.
(or a manu#acturing concern@ Jcost o# goods manu#actured and soldJ shall include all costs o# production
o# #inished goods@ such as raw materials used@ direct la7or and manu#acturing oerhead@ #reight cost@ insurance
premiums and other costs incurred to 7ring the raw materials to the #actor) or warehouse.
In the case o# taxpa)ers engaged in the sale o# serice@ Qgross incomeQ means gross receipts less sales
returns@ allowances and discounts.
Tax rate o# "omestic Corporations 0,P o# taxa7le income #rom all sources within and
outside the Philippines@ or
!P o# gross income i# -CIT applies@ or
1;P o# gross income if the #ollowing conditions
are met:
1. tax e##ort ratio o# !,P o# G4P
!. ratio o# 2,P o# income tax collection to
total tax reenues
0. >AT tax e##ort o# 2P o# G4P? and
2. .+P ratio o# the Consolidated Pu7lic <ector
(inancial Position .CP<(P/ to G4P .this last
one has )et to 7e implemented/
Option to 7e taxed 7ased on gross income shall 7e aaila7le onl) to #irms whose ratio o#
cost o# sales to gross sales or receipts #rom all sources does not exceed ;;P
%lection o# the gross income tax option 7) the corporation shall 7e irreoca7le #or
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0 consecutie taxa7le )ears
"omestic corporations are su7Hect to an) or some o# the #ollowing:
Capital gains tax
(inal tax on passie income
4ormal tax
-inimum corporate income tax .-CIT/
Gross income tax .GIT/
Improperl) accumulated earnings tax .IA%T/
Gross Income Computation
Gross <ales
6ess: <ales &eturns
"iscounts
Allowances
CoG< .all 7usiness expenses directl) incurred to produce the merchandise and 7ring
them to their present location or use/
Total Gross Income
CoG! &or a Tradin( or 5erchandise Concern
Inoice cost o# goods sold
Import duties
(reight in transporting the goods to the place where the goods are actuall) sold
Insurance while the goods are in transit
CoG! &or a 5anu&acturin( Concern
All costs o# production o# #inished goods such as raw materials@ direct la7or R manu#acturing
oerhead
(reight cost
Insurance premiums
Other costs incurred to 7ring the raw materials to the #actor) or warehouse
Gross Income Computation &or a !erice Concern
Gross <ales
6ess: <ales &eturns
"iscounts
Allowances
Cost o# <erices .all direct costs R expenses necessaril) incurred to proide the
serices reKuired 7) the customers R clients including:
<alaries R emplo)ee 7ene#its o# personnel@ consultants R specialists
directl) rendering the serice
Cost o# #acilities directl) utiliCed in proiding the serice such as
depreciation or rental o# eKuipment use R cost o# supplies
I# itBs a 7anE@ interest expense is included
Total Gross income o# a serice concern
'. Proprietary 0ducational Institutions and 3ospitals
.B/ Proprietar) %ducational Institutions and *ospitals. 5 Proprietar) educational institutions and hospitals which
are nonpro#it shall pa) a tax o# ten percent .1,P/ on their taxa7le income except those coered 7) <u7section
."/ hereo#: Proided@ that i# the gross income #rom unrelated trade@ 7usiness or other actiit) exceeds #i#t)
percent .;,P/ o# the total gross income deried 7) such educational institutions or hospitals #rom all sources@
the tax prescri7ed in <u7section .A/ hereo# shall 7e imposed on the entire taxa7le income. (or purposes o# this
<u7section@ the term Qunrelated trade@ 7usiness or other actiit)Q means an) trade@ 7usiness or other actiit)@ the
conduct o# which is not su7stantiall) related to the exercise or per#ormance 7) such educational institution or
hospital o# its primar) purpose or #unction. A JProprietar) educational institutionJ is an) priate school
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maintained and administered 7) priate indiiduals or groups with an issued permit to operate #rom the
"epartment o# %ducation@ Culture and <ports ."%C</@ or the Commission on *igher %ducation .C*%"/@ or the
Technical %ducation and <Eills "eelopment Authorit) .T%<"A/@ as the case ma) 7e@ in accordance with existing
laws and regulations.
Proprietar) educational institution is:
o An) priate school maintained R administered 7) priate indiiduals or groups
o 9ith an issued permit to operate #rom the "%C< or C*%" or T%<"A
Tax rate o# proprietar) educational
institutions and hospitals
1,P on their taxa7le income .except #or passie
income/@ or
0,P on their entire taxa7le income i# the gross
income #rom unrelated trade@ 7usiness or other
actiit) exceeds ;,P o# the total gross income o#
the institution
=nrelated trade@ 7usiness or other actiit) means
o An) trade@ 7usiness or other actiit)
o The conduct o# which is not su%stantially related to the exercise or per#ormance
7) such its institution o# its primar) purpose or #unction.
(or non5stocE@ non5pro#it educational institutions@ all reenues use actuall)@ directl) and
exclusiel) #or educational purposes are exempt.
o Their exemption re#ers onl) to reenues deried #rom assets used actuall)@
directl) and exclusiel) #or educational purposes.
o Income #rom ca#eterias@ canteens R 7ooEstores are also exempt i# the) are
owned R operated 7) the educational institution and are located within the school
premises.
o *oweer@ the) shall 7e su7Hect to internal reenue taxes on income #rom trade@
7usiness or other actiit)@ the conduct o# which is not related to the exercise or
per#ormance 7) such educational institutions o# their educational purposes or
#unctions@ i. e. rental pa)ment #rom their 7uildingDpremises. .RR =2,"++9%
(or non5stocE@ non5pro#it corporations who are exempt@ the) are still lia7le #or taxes on:
o Income deried #rom an) o# their real properties .rental pa)ment #orm their
7uilding premises/
o An) actiit) conducted #rom pro#it regardless o# disposition thereo#
o Interest income #rom an) 7anE deposits or )ield on deposit su7stitutes .#inal tax
o# !,P/
o I# its #oreign currenc) deposit@ #inal tax o# $.;P ."ep Order 12+5+;@ 1++;/
o The) shall also 7e withholding agents #or their emplo)eeBs compensation income
su7Hect to withholding tax .RR =2,"++9%
(or priate educational institutions@ the) are exempt #rom >AT@ 7ut the) must 7e
accredited with either "%C< or C*%".
o *oweer@ income deried #rom trade@ 7usiness or other actiit) is still taxa7le.
o Their 7anE deposits and #oreign currenc) deposits are exempt #rom withholding
taxes 7ut the) must show proo# that such income is used to #und proposed
proHects #or their institutionBs improement.
o The) shall also 7e the withholding agents #or their emplo)eeBs compensation
income su7Hect to withholding tax.
G. GOCCs
!ec. "= $C% Government-owned or +ontrolled-+orporations, A#encies or Instrumentalities. 5 The
proisions o# existing special or general laws to the contrar) notwithstanding@ all corporations@ agencies@ or
instrumentalities owned or controlled 7) the Goernment@ except the Goernment <erice Insurance <)stem
.G<I</@ the <ocial <ecurit) <)stem .<<</@ the Philippine *ealth Insurance Corporation .P*IC/@ and the Philippine
Charit) <weepstaEes O##ice .PC<O/@ shall pa) such rate o# tax upon their taxa7le income as are imposed 7) this
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<ection upon corporations or associations engaged in s similar 7usiness@ industr)@ or actiit).
GOCCs are taxed on the same rate upon their taxa7le income upon corporations or
associations engaged in similar 7usiness@ industr)@ or actiit).
o %xempt GOCCs:
G<I<
<<<
P*IC
PC<O
As per &A +00$@ PAGCO& was deleted #rom the list o# exempt GOCCs.
3. Passie Income
!ec. "= $)% 'ates of Tax on +ertain Passive Incomes. -
.1/ "nterest from (eposits and ;ield or any other Monetary Benefit from (eposit Su%stitutes and from 4rust -unds
and Similar Arrangements, and Royalties. 5 A #inal tax at the rate o# twent) percent .!,P/ is here7) imposed
upon the amount o# interest on currenc) 7anE deposit and )ield or an) other monetar) 7ene#it #rom deposit
su7stitutes and #rom trust #unds and similar arrangements receied 7) domestic corporations@ and ro)alties@
deried #rom sources within the Philippines: +rovided, however, That interest income deried 7) a domestic
corporation #rom a depositor) 7anE under the expanded #oreign currenc) deposit s)stem shall 7e su7Hect to a #inal
income tax at the rate o# seen and one5hal# percent .$ 1D!P/ o# such interest income.
.!/ 6apital 7ains from the Sale of Shares of Stoc 0ot 4raded in the Stoc 9*change. 8 A #inal tax at the rates
prescri7ed 7elow shall 7e imposed on net capital gains realiCed during the taxa7le )ear #rom the sale@ exchange or
other disposition o# shares o# stocE in a domestic corporation except shares sold or disposed o# through the stocE
exchange:
4ot oer P1,,@,,,OOOOOOOOO..... ;P
Amount in excess o# P1,,@,,,OOOOO.. 1,P
.0/ 4a* on "ncome (erived under the 9*panded -oreign 6urrency (eposit System. - Income deried 7) a
depositor) 7anE under the expanded #oreign currenc) deposit s)stem #rom #oreign currenc) transactions with
nonresidents@ o##shore 7anEing units in the Philippines@ local commercial 7anEs including 7ranches o# #oreign 7anEs
that ma) 7e authoriCed 7) the BangEo <entral ng Pilipinas .B<P/ to transact 7usiness with #oreign currenc)
deposit s)stem shall 7e exempt #rom all taxes@ except net income #rom such transactions as ma) 7e speci#ied 7)
the <ecretar) o# (inance@ upon recommendation 7) the -onetar) Board to 7e su7Hect to the regular income tax
pa)a7le 7) 7anEs: +rovided, however, That interest income #rom #oreign currenc) loans granted 7) such
depositor) 7anEs under said expanded s)stem to residents other than o##shore 7anEing units in the Philippines or
other depositor) 7anEs under the expanded s)stem shall 7e su7Hect to a #inal tax at the rate o# ten percent .1,P/.
An) income o# nonresidents@ whether indiiduals or corporations@ #rom transactions with depositor) 7anEs under
the expanded s)stem shall 7e exempt #rom income tax
.2/ "ntercorporate (ividends. 5 "iidends receied 7) a domestic corporation #rom another domestic corporation
shall not 7e su7Hect to tax.
.;/ 6apital 7ains Reali&ed from the Sale, 9*change or (isposition of 5ands and'or Buildings. 8 A #inal tax o# six
percent .NP/ is here7) imposed on the gain presumed to hae 7een realiCed on the sale@ exchange or disposition
o# lands andDor 7uildings which are not actuall) used in the 7usiness o# a corporation and are treated as capital
assets@ 7ased on the gross selling price o# #air marEet alue as determined in accordance with <ection N.%/ o# this
Code@ whicheer is higher@ o# such lands andDor 7uildings.
Tax Rate on Passie Income o& )omestic Corporations 'inal Tax
1. Interest under the expanded #oreign currenc) deposit s)stem $.;P
!. &o)alt) o# all t)pes within the Philippines
o &o)alt) #rom a7roadG %nters the taxa7le income 0,P tax rate
!,P
!,P
2. "iidend #rom domestic corporations .inter5corporate diidend/ exempt
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Tax Rate on Capital Gains $same as indiiduals%
a capital asset@
asset NP o# the gross selling
whicheer is higher
Tax Rate o& BA;>! on Income )eried under the 0xpanded 'C)
!ystem
'inal Tax
1. Income deried 7) a depositor) BA43 #rom #oreign currenc)
transactions with non5residents@ OB=s@ etc
exempt
!. Interest income #rom #oreign currenc) loans granted 7) a 7anE to
residents other than OB=s
1,P
Income o# non5residents .indiiduals or corporations/ #rom transactions with depositor)
7anE under the expanded (C" s)stem are exempt.
9hat are deposit su7stitutesG
.I/ The term Jdeposit su7stitutesJ shall mean an alternatie #rom o# o7taining #unds #rom the pu7lic .the term
Qpu7licQ means 7orrowing #rom twent) .!,/ or more indiidual or corporate lenders at an) one time/ other than
deposits@ through the issuance@ endorsement@ or acceptance o# de7t instruments #or the 7orrowers own account@
#or the purpose o# relending or purchasing o# receia7les and other o7ligations@ or #inancing their own needs or
the needs o# their agent or dealer. These instruments ma) include@ 7ut need not 7e limited to 7anEersQ
acceptances@ promissor) notes@ repurchase agreements@ including reerse repurchase agreements entered into
7) and 7etween the BangEo <entral ng Pilipinas .B<P/ and an) authoriCed agent 7anE@ certi#icates o# assignment
or participation and similar instruments with recourse: Proided@ howeer@ That de7t instruments issued #or
inter7anE call loans with maturit) o# not more than #ie .;/ da)s to coer de#icienc) in reseres against deposit
lia7ilities@ including those 7etween or among 7anEs and Kuasi57anEs@ shall not 7e considered as deposit
su7stitute de7t instruments.
A deposit su7stitute is a means o# 7orrowing mone) #rom the pu7lic .!, or more
indiidual or corporate lenders/ other than 7) wa) o# deposit with 7anEs through the
issuance o# de7t instruments.
<ale o# shares
Tax Rate on Income &rom !ale/ Barter/ 0xchan(e or
other )isposition o& !hares o& !toc1 $RR 2,"++.%
I# shares o# stocE are listed and traded through the local
stocE exchange
S o# 1P .or .,,;P/ o# the
gross selling price or gross
alue in mone) o# the
shares o# stocE
I# shares not traded through the local stocE exchange
(C"=
Income o# non5residents .indiiduals or corporations/ #rom transactions with depositor)
7anE under the expanded (C" s)stem are exempt.
Intercorporate diidends
"iidends receied 7) a domestic corporation #rom another domestic corporation shall
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not 7e su7Hect to tax.
o 9h)G 6aw assumes that the diidends receied will 7e inHected to the capital@
which will eentuall) 7e taxed when the corporation gets income #rom the use o#
the capital.
<ale o# realt)
'inal Tax Rate on !ales/ 0xchan(es/ or Trans&ers or Real
Properties Classi&ied as Capital Assets $RR .,-.%
<ale o# real propert) in the Philippines NP o# the gross selling
price@ or the current
marEet alue at the time
o# sale@ whicheer is
higher
I# sale was made to the goernment or to GOCCs %ither NP o# the gross
selling priceDcurrent
marEet alue or under
the normal income tax
rate@ taxpa)erBs option
Creditable 7ithholdin( Tax on !ales/ 0xchan(es or
Trans&ers o& Real Properties classi&ied as Ordinary Assets
$RR .,-.%
1. I# the seller is ha%itually engaged in the real estate 7usiness
o <elling price is less than P;,,@,,,
o <elling price is P;,,@,,, to P!m
o <elling price is a7oe P!m
1.;P
0P
;P o# gross selling
alue@ whicheer is
higher
!. I# the seller is not ha7ituall) engaged in the real estate
7usiness
$.;P o# gross selling
alue@ whicheer is
higher
0. I# the seller is exempt #rom credita7le withholding tax as per
&& !5+'
0xempt
I# the mortgagor exercises his right o# redemption within 1 )ear@ no capital gains tax.
highest 7idder. .&& 25++/
I. 5inimum Corporate Income Tax $5CIT%
!ec "= $0% *inimum +orporate Income Tax on Domestic +orporations. .
.1/ "mposition of 4a*. 5 A minimum corporate income tax o# two percent .!P, o# the gross income as o# the end
o# the taxa7le )ear@ as de#ined herein@ is here7) imposed on a corporation taxa7le under this Title@ 7eginning on
the #ourth taxa7le )ear immediatel) #ollowing the )ear in which such corporation commenced its 7usiness
operations@ when the minimum income tax is greater than the tax computed under <u7section .A/ o# this <ection
#or the taxa7le )ear.
.!/ 6arry -orward of 9*cess Minimum 4a*. 5 An) excess o# the minimum corporate income tax oer the normal
income tax as computed under <u7section .A/ o# this <ection shall 7e carried #orward and credited against the
normal income tax #or the three .0/ immediatel) succeeding taxa7le )ears.
.0/ Relief from the Minimum 6orporate "ncome 4a* :nder 6ertain 6onditions. 5 The <ecretar) o# (inance is
here7) authoriCed to suspend the imposition o# the minimum corporate income tax on an) corporation which
su##ers losses on account o# prolonged la7or dispute@ or 7ecause o# #orce maHeure@ or 7ecause o# legitimate
7usiness reerses.
The <ecretar) o# (inance is here7) authoriCed to promulgate@ upon recommendation o# the Commissioner@ the
necessar) rules and regulation that shall de#ine the terms and conditions under which he ma) suspend the
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imposition o# the minimum corporate income tax in a meritorious case.
.2/ 7ross "ncome (efined. 5 (or purposes o# appl)ing the minimum corporate income tax proided under
<u7section .%/ hereo#@ the term Qgross incomeQ shall mean gross sales less sales returns@ discounts and
allowances and cost o# goods sold. /6ost of goods sold< shall include all 7usiness expenses directl) incurred to
produce the merchandise to 7ring them to their present location and use.
(or a trading or merchandising concern@ /cost of goods sold< shall include the inoice cost o# the goods sold@ plus
import duties@ #reight in transporting the goods to the place where the goods are actuall) sold including
insurance while the goods are in transit.
(or a manu#acturing concern@ cost o# /goods manufactured and sold/ shall include all costs o# production o#
#inished goods@ such as raw materials used@ direct la7or and manu#acturing oerhead@ #reight cost@ insurance
premiums and other costs incurred to 7ring the raw materials to the #actor) or warehouse.
In the case o# taxpa)ers engaged in the sale o# serice@ Qgross incomeQ means gross receipts less sales returns@
allowances@ discounts and cost o# serices. /6ost of services/ shall mean all direct costs and expenses necessaril)
incurred to proide the serices reKuired 7) the customers and clients including .A/ salaries and emplo)ee
7ene#its o# personnel@ consultants and specialists directl) rendering the serice and .B/ cost o# #acilities directl)
utiliCed in proiding the serice such as depreciation or rental o# eKuipment used and cost o# supplies: +rovided,
however, That in the case o# 7anEs@ /cost of services/ shall include interest expense.
Beginning with the #ourth )ear o# operations@ a domestic corporation is taxed 7)
whicheer is higher:
o 4ormal tax o# 0,P@ or
o -inimum corporate income tax o# !P
The minimum corporate income tax is !P o# gross income .compare with the normal tax
which has taxa7le income as its tax 7ase/
An) excess o# the oer the normal tax o# a )ear shall 7e carried #orward and credited
against the normal tax #or the three immediatel) succeeding taxa7le )ears.
o (or the carr) #orward to appl)@ the normal tax should 7e higher than the
minimum corporate income tax.
o =suall) #ollows the #irst5in@ #irst5out .(I(O/ method .Att). -ontero/
o <o@ )ou usuall) compute 7oth #irst@ then appl) either the -CIT or 4ormal Tax@
whicheer is higher.
%xample
Iear 2 Iear ; Iear N Iear $
-CIT !,, 2,, 1,, 1,,
4ormal 1,, !,, 0,, !,,
Income tax !,, 2,, , !,,
%xcess -CIT .1,,/ .1,,/ u%os na yung year = e*cess
.!,,/
-CIT is implemented on domestic and resident #oreign corporations wheneer the) hae
Cero or negatie taxa7le income@ or when the -CIT is greater than the normal income
tax due. .RR -,-.%
The #ollowing are exempted #rom the -CIT:
o &esident #oreign corporations engaged in 7usiness as international carriers .see
7elow #or more discussion/
o &esident #oreign corporations engaged in 7usiness as o##shore 7anEing units
o &esident #oreign corporations engaged in 7usiness as regional operating
headKuarters
o (irms that are taxed under a special income tax regime .liEe those under P%TA or
other economic Cones/
?. Income Tax on Resident 'orei(n Corporations
!ec ".$A% Tax on 'esident -orei#n +orporations. .
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.1/ "n 7eneral. 5 %xcept as otherwise proided in this Code@ a corporation organiCed@ authoriCed@ or existing
under the laws o# an) #oreign countr)@ engaged in trade or 7usiness within the Philippines@ shall 7e su7Hect to an
income tax eKuialent to thirt)5#ie percent .0;P/ o# the taxa7le income deried in the preceding taxa7le )ear
#rom all sources within the Philippines: +rovided, That e##ectie 1anuar) 1@ 1++'@ the rate o# income tax shall 7e
thirt)5#our percent .02P/? e##ectie 1anuar) 1@ 1+++@ the rate shall 7e thirt)5three percent .00P/@ and e##ectie
1anuar) 1@ !,,, and therea#ter@ the rate shall 7e thirt)5two percent .0!P/.
In the case o# corporations adopting the #iscal5)ear accounting period@ the taxa7le income shall 7e computed
without regard to the speci#ic date when sales@ purchases and other transactions occur. Their income and
expenses #or the #iscal )ear shall 7e deemed to hae 7een earned and spent eKuall) #or each month o# the
period.
The reduced corporate income tax rates shall 7e applied on the amount computed 7) multipl)ing the num7er o#
months coered 7) the new rates within the #iscal )ear 7) the taxa7le income o# the corporation #or the period@
diided 7) twele.
+rovided, however, That a resident #oreign corporation shall 7e granted the option to 7e taxed at #i#teen percent
.1;P/ on gross income under the same conditions@ as proided in <ection !$ .A/.
.!/ Minimum 6orporate "ncome 4a* on Resident -oreign 6orporations. 8 A minimum corporate income tax o# two
percent .!P/ o# gross income@ as prescri7ed under <ection !$ .%/ o# this Code@ shall 7e imposed@ under the
same conditions@ on a resident #oreign corporation taxa7le under paragraph .1/ o# this <u7section.
A #oreign corporation is one which is not domestic .ie organiCedDincorporated here/. It
ma) 7e a resident or non5resident corporation.
A resident corporation is a #oreign corporation engaged in 7usiness in the Philippines.
o A #oreign corporation can engage in 7usiness in the Philippines onl) a#ter it had
registered with@ and had 7een allowed 7)@ the regulator) agencies o# the
Philippine goernment to engage in 7usiness in the Philippines.
Tax rate o& 'orei(n Resident
Corporations
0,P o# taxa7le income #rom all sources within the
Philippines@ or
!P o# gross income i# -CIT applies@ or
1;P o# gross income .again, the 7"4 has yet to
%e implemented2
Tax Rate on Passie Income o& 'orei(n Resident Corporations 'inal Tax
o &o)alt) #rom a7roadG 0xempt. .remem7er@ onl) taxed #rom
sources within the Philippines/
!,P
!,P
2. "iidend #rom domestic corporations .inter5corporate diidend/ exempt
Tax Rate on Capital Gains
a capital asset@
!. On sale o# real propert) in the Philippines 0o provision for capital
gains for sale of realty.
Atty. Montero says that you
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apply it to the normal
corporate ta* of >?@
International Carrier
<ec !' .A/
.0/ "nternational 6arrier. 5 An international carrier doing 7usiness in the Philippines shall pa) a tax o# two and
one5hal# percent .! 1D!P/ on its /7ross +hilippine Billings/ as de#ined hereunder:
.a/ "nternational Air 6arrier. 8 /7ross +hilippine Billings/ re#ers to the amount o# gross reenue deried #rom
carriage o# persons@ excess 7aggage@ cargo and mail originating #rom the Philippines in a continuous and
uninterrupted #light@ irrespectie o# the place o# sale or issue and the place o# pa)ment o# the ticEet or passage
document: +rovided, That ticEets realidated@ exchanged andDor indorsed to another international airline #orm
part o# the Gross Philippine Billings i# the passenger 7oards a plane in a port or point in the Philippines: +rovided,
further@ That #or a #light which originates #rom the Philippines@ 7ut transshipment o# passenger taEes place at an)
port outside the Philippines on another airline@ onl) the aliKuot portion o# the cost o# the ticEet corresponding to
the leg #lown #rom the Philippines to the point o# transshipment shall #orm part o# Gross Philippine Billings.
.7/ "nternational Shipping. 5 /7ross +hilippine Billings/ means gross reenue whether #or passenger@ cargo or
mail originating #rom the Philippines up to #inal destination@ regardless o# the place o# sale or pa)ments o# the
passage or #reight documents.
Tax rate #or international carriers is !.;P o# Gross Philippine Billings
Gross Philippine Billings re#ers to
o Gross reenue deried #rom carriage o# persons@ excess 7aggage@ cargo and mail
o 3riginating from the +hilippines in a continuous and uninterrupted #light
o "rrespective o# the place o# sale or issue and the place o# pa)ment o# the ticEet or
passage document
In CI& BOAC@ British Oerseas Airwa)s did not hae an) landing rights here nor did
the) hae license to operate here. The) also did not carr) passengers or cargo to or
#rom the Philippines. The) did@ howeer@ hae a general sales agent which sold BOAC
ticEets. The) were taxed #or the sale o# the ticEets .7ecause o# the situs o# taxation
principle/@ een i# the serice to 7e rendered was outside the Philippines. The) werenBt
lia7le #or carrierBs tax though.
o "oing 7usiness has no speci#ic criterion. As long as there was a continuit) o#
conduct and intention to esta7lish a continuous 7usiness and not one o# a
temporar) character@ then )ou are doing 7usiness in the Philippines. .&emem7er
)our corp8/
An o##line airline which has a 7ranchDagent in the Philippines and sells passage
documents to coer o##line #lights o# its principal or other airlines in considered engaged
in 7usiness as an international air carrier in the countr) and is 4OT su7Hect to the GPB
nor to the 0P common carrierBs tax.
I# the airline has #lights which originate #rom an) point in the Philippines@ it is su7Hect to
the !.;P GPB tax unless it is su7Hect to a di##erent tax rate under a tax treat) to which
the Philippines is a signator).
In a nutshell@ i# an international air carrier maintains #lights to and #rom the Philippines@
it shall 7e taxed at the rate o# !.;P GPB while international air carriers that do not hae
#lights to and #rom the Philippines 7ut nonetheless earn income #rom other actiities in
the countr) will 7e taxed at the rate o# 0!P o# such income. .<outh A#rican Airwa)s@ (e7
1N@ !,1,/
9hat is included in computing the GPBG
o Gross reenue #rom passage o# persons .actual amount as re#lected in the tax
coupon part o# the plane ticEet/
o %xcess 7aggage
o Cargo and mail originating #rom the Philippines in a continuous and uninterrupted
#light
To compute the GPB: .monthl) aerage net #are o# all the tax coupons o# plane ticEets
per point o# #inal destination@ per class o# passage@ per classi#ication o# passenger/
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-=6TIP6I%" 7) the .total num7er o# passengers #lown #or the month as declared in the
#light mani#est/
In case o# passengersB #lights #rom an) point in the Philippines and 7acE@ that portion o#
reenue pertaining to the return trip to the Philippines is 4OT included as part o# the
GPB. .RR *:,"++"%
O##shore BanEing =nits
.2/ 3ffshore Baning :nits. 5 The proisions o# an) law to the contrar) notwithstanding@ income deried 7)
o##shore 7anEing units authoriCed 7) the BangEo <entral ng Pilipinas .B<P/ to transact 7usiness with o##shore
7anEing units@ including an) interest income deried #rom #oreign currenc) loans granted to residents@ shall 7e
su7Hect to a #inal income tax at the rate o# ten percent .1,P/ o# such income.
An) income o# nonresidents@ whether indiiduals or corporations@ #rom transactions with said o##shore 7anEing
units shall 7e exempt #rom income tax.
Tax rate o# o##shore 7anEing units authoriCed 7) the B<P .including an) interest income
#oreign currenc) loans granted to residents/ is 1,P #inal tax.
Income o# nonresidents from transactions with OB=s shall 7e exempt #rom income tax.
An o##shore 7anEing unit is a 7ranch o# a #oreign 7anE whish is authoriCed 7) the B<P to
transact o##shore 7anEing 7usiness in the Philippines.
A #oreign currenc) deposit unit is a department o# a local 7anE or an inexisting local
7ranch o# a #oreign 7anE which is authoriCed 7) the B<P to operated under the expanded
#oreign currenc) deposit s)stem.
Gross onshore income coers all income arising #rom transactions allowed 7) the B<P
conducted 7) and 7etween an o##shore 7anE with another o##shore 7anE or with an (C"=
or with a non5resident. .RR *+,=2%
The #ollowing are included in computing the gross onshore income o# OB=s and (C"=sG
o Gross interest income arising #rom #oreign currenc) loans and adances and
inestments with residents
o (ees@ commissions and other charges which are integral parts o# the income #rom
#oreign currenc) loan transactions are %U%-PT. The) are not to 7e included in
computing the #inal tax. .RR *#,==%
o
Tax Rate on Interest Income &rom 'orei(n Currency )eposit $RR
*+,-.%
1. Interest income actuall) receied 7) a resident citiCen or resident alien
#rom (C"
$.;P #inal
withholding tax
!. I# it was deposited 7) an OC9 or seaman or nonresident citiCen %xempt
0. I# it was in a 7anE account in the Hoint names o# an OC9 and his
spouse .who is a resident/
;,P exemptD
;,P #inal
withholding tax
o# $.;P
2. Interest income actuall) receied 7) a domestic corporation or
resident #oreign corporation #rom (C"
$.;P #inal
withholding tax
Branch Pro#it &emittance Tax
.;/ 4a* on Branch +rofits Remittances. 5 An) pro#it remitted 7) a 7ranch to its head o##ice shall 7e su7Hect to a
tax o# #i#teen .1;P/ which shall 7e 7ased on the total pro#its applied or earmarEed #or remittance without an)
deduction #or the tax component thereo# .except those actiities which are registered with the Philippine
%conomic Tone Authorit)/. The tax shall 7e collected and paid in the same manner as proided in <ections ;$
and ;' o# this Code: proided@ that interests@ diidends@ rents@ ro)alties@ including remuneration #or technical
serices@ salaries@ wages premiums@ annuities@ emoluments or other #ixed or determina7le annual@ periodic or
casual gains@ pro#its@ income and capital gains receied 7) a #oreign corporation during each taxa7le )ear #rom all
sources within the Philippines shall not 7e treated as 7ranch pro#its unless the same are e##ectiel) connected
with the conduct o# its trade or 7usiness in the Philippines.
An) pro#it remitted 7) a 7ranch to its head o##ice shall 7e su7Hect to a tax o# 1;P@
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except those registered with P%TA .the) hae their own tax rules as incenties/
9hatBs the 7ase #or the BP&TG
o ItBs the total pro#its applied #or remittance or earmarEed #or remittance without
an) deduction #or the tax component@ not the profit actually remitted a%road.
o I# it is a #oreign corporation@ the #ollowing are not included:
Interests
"iidends
&ents
&o)alties
Pa)ment #or technical serices
<alaries and wage premiums
Annuities@ emoluments@ or other #ixed or determina7le casual gains
Pro#its@ income R capital gains
9*cept if the a%ove are connected with the conduct of its %usiness in the
+hilippines.
Passie income is not included in computing #or the BP&T. It is su7Hect to a #inal tax.
.Compania General de Ta7acos CI&/
o %xcept when it arises #rom 7usiness actiit) in which the corporation is engaged
or connected with the conduct o# its 7usiness in the Philippines.
"iidends #rom a local corporation to a non5resident #oreign corporation is not su7Hect to
BPT 7ut to #inal withholding tax. .-aru7eni CI&@ 1++,/
&egional or Area *eadKuarters and &O*:s
<ec !!.""/ The term /regional or area headquarters/ shall mean a 7ranch esta7lished in the Philippines 7)
multinational companies and which headKuarters do not earn or derie income #rom the Philippines and which act
as superisor)@ communications and coordinating center #or their a##iliates@ su7sidiaries@ or 7ranches in the Asia5
Paci#ic &egion and other #oreign marEets.
.%%/ The term /regional operating headquarters/ shall mean a 7ranch esta7lished in the Philippines 7)
multinational companies which are engaged in an) o# the #ollowing serices: general administration and planning?
7usiness planning and coordination? sourcing and procurement o# raw materials and components? corporate
#inance adisor) serices? marEeting control and sales promotion? training and personnel management? logistic
serices? research and deelopment serices and product deelopment? technical support and maintenance? data
processing and communications? and 7usiness deelopment.
&egional or Area *eadKuarters is a 7ranch esta7lished in the Philippines 7) multi5
nationals and which headKuarters:
o "o 4OT earn or derie income #rom the Philippines@ and
o 9hich act as superisor)@ communications and coordinating center #or their
a##iliates@ su7sidiaries or 7ranches in the Asia5Paci#ic &egions.
The) are %U%-PT #rom income tax.
&egional Operating *eadKuarters is a 7ranch esta7lished in the Philippines 7) multi5
nationals which are engaged in an) o# the #ollowing serices:
o General admin and planning
o Business planning and coordination?
o <ourcing and procurement o# raw materials and components?
o Corporate #inance adisor) serices?
o -arEeting control and sales promotion?
o Training and personnel management?
o 6ogistic serices?
o &esearch and deelopment serices and product deelopment?
o Technical support and maintenance?
o "ata processing and communications? and
o Business deelopment.
The) are taxed 1,P on taxa7le income.
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>. Income Tax on ;on,resident 'orei(n Corporations
In general
.B/ Tax on 4onresident (oreign Corporation. 5
.1/ "n 7eneral. 5 %xcept as otherwise proided in this Code@ a #oreign corporation not engaged in trade or
7usiness in the Philippines shall pa) a tax eKual to thirt)5#ie percent .0;P/ o# the gross income receied during
each taxa7le )ear #rom all sources within the Philippines@ such as interests@ diidends@ rents@ ro)alties@ salaries@
premiums .except reinsurance premiums/@ annuities@ emoluments or other #ixed or determina7le annual@ periodic
or casual gains@ pro#its and income@ and capital gains@ except capital gains su7Hect to tax under su7paragraph
;.c/ +rovided, That e##ectie 1anuar) 1@ !,,+@ the rate o# income tax shall 7e thirt) percent .0,P/
4on5resident #oreign corporations are su7Hect to 0,P income tax on the gross income
deried during each taxa7le )ear #rom all sources within the Philippines onl)
o <pecial corporations .seen 7elow/ are su7Hect to a di##erent tax rate
9hen the #oreign corporation transacts 7usiness in the Philippines independentl) o# its
7ranch in the countr)@ the principal agent relationship is set aside. The transaction
7ecomes that o# the #oreign corporation@ not o# the 7ranch@ hence@ the corporation is
considered a #oreign non5resident corporation #or that isolated and independent
transaction. .-aru7eni CI&/
A casual actiit) in the Philippines 7) a #oreign corporation does not amount to engaging
in trade or 7usiness in the Philippines #or income tax purposes. In order that a #oreign
corporation ma) 7e considered engaged in trade or 7usiness@ its 7usiness transactions
must 7e continuous. .4> &eederiH CI&/
<pecial non5resident #oreign corporations
.!/ 0onresident 6inematographic -ilm 3wner, 5essor or (istri%utor. 8 A cinematographic #ilm owner@ lessor@ or
distri7utor shall pa) a tax o# twent)5#ie percent .!;P/ o# its gross income #rom all sources within the
Philippines.
.0/ 0onresident 3wner or 5essor of Aessels 6hartered %y +hilippine 0ationals. 8 A nonresident owner or lessor o#
essels shall 7e su7Hect to a tax o# #our and one5hal# percent .2 1D!P/ o# gross rentals@ lease or charter #ees
#rom leases or charters to (ilipino citiCens or corporations@ as approed 7) the -aritime Industr) Authorit).
.2/ 0onresident 3wner or 5essor of Aircraft, Machineries and 3ther 9quipment. 8 &entals@ charters and other #ees
deried 7) a nonresident lessor o# aircra#t@ machineries and other eKuipment shall 7e su7Hect to a tax o# seen
and one5hal# percent .$ 1D!P/ o# gross rentals or #ees.
!P0CIA< CORPORATIO;!
Tax &ate Tax Base
4on5resident owner o# lessor o#
essel
2.;P Gross rentals@ lease and
charter #ees #rom the Phil
4on5resident cinematographic #ilm
owner@ lessor@ or distri7utor
!;P Gross income #rom the Phil
4on5resident lessor o# aircra#t@
machiner) and other eKuipment
$.;P Gross rentals@ charges and
other #ees #rom Phil sources
Proprietar) educational institution and
non5pro#it hospital
1,P Taxa7le income #rom all
sources
&esident international carrier !.;P Gross Philippine 7illings
&egional operating headKuarters or
multinational corporation
1,P Philippine Taxa7le income
ThereBs no -CIT #or special corporations
Tax rate on certain incomes o# non5resident #oreign corporations
.;/ 4a* on 6ertain "ncomes Received %y a 0onresident -oreign 6orporation. 8
.a/ "nterest on -oreign 5oans. 5 A #inal withholding tax at the rate o# twent) percent .!,P/ is here7) imposed on
the amount o# interest on #oreign loans contracted on or a#ter August 1@ 1+'N?
.7/ "ntercorporate (ividends. 5 A #inal withholding tax at the rate o# #i#teen percent .1;P/ is here7) imposed on
the amount o# cash andDor propert) diidends receied #rom a domestic corporation@ which shall 7e collected and
paid as proided in <ection ;$ .A/ o# this Code@ su7Hect to the condition that the countr) in which the
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nonresident #oreign corporation is domiciled@ shall allow a credit against the tax due #rom the nonresident #oreign
corporation taxes deemed to hae 7een paid in the Philippines eKuialent to twent) percent .!,P/@ which
represents the dei##erence 7etween the regular income tax o# 0;P and the 1;P tax on diidends as proided in
this su7paragaprh: +rovided@ that e##ectie 1anuar) 1@ !,,+@ the credit against the tax due shall 7e eKuialent to
1;P@ which represents the di##erence 7etween the regular income tax o# 0,P and the 1;P tax on diidends. .As
amended %y RA B>>C2
.c/ 9*change. 8 A #inal tax at the rates prescri7ed 7elow is here7) imposed upon the net capital gains realiCed
during the taxa7le )ear #rom the sale@ 7arter@ exchange or other disposition o# shares o# stocE in a domestic
corporation@ except shares sold@ or disposed o# through the stocE exchange:
4ot oer P1,,@,,,OOOO..OOOOOO..........;P On an) amount in excess o# P1,,@,,,OOOO 1,P
Tax Rate on Passie Income o& 'orei(n ;on,Resident
Corporations
'inal Tax
1. Interest on #oreign loans
0on8resident lends to a domestic corporation
!,P
!. "iidend #rom domestic corporations .inter5corporate diidend/
4his is su%Dect to the condition that the country in which the non8
resident foreign corporation is domiciled allows a credit against
the ta* due from the non8resident foreign corp ta*es deemed to
have %een paid in the +hilippines equivalent to EF@. "f they dont,
the dividends will %e ta*ed at >?@.
1;P
Tax Rate on Capital Gains $same as &orei(n resident
corporations%
;. On sale o# shares o# stocE o# a domestic corporation 034
a capital asset@
!. On sale o# real propert) in the Philippines 0o provision for capital
gains for sale of realty.
Atty. Montero says that you
apply it to the normal
corporate ta* of >?@
On inter5corporate diidends .CI& Procter and Gam7le Philippine -anu#acturing@ 1++1/
The ordinar) 0;P tax rate applica7le to diidend remittances to non5resident
corporate stocEholders o# a Philippine corporation@ goes down to 1;P i# the countr)
o# domicile o# the #oreign stocEholder corporation Lshall allowM such #oreign
corporation a tax credit #or Ltaxes deemed paid in the PhilippinesM@ applica7le against
the tax pa)a7le to the domiciliar) countr) 7) the #oreign stocEholder corporation.
In CI& PG .P-C/ .1++1/@ Procter and Gam7le Philippines declared diidends to its
parent compan)@ PRG5=<A. It deducted 0;P withholding tax@ 7ut now claimed #or a
re#und@ stating that the reduced 1;P diidend tax rate should appl).
o The <C said that the reduced 1;P diidend tax rate is applica7le i# the =<A
Lshall allowM to PRG5=<A a tax credit #or Ltaxes deemed paid in the
PhilippinesM applica7le against the =< taxes o# PRG5=<A.
o The 4I&C speci#ies that such tax credit #or Ltaxes deemed paid in the
PhilippinesM must@ as a minimum@ reach an amount eKuialent to !,P points
which represents the di##erence 7etween the regular 0;P .now >?@/
diidend tax rate and the pre#erred 1;P diidend tax rate. It is important to
note that <ec. !2.7/1 .now Sec. GH 1B2 1F2 1%2 o# the 4I&C does not reKuire
that the =< must gie a Ldeemed paidM tax credit #or the diidend tax .!,P
points/ waied 7) the Philippines in maEing applica7le the pre#erred diidend
tax rate o# 1;P.
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o In other words@ our 4I&C does not reKuire that the =< tax law deem the
parent5corporation to hae paid the !,P points o# diidend tax waied 7) the
Philippines. The 4I&C onl) reKuires that the =< Lshall allowM PRG5=<A a
Ldeemed paidM tax credit in an amount eKuialent to the !,P points waied
7) the Philippines.
CI& 9ander Philippines had the same #acts as CI& PRGP-C. But in 9ander@ the
countr) at issue was <witCerland and it did not een impose an) income tax on the
diidends receied 7) <wiss corporations #rom #oreign corporations.
o T*% <C said that the condition o# Ltaxes deemed paidM was alread) complied
with since no income tax was imposed on the diidends in the #irst place.
In 7oth cases@ the taxpa)ers were entitled to a re#und.
Income coered 7) tax treaties
In negotiating tax treaties@ the underl)ing rationale #or reducing the tax rate is that the
Philippines will gie up a part o# the tax in the expectation that the tax gien up #or this
particular inestment is not taxed 7) the other countr). There would 7e some incenties
on the part o# the #oreigners to inest in the Philippines 7ecause the rates o# tax are
lowered and at the same time@ the) are credited against the domestic tax a7road a
#igure higher than what was collected in the Philippines.
o Thus@ i# the rates o# tax are lowered here@ there should 7e a concomitant
commitment on the part o# the state o# residence .o# the #oreign corp/ to grant
some #orm o# tax relie#@ whether this 7e in the #orm o# a tax credit or exemption.
Otherwise@ the tax which would hae 7een collected here will simpl) 7e collected
7) another state@ de#eating the o7Hect o# the tax treat) since the tax 7urden
imposed would remain unrelieed.
o The purpose o# the most #aored nation clause is to esta7lish the principle o#
eKualit) o# international treatment 7) proiding that citiCens o# the contracting
nations ma) enHo) the priileges accorded 7) either part) to those o# the most
#aored nation. This allows the taxpa)er in one state to aail o# more li7eral
proisions granted to another tax treat) to which his countr) or residence is also
a part). *oweer@ the use o# the most #aored nation clause is su7Hect to the
rationale o# tax treaties.
o I# the state o# residence does not grant some #orm o# tax relie# to the inestor
.the #oreign non5resident corp/@ no 7ene#it would redound to the Philippines. .CI&
<C 1ohnson and <on@ wherein the issue was with the pa)ment o# taxes on
ro)alties. <C 1ohnson wanted tax credit 7ased on the =<5&P tax treat) which had
a Lmost #aored nation clause.M The German)5&P treat) was more 7ene#icial
7ecause it allowed a 1,P rate on ro)alties. *oweer@ the German)5&P treat) also
allowed #or !,P matching credit #or ro)alties. The =<5&P tax treat) did 4OT hae
this !,P matching credit. <o the <C said that since the &P5=< Tax Treat) does
not gie a matching tax credit o# !, percent #or the taxes paid to the Philippines
on ro)alties as allowed under the &P5 German) Tax Treat)@ <C 1ohnson cannot 7e
deemed entitled to the 1, percent rate granted under the latter treat) #or the
reason that there is no pa)ment o# taxes on ro)alties under similar
circumstances./
Based on &-C 2N5!,,! .a##irmed 7) Golden Arches CI&@ CTA Case N'N!@ !,,$/@ the
1,P rate o# withholding tax on ro)alties remitted to residents o# the =< ma) now 7e
aailed o# 7ecause o# the &P5China tax treat) which has the 7asicall) the same
proisions o# the &P5=< tax treat). <o@ the -(4 o# the &P5=< tax treat) can re#er to the
&P5China tax treat) .as compared to the &P5German) treat) which were essentiall) not
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the same/.
1
<. Improperly Accumulated 0arnin(s Tax $IA0T%
<%C. !+. Imposition o# Improperl) Accumulated %arnings Tax. 5
.A/ In General. 5 In addition to other taxes imposed 7) this Title@ there is here7) imposed #or each taxa7le )ear
on the improperl) accumulated taxa7le income o# each corporation descri7ed in <u7section B hereo#@ an
improperl) accumulated earnings tax eKual to ten percent .1,P/ o# the improperl) accumulated taxa7le income.
.B/ Tax on Corporations <u7Hect to Improperl) Accumulated %arnings Tax. 5
.1/ In General. 5 The improperl) accumulated earnings tax imposed in the preceding <ection shall appl) to eer)
corporation #ormed or aailed #or the purpose o# aoiding the income tax with respect to its shareholders or the
shareholders o# an) other corporation@ 7) permitting earnings and pro#its to accumulate instead o# 7eing diided
or distri7uted.
.!/ %xceptions. 5 The improperl) accumulated earnings tax as proided #or under this <ection shall not appl) to:
.a/ Pu7licl)5held corporations?
.7/ BanEs and other non7anE #inancial intermediaries? and
.c/ Insurance companies.
.C/ %idence o# Purpose to Aoid Income Tax. 5
.1/ Prima (acie %idence. 5 the #act that an) corporation is a mere holding compan) or inestment compan) shall
7e prima #acie eidence o# a purpose to aoid the tax upon its shareholders or mem7ers.
.!/ %idence "eterminatie o# Purpose. 5 The #act that the earnings or pro#its o# a corporation are permitted to
accumulate 7e)ond the reasona7le needs o# the 7usiness shall 7e determinatie o# the purpose to aoid the tax
upon its shareholders or mem7ers unless the corporation@ 7) the clear preponderance o# eidence@ shall proe to
the contrar).
."/ Improperl) Accumulated Taxa7le Income. 5 (or purposes o# this <ection@ the term Qimproperl) accumulated
taxa7le incomeQ means taxa7le incomeQ adHusted 7):
.1/ Income exempt #rom tax?
.!/ Income excluded #rom gross income?
.0/ Income su7Hect to #inal tax? and
.2/ The amount o# net operating loss carr)5oer deducted?
And reduced 7) the sum o#:
.1/ "iidends actuall) or constructiel) paid? and
.!/ Income tax paid #or the taxa7le )ear.
Proided@ howeer@ That #or corporations using the calendar )ear 7asis@ the accumulated earnings under tax shall
not appl) on improperl) accumulated income as o# "ecem7er 01@ 1++$. In the case o# corporations adopting the
#iscal )ear accounting period@ the improperl) accumulated income not su7Hect to this tax@ shall 7e recEoned@ as o#
the end o# the month comprising the twele .1!/5month period o# #iscal )ear 1++$51++'.
.%/ &easona7le 4eeds o# the Business. 5 (or purposes o# this <ection@ the term Qreasona7le needs o# the
7usinessQ includes the reasona7l) anticipated needs o# the 7usiness.
An improperl) accumulated earnings tax o# 1,P o# improperl) accumulated taxa7le
income is imposed on corporations which permit earnings and pro#its to accumulate
instead o# 7eing diided or distri7uted.
1
Article !0 o# the &P5=< tax treat) and Article !0 o# the &P5China tax treat)@ though di##erentl) worded@ plainl)
reeal a similarit) in the proisions on relie# #rom or aoidance o# dou7le taxation to their respectie residents.
Thus@ the tax on ro)alt) pa)ments to residents o# =< and China are paid under similar circumstances@ i.e.@ the
amount o# ro)alt) income tax paid or accrued to the Philippines under the respectie tax treaties is aaila7le as tax
credit against the income tax pa)a7le in their respectie countries. =< residents ma)@ there#ore@ inoEe the
pre#erential tax rate o# 1,P on ro)alties@ accruing 7eginning 1anuar) 1@ !,,!@ arising in the Philippines J#rom the
use o#@ or the right to use@ an) patent@ trademarE@ design or model@ plan@ secret #ormula or process@ . . .@ or #or
in#ormation concerning industrial@ commercial or scienti#ic experienceJ under the &P5China tax treat)@ pursuant to
the Jmost5#aored5nationJ clause o# the &P5=< tax treat).
It 7ears stressing@ howeer@ that there are two important reKuirements that should 7e complied with 7e#ore the
1,P rate o# withholding tax on ro)alties remitted to a resident o# =< and China ma) 7e aailed o#@ to wit:
1. It is necessar) that there 7e an agreement or a contract where7) the ro)alties paid to the =< must originate
#rom the use o#@ or the right to use an) patent@ trade marE@ design or model@ plan@ secret #ormula or process@ or
#rom the use@ or the right to use@ industrial@ commercial or scienti#ic experience? and
!. (or as long as the contract or agreement is su7Hect to approal under Philippine law@ the same must 7e dul)
approed 7) the Philippine competent authorities.
All internal reenue o##icers@ emplo)ees and others concerned are enHoined to gie this Circular the widest pu7licit)
possi7le.
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9ho are coeredG
o All domestic corporations which are classi#ied as closel) held corporationsG
o A closel)5held corporation are those at least ;,P in alue o# the outstanding
capital stocE or at least ;,P o# the total com7ined oting power o# all classes o#
stocE is owned directl) or indirectl) 7) not more than !, indiiduals. .RR ",+*%
*ow do )ou determine i# a corporation is a closel)5held oneG 6ooE at
stocE5ownership8
I# stocE not owned 7) indiiduals@ it will 7e considered to 7e owned
proportionatel) 7) its shareholders.
I# itBs a #amil) R partnership ownership@ an indiidual shall 7e
considered to own the stocE #or his #amil) mem7ers or partners.
I# thereBs an option to acKuire stocEs@ it shall 7e considered as
7eing owned 7) the person with the option. .BIR Rulin( ":,+"%
9ho are not coeredG
1. Pu7licl)5held corporations
!. BanEs and other #inancial institutions
0. Insurance companies
2. Taxa7le partnerships
;. General pro#essional partnerships
N. 4on5taxa7le Hoint entures
$. %nterprises registered with P%TA or with the BC"A or with other special economic
Cones .the last four are %ased on RR ",+*%
9hatBs prima #acie eidence o# IA%G
o The #act that an) corporation is a mere holding compan) or inestment compan)
o The #act that the earnings or pro#its o# a corporation are permitted to accumulate
7e)ond the reasona7le needs o# the 7usiness
o Inestment o# su7stantial earnings in unrelated 7usiness or in stocE or securities
o# an unrelated 7usiness
o Inestment in 7onds and other long term securities
o Accumulation o# earnings in excess o# 1,,P o# paid up capital .the last three are
%ased on RR ",+*%
*ow do )ou compute #or the improperl) accumulated taxa7le incomeG
Taxa7le Income@
I4C&%A<%" BI:
Income exempt #rom tax
Income excluded #rom gross income
Income su7Hect to #inal tax
The amount o# net operating loss carr) oer .4O6CO/
"%"=CT%" BI:
"iidends actuall) or constructiel) paid
Income tax paid #or the taxa7le )ear
Amount reserved for reasona%le needs of the %usiness
emanating from the covered years ta*a%le income 1#rom
&e)es@ p. $1/
%:=A6<:
Improperl) accumulated taxa7le income
U 1,P .IA%T/
9hat )ou hae to pa)
L&easona7le needsM means the immediate needs o# the 7usiness. I# the corporation can
not proe this@ then it is not an immediate need. In order to determine whether pro#its
are accumulated #or the reasona7le needs o# the 7usiness as to aoid the surtax upon
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shareholders@ the controlling intention o# the taxpa)er is that which is mani#ested at the
time o# accumulation@ not su7seKuentl) declared intentions which are merel) the product
o# a#terthought. .-anila 9ine -erchants CI&/
o This is the immediac) test in RR ",+*.
&easona7le needs means the immediate needs o# the 7usiness including
reasona7l) anticipated needs. The 7urden o# proo# is with the corporation.
The touchstone o# lia7ilit) is the purpose 7ehind the accumulation o# the income and not
the conseKuences o# the accumulation. <o@ i# the #ailure to pa) diidends were #or the
purpose o# using the undistri7uted earnings and pro#its #or the reasona7le needs o# the
7usiness@ that purpose would not #all within the interdiction o# the statute. .CI&
Tuason/
The tax on improper accumulation o# surplus is essentiall) a penalt) tax designed to
compel corporations to distri7ute earnings so that the said earnings 7) shareholders@
could@ in turn@ 7e taxed. 9hen corporations do not declare diidends@ income taxes are
not paid on the undeclared diidends receied 7) the shareholders. .C)anamid CTA/
9hat are considered reasona7leG
a. Allowance #or the increase o# accumulated earnings up to 1,,P o# the paid5up
capital
7. %arnings resered #or 7uilding@ plant@ or eKuipment acKuisitions as approed 7)
the Board o# "irectors .expansion@ improement@ and repairs/
c. %arnings resered #or compliance with an) loan or o7ligation esta7lished under a
legitimate 7usiness agreement .de7t retirement/
d. In case o# su7sidiaries o# #oreign corporations in the Philippines@ all undistri7uted
earnings intended or resered #or inestments in the Philippines
e. %arnings reKuired 7) law to 7e retained .RR ",+*%
#. Anticipated losses or reerses in 7usiness .&e)es@ p. $,/
5. Tax,exempt Corporations
<%C. 0,. %xemptions #rom Tax on Corporations. 5 The #ollowing organiCations shall not 7e taxed under this Title
in respect to income receied 7) them as such:
.A/ 6a7or@ agricultural or horticultural organiCation not organiCed principall) #or pro#it?
.B/ -utual saings 7anE not haing a capital stocE represented 7) shares@ and cooperatie 7anE without capital
stocE organiCed and operated #or mutual purposes and without pro#it?
.C/ A 7ene#iciar) societ)@ order or association@ operating #ort he exclusie 7ene#it o# the mem7ers such as a
#raternal organiCation operating under the lodge s)stem@ or mutual aid association or a nonstocE corporation
organiCed 7) emplo)ees proiding #or the pa)ment o# li#e@ sicEness@ accident@ or other 7ene#its exclusiel) to the
mem7ers o# such societ)@ order@ or association@ or nonstocE corporation or their dependents?
."/ Cemeter) compan) owned and operated exclusiel) #or the 7ene#it o# its mem7ers?
.%/ 4onstocE corporation or association organiCed and operated exclusiel) #or religious@ charita7le@ scienti#ic@
athletic@ or cultural purposes@ or #or the reha7ilitation o# eterans@ no part o# its net income or asset shall 7elong
to or inures to the 7ene#it o# an) mem7er@ organiCer@ o##icer or an) speci#ic person?
.(/ Business league cham7er o# commerce@ or 7oard o# trade@ not organiCed #or pro#it and no part o# the net
income o# which inures to the 7ene#it o# an) priate stocE5holder@ or indiidual?
.G/ Ciic league or organiCation not organiCed #or pro#it 7ut operated exclusiel) #or the promotion o# social
wel#are?
.*/ A nonstocE and nonpro#it educational institution?
.I/ Goernment educational institution?
.1/ (armersQ or other mutual t)phoon or #ire insurance compan)@ mutual ditch or irrigation compan)@ mutual or
cooperatie telephone compan)@ or liEe organiCation o# a purel) local character@ the income o# which consists
solel) o# assessments@ dues@ and #ees collected #rom mem7ers #or the sole purpose o# meeting its expenses? and
.3/ (armersQ@ #ruit growersQ@ or liEe association organiCed and operated as a sales agent #or the purpose o#
marEeting the products o# its mem7ers and turning 7acE to them the proceeds o# sales@ less the necessar)
selling expenses on the 7asis o# the Kuantit) o# produce #inished 7) them?
4otwithstanding the proisions in the preceding paragraphs@ the income o# whateer Eind and character o# the
#oregoing organiCations #rom an) o# their properties@ real or personal@ or #rom an) o# their actiities conducted
#or pro#it regardless o# the disposition made o# such income@ shall 7e su7Hect to tax imposed under this Code.
The #ollowing organiCations are tax5exempt@ proiding the) are not organiCed #or pro#it@
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1. 6a7or@ agricultural and horticultural organiCations
!. -utual saings 7anE without capital stocE represented 7) shares R cooperatie 7anEs
without capital stocE
0. A 7ene#iciar) societ)@ order or association operating #or the exclusie 7ene#it o# the
mem7ers .liEe a #rat operating under the lodge s)stem@ a mutual aid association@ a
non5stocE corporation organiCed 7) emplo)ees proiding #or the pa)ment o# li#e@
sicEness@ or other 7ene#its exclusie to its mem7ers/
2. Cemeter) compan) owned R operated exclusiel) #or the 7ene#it o# its mem7ers
;. 4on5stocE corporations or associations organiCed and operated exclusiel) #or
religious@ charita7le@ scienti#ic@ athletic or cultural purposes or #or the reha7 o#
eterans@ no part o# its net income or asset shall 7elong to or inures to the 7ene#it o#
an) mem7er or speci#ic person
N. Business league cham7er o# commerce or 7oard o# trade@ no part o# its income inures
to an) indiidual
$. Ciic league or organiCation operated exclusiel) #or the promotion o# social wel#are
'. A non5stocE and non5pro#it educational institution
+. Goernment educational institution
1,. (armersB or other mutual t)phoon or #ire insurance compan)@ mutual ditch or
irrigation compan)@ mutual or cooperatie telephone compan)@ or liEe organiCations
or a purel) local character@ the income o# which consists solel) o# dues@ assessments
R #ees collected #rom mem7ers #or the sole purpose o# meeting its expenses
11. (armersB@ #ruit growersB or liEe associations organiCed and operated as sales agent
#or the purpose o# marEeting the products o# its mem7ers R turning 7acE to them the
proceeds less expenses
The) are not su7Hect to income tax on income receied 7) them #rom undertaEings
which are essential to or necessaril) connected with the purposes #or which the) were
organiCed and operated.
o But the) are su7Hect to income tax on income o# whateer Eind and character
#rom an) o# their properties .real or personal/@ or #rom an) o# their actiities
.unrelated/ conducted #or pro#it@ regardless o# the disposition made o# such
income.
<ome stu## #rom the Omni7us Inestment Code o# 1+'$ .Art 9-/ 0O ""2 , Incenties
to Re(istered 0nterprises under the Inestment Priorities Plan/ F these are
actiit)5drien incenties:
o Income Tax *olida)
(or pioneer #irms F N )ears #rom commercial operation
(or non5pioneer #irms F 2 )ears #rom commercial operation
(or newl) registered #irms F #ull) exempt #rom income taxes
%xtension o# tax exemption #or more than 1 )ear:
I# the proHect meets the prescri7ed ratio o# capital eKuipment to
num7er o# worEs set 7) the Board
I# the utiliCation o# indigenous raw materials are at rates set 7) the
Board
I# the net #oreign exchange saings or earnings amount to at least
V;m annuall) during the #irst 0 )ears o# operation
o But no registered #irm ma) aail o# this incentie #or a
period exceeding ' )ears
%xemption #or registered expanding #irms:
(or a period o# 0 )ears #orm commercial operation@ registered
expanding #irms are entitled to tax5exemption proportionate to
their expansion@ 7ut i# it aailed o# this incentie during this period@
it is 4OT entitled to additional deduction #or incremental la7or
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expense
This incentie cannot 7e extended 7e)ond 0 )ears
o Additional deduction #or la7or expense
(or the #irst ; )ears #rom registration@ a registered enterprise is allowed
an additional deduction o# ;,P o# the wages corresponding to the
increment in the num7er o# "I&%CT la7or #or sEilled and unsEilled la7ors i#
the proHect meets the prescri7ed ratio o# capital eKuipment to num7er o#
worEers set 7) the Board
This exemption shall 7e dou7led i# the actiit) is located in less
deeloped areas
o Tax R "ut) exemption on imported capital eKuipment
9ithin ; )ears #rom the e##ectiit) o# this code .until 1++!/@ importations
o# machiner) and eKuipment and spare parts o# registered enterprises
shall 7e 1,,P exempt o# customs duties and reenue tax@ 7ut the
importation must compl) with the #ollowing conditions:
The) are not manu#actured domesticall) in su##icient Kuantit) o#
compara7le Kualit) and at reasona7le prices
The) are reasona7l) needed and will 7e used exclusiel) 7) the
registered enterprise in the manu#acture o# its products
The approal o# the Board was o7tained #or such importation
o Tax credit #or domestic capital eKuipment
A tax credit o# 1,,P o# the alue o# the reenue tax and customs duties
that would hae 7een waied on the machiner) and eKuipment had these
7een imported is gien to registered enterprises which purchase them
#rom a domestic manu#acturer
o %xemption #rom contractorBs tax
The registered enterprise is exempt #rom contractorBs tax
<ome stu## #rom the Bases Conersion and "eelopment Act o# 1++! and <pecial
%conomic Tone Act o# 1++; .RA =-*2/ !ec "9,":% A these are actiit)5 and location5
drien incenties.
o (iscal Incenties
Businesses operating within the %COTO4%< shall 7e entitled to #iscal
incenties as per P" NN .%PTA/ or with %O !!N.
%xporters using local materials as inputs shall get tax credits same as
those proided in the %xport "eelopment Act o# 1++2
o %xemption #rom Taxes under the 4I&C
4o taxes .local R national/ shall 7e imposed on 7usinesses operating
within the %COTO4%s
In lieu o# taxes@ ;P o# the gross income shall 7e remitted to the national
goernment
o Applica7le national taxes
All income deried 7) persons and all serices esta7lishments in the
%COTO4% are su7Hect to taxes under the Tax Code
Income deried #rom inside the Cones should not 7e more than
0,P o# its total income. $RR ","++:%
o 4ote: &A +2,, has restored tax priileges to ClarE Air Base@ Camp 1ohn *a)@
Poro Point and -orong <pecial %co Tone
In 1ohn *a) 6im@ the <C said that Camp 1ohn *a) was not a##orded tax
priilegs. But &A +2,, has restored it.
<ome stu## #rom the 1ewelr) Industr) "eelopment Act o# 1++' .RA .:+"/ and && 15++
o :uali#ied Hewelr) enterprises
!
:
!
<ec. 2. 9ligi%ility for government assistance. W To Kuali#) #or the assistance@ counselling and other incenties
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%xempted #rom excise tax o# manu#actured and produced Hewelries@ i#
shown to hae 7een purchased #rom a Kuali#ied Hewelr) enterprise? and
*ae additional deduction o# ;,P #or training expenses incurred 7)
Kuali#ied Hewelr) enterprises.
1ewelr) enterprises aailing o# incenties shall still 7e eligi7le to incenties
proided 7) other special laws such as &epu7lic Act 4o. $'22 19*port
(evelopment Act of EBB=2@ &epu7lic Act 4o. $+1N 1Special 9conomic Ione
Act of EBBF2@ %xecutie Order !!N 1B3" 3mni%us "nvestments 6ode2@
among others: +rovided, That the actiit) is export5oriented and that
there is no dou7le aailment o# the same incenties.
<ome stu## #rom the Cooperatie Code o# the Philippines .&A N+'0/ and && !,5!,,1
o Cooperaties which transact onl) with its mem7ers are exempt #rom:
Income tax
>alue5Added Tax .>AT/ under <ection 1,+ pars. .r/@ .s/@ .t/ and .u/
0
0P Percentage Tax
"onorBs tax to accredited exempt
%xcise tax
"<T
But the other part) not exempt has to pa) the "<T
Annual registration #ee o# P;,, under <ec !0N .B/
o I# it deals with mem7ers and outsiders@ see #ootnote.
2
enisioned in this Act@ Hewelr) enterprises aailing o# the same must 7e dul) registered with the appropriate
goernment agencies as presentl) proided 7) law.
1ewelr) enterprise as used in this Act shall re#er to an) enterprise engaged in an) aspect in the manu#acture o#
goods commonl) or commerciall) Enown as #ine and imitation Hewelr) including those producing@ cutting and
polishing@ shaping@ re#ining@ #orming or #a7ricating real or imitation pearls@ precious and semi5precious stones and
imitations thereo#@ goods made o# precious metal and imitations thereo#@ and other raw materials and parts used in
the manu#acture o# Hewelr).
0
<ec 1,+@ .r/ <ales 7) agricultural cooperaties dul) registered with the Cooperatie "eelopment Authorit) to
their mem7ers as well as sale o# their produce@ whether in its original state or processed #orm@ to non5mem7ers?
their importation o# direct #arm inputs@ machineries and eKuipment@ including spare parts thereo#@ to 7e used
directl) and exclusiel) in the production andDor processing o# their produce?
.s/ <ales 7) electric cooperaties dul) registered with the Cooperatie "eelopment authorit) or 4ational
%lectri#ication Administration@ relatie to the generation and distri7ution o# electricit) as well as their importation o#
machineries and eKuipment@ including spare parts@ which shall 7e directl) used in the generation and distri7ution o#
electricit)?
.t/ Gross receipts #rom lending actiities 7) credit or multi5purpose cooperaties dul) registered with the
Cooperatie "eelopment Authorit) whose lending operation is limited to their mem7ers?
.u/ <ales 7) non5agricultural@ non5 electric and non5credit cooperaties dul) registered with the Cooperatie
"eelopment Authorit): Proided@ That the share capital contri7ution o# each mem7er does not exceed (i#teen
thousand pesos .P1;@,,,/ and regardless o# the aggregate capital and net surplus rata7l) distri7uted among the
mem7ers?
2
(or cooperaties with accumulated reseres and undiided net saings o# not more than Ten -illion Pesos
.P1,@,,,@,,,.,,/
a. %xemption #rom all national internal reenue taxes #or which the) aredirectl) lia7le@ as enumerated under <ec.
0.1 o# these &egulations.
II. (or cooperaties with accumulated reseres and undiided net saings o# more than Ten -illion Pesos
.P1,@,,,@,,,.,,/ W
a. %xemption #rom income tax #or a period o# ten .1,/ )ears #rom the dateo# registration with the C"A@ proided@
that at least twent)5#ie percent.!;P/ o# the net income o# the cooperatie is returned to the mem7ersin the #orm
o# interest andDor patronage re#und.
(or cooperaties whose exemptions were remoed 7) %xecutie Order 4o. +0@ the ten5)ear period shall 7e
recEoned #rom -arch 1,@ 1+'$ .meaning@ tax exemption is alid onl) until -arch 1,@ 1++$/.
A#ter the lapse o# the a7oe ten5)ear period@ the) shall 7e su7Hect to income tax at the #ull rate on the amount
allocated #or interests on capital@ proided that the same is not conseKuentl) imposed on interest indiiduall)
receied 7) mem7ers?
The tax 7ase #or all cooperaties lia7le to income tax shall 7e the net surplus arising #rom 7usiness transactions
with non5mem7ers a#ter deducting the amounts #or the statutor) resere #unds as proided #or in the Cooperatie
Code and other laws.
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o 4ote: All income o# the cooperatie not related to its mainDprincipal 7usinessDes
shall 7e su7Hect to all the appropriate taxes under the Tax Code o# 1++$. This is
applica7le to all t)pes o# cooperaties@ whether dealing purel) with mem7ers or
7oth mem7ers and non5mem7ers.
o Cooperaties are 4OT exempt #rom
#inal taxes on deposits@ interest income and capital gains tax@
"<T i# dealing with nonmem7ers and cooperatie exceeding P1,m@
>AT 7illed on certain purchases
;
o The exemption o# the cooperaties does not extend to their indiidual mem7ers.
Thus@ mem7ers o# cooperaties are lia7le to pa) all the necessar) internal
reenue taxes under the 4ational Internal &eenue Code@ including the tax on
earnings deried #rom their capital contri7ution.
Proided@ howeer@ that interests receied 7) mem7ers o# a cooperatie
with accumulated reseres and undiided net saings greater than Ten
-illion Pesos .P1,@,,,@,,,.,,/@ a#ter the lapse o# the ten5)ear exemption@
shall no longer 7e taxa7le in the hands o# such mem7ers.
<ome stu## #rom the Baranga) -icro Business %nterprises .B-B%s/ .RA -*=. and )ept
Order *=,+#%
o B-B%s
N
are exempt #rom income tax.
But not #rom #inal taxes on deposits@ interest income@ capital gains tax@
ro)alties@ etc
<ome stu## #rom the Tourism Act o# !,,+ .RA -:-9 and its IRR/
o Income tax holida)
4ew enterprises in Green#ield and Brown#ield Tourism Tones F N )ears
#rom start o# 7usiness operations
%xisting enterprises in Brown#ield Tourism Tones F N )ears #rom time o#
completion o# expansion or upgrade
The income tax holida) can 7e extended 7ut note more than N )ears
proided the #acilities are upgraded to at least ;,P o# the original
inestment
<pecial 4O6CO rule: carried oer #or the next N consecutie )ears #rom
)ear o# loss@ proided loss has not 7een preiousl) o##set as a deduction
o Gross income taxation: ;P gross income tax@ in lieu o# all national internal
reenue taxes and local taxes@ impost@ assessments@ #ees and licenses
;. Taxable Income
7. %xemption #rom >AT under <ection 1,+ .r/@ .s/@ .t/ and .u/@ 0P percentage tax under <ection 11N@ and the
P;,,.,, annual registration #ee imposed under <ection !0N .B/@ all o# the Tax Code o# 1++$?
c. <u7Hect to all other internal reenue taxes unless otherwise proided 7) law? and
d. %ntitled to limited or #ull deducti7ilit) #rom the gross income o# amount donated to dul) accredited charita7le@
research and educational institutions and reinestment to socio5economic proHects within the area o# operation o#
the cooperatie.
;
e/ >AT 7illed on purchases o# goods and serices@ except the >AT on the importation 7) agricultural cooperaties
o# direct #arm inputs@ machineries and eKuipment@ including spare parts thereo#@ to 7e used directl) and exclusiel)
in the production andDor processing o# their produce@ and importation 7) electric cooperaties o# machineries and
eKuipment@ including spare parts@ which shall 7e directl) used in the generation and distri7ution o# electricit)@
pursuant to <ection 1,+ .r/ and .s/ o# the Tax Code o# 1++$ 7ut which are not aaila7le locall) as certi#ied 7) the
"epartment o# Trade and Industr). All tax5#ree importations shall not 7e trans#erred to an) person until #ie .;/
)ears@ otherwise@ the cooperatie and the trans#eree or assignee shall 7e solidaril) lia7le to pa) twice the amount
o# the tax andDor the duties thereon?
N
JBaranga) -icro Business %nterprise@J hereina#ter re#erred to as B-B%@ re#ers to an) 7usiness entit) or enterprise
engaged in the production@ processing or manu#acturing o# products or commodities@ including agro5processing@
trading and serices@ whose total assets including those arising #rom loans 7ut exclusie o# the land on which the
particular 7usiness entit)Qs o##ice@ plant and eKuipment are situated@ shall not 7e more than Three -illion Pesos
.P0@,,,@,,,.,,/ The A7oe de#inition shall 7e su7Hected to reiew and upward adHustment 7) the <-%" Council@ as
mandated under &epu7lic Act 4o. N+$$@ as amended 7) &epu7lic Act 4o. '!'+
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!0C. 9*. Taxa&le Income Defined. , The term taxa7le income means the pertinent items o# gross income
speci#ied in this Code@ less the deductions andDor personal and additional exemptions@ i# an)@ authoriCed #or such
t)pes o# income 7) this Code or other special laws.
Gross Income
6ess: deductions
6ess: Personal exemptions
Taxa7le income
O. Gross Income
<%C. 0!. Gross Income. 5
.A/ General "e#inition. 5 %xcept when otherwise proided in this Title@ gross income means all income deried
#rom whateer source@ including .7ut not limited to/ the #ollowing items:
.1/ Compensation #or serices in whateer #orm paid@ including@ 7ut not limited to #ees@ salaries@ wages@
commissions@ and similar items?
.!/ Gross income deried #rom the conduct o# trade or 7usiness or the exercise o# a pro#ession?
.0/ Gains deried #rom dealings in propert)?
.2/ Interests?
.;/ &ents?
.N/ &o)alties?
.$/ "iidends?
.'/ Annuities?
.+/ PriCes and winnings?
.1,/ Pensions? and
.11/ PartnerQs distri7utie share #rom the net income o# the general pro#essional partnership.
Gross income means A66 I4CO-% deried #rom 9*AT%>%& <O=&C%. This includes@ 7ut
is not limited to@ the enumeration in the codal.
In answering pro7lems@ the #irst thing )ou should asE is LIs this gross incomeGM@ and
then )ou asE Lis this excludi7leGM .thatBs the thought process to #ollow8/
Compensation
Compensation #or serices in whateer #orm paid@ including@ 7ut not limited to:
o #ees@
o salaries@
o wages@
o commissions@
o and similar items.
Compensation earners are not allowed to deduct an) other deductions #rom their salar)
o 7ut the) ma) hae deductions applied to income earned #rom other sources.
*igh5ranEing executie was gien an apartment where he would host parties #or the
clients o# his compan). *e would also trael a7road with his wi#e to go on meetings. Are
these rental allowances and trael allowances part o# the gross incomeG
o 4O.
o Conenience o# the emplo)er rule: 4o part o# these redounded to the executieBs
personal 7ene#it@ nor were such amounts retained 7) him. These 7ills were paid
directl) 7) the emplo)er5corporation. These expenses are CO-PA4I %UP%4<%<@
not income 7) emplo)ees which are su7Hect to tax. .*enderson Collector/
P%&A
$
contri7utions #rom an emplo)er to an emplo)ee do 4OT #orm part o# his gross
income. .&& 1$5!,11 and &A +;,;/
Business income
$
JPersonal %Kuit) and &etirement Account .P%&A/J re#ers to the oluntar) retirement account esta7lished 7) and
#or the exclusie use and 7ene#it o# the Contri7utor #or the purpose o# 7eing inested solel) in P%&A inestment
products in the Philippines. The Contri7utor shall retain the ownership@ whether legal or 7ene#icial@ o# #unds placed
therein@ including all earnings o# such #unds.
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Gross income deried #rom the conduct o# trade or 7usiness or the exercise o# a
pro#ession
In the case o# manu#acturing@ merchandising or other 7usiness@ gross income means:
Total <ales
6ess: cost o# goods sold
Add: all income #rom incidental and outside sources
Gross Income
Gains
Gains deried #rom dealings in propert)
Gain or loss on sale or exchange o# propert) is recogniCed when the propert) receied in
exchange is essentiall) di##erent #rom the propert) disposed and the propert) receied
has marEet alue.
In sale or exchange o# real or personal propert)@ distinguish #irst 7etween ordinar)
ersus capital assets 7ecause capital assets hae special rules goerning them.
<ee & and < #or more details
Interests
Income #rom interests are also to 7e included in computing #or the gross income
In the case o# ! or more organiCations@ trades or 7usinesses .whether organiCed R
incorporated here or not/ are owned or controlled "I&%CT6I or I4"I&%CT6I 7) the same
interests@ the CI& is authoriCed to distri7ute@ apportion or allocate gross income or
deductions 7etween or among such orgs@ trades or 7usinesses@ i# the CI& determines
that such is necessar) in order to preent tax easion. .!ec :+/ ;IRC%
o This is called Ltrans#er pricingM or Limputed interestM
o The standard to determine the #airness o# related part) transactions is the armBs
length standard.
It means that there should 7e no intimac) 7etween the two.
It means that the corporation should deal with the related corporation in
the same manner it would with an uncontrolled taxpa)er.
o I# a mem7er o# a group o# controlled entities maEes a loan or adances directl) or
indirectl) to another mem7er o# such group and does 4OT charge an) interest or
charges interest not eKual to an armBs length@ the CI& ma) maEe appropriate
allocations to re#lect armBs length interest rate. .meaning the CI& can come in
and impose an interest on the transaction/
o The armBs length interest rate shall 7e:
The same rate o# interest which would hae 7een charged at the time the
inde7tedness arose in an independent transaction 7etween unrelated
parties under similar circumstances@ or
The BanE &e#erence rate 7) the B<P .R5O 29,--%
&ents
&ents are included in the gross income
But what a7out improements 7) lesseesG .!ection #-/ RR "%
o 9hen a lessee erects a 7uilding or maEes improements per agreement with the
lessor@ the lessor ma) report the income there#rom upon either o# the #ollow@ at
his option:
At the time when such 7uilding or improements are completed@ the #air
marEet alue o# such 7uilding or improement
The lessor ma) spread oer the li#e o# the lease the estimated depreciated
alue o# such 7uilding or improement at the termination o# the lease and
report the income #or each o# the adeKuate part.
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o I# the lease is terminated@ and it is not through purchase 7) the lessor@ so that
the lessor comes into possession o# the propert) prior to the time originall) #ixed@
the lessor is considered to receie additional income #or that )ear .i# the alue o#
the 7uilding exceeds the amount alread) reported as income/
4o appreciation alue due to causes other than premature termination o#
the lease shall 7e included.
o I# the 7uilding is destro)ed 7e#ore the expiration o# the lease@ the lessor is
entitled to deduct as loss #or the )ear when such destruction occurred the
amount preiousl) reported as income@ less an) salage alue to the extent that
such loss was not compensated 7) insurance.
o O7ligations o# lessor to third parties are assumed and paid 7) the lessee. .G/
o 9hat a7out adanced rentalsG
&o)alties
&o)alties are an) pa)ment o# an) Eind receied as consideration #or the use o# or right
to use:
1. An) patent@ trademarE@ design or model
!. <ecret #ormula or process
0. Industrial@ commercial or scienti#ic eKuipment
2. In#ormation concerning industrial@ commercial or scienti#ic experience.
"iidends
"iidends are an) distri7ution whether in cash or in other propert) in the ordinar)
course o# 7usiness een i# extraordinar) in amount@ made 7):
o A domestic or resident #oreign corporation
o A Hoint stocE corporation
o A partnership
o A Hoint account
o An association
o An insurance compan)
To the shareholders or mem7ers out o# its earnings or pro#its.
Tid7its:
o 9hen the corporation receies diidends which are tax5#ee .liEe intercorporate
diidends/@ it 7ecomes taxa7le as diidends when it distri7utes the same to its
shareholders.
o 9hen the diidend is paid 7) a domestic corporation to a non5resident #oreign
corporation@ it is taxa7le in #ull. .<ec !' .;7/ o# 4I&C/
General rule: Cash and propert) diidends are taxa7le. <tocE diidends are not taxa7le.
Propert) diidends .or securities other than its own stocE/ .!ection ":*/ RR "%
o These are considered income in the amount o# the #ull marEet alue as when
receied 7) the stocEholder.
o The) are taxed 1,P.
o I# it was paid in stocE o# another corporation@ it is not considered a stocE
diidend.
o The aluation is the marEet alue at the time the diidend 7ecomes pa)a7le. .(or
shares o# stocE o# another corporation gien as diidends@ it is the marEet alue
when the shares o# stocE are receied/
<tocE diidends
o The) are not taxa7le.
%UC%PT when the stocE diidend causes change in the corporate identit)
or a change in the nature o# the shares issued where7) the proportional
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interest o# the stocEholders a#ter the distri7ution is essentiall) di##erent
#rom his #ormer interest. $!ection ":"/ RR "%
A stocE diidend constitutes income i# it gies the shareholder an
interest di##erent #rom that which his #ormer stocE represented.
9hen a stocEholder receies a stocE diidend which is taxa7le
income@ the measure o# income is the #air marEet alue o# the
shares o# stocE receied.
<ale o# stocE receied as diidends .!ection ":9/ RR "%
o Once the recipient sells the stocE diidend@ he ma) realiCe gain or loss. This gain
or loss is treated as arising #orm the sale or exchange o# a capital asset.
o Computation o# gain or loss .the new 7asis per share is used in computing an)
gain or loss upon an) su7seKuent sale o# the shares/:
9hen stocE diidend is the same character as the stocE upon which it is
paid:
Cost: Old <hares D .total num7er o# old and new shares/
9hen stocE diidend materiall) di##ers #rom stocE upon which it is paid:
Cost: Cost o# shares o# 1 class D num7er o# shares in
that class
9hen stocE was purchased at di##erent times and at di##erent prices so
that the identit) cannot 7e determined:
Cost: Presumed to 7e #rom stocE issued with respect to earliest
purchased stocE
<tocE declaration and su7seKuent redemption
o I# a#ter the stocE diidend declaration@ a corporation cancels or redeems the
same in such time and manner as to maEe the distri7utionDredemption essentiall)
eKuialent to a distri7ution o# a taxa7le diidend@ the amount receied shall 7e
considered as a taxa7le diidend .1,P #inal tax #or indiiduals/. .!ection ":#/
RR "%
9h) do corporations do thisG
<o that the shareholder will aoid pa)ing tax. &emem7er@ stocE
diidends are not taxa7le@ 7ut cash diidends are su7Hect to 1,P
#inal tax #or indiiduals .remem7er )our passie income charts8/.
<o corporations declare stocE diidends@ and then redeem them
.7) giing their shareholders cash/ to go around the tax. But
7ecause o# the law@ their su7seKuent redemptions are now taxa7le.
The issuance o# stocE diidends and its su7seKuent redemption
must 7e separate@ distinct@ and not related@ #or the redemption to
7e considered a legitimate tax scheme.
o "epending on each case@ the exempting proision o# <ec
'0.7/ o# the 1+0+ Code .now@ <ec !;2@ &&!/@ ma) not 7e
applica7le i# the redeemed shares were issued with %ona
fide 7usiness purpose@ which is Hudged a#ter each and eer)
step o# the transaction hae 7een considered and the whole
transaction does not amount to a tax easion scheme.
o It is in the issuance o# the stocEs which are su7seKuentl)
redeemed that must hae a %ona fide 7usiness purpose@ not
the redemption. The existence o# legitimate 7usiness
purposes in support o# the redemption o# stocE diidends is
immaterial in income taxation. The test o# taxa7ilit) under
the exempting clause is whether income was realiCed
through the redemption o# stocE diidends. .CI& CA R
Anscor/
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In other words@ i# there was a legitimate 7usiness
purpose in issuing the shares@ A4<CO& wouldnBt
hae 7een taxed #or the redemption. But@ the) #ailed
to show an) 7usiness purpose@ their actuations were
mere a#terthought.
<ources o# distri7ution
o %er) distri7ution is made out o# earnings or pro#its.
o "etermine them to 7e coming #rom the earnings or pro#its o# the taxa7le )ear. I#
not@ then to the past taxa7le )ears. .!ection "::/ RR "%
"istri7ution in liKuidation
o 9hen a corporation distri7utes all its properties or assets in complete liKuidation@
the gain realiCed #rom this is taxa7le.
o Computation is 7ased on <ec 02 .7/ or .c/ o# the Tax Code .!ection ":2/ RR "%
9hen a corporation distri7utes all o# its assets in complete dissolution and
liKuidation@ there is no diidend income to the shareholder receiing the
liKuidating diidend. There is@ instead@ a sale or exchange o# propert). An)
gain realiCed or loss sustained 7) the stocEholder@ whether indiidual or
corporate@ is taxa7le income or deducti7le loss@ as the case ma) 7e.
9hen a corporation was dissoled and in process o# complete liKuidation
and its shareholders surrendered their stocE to it and it paid the sums in
Kuestion to them in exchange@ a transaction tooE place@ which was no
di##erent in its essence #rom a sale o# the same stocE to a third part) who
paid there#ore. .9ise -eer/
In other words@ the gain or loss one incurs when a corporation
liKuidates goes into )our ordinar) income .schedular rate #or
indiiduals@ 0,P #or resident corporations./
o The 1!5month ;,PD1,,P o# gains threshold applies .see
7elow/
ThatBs the di##erence 7etween redeemed shares .taxed at 1,P/
and liKuidating shares .schedular rate #or indiiduals@ or 0,P #or
resident corporations/
(or a trading compan) that is in the process o# liKuidation@ and whose stocEholders are
to receie liKuidating diidends in excess o# their inestment@ the gain is taxa7le 7ecause
the shareholders will realiCe capital gain or loss.
o <uch gain is the di##erence 7etween the #air marEet alue o# the liKuidating
diidends and the adHusted cost to the stocEholders o# their respectie
shareholdings. .BIR Rulin( 9"",.=%
But 7ecause o# <ection 02 .7/ o# the tax code@
I# the shareholder held his shares #or more than 1! months@ onl)
;,P o# the capital gains is taxa7le.
I# less than 1! months@ the entire 1,,P o# the capital gains is
taxa7le.
Annuities
An annuit) is a sum o# mone) pa)a7le )earl) or at regular interals.
Annuities are tax5exempt.
PriCes and 9innings
PriCes and winnings are generall) taxa7le .the) are similar to gains deried #rom la7or/
o %UC%PT: .these are not taxa7le/
1. I# the recipient was selected without an) action on his part to enter the contest
and he was not reKuired to render su7stantial #uture serices as a condition #or
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receiing the priCe or award
!. Those granted to athletes are exempt
0. Those that are in the nature o# gi#ts
Pensions
A pension is a gratuit) granted as a #aor or reward or one paid under gien conditions
to a person #ollowing retirement #rom serice or to suriing dependents
Pensions are tax5exempt
<hare in GPPBs Income
<%C. !N. Tax 6ia7ilit) o# -em7ers o# General Pro#essional Partnerships. 5 A general pro#essional partnership as
such shall not 7e su7Hect to the income tax imposed under this Chapter. Persons engaging in 7usiness as
partners in a general pro#essional partnership shall 7e lia7le #or income tax onl) in their separate and indiidual
capacities.
(or purposes o# computing the distri7utie share o# the partners@ the net income o# the partnership shall 7e
computed in the same manner as a corporation.
%ach partner shall report as gross income his distri7utie share@ actuall) or constructiel) receied@ in the net
income o# the partnership.
The GPP is tax5exempt@ 7ut the income o# the indiidual partners are su7Hect to tax.
o Pro#essional partnerships o# real estate 7roEers are included in this exemption
.&uling !+25''@ 1ul) ;@ 1+''/
%ach partner shall report as gross income his distri7utie share in the net income o# the
partnership.
(rom whateer source
Cancellation or #orgieness o# de7t ma) amount to
o Pa)ment o# income F thatBs taxa7le. .a person per#orms serice #or a creditor
who cancels his de7t/
o A capital transaction F thatBs taxa7le .a corporation #orgies the de7t o# a
stocEholder@ thatBs liEe pa)ing a diidend/
o A gi#t F thatBs exempt. .a creditor merel) wants to 7ene#it a de7tor 7) canceling
the de7t without an) consideration/ .!ection :+/ RR "%
AcKuisition 7) the Goernment o# priate properties expropriation@ said properties 7eing
1=<T6I compensated@ is em7raced within the meaning o# the term JsaleJ Jdisposition o#
propert)J@ and the proceeds should 7e included in the gross compensation. .GutierreC
Collector@ 1,1 Phil $20/
&e#unds R Tax Credits
o Taxes which were preiousl) claimed and allowed as deductions 7ut su7seKuentl)
was re#unded or granted as tax credit should 7e declared as part o# the gross
income o# that )ear. The purpose o# this is put )ou 7acE in eKuili7rium F to 7ring
)our gross income 7acE up.
o %UC%PT:
%state and donorBs tax
Income@ war5pro#it and excess pro#it taxes imposed 7) a #oreign countr)
%state and gi#t taxes
Taxes assessed against local 7ene#its o# a Eind tending to increase the
alue o# the propert) assessed
<tocE transaction tax
%nerg) tax
Taxes which are not allowa7le as deductions under the law
9hen re#unded@ the) are not declara7le as gross income 7ecause
the) are not allowa7le as deductions.
<pecial tax credits
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o <ales@ compensating and speci#ic taxes paid on supplies and raw materials
imported 7) a registered export producerG ThatBs gien as tax credit.
o 9hen a registered BOI R Tourism enterprise assumes pa)ment o# taxes withheld
due #rom the #oreign lender on interest pa)ments on #oreign loans@ thatBs gien
as a tax credit too. .R5C *9,.+%
o 9hen a P%&A Contri7utor contri7utes@ he is gien a tax credit o# ;P o# the total
P%&A contri7ution. .&A +;,;/
'
%xclusions
!ection 9" $B% 0xclusions &rom Gross Income. 5 The #ollowing items shall not 7e included in gross income
and shall 7e exempt #rom taxation under this title:
.1/ 6i#e Insurance. 5 The proceeds o# li#e insurance policies paid to the heirs or 7ene#iciaries upon the death o#
the insured@ whether in a single sum or otherwise@ 7ut i# such amounts are held 7) the insurer under an
agreement to pa) interest thereon@ the interest pa)ments shall 7e included in gross income.
.!/ Amount &eceied 7) Insured as &eturn o# Premium. 5 The amount receied 7) the insured@ as a return o#
premiums paid 7) him under li#e insurance@ endowment@ or annuit) contracts@ either during the term or at the
maturit) o# the term mentioned in the contract or upon surrender o# the contract.
.0/ Gi#ts@ BeKuests@ and "eises. 5 The alue o# propert) acKuired 7) gi#t@ 7eKuest@ deise@ or descent: Proided@
howeer@ That income #rom such propert)@ as well as gi#t@ 7eKuest@ deise or descent o# income #rom an)
propert)@ in cases o# trans#ers o# diided interest@ shall 7e included in gross income.
.2/ Compensation #or InHuries or <icEness. 5 amounts receied@ through Accident or *ealth Insurance or under
9orEmenQs Compensation Acts@ as compensation #or personal inHuries or sicEness@ plus the amounts o# an)
damages receied@ whether 7) suit or agreement@ on account o# such inHuries or sicEness.
.;/ Income %xempt under Treat). 5 Income o# an) Eind@ to the extent reKuired 7) an) treat) o7ligation 7inding
upon the Goernment o# the Philippines.
.N/ &etirement Bene#its@ Pensions@ Gratuities@ etc.5
.a/ &etirement 7ene#its receied under &epu7lic Act 4o. $N21 and those receied 7) o##icials and emplo)ees o#
priate #irms@ whether indiidual or corporate@ in accordance with a reasona7le priate 7ene#it plan maintained
7) the emplo)er: Proided@ That the retiring o##icial or emplo)ee has 7een in the serice o# the same emplo)er
#or at least ten .1,/ )ears and is not less than #i#t) .;,/ )ears o# age at the time o# his retirement: Proided@
#urther@ That the 7ene#its granted under this su7paragraph shall 7e aailed o# 7) an o##icial or emplo)ee onl)
once. (or purposes o# this <u7section@ the term Qreasona7le priate 7ene#it planQ means a pension@ gratuit)@
stocE 7onus or pro#it5sharing plan maintained 7) an emplo)er #or the 7ene#it o# some or all o# his o##icials or
emplo)ees@ wherein contri7utions are made 7) such emplo)er #or the o##icials or emplo)ees@ or 7oth@ #or the
purpose o# distri7uting to such o##icials and emplo)ees the earnings and principal o# the #und thus accumulated@
and wherein its is proided in said plan that at no time shall an) part o# the corpus or income o# the #und 7e used
#or@ or 7e dierted to@ an) purpose other than #or the exclusie 7ene#it o# the said o##icials and emplo)ees.
.7/ An) amount receied 7) an o##icial or emplo)ee or 7) his heirs #rom the emplo)er as a conseKuence o#
separation o# such o##icial or emplo)ee #rom the serice o# the emplo)er 7ecause o# death sicEness or other
ph)sical disa7ilit) or #or an) cause 7e)ond the control o# the said o##icial or emplo)ee.
.c/ The proisions o# an) existing law to the contrar) notwithstanding@ social securit) 7ene#its@ retirement
gratuities@ pensions and other similar 7ene#its receied 7) resident or nonresident citiCens o# the Philippines or
aliens who come to reside permanentl) in the Philippines #rom #oreign goernment agencies and other
institutions@ priate or pu7lic.
.d/ Pa)ments o# 7ene#its due or to 7ecome due to an) person residing in the Philippines under the laws o# the
=nited <tates administered 7) the =nited <tates >eterans Administration.
.e/ Bene#its receied #rom or enHo)ed under the <ocial <ecurit) <)stem in accordance with the proisions o#
&epu7lic Act 4o. '!'!.
.#/ Bene#its receied #rom the G<I< under &epu7lic Act 4o. '!+1@ including retirement gratuit) receied 7)
goernment o##icials and emplo)ees.
.$/ -iscellaneous Items. 5
.a/ Income "eried 7) (oreign Goernment. 5 Income deried #rom inestments in the Philippines in loans@
stocEs@ 7onds or other domestic securities@ or #rom interest on deposits in 7anEs in the Philippines 7)
.i/ #oreign goernments@
.ii/ #inancing institutions owned@ controlled@ or enHo)ing re#inancing #rom #oreign goernments@ and
'
!0C. .. Tax Treatment of +ontri&utions. 5 The Contri7utor shall 7e gien an income tax credit eKuialent to
#ie percent .;P/ o# the total P%&A contri7ution: +rovided@ however: That in no instance can there 7e an) re#und
o# the said tax credit arising #rom the P%&A contri7utions. I# the Contri7utor is an oerseas (ilipino@ he shall 7e
entitled to claim tax credit #rom an) tax pa)a7le to the national goernment under the 4ational Internal &eenue
Code o# 1++$@ as amended.
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.iii/ international or regional #inancial institutions esta7lished 7) #oreign goernments.
.7/ Income "eried 7) the Goernment or its Political <u7diisions. 5 Income deried #rom an) pu7lic utilit) or
#rom the exercise o# an) essential goernmental #unction accruing to the Goernment o# the Philippines or to an)
political su7diision thereo#.
.c/ PriCes and Awards. 5 PriCes and awards made primaril) in recognition o# religious@ charita7le@ scienti#ic@
educational@ artistic@ literar)@ or ciic achieement 7ut onl) i#:
.i/ The recipient was selected without an) action on his part to enter the contest or proceeding? and
.ii/ The recipient is not reKuired to render su7stantial #uture serices as a condition to receiing the priCe or
award.
.d/ PriCes and Awards in <ports Competition. 5 All priCes and awards granted to athletes in local and
international sports competitions and tournaments whether held in the Philippines or a7road and sanctioned 7)
their national sports associations.
.e/ 10th -onth Pa) and Other Bene#its. 5 Gross 7ene#its receied 7) o##icials and emplo)ees o# pu7lic and
priate entities: Proided@ howeer@ That the total exclusion under this su7paragraph shall not exceed Thirt)
thousand pesos .P0,@,,,/ which shall coer:
.i/ Bene#its receied 7) o##icials and emplo)ees o# the national and local goernment pursuant to &epu7lic Act
4o. NN'N?
.ii/ Bene#its receied 7) emplo)ees pursuant to Presidential "ecree 4o. ';1@ as amended 7) -emorandum
Order 4o. !'@ dated August 10@ 1+'N?
.iii/ Bene#its receied 7) o##icials and emplo)ees not coered 7) Presidential decree 4o. ';1@ as amended 7)
-emorandum Order 4o. !'@ dated August 10@ 1+'N? and
.i/ Other 7ene#its such as productiit) incenties and Christmas 7onus: Proided@ #urther@ That the ceiling o#
Thirt) thousand pesos .P0,@,,,/ ma) 7e increased through rules and regulations issued 7) the <ecretar) o#
(inance@ upon recommendation o# the Commissioner@ a#ter considering among others@ the e##ect on the same o#
the in#lation rate at the end o# the taxa7le )ear.
.#/ G<I<@ <<<@ -edicare and Other Contri7utions. 5 G<I<@ <<<@ -edicare and Pag5i7ig contri7utions@ and union
dues o# indiiduals.
.g/ Gains #rom the <ale o# Bonds@ "e7entures or other Certi#icate o# Inde7tedness. 5 Gains realiCed #rom the
same or exchange or retirement o# 7onds@ de7entures or other certi#icate o# inde7tedness with a maturit) o#
more than #ie .;/ )ears.
.h/ Gains #rom &edemption o# <hares in -utual (und. 5 Gains realiCed 7) the inestor upon redemption o#
shares o# stocE in a mutual #und compan) as de#ined in <ection !! .BB/ o# this Code.
The #ollowing are tax5exempt and are 4OT included in gross income:
1. 6i#e insurance .except i# the proceeds are held 7) the insurer under an agreement to
pa) interest thereon. The interest pa)ments onl) are included in the gross income/
!. Amount receied 7) insured as return o# premium
0. Gi#ts@ 7eKuests@ deises or descents .7ut the income #rom such propert) acKuired 7)
these which shall 7e included in gross income/
2. Compensation #or income personal inHuries or sicEness .plus the amounts o# an)
damages receied on account o# such/
;. Income exempt under an) treat)
N. Bene#its receied #rom the =< >eterans Administration
$. &etirement 7ene#its@ pensions@ gratuities .proided@ the retiring person has 7een in
the serice o# the same emplo)er #or at least 1, )ears and is not less than ;, )ears
o# age at the time o# his retirement. This 7ene#it can onl) 7e aailed o# once/ XRA
#-*=B
'. <eparation pa)@ caused 7) death@ sicEness or other disa7ilit) 7e)ond the control o#
the emplo)ee .RA #-*=%
-
+
<ection 1. An) proision o# law to the contrar) notwithstanding@ the retirement 7ene#its receied 7) o##icials and
emplo)ees o# priate #irms@ whether indiidual or corporate@ in accordance with a reasona7le priate 7ene#it plan
maintained 7) the emplo)er shall 7e exempt #rom all taxes and shall not 7e lia7le to attachment@ garnishment@ le)
or seiCure 7) or under an) legal or eKuita7le process whatsoeer except to pa) a de7t o# the o##icial or emplo)ee
concerned to the priate 7ene#it plan or that arising #rom lia7ilit) imposed in a criminal action: Proided@ That the
retiring o##icial or emplo)ee has 7een in the serice o# the same emplo)er #or at least ten .1,/ )ears and is not less
than #i#t) )ears o# age at the time o# his retirement: Proided@ #urther@ That the 7ene#its granted under this Act
shall 7e aailed o# 7) an o##icial or emplo)ee onl) once: Proided@ #inall)@ That in case o# separation o# an o##icial or
emplo)ee #rom the serice o# the emplo)er due to death@ sicEness or other ph)sical disa7ilit) or #or an) cause
7e)ond the control o# the said o##icial or emplo)ee@ an) amount receied 7) him or 7) his heirs #rom the emplo)er
as a conseKuence o# such separation shall liEewise 7e exempt as hereina7oe proided.
As used in this Act@ the term Jreasona7le priate 7ene#it planJ means a pension@ gratuit)@ stocE 7onus or pro#it
sharing plan maintained 7) an emplo)er #or the 7ene#it o# some or all o# his o##icials and emplo)ees@ wherein
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6iEe redundanc)@ etc
I# #ault or conduct o# emplo)ee is to 7lame@ not exempted
+. <ocial securit) 7ene#its@ retirement gratuities@ pensions and similar 7ene#its #rom
#oreign goernment agencies
1,. <<< 7ene#its
11. G<I< 7ene#its
-iscellaneous tax5exempt items:
1. Income earned 7) #oreign goernments in the Philippines
!. Income earned 7) the Phil goernment or its political su7diisions .liEe pu7lic
utilities/
0. PriCes and awards made primaril) in recognition o# religious@ charita7le@ scienti#ic@
educational@ artistic@ literar) or ciic achieement F 7ut onl) i# he was selected
without an) action on his part to enter the contest and he is not reKuired to render
su7stantial #uture serices as a condition to receiing the priCe or award
2. PriCes and awards in sports competitions sanctioned 7) the national sports
associations
;. 10
th
month pa)@ Christmas 7onus@ productiit) incenties@ and other 7ene#its .7ut
exemptions appl) onl) to the #irst P0,@,,,/ XRA =.99B
N. G<I<@ <<<@ -edicare@ Pag5i7ig union dues and other contri7utions
$. Gains #rom sale o# 7onds@ de7entures or other certi#icate o# inde7tedness with
maturities o# more than ; )ears
'. Gains #rom redemption o# shares in mutual #unds
+. Interest receied 7) a non5resident indiidual or a non5resident corp #rom deposits
with depositor) 7anEs under the expanded (C"=
1,. Intercompan) diidends .residentDdomestic corps #rom domestic corps/
11. (e minimis 7ene#its receied 7) a managerial or superisor
1!. Those under special laws .PC<O and lotto winnings8/
-inimum wage earners shall 7e exempt #rom the pa)ment o# income tax too. *olida)
pa)@ oertime pa)@ night shi#t di##erential pa) and haCard pa) receied 7) such minimum
wage earners shall liEewise 7e exempt #rom income tax.
Income #rom emplo)eesB trusts are exempt #rom A66 Einds o# taxes@ including #inal
withholding tax on interest income. .CI& CA R GC6/
Terminal leae pa) is not part o# gross salar). It is a retirement 7ene#it and is tax
exempt. .CI& CA R Castaneda@ and &eKuest o# Att). Tialcita/
I# the emplo)ee is separated #rom a preious emplo)er@ 7ut is not emplo)ed 7) another
emplo)er@ he shall 7e re#unded or credited the taxes withheld on his exempt 10
th
month
pa) and other 7ene#its 7) his present emplo)er.
I# the emplo)ee is separated 7ut has no present Ho7@ he shall claim his re#und
with the BI&. .RR ",-: & R5C 92,-#%
Income deried 7) #oreign goernment
(or it to 7e exempt@ the income should 7e receied 7):
B) #oreign goernments
B) #inancing institutions owned@ controlled or enHo)ing re5#inancing #rom #oreign
goernments
B) international or regional #inancial institutions esta7lished 7) #oreign goernments
contri7utions are made 7) such emplo)er or o##icials and emplo)ees@ or 7oth@ #or the purpose o# distri7uting to
such o##icials and emplo)ees the earnings and principal o# the #und thus accumulated@ and wherein it is proided in
said plan that at no time shall an) part o# the corpus or income o# the #und 7e used #or@ or 7e dierted to@ an)
purpose other than #or the exclusie 7ene#it o# the said o##icials and emplo)ees.
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P. 'rin(e Bene&its Tax $'BTC 7hut upC%
<%C. 00. <pecial Treatment o# (ringe Bene#it.5
.A/ Imposition o# Tax.5 A #inal tax o# thirt)5#our percent .02P/ e##ectie 1anuar) 1@ 1++'? thirt)5three percent
.00P/ e##ectie 1anuar) 1@ 1+++? and thirt)5two percent .0!P/ e##ectie 1anuar) 1@ !,,, and therea#ter@ is
here7) imposed on the grossed5up monetar) alue o# #ringe 7ene#it #urnished or granted to the emplo)ee
.except ranE and #ile emplo)ees as de#ined herein/ 7) the emplo)er@ whether an indiidual or a corporation
.unless the #ringe 7ene#it is reKuired 7) the nature o#@ or necessar) to the trade@ 7usiness or pro#ession o# the
emplo)er@ or when the #ringe 7ene#it is #or the conenience or adantage o# the emplo)er/. The tax herein
imposed is pa)a7le 7) the emplo)er which tax shall 7e paid in the same manner as proided #or under <ection
;$ .A/ o# this Code. The grossed5up monetar) alue o# the #ringe 7ene#it shall 7e determined 7) diiding the
actual monetar) alue o# the #ringe 7ene#it 7) sixt)5six percent .NNP/ e##ectie 1anuar) 1@ 1++'? sixt)5seen
percent .N$P/ e##ectie 1anuar) 1@ 1+++? and sixt)5eight percent .N'P/ e##ectie 1anuar) 1@ !,,, and
therea#ter: Proided@ howeer@ That #ringe 7ene#it #urnished to emplo)ees and taxa7le under <u7sections .B/@
.C/@ ."/ and .%/ o# <ection !; shall 7e taxed at the applica7le rates imposed thereat: Proided@ #urther@ That the
grossed 5=p alue o# the #ringe 7ene#it shall 7e determined 7) diiding the actual monetar) alue o# the #ringe
7ene#it 7) the di##erence 7etween one hundred percent .1,,P/ and the applica7le rates o# income tax under
<u7sections .B/@ .C/@ ."/@ and .%/ o# <ection !;.
.B/ (ringe Bene#it de#ined.5 (or purposes o# this <ection@ the term J#ringe 7ene#itJ means an) good@ serice or
other 7ene#it #urnished or granted in cash or in Eind 7) an emplo)er to an indiidual emplo)ee .except ranE and
#ile emplo)ees as de#ined herein/ such as@ 7ut not limited to@ the #ollowing:
.1/ *ousing?
.!/ %xpense account?
.0/ >ehicle o# an) Eind?
.2/ *ousehold personnel@ such as maid@ drier and others?
.;/ Interest on loan at less than marEet rate to the extent o# the di##erence 7etween the marEet rate and actual
rate granted?
.N/ -em7ership #ees@ dues and other expenses 7orne 7) the emplo)er #or the emplo)ee in social and athletic
clu7s or other similar organiCations?
.$/ %xpenses #or #oreign trael?
.'/ *olida) and acation expenses?
.+/ %ducational assistance to the emplo)ee or his dependents? and
.1,/ 6i#e or health insurance and other non5li#e insurance premiums or similar amounts in excess o# what the law
allows.
.C/ (ringe Bene#its 4ot Taxa7le. 5 The #ollowing #ringe 7ene#its are not taxa7le under this <ection:
.1/ #ringe 7ene#its which are authoriCed and exempted #rom tax under special laws?
.!/ Contri7utions o# the emplo)er #or the 7ene#it o# the emplo)ee to retirement@ insurance and hospitaliCation
7ene#it plans?
.0/ Bene#its gien to the ranE and #ile emplo)ees@ whether granted under a collectie 7argaining agreement or
not? and
.2/ "e minimis 7ene#its as de#ined in the rules and regulations to 7e promulgated 7) the <ecretar) o# (inance@
upon recommendation o# the Commissioner.
The <ecretar) o# (inance is here7) authoriCed to promulgate@ upon recommendation o# the Commissioner@ such
rules and regulations as are necessar) to carr) out e##icientl) and #airl) the proisions o# this <ection@ taEing into
account the peculiar nature and special need o# the trade@ 7usiness or pro#ession o# the emplo)er.
4ote: the (BT is paid 7) the emplo)er.
(ringe 7ene#it is an) good@ serice@ or other 7ene#it granted in cash or in Eind 7) an
emplo)er to an emplo)ee .except ranE R #ile/ such as:
1. *ousing
!. %xpense account
0. >ehicle o# an) Eind
2. *ousehold personnel@ liEe maids and driers
;. Interest on loan at less than marEet rate@ to the extent o# the di##erence 7etween the
marEet rate and the actual rate granted
N. -em7ership #ees@ dues R other expenses in social R athletic clu7s or similar orgs
$. %xpenses #or #oreign trael
'. *olida) and acation expenses
+. %ducational assistance to the emplo)ee or his dependents
1,. 6i#e or health insurance R other non5li#e premiums
This list is not exclusie.
(ringe 7ene#it taxG A #inal tax o# 0!P on the grossed up monetar) alue o# #ringe
7ene#its will 7e imposed.
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o The #ringe 7ene#it tax on the taxa7le #ringe 7ene#it is computed as #ollows:
i. "etermine the grossed5up monetar) alue o# the #ringe 7ene#it. This is the
monetar) alue o# the 7ene#it diided 7) N'P
ii. Compute the #ringe 7ene#it tax 7) multipl)ing the grossed5up monetar)
alue o# the #ringe 7ene#it 7) 0!P
Actual -onetar) >alueDN'P Y Grossed5up -onetar) >alue
Grossed5up -onetar) >alue x 0!P Y (BT
!pecial Cases &or 'BT 'BT
&eceied 7) non5resident alien not engaged
in trade or 7usiness
!;P
&eceied 7) alien or (ilipino emplo)ed 7) a
&O*: or &A*:
1;P
&eceied 7) emplo)ees in a special economic
Cone
!; P or 1;P .depends/
The (BT is also an expense which is deducti7le #rom the emplo)erBs gross income.
o The deduction #or the emplo)er is the grossed5up monetar) alue o# the #ringe
7ene#it.
The #ollowing #ringe 7ene#its are not su7Hect to the (BT:
1. Those that are necessar) or reKuired 7) the trade R 7usiness o# the emplo)er
!. Those #or the conenience or adantage o# the emplo)er
0. Those exempt under special laws
2. Contri7utions to retirement@ insurance and hospitaliCation 7ene#it plans
;. "e minimis 7ene#its . these are o# relatiel) small alue R are #urnished merel) as a
means o# promoting the health@ goodwill o# the emplo)ees. <ee RR .,++ #or
examples/
N. Those gien to ranE R #ile emplo)ees .those who are holding neither managerial nor
superisor) positions/
Clari#ications #rom RR 9,-. .a 7it mala%o@ so checE the &e)es 7ooE and that excel
reiewer thing/
On housin( priile(es 5onetary 6alue
I# emplo)er leases a residential propert) #or the use o# the emplo)ee
and the propert) is the usual place o# residence o# the emplo)ee
;,P o# the
monthl) rental paid
I# the emplo)er purchases a residential propert) on installment 7asis
and allows the emplo)ee to use it as his usual place o# residence
<ee page 01N o#
&e)es
I# the emplo)er purchases a residential propert) and trans#ers
ownership to the emplo)ee
<ee page 01N o#
&e)es
*ousing o# militar) o##icials %xempt
*ousing which is situated inside or adHacent to the premises o# a
7usiness or #actor) .within ;, meters/
%xempt
Temporar) housing #or emplo)ee who sta)s #or not more than 0
months
%xempt
0xpense Account !ubDect to 'BT or
notE
I# the expense was dul) receipted #or and in the name o# the
emplo)er@ and the expense is not in the nature o# a personal expense
attri7uta7le to the emplo)ee
4ope.
I# these are personal expenses such as groceries@ paid #or or
reim7ursed 7) the emplo)er@ een i# these are dul) receipted #or in the
Iup.
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name o# the emplo)er
&ATA which are #ixed in amount R regularl) gien as part o# monthl)
compensation
4ope@ 7ut to 7e
treated as income
o# the emplo)ee.
5otor 6ehicles 5onetary 6alue
I# emplo)er purchases ehicle in the name o# the emplo)ee@ regardless
o# usage o# the ehicle
1,,P o# the alue
.acKuisition cost/
I# emplo)er shoulders a portion o# the amount o# the purchase price o#
a ehicle owned 7) the emplo)ee
Amount shouldered
7) the emplo)er
I# emplo)er owns R maintains a #leet o# ehicles #or the use o# the
7usiness and the emplo)ees
;,P o# the alue
=se o# aircra#t owned R maintained 7) the emplo)er %xempt
=se o# )acht >alue 7ased on
depreciation
0xpenses &or 'orei(n Trael 5onetary 6alue
I# it is reasona7le #or the purpose o# attending 7usiness meetings or
conentions
%xempt
I# itBs #or local trael expenses not more than =<V0,, per da) .not
including lodging/
%xempt
Cost o# plane ticEet i# econom) or 7usiness class %xempt
Cost o# plane ticEet i# #irst class 0,P o# the alue
Trael expense o# #amil) mem7ers o# the emplo)ee 1,,P o# the alue
0ducational Assistance 5onetary 6alue
I( the emplo)ee was granted a scholarship 7) the emplo)er and the
education or stud) is directl) connected to the trade or 7usiness o# the
emplo)er@ and there is a written contract that the emplo)ee must
remain in emplo) #or a period o# time
%xempt
I# the assistance was extended to the emplo)eeBs dependents and was
proided through a scholarship program o# the compan)
%xempt
<i&e or 3ealth Insurance/ etc Premiums in 0xcess o& 7hat the
<a4 Allo4s
5onetary 6alue
I# the contri7ution is pursuant to existing law such as to the G<I< or
<<<
%xempt
I# it is #or the group insurance o# the emplo)ees %xempt
(or the others .household e*penses, mem%ership fees J other e*penses in social J
athletic clu%s, holiday J vacation e*penses2@ these monetar) alue will 7e 1,,P o# the
alue o# the 7ene#it receied.
The #ollowing are considered de minimis 7ene#its o# A66 t)pes o# emplo)ees. These are
exempt #rom tax. $RR .,++%
1. -onetiCed unused action leae@ not exceeding 1, da)s per )ear
!. -edical cash allowance to dependents o# emplo)ees not exceeding P$;,Demplo)ee
per sem or P1!;Dmonth
0. &ice su7sid) o# P1;,, or 1 sacE o# ;, Eg rice per month .sarap,2 1&& ;5!,,'/
2. =ni#orms and clothing allowance not exceeding P2@,,,Dmonth .u%os sa Iara,2 .&& ;5
!,11/
;. Actual )earl) medical 7ene#its not exceeding P1,@,,,Dmonth
N. 6aundr) allowance not exceeding P0,,Dmonth
$. %mplo)ee achieement awards #or length o# serice or sa#et) achieement in the
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#orm o# tangi7le propert) with alue not exceeding P1,@,,,
'. (lowers@ #ruits@ 7ooEs gien under special circumstances liEe illness@ marriage@ 7irth
o# 7a7)
+. Gi#ts gien during Christmas R maHor anniersaries not exceeding P;@,,,D)ear
1,. "ail) meal allowance #or oertime worE@ not exceeding !;P o# the 7asic minimum
wage
The amount o# de minimis 7ene#its is not computed in determining the P0,@,,, ceiling o#
Lother 7ene#itsM proided in <ec 0!.7/ o# the Tax Code .see e*clusions2@
o 7ut i# the emplo)er pa)s -O&% than the ceilings prescri7ed a7oe@ the excess is
taxa7le to the emplo)ee O46I i# it is 7e)ond the P0,@,,, ceiling.
o In other words@ when a 7ene#it is de minimis with a ceiling@ the 7ene#it exempt
#rom the #ringe 7ene#it tax is up to the ceiling. An) excess oer the ceiling shall
7e part o# the 7ene#its which are exempt .exclusions #rom gross income/ up to
P0,@,,,.
An) amount gien 7) the emplo)er as 7ene#its@ whether de minimis or others@ shall 7e
deducti7le as 7usiness expense. &emem7er this8 .RR *+,++%
To recap@
o (ringe 7ene#it gien to ranE and #ile emplo)ee is not su7Hect to the #ringe 7ene#it
tax.
o (ringe 7ene#it gien to a superisor) or managerial emplo)ee is su7Hect to the
#ringe 7ene#it tax.
o (e minimis 7ene#it@ whether gien to ranE and #ile emplo)ee or to superisor) or
managerial emplo)ee@ is not su7Hect to the #ringe 7ene#it tax.
F. )eductions
<%C. 02. "eductions #rom Gross Income. 5 %xcept #or taxpa)ers earning compensation income arising #rom
personal serices rendered under an emplo)er5emplo)ee relationship where no deductions shall 7e allowed
under this <ection other than under su7section .-/ hereo#@ in computing taxa7le income su7Hect to income tax
under <ections !2 .A/? !; .A/? !N? !$ .A/@ .B/ and .C/? and !' .A/ .1/@ there shall 7e allowed the #ollowing
deductions #rom gross income?
"eductions are amounts allowed 7) law to reduce the gross income to taxa7le income.
These amounts are allowed to taxpa)ers 7) legislatie grace and the taxpa)er claiming
them must proe compliance with the proisions o# the law authoriCing the deductions.
The #ollowing are the deductions #rom gross income:
o (or indiiduals with gross compensation income .#rom emplo)er5emplo)ee
relationship/ onl):
i. Premium pa)ments on health andDor hospitaliCation insurance .P**I/
ii. Personal exemptions
o (or indiiduals with gross income #rom 7usiness or practice o# pro#ession:
i. Optional standard deduction .O<"/@ or
ii. ItemiCed deductions@
iii. P**I@
i. Personal exemptions.
o (or corporations:
i. Optional standard deduction .O<"/@ or
ii. ItemiCed deductions
ItemiCed deductions are expenses and losses related to trade or 7usiness or the practice
o# a pro#ession.
o ItemiCed deductions are what <ec. 02 talEs a7out@ and these do not appl) to
taxpa)ers earning compensation income #rom an emplo)er5emplo)ee
relationship.
The #ollowing are the itemiCed deductions:
1. %xpenses
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!. Interest
0. Taxes
2. 6osses
;. Bad de7ts
N. "epreciation
$. "epletion
'. Charita7le and other contri7utions
+. &esearch and deelopment
1,. Pension trusts
%xpenses@ in general
.A/ %xpenses. 5
.1/ Ordinar) and 4ecessar) Trade@ Business or Pro#essional %xpenses.5
.a/ In General. 5 There shall 7e allowed as deduction #rom gross income all the ordinar) and necessar) expenses
paid or incurred during the taxa7le )ear in carr)ing on or which are directl) attri7uta7le to@ the deelopment@
management@ operation andDor conduct o# the trade@ 7usiness or exercise o# a pro#ession@ including:
.i/ A reasona7le allowance #or salaries@ wages@ and other #orms o# compensation #or personal serices
actuall) rendered@ including the grossed5up monetar) alue o# #ringe 7ene#it #urnished or granted 7) the
emplo)er to the emplo)ee: Proided@ That the #inal tax imposed under <ection 00 hereo# has 7een paid?
.ii/ A reasona7le allowance #or trael expenses@ here and a7road@ while awa) #rom home in the pursuit o#
trade@ 7usiness or pro#ession?
.iii/ A reasona7le allowance #or rentals andDor other pa)ments which are reKuired as a condition #or the
continued use or possession@ #or purposes o# the trade@ 7usiness or pro#ession@ o# propert) to which the taxpa)er
has not taEen or is not taEing title or in which he has no eKuit) other than that o# a lessee@ user or possessor?
.i/ A reasona7le allowance #or entertainment@ amusement and recreation expenses during the taxa7le
)ear@ that are directl) connected to the deelopment@ management and operation o# the trade@ 7usiness or
pro#ession o# the taxpa)er@ or that are directl) related to or in #urtherance o# the conduct o# his or its trade@
7usiness or exercise o# a pro#ession not to exceed such ceilings as the <ecretar) o# (inance ma)@ 7) rules and
regulations prescri7e@ upon recommendation o# the Commissioner@ taEing into account the needs as well as the
special circumstances@ nature and character o# the industr)@ trade@ 7usiness@ or pro#ession o# the taxpa)er:
Proided@ That an) expense incurred #or entertainment@ amusement or recreation that is contrar) to law@ morals
pu7lic polic) or pu7lic order shall in no case 7e allowed as a deduction.
.7/ <u7stantiation &eKuirements. 5 4o deduction #rom gross income shall 7e allowed under <u7section .A/ hereo#
unless the taxpa)er shall su7stantiate with su##icient eidence@ such as o##icial receipts or other adeKuate
records: .i/ the amount o# the expense 7eing deducted@ and
.ii/ the direct connection or relation o# the expense 7eing deducted to the deelopment@ management@
operation andDor conduct o# the trade@ 7usiness or pro#ession o# the taxpa)er.
.c/ Bri7es@ 3icE7acEs and Other <imilar Pa)ments. 5 4o deduction #rom gross income shall 7e allowed under
<u7section .A/ hereo# #or an) pa)ment made@ directl) or indirectl)@ to an o##icial or emplo)ee o# the national
goernment@ or to an o##icial or emplo)ee o# an) local goernment unit@ or to an o##icial or emplo)ee o# a
goernment5owned or 5controlled corporation@ or to an o##icial or emplo)ee or representatie o# a #oreign
goernment@ or to a priate corporation@ general pro#essional partnership@ or a similar entit)@ i# the pa)ment
constitutes a 7ri7e or EicE7acE.
.!/ %xpenses Allowa7le to Priate %ducational Institutions. 5 In addition to the expenses allowa7le as deductions
under this Chapter@ a priate educational institution@ re#erred to under <ection !$ .B/ o# this Code@ ma) at its
option elect either: .a/ to deduct expenditures otherwise considered as capital outla)s o# deprecia7le assets
incurred during the taxa7le )ear #or the expansion o# school #acilities or .7/ to deduct allowance #or depreciation
thereo# under <u7section .(/ hereo#.
The codal considers as deductions all ordinar) and necessar) expenses in carr)ing on
the deelopment@ management@ and operation o# a trade@ 7usiness or pro#ession@
including a reasona7le allowance #or:
1. <alaries@ wages@ and other #orms o# compensation including #ringe 7ene#its
!. Trael expenses@ here and a7road@ in pursuit o# trade and 7usiness
0. &entals and others which are reKuired #or the continued use o# propert)
2. %ntertainment@ amusement and recreation expenses that are directl) connected to
the trade@ 7usiness@ or pro#ession .7ut should not 7e contrar) to law@ morals@ etc/
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According to the codal@ these are the reKuirements #or deducti7le claims:
1. <u##icient eidence .liEe o##icial receipts/
!. A direct connection o# the expense to the deelopment@ management@ operation@
andDor conduct o# the trade@ 7usiness or pro#ession
Pa)ments o# 7ri7es R EicE7acEs are not deducti7le.
1urisprudence expounded on the reKuirements with the #ollowing reKuisites #or the
deducti7ilit) o# ordinar) and necessar) trade@ 7usiness@ or pro#essional expenses .CI&
Isa7ela/:
1. %xpense must 7e ordinar) and necessar)
!. -ust hae 7een paid or incurred during the taxa7le )ear
0. -ust hae 7een paid or incurred in carr)ing on the tradeD7usiness
2. -ust 7e supported 7) receipts@ records or other pertinent papers
A taxpa)er who is authoriCed to deduct certain expenses and other allowa7le deductions
#or the current )ear 7ut #ailed to do so cannot deduct the same #or the next )ear.
It is ordinar) when it is normal in relation to the 7usiness o# the taxpa)er. It need not 7e
recurring.
It is necessar) when it is appropriate and help#ul in the deelopment o# the taxpa)erBs
7usiness. <ee i# it is intended to minimiCe losses@ or to maximiCe pro#its.
&egarding adertising expenses .CI& General (oods%:
o Adertising is generall) o# two Einds:
i. To stimulate the current sale o# merchandise or use o# serices
ii. To stimulate the #uture sale o# merchandise or use o# serices
o The second t)pe inoles expenditures incurred@ in whole or in part@ to create or
maintain some #orm o# goodwill #or the taxpa)erBs trade or 7usiness or #or the
industr) or pro#ession o# which the taxpa)er is a mem7er.
o I# itBs the #irst Eind@ itBs de#initel) deducti7le as a 7usiness expense@ the onl)
Kuestion to 7e answered is i# itBs reasona7le or not.
o I# itBs the second Eind@ normall) the) should 7e spread out oer a reasona7le
time.
o In the case@ the amount was not onl) huge .ie unreasona7le/@ 7ut was also used
to protect the 7rand #ranchise. The <upreme Court said that it was analogous to
the maintenance o# goodwill or title to oneBs propert). Thus@ it was a capital
expenditure which should hae 7een spread out oer a reasona7le period o# time.
It was aEin to the acKuisition o# capital assets and there#ore expenses related
thereto were not to 7e considered as 7usiness expenses 7ut as capital
expenditures.
%xpenses paid to adertising #irms to promote sale o# capital stocE #or acKuisition o#
additional capital is not deducti7le #rom taxa7le income. %##orts to esta7lish reputation
are aEin to acKuisition o# capital assets@ and there#ore@ expenses related thereto are not
7usiness expense 7ut capital expenditures. .Atlas Consolidated CI&/
6itigation expenses incurred in de#ense o# title to propert) is capital in nature and not
deducti7le. .Atlas/
Bonuses to emplo)ees made in good #aith and as additional compensation #or the
serices actuall) rendered 7) the emplo)ees are deducti7le@ proided such pa)ments@
when added to the stipulated salaries@ do not exceed a reasona7le compensation #or the
serices rendered. .3uenCle CI&/
o Bonus gien to corporate o##icers out o# sale o# corporate land not deducti7le as
an ordinar) 7usiness expenses in the a7sence o# showing what role said o##icers
per#ormed to e##ectuate said sale. The taxpa)er must show that personal serices
had 7een rendered and that the amount was reasona7le. .Aguinaldo Industries
CI&/
o (or income tax purposes@ the emplo)er cannot legall) claim such 7onuses as
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deducti7le expenses unless the) are shown to 7e reasona7le. The conditions
precedent to the deduction o# 7onuses are:
1. The pa)ment o# the 7onuses is in #act compensation
!. It must 7e #or personal serices actuall) rendered@ and
0. The 7onuses@ when added to the salaries@ are reasona7le when measured 7)
the amount and Kualit) o# the serices per#ormed with relation the 7usiness o#
the taxpa)er. .C- *osEins CI&/
Contri7utions to a priate entit) that gies diidends to stocEholders not deducti7le
7ecause the net income o# the recipient inures to the 7ene#it o# its stocEholders.
o Contri7utions to a goernment entit) is deducti7le when used exclusiel) #or
pu7lic purposes .&oxas CTA/
Pa)ment #or police protection is illegal as it is a compensation gien 7) the petitioner to
the police #or the per#ormance 7) the latter o# the #unctions reKuired o# them to 7e
rendered 7) law. .Calanoc CI&/
(or cost o# materials@ taxpa)ers carr)ing materials and supplies on hand should include
in expenses the charges o# materials and supplies onl) to the amount that the) are
actuall) consumed and used in operation during the )ear #or which the return is made@
proided that the cost o# such materials and supplies has not 7een deducted in
determining the net income #or an) preious )ear.
o I# a taxpa)er carries incidental materials or supplies on hand #or which no record
o# consumption is Eept or o# which ph)sical inentories at the 7eginning and end
o# the )ear are not taEen@ it will 7e permissi7le #or the taxpa)er to include in his
expenses and deduct #rom gross income the total cost o# such supplies and
materials as were purchased during the )ear #or which the return is made@
proided the net income is clearl) re#lected 7) this method. .<ec N$@ && !/
(or repairs@ the cost o# incidental repairs which neither materiall) add to the alue o# the
propert) nor apprecia7l) prolong its li#e@ 7ut Eeep it in an ordinaril) e##icient operating
condition@ ma) 7e deducted as expense@ proided the plant or propert) account is not
increased 7) the amount o# such expenditure.
o &epairs in the nature o# replacement@ to the extent that the) arrest deterioration
and apprecia7l) prolong the li#e o# the propert) should 7e charged against the
depreciation reseres i# such account is Eept. .<ec N'@ && !/
(or lease agreement expenses@ the #ollowing are allowed deductions .<ec $2@ && !/:
o 9here a leasehold is acKuired #or 7usiness purposes #or a speci#ied sum@ the
purchaser ma) taEe deduction in his return #or an aliKuot part o# such sum each
)ear@ 7ased on the num7er o# )ears the lease will run?
o Taxes paid 7) a tenant to or #or a landlord #or 7usiness propert) are additional
rent and constitute a deducti7le item to the tenant and taxa7le income to the
landlord? the amount o# the tax 7eing deducti7le 7) the latter.
o The cost o# leasehold improements are 4OT considered 7usiness expenses since
the) are capital inestments.
i. In order to return to such taxpa)er his inestment o# capital@ an annual
deduction ma) 7e made #rom gross income o# an amount eKual to the cost
o# such improements diided 7) the num7er o# )ears remaining o# the
term o# the lease@ and such deduction shall 7e in lieu o# a deduction #or
depreciation. I# the remainder o# the term o# lease is greater than the
pro7a7le li#e o# the 7uilding erected@ or o# the improements made@ this
deduction shall taEe the #orm o# an allowance #or depreciation.
(or pro#essional expenses@ the #ollowing are allowed deductions .<ec N+@ && !/:
o Cost o# supplies
o %xpenses paid in the operation and repair o# transportation eKuipment used in
maEing pro#essional class
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o "ue to pro#essional societies and su7scriptions to pro#essional Hournals
i. <o 7ar reiew tuition #ees and 7ar examination #ees paid are not
deducti7le
o &ent paid #or o##ices
o %xpenses #or utilities on o##ices
o %xpenses #or hiring o# o##ice assistants
o BooEs@ #urniture and pro#essional instruments and eKuipment with a <*O&T
use#ul li#e
i. Those with a permanent character are 4OT allowa7le
Pro#essional expenses are deducti7le in the )ear the pro#essional serices are rendered@
not in the )ear the) are 7illed. .-amalateo/
(or #armer who operates #or a pro#it , the) can deduct necessar) expenses all amounts
actuall) expended in the carr)on on o# the 7usiness o# #arming.
1,
Priate educational institutions hae special deducti7les.:
1. The) are allowed to deduct expenditures otherwise considered as capital outla)s o#
deprecia7le assets incurred #or the expansion o# school #acilities@ or
!. The) are allowed to capitaliCe the expenditure@ and claim deduction 7) wa) o#
depreciation.
Representation, amusement, recreation e*penses and entertainment facilities 1RR *+,+"%
&epresentation expenses are expenses incurred in connection with the conduct o# oneBs
trade@ 7usiness or pro#ession in:
o %ntertaining@ proiding amusement R recreation to@ or meeting with guests
o At a dining place@ place o# amusement@ countr) clu7@ theater@ concert@ pla)@
sporting eent R similar places
i. I# the taxpa)er is the registered mem7er o# a countr)@ gol#@ or sports clu7@
the presumption is that the expenses are #ringe 7ene#its su7Hect to the
(BT unless the taxpa)er can proe that these are actuall) representation
expenses.
%ntertainment #acilities re#er to a )acht@ acation home or condominium R similar items
o# real or personal propert) used 7) the taxpa)er primaril) #or entertainment@
amusement@ or recreation o# guests or emplo)ees.
o It must 7e owned or #orm part o# the taxpa)erBs trade@ 7iC@ or pro#ession #or
which he claims a rental expense.
o A )acht is considered an entertainment #acilit) i# its use is not restricted to
1,
The cost o# ordinar) tools o# short li#e or small cost@ such as hand tools@ including shoels@ raEes@ etc.@ ma) 7e
included. The cost o# #eeding and raising liestocE ma) 7e treated as an expense deduction@ in so #ar as such cost
represents actual outla)@ 7ut not including the alue o# #arm produce grown upon the #ar@ or the la7orer o# the
taxpa)er. 9here a #armer is engaged in producing crops which taEe more than a )ear #rom the time o# planting to
the process o# gathering and disposal@ expenses deducted ma) 7e determined upon the crop 7asis@ and such
deductions must 7e taEen in the )ear in which the gross income #rom the crop has 7een realiCed. The cost o# #arm
machiner)@ eKuipment@ and #arm 7uildings represents a capital inestment and is not allowa7le deduction as an
item o# expense. Amounts expended in the deelopment o# #arms@ orchards@ and ranches@ prior to the time when
the productie state is reached ma) 7e regarded as inestments o# capital. Amounts expended in purchasing worE@
7reeding or dair) animals are regarded as inestments o# capital@ and ma) 7e depreciated unless such animals are
included in an inentor) in accordance with section 12+ o# these regulations. The purchase price o# transportation
eKuipment i# used wholl) used in carr)ing on #arm operations@ is not deducti7le 7ut is regarded as an inestment o#
capital. The cost o# gasoline or #uel@ repairs@ and upEeep o# the transportation eKuipment i# used wholl) in the
7usiness o# #arming is deducti7le as an expense? i# used partl) #or 7usiness purposes and partl) #or the pleasure or
conenience o# the taxpa)er or his #amil)@ such cost ma) 7e apportioned according to the extent o# the use #or
purposes o# 7usiness and pleasure or conenience@ and onl) the proportion o# such cost Hustl) attri7uta7le to
7usiness purposes is deducti7le as a necessar) expense. I# a #arm is operated #or recreation or pleasure and not on
a commercial 7asis@ and i# the expenses incurred in connection with the #arm are in excess o# the receipt
there#rom@ the entire receipts #rom the sale o# products ma) 7e ignored in rendering a return o# income@ and the
expenses incurred@ 7eing regarded as personal expenses@ will not constitute allowa7le deduction.
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speci#ied o##icers or emplo)ees. I# it was restricted to them@ it would 7e a #ringe
7ene#it@ su7Hect to the (BT.
The #ollowing are not considered entertainment@ amusement R recreation expenses:
1. Those that are treated as compensation #or #ringe 7ene#its
!. %xpenses #or charita7le R #und5raising eents
0. %xpenses #or 7ona #ide meeting o# stocEholders@ partners or directors
2. %xpenses #or attending or sponsoring an emplo)ee to a 7usiness league or
pro#essional org meeting
;. %xpenses #or eents organiCed #or promotion@ marEeting R adertising including
concerts@ con#erences@ seminars@ worEshops@ conentions@ etc
N. Other expenses o# a similar nature
o B=T8 These ma) still 7e Kuali#ied as deductions under other proisions o# <ection
02.
o Possi7le legal implicationG The) wonBt 7e su7Hect to the ceiling o# representation
expenses .my opinion lang ah,2
&eKuisites o# deducti7ilit) #or entertainment@ amusement@ and recreational expense:
1. Paid or incurred during the taxa7le )ear
!. -ust 7e directl) connected to the deelopment@ management R operation o#
the trade@ 7iC or pro#ession o# the taxpa)er? or directl) related to or in
#urtherance o#@ his or its trade@ 7iC or exercise o# pro#ession
0. 4ot 7e contrar) to 7lah 7lah 7lah
2. 4ot 7een paid to an o##icial o# the goernment as a 7ri7e or EicE7acE
;. -ust 7e su7stantiated 7) adeKuate proo#
N. -ust 7een withheld@ i# applica7le@ and paid to the BI&
Ceilin( &or Representation/ 0ntertainment and Amusement 0xpenses
Taxpa)ers engaged in sale o# goods or properties ,.;P o# net sales
Taxpa)ers engaged in sale o# serices@ including exercise o#
pro#ession and use or lease o# properties
1P o# net reenue
(or constructie diidends@ see #ootnote.
11
11
<ec. $,@ &&5!
<ec. $,. Compensation #or personal serices.W Among the ordinar) and necessar) expenses paid or incurred in
carr)ing on an) trade or 7usiness ma) 7e included a reasona7le allowance #or salaries or other compensation #or
personal serices actuall) rendered. The test o# deducti7ilit) in the case o# compensation pa)ments is whether the)
are reasona7le and are@ in #act@ pa)ments purel) #or serice. This test and its practical application ma) 7e #urther
stated and illustrated as #ollows:
.1/ An) amount paid in the #orm o# compensation@ 7ut not in #act as the purchase price serices@ is not deducti7le.
.a/ an ostensi7le salar) paid 7) a corporation ma) 7e a distri7ution o# diidend on stocE. This is liEel) to occur in
the case o# a corporation haing #ew shareholders@ practicall) all o# whom draw salaries. I# in such a case the
salaries are in excess o# those ordinaril) paid #or similar serices@ and the excessie pa)ment correspond or 7ear a
close relationship to the stocEholder o# the o##icers or emplo)ees@ it would seem liEel) that the salaries are not paid
wholl) #or serices rendered@ 7ut that the excessie pa)ments are a distri7ution o# earnings upon the stocE. .7/ An
ostensi7le salar) ma) 7e in part pa)ment #or propert). This ma) occur@ #or example@ where a partnership sells out
to a corporation@ the #ormer partners agreeing to continue in the serice o# the corporation. In such a case it ma)
7e #ound that the salaries o# the #ormer partners are not merel) #or serices@ 7ut in part constitute pa)ment #or the
trans#er o# their 7usiness.
.!/ The #orm or method o# #ixing compensation is not decisie as to the deducti7ilit). 9hile an) #orm o# contingent
compensation inites scrutin) as a possi7le distri7ution o# earnings o# the enterprise@ it does not #ollow that
pa)ments on a continent 7asis are to 7e treated #undamentall) on an) 7asis di##erent #rom that appl)ing to
compensation at a #lat rate. Generall) speaEing@ i# contingent compensation is paid pursuant to a #ree 7argain
7etween the emplo)er and the indiidual made 7e#ore the serices are rendered@ not in#luenced 7) an)
consideration on the part o# the emplo)er other than that o# securing on #air and adantageous terms the serices
o# the indiidual@ it should 7e allowed as a deduction een though in the actual worEing out o# the contract it ma)
proe to 7e greater than the amount which would ordinaril) 7e paid.
.0/ In an) eent the allowance #or compensation paid ma) not exceed what is reasona7le in all the circumstances.
It is in general Hust to assume that reasona7le and true compensation is onl) such amount as would ordinaril) 7e
paid #or liEe serices 7) liEe enterprises in liEe circumstances. The circumstances to 7e taEen into consideration are
those existing at the date when the contract #or serices was made@ not those existing at the date when the
contract is Kuestioned.
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o <orr)@ pagod na,
Interests
.B/ Interest.5
.1/ In General. 5 The amount o# interest paid or incurred within a taxa7le )ear on inde7tedness in connection
with the taxpa)erQs pro#ession@ trade or 7usiness shall 7e allowed as deduction #rom gross income: Proided@
howeer@ That the taxpa)erQs otherwise allowa7le deduction #or interest expense shall 7e reduced 7) 2!P o# the
interest income su7Hect to #inal tax: +rovided@ that e##ectie 1anuar) 1@ !,,+@ the percentage shall 7e 00P.
.!/ %xceptions. 5 4o deduction shall 7e allowed in respect o# interest under the succeeding su7paragraphs:
.a/ I# within the taxa7le )ear an indiidual taxpa)er reporting income on the cash 7asis incurs an inde7tedness
on which an interest is paid in adance through discount or otherwise: Proided@ That such interest shall 7e
allowed a a deduction in the )ear the inde7tedness is paid: Proided@ #urther@ That i# the inde7tedness is pa)a7le
in periodic amortiCations@ the amount o# interest which corresponds to the amount o# the principal amortiCed or
paid during the )ear shall 7e allowed as deduction in such taxa7le )ear?
.7/ I# 7oth the taxpa)er and the person to whom the pa)ment has 7een made or is to 7e made are persons
speci#ied under <ection 0N .B/? or
.c/I# the inde7tedness is incurred to #inance petroleum exploration.
.0/ Optional Treatment o# Interest %xpense. 5 At the option o# the taxpa)er@ interest incurred to acKuire propert)
used in trade 7usiness or exercise o# a pro#ession ma) 7e allowed as a deduction or treated as a capital
expenditure.
Interests paid on de7ts are allowed as deductions 7ut:
o These must 7e incurred in connection with the taxpa)erBs pro#ession@ trade or 7iC
o The allowa7le deduction is onl) 00P o# the interest income su7Hect to #inal tax.
.more on this %elow2
&eKuisites #or deducti7ilit) o# interest expense .RR *9,++%:
1. There must 7e an inde7tedness
!. There should 7e an interest expense paid or incurred upon the inde7tedness
.incurred meaning that it was due and demanda7le/
0. The inde7tedness must 7e that o# the taxpa)er
2. It must 7e connected with the taxpa)erBs trade@ 7iC or pro#ession
;. The interest expense must hae 7een paid or incurred during the taxa7le )ear
N. The interest must hae 7een stipulated in writing
$. The interest must 7e legall) due
'. The interest pa)ment arrangement must not 7e 7etween related taxpa)ers
+. The interest must not 7e incurred to #inance petroleum operations
1,. In case the interest was incurred to acKuire propert) used in trade@ 7iC or pro#ession@
it was not treated as capital expenditure.
o In cases liEe this@ the axpa)er has the option to treat it as either
i. interest expense deducti7le in #ull or
ii. as a capital expenditure and claim as deduction onl) the periodic
amortiCationDdepreciation.
o But he can onl) choose one@ or else dou7le deduction@ that ainBt allowed. .<ec 02
.B.0/@ and Picop > CA where the <C allowed interest expense on a loan to 7u)
machiner) as deducti7le./
Interest is not deducti7le i#:
o Both the taxpa)er and the person to whom interest was paid are related
taxpa)ers@ meaning:
i. -em7ers o# a #amil)
ii. An indiidual and a corp where more than ;,P o# the outstanding stocE o#
the corp is owned 7) the indiidual
iii.Two corps where more than ;,P o# the outstanding stocE o# each is owned
7) the other or 7) the same indiidual
i. Between grantor and #iduciar) o# an) trust
. Between #iduciar) o# a trust and the #iduciar) o# another trust i# the same
person is a grantor with respect to each trust
i. Between #iduciar) o# a trust and the 7ene#iciar)
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I# an indiidual is on the cash %asis o# accounting@ interest paid in adance@ through
discount or otherwise@ shall 7e allowed as deduction not in the )ear that the interest was
paid in adance@ 7ut in the )ear that the inde7tedness was paid.
o But i# the inde7tedness is pa)a7le in periodic amortiCation@ the amount o# the
interest which corresponds to the amount o# the principal amortiCed or paid
during the )ear shall 7e allowed as deduction in such taxa7le )ear.
6ate pa)ment o# tax is considered a de7t@ and there#ore interest on taxes is interest on
inde7tedness and is thus deducti7le. .CI& de Prieto/
I# a taxpa)er has interest income su7Hect to #inal tax@ the otherwise allowa7le deduction
#or interest expense shall 7e reduced 7) an amount eKual to 00P o# interest income
su7Hected to #inal tax. This 00P rule will onl) appl) i# there is interest income su7Hect to
#inal tax. I# none@ then )ou can deduct in #ull.
The law assumes that the mone) 7orrowed is used to reinest@ legitimate 7usiness
purpose is irreleant. .Att). -ontero/
The law e##ectiel) cancelled out the tax ar7itrage adantage. Corporations 7e#ore would
7orrow mone) and use the interest the) had to pa) as a deduction@ een i# the)
reinested the mone) elsewhere and got interest income.
(or example@ 1uan 7orrowed mone) #rom BPI. It had an interest expense o# P'@,,,. *e
then deposited the mone) that he 7orrowed with *<BC@ and it had an interest income on
it o# P+,,, .net alread) o# the !,P #inal tax/. *ow much is his deduci7le interest
expenseG .p. !,+@ &e)es/
Interest expense@ unadHusted P'@,,,
6ess: AdHustment #or interest
Income su7Hect to #inal tax
.00P o# P+@,,,/ !@+$,
AdHusted 7alance@ deduction #or interest expense P;@,0,
o But interest paid or accrued on taxes related to 7usiness or practice o# pro#ession
can 7e deducted in #ull .it is not su7Hect to this rule on downward adHustment/
Taxes
.C/ Taxes.5
.1/ In General. 5 Taxes paid or incurred within the taxa7le )ear in connection with the taxpa)erQs pro#ession@
trade or 7usiness@ shall 7e allowed as deduction@ except
.a/ The income tax proided #or under this Title?
.7/ Income taxes imposed 7) authorit) o# an) #oreign countr)? 7ut this deduction shall 7e allowed in the case o#
a taxpa)er who does not signi#) in his return his desire to hae to an) extent the 7ene#its o# paragraph .0/ o#
this su7section .relating to credits #or taxes o# #oreign countries/?
.c/ %state and donorQs taxes? and
.d/ Taxes assessed against local 7ene#its o# a Eind tending to increase the alue o# the propert) assessed.
Proided@ That taxes allowed under this <u7section@ when re#unded or credited@ shall 7e included as part o# gross
income in the )ear o# receipt to the extent o# the income tax 7ene#it o# said deduction.
.!/ 6imitations on "eductions. 5 In the case o# a nonresident alien indiidual engaged in trade or 7usiness in the
Philippines and a resident #oreign corporation@ the deductions #or taxes proided in paragraph .1/ o# this
<u7section .C/ shall 7e allowed onl) i# and to the extent that the) are connected with income #rom sources
within the Philippines.
.0/ Credit Against Tax #or Taxes o# (oreign Countries. 5 I# the taxpa)er signi#ies in his return his desire to hae
the 7ene#its o# this paragraph@ the tax imposed 7) this Title shall 7e credited with:
.a/ CitiCen and "omestic Corporation. 5 In the case o# a citiCen o# the Philippines and o# a domestic corporation@
the amount o# income taxes paid or incurred during the taxa7le )ear to an) #oreign countr)? and
.7/ Partnerships and %states. 5 In the case o# an) such indiidual who is a mem7er o# a general pro#essional
partnership or a 7ene#iciar) o# an estate or trust@ his proportionate share o# such taxes o# the general
pro#essional partnership or the estate or trust paid or incurred during the taxa7le )ear to a #oreign countr)@ i# his
distri7utie share o# the income o# such partnership or trust is reported #or taxation under this Title.
An alien indiidual and a #oreign corporation shall not 7e allowed the credits against the tax #or the taxes o#
#oreign countries allowed under this paragraph.
.2/ 6imitations on Credit. 5 The amount o# the credit taEen under this <ection shall 7e su7Hect to each o# the
#ollowing limitations:
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.a/ The amount o# the credit in respect to the tax paid or incurred to an) countr) shall not exceed the same
proportion o# the tax against which such credit is taEen@ which the taxpa)erQs taxa7le income #rom sources within
such countr) under this Title 7ears to his entire taxa7le income #or the same taxa7le )ear? and
.7/ The total amount o# the credit shall not exceed the same proportion o# the tax against which such credit is
taEen@ which the taxpa)erQs taxa7le income #rom sources without the Philippines taxa7le under this Title 7ears to
his entire taxa7le income #or the same taxa7le )ear.
.;/ AdHustments on Pa)ment o# Incurred Taxes. 5 I# accrued taxes when paid di##er #rom the amounts claimed as
credits 7) the taxpa)er@ or i# an) tax paid is re#unded in whole or in part@ the taxpa)er shall noti#) the
Commissioner? who shall redetermine the amount o# the tax #or the )ear or )ears a##ected@ and the amount o#
tax due upon such redetermination@ i# an)@ shall 7e paid 7) the taxpa)er upon notice and demand 7) the
Commissioner@ or the amount o# tax oerpaid@ i# an)@ shall 7e credited or re#unded to the taxpa)er. In the case
o# such a tax incurred 7ut not paid@ the Commissioner as a condition precedent to the allowance o# this credit
ma) reKuire the taxpa)er to gie a 7ond with sureties satis#actor) to and to 7e approed 7) the Commissioner in
such sum as he ma) reKuire@ conditioned upon the pa)ment 7) the taxpa)er o# an) amount o# tax #ound due
upon an) such redetermination. The 7ond herein prescri7ed shall contain such #urther conditions as the
Commissioner ma) reKuire.
.N/ Iear in 9hich Credit TaEen. 5 The credits proided #or in <u7section .C/.0/ o# this <ection ma)@ at the option
o# the taxpa)er and irrespectie o# the method o# accounting emplo)ed in Eeeping his 7ooEs@ 7e taEen in the
)ear which the taxes o# the #oreign countr) were incurred@ su7Hect@ howeer@ to the conditions prescri7ed in
<u7section .C/.;/ o# this <ection. I# the taxpa)er elects to taEe such credits in the )ear in which the taxes o# the
#oreign countr) accrued@ the credits #or all su7seKuent )ears shall 7e taEen upon the same 7asis and no portion
o# an) such taxes shall 7e allowed as a deduction in the same or an) succeeding )ear.
.$/ Proo# o# Credits. 5 The credits proided in <u7section .C/.0/ hereo# shall 7e allowed onl) i# the taxpa)er
esta7lishes to the satis#action o# the Commissioner the #ollowing:
.a/ The total amount o# income deried #rom sources without the Philippines?
.7/ The amount o# income deried #rom each countr)@ the tax paid or incurred to which is claimed as a credit
under said paragraph@ such amount to 7e determined under rules and regulations prescri7ed 7) the <ecretar) o#
(inance? and
.c/ All other in#ormation necessar) #or the eri#ication and computation o# such credits.
Taxes paid or accrued within the taxa7le )ear in connection with the taxpa)erBs trade or
7usiness or exercise o# a pro#ession are deducti7le #rom gross income.
o %UC%PT: .<ec '!5'0@ && !/
i. Philippine income tax .7ut the #ringe 7ene#it tax can 7e deducted8/
ii. %state tax
iii. "onorBs tax
i. <pecial assessment .see #ootnote/
1!
. Income tax imposed 7) a #oreign countr) #or income sourced outside the
Philippines .7ut it shall 7e allowed i# the taxpa)er does not signi#) his
desire to enHo) an) 7ene#its o# the tax credit #or taxes paid to #oreign
countries/
i. <tocE transaction tax
ii. >AT on 7usiness .last two e*ceptions cited %y Reyes, p. GEG2
Income@ war5pro#its@ and excess5pro#its taxes imposed 7) the authorit) o# a #oreign
countr) .including the =nited <tates and possessions thereo#/ are allowed as deductions
onl) i# the taxpa)er does not signi#) in his return his desire to hae to an) extent the
7ene#its o# the proisions o# law allowing credits against the tax #or taxes o# #oreign
countries. .<ec '!@ && !/
9ith regard to tax credits@ onl) resident citiCens and domestic corporations are a##ected
7) this@ 7ecause the) are onl) ones taxed worldwide. 9hen a taxpa)er is Kuali#ied #or a
credit@ he has the option o# either:
1!
A tax is considered assessed against local 7ene#its when the propert) su7Hect to the tax is limited to the propert)
7ene#ited. <pecial assessments are not deducti7le@ een though an incidental 7ene#it ma) inure to the pu7lic
wel#are. The taxes deducti7le are those leied #or the general pu7lic wel#are@ 7) the proper taxing authorities at a
liEe rate against all propert) in the territor) oer which such authorities hae Hurisdiction. 9hen assessments are
made #or the purpose o# maintenance or repair o# local 7ene#its@ the taxpa)er ma) deduct assessments paid as an
expense incurred in 7usiness@ i# the pa)ment o# such assessments is necessar) to the conduct o# his 7usiness.
9hen the assessments are made #or the purpose o# constructing local 7ene#its@ the pa)ments 7) the taxpa)er are
in the nature o# capital expenditures and are not deducti7le. 9here assessments are made #or the purpose o# 7oth
construction and maintenance or repairs@ the 7urden is on the taxpa)er to show the allocation o# the amounts
assessed to the di##erent purposes. I# the allocation can not 7e made@ none o# the amounts so paid is deducti7le.
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o "educting the #oreign income tax #rom his gross income@ or
o Claiming the tax credit.
*ow do we determine the amount o# tax to 7e creditedG 1ust #ollow the #ormulas 7elow@
and choose which o# them is lower8
1. 4et income #rom #oreign countr) x Taxes paid in the &P Y ZZZZZZ
4et income worldwide
!. (oreign income tax paid Y ZZZZZZZZZZ
%xample
Blessings had a taxa7le income #rom the Philippines o# P0,,@,,, and #rom the =< o#
P1,,@,,,. An income tax o# P2,@,,, was paid to the =<. I# Blessings chose to taEe a tax
credit #or the income tax paid to the <tates@ how much tax does he hae to pa) the
Philippine goernment a#ter the tax credit would hae 7een computedG
5ine everything up and now the ta*a%le income worldwide and the total ta*es paid
here,
Taxa7le income 7e#ore tax credit@ =<A P1,,@,,,
Taxa7le income 7e#ore tax credit@ Phil P0,,@,,,
Taxa7le income@ worldwide P2,,@,,,
Corporate income tax o# 0,P P1!,@,,,
6ess: Tax credit #or #oreign tax
+lug in the values,
.1,,@,,,D2,,@,,,/ x 1!,@,,, Y P0,@,,,
(oreign income tax paid Y P2,@,,,
6hoose whats lower,Allowed tax credit P 0,@,,,
Philippine income tax still due P +,@,,,
9hat would Blessings 7ring home i# the) chose to do the tax creditG
Taxa7le income@ worldwide P2,,@,,,
P +,@,,,
P01,@,,,
I# Blessings chose to deduct@ this is what would hae happened:
Taxa7le income worldwide P2,,@,,,
"eduction #or #oreign income tax paid 2,@,,,
Taxa7le income P0N,@,,,
Income tax at 0,P P1,'@,,,
Income a#ter tax .what Blessings taEes home/ P1;!@,,,
ItBs prett) o7ious that )ou should go #or a tax credit. Iou end up with more cash in
)our pocEets at the end o# the da)8 As Att). -ontero said@ )ou get 1,,P 7ene#it@ as
compared to deductions where all expenses 7ene#it to the extent onl) o# 0,P .#or
corporations/.
Can )ou deduct #ines and penalties paid to the BI& 7ecause o# late pa)ment o# taxesG
4O8 .GutierreC Collector@ 12 <C&A 00/
6osses
."/ 6osses. 5
.1/ In General.5 6osses actuall) sustained during the taxa7le )ear and not compensated #or 7) insurance or other
#orms o# indemnit) shall 7e allowed as deductions:
.a/ I# incurred in trade@ pro#ession or 7usiness?
.7/ O# propert) connected with the trade@ 7usiness or pro#ession@ i# the loss arises #rom #ires@ storms@ shipwrecE@
or other casualties@ or #rom ro77er)@ the#t or em7eCClement.
The <ecretar) o# (inance@ upon recommendation o# the Commissioner@ is here7) authoriCed to promulgate rules
and regulations prescri7ing@ among other things@ the time and manner 7) which the taxpa)er shall su7mit a
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declaration o# loss sustained #rom casualt) or #rom ro77er)@ the#t or em7eCClement during the taxa7le )ear:
Proided@ howeer@ That the time limit to 7e so prescri7ed in the rules and regulations shall not 7e less than
thirt) .0,/ da)s nor more than ninet) .+,/ da)s #rom the date o# discoer) o# the casualt) or ro77er)@ the#t or
em7eCClement giing rise to the loss.
.c/ 4o loss shall 7e allowed as a deduction under this <u7section i# at the time o# the #iling o# the return@ such
loss has 7een claimed as a deduction #or estate tax purposes in the estate tax return.
.!/ Proo# o# 6oss. 5 In the case o# a nonresident alien indiidual or #oreign corporation@ the losses deducti7le shall
7e those actuall) sustained during the )ear incurred in 7usiness@ trade or exercise o# a pro#ession conducted
within the Philippines@ when such losses are not compensated #or 7) insurance or other #orms o# indemnit). The
<ecretar) o# (inance@ upon recommendation o# the Commissioner@ is here7) authoriCed to promulgate rules and
regulations prescri7ing@ among other things@ the time and manner 7) which the taxpa)er shall su7mit a
declaration o# loss sustained #rom casualt) or #rom ro77er)@ the#t or em7eCClement during the taxa7le )ear:
Proided@ That the time to 7e so prescri7ed in the rules and regulations shall not 7e less than thirt) .0,/ da)s
nor more than ninet) .+,/ da)s #rom the date o# discoer) o# the casualt) or ro77er)@ the#t or em7eCClement
giing rise to the loss? and
6osses actuall) sustained during the taxa7le )ear and not compensated 7) insurance or
other #orm o# indemnit) are deducti7le #rom gross income:
o I# incurred in trade@ 7iC or pro#ession?
o O# propert) connected with trade@ 7iC or pro#ession@ i# the loss arises #rom #ire@
storm@ shipwrecE or other casualt)@ or #rom ro77er)@ the#t or em7eCClement.
(or non5resident indiiduals and #oreign corporations@ the losses should 7e those actuall)
sustained during the taxa7le )ear@ incurred in trade@ 7iC or pro#ession conducted within
the Philippines.
I# the loss has alread) 7een claimed as deduction #or estate tax purposes@ it is no longer
deducti7le #rom gross income.
Casualt) means the complete or partial destruction o# propert) resulting #rom an
identi#ia7le eent o# a sudden@ unexpected or unusual nature. The taxpa)er 7ears the
7urden o# proo#. .RR *",==%
<pecial rules on losses:
o >oluntar) remoal o# 7uildings .<ec +$@ && !/:
i. 6oss due to the oluntar) remoal or demolition o# old 7uildings@ the
scrapping o# old machiner)@ eKuipment@ etc.@ incident to renewals and
replacements will 7e deducti7le #rom gross income.
ii. 9hen a taxpa)er 7u)s real estate upon which is located a 7uilding@ which
he proceeds to raCe with a iew to erecting thereon another 7uilding@ it
will 7e considered that the taxpa)er has sustained no deducti7le expense
on account o# the cost o# such remoal@ the alue o# the real estate@
exclusie o# old improements@ 7eing presuma7l) eKual to the purchase
price o# the land and 7uilding plus the cost o# remoing the useless
7uilding.
o 6oss o# use#ul alue o# assets .<ec +'@ && !/:
i. 9hen through some change in 7usiness conditions@ the use#ulness in the
7usiness o# some or all o# the capital assets is suddenl) terminated@ so
that the taxpa)er discontinues the 7usiness or discards such assets
permanentl) #rom use o# such 7usiness@ he ma) claim as deduction the
actual loss sustained.
In determining the amount o# the loss@ adHustment must 7e made@
howeer@ #or improements@ depreciation and the salage alue o#
the propert).
This exception to the rule reKuiring a sale or other disposition o#
propert) in order to esta7lish a loss reKuires proo# o# some
un#oreseen cause 7) reason o# which the propert) has 7een
prematurel) discarded@ as@ #or example@ where an increase in the
cost or change in the manu#acture o# an) product maEes it
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necessar) to a7andon such manu#acture@ to which special
machiner) is exclusiel) deoted@ or where new legislation directl)
or indirectl) maEes the continued pro#ita7le use o# the propert)
impossi7le.
This exception does 4OT extend to a case where the use#ul li#e o#
propert) terminates solel) as a result o# those gradual processes
#or which depreciation allowance are authoriCed. It does not appl)
to inentories or to other than capital assets. The exception applies
to 7uildings onl) when the) are permanentl) a7andoned or
permanentl) deoted to a radicall) di##erent use@ and to machiner)
onl) when its use as such is permanentl) a7andoned. An) loss to
7e deducti7le under this exception must 7e charged o## in the
7ooEs and #ull) explained in returns o# income.
o <hrinEage in alue o# stocEs .<ec ++@ && !/:
i. A person possessing stocE o# a corporation can not deduct #rom gross
income an) amount claimed as a loss merel) on account o# shrinEage in
alue o# such stocE through #luctuation o# the marEet or otherwise.
The loss allowa7le in such case is that actuall) su##ered when the
stocE is disposed o#.
ii. I# stocE o# a corporation 7ecomes worthless@ its cost or other 7asis
determined in accordance with these regulations ma) 7e deducted 7) the
owner in the taxa7le )ear in which the stocE 7ecame worthless@ proided a
satis#actor) showing o# its worthlessness 7e made@ as in the case o# 7ad
de7ts.
03563
.0/ 4et Operating 6oss Carr)5Oer. 5 The net operating loss o# the 7usiness or enterprise #or an) taxa7le )ear
immediatel) preceding the current taxa7le )ear@ which had not 7een preiousl) o##set as deduction #rom gross
income shall 7e carried oer as a deduction #rom gross income #or the next three .0/ consecutie taxa7le )ears
immediatel) #ollowing the )ear o# such loss: Proided@ howeer@ That an) net loss incurred in a taxa7le )ear
during which the taxpa)er was exempt #rom income tax shall not 7e allowed as a deduction under this
<u7section: Proided@ #urther@ That a net operating loss carr)5oer shall 7e allowed onl) i# there has 7een no
su7stantial change in the ownership o# the 7usiness or enterprise in that 5
.i/ 4ot less than seent)5#ie percent .$;P/ in nominal alue o# outstanding issued shares.@ i# the 7usiness is in
the name o# a corporation@ is held 7) or on 7ehal# o# the same persons? or
.ii/ 4ot less than seent)5#ie percent .$;P/ o# the paid up capital o# the corporation@ i# the 7usiness is in the
name o# a corporation@ is held 7) or on 7ehal# o# the same persons.
(or purposes o# this su7section@ the term Jnot operating lossJ shall mean the excess o# allowa7le deduction oer
gross income o# the 7usiness in a taxa7le )ear.
Proided@ That #or mines other than oil and gas wells@ a net operating loss without the 7ene#it o# incenties
proided #or under %xecutie Order 4o. !!N@ as amended@ otherwise Enown as the Omni7us Inestments Code o#
1+'$@ incurred in an) o# the #irst ten .1,/ )ears o# operation ma) 7e carried oer as a deduction #rom taxa7le
income #or the next #ie .;/ )ears immediatel) #ollowing the )ear o# such loss. The entire amount o# the loss
shall 7e carried oer to the #irst o# the #ie .;/ taxa7le )ears #ollowing the loss@ and an) portion o# such loss
which exceeds@ the taxa7le income o# such #irst )ear shall 7e deducted in liEe manner #orm the taxa7le income o#
the next remaining #our .2/ )ears.
4et operating loss is the excess o# allowa7le deduction oer gross income o# the
7usiness in a taxa7le )ear.
o 4O6CO : The net operating loss o# the 7usiness which has not 7een preiousl)
o##set as deduction shall 7e carried oer as deduction #rom gross income #or the
next 0 consecutie )ears immediatel) #ollowing the )ear o# such loss
o This is allowed i# there has 7een no su7stantial change in ownership o# the
7usiness@ meaning
i. 9here not less than $;P o# outstanding shares in the 7usiness is in the
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name o# a corporation held 7) the same persons@ or
ii. 9here not less than $;P o# the paid5up capital o# the corporation is held
7) the same persons
o (or mines other than oil and gas wells@ a net operating loss without the 7ene#it o#
incenties proided #or 7) the Omni7us Inestments Code ma) 7e carried oer as
deduction #or the next ; )ears immediatel) #ollowing the )ear o# loss
4O6CO is allowed regardless o# the change in the ownership o# a compan) in case o# a
merger where the taxpa)er who accumulated the 4O6CO is the suriing entit)
I# the 4O6CO arises #rom a merger@ consolidation or com7ination@ the
trans#ereeDassignee is not entitled to cleaim the same 4O6CO as deduction unless the
trans#eror gains control o# at least $;P o# he outstanding issues or paid,up capital o#
the trans#eree.
4O6CO is not trans#era7le or assigna7le to another person %UC%PT i# there has 7een no
su7stantial change in the ownership o# the 7usiness in that not less than $;P o# the
paid5up capital o# the 7usiness is held 7) the same #olE
An indiidual who claims the 2,P O<" cannot claim deduction o# 4O6CO
simultaneousl). %en i# the 4O6CO was not claimed@ the 0 )ear period shall continue to
run.
I# the taxpa)er paid its income tax under the -CIT computation@ the 0 )ear period still
runs. .RR *#,+*%
9ho arenBt Kuali#ied to 4O6COG
1. OB=s #or a #oreign 7anEing corporation and (C"= o# a domestic 7anEing corp
!. %nterprise registered with the BOI enHo)ing the Income Tax *olida) Incentie
0. P%TA5registered enterprise
2. <B-A5registered enterprise
;. (oreign corp engaged in international shipping or air carriage 7usiness in the
Philippines
N. An) person@ natural or Huridical@ enHo)ing exemption #rom income tax
%xample o# 4O6CO
!,,; !,,N !,,$ !,,' !,,+
Gross Income ;,, N,, $,, ;,, ',,
6ess:deductions +,, ;,, $;, 2!, 2;,
4et loss 2,, ;,
4et income 1,, ', 0;,
6ess:
4olco
(rom !,,; 1,, ',
(rom !,,$ ;,
Taxa7le income , , , , 0,,
.2/ Capital 6osses. 5
.a/ 6imitation. 5 6oss #rom sales or %xchanges o# capital assets shall 7e allowed onl) to the extent proided in
<ection 0+.
.7/ <ecurities Becoming 9orthless. 5 I# securities as de#ined in <ection !! .T/ 7ecome worthless during the taxa7le
)ear and are capital assets@ the loss resulting there#rom shall@ #or purposes o# this Title@ 7e considered as a loss
#rom the sale or exchange@ on the last da) o# such taxa7le )ear@ o# capital assets.
.;/ 6osses (rom 9ash <ales o# <tocE or <ecurities. 5 6osses #rom Jwash salesJ o# stocE or securities as proided in
<ection 0'.
.N/ 9agering 6osses. 5 6osses #rom wagering transactions shall 7 allowed onl) to the extent o# the gains #rom such
transactions.
.$/ A7andonment 6osses. 5
.a/ In the eent a contract area where petroleum operations are undertaEen is partiall) or wholl) a7andoned@ all
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accumulated exploration and deelopment expenditures pertaining thereto shall 7e allowed as a deduction:
Proided@ That accumulated expenditures incurred in that area prior to 1anuar) 1@ 1+$+ shall 7e allowed as a
deduction onl) #rom an) income deried #rom the same contract area. In all cases@ notices o# a7andonment shall
7e #iled with the Commissioner.
.7/ In case a producing well is su7seKuentl) a7andoned@ the unamortiCed costs thereo#@ as well as the
undepreciated costs o# eKuipment directl) used therein@ shall 7e allowed as a deduction in the )ear such well@
eKuipment or #acilit) is a7andoned 7) the contractor: Proided@ That i# such a7andoned well is reentered and
production is resumed@ or i# such eKuipment or #acilit) is restored into serice@ the said costs shall 7e included as
part o# gross income in the )ear o# resumption or restoration and shall 7e amortiCed or depreciated@ as the case
ma) 7e.
-ore* losses
9hen #oreign currenc) is acKuired in connection with the regular course o# 7iC@ ordinar)
gain or loss results #rom the #luctuations. <uch loss is deducti7le onl) in the )ear that it
is sustained. But since loans hae not actuall) 7een paid )et@ there#ore the losses hae
not )et 7een realiCed and are not deducti7le )et. .BIR Rulin( "+2,-+%
Annual increase in alue o# an asset is not taxa7le income 7ecause such increase has not
)et 7een realiCed. The increase in alue can onl) 7e taxed when such is disposed and
there was a gain. The same is true o# decrease in alue. It is onl) when the decrease is
realiCed@ 7e#ore it is allowed to 7e deducted. .BIR Rulin( *##,.:%
Wagering loses
Allowed onl) to the extent o# gains #rom such transactions
A%andonment loses
9hen a petroleum operation is partiall) or wholl) a7andoned@ all accumulated
exploration and deelopment expenses shall 7e allowed as a deduction
Bad de7ts
.%/ Bad "e7ts. 5
.1/ In General. 5 "e7ts due to the taxpa)er actuall) ascertained to 7e worthless and charged o## within the
taxa7le )ear except those not connected with pro#ession@ trade or 7usiness and those sustained in a transaction
entered into 7etween parties mentioned under <ection 0N .B/ o# this Code: Proided@ That recoer) o# 7ad de7ts
preiousl) allowed as deduction in the preceding )ears shall 7e included as part o# the gross income in the )ear
o# recoer) to the extent o# the income tax 7ene#it o# said deduction.
.!/ <ecurities Becoming 9orthless. 5 I# securities@ as de#ined in <ection !! .T/@ are ascertained to 7e worthless
and charged o## within the taxa7le )ear and are capital assets@ the loss resulting there#rom shall@ in the case o# a
taxpa)er other than a 7anE or trust compan) incorporated under the laws o# the Philippines a su7stantial part o#
whose 7usiness is the receipt o# deposits@ #or the purpose o# this Title@ 7e considered as a loss #rom the sale or
exchange@ on the last da) o# such taxa7le )ear@ o# capital assets.
Bad de7ts are de7ts resulting #rom worthlessness or uncollecti7ilit) o# amounts due the
taxpa)er 7) others@ arising #rom mone) lent or #rom uncollecti7le amounts o# income
#rom goods sold or serices rendered.
Bad de7ts are deducti7le proided that:
o There is an existing inde7tedness due to the taxpa)er which is alid and legall)
demanda7le .and not losses #rom inestments@ as in *ermanos CI&/
o The) are connected with trade@ 7iC or pro#ession o# the taxpa)er
o The) are actuall) ascertained to 7e worthless@ uncollecti7le@ and charged o##
within the taxa7le )ear
o The taxpa)er must show that it its uncollecti7le even in the #uture .Phil &e#ining
CTA/
o The) are not sustained 7etween related parties
o I# the) are recoered@ the) should 7e included as part o# gross income in the )ear
o# recoer) .this is the tax 7ene#it rule/
6osses or 7ad de7ts must 7e ascertained to 7e so and written o## during the taxa7le
)ear. The) are there#ore deducti7le in #ull or not at all. ThereBs no partial deductions.
.*ermanos CI&/
Its worthless5ness depends on the particular #acts o# each case. It canBt 7e considered
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worthless Hust 7ecause o# its dou7t#ul alue or di##icult) to collect.
I# itBs a 7anE@ the B<P is the one that will ascertain the worthlessness and uncollecti7ilit)
o# the 7ad de7ts.
I# the receia7le is #rom an insurance compan)@ it cannot 7e claimed as 7ad de7t unless
the insurance compan) has 7een declared closed or insolent 7) the Insurance Commish
<ecurities 7ecome worthless are considered to 7e a loss #rom sale o# capital assets on
the last da) o# the taxa7le )ear except #or a 7anE or trust compan).
Illustration o# the tax 7ene#it rule #or 7ad de7ts
o !,1, taxa7le income 7e#ore 7ad de7ts: P1,,@,,,
o Bad de7ts in !,1,: P1$,@,,,
o Bad de7ts recoered in !,11: P10,@,,,
*ow much do I report in !,11 as gross income@ ie@ how much did I 7ene#it
#rom the 7ad de7t I recorded as a deduction in !,1,G
P1,,@,,,. ThatBs how much I 7ene#ited #rom the de7ts 7eing
written o##. I 7ene#ited #rom it 7ecause I didnBt hae to pa) the
P1,,@,,, since the 7ad de7t as a deduction coered it #ull). .It
would 7e a di##erent amount i# the 7ad de7ts were less than the
taxa7le income 7e#ore 7ad de7s./ <o@ I hae to include this amount
in the computation in the gross income.
9hat happens to the P0,@,,,G ItBs non5taxa7le.
"epreciation
.(/ "epreciation. 5
.1/ General &ule. 5 There shall 7e allowed as a depreciation deduction a reasona7le allowance #or the exhaustion@
wear and tear .including reasona7le allowance #or o7solescence/ o# propert) used in the trade or 7usiness. In the
case o# propert) held 7) one person #or li#e with remainder to another person@ the deduction shall 7e computed
as i# the li#e tenant were the a7solute owner o# the propert) and shall 7e allowed to the li#e tenant. In the case o#
propert) held in trust@ the allowa7le deduction shall 7e apportioned 7etween the income 7ene#iciaries and the
trustees in accordance with the pertinent proisions o# the instrument creating the trust@ or in the a7sence o#
such proisions@ on the 7asis o# the trust income allowa7le to each.
.!/ =se o# Certain -ethods and &ates. 5 The term Jreasona7le allowanceJ as used in the preceding paragraph
shall include@ 7ut not limited to@ an allowance computed in accordance with rules and regulations prescri7ed 7)
the <ecretar) o# (inance@ upon recommendation o# the Commissioner@ under an) o# the #ollowing methods:
.a/ The straight5line method?
.7/ "eclining57alance method@ using a rate not exceeding twice the rate which would hae 7een used had the
annual allowance 7een computed under the method descri7ed in <u7section .(/ .1/?
.c/ The sum5o#5the5)ears5digit method? and
.d/ an) other method which ma) 7e prescri7ed 7) the <ecretar) o# (inance upon recommendation o# the
Commissioner.
.0/ Agreement as to =se#ul 6i#e on 9hich "epreciation &ate is Based. 5 9here under rules and regulations
prescri7ed 7) the <ecretar) o# (inance upon recommendation o# the Commissioner@ the taxpa)er and the
Commissioner hae entered into an agreement in writing speci#icall) dealing with the use#ul li#e and rate o#
depreciation o# an) propert)@ the rate so agreed upon shall 7e 7inding on 7oth the taxpa)er and the national
Goernment in the a7sence o# #acts and circumstances not taEen into consideration during the adoption o# such
agreement. The responsi7ilit) o# esta7lishing the existence o# such #acts and circumstances shall rest with the
part) initiating the modi#ication. An) change in the agreed rate and use#ul li#e o# the deprecia7le propert) as
speci#ied in the agreement shall not 7e e##ectie #or taxa7le )ears prior to the taxa7le )ear in which notice in
writing 7) certi#ied mail or registered mail is sered 7) the part) initiating such change to the other part) to the
agreement:
Proided@ howeer@ that where the taxpa)er has adopted such use#ul li#e and depreciation rate #or an)
deprecia7le and claimed the depreciation expenses as deduction #rom his gross income@ without an) written
o7Hection on the part o# the Commissioner or his dul) authoriCed representaties@ the a#oresaid use#ul li#e and
depreciation rate so adopted 7) the taxpa)er #or the a#oresaid deprecia7le asset shall 7e considered 7inding #or
purposes o# this <u7section.
.2/ "epreciation o# Properties =sed in Petroleum Operations. 5 An allowance #or depreciation in respect o# all
properties directl) related to production o# petroleum initiall) placed in serice in a taxa7le )ear shall 7e allowed
under the straight5line or declining57alance method o# depreciation at the option o# the serice contractor.
*oweer@ i# the serice contractor initiall) elects the declining57alance method@ it ma) at an) su7seKuent date@
shi#t to the straight5line method.
The use#ul li#e o# properties used in or related to production o# petroleum shall 7e ten .1,/ )ears o# such shorter
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li#e as ma) 7e permitted 7) the Commissioner.
Properties not used directl) in the production o# petroleum shall 7e depreciated under the straight5line method
on the 7asis o# an estimated use#ul li#e o# #ie .;/ )ears.
.;/ "epreciation o# Properties =sed in -ining Operations. 5 an allowance #or depreciation in respect o# all
properties used in mining operations other than petroleum operations@ shall 7e computed as #ollows:
.a/ At the normal rate o# depreciation i# the expected li#e is ten .1,/ )ears or less? or
.7/ "epreciated oer an) num7er o# )ears 7etween #ie .;/ )ears and the expected li#e i# the latter is more than
ten .1,/ )ears@ and the depreciation thereon allowed as deduction #rom taxa7le income: Proided@ That the
contractor noti#ies the Commissioner at the 7eginning o# the depreciation period which depreciation rate allowed
7) this <ection will 7e used.
.N/ "epreciation "educti7le 7) 4onresident Aliens %ngaged in Trade or Business or &esident (oreign
Corporations. 5 In the case o# a nonresident alien indiidual engaged in trade or 7usiness or resident #oreign
corporation@ a reasona7le allowance #or the deterioration o# Propert) arising out o# its use or emplo)ment or its
non5use in the 7usiness trade or pro#ession shall 7e permitted onl) when such propert) is located in the
Philippines.
"epreciation is the gradual diminution in the use#ul alue o# tangi7le propert) resulting
#rom war and tear and normal o7solescence
A reasona7le allowance #or depreciation is deducti7le
<ome methods to determine reasona7le allowance can 7e #ound in the codal.
o I# the taxpa)er and the CI& come to an agreement o# the use#ul li#e on which
depreciation will 7e 7ased@ this agreement will 7e considered 7inding.
"epreciation is allowed on tangi7le propert) and intangi7le propert).
A compan) has the right to claim depreciation@ 7ut the law does not allow depreciation
7e)ond its acKuisition cost. .Basilan CI&/
Certain cases o& depreciation
Properties used directl) in production o# petroleum 1, )ears .straight5lineDdeclining
method/
Properties used indirectl) in production o#
petroleum
; )ears .straight5line/
Properties used in mining operations I# expected li#e is 1, )ears or less@
normal rate o# depreciation
I# expected li#e is more than 1, )ears@
noti#) the CI&@ 7ro.
(or non5resident aliens engaged in trade@ or
7usiness here@ or resident #oreign corporations
A reasona7le rate is allowed onl) on
properties located in the Philippines
"epletion
.G/ "epletion o# Oil and Gas 9ells and -ines. 5
.1/ In General. 5 In the case o# oil and gas wells or mines@ a reasona7le allowance #or depletion or amortiCation
computed in accordance with the cost5depletion method shall 7e granted under rules and regulations to 7e
prescri7ed 7) the <ecretar) o# #inance@ upon recommendation o# the Commissioner. Proided@ That when the
allowance #or depletion shall eKual the capital inested no #urther allowance shall 7e granted: Proided@ #urther@
That a#ter production in commercial Kuantities has commenced@ certain intangi7le exploration and deelopment
drilling costs: .a/ shall 7e deducti7le in the )ear incurred i# such expenditures are incurred #or non5producing
wells andDor mines@ or .7/ shall 7e deducti7le in #ull in the )ear paid or incurred or at the election o# the
taxpa)er@ ma) 7e capitaliCed and amortiCed i# such expenditures incurred are #or producing wells andDor mines in
the same contract area.
JIntangi7le costs in petroleum operationsJ re#ers to an) cost incurred in petroleum operations which in itsel# has
no salage alue and which is incidental to and necessar) #or the drilling o# wells and preparation o# wells #or the
production o# petroleum: Proided@ That said costs shall not pertain to the acKuisition or improement o#
propert) o# a character su7Hect to the allowance #or depreciation except that the allowances #or depreciation on
such propert) shall 7e deducti7le under this <u7section.
An) intangi7le exploration@ drilling and deelopment expenses allowed as a deduction in computing taxa7le
income during the )ear shall not 7e taEen into consideration in computing the adHusted cost 7asis #or the purpose
o# computing allowa7le cost depletion.
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.!/ %lection to "educt %xploration and "eelopment %xpenditures. 5 In computing taxa7le income #rom mining
operations@ the taxpa)er ma) at his option@ deduct exploration and deelopment expenditures accumulated as
cost or adHusted 7asis #or cost depletion as o# date o# prospecting@ as well as exploration and deelopment
expenditures paid or incurred during the taxa7le )ear: Proided@ That the amount deducti7le #or exploration and
deelopment expenditures shall not exceed twent)5#ie percent .!;P/ o# the net income #rom mining operations
computed without the 7ene#it o# an) tax incenties under existing laws. The actual exploration and deelopment
expenditures minus twent)5#ie percent .!;P/ o# the net income #rom mining shall 7e carried #orward to the
succeeding )ears until #ull) deducted.
The election 7) the taxpa)er to deduct the exploration and deelopment expenditures is irreoca7le and shall 7e
7inding in succeeding taxa7le )ears.
J4et income #rom mining operationsJ@ as used in this <u7section@ shall mean gross income #rom operations less
Jallowa7le deductionsJ which are necessar) or related to mining operations. JAllowa7le deductionsJ shall include
mining@ milling and marEeting expenses@ and depreciation o# properties directl) used in the mining operations.
This paragraph shall not appl) to expenditures #or the acKuisition or improement o# propert) o# a character
which is su7Hect to the allowance #or depreciation.
In no case shall this paragraph appl) with respect to amounts paid or incurred #or the exploration and
deelopment o# oil and gas.
The term Jexploration expendituresJ means expenditures paid or incurred #or the purpose o# ascertaining the
existence@ location@ extent or Kualit) o# an) deposit o# ore or other mineral@ and paid or incurred 7e#ore the
7eginning o# the deelopment stage o# the mine or deposit.
The term Jdeelopment expendituresJ means expenditures paid or incurred during the deelopment stage o# the
mine or other natural deposits. The deelopment stage o# a mine or other natural deposit shall 7egin at the time
when deposits o# ore or other minerals are shown to exist in su##icient commercial Kuantit) and Kualit) and shall
end upon commencement o# actual commercial extraction.
.0/ "epletion o# Oil and Gas 9ells and -ines "educti7le 7) a 4onresident Alien indiidual or (oreign Corporation.
5 In the case o# a nonresident alien indiidual engaged in trade or 7usiness in the Philippines or a resident #oreign
corporation@ allowance #or depletion o# oil and gas wells or mines under paragraph .1/ o# this <u7section shall 7e
authoriCed onl) in respect to oil and gas wells or mines located within the Philippines.
Oil R gas wells or mines are allowed a reasona7le allowance #or depletion or amortiCation
computed using the cost5depletion method
9hen the allowance #or depletion eKuals the capital inested@ no #urther allowance shall
7e granted
A#ter production in commercial Kuantities has started@ certain intangi7le exploration R
drilling costs will 7e deducted in the e)ar incurred i# such were incurred #or non5
producing wells or mines@ or these ma) 7e capitaliCed R amortiCed i# such were incurred
#or producing wells or mines in same contract area
I# it was a non5resident alien or a resident #oreign corporation@ the allowance #or
depletion is limited to oil wells R mines in the Philippines
The #ormula #or rate o# depletion is .cost o# mine propert)/D.estimated ore deposit/
.Consolidated -ines CTA/
Charita7le and other Contri7utions
.*/ Charita7le and Other Contri7utions. 5
.1/ In General. 5 Contri7utions or gi#ts actuall) paid or made within the taxa7le )ear to@ or #or the use o# the
Goernment o# the Philippines or an) o# its agencies or an) political su7diision thereo# exclusiel) #or pu7lic
purposes@ or to accredited domestic corporation or associations organiCed and operated exclusiel) #or religious@
charita7le@ scienti#ic@ )outh and sports deelopment@ cultural or educational purposes or #or the reha7ilitation o#
eterans@ or to social wel#are institutions@ or to non5goernment organiCations@ in accordance with rules and
regulations promulgated 7) the <ecretar) o# #inance@ upon recommendation o# the Commissioner@ no part o# the
net income o# which inures to the 7ene#it o# an) priate stocEholder or indiidual in an amount not in excess o#
ten percent .1,P/ in the case o# an indiidual@ and #ie percent .P/ in the case o# a corporation@ o# the
taxpa)erQs taxa7le income deried #rom trade@ 7usiness or pro#ession as computed without the 7ene#it o# this and
the #ollowing su7paragraphs.
.!/ Contri7utions "educti7le in (ull. 5 4otwithstanding the proisions o# the preceding su7paragraph@ donations
to the #ollowing institutions or entities shall 7e deducti7le in #ull?
.a/ "onations to the Goernment. 5 "onations to the Goernment o# the Philippines or to an) o# its agencies or
political su7diisions@ including #ull)5owned goernment corporations@ exclusiel) to #inance@ to proide #or@ or to
7e used in undertaEing priorit) actiities in education@ health@ )outh and sports deelopment@ human
settlements@ science and culture@ and in economic deelopment according to a 4ational Priorit) Plan determined
7) the 4ational %conomic and "eelopment Authorit) .4%"A/@ In consultation with appropriate goernment
agencies@ including its regional deelopment councils and priate philantrophic persons and institutions:
Proided@ That an) donation which is made to the Goernment or to an) o# its agencies or political su7diisions
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not in accordance with the said annual priorit) plan shall 7e su7Hect to the limitations prescri7ed in paragraph .1/
o# this <u7section?
.7/ "onations to Certain (oreign Institutions or International OrganiCations. 5 "onations to #oreign institutions or
international organiCations which are #ull) deducti7le in pursuance o# or in compliance with agreements@ treaties@
or commitments entered into 7) the Goernment o# the Philippines and the #oreign institutions or international
organiCations or in pursuance o# special laws?
.c/ "onations to Accredited 4ongoernment OrganiCations. 5 The term Jnongoernment organiCationJ means a
non pro#it domestic corporation:
.1/ OrganiCed and operated exclusiel) #or scienti#ic@ research@ educational@ character57uilding and )outh and
sports deelopment@ health@ social wel#are@ cultural or charita7le purposes@ or a com7ination thereo#@ no part o#
the net income o# which inures to the 7ene#it o# an) priate indiidual?
.!/ 9hich@ not later than the 1;th da) o# the third month a#ter the close o# the accredited nongoernment
organiCations taxa7le )ear in which contri7utions are receied@ maEes utiliCation directl) #or the actie conduct o#
the actiities constituting the purpose or #unction #or which it is organiCed and operated@ unless an extended
period is granted 7) the <ecretar) o# (inance in accordance with the rules and regulations to 7e promulgated@
upon recommendation o# the Commissioner?
.0/ The leel o# administratie expense o# which shall@ on an annual 7asis@ con#orm with the rules and regulations
to 7e prescri7ed 7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner@ 7ut in no case to
exceed thirt) percent .0,P/ o# the total expenses? and
.2/ The assets o# which@ in the een o# dissolution@ would 7e distri7uted to another nonpro#it domestic
corporation organiCed #or similar purpose or purposes@ or to the state #or pu7lic purpose@ or would 7e distri7uted
7) a court to another organiCation to 7e used in such manner as in the Hudgment o# said court shall 7est
accomplish the general purpose #or which the dissoled organiCation was organiCed.
<u7Hect to such terms and conditions as ma) 7e prescri7ed 7) the <ecretar) o# (inance@ the term JutiliCationJ
means:
.i/ An) amount in cash or in Eind .including administratie expenses/ paid or utiliCed to accomplish one or more
purposes #or which the accredited nongoernment organiCation was created or organiCed.
.ii/ An) amount paid to acKuire an asset used .or held #or use/ directl) in carr)ing out one or more purposes #or
which the accredited nongoernment organiCation was created or organiCed.
An amount set aside #or a speci#ic proHect which comes within one or more purposes o# the accredited
nongoernment organiCation ma) 7e treated as a utiliCation@ 7ut onl) i# at the time such amount is set aside@ the
accredited nongoernment organiCation has esta7lished to the satis#action o# the Commissioner that the amount
will 7e paid #or the speci#ic proHect within a period to 7e prescri7ed in rules and regulations to 7e promulgated 7)
the <ecretar) o# (inance@ upon recommendation o# the Commissioner@ 7ut not to exceed #ie .;/ )ears@ and the
proHect is one which can 7e 7etter accomplished 7) setting aside such amount than 7) immediate pa)ment o#
#unds.
.0/ >aluation. 5 The amount o# an) charita7le contri7ution o# propert) other than mone) shall 7e 7ased on the
acKuisition cost o# said propert).
.2/ Proo# o# "eductions. 5 Contri7utions or gi#ts shall 7e allowa7le as deductions onl) i# eri#ied under the rules
and regulations prescri7ed 7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner.
"onations to the #ollowing are partiall) deducti7le:
1. To the goernment@ exclusiel) #or pu7lic purposes
!. To accredited domestic corporations or associations which are organiCed and
operated exclusiel) #or religious@ charita7le@ scienti#ic@ )outh R sports deelopment@
cultural or educational purposes@ or #or the reha7ilitation o# eterans
0. To social wel#are institutions
2. To non5accredited 4GOs
o The amount that can 7e deducted should not exceed:
i. 1,P .indiiduals/@ or
ii. ;P .corporations/
o# the taxpa)erBs taxa7le income deried #rom trade@ 7iC or
pro#ession 7e#ore the deduction #or contri7utions and donations.
<o@ looE at two things: 1. )our charita7le contri7utions and !. 1,P
or ;P .as the case ma) 7e/ o# )our taxa7le income@ and then see
whatBs lower. That amount is what )our allowed to deduct.
"onations to the #ollowing are #ull) deducti7le:
1. To the goernment@ exclusiel) to #inance actiities in education@ )outh@ health@
sports deelopment@ human settlements@ science and culture@ and in economic
deelopment according to the 4%"A Plan .in other words@ goernment priorit)
actiities/
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!. To certain #oreign institutions or international organiCations .treat)57ased@ etc/
0. To accredited 4GOs
4GOBs are non5pro#it domestic corporations organiCed and operated exclusiel) #or
scienti#ic research@ educational@ character57uilding and )outh R sports deelopment@ etc@
where no part o# the net income inures to the 7ene#it o# an) priate indiidual or
stocEholder. Their leel o# admin expenses cannot exceed 0,P o# the total expenses@
and the) must utiliCe contri7utions not later than 1;
th
da) o# the 0
rd
monthO .see codal8/
&esearch and "eelopment
.I/ &esearch and "eelopment.5
.1/ In General. 5 a taxpa)er ma) treat research or deelopment expenditures which are paid or incurred 7) him
during the taxa7le )ear in connection with his trade@ 7usiness or pro#ession as ordinar) and necessar) expenses
which are not chargea7le to capital account. The expenditures so treated shall 7e allowed as deduction during
the taxa7le )ear when paid or incurred.
.!/ AmortiCation o# Certain &esearch and "eelopment %xpenditures. 5 At the election o# the taxpa)er and in
accordance with the rules and regulations to 7e prescri7ed 7) the <ecretar) o# (inance@ upon recommendation o#
the Commissioner@ the #ollowing research and deelopment expenditures ma) 7e treated as de#erred expenses:
.a/ Paid or incurred 7) the taxpa)er in connection with his trade@ 7usiness or pro#ession?
.7/ 4ot treated as expenses under paragraph +1/ hereo#? and
.c/ Chargea7le to capital account 7ut not chargea7le to propert) o# a character which is su7Hect to depreciation
or depletion.
In computing taxa7le income@ such de#erred expenses shall 7e allowed as deduction rata7l) distri7uted oer a
period o# not less than sixt) .N,/ months as ma) 7e elected 7) the taxpa)er .7eginning with the month in which
the taxpa)er #irst realiCes 7ene#its #rom such expenditures/.
The election proided 7) paragraph .!/ hereo# ma) 7e made #or an) taxa7le )ear 7eginning a#ter the e##ectiit)
o# this Code@ 7ut onl) i# made not later than the time prescri7ed 7) law #or #iling the return #or such taxa7le )ear.
The method so elected@ and the period selected 7) the taxpa)er@ shall 7e adhered to in computing taxa7le
income #or the taxa7le )ear #or which the election is made and #or all su7seKuent taxa7le )ears unless with the
approal o# the Commissioner@ a change to a di##erent method is authoriCed with respect to a part or all o# such
expenditures. The election shall not appl) to an) expenditure paid or incurred during an) taxa7le )ear #or which
the taxpa)er maEes the election.
.0/ 5imitations on (eduction. 5 This <u7section shall not appl) to:
.a/ An) expenditure #or the acKuisition or improement o# land@ or #or the improement o# propert) to 7e used in
connection with research and deelopment o# a character which is su7Hect to depreciation and depletion? and
.7/ An) expenditure paid or incurred #or the purpose o# ascertaining the existence@ location@ extent@ or Kualit) o#
an) deposit o# ore or other mineral@ including oil or gas.
%xpenses #or &R" can 7e treated as ordinar) and necessar) expenses proided that:
1. It is incurred during the taxa7le )ear
!. It is incurred in connection with his trade or 7usiness
The taxpa)er can either #ull) deduct it or amortiCe the deductions.
This is not applica7le to the expenses:
1. #or the acKuisition or improement o# land or propert) to 7e used in connection with
&R" .these are su7Hect to depreciation or depletion/
!. incurred #or the purpose o# ascertaining the existence@ location@ extent or Kualit) o#
an) deposit o# minerals R oil.
Pension trusts
$?% Pension Trusts. 5 An emplo)er esta7lishing or maintaining a pension trust to proide #or the pa)ment o#
reasona7le pensions to his emplo)ees shall 7e allowed as a deduction .in addition to the contri7utions to such
trust during the taxa7le )ear to coer the pension lia7ilit) accruing during the )ear@ allowed as a deduction under
<u7section .A/ .1/ o# this <ection/ a reasona7le amount trans#erred or paid into such trust during the taxa7le
)ear in excess o# such contri7utions@ 7ut onl) i# such amount .1/ has not thereto#ore 7een allowed as a
deduction@ and .!/ is apportioned in eKual parts oer a period o# ten .1,/ consecutie )ears 7eginning with the
)ear in which the trans#er or pa)ment is made.
Two Einds o# deduction #or emplo)er:
o =nder <u7section .A/ .1/: contri7utions to such trust to coer the pension lia7ilit)
during the )ear
o =nder this <ection: reasona7le amount paid to the trust in excess o# such
contri7utions
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The emplo)er who esta7lished the pension trust #or his emplo)eeBs 7ene#it can deduct it
7ut:
o The amount paid to the trust is reasona7le
o It must not hae 7een preiousl) allowed #or deduction .dou7le deduction/
o -ust 7e apportioned in eKual parts oer a period o# 1, consecutie )ears@
7eginning with the )ear in which the pa)ment is made.
<ee <ec 11'@ && ! #or more details
10
9hen an emplo)er maEes a contri7ution to his emplo)eeBs Personal %Kuit) and
&etirement Account .P%&A/@ the emplo)er can claim this amount as a deduction 7ut onl)
to the extent o# the emplo)erBs contri7ution that would complete the maximum allowa7le
P%&A contri7ution o# an emplo)ee. .&& !,1151$@ with &A +;,;/.
Additional reKuirements #or deducti7ilit)
$>% Additional 'e(uirements for Deducti&ility of +ertain Payments. 5 An) amount paid or pa)a7le which is
otherwise deducti7le #rom@ or taEen into account in computing gross income or #or which depreciation or
amortiCation ma) 7e allowed under this <ection@ shall 7e allowed as a deduction onl) i# it is shown that the tax
reKuired to 7e deducted and withheld there#rom has 7een paid to the Bureau o# Internal &eenue in accordance
with this <ection ;' and '1 o# this Code
I# the item to 7e deducted is #rom gross income is depreciated or amortiCed@ it must 7e
proen to hae 7een withheld and paid to the BI&@ otherwise it wonBt 7e allowed ot 7e
deducted.
Taxes which were not originall) withheld R paid@ 7ut were onl) paid during audit are
deducti7le in these conditions:
o 4o withholding tax was made@ 7ut the pa)ee reported the income and the
withholding agent pa)s during the audit .with penalties/
o 4o withholding tax was made and the pa)ee did not report the income@ 7ut the
withholding agent pa)s it during the audit
o The withholding agent erroneousl) underwithheld the tax 7ut pa)s the di##erence
during the audit
o 9hen shown that pa)ee reported the income@ and paid the income tax .no need
to pa) withholding@ na%ayaran na eh2
Optional <tandard "eduction
$<% )ptional /tandard Deduction. 5 In lieu o# the deductions allowed under the preceding <u7sections@ an
10
<%CTIO4 11'. Pa)ments to emplo)eesQ pension trusts. W An emplo)er who adopts or has adopted a reasona7le
pension plan@ actuariall) sound@ and who esta7lishes@ or has esta7lished@ and maintains a pension trust #or the
pa)ment o# reasona7le pensions to his emplo)ees shall 7e allowed to deduct #rom gross income reasona7le
amounts paid to such trust@ in accordance with the pension plan .including an) reasona7le amendment thereo#/@ as
#ollows:
.a/ I# the plan contemplates the pa)ment to the trust@ in adance o# the time when pensions are granted@ o#
amounts to proide #or #uture pensions pa)ments@ then .1/ reasona7le amounts paid to the trust during the taxa7le
)ear representing the pension lia7ilit) applica7le to such )ear@ determined in accordance with the plan@ shall 7e
allowed as a deduction #or such )ear as an ordinar) and necessar) 7usiness expense@ and in addition .!/ one5tenth
o# a reasona7le amount trans#erred or paid to the trust during the taxa7le )ear to coer in whole or in part the
pension lia7ilit) applica7le to the )ears prior to the taxa7le )ear@ or so trans#erred or paid to place the trust on a
sound #inancial 7asis@ shall 7e allowed as a deduction #or the taxa7le )ear and #or each o# the nine succeeding
taxa7le )ears.
.7/ I# the plan does not contemplate the pa)ment to the trust@ in adance o# the time when pensions are
granted@ o# amounts to proide #or #uture pension pa)ments@ then .1/ reasona7le amounts paid to the trust during
the taxa7le )ear representing the present alue o# the expected #uture pa)ments in respect o# pensions granted to
emplo)ees retired during the taxa7le )ear shall 7e allowed as deduction #or such )ear as an ordinar) and necessar)
7usiness expense@ and in addition .!/ one tenth o# a reasona7le amount trans#erred or paid to the trust during the
taxa7le )ear to coer in whole or in part the present alue o# the expected #uture pa)ments in respect o# pensions
granted to emplo)ees retired prior to the taxa7le )ear@ or so trans#erred or paid to place the trust on a sound
#inancial 7asis@ shall 7e allowed as a deduction #or the taxa7le )ear and #or each o# the nine succeeding taxa7le
)ears.
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indiidual su7Hect to tax under <ection !2@ other than a nonresident alien@ ma) elect a standard deduction in an
amount not exceeding #ort) percent .2,P/ o# his gross sales or gross receipts@ as the case ma) 7e. In the case
o# a corporation su7Hect to tax under section !$.A/ and !'.A/.1/@ it ma) elect a standard deduction in an amount
not exceeding #ort) percent .2,P/ o# it gross income as de#ined in <ection 0! o# this Code. =nless the taxpa)er
signi#ies in his return his intention to elect the optional standard deduction@ he shall 7e considered as haing
aailed himsel# o# the deductions allowed in the preceding <u7sections. <uch election when made in the return
shall 7e irreoca7le #or the taxa7le )ear #or which the return is made: +rovided@ That an indiidual who is entitled
to and claimed #or the optional standard shall not 7e reKuired to su7mit with his tax return such #inancial
statements otherwise reKuired under this Code: +rovided@ further@ That except when the Commissioner otherwise
permits@ the said indiidual shall Eeep such records pertaining to his gross sales or gross receipts@ or the said
corporation shall Eeep such records pertaining to his gross income as de#ined in <ection 0! o# this Code during
the taxa7le )ear@ as ma) 7e reKuired 7) the rules and regulations promulgated 7) the <ecretar) o# (inance@ upon
recommendation o# the Commissioner.
o The taxpa)er@ except a non5resident alien@ can choose to Hust hae the O<" o# 2,P o#
his gross income@ instead o# going with the itemiCed deductions.
Imposition o# Ceilings 7) the <ec o# (inance
4otwithstanding the proision o# the preceding <u7sections@ The <ecretar) o# (inance@ upon recommendation o#
the Commissioner@ a#ter a pu7lic hearing shall hae 7een held #or this purpose@ ma) prescri7e 7) rules and
regulations@ limitations or ceilings #or an) o# the itemiCed deductions under <u7sections .A/ to .1/ o# this <ection:
Proided@ That #or purposes o# determining such ceilings or limitations@ the <ecretar) o# (inance shall consider
the #ollowing #actors: .1/ adeKuac) o# the prescri7ed limits on the actual expenditure reKuirements o# each
particular industr)? and .!/e##ects o# in#lation on expenditure leels: Proided@ #urther@ That no ceilings shall
#urther 7e imposed on items o# expense alread) su7Hect to ceilings under present law.
The <ec o# (inance can impose ceilings on the deductions a#ter a pu7lic hearing
o Ceiling wonBt appl) to O<"
4on5deducti7le expenses
<%C. 0N. Items 4ot "educti7le.5
.A/ General &ule. 5 In computing net income@ no deduction shall in an) case 7e allowed in respect to 5
.1/ Personal@ liing or #amil) expenses?
.!/ An) amount paid out #or new 7uildings or #or permanent improements@ or 7etterments made to increase the
alue o# an) propert) or estate?
This <u7section shall not appl) to intangi7le drilling and deelopment costs incurred in petroleum operations
which are deducti7le under <u7section .G/ .1/ o# <ection 02 o# this Code.
.0/ An) amount expended in restoring propert) or in maEing good the exhaustion thereo# #or which an allowance
is or has 7een made? or
.2/ Premiums paid on an) li#e insurance polic) coering the li#e o# an) o##icer or emplo)ee@ or o# an) person
#inanciall) interested in an) trade or 7usiness carried on 7) the taxpa)er@ indiidual or corporate@ when the
taxpa)er is directl) or indirectl) a 7ene#iciar) under such polic).
.B/ 6osses #rom <ales or %xchanges o# Propert). 5 In computing net income@ no deductions shall in an) case 7e
allowed in respect o# losses #rom sales or exchanges o# propert) directl) or indirectl) 5
.1/ Between mem7ers o# a #amil). (or purposes o# this paragraph@ the #amil) o# an indiidual shall include onl)
his 7rothers and sisters .whether 7) the whole or hal#57lood/@ spouse@ ancestors@ and lineal descendants? or
.!/ %xcept in the case o# distri7utions in liKuidation@ 7etween an indiidual and corporation more than #i#t)
percent .;,P/ in alue o# the outstanding stocE o# which is owned@ directl) or indirectl)@ 7) or #or such
indiidual? or
.0/ %xcept in the case o# distri7utions in liKuidation@ 7etween two corporations more than #i#t) percent .;,P/ in
alue o# the outstanding stocE o# which is owned@ directl) or indirectl)@ 7) or #or the same indiidual i# either one
o# such corporations@ with respect to the taxa7le )ear o# the corporation preceding the date o# the sale o#
exchange was under the law applica7le to such taxa7le )ear@ a personal holding compan) or a #oreign personal
holding compan)?
.2/ Between the grantor and a #iduciar) o# an) trust? or
.;/ Between the #iduciar) o# and the #iduciar) o# a trust and the #iduciar) o# another trust i# the same person is a
grantor with respect to each trust? or
.N/ Between a #iduciar) o# a trust and 7ene#iciar) o# such trust.
The #ollowing are not deducti7le:
1. Personal@ liing or #amil) expenses
!. An) amount paid #or new 7uildings or #or permanent improements made to increase
the alue o# an) propert) or estate
0. An) amount spent in resotring propert) or in maEing good the exhaustion thereo# #or
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which an allowance has 7een made
2. Premiums paid on an) li#e insurance polic) coering the li#e o# an) o##icer@ or
emplo)ee or i# the taxpa)er is directl) or indirectl) a 7ene#iciar) under the polic).
4o deductions shall 7e allowed #or:
1. 6osses #rom sales or exchanges o# propert)? or
!. Interest expense? or
0. Bad de7ts
o 9here the transaction .either o# 1@ ! or 0/ is 7etween related taxpa)ers
12
.
The #ollowing personal expenses are not deducti7le either:
1. Insurance paid on a dwelling owned R occupied 7) the taxpa)er
!. Premiums paid #or li#e insurance
0. 9hen a pro#essional man rents a propert) #or residential purposes 7ut receies
clients in connection with his worE@ no part o# the rent is allowa7le as 7usiness
expense. .But i# he uses part o# his house as an o##ice@ that portion is considered
7usiness expense@ thus deducti7le/
2. Allowance gien 7) dadd) to Eids
;. Alimon) or allowance paid under a separation agreement
The #ollowing capital expenses are not deducti7le:
1. 4ew 7uildings@ permanent improements@ or an) amount spent in restoring propert)
!. Cost o# de#ending or per#ecting title to propert)
0. ArchitectBs serices
2. %xpense #or administration o# estate@ court costs@ attorne)Bs #ees and executorBs
commissions
;. Amount assess R paid under an agreement 7etween 7ondholders R shareholders o# a
corp@ to 7e used in the reorganiCation o# the corp .!ec **-,*""/ RR "%
*:
12
<%CTIO4 1!!. 6osses #rom sales or exchanges o# propert). W 4o deduction is allowed in respect o# losses #rom
sales or exchanges o# propert)@ directl) or indirectl) W
.a/ Between mem7ers o# a #amil). As used in <ection 01@ the #amil) o# an indiidual shall include onl) his
7rothers and sisters .whether 7) the whole or hal# 7lood/@ spouse@ ancestors@ and lineal descendants?
.7/ %xcept in the case o# distri7utions in liKuidation@ 7etween an indiidual and a corporation more than #i#t)
per centum in alue o# the outstanding stocE o# which is owned@ directl) or indirectl)@ 7) or #or such indiidual?
.c/ %xcept in the case o# distri7utions in liKuidation@ 7etween two corporations more than ;, per cent in alue
o# the outstanding stocE o# each o# which is owned@ directl) or indirectl)@ 7) or #or the same indiidual@ i# either one
o# such corporations with respect to the taxa7le )ear o# the corporation preceding the date o# the sale or exchange
was@ under the law applica7le to such taxa7le )ear@ a personal holding compan) or a #oreign personal holding
compan)?
.d/ Between a grantor and a #iduciar) o# an) trust?
.e/ Between the #iduciar) o# a trust and the #iduciar) o# another trust@ i# the same person is a grantor with
respect to each trust? or
.#/ Between a #iduciar) o# a trust and a 7ene#iciar) o# such trust.
1;
<%CTIO4 11+. Personal@ liing@ and #amil) expenses. W Personal@ liing@ and #amil) expenses are not deducti7le.
Insurance paid on a dwelling owned and occupied 7) a taxpa)er is a personal expense and not deducti7le.
Premiums paid #or li#e insurance 7) the insured are not deducti7le. In the case o# a pro#essional man who rents a
propert) #or residential purposes@ 7ut incidentall) receies his clients@ patients@ or callers in connection with his
pro#essional worE .his place o# 7usiness 7eing elsewhere/@ no part o# the rent is deducti7le as a 7usiness expense.
I# howeer@ he uses part o# the house #or his o##ice@ such portion o# the rent as is properl) attri7uta7le to such
o##ice is deducti7le. 9here the #ather is legall) entitled to the serices o# his minor children@ an) allowances which
he gies them@ whether said to 7e in consideration o# serices or otherwise@ are not allowa7le deductions in his
return o# income. Alimon)@ and an allowance paid under a separation agreement are not deducti7le #rom gross
income.
<%CTIO4 1!,. Capital expenditures. W 4o deduction #rom gross income ma) 7e made #or an) amounts paid out
#or new 7uildings or #or permanent improements or 7etterments made to increase the alue o# the taxpa)erQs
propert)@ or #or an) amount expended in restoring propert) or in maEing good the exhaustion thereo# #or which an
allowance #or depreciation or depletion or other allowance is or has 7een made. Amounts expended #or securing a
cop)right and plates@ which remain the propert) o# the person maEing the pa)ments@ are inestments o# capital.
The cost o# de#ending or per#ecting title to propert) constitutes a part o# the cost o# the propert) and is not a
deducti7le expense. The amount expended #or architectQs serices is part o# the cost o# the 7uilding. Commissions
paid in purchasing securities are a part o# the cost o# such securities. Commissions paid in selling securities are an
o##set against the selling price. %xpenses o# the administration o# an estate@ such as court costs@ attorne)Qs #ees@
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-argin leies are not deducti7le. .%sso CI&/
R. Capital Gains and <osses $!ale or 0xchan(e o& Property%
Capital Assets
<%C. 0+. Capital Gains and 6osses. 5
$A% )e&initions. , As used in this Title ,
$*% Capital Assets. 5 The term Jcapital assetsJ means propert) held 7) the taxpa)er .whether or not connected
with his trade or 7usiness/@ 7ut does not include stocE in trade o# the taxpa)er or other propert) o# a Eind which
would properl) 7e included in the inentor) o# the taxpa)er i# on hand at the close o# the taxa7le )ear@ or
propert) held 7) the taxpa)er primaril) #or sale to customers in the ordinar) course o# his trade or 7usiness@ or
propert) used in the trade or 7usiness@ o# a character which is su7Hect to the allowance #or depreciation proided
in <u7section .(/ o# <ection 02? or real propert) used in trade or 7usiness o# the taxpa)er.
$B% Percenta#e Ta0en Into Account. 5 In the case o# a taxpa)er@ other than a corporation@ onl) the #ollowing
percentages o# the gain or loss recogniCed upon the sale or exchange o# a capital asset shall 7e taEen into
account in computing net capital gain@ net capital loss@ and net income:
.1/ One hundred percent .1,,P/ i# the capital asset has 7een held #or not more than twele .1!/ months? and
.!/ (i#t) percent .;,P/ i# the capital asset has 7een held #or more than twele .1!/ months?
$C% 1imitation on +apital 1osses. 5 6osses #rom sales or exchanges o# capital assets shall 7e allowed onl) to
the extent o# the gains #rom such sales or exchanges. I# a 7anE or trust compan) incorporated under the laws o#
the Philippines@ a su7stantial part o# whose 7usiness is the receipt o# deposits@ sells an) 7ond@ de7enture@ note@
or certi#icate or other eidence o# inde7tedness issued 7) an) corporation .including one issued 7) a goernment
or political su7diision thereo#/@ with interest coupons or in registered #orm@ an) loss resulting #rom such sale
shall not 7e su7Hect to the #oregoing limitation and shall not 7e included in determining the applica7ilit) o# such
limitation to other losses.
$)% "et +apital 1oss +arry-over. 5 I# an) taxpa)er@ other than a corporation@ sustains in an) taxa7le )ear a
net capital loss@ such loss .in an amount not in excess o# the net income #or such )ear/ shall 7e treated in the
succeeding taxa7le )ear as a loss #rom the sale or exchange o# a capital asset held #or not more than twele .1!/
months.
$0% 'etirement of $onds, Etc. 5 (or purposes o# this Title@ amounts receied 7) the holder upon the retirement
o# 7onds@ de7entures@ notes or certi#icates or other eidences o# inde7tedness issued 7) an) corporation
.including those issued 7) a goernment or political su7diision thereo#/ with interest coupons or in registered
#orm@ shall 7e considered as amounts receied in exchange there#or.
$'% Gains or 1osses -rom /hort /ales, Etc. 5 (or purposes o# this Title 5
.1/ Gains or losses #rom short sales o# propert) shall 7e considered as gains or losses #rom sales or exchanges o#
capital assets? and
.!/ Gains or losses attri7uta7le to the #ailure to exercise priileges or options to 7u) or sell propert) shall 7e
considered as capital gains or losses.
(irst o#@ what is a sale or exchangeG
o There is a sale or exchange o# propert) when there is an e##ectie and actual
trans#er o# ownership o# the propert) to another as would diest the trans#erors
o# the 7ene#its accruing #rom the ownership o# the propert)@ #or a alua7le
consideration.
o 9hat is important is when the sale or exchange is consummated@ not per#ected.
o Thus@ it includes:
i. (orced sales
ii. "istri7ution in complete liKuidation
and executorQs commissions@ are chargea7le against the JcorpusJ o# the estate and are not allowa7le deductions.
Amounts to 7e assessed and paid under an agreement 7etween 7ondholders or shareholders o# a corporation@ to 7e
used in a reorganiCation o# the corporation@ are inestments o# capital and not deducti7le #or an) purpose in return
o# income.
In the case o# a corporation@ expenses #or organiCation@ such as incorporation #ees@ attorne)Qs #ees and
accountantsQ charges@ are ordinaril) capital expenditures? 7ut where such expenditures are limited to purel)
incidental expenses@ a taxpa)er ma) charge such items against income in the )ear in which the) are incurred. A
holding compan) which guarantees diidends at a speci#ied rate on the stocE o# a su7sidiar) corporation #or the
purpose o# securing new capital #or the su7sidiar) and increasing the alue o# its stocEholdings in the su7sidiar)
ma) not deduct amounts paid in carr)ing out this guarant) in computing its net income@ 7ut such pa)ments ma)
7e added to the cost o# its stocE in the su7sidiar).
<%CTIO4 1!1. Premiums on li#e insurance o# emplo)ees. W An) amounts paid #or premiums on an) li#e
insurance polic) coering the li#e o# an o##icer or emplo)ee or o# an) person #inanciall) interested in the 7usiness o#
the taxpa)er when the taxpa)er is directl) or indirectl) a 7ene#iciar) under such polic) are not deducti7le.
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o 4OT sale or exchange:
i. Assignment 7) 1oh Corp o# a countr) clu7 share to -r. 1ohn with -r. 1ohn
signing a declaration o# trust that 1oh Corp is the owner o# the share
.since no trans#er o# ownership@ onl) 7ene#icial ownership was trans#ered/
ii. Cone)ance o# the common areas o# a condominium #rom the deeloper to
the condominium corporation .since no consideration and cone)ance is
merel) #or the management o# the common areas/
It is important to Enow whether the asset sold or exchanged was held as ordinar) asset
or capital asset 7ecause o# the di##erent rules which appl) to each.
<o@ what are capital assetsG 9ell@ we Enow what the) A&%4BT.
Capital assets are propert) held 7) the taxpa)er .whether or not connected with his
trade or 7usiness/ 7ut does 4OT include:
1. <tocE in trade o# the taxpa)er@
!. Other propert) o# a Eind which would properl) 7e included in the inentor) o# the
taxpa)er i# on hand at the close o# the )ear
0. Propert) held 7) the taxpa)er primaril) #or sale to customers in the ordinar) course
o# his trade or 7usiness
2. Propert) used in trade or 7usiness o# a character which is su7Hect to allowance #or
depreciation@
;. &eal propert) used in trade or 7usiness.
The codal enumerates what are ordinar) assets. All assets other than ordinar) assets
are capital assets.
Propert) initiall) classi#ied as capital asset ma) later 7ecome an ordinar) asset and ice
ersa. .CalasanC CI&@ wherein inherited land was deeloped into a su7diision@
changing it #rom capital to ordinar) asset/
<hares o# stocE would 7e ordinar) assets onl) to a dealer in securities or a person
engaged in the purchase and sale o#@ or an actie trader in@ securities. .China BanE
CA/
RR =,"++9 has also gien guidelines in determining whether real propert) is a capital or
ordinar) asset@ to wit .yun eh, 4o wit raw eh,/
o (or those engaged in real estate 7usiness@ the #ollowing are ordinar) assets:
i. All real properties acKuired 7) the real estate dealer
ii. All real properties acKuired 7) the real estate deeloper@ whether
deeloped or undeeloped
iii. All real properties held #or sale or lease in the ordinar) course o# 7usiness
or which would 7e properl) 7e included in the inentor)
i. All real properties acKuired #or leaseDrent
. All real properties acKuired in the ordinar) course o# 7usiness 7) a
taxpa)er ha7ituall) engaged in the sale o# real estate
o 9ill the propert) change nature #rom ordinar) to capital assetG
i. Changing #rom real estate 7usiness to a non5real estate 7usiness: 4O
ii. Ceasing operations o# the real estate 7usiness: 4O
iii. The properties acKuired 7) the real estate 7usiness are a7andoned: 4O
i. The properties acKuired 7) the real estate 7usiness 7ecome idle: 4O
. &eal estate 7usiness trans#ers the propert) to an ordinar) person: I%<
o The nature o# the propert) CA4 change in the hands o# the 7u)erDtrans#eree.
o In case o# inoluntar) trans#er .liEe expropriation or #oreclosure/@ the inoluntar)
nature shall hae 4O e##ect on the classi#ication in the hands o# the inoluntar)
seller.
o (or those 4OT engaged in the real estate 7usiness@ real propert) 7eing used or
hae 7een used in the trade or 7usiness are considered ordinar) assets.
i. Can these change into capital assetsG
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I%<@ proided the) show proo# that the same hae not 7een used
in 7usiness #or more than ! )ears .prior to the taxa7le transaction/
o (or %U%-PT corporations@ real propert) used in exempt transactions shall not 7e
considered #or 7usiness purposes@ and thus are CAPITA6 assets.
The rules on capital gains and losses are the #ollowing: .<ee <ec 10!510;@ && !/
1. (irst@ Eeep me in mind that these rules do not appl) to:
a. &eal propert) with a capital gain tax@ and
7. <hares o# stocE o# a domestic corporation with a capital gain tax@
i. These two Einds o# capital assets hae their own rates. .&emem7er the
capital gains tax8 The whole NP@ ;PD1,P rates8 An) capital gain
su7Hect to the capital gain tax shall not 7e included in the computation
o# the taxa7le income and income tax at the end o# the )ear./
!. 4ext@ the transaction on the capital asset should 7e a sale or exchange
0. In the case o# a taxpa)er other than a corporation .#or indiiduals onl)/@ the
#ollowing percentages o# the gain or loss shall 7e taEen into account in computing net
capital gain@ net capital loss and net income:
a. 1,,P o# the gainDloss@ i# the asset has 7een held #or not more than 1!
months
7. ;,P o# the gainDloss@ i# the asset has 7een held #or more than 1! months.
o (or corporations@ capital gains and losses are alwa)s considered at 1,,P.
2. 6osses #rom sales or exchanges o# capital assets shall 7e allowed onl) to the extent
o# the gains #rom such sales or exchanges .limitation on capital loss/ .see example
7elow/@
o I# the taxpa)er incurs net capital loss@ such loss cannot 7e deducted #rom his
ordinar) income 7ecause the loss can 7e deducted onl) to the extent o# capital
gains.
;. I# an) taxpa)er@ other than a corporation@ sustains in an) taxa7le )ear a net capital
loss@ such loss@ in an amount not in excess o# the net income .taxa7le income/ o#
such )ear@ shall 7e treated in the succeeding )ear as a loss #rom a sale or exchange
o# a capital asset held #or not more than twele months .meaning@ 1,,P o# the
loss/. This is what )ou call the net capital loss carr) oer.
o Corporations donBt hae net capital loss carr)5oer.
%xample
-ao is in the 7u) and sell 7usiness@ and he had ordinar) income o# P!,@,,,@ capital gains o#
P;@,,, .#rom the sale o# his personal art collection@ which he held #or 0 )ears/@ and capital
losses o# P0@,,, .#rom the sale o# his )acht@ which he held #or ! )ears.
Ordinar) net income P!,@,,,
Gains #rom sale o# capital asset P;@,,,
But held #or 0 )ears8 so ;,P P!@;,,
6oss #rom sale o# capital asset P0@,,,
But held #or ! )ears8 so ;,P P1@;,,
4et taxa7le gain P1@,,,
Taxa7le Income P!1@,,,
<ame #acts@ 7ut -ao had capital gains o# P!@,,,@ and capital losses o# P$@,,,.
Ordinar) net income P!,@,,,
Gains #rom sale o# capital asset P!@,,,
;,P onl)8 P1@,,,
6oss #rom sale o# capital asset P$@,,,
;,P onl)8 P0@;,,
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4et capital loss P!@;,,
Taxa7le income P!,@,,,
;ou cant deduct the capital loss of +G,F?? %ecause you can only deduct to the e*tent of
your capital gains.
BIR Rulin( "=,+" gies some steps to determine the tax in real estate transactions
o (irst@ determine the character o# propert) 7eing sold.
I# propert) is not used in 7usiness o# seller@ then itBs a capital asset and
the gain o# the seller is su7Hect to NP capital gains tax 7ased on gross
selling price or #air marEet alue.
I# the propert) is used in the 7usiness o# the seller@ it is treated as
ordinar) asset@ so the withholding tax rates 7elow shall appl). These rates
will depend on:
9hether the seller is exempt or taxa7le
9hether the seller is engaged in real estate 7usiness or not
I# he is engaged in real estate 7usiness@ what was the gross selling
priceG
)i&&erent !cenarios o& !ale o& Real Property $seller not exempt and real property is
OR)I;ARG asset%
<eller Bu)er Tax Treatment
Corp engaged in real
estate 7usiness .sells
N parcels o# land
within a )ear/
estate 7usiness
Credita7le withholding tax 7ased on gross
selling price or #air marEet alue is
deducted 7) the 7u)er .to 7e credited to
the seller/
I# selling price is P;,,@,,, or less 1.;P
I# itBs P;,,@,,, to P!- 0P
I# its a7oe P!m ;P
estate 7usiness
Corp 4OT engaged in
real estate 7usiness
<ame as a7oe
Corp 4OT engaged in
real estate 7usiness
estate 7usiness
I# propert) considered ordinar) asset NP
credita7le withholding
I# propert) considered capital asset NP
#inal tax
estate 7usiness
Indiidual 4OT
engaged in trade or
7usiness
I# on installment 7asis@ no withholding tax
on periodic installments@ it will 7e withheld
on the last pa)ment
I# on cash 7asis or de#erred pa)ment@
7u)er withholds the tax on the #irst
installment
estate 7usiness
Indiidual engaged in
trade or 7usiness
I# on installment@ tax withheld 7) the 7u)er
on %>%&I installment
I# it was on cash or de#erred pa)ment@
7u)er withholds the tax on the #irst
installment
Installment plan: where the total pa)ment in the )ear o# sale "O%< 4OT exceed !;P o#
the total selling price
"e#erred pa)ment plan: where the total pa)ment in the )ear o# sale exceeds !;P o# the
total selling price
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3n mortgage and redemption of a capital asset
I# the mortgagor exercises his right o# redemption within 1 )ear@ no capital gains tax.
highest 7idder. .&& 25++/
Remem%er the conditions for e*emption from capital gains ta* from the sale or e*change of
the principal residence 1See Sec G= 1d2 1G2, all the way near the start of this reviewer2
Ordinar) income
!ec "" .T/ The term /ordinary income/ includes an) gain #rom the sale or exchange o# propert) which is not a
capital asset or propert) descri7ed in <ection 0+.A/.1/. An) gain #rom the sale or exchange o# propert) which is
treated or considered@ under other proisions o# this Title@ as Qordinar) incomeQ shall 7e treated as gain #rom the
sale or exchange o# propert) which is not a capital asset as de#ined in <ection 0+.A/.1/. The term Qordinar) lossQ
includes an) loss #rom the sale or exchange o# propert) which is not a capital asset. An) loss #rom the sale or
exchange o# propert) which is treated or considered@ under other proisions o# this Title@ as Qordinar) lossQ shall
7e treated as loss #rom the sale or exchange o# propert) which is not a capital asset.
Ordinar) income is an) gain #rom sale or exchange o# propert) which is not a capital
asset.
o Ordinar) loss is the opposite.
4et capital gain is the excess o# the gains #rom such sales or exchanges o# capital assets
oer the losses #rom such sales or exchanges.
o 4et capital loss is the opposite.
Is it 7etter #or real propert) to 7e considered capital or ordinar) assetG
o "epends.
o (or example@ the corporation )ouBre counsel #or sells a piece o# land #or P1,,E.
"o )ou want to consider it as capital or ordinar)G
i. I# it were capital@ )ouBd get taxed NP o# P1,,E .capital gains tax/@ thatBs
PN@,,,. Iou go home with P+2E.
ii. I# it were ordinar)@ itBll 7e part o# )our gross income@ which will 7e taxed
0,P a#ter all the deductions hae 7een accounted #or. The Kuestion is@ do
)ou hae enough deductions .and proo#/ which will ena7le )ou to get a
7etter deal .i.e. more mone) a#ter all the taxes are paid out/G
!. )etermination o& Gain or <oss &rom !ale or Trans&er o& Property
<ec 2, is chopped up in 0 parts. 3eep this in mind #or a 7etter understanding o# the
proision.
1. <ection 2, .A/ which tells us how to arrie at the gain .or loss/.
!. <ection 2, .C 15!/ which tells us the general rule and the exceptions .tax5#ree
exchanges/
0. <ection 2, .C ;/ which gies us the su7stituted 7asis? i.e. the 7asis #or tax5#ree
exchanges when the trans#eror later sells the stocE he got in the tax5#ree exchange.
<%C. 2,. "etermination o# Amount and &ecognition o# Gain or 6oss. 5
.A/ Computation o# Gain or 6oss. 5 The gain #rom the sale or other disposition o# propert) shall 7e the excess o#
the amount realiCed there#rom oer the 7asis or adHusted 7asis #or determining gain@ and the loss shall 7e the
excess o# the 7asis or adHusted 7asis #or determining loss oer the amount realiCed. The amount realiCed #rom
the sale or other disposition o# propert) shall 7e the sum o# mone) receied plus the #air marEet alue o# the
propert) .other than mone)/ receied?
Gain is the excess amount realiCed oer the 7asis #or determining gain
6oss is the opposite
The amount realiCed is the sum o# mone) receied plus the #air marEet alue o# the
propert) .other than mone)/ receied
9hat is the 7asis o# determining gain or lossG
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.B/ Basis #or "etermining Gain or 6oss #rom <ale or "isposition o# Propert). 5 The 7asis o# propert) shall 7e 5
.1/ The cost thereo# in the case o# propert) acKuired on or a#ter -arch 1@ 1+10@ i# such propert) was acKuired 7)
purchase? or
.!/ The #air marEet price or alue as o# the date o# acKuisition@ i# the same was acKuired 7) inheritance? or
.0/ I# the propert) was acKuired 7) gi#t@ the 7asis shall 7e the same as i# it would 7e in the hands o# the donor or
the last preceding owner 7) whom it was not acKuired 7) gi#t@ except that i# such 7asis is greater than the #air
marEet alue o# the propert) at the time o# the gi#t then@ #or the purpose o# determining loss@ the 7asis shall 7e
such #air marEet alue? or
.2/ I# the propert) was acKuired #or less than an adeKuate consideration in mone) or mone)Qs worth@ the 7asis o#
such propert) is the amount paid 7) the trans#eree #or the propert)? or
.;/ The 7asis as de#ined in paragraph .C/.;/ o# this <ection@ i# the propert) was acKuired in a transaction where
gain or loss is not recogniCed under paragraph .C/.!/ o# this <ection.
Basis &or )eterminin( Gain or <oss &rom !ale or )isposition o& Property $Ori(inal
Basis
*2
%
-ode o# acKuisition Cost 7asis
1. AcKuired 7) purchase The actual cost
!. B) inheritance (air marEet alue
0. B) gi#t The same as i# it would 7e in the hands o#
the donor or the last preceding owner@
B=T i# the 7asis is greater than the #m@ then
the 7asis shall 7e the #m .so@ whateerBs
lower/
2. AcKuired #or less than an adeKuate
consideration in mone) or its worth
Amount paid 7) the trans#eree #or the
propert)
%xample
-ao sold a car worth P1,, to Apple Inc@ in exchange #or P11, worth o# Apple Inc stocE@ P1,
cash and P!, propert). *ow much is the gain #or -aoG 9hat a7out the loss #or Apple IncG
7et the amount reali&ed first! P12, .cash + stocE + propert)/
(educt the %asis! P1,, .alue o# car/
Gain: P 2, .gain #or -ao/@ loss o# P2, #or Apple Inc
*ow do )ou maEe the transaction a tax5#ree exchangeG ChecE the codal 7elow. ItBs one o#
the most used proisions.
.C/ %xchange o# Propert). 5
.1/ General &ule. 5 %xcept as herein proided@ upon the sale or exchange or propert)@ the entire amount o# the
gain or loss@ as the case ma) 7e@ shall 7e recogniCed.
.!/ %xception. 5 4o gain or loss shall 7e recogniCed i# in pursuance o# a plan o# merger or consolidation 5
.a/ A corporation@ which is a part) to a merger or consolidation@ exchanges propert) solel) #or stocE in a
corporation@ which is a part) to the merger or consolidation? or
.7/ A shareholder exchanges stocE in a corporation@ which is a part) to the merger or consolidation@ solel) #or
the stocE o# another corporation also a part) to the merger or consolidation? or
.c/ A securit) holder o# a corporation@ which is a part) to the merger or consolidation@ exchanges his securities in
such corporation@ solel) #or stocE or securities in such corporation@ a part) to the merger or consolidation.
1N
&& 1'5!,,1 C. The Original Basis o# Propert) to 7e Trans#erred. The original 7asis o# the propert) to 7e
trans#erred shall 7e the #ollowing@ as ma) 7e appropriate:
.a/ The cost o# the propert)@ i# acKuired 7) purchase on or a#ter -arch 1@ 1+10?
.7/ The #air marEet price or alue as o# the moment o# death o# the decedent@ i# acKuired 7) inheritance?
.c/ The 7asis in the hands o# the donor or the last preceding owner 7) whom the propert) was not acKuired 7) gi#t@
i# the propert) was acKuired 7) donation.
I# the 7asis@ howeer@ is greater than the #air marEet alue o# the propert) at the time o# donation@ then@ #or
purposes o# determining loss@ the 7asis shall 7e such #air marEet alue? or@
.d/ The amount paid 7) the trans#eree #or the propert)@ i# the propert) was acKuired #or less than an adeKuate
consideration in mone) or mone)Qs worth.
.e/ The adHusted 7asis o# .a/ to .d/ a7oe@ i# the acKuisition cost o# the propert) is increased 7) the amount o#
improements that materiall) add to the alue o# the propert) or apprecia7l) prolong its li#e less accumulated
depreciation.
.#/ The su7stituted 7asis@ i# the propert) was acKuired in a preious tax5 #ree exchange under <ection 2,.C/.!/ o#
the Tax Code o# 1++$.
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4o gain or loss shall also 7e recogniCed i# propert) is trans#erred to a corporation 7) a person in exchange #or
stocE or unit o# participation in such a corporation o# which as a result o# such exchange said person@ alone or
together with others@ not exceeding #our .2/ persons@ gains control o# said corporation: Proided@ That stocEs
issued #or serices shall not 7e considered as issued in return #or propert).
%xchange o# propert)@ and tax5#ree exchange.
General rule: in a sale or exchange o# propert)@ the entire amount o# gain or loss is
recogniCed
o %UC%PT .no gain or loss is realiCed/:
i. In a mergerDconsolidation .mDc/@ where a corp exchanges propert) solel)
#or stocE in another corporation@ which is also a part) to the mDc
ii. In a mDc@ where a shareholder exchanges stocE in a corp #or the stocE o#
another corp@ also a part) to the mDc
iii. In a mDc@ where a securit) holder o# a corp exchanges his securities in
such corp solel) #or stocE or securities in another corp also a part) to the
mDc
i. 9here propert) is trans#erred to a corp 7) a person in exchange #or stocE
in the corp@ and the result o# such exchange is that the person .and up to
2 other persons/ gains control o# the corp@ 7ut the stocEs issued #or
serices are not considered as issued in return #or propert).
&ule o# momentar) control
o I# two tax5#ree exchanges are done in the same taxa7le )ear@ the) are not
considered tax5#ree. .Att). -ontero/
.N/ "e#initions. 5

.a/ The term JsecuritiesJ means 7onds and de7entures 7ut not JnotesJ o# whateer class or duration.
.7/ The term JmergerJ or JconsolidationJ@ when used in this <ection@ shall 7e understood to mean: .i/ the
ordinar) merger or consolidation@ or .ii/ the acKuisition 7) one corporation o# all or su7stantiall) all the properties
o# another corporation solel) #or stocE: Proided@ That #or a transaction to 7e regarded as a merger or
consolidation within the puriew o# this <ection@ it must 7e undertaEen #or a 7ona #ide 7usiness purpose and not
solel) #or the purpose o# escaping the 7urden o# taxation: Proided@ #urther@ That in determining whether a 7ona
#ide 7usiness purpose exists@ each and eer) step o# the transaction shall 7e considered and the whole
transaction or series o# transaction shall 7e treated as a single unit: Proided@ #inall) @ That in determining
whether the propert) trans#erred constitutes a su7stantial portion o# the propert) o# the trans#eror@ the term
Qpropert)Q shall 7e taEen to include the cash assets o# the trans#eror.
.c/ The term JcontrolJ@ when used in this <ection@ shall mean ownership o# stocEs in a corporation possessing at
least #i#t)5one percent .;1P/ o# the total oting power o# all classes o# stocEs entitled to ote.
.d/ The <ecretar) o# (inance@ upon recommendation o# the Commissioner@ is here7) authoriCed to issue rules
and regulations #or the purpose Jsu7stantiall) allJ and #or the proper implementation o# this <ection.
<ecurities means 7onds and de7entures@ 7ut not notes o# whateer class or duration.
-erger or consolidation means:
o The ordinar) merger or consolidation
o The acKuisition 7) one corporation o# all or almost all the properties o# another
corporation solel) #or stocE
A corporate merger where the new corporation continued to operate the 7usiness o# the
old corporation is not su7Hect to capital gains tax. The merger@ howeer@ must 7e
undertaEen #or a 7ona #ide 7usiness purpose and not solel) #or the purpose o# escaping
the 7urden o# taxation. .CI& &u#ino@ where the merger was done to extend the li#e o#
the corporation@ this was legitimate/
Trans#er o# su7stantiall) LallM the assets means a trans#er o# at least ',P o# the assets@
including cash@ with some degree o# permanence.
Trans#er o# propert) #or shares o# stocE : no gain or loss is recogniCed when a person
trans#ers propert) .not serices/ to a corporation in exchange #or shares o# stocE .alone
or with 2 others/@ where such person gains control o# the corporation .at least ;1P o#
the total oting power/
The trans#er o# assets 7) one corporation to another must hae a 7usiness purpose.
.Gregor) *eling/
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Administratie reKuirements in case o# tax5#ree exchanges.
o Iou hae to su7mit the #ollowing to the BI&:
i. <worn certi#icate on the 7asis o# propert) to 7e trans#erred
ii. Certi#ied true copies .ctc/ o# the TCT
iii. Ctc o# the corresponding tax declaration o# the real properties to 7e
trans#erred
i. Ctc o# the certi#icates o# stocE eidencing shares o# stocE to 7e trans#erred
. Ctc o# the inentor) o# the propert) to 7e trans#erred .RR *.,+*%
%lements o# a de #actor merger .which is a alid merger/
1. Trans#er o# all or su7stantiall) all o# the properties o# the trans#eror corp solel) #or
stocE
!. =ndertaEen #or a 7ona #ide 7iC purpose@ not #or escaping taxes
*ow does a statutor) merger worEG
o I corp acKuires all the assets o# U corp. U corp gets I shares in exchange. U corp
then dissoles and distri7utes these shares to its stocEholders.
"i##erence 7etween a de #acto merger a statutor) merger
o In a de #acto merger@ the trans#eror is not automaticall) dissoled
o In a de #acto merger@ there is no automatic trans#er to the trans#eree o# all the
rights@ priileges and lia7ilities o# the trans#eror
"i##erence 7etween a de #acto merger a trans#er to a controlled corporation
o In a de #acto merger@ the trans#eror is a corp. in the latter@ the trans#eror ma) 7e
an indiidual.
o In a de #acto merger@ the reKuirement is that the trans#eree acKuires all or
su7stantiall) all o# the properties o# the trans#eror. In the latter@ the reKuirement
is that the trans#eror gains control o# the trans#eree .own ;1P o# the oting
power/
.0/ %xchange 4ot <olel) in 3ind. 5

.a/ I#@ in connection with an exchange descri7ed in the a7oe exceptions@ an indiidual@ a shareholder@ a securit)
holder or a corporation receies not onl) stocE or securities permitted to 7e receied without the recognition o#
gain or loss@ 7ut also mone) andDor propert)@ the gain@ i# an)@ 7ut not the loss@ shall 7e recogniCed 7ut in an
amount not in excess o# the sum o# the mone) and #air marEet alue o# such other propert) receied: Proided@
That as to the shareholder@ i# the mone) andDor other propert) receied has the e##ect o# a distri7ution o# a
taxa7le diidend@ there shall 7e taxed as diidend to the shareholder an amount o# the gain recogniCed not in
excess o# his proportionate share o# the undistri7uted earnings and pro#its o# the corporation? the remainder@ i#
an)@ o# the gain recogniCed shall 7e treated as a capital gain.
.7/ I#@ in connection with the exchange descri7ed in the a7oe exceptions@ the trans#eror corporation receies not
onl) stocE permitted to 7e receied without the recognition o# gain or loss 7ut also mone) andDor other propert)@
then .i/ i# the corporation receiing such mone) andDor other propert) distri7utes it in pursuance o# the plan o#
merger or consolidation@ no gain to the corporation shall 7e recogniCed #rom the exchange@ 7ut .ii/ i# the
corporation receiing such other propert) andDor mone) does not distri7ute it in pursuance o# the plan o# merger
or consolidation@ the gain@ i# an)@ 7ut not the loss to the corporation shall 7e recogniCed 7ut in an amount not in
excess o# the sum o# such mone) and the #air marEet alue o# such other propert) so receied@ which is not
distri7uted.
.2/ Assumption o# 6ia7ilit). 5
.a/ I# the taxpa)er@ in connection with the exchanges descri7ed in the #oregoing exceptions@ receies stocE or
securities which would 7e permitted to 7e receied without the recognition o# the gain i# it were the sole
consideration@ and as part o# the consideration@ another part) to the exchange assumes a lia7ilit) o# the
taxpa)er@ or acKuires #rom the taxpa)er propert)@ su7Hect to a lia7ilit)@ then such assumption or acKuisition shall
not 7e treated as mone) andDor other propert)@ and shall not preent the exchange #rom 7eing within the
exceptions.
.7/ I# the amount o# the lia7ilities assumed plus the amount o# the lia7ilities to which the propert) is su7Hect
exceed the total o# the adHusted 7asis o# the propert) trans#erred pursuant to such exchange@ then such excess
shall 7e considered as a gain #rom the sale or exchange o# a capital asset or o# propert) which is not a capital
asset@ as the case ma) 7e.
Assumption o# lia7ilit) in tax5#ree exchanges:
I# the trans#eror receies stocE or securities in a trans#er o# propert)@ and as part o# the
consideration@ the other part) also assumes the lia7ilit) o# the trans#eror or that the
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propert) he assumes has a lia7ilit)@ then the propert)Dlia7ilit) acKuired will 4OT 7e
treated as mone) or other propert)@ so that it still #alls under the exception o# the <ec
2, .C/ and no gain or loss is recogniCed.
But i# the amount o# the lia7ilit) assumed exceeds the total o# the adHusted 7asis o# the
propert) trans#erred@ then the excess is considered a gain #rom sale o# either a capital
asset or an ordinar) asset@ as the case ma) 7e.
%xample
To7) trans#ers propert) to Apple Inc with an adHusted 7asis o# P1;m in exchange #or
Apple IncBs stocE plus Apple Inc assumes To7)Bs lia7ilit) o# P1,m. The exchange is
considered tax5#ree.
But i# the lia7ilit) o# To7) is P!,m@ then this will exceed the adHusted 7asis o# P1;m.
<o the P;m will 7e considered a gain and it will 7e taxa7le.
Cost or 7asis in tax5#ree exchanges
.;/ Basis 5
.a/ The 7asis o# the stocE or securities receied 7) the trans#eror upon the exchange speci#ied in the a7oe
exception shall 7e the same as the 7asis o# the propert)@ stocE or securities exchanged@ decreased 7) .1/ the
mone) receied@ and .!/ the #air marEet alue o# the other propert) receied@ and increased 7) .a/ the amount
treated as diidend o# the shareholder and .7/ the amount o# an) gain that was recogniCed on the exchange:
+rovided@ That the propert) receied as /%oot/ shall hae as 7asis its #air marEet alue! +rovided, further@ That i#
as part o# the consideration to the trans#eror@ the trans#eree o# propert) assumes a lia7ilit) o# the trans#eror or
acKuires #orm the latter propert) su7Hect to a lia7ilit)@ such assumption or acKuisition .in the amount o# the
lia7ilit)/ shall@ #or purposes o# this paragraph@ 7e treated as mone) receied 7) the trans#eror on the exchange!
+rovided, finally@ That i# the trans#eror receies seeral Einds o# stocE or securities@ the Commissioner is here7)
authoriCed to allocate the 7asis among the seeral classes o# stocEs or securities.
.7/ The 7asis o# the propert) trans#erred in the hands o# the trans#eree shall 7e the same as it would 7e in the
hands o# the trans#eror increased 7) the amount o# the gain recogniCed to the trans#eror on the trans#er.
9hen the trans#eror later on sells or exchanges the stocE he got tax5#ree@ the 7asis #or
determining the gain or loss is the su7stituted 7asis. This will also 7e the cost 7asis
when the trans#eree later on sells the propert) acKuired.
*ow to compute the su7stituted 7asis:
1. TaEe the original 7asis o# the propert) .see the ta7le a #ew pages 7acE/
a. The original 7asis is usuall) whatBs indicated in the deed o# sale .the (-> o#
the propert) is used #or accounting purposes/ F Att) <alador
!. <u7tract an) mone) or the #air marEet alue o# an) propert) that ma) hae 7een
receied aside #rom the shares o# stocE
0. Add the amount treated as diidend 7) the shareholder R an) gain that was
recogniCed on the exchange .i# an)/
%xample
*a)le) trans#ers propert) to Apple Inc #or shares o# stocE. The propert)Bs 7ooE alue
was P;m and *a)le) receied an extra P1m #rom stocE.
I# she later sells her shares o# stocE to -el@ the su7stituted 7asis will 7e computed as
.P;m5P1m/YP2m.
I# *a)le) sells the shares to -el #or PNm@ her gain will 7e .PN5P2m/ P!m and it will
7e su7Hect to capital gains tax.
6osses #rom 9ash <ales o# <tocEs or <ecurities
<%C. 0'. 6osses #rom 9ash <ales o# <tocE or <ecurities. 5
.A/ In the case o# an) loss claimed to hae 7een sustained #rom an) sale or other disposition o# shares o# stocE
or securities where it appears that within a period 7eginning thirt) .0,/ da)s 7e#ore the date o# such sale or
disposition and ending thirt) .0,/ da)s a#ter such date@ the taxpa)er has acKuired .7) purchase or 7) exchange
upon which the entire amount o# gain or loss was recogniCed 7) law/@ or has entered into a contact or option so
to acKuire@ su7stantiall) identical stocE or securities@ then no deduction #or the loss shall 7e allowed under
<ection 02 unless the claim is made 7) a dealer in stocE or securities and with respect to a transaction made in
the ordinar) course o# the 7usiness o# such dealer.
.B/ I# the amount o# stocE or securities acKuired .or coered 7) the contract or option to acKuire/ is less than the
amount o# stocE or securities sold or otherwise disposed o#@ then the particular shares o# stocE or securities@ the
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loss #orm the sale or other disposition o# which is not deducti7le@ shall 7e determined under rules and regulations
prescri7ed 7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner.
.C/ I# the amount o# stocE or securities acKuired .or coered 7) the contract or option to acKuire which/ resulted
in the non5deducti7ilit) o# the loss@ shall 7e determined under rules and regulations prescri7ed 7) the <ecretar)
o# (inance@ upon recommendation o# the Commissioner.
6osses are not allowed to 7e claimed in sales o# stocE or securities
o 9ithin a period o# 0, da)s 7e#ore the sale@ and 0, da)s a#ter the sale .N1 da)s
total/
o 9hen the taxpa)er acKuires or enters into an option to purchase
o I# su7stantiall) the sameDidentical stocEs or securities
6osses are allowed onl) i# the taxpa)er is a stocE7roEer and the saleDpurchase was made
in the regular course o# 7usiness.
The important thing to remem7er is the N1 da) period. .!ec *9*/ RR "%
o %xample: 1oe) 7u)s share o# stocE in a corporation and within 0, da)s@ 7u)s
more shares. Then within another 0, da)s@ he sells those shares at a loss. *e
cannot claim this loss.
T. !itus o& Taxation
<%C. 2!. Income #rom <ources 9ithin the Philippines.5
.A/ Gross Income (rom <ources 9ithin the Philippines. 5 The #ollowing items o# gross income shall 7e treated as
gross income #rom sources within the Philippines:
.1/ Interests. 5 Interests deried #rom sources within the Philippines@ and interests on 7onds@ notes or other
interest57earing o7ligation o# residents@ corporate or otherwise?
.!/ "iidends. 5 The amount receied as diidends:
.a/ #rom a domestic corporation? and
.7/ #rom a #oreign corporation@ unless less than #i#t) percent .;,P/ o# the gross income o# such #oreign
corporation #or the three5)ear period ending with the close o# its taxa7le )ear preceding the declaration o# such
diidends or #or such part o# such period as the corporation has 7een in existence/ was deried #rom sources
within the Philippines as determined under the proisions o# this <ection? 7ut onl) in an amount which 7ears the
same ration to such diidends as the gross income o# the corporation #or such period deried #rom sources within
the Philippines 7ears to its gross income #rom all sources.
.0/ <erices. 5 Compensation #or la7or or personal serices per#ormed in the Philippines?
.2/ &entals and &o)alties. 5 &entals and ro)alties #rom propert) located in the Philippines or #rom an) interest in
such propert)@ including rentals or ro)alties #or 5
.a/ The use o# or the right or priilege to use in the Philippines an) cop)right@ patent@ design or model@ plan@
secret #ormula or process@ goodwill@ trademarE@ trade 7rand or other liEe propert) or right?
.7/ The use o#@ or the right to use in the Philippines an) industrial@ commercial or scienti#ic eKuipment?
.c/ The suppl) o# scienti#ic@ technical@ industrial or commercial Enowledge or in#ormation?
.d/ The suppl) o# an) assistance that is ancillar) and su7sidiar) to@ and is #urnished as a means o# ena7ling the
application or enHo)ment o#@ an) such propert) or right as is mentioned in paragraph .a/@ an) such eKuipment as
is mentioned in paragraph .7/ or an) such Enowledge or in#ormation as is mentioned in paragraph .c/?
.e/ The suppl) o# serices 7) a nonresident person or his emplo)ee in connection with the use o# propert) or
rights 7elonging to@ or the installation or operation o# an) 7rand@ machiner) or other apparatus purchased #rom
such nonresident person?
.#/ Technical adice@ assistance or serices rendered in connection with technical management or administration
o# an) scienti#ic@ industrial or commercial undertaEing@ enture@ proHect or scheme? and
.g/ The use o# or the right to use:
.i/ -otion picture #ilms?
.ii/ (ilms or ideo tapes #or use in connection with teleision? and
.iii/ Tapes #or use in connection with radio 7roadcasting.
.;/ <ale o# &eal Propert). 5 Gains@ pro#its and income #rom the sale o# real propert) located in the Philippines?
and
.N/ <ale o# Personal Propert). 5 Gains? pro#its and income #rom the sale o# personal propert)@ as determined in
<u7section .%/ o# this <ection.
.B/ Taxa7le Income (rom <ources 9ithin the Philippines. 5
.1/ General &ule. 5 (rom the items o# gross income speci#ied in <u7section .A/ o# this <ection@ there shall 7e
deducted the expenses@ losses and other deductions properl) allocated thereto and a rata7le part o# expenses@
interests@ losses and other deductions e##ectiel) connected with the 7usiness or trade conducted exclusiel)
within the Philippines which cannot de#initel) 7e allocated to some items or class o# gross income: Proided@ That
such items o# deductions shall 7e allowed onl) i# #ull) su7stantiated 7) all the in#ormation necessar) #or its
calculation. The remainder@ i# an)@ shall 7e treated in #ull as taxa7le income #rom sources within the Philippines.
.!/ %xception. 5 4o deductions #or interest paid or incurred a7road shall 7e allowed #rom the item o# gross
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income speci#ied in su7section .A/ unless inde7tedness was actuall) incurred to proide #unds #or use in
connection with the conduct or operation o# trade or 7usiness in the Philippines.
This section is 4OT releant to domestic corporations and resident citiCens 7ecause the)
are taxed worldwide an)wa).
The #ollowing are treated as gross income #rom sources within the Philippines .<ec 1;!5
1N;@ && !/:
1. Interests F including interests on 7onds@ notes and other interest 7earing o7ligations:
a. The loan was used here in the Philippines@ or
7. The de7tor is in the Philippines
!. "iidends F #rom a domestic corporation and a #oreign corporation@
a. =nless less than ;,P o# the gross income o# the #oreign corporation was
deried #rom the Philippines .the amount will 7e 7ased on the same ratio to
diidends as the gross income #or such period deried #rom sources within
Philippines to its gross income #rom all sources. 9hutG8/
i. %xample@ a 1apanese corporation@ who deries income more than ;,P
o# its income in the Philippines@ declares diidends to an American in
6os Angeles. That will 7e taxed. I Hust donBt Enow how much.
0. <erices F compensation #or la7or or personal serices per#ormed in the Philippines
2. &entals R &o)alties F #rom propert) located in the Philippines or #rom an) interest in
such propert) #or:
a. the use o# an) cop)right@ patent@ design or model@ plan@ secret #ormula or
process@ goodwill@ trademarE@ trade 7rand or other similar stu##
7. the use o# an) industrial@ commercial or scienti#ic eKuipment
c. the suppl) o# scienti#ic@ technical@ industrial or commercial Enowledge or in#o
i. This includes inestment@ training and education accounting .Philamli#e
CA G& <P 01!'0@ 1++;/
d. the suppl) o# serices 7) a non5resident person in connection with those o#
propert) or rights@ or the installation or operation o# an) 7rand@ machiner)@ or
other apparatus purchased #rom such non5resident person
e. technical adise@ assistance or serices rendered in connection with technical
management o# an) scienti#ic@ industrial or commercial undertaEing
#. the use o# motion picture #ilms@ #ilms #or t@ tapes #or radio 7roadcast
;. <ale o# real propert) F the gains@ pro#its R income #rom sale o# real propert) located
in the Philippines
N. <ale o# personal propert) F gains@ pro#its and income #rom sale o# personal propert)@
determined 7) su7section .%/
The place o# the singing o# a contract is 4%>%& an issue or a #actor #or determining the
source o# income. .Att) -ontero/
In the CI& -aru7eni case@ what was inoled was a turnEe) contract. -aru7eni was a
non5resident #oreign corporation. 9hat was interesting here@ according to sir@ is that a
turnEe) contract could 7e argued to 7e a diisi7le contract which has 0 stages F
engineering@ procurement@ and construction. The tax implication o# this is that certain
stages o# the contract could 7e argued to 7e 7e)ond the taxing Hurisdiction o# the
Philippines.
o (or the engineering stage:
i. &o)alties is sourced here@ so thatBs taxed. .According to Phil5Am 6i#e
CTA@ ro)alties are technical #ees/
ii. <erice #ees are pro7a7l) situated a7road@ so thatBs not taxed here.
o (or the procurement stage:
i. 9here was the stu## 7oughtG It could 7e here .which would 7e taxed/ or
a7road .then it wouldnBt 7e taxed/
o (or the construction stage:
i. That would de#initel) 7e here@ so itBll 7e taxed.
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o The implication here is that i# )ou can argue that the contract is indiisi7le@ )ou
can also argue that some stages o# the contract were not sourced here in the
Philippines@ and thus 7e)ond the taxing Hurisdiction o# the Philippines.
o This would 7e huge@ considering that i# the contract was considered indiisi7le@
then eer)thing would 7e considered situated here in the Philippines and thus the
whole contract would 7e #ull) taxed. ThinE o# how much )ouBd sae8
%xpenses o# a multination corporation directl) related to the production o# Philippine5
deried income can 7e deducted #rom gross income in the Philippines without need o#
apportionment@ 7ut oerhead expenses o# its parent compan) 7elong to a di##erent
categor).
o These are items which canBt 7e de#initel) allocated or identi#ied with the
operations o# the Philippine 7ranch. <o@ the compan) can claim as its deducti7le
share a rata7le part o# such expenses 7ased upon the ratio o# the local 7ranchBs
gross income to the total gross income@ worldwide@ o# the multinational
corporation. .CI& CTA and <mith 3line/
&einsurance premiums ceded to #oreign reinsurers are considered income #rom Philippine
sources.
o It is the place o# actiit) creating the income which is controlling@ and not the
place o# 7usiness. .Phil Guarant) CI&/
RA5O *,-: applies only to the income tax o#:
1. Philippine 7ranches and liaison o##ices o# 1apanese trading #irms
!. All other #oreign trading companies
-or solicitation and trading activities
9orldwide Operating Income U <ales to the Phil x Attri7ution &ate .$;P/ x Tax &ate .0;P/
9orldwide <ales
-or construction
4et Income #rom Construction and other actiities x Tax &ate .0;P/
RA5O *,.2 was implemented 7ecause the Philippine liaison o##ices o# some
multinational companies were soliciting orders #orm local importers. But then@ these
liaison o##ices were not reporting as income the sales made to local importers 7ecause
the) claim that the sale was actuall) consummated 7) their head o##ice a7road.
o In this case@ the sales purportedl) consummated a7road are deemed
constructiel) consummated here and thus 7e deemed income #rom sources
within the philippines
The other issue in RA5O *,.2 was that the Philippine liaison o##ice would solicit orders
#rom local importers. It then would rela) the in#ormation to its #oreign head o##ice which
looEs #or exporters o# the product and earns a commission. But the commission would 7e
earned 7) the head o##ice. <o@ the Philippine liaison o##ice would not pa) tax on these
7roEerBs commissions here.
o *ere@ he 7ranch shall 7e considered La commercial 7roEerM or indentor? .ii/ its
share #rom compensation as allocated 7) its home o##ice shall 7e su7Hect to
commercial 7roEer gross receipts tax? .iii/ the 7ranch shall proide itsel# with
corresponding #ixed tax as a commercial 7roEer? and .i/ pa) income tax on its
share o# compensation.
RR *2,.2 talEs a7out the allocation o# head o##ice oerhead expenses:
o (rom the items speci#ied in <ection0$.a/ as 7eing deried speci#icall) #rom
sources within the Philippines@ there shall 7e deducted the expenses@ losses@ and
other deductions properl) allocated thereto and a rata7le part o# an) other
expenses@ losses and other deductions e##ectiel) connected with the 7usiness or
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trade conducted Lexclusiel) within the Philippines which cannot de#initel) 7e
allocated to some items or class o# gross income. The remainder shall 7e included
in #ull as net income #rom sources within the Philippines. The rata7le part shall 7e
7ased upon the #ollowing ratios consistentl) #ollowed #rom )ear to )ear:
i. Gross income #rom sources within the Philippines to the total gross
income.
ii. 4et sales in the Philippines to total net sales.
iii. I# an) other method o# allocation is adopted@ a written permission #rom
the CI& shall #irst 7e secured.
The pro7lem here is that deductions 7eing made 7) the Philippine 7ranch o##ices o#
#oreign corps are hard to checE 7ecause the supporting documents R 7ooEs o# accounts
are not accessi7le to the BI&. <o@ the Phil 7ranch o##ices onl) su7mit an audit
certi#ication to 7acE5up their claims #or deductions. This order proides seeral
procedures #or the BI& to determine the correct deductions such as #unctional anal)sis@
releance tests@ reasona7leness tests and other measures. .RA5O #,.2%
R5O ##,"++: gies the rules #or sale o# computer hardware 7undled with so#tware@
where the so#tware is 7undled I4 T*% P*I6IPPI4%<. .those 7undled outside the Phil is
coered 7) a di##erent &-O/
o Pa)ments to a local cop)right owner #or trans#er o# cop)right shall 7e su7Hect to
income tax
i. Trans#er 7) a resident indiidual owner o# cop)right: amount paid shall
#orm part o# cop)right ownerBs gross income
ii. Trans#er 7) a domestic corporation owner: amount paid shall #orm part o#
corporate gross income
o Pa)ments made to a #oreign cop)right owner
i. Trans#er 7) a non5resident alien indiidual: engaged in trade in 7usiness
taxed the same wa) a resident owner is
ii. Trans#er 7) a #oreign corporation: amount paid shall #orm part o#
corporate gross income
iii. Trans#er 7) a non5resident #oreign corporation: 0!P #inal tax on the
amount paid in consideration
o I# the #oreign owner is resident o# a countr) with a tax treat)@ then ro)alties will
7e 7ased on the treat).
o Pa)ments 7) a local resellerDdistri7utor
i. to a domestic corporate owner: !,P #inal tax on the ro)alties
ii. to a non5resident #oreign owner: 0!P #inal tax to 7e collected 7) the local
reseller
o Pa)ments 7) the end5user to local resellersDdistri7utors o# resellers: amount paid
shall #orm part o# resellersB gross income
i. %nd5user will also withhold !P income tax against the taxa7le income o#
the local su7sidiaries@ reseller or distri7utors@ P&O>I"%" the end5user is
either:
A Huridical person@ whether engaged in 7usiness or not@ or
An indiidual@ with respect to pa)ments made in connection with
his 7usiness@ or
A goernment o##ice
o I# a local end5user gets a license straight #rom the #oreign owner@ then the
ro)alties are su7Hect to 0!P income tax which will 7e withheld 7) the local end5
user
o (or >AT purposes@ the #ollowing are also su7Hect to the >AT:
i. &o)alt) pa)ments #or the use o# a cop)right oer a so#tware
ii. Pa)ments made to resellersDdistri7uttorsDretailers who are engaged in
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trade or 7usiness
iii. Pa)ments #or serices rendered in the Philippines in connection with
so#tware purchased
Gross income #orm sources outside .without/ the Philippines
$C% Gross Income -rom /ources %ithout the Philippines. 5 The #ollowing items o# gross income shall 7e
treated as income #rom sources without the Philippines:
.1/ Interests other than those deried #rom sources within the Philippines as proided in
paragraph .1/ o# <u7section .A/ o# this <ection?
.!/ "iidends other than those deried #rom sources within the Philippines as proided in
paragraph .!/ o# <u7section .A/ o# this <ection?
.0/ Compensation #or la7or or personal serices per#ormed without the Philippines?
.2/ &entals or ro)alties #rom propert) located without the Philippines or #rom an) interest in
such propert) including rentals or ro)alties #or the use o# or #or the priilege o# using
without the Philippines@ patents@ cop)rights@ secret processes and #ormulas@ goodwill@
trademarEs@ trade 7rands@ #ranchises and other liEe properties? and
.;/ Gains@ pro#its and income #rom the sale o# real propert) located without the Philippines.
1. Interests other than those deried #rom sources within
!. "iidends other than those deried #rom sources within
0. Compensation #or la7or or personal serices per#ormed outside the Phil
2. &entals or ro)alties #rom propert) located outside the Philippines or an) interest in
such propert)
;. Gains@ pro#its@ income #rom sale o# real propert) located outside the Philippines
Income #rom sources partl) within and partl) without the Philippines
$)% Taxa&le Income -rom /ources %ithout the Philippines. 8 (rom the items o# gross income speci#ied in
<u7section .C/ o# this <ection there shall 7e deducted the expenses@ losses@ and other deductions properl)
apportioned or allocated thereto and a rata7le part o# an) expense@ loss or other deduction which cannot
de#initel) 7e allocated to some items or classes o# gross income. The remainder@ i# an)@ shall 7e treated in #ull as
taxa7le income #rom sources without the Philippines.
$0% Income -rom /ources Partly %ithin and Partly %ithout the Philippines.8 Items o# gross income@
expenses@ losses and deductions@ other than those speci#ied in <u7sections .A/ and .C/ o# this <ection@ shall 7e
allocated or apportioned to sources within or without the Philippines@ under the rules and regulations prescri7ed
7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner. 9here items o# gross income are
separatel) allocated to sources within the Philippines@ there shall 7e deducted .#or the purpose o# computing the
taxa7le income there#rom/ the expenses@ losses and other deductions properl) apportioned or allocated thereto
and a rata7le part o# other expenses@ losses or other deductions which cannot de#initel) 7e allocated to some
items or classes o# gross income. The remainder@ i# an)@ shall 7e included in #ull as taxa7le income #rom sources
within the Philippines. In the case o# gross income deried #rom sources partl) within and partl) without the
Philippines@ the taxa7le income ma) #irst 7e computed 7) deducting the expenses@ losses or other deductions
apportioned or allocated thereto and a rata7le part o# an) expense@ loss or other deduction which cannot
de#initel) 7e allocated to some items or classes o# gross income? and the portion o# such taxa7le income
attri7uta7le to sources within the Philippines ma) 7e determined 7) processes or #ormulas o# general
apportionment prescri7ed 7) the <ecretar) o# (inance. Gains@ pro#its and income #rom the sale o# personal
propert) produced .in whole or in part/ 7) the taxpa)er within and sold without the Philippines@ or produced .in
whole or in part/ 7) the taxpa)er without and sold within the Philippines@ shall 7e treated as deried partl) #rom
sources within and partl) #rom sources without the Philippines.
Gains@ pro#its and income deried #rom the purchase o# personal propert) within and its sale without the
Philippines@ or #rom the purchase o# personal propert) without and its sale within the Philippines shall 7e treated
as deried entirel) #orm sources within the countr) in which sold: +rovided, however@ That gain #rom the sale o#
shares o# stocE in a domestic corporation shall 7e treated as deried entirel) #orm sources within the Philippines
regardless o# where the said shares are sold. The trans#er 7) a nonresident alien or a #oreign corporation to
an)one o# an) share o# stocE issued 7) a domestic corporation shall not 7e e##ected or made in its 7ooE unless:
.1/ the trans#eror has #iled with the Commissioner a 7ond conditioned upon the #uture pa)ment 7) him o# an)
income tax that ma) 7e due on the gains deried #rom such trans#er@ or .!/ the Commissioner has certi#ied that
the taxes@ i# an)@ imposed in this Title and due on the gain realiCed #rom such sale or trans#er hae 7een paid. It
shall 7e the dut) o# the trans#eror and the corporation the shares o# which are sold or trans#erred@ to adise the
trans#eree o# this reKuirement.
$'% Definitions. 5 As used in this <ection the words /sale/ or /sold/ include /e*change/ or /e*changed/? and the
word /produced/ includes /created/@ /fa%ricated/@ /manufactured/, /e*tracted/@ /processed/@ /cured/ or /aged/.
(or the gross income items allocated to sources partl) within and partl) without the
Philippines@
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o there shall 7e deducted the expenses@ losses and other deductions properl)
apportioned@ and
o and a rata7le part o# other expenses@ losses R deductions which cannot properl)
7e allocated to some item o# gross income.
I# there is an) remainder@ it shall 7e included in #ull as taxa7le income #rom sources
within the Philippines
<itus o# sale o# personal propert)
Gains@ pro#its and income deried #rom purchase o# personal propert) within and sold
without@ or #rom purchase without and sale within@ are treated as deried entirel) #rom
sources with the countr) in which it is <O6".
<itus o# sale o# stocEs in a domestic corporation
Gains #rom sale o# shares o# stocE in a domestic corporation are treated as "%&I>%"
%4TI&%6I #rom sources within the Philippines regardless o# where the said shares are
sold.
H. Accountin( Periods and 5ethods
!0C. #9. General 'ule. 5 The taxa7le income shall 7e computed upon the 7asis o# the taxpa)erQs annual
accounting period .#iscal )ear or calendar )ear@ as the case ma) 7e/ in accordance with the method o# accounting
regularl) emplo)ed in Eeeping the 7ooEs o# such taxpa)er@ 7ut i# no such method o# accounting has 7een so
emplo)ed@ or i# the method emplo)ed does not clearl) re#lect the income@ the computation shall 7e made in
accordance with such method as in the opinion o# the Commissioner clearl) re#lects the income. I# the taxpa)erQs
annual accounting period is other than a #iscal )ear@ as de#ined in <ection !!.:/@ or i# the taxpa)er has no annual
accounting period@ or does not Eeep 7ooEs@ or i# the taxpa)er is an indiidual@ the taxa7le income shall 7e
computed on the 7asis o# the calendar )ear.
Taxa7le income is computed on the 7asis o# the taxpa)erBs annual accounting period in
accordance with the method o# accounting regularl) emplo)ed in Eeeping his 7ooEs.
I# there is no method emplo)ed or he doesnBt Eeep 7ooEs@ the taxa7le income shall 7e
computed on the 7asis o# the calendar )ear.
I# the taxpa)er is an indiidual@ it shall 7e the calendar )ear.
Although the taxpa)er is allowed to do his own accounting method@ some guidelines
should 7e #ollowed
1$
:
1$
&& !@ <ec 1NN General &ule F The method o# accounting regularl) emplo)ed 7) the taxpa)er in Eeeping his
7ooEs@ i# such method clearl) re#lects his income is to 7e #ollowed with respect to the time as o# which items o#
gross income and deductions are to 7e accounted #or. I# the taxpa)er does not regularl) emplo) a method o#
accounting which re#lects his income@ the computation shall 7e made in such manner as in the opinion o# the
Commissioner o# Internal &eenue clearl) re#lects it. .<ee section 10$ o# these regulations #or computation o# net
income@ and section 0' #or 7ases o# computation. (or the use o# inentories@ see sections 122 to 1;1 o# these
regulations./
<ec 1N$ -ethods o# accounting F It is recogniCed that no uni#orm method o# accounting can 7e prescri7ed #or all
taxpa)ers@ and the law contemplates that each taxpa)er shall adopt such #orms and s)stems o# accounting as are
in his Hudgment 7est suited to his purpose. %ach taxpa)er is reKuired 7) law to maEe a return o# his true income.
*e must@ there#ore@ maintain such accounting records as will ena7le him to do so. An) approed standard method
o# accounting which re#lects taxpa)erBs income ma) 7e adopted. Among the essential are the #ollowing:
.1/ In all cases in which the production@ purchase@ or sale o# merchandise o# an) Eind is an income5producing
#actor@ inentories o# the merchandise in hand .including #inished goods@ worE in process@ raw materials@ and
supplies/ should 7e taEen at the 7eginning and end o# the )ear and used in computing the net income o# the )ear
in accordance with sections 122 to 1;1 o# these regulations.
.!/ %xpenditures made during the )ear should 7e properl) classi#ied as 7etween capital an income? that is to sa)@
expenditures #or items o# plant@ eKuipment@ etc. which hae a use#ul li#e extending su7stantiall) 7e)ond the) )ear
should 7e charged to capital account and not to expense account? and
.0/ In an) case in which the cost o# capital assets is 7eing recoered through deductions #or wear and tear@
depletion@ or o7solescence@ an) expenditure +other than ordinar) repairs/ ZZZZZ restore the propert) or prolong its
use#ul li#e should 7e added to the propert) account or charged against the appropriate resere and not to current
expenses.
<ec 1N' Changes in accounting methods F The true income@ computed under the law@ shall in all cases 7e entered
in the return. I# #or an) reason the 7asis o# reporting income su7Hect to tax is changed@ the taxpa)er shall attach to
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o 9hen the production@ purchase or sale o# merchandise o# an) Eind is an income
producing #actor@ inentories should 7e taEen at the 7eginning and at the end o#
the )ear
o %xpenses should 7e properl) classi#ied 7etween capital and income. Capital
expenses are those which hae a long use#ul li#e extending su7stantiall) 7e)ond
the )ear
o 9hen the cost o# capital assets is 7eing recoered thru deductions #or wear R
tear@ etc@ an) expenses made to restore the propert) or prolong its use#ul li#e
should 7e added to the propert) account@ and not to current expenses
Accrual 7asis is the de#ault F meaning@ )ou report income when earned and report
expense when incurred@ i.e. when itBs legall) due@ demanda7le and en#orcea7le.
!0C. ##. Period in which Items of Gross Income Included. 5 The amount o# all items o# gross income shall
7e included in the gross income #or the taxa7le )ear in which receied 7) the taxpa)er@ unless@ under methods o#
accounting permitted under <ection 20@ an) such amounts are to 7e properl) accounted #or as o# a di##erent
period. In the case o# the death o# a taxpa)er@ there shall 7e included in computing taxa7le income #or the
taxa7le period in which #alls the date o# his death@ amounts accrued up to the date o# his death i# not otherwise
properl) includi7le in respect o# such period or a prior period.
The items o# gross income are included in the taxa7le )ear that the) are receied 7) the
taxpa)er@ unless the) are properl) accounted #or as o# a di##erent period.
1'
is return a separate statement setting #orth #or the taxa7le )ear and #or the preceding )ear the classes o# items
di##erentl) treated under the two s)stems@ speci#)ing in particular all amounts duplicated or entirel) omitted as the
result o# such change.
A taxpa)er who changes the method or recounting emplo)ed in Eeeping his 7ooE shall@ 7e#ore computing his
income upon such new method #or purposes o# taxation@ secure the consent o# the Commissioner o# Internal
&eenue. (or the purpose o# this section@ a change in the method o# accounting emplo)ed in Eeeping 7ooEs means
an) change in the accounting treatment o# items o# income or deduction@ such as a change #rom cash receipts and
dis7ursement methods to the accrued method@ or ice ersa? a change inoling the 7asis o# aluation emplo)ed in
the computation o# inentories .see sections 122 to 1;1 o# these regulations/? a change #rom the cash to accrual
method to the long5term contract method@ or ice ersa? a change in the long5term contract method #rom the
percentage o# computation 7asis to the completed contract 7asis@ or ice ersa .see section 22 o# these
regulations/? or a change inoling the adoption o#@ or a change in the use o#@ an) other specialiCed 7asis o#
computing net income such as the crop 7asis. Application #or permission to change the method accounting
emplo)ed and the 7asis upon which the return is made shall 7e #iled within +, da)s a#ter the 7eginning o# the
taxa7le )ear to 7e coered 7) the return. The application shall 7e accompanied 7) a statement speci#)ing all
amounts which would 7e duplicated or entirel) omitted as a result o# the proposed change. Permission to change
the method o# accounting will not 7e granted unless the taxpa)er and the Commissioner o# Internal &eenue agree
to the terms and conditions under which the change will 7e e##ected.
1'
<ec 1$, 9hen included in gross income F %xcept as otherwise proided in section 0+ in the case o# the death o#
the taxpa)er@ gains@ pro#its@ and income are to 7e included in the gross income #or the taxa7le )ear in which the)
are receied 7) the taxpa)er@ unless the) are included as o# a di##erent period in accordance with the approed
method o# accounting #ollowed 7) him. I# a taxpa)er has died there shall also 7e included in computing #or the
taxa7le period in which he died amounts accrued up to the date o# his death i# not otherwise properl) includi7le in
respect o# such period or a prior period@ regardless o# the #act that the decedent ma) hae Eept his 7ooEs and
made his returns on the 7asis o# cash receipts and dis7ursements.
.(or income not reduced to possession 7ut considered as constructiel) receied and #or examples o# constructie
receipt@ see sections ;! and ;0 o# these regulations. (or the treatment o# income long term contracts@ see section
22 o# these regulations./
<ec 1$1 LPaid or incurredM or Lpaid or accruedM F .a/ The terms Lpaid or incurredM and Lpaid or accruedM will 7e
construed according to the method o# accounting upon the 7asis o# which the net income is computed 7) the
taxpa)er. The deductions and credits must 7e taEen #or the taxa7le )ear@ in which Lpaid or accruedM or Apaid or
incurredM@ unless in order clearl) to re#lect the income such deductions or credits should 7e taEen as o# a di##erent
period. I# a taxpa)er desires to claim a deduction or a credit as o# a period other than the period in which it was
Lpaid or accruedM or Lpaid or incurredM@ he shall attach to his return a statement setting #orth his reKuest #or
consideration o# the case 7) the Commissioner o# Internal &eenue together with a complete statement o# the #acts
upon which he relies. *oweer@ in his income tax return he shall taEe the deduction or credit onl) #or the taxa7le
period in which it was actuall) Lpaid or incurredM@ or Lpaid or accruedM@ as the case ma) 7e. =pon the audit o# the
return@ the Commissioner o# Internal &eenue will decide whether the case is within the exception proided 7) law@
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!0C. #:. Period for which Deductions and +redits Ta0en. 5 The deductions proided #or in this Title shall 7e
taEen #or the taxa7le )ear in which /paid or accrued/ or /paid or incurred/@ dependent upon the method o#
accounting the 7asis o# which the net income is computed@ unless in order to clearl) re#lect the income@ the
deductions should 7e taEen as o# a di##erent period. In the case o# the death o# a taxpa)er@ there shall 7e allowed
as deductions #or the taxa7le period in which #alls the date o# his death@ amounts accrued up to the date o# his
death i# not otherwise properl) allowa7le in respect o# such period or a prior period.
The deduction shall 7e taEen #or the taxa7le )ear in which it is incurred.
!0C. #2. +han#e of Accountin# Period. I# a taxpa)er@ other than an indiidual@ changes his accounting period
#rom #iscal )ear to calendar )ear@ #rom calendar )ear to #iscal )ear@ or #rom one #iscal )ear to another@ the net
income shall@ with the approal o# the Commissioner@ 7e computed on the 7asis o# such new accounting period@
su7Hect to the proisions o# <ection 2$.
I# the taxpa)er@ other than an indiidual@ changes his accounting period@ the net income
will 7e computed on the 7asis o# his new accounting period.
1+
!0C. #=. -inal or Ad2ustment 'eturns for a Period of 1ess than Twelve 3456 *onths. 8
$A% 'eturns for /hort Period 'esultin# from +han#e of Accountin# Period. 8 I# a taxpa)er@ other than an
indiidual@ with the approal o# the Commissioner@ changes the 7asis o# computing net income #rom #iscal )ear to
calendar )ear@ a separate #inal or adHustment return shall 7e made #or the period 7etween the close o# the last
#iscal )ear #or which return was made and the #ollowing "ecem7er 01. I# the change is #rom calendar )ear to
#iscal )ear@ a separate #inal or adHustment return shall 7e made #or the period 7etween the close o# the last
calendar )ear #or which return was made and the date designated as the close o# the #iscal )ear. I# the change is
#rom one #iscal )ear to another #iscal )ear@ a separate #inal or adHustment return shall 7e made #or the period
7etween the close o# the #ormer #iscal )ear and the date designated as the close o# the new #iscal )ear.
$B% Income +omputed on $asis of /hort Period. 5 9here a separate #inal or adHustment return is made
under <u7section .A/ on account o# a change in the accounting period@ and in all other cases where a separate
#inal or adHustment return is reKuired or permitted 7) rules and regulations prescri7ed 7) the <ecretar) o#
(inance@ upon recommendation o# the Commissioner@ to 7e made #or a #ractional part o# a )ear@ then the income
shall 7e computed on the 7asis o# the period #or which separate #inal or adHustment return is made.
I# the taxpa)er changes his accounting period@ a separate return must 7e made #or the
gap caused 7) the change. Income will 7e apportioned properl).
!,
and the taxpa)er will 7e adised as to the period #or which the deduction or credit is properl) allowa7le.
.7/ The proision o# paragraph .a/ o# this section in general are not applica7le with respect to the taxa7le period
during which the taxpa)er dies. In such case there shall also 7e allowed as deductions and credits #or such taxa7le
period amounts accrued and credits #or such taxa7le period@ amounts accrued up to the date o# his death i# not
otherwise allowa7le with respect to such period or a prior period@ regardless o# the #act that the decedent was
reKuired to Eeep his 7ooEs and maEe his returns on the 7asis o# cash receipts and dis7ursements.
1+
<ec 1N+ Accounting Period F Income tax returns@ whether #or indiidual o# #or corporations@ associations@ or
partnerships@ are reKuired to 7e made and their income computed #or each calendar )ear ending on "ecem7er 01st
o# eer) )ear. *oweer@ corporations@ associations or partnerships ma) with the approal o# the Commissioner o#
Internal &eenue ZZZ secured@ #ile their returns and compute their income on the 7asis o# a #iscal )ear which
means an accounting period o# twele months ending on the last da) o# an) month other than "ecem7er. But in no
instance shall indiidual taxpa)ers 7e authoriCed to esta7lish #iscal )ear as 7asis #or #iling their returns and
computing their income. .(or authorit) to #ile on #iscal )ear 7asis see section 1$! o# these regulations/.
<ec 1$! Change o# accounting period. F I# a corporation@ including a dul) registered general partnership@ desires to
change its accounting period #rom the #iscal )ear to calendar )ear or #rom calendar )ear to #iscal )ear@ or #rom one
#iscal to another@ it shall at an) time not less than thirt) da)s prior to the date #ixed in section 2N .7/ o# the Code
#or the #iling o# its return on the 7asis o# its original accounting period su7mit a written application to the
Commissioner o# Internal &eenue designating the proposed date #or the closing o# its new taxa7le )ear@ together
with a statement o# the date on which the 7ooEs o# account were opened and closed each )ear #or the past three
)ears@ the date on which the taxa7le )ear 7egan and ended as shown on the returns #iled #or the past three )ears@
and the reasons wh) the change in accounting period is desired.
!,
<ec 1$0 &eturns #or periods o# less than twele months F 4o returns can 7e made #or a period o# more than
twele months. A separate return #or the #ractional part o# a )ear is there#ore reKuired wheneer there is a change@
with the approal o# the Commissioner o# Internal &eenue@ in the 7asis o# computing net income #rom one taxa7le
)ear to another taxa7le )ear. The periods to 7e coered 7) such separate returns in the seeral cases stated in
section 2! .a/. The reKuirements with respect to the #iling o# a separate return and the pa)ment o# tax #or a part o#
a )ear are the same as #or the #iling o# a separate return and the pa)ment o# tax #or a part o# a )ear are the same
as #or the #iling o# a return and the pa)ment o# tax #or a #ull taxa7le )ear closing at the same time.
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<hort5term periods are also needed in instances o# death and dissolution o# a
corporation.
!0C. #.. Accountin# for 1on#-Term +ontracts. 5 Income #rom long5term contracts shall 7e reported #or tax
purposes in the manner as proided in this <ection. As used herein@ the term Qlong5term contractsQ means
7uilding@ installation or construction contracts coering a period in excess o# one .1/ )ear. Persons whose gross
income is deried in whole or in part #rom such contracts shall report such income upon the 7asis o# percentage
o# completion. The return should 7e accompanied 7) a return certi#icate o# architects or engineers showing the
percentage o# completion during the taxa7le )ear o# the entire worE per#ormed under contract. There should 7e
deducted #rom such gross income all expenditures made during the taxa7le )ear on account o# the contract@
account 7eing taEen o# the material and supplies on hand at the 7eginning and end o# the taxa7le period #or use
in connection with the worE under the contract 7ut not )et so applied. I# upon completion o# a contract@ it is
#ound that the taxa7le net income arising thereunder has not 7een clearl) re#lected #or an) )ear or )ears@ the
Commissioner ma) permit or reKuire an amended return.
6ong term means 7uilding@ installation or construction contracts coering a period in
excess o# 1 )ear.
Persons reporting long5term contracts must report it on 7asis o# percentage o#
completion
!1
.
Total is ;,- Iear 1 Iear ! Iear 0
!,P $,P 1,,P
1,m 0;m ;,m
&unning cost ;m 0,m 2,m
4et Income ;m , .4I Iear !5 4I Iear 1/
!0C. #-. Installment $asis. 5
$A% /ales of Dealers in Personal Property. 5 =nder rules and regulations prescri7ed 7) the <ecretar) o#
(inance@ upon recommendation o# the Commissioner@ a person who regularl) sells or otherwise disposes o#
personal propert) on the installment plan ma) return as income there#rom in an) taxa7le )ear that proportion o#
the installment pa)ments actuall) receied in that )ear@ which the gross pro#it realiCed or to 7e realiCed when
pa)ment is completed@ 7ears to the total contract price.
$B% /ales of 'ealty and +asual /ales of Personality. 5 In the case .1/ o# a casual sale or other casual
disposition o# personal propert) .other than propert) o# a Eind which would properl) 7e included in the inentor)
o# the taxpa)er i# on hand at the close o# the taxa7le )ear/@ #or a price exceeding One thousand pesos .P1@,,,/@
or .!/ o# a sale or other disposition o# real propert)@ i# in either case the initial pa)ments do not exceed twent)5
#ie percent .!;P/ o# the selling price@ the income ma)@ under the rules and regulations prescri7ed 7) the
<ecretar) o# (inance@ upon recommendation o# the Commissioner@ 7e returned on the 7asis and in the manner
!1
&&5!@ <ec 22 6ong term contracts. F Income #rom long5term contracts is taxa7le #or the period in which the
income is determined@ such determination depending upon the nature and terms o# the particular contract. As used
herein the term Llong5termM contracts mean 7uilding@ installation or construction contracts coering a period in
excess o# one )ear. Persons whose income is deried in whole or in part #rom such contracts ma)@ as to such
income@ prepare their returns upon the #ollowing 7ases:
.a/ Gross income deried #rom such contracts ma) 7e reported upon the 7asis o# percentage o# completion. In such
case there should accompan) the return certi#icate o# architects@ or engineers showing the percentage o#
completion during the taxa7le )ear o# the entire worE per#ormed under contract. There should 7e deducted #rom
such gross income all expenditures made during the taxa7le )ear on account o# the contract@ account 7eing taEen
o# the material and supplies period #or use in connection with the worE under the contract 7ut not )et so applied. I#
upon completion o# a contract@ it is #ound that the taxa7le net income arising thereunder has not 7een clearl)
re#lected #or an) )ear or )ears@ the CI& ma) permit or reKuire an amended return.
.7/ Gross income ma) 7e reported in the taxa7le )ear in which the contract is #inall) completed and accepted i# the
taxpa)er elects as a consistent practice to treat such income@ proided such method clearl) re#lects the net income.
I# this method is adopted there should 7e deducted #rom gross income all expenditures during the li#e o# the
contract which are properl) allocated thereto@ taEing into consideration an) material and supplies charged to the
worE under the contract 7ut remaining on hand at the time o# the completion.
9hen a taxpa)er has #iled his return in accordance with the method o# accounting regularl) emplo)ed 7) him in
Eeeping his 7ooEs and such method clearl) re#lects the income@ he will not 7e reKuired to change either o# the
methods a7oe set #orth. I# a taxpa)er desires to change his method o# accounting in accordance with paragraphs
.a/ and .7/ a7oe@ a statement showing the composition o# all items appearing upon his 7alance sheet and used in
connection with the method o# accounting #ormerl) emplo)ed 7) him@ should accompan) his return.
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a7oe prescri7ed in this <ection. As used in this <ection@ the term /initial payments/ means the pa)ments
receied in cash or propert) other than eidences o# inde7tedness o# the purchaser during the taxa7le period in
which the sale or other disposition is made.
$C% /ales of 'eal Property +onsidered as +apital Asset &y Individuals. 5 An indiidual who sells or
disposes o# real propert)@ considered as capital asset@ and is otherwise Kuali#ied to report the gain there#rom
under <u7section .B/ ma) pa) the capital gains tax in installments under rules and regulations to 7e
promulgated 7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner.
$)% +han#e from Accrual to Installment $asis. 5 I# a taxpa)er entitled to the 7ene#its o# <u7section .A/
elects #or an) taxa7le )ear to report his taxa7le income on the installment 7asis@ then in computing his income
#or the )ear o# change or an) su7seKuent )ear@ amounts actuall) receied during an) such )ear on account o#
sales or other dispositions o# propert) made in an) prior )ear shall not 7e excluded.
<ales o# dealers in personal propert)
o A person who regularl) sells personal propert) on the installment plan ma) return
as income in an) taxa7le )ear that proportion o# the installment pa)ment which
the gross pro#it realiCed 7ears to the total contract price
<ale o# real propert) and casual sales o# personal propert)
o I# the price exceeds P1,,, or where the initial pa)ment does not exceed !;P o#
the selling price@ the same 7asis as a7oe ma) 7e #ollowed
<ales o# real propert) considered as capital asset 7) indiiduals
o An indiidual who sells real propert) considered as capital asset ma) pa) the
capital gains tax in installments under the rules o# the BI&
Changes #rom Accrual to installment 7asis
o 9hen a taxpa)er decides to report his taxa7le income on the installment 7asis@
the amounts actuall) receied in prior )ears are not excluded
<ee && !@ <ec 1$251$+ .ha%a eh, sayang sa papel2
I# postdated checEs were gien to pa) a sale on installments@ and then the postdated
checEs were discounted .i.e. sold to a 0
rd
person to get the cash immediatel)/@ this is
still considered a sale on installment. .Banas CA@ 7ecause the postdated checEs were
evidences of inde%tedness/
!0C. :+. Allocation of Income and Deductions. 5 In the case o# two or more organiCations@ trades or
7usinesses .whether or not incorporated and whether or not organiCed in the Philippines/ owned or controlled
directl) or indirectl) 7) the same interests@ the Commissioner is authoriCed to distri7ute@ apportion or allocate
gross income or deductions 7etween or among such organiCation@ trade or 7usiness@ i# he determined that such
distri7ution@ apportionment or allocation is necessar) in order to preent easion o# taxes or clearl) to re#lect the
income o# an) such organiCation@ trade or 7usiness.
9hen two or more organiCations@ trades or 7usinesses are owned or controlled directl)
or indirectl) 7) the same interests@ the CI& can distri7ute@ apportion or allocate gross
income or deductions 7etween or among such orgs@ trades or 7usinesses@ in order to
preent tax easion.
On the net worth method@ #rom PereC CTA@ 651,;,$@ -a) 0,@ 1+;':
o On the application o# the net worth method o# determining taxa7le income@ used
7) the collector and upheld 7) the court 7elow@ it must he explained that the
method is 7ased upon the general theor) that mone) and other assets in excess
o# lia7ilities o# a taxpa)er .a#ter an accurate and proper adHustment o# non5
deducti7le items/ not accounted #or 7) his income tax returns@ leads to the
in#erence that part o# his income has not 7een reported. The authorit) to use this
method in determining income is rooted in or stems #rom section 21 o# the
Internal &eenue Code o# 1+0+ o# the =nited <tates. 4o cogent reason is shown
#or deiating #rom this practice in the Philippines. In #act section 0' o# the
4ational Internal &eenue Code authoriCes the application o# the 4et 9orth
-ethod in this Hurisdiction.
6. 0states and Trusts
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!0C. 2+. Imposition o& Tax. 5
.A/ Application o# Tax. 5 The tax imposed 7) this Title upon indiiduals shall appl) to the income o# estates or o#
an) Eind o# propert) held in trust@ including:
.1/ Income accumulated in trust #or the 7ene#it o# un7orn or unascertained person or persons with contingent
interests@ and income accumulated or held #or #uture distri7ution under the terms o# the will or trust?
.!/ Income which is to 7e distri7uted currentl) 7) the #iduciar) to the 7ene#iciaries@ and income collected 7) a
guardian o# an in#ant which is to 7e held or distri7uted as the court ma) direct?
.0/ Income receied 7) estates o# deceased persons during the period o# administration or settlement o# the
estate? and
(2/ Income which@ in the discretion o# the #iduciar)@ ma) 7e either distri7uted to the 7ene#iciaries or
accumulated.
.B/ %xception. 5 The tax imposed 7) this Title shall not appl) to emplo)eeQs trust which #orms part o# a pension@
stocE 7onus or pro#it5sharing plan o# an emplo)er #or the 7ene#it o# some or all o# his emplo)ees .1/ i#
contri7utions are made to the trust 7) such emplo)er@ or emplo)ees@ or 7oth #or the purpose o# distri7uting to
such emplo)ees the earnings and principal o# the #und accumulated 7) the trust in accordance with such plan@
and .!/ i# under the trust instrument it is impossi7le@ at an) time prior to the satis#action o# all lia7ilities with
respect to emplo)ees under the trust@ #or an) part o# the corpus or income to 7e .within the taxa7le )ear or
therea#ter/ used #or@ or dierted to@ purposes other than #or the exclusie 7ene#it o# his emplo)ees: Proided@
That an) amount actuall) distri7uted to an) emplo)ee or distri7utee shall 7e taxa7le to him in the )ear in which
so distri7uted to the extent that it exceeds the amount contri7uted 7) such emplo)ee or distri7utee.
.C/ Computation and Pa)ment. 5
.1/ In General. 5 The tax shall 7e computed upon the taxa7le income o# the estate or trust and shall 7e paid 7)
the #iduciar)@ except as proided in <ection N0 .relating to reoca7le trusts/ and <ection N2 .relating to income
#or the 7ene#it o# the grantor/. .!/ Consolidation o# Income o# Two or -ore Trusts. 5 9here@ in the case o# two or
more trusts@ the creator o# the trust in each instance is the same person@ and the 7ene#iciar) in each instance is
the same@ the taxa7le income o# all the trusts shall 7e consolidated and the tax proided in this <ection
computed on such consolidated income@ and such proportion o# said tax shall 7e assessed and collected #rom
each trustee which the taxa7le income o# the trust administered 7) him 7ears to the consolidated income o# the
seeral trusts.

<%C. N1. Taxa7le Income. 5 The taxa7le income o# the estate or trust shall 7e computed in the same manner and
on the same 7asis as in the case o# an indiidual@ except that:
.A/ There shall 7e allowed as a deduction in computing the taxa7le income o# the estate or trust the amount o#
the income o# the estate or trust #or the taxa7le )ear which is to 7e distri7uted currentl) 7) the #iduciar) to the
7ene#iciaries@ and the amount o# the income collected 7) a guardian o# an in#ant which is to 7e held or distri7uted
as the court ma) direct@ 7ut the amount so allowed as a deduction shall 7e included in computing the taxa7le
income o# the 7ene#iciaries@ whether distri7uted to them or not. An) amount allowed as a deduction under this
<u7section shall not 7e allowed as a deduction under <u7section .B/ o# this <ection in the same or an)
succeeding taxa7le )ear.
.B/ In the case o# income receied 7) estates o# deceased persons during the period o# administration or
settlement o# the estate@ and in the case o# income which@ in the discretion o# the #iduciar)@ ma) 7e either
distri7uted to the 7ene#iciar) or accumulated@ there shall 7e allowed as an additional deduction in computing the
taxa7le income o# the estate or trust the amount o# the income o# the estate or trust #or its taxa7le )ear@ which is
properl) paid or credited during such )ear to an) legatee@ heir or 7ene#iciar) 7ut the amount so allowed as a
deduction shall 7e included in computing the taxa7le income o# the legatee@ heir or 7ene#iciar).
.C/ In the case o# a trust administered in a #oreign countr)@ the deductions mentioned in <u7sections .A/ and .B/
o# this <ection shall not 7e allowed: Proided@ That the amount o# an) income included in the return o# said trust
shall not 7e included in computing the income o# the 7ene#iciaries.

<%C. N!. %xemption Allowed to %states and Trusts. 5 (or the purpose o# the tax proided #or in this Title@ there
shall 7e allowed an exemption o# Twent) thousand pesos .P!,@,,,/ #rom the income o# the estate or trust.
<%C. N0. &eoca7le trusts. 5 9here at an) time the power to reest in the grantor title to an) part o# the corpus
o# the trust is ested .1/ in the grantor either alone or in conHunction with an) person not haing a su7stantial
aderse interest in the disposition o# such part o# the corpus or the income there#rom@ or .!/ in an) person not
haing a su7stantial aderse interest in the disposition o# such part o# the corpus or the income there#rom@ the
income o# such part o# the trust shall 7e included in computing the taxa7le income o# the grantor.
<%C. N2. Income #or Bene#it o# Grantor.5
.A/ 9here an) part o# the income o# a trust .1/ is@ or in the discretion o# the grantor or o# an) person not haing
a su7stantial aderse interest in the disposition o# such part o# the income ma) 7e held or accumulated #or #uture
distri7ution to the grantor@ or .!/ ma)@ or in the discretion o# the grantor or o# an) person not haing a
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su7stantial aderse interest in the disposition o# such part o# the income@ 7e distri7uted to the grantor@ or .0/ is@
or in the discretion o# the grantor or o# an) person not haing a su7stantial aderse interest in the disposition o#
such part o# the income ma) 7e applied to the pa)ment o# premiums upon policies o# insurance on the li#e o# the
grantor@ such part o# the income o# the trust shall 7e included in computing the taxa7le income o# the grantor.
.B/ As used in this <ection@ the term Qin the discretion o# the grantorQ means in the discretion o# the grantor@
either alone or in conHunction with an) person not haing a su7stantial aderse interest in the disposition o# the
part o# the income in Kuestion.
<%C. N;. (iduciar) &eturns. 5 Guardians@ trustees@ executors@ administrators@ receiers@ conserators and all
persons or corporations@ acting in an) #iduciar) capacit)@ shall render@ in duplicate@ a return o# the income o# the
person@ trust or estate #or whom or which the) act@ and 7e su7Hect to all the proisions o# this Title@ which appl)
to indiiduals in case such person@ estate or trust has a gross income o# Twent) thousand pesos .P!,@,,,/ or
oer during the taxa7le )ear. <uch #iduciar) or person #iling the return #or him or it@ shall taEe oath that he has
su##icient Enowledge o# the a##airs o# such person@ trust or estate to ena7le him to maEe such return and that the
same is@ to the 7est o# his Enowledge and 7elie#@ true and correct@ and 7e su7Hect to all the proisions o# this Title
which appl) to indiiduals: Proided@ That a return made 7) or #or one or two or more Hoint #iduciaries #iled in the
proince where such #iduciaries reside? under such rules and regulations as the <ecretar) o# (inance@ upon
recommendation o# the Commissioner@ shall prescri7e@ shall 7e a su##icient compliance with the reKuirements o#
this <ection.
<%C. NN. (iduciaries Indemni#ied Against Claims #or Taxes Paid. 5 Trustees@ executors@ administrators and other
#iduciaries are indemni#ied against the claims or demands o# eer) 7ene#iciar) #or all pa)ments o# taxes which
the) shall 7e reKuired to maEe under the proisions o# this Title@ and the) shall hae credit #or the amount o#
such pa)ments against the 7ene#iciar) or principal in an) accounting which the) maEe as such trustees or other
#iduciaries.
A trust is a legal arrangement where the owner o# the propert) .trustor/ trans#ers
ownership to a person .trustee/ to hold and control the propert) #or the 7ene#it o#
another person .7ene#iciar)/
An estate is created 7) operation o# law when an indiidual dies@ leaing propreties to
heirs.
Taxa7le estates and trusts are taxed in the same manner and on the same 7asis as in
the case o# an indiidual.
The #ollowing are allowed deductions #or the estate and trust:
o amount distri7uted to the 7ene#iciaries@ or
o amount collected 7) a guardian o# an in#ant which is to 7e held or distri7uted as
the court ma) direct
in 7oth these cases@ the amount allowed shall 7e included in computing
the taxa7le income o# the 7ene#iciaries whether distri7uted to them or not
o &ule #or income receied 7) estates o# deceased persons during the period o#
administration or settlement o# the estate@ and in the case o# income@ which ma)
7e either distri7uted to the 7ene#iciar) or accumulated: the amount paid or
credited to an) legatee@ heir or 7ene#iciar) shall 7e allowed as a deduction
Proided that the amount so allowed as a deduction shall 7e included in
computing the taxa7le income o# the legatee@ heir or 7ene#iciar)
Trusts and estates are entitled to a personal exemption eKuialent to a single indiidual
o# P!,@,,,.
The income o# a trust will 7e taxed to the:
o Trustor@ i# reoca7le trust
o Trustee@ i# irreoca7le trust
9hen this proision will 4OT appl): The income tax is 4OT imposed on emplo)eesQ trust
which #orms part o# a pension@ stocE 7onus or pro#it sharing plan o# an emplo)er #or the
7ene#it o# some or all o# his emplo)ees
o i# contri7utions are made to the trust 7) such emplo)er@ or emplo)ees@ or 7oth@
#or the purpose o# distri7uting to such emplo)ees the earnings and principal o#
the #und accumulated 7) the trust in accordance with such plan? and
o i# under the trust instrument it is impossi7le@ at an) time prior to the satis#action
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o# all lia7ilities with respect to emplo)ees under the trust@ #or part o# the corpus
or income to .within the taxa7le )ear or therea#ter/ used #or@ or dierted to@
purposes other than #or the exclusie 7ene#it o# the emplo)ees.
o An) amount@ howeer@ actuall) distri7uted to an) emplo)ee or distri7utee shall
7e taxa7le to him in the )ear in which so distri7uted to the extent that it exceeds
the amount contri7uted 7) such emplo)ee or distri7utee.
Income #or the 7ene#it o# the grantor:
o &ules on reoca7le trust will appl) #or income #or the 7ene#it o# the grantor.
o The #ollowing will 7e included in the taxa7le income o# the grantor:
9here an) part o# the income o# a trust is@ or in the discretion o# the
grantor or o# an) person not haing a su7stantial aderse interest in the
disposition o# such part o# the income
ma) 7e held or accumulated #or #uture distri7ution to the grantor?
or
ma)@ or in the discretion o# the grantor or o# an) person not haing
a su7stantial aderse interest in the disposition o# such part o# the
income@ 7e distri7uted to the grantor? or
is@ or in the discretion o# the grantor or o# an) person not haing a
su7stantial aderse interest in the disposition o# such part o# the
income ma) 7e applied to the pa)ment o# the premiums upon
policies o# insurance on the li#e o# the grantor
&e#er to <ec !,$5!10@ && ! #or more details
7. Returns and Payment o& Taxes
Indiidual &eturn
<%C. ;1. Indiidual &eturn. 5
.A/ &eKuirements. 5
.1/ %xcept as proided in paragraph .!/ o# this <u7section@ the #ollowing indiiduals are reKuired to #ile an
income tax return:
.a/ %er) (ilipino citiCen residing in the Philippines?
.7/ %er) (ilipino citiCen residing outside the Philippines@ on his income #rom sources within the Philippines?
.c/ %er) alien residing in the Philippines@ on income deried #rom sources within the Philippines? and
.d/ %er) nonresident alien engaged in trade or 7usiness or in the exercise o# pro#ession in the Philippines.
9ho are reKuired to #ileG
1. &esident citiCen@ on income within and without the Philippines
!. 4on5resident citiCen@ on income within onl)
0. &esident alien@ on income within onl)
2. 4on5resident alien .engaged in 7iC here/@ on income within onl)
.!/ The #ollowing indiiduals shall not 7e reKuired to #ile an income tax return?
.a/ An indiidual whose gross income does not exceed his total personal and additional exemptions #or
dependents under <ection 0;: Proided@ That a citiCen o# the Philippines and an) alien indiidual engaged in
7usiness or practice o# pro#ession within the Philippine shall #ile an income tax return@ regardless o# the amount
o# gross income?
.7/ An indiidual with respect to pure compensation income@ as de#ined in <ection 0!.A/.1/@ deried #rom such
sources within the Philippines@ the income tax on which has 7een correctl) withheld under the proisions o#
<ection $+ o# this Code: +rovided@ That an indiidual deriing compensation concurrentl) #rom two or more
emplo)ers at an) time during the taxa7le )ear shall #ile an income tax return?
.c/ An indiidual whose sole income has 7een su7Hected to #inal withholding tax pursuant to <ection ;$.A/ o# this
Code? and
.d/ A minimum wage earner as de#ined in <ection !!.**/ o# this Code or an indiidual who is exempt #rom
income tax pursuant to the proisions o# this Code and other laws@ general or special.
.0/ The #orgoing notwithstanding@ an) indiidual not reKuired to #ile an income tax return ma) neertheless 7e
reKuired to #ile an in#ormation return pursuant to rules and regulations prescri7ed 7) the <ecretar) o# (inance@
upon recommendation o# the Commissioner.
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9ho are not reKuired to #ileG
1. Those whose gross income does not exceed his total personal and additional
exemptions
o But those engaged in 7iC or practices a pro#ession must #ile@ regardless o# the
amount o# gross income
!. Those who earn pure compensation income and the income tax on which has alread)
7een correctl) withheld .su7stituted #iling@ done 7) emplo)er/@ proided that an
indiidual deriing compensation concurrentl) #rom ! or or more emplo)ers at an)
time during the ta7le )ear shall #ile an income tax return
0. The #ollowing are not reKuired to #ile@ regardless o# income amount .#inal withholding
taxed alread)/
a. Those whose income consists solel) o# ro)alties@ interests@ priCes@ winnings@
diidends@ etc and the share in a partnership or association@ Hoint enture@ or
consortium taxa7le as a corp
7. Aliens emplo)ed 7) &O*:s with respect to their compensation income
c. Aliens emplo)ed 7) OB=s with respect to their compensation income
d. Aliens emplo)ed 7) #oreign serice contractors and su7contractors engaged in
petroleum exploration@ with respect to their compensation income
2. -inimum wage earners
;. Those exempted 7) the Tax code and other special laws
.2/ The income tax return shall 7e #iled in duplicate 7) the #ollowing persons:
.a/ A resident citiCen 5 on his income #rom all sources?
.7/ A nonresident citiCen 5 on his income deried #rom sources within the Philippines?
.c/ A resident alien 5 on his income deried #rom sources within the Philippines? and
.d/ A nonresident alien engaged in trade or 7usiness in the Philippines 5 on his income deried #rom sources
within the Philippines.
9here and when to #ile
.B/ 9here to (ile. 5 %xcept in cases where the Commissioner otherwise permits@ the return shall 7e #iled with an
authoriCed agent 7anE@ &eenue "istrict O##icer@ Collection Agent or dul) authoriCed Treasurer o# the cit) or
municipalit) in which such person has his legal residence or principal place o# 7usiness in the Philippines@ or i#
there 7e no legal residence or place o# 7usiness in the Philippines@ with the O##ice o# the Commissioner.
.C/ 9hen to (ile. 5
.1/ The return o# an) indiidual speci#ied a7oe shall 7e #iled on or 7e#ore the #i#teenth .1;th/ da) o# April o# each
)ear coering income #or the preceding taxa7le )ear.
.!/ Indiiduals su7Hect to tax on capital gains?
.a/ (rom the sale or exchange o# shares o# stocE not traded thru a local stocE exchange as prescri7ed under
<ection !2.c/ shall #ile a return within thirt) .0,/ da)s a#ter each transaction and a #inal consolidated return on or
7e#ore April 1; o# each )ear coering all stocE transactions o# the preceding taxa7le )ear? and
.7/ (rom the sale or disposition o# real propert) under <ection !2."/ shall #ile a return within thirt) .0,/ da)s
#ollowing each sale or other disposition.
."/ *us7and and 9i#e. 5 -arried indiiduals@ whether citiCens@ resident or nonresident aliens@ who do not derie
income purel) #rom compensation@ shall #ile a return #or the taxa7le )ear to include the income o# 7oth spouses@
7ut where it is impractica7le #or the spouses to #ile one return@ each spouse ma) #ile a separate return o# income
7ut the returns so #iled shall 7e consolidated 7) the Bureau #or purposes o# eri#ication #or the taxa7le )ear.
.%/ &eturn o# Parent to Include Income o# Children. 5 The income o# unmarried minors deried #rom properl)
receied #rom a liing parent shall 7e included in the return o# the parent@ except .1/ when the donorQs tax has
7een paid on such propert)@ or .!/ when the trans#er o# such propert) is exempt #rom donorQs tax. .(/ Persons
=nder "isa7ilit). 5 I# the taxpa)er is una7le to maEe his own return@ the return ma) 7e made 7) his dul)
authoriCed agent or representatie or 7) the guardian or other person charged with the care o# his person or
propert)@ the principal and his representatie or guardian assuming the responsi7ilit) o# maEing the return and
incurring penalties proided #or erroneous@ #alse or #raudulent returns. .G/ <ignature Presumed Correct. 5 The
#act that an indiidualQs name is signed to a #iled return shall 7e prima #acie eidence #or all purposes that the
return was actuall) signed 7) him.
9here to #ileG
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1. AuthoriCed agent 7anE
!. &eenue district o##icer
0. Collection agent
2. "ul) authoriCed cit) treasurer where he is legall) residing
;. O##ice o# the commissioner
9hen to #ileG
On or 7e#ore April 1; o# each )ear
9hat i# hus7and and wi#eG
Those married indiiduals who do not derie income purel) #rom compensation shall #ile
a return to include income #rom 7oth spouses. But i# impractical@ then the) ma) #ile
separate returns.
*ow a7out parents and EidsG
Parents must include the income o# unmarried minors deried #rom propert) receied
#rom a liing parent.
o %UC%PT
i. 9hen the donorBs tax has alread) 7een paid on such propert)
ii. 9hen the trans#er o# such propert) is exempt #rom donorBs tax
9hen to pa) .applies to 7oth indiiduals and corporations/
<%C. ;N. Pa)ment and Assessment o# Income Tax #or Indiiduals and Corporation. 5
.A/ Pa)ment o# Tax. 5
.1/ In General. 5 The total amount o# tax imposed 7) this Title shall 7e paid 7) the person su7Hect thereto at the
time the return is #iled. In the case o# tramp essels@ the shipping agents andDor the hus7anding agents@ and in
their a7sence@ the captains thereo# are reKuired to #ile the return herein proided and pa) the tax due thereon
7e#ore their departure. =pon #ailure o# the said agents or captains to #ile the return and pa) the tax@ the Bureau
o# Customs is here7) authoriCed to hold the essel and preent its departure until proo# o# pa)ment o# the tax is
presented or a su##icient 7ond is #iled to answer #or the tax due.
.!/ Installment o# Pa)ment. 5 9hen the tax due is in excess o# Two thousand pesos .P!@,,,/@ the taxpa)er other
than a corporation ma) elect to pa) the tax in two .!/ eKual installments in which case@ the #irst installment shall
7e paid at the time the return is #iled and the second installment@ on or 7e#ore 1ul) 1; #ollowing the close o# the
calendar )ear. I# an) installment is not paid on or 7e#ore the date #ixed #or its pa)ment@ the whole amount o# the
tax unpaid 7ecomes due and pa)a7le@ together with the delinKuenc) penalties.
.0/ Pa)ment o# Capital Gains Tax. 5 The total amount o# tax imposed and prescri7ed under <ection !2 .c/@ !2."/@
!$.%/.!/@ !'.A/.'/.c/ and !'.B/.;/.c/ shall 7e paid on the date the return prescri7ed there#or is #iled 7) the
person lia7le thereto: Proided@ That i# the seller su7mits proo# o# his intention to aail himsel# o# the 7ene#it o#
exemption o# capital gains under existing special laws@ no such pa)ments shall 7e reKuired : Proided@ #urther@
That in case o# #ailure to Kuali#) #or exemption under such special laws and implementing rules and regulations@
the tax due on the gains realiCed #rom the original transaction shall immediatel) 7ecome due and pa)a7le@
su7Hect to the penalties prescri7ed under applica7le proisions o# this Code: Proided@ #inall)@ That i# the seller@
haing paid the tax@ su7mits such proo# o# intent within six .N/ months #rom the registration o# the document
trans#erring the real propert)@ he shall 7e entitled to a re#und o# such tax upon eri#ication o# his compliance with
the reKuirements #or such exemption.
In case the taxpa)er elects and is Kuali#ied to report the gain 7) installments under <ection 2+ o# this Code@ the
tax due #rom each installment pa)ment shall 7e paid within .0,/ da)s #rom the receipt o# such pa)ments.
4o registration o# an) document trans#erring real propert) shall 7e e##ected 7) the &egister o# "eeds unless the
Commissioner or his dul) authoriCed representatie has certi#ied that such trans#er has 7een reported@ and the
tax herein imposed@ i# an)@ has 7een paid.
.B/ Assessment and Pa)ment o# "e#icienc) Tax. 5 A#ter the return is #iled@ the Commissioner shall examine it and
assess the correct amount o# the tax. The tax or de#icienc) income tax so discoered shall 7e paid upon notice
and demand #rom the Commissioner.
As used in this Chapter@ in respect o# a tax imposed 7) this Title@ the term Jde#icienc)J means:
.1/ The amount 7) which the tax imposed 7) this Title exceeds the amount shown as the tax 7) the taxpa)er
upon his return? 7ut the amount so shown on the return shall 7e increased 7) the amounts preiousl) assessed
.or collected without assessment/ as a de#icienc)@ and decreased 7) the amount preiousl) a7ated@ credited@
returned or otherwise repaid in respect o# such tax? or .!/ I# no amount is shown as the tax 7) the taxpa)er
upon this return@ or i# no return is made 7) the taxpa)er@ then the amount 7) which the tax exceeds the
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amounts preiousl) assessed .or collected without assessment/ as a de#icienc)? 7ut such amounts preiousl)
assessed or collected without assessment shall #irst 7e decreased 7) the amounts preiousl) a7ated@ credited
returned or otherwise repaid in respect o# such tax.
It is Lpa)5as5)ou5#ileM and Lpa)5where5)ou5#ileM
A person ma) pa) in installments i# the tax due exceeds P!@,,,.
'ilin( o& Return coerin( Capital Gains
<ale or exchange o# stocE 4OT traded thru
the local stocE exchange
9ithin 0, da)s a#ter each transaction R #inal
consolidated return on or 7e#ore April 1;
<ale or disposition o# real propert) 9ithin 0, da)s #ollowing each sale or other
disposition
Gains receied 7) installment 9ithin 0, da)s #rom receipt o# each
installment
Annual "eclaration o# income tax
<%C. $2. "eclaration o# Income Tax #or Indiiduals. 5
.A/ In General. 5 %xcept as otherwise proided in this <ection@ eer) indiidual su7Hect to income tax under
<ections !2 and !;.A/ o# this Title@ who is receiing sel#5emplo)ment income@ whether it constitutes the sole
source o# his income or in com7ination with salaries@ wages and other #ixed or determina7le income@ shall maEe
and #ile a declaration o# his estimated income #or the current taxa7le )ear on or 7e#ore April 1; o# the same
taxa7le )ear. In general@ sel#5emplo)ment income consists o# the earnings deried 7) the indiidual #rom the
practice o# pro#ession or conduct o# trade or 7usiness carried on 7) him as a sole proprietor or 7) a partnership
o# which he is a mem7er. 4onresident (ilipino citiCens@ with respect to income #rom without the Philippines@ and
nonresident aliens not engaged in trade or 7usiness in the Philippines@ are not reKuired to render a declaration o#
estimated income tax. The declaration shall contain such pertinent in#ormation as the <ecretar) o# (inance@ upon
recommendation o# the Commissioner@ ma)@ 7) rules and regulations prescri7e. An indiidual ma) maEe
amendments o# a declaration #iled during the taxa7le )ear under the rules and regulations prescri7ed 7) the
<ecretar) o# (inance@ upon recommendation o# the Commissioner.
.B/ &eturn and Pa)ment o# %stimated Income Tax 7) Indiiduals. 5 The amount o# estimated income as de#ined
in <u7section .C/ with respect to which a declaration is reKuired under <u7section .A/ shall 7e paid in #our .2/
installments. The #irst installment shall 7e paid at the time o# the declaration and the second and third shall 7e
paid on August 1; and 4oem7er 1; o# the current )ear@ respectiel). The #ourth installment shall 7e paid on or
7e#ore April 1; o# the #ollowing calendar )ear when the #inal adHusted income tax return is due to 7e #iled.
.C/ "e#inition o# %stimated Tax. 5 In the case o# an indiidual@ the term Jestimated taxJ means the amount
which the indiidual declared as income tax in his #inal adHusted and annual income tax return #or the preceding
taxa7le )ear minus the sum o# the credits allowed under this Title against the said tax. I#@ during the current
taxa7le )ear@ the taxpa)er reasona7le expects to pa) a 7igger income tax@ he shall #ile an amended declaration
during an) interal o# installment pa)ment dates.
Indiiduals who receie sel#5emplo)ment income must maEe and #ile a declaration o# his
estimated income #or the current )ear on or 7e#ore April 1;
o &emem7er this 7ecause as law)ers we will go under this proision
<el#5emplo)ment income consists o# earnings #rom the practice o# a pro#ession or
conduct o# trade or 7usiness carried on as the sole proprietor or a partnership o# which
he is a mem7er
:uarterl) pa)ment o# income tax@ in 2 installments
o (irst at time o# declaration
o <econd August 1;
o Third 4oem7er 1;
o (ourth On or 7e#ore April 1;
Corporate returns
<%C. ;!. Corporation &eturns. 5
.A/ &eKuirements. 5 %er) corporation su7Hect to the tax herein imposed@ except #oreign corporations not
engaged in trade or 7usiness in the Philippines@ shall render@ in duplicate@ a true and accurate Kuarterl) income
tax return and #inal or adHustment return in accordance with the proisions o# Chapter UII o# this Title. The return
shall 7e #iled 7) the president@ ice5president or other principal o##icer@ and shall 7e sworn to 7) such o##icer and
7) the treasurer or assistant treasurer.
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.B/ Taxa7le Iear o# Corporation. 5 A corporation ma) emplo) either calendar )ear or #iscal )ear as a 7asis #or
#iling its annual income tax return: Proided@ That the corporation shall not change the accounting period
emplo)ed without prior approal #rom the Commissioner in accordance with the proisions o# <ection 2$ o# this
Code.
.C/ &eturn o# Corporation Contemplating "issolution or &eorganiCation. 5 %er) corporation shall@ within thirt)
.0,/ da)s a#ter the adoption 7) the corporation o# a resolution or plan #or its dissolution@ or #or the liKuidation o#
the whole or an) part o# its capital stocE@ including a corporation which has 7een noti#ied o# possi7le inoluntar)
dissolution 7) the <ecurities and %xchange Commission@ or #or its reorganiCation@ render a correct return to the
Commissioner@ eri#ied under oath@ setting #orth the terms o# such resolution or plan and such other in#ormation
as the <ecretar) o# (inance@ upon recommendation o# the commissioner@ shall@ 7) rules and regulations@
prescri7e.
The dissoling or reorganiCing corporation shall@ prior to the issuance 7) the <ecurities and %xchange
Commission o# the Certi#icate o# "issolution or &eorganiCation@ as ma) 7e de#ined 7) rules and regulations
prescri7ed 7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner@ secure a certi#icate o# tax
clearance #rom the Bureau o# Internal &eenue which certi#icate shall 7e su7mitted to the <ecurities and
%xchange Commission.
."/ &eturn on Capital Gains &ealiCed #rom <ale o# <hares o# <tocE not Traded in the 6ocal <tocE %xchange. 5
%er) corporation deriing capital gains #rom the sale or exchange o# shares o# stocE not traded thru a local
stocE exchange as prescri7ed under <ections !2 .c/@ !; .A/.0/@ !$ .%/.!/@ !'.A/.'/.c/ and !' .B/.;/.c/@ shall #ile
a return within thirt) .0,/ da)s a#ter each transactions and a #inal consolidated return o# all transactions during
the taxa7le )ear on or 7e#ore the #i#teenth .1;th/ da) o# the #ourth .2th/ month #ollowing the close o# the taxa7le
)ear.
<%C. ;0. %xtension o# Time to (ile &eturns. 5 The Commissioner ma)@ in meritorious cases@ grant a reasona7le
extension o# time #or #iling returns o# income .or #inal and adHustment returns in case o# corporations/@ su7Hect to
the proisions o# <ection ;N o# this Code.
All corporations@ except #oreign corporation not engaged in trade or 7iC in Philippines
.7ecause the)Bre su7Hect to #inal withholding tax alread)/@ are reKuired to #ile:
o :uarterl) income tax return@ on a cumulatie 7asis #or the preceding Kuarters
o A #inal or adHustment return@ on or 7e#ore April 1;
A corporation ma) use either calendar )ear or #iscal e)ar 7asis #or #iling
:uarterl) income tax return
!0C. =:. Declaration of 7uarterly +orporate Income Tax. 5 %er) corporation shall #ile in duplicate a
Kuarterl) summar) declaration o# its gross income and deductions on a cumulatie 7asis #or the preceding
Kuarter or Kuarters upon which the income tax@ as proided in Title II o# this Code@ shall 7e leied@ collected and
paid. The tax so computed shall 7e decreased 7) the amount o# tax preiousl) paid or assessed during the
preceding Kuarters and shall 7e paid not later than sixt) .N,/ da)s #rom the close o# each o# the #irst three .0/
Kuarters o# the taxa7le )ear@ whether calendar or #iscal )ear.
A corporation must #ile tax return #or preceding Kuarter within N, da)s #ollowing the
close o# each Kuarter
(inal adHustment return
!0C. =2. -inal Ad2ustment 'eturn. 5 %er) corporation lia7le to tax under <ection !$ shall #ile a #inal
adHustment return coering the total taxa7le income #or the preceding calendar or #iscal )ear. I# the sum o# the
Kuarterl) tax pa)ments made during the said taxa7le )ear is not eKual to the total tax due on the entire taxa7le
income o# that )ear@ the corporation shall either:
.A/ Pa) the 7alance o# tax still due? or
.B/ Carr)5oer the excess credit? or
.C/ Be credited or re#unded with the excess amount paid@ as the case ma) 7e.
In case the corporation is entitled to a tax credit or re#und o# the excess estimated Kuarterl) income taxes paid@
the excess amount shown on its #inal adHustment return ma) 7e carried oer and credited against the estimated
Kuarterl) income tax lia7ilities #or the taxa7le Kuarters o# the succeeding taxa7le )ears. Once the option to carr)5
oer and appl) the excess Kuarterl) income tax against income tax due #or the taxa7le Kuarters o# the
succeeding taxa7le )ears has 7een made@ such option shall 7e considered irreoca7le #or that taxa7le period and
no application #or cash re#und or issuance o# a tax credit certi#icate shall 7e allowed there#or.
A corp will #ile the #inal return at the end o# either #iscal or calendar )ear
I# the sum o# the Kuarterl) retruns is not eKual to the total tax due@ the corporation shall
either
o Pa) the 7alance?
o Carr) oer the excess credit perpetuall)@ or
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o Be credited or re#unded with the excess amount.
i. But the corporation can choose onl) 1 option and it is irreoca7le@ een i#
)ou didnBt get the 7ene#it o# the oerpa)ment.
The carr) oer o# the excess can 7e used perpetuall). .<)stra CI&/
<u7seKuent acts can show the exercise o# the carr)5oer@ een i# the corp didnBt checE
the little 7ox that said Lcarr) oerM .Philam CI&/
9here and when to #ile
<%C. $$. Place and Time o# (iling and Pa)ment o# :uarterl) Corporate Income Tax. 5
.A/ Place o# (iling. 5 %xcept as the Commissioner other wise permits@ the Kuarterl) income tax declaration
reKuired in <ection $; and the #inal adHustment return reKuired in <ection $N shall 7e #iled with the authoriCed
agent 7anEs or &eenue "istrict O##icer or Collection Agent or dul) authoriCed Treasurer o# the cit) or
municipalit) haing Hurisdiction oer the location o# the principal o##ice o# the corporation #iling the return or place
where its main 7ooEs o# accounts and other data #rom which the return is prepared are Eept.
.B/ Time o# (iling the Income Tax &eturn. 5 The corporate Kuarterl) declaration shall 7e #iled within sixt) .N,/
da)s #ollowing the close o# each o# the #irst three .0/ Kuarters o# the taxa7le )ear. The #inal adHustment return
shall 7e #iled on or 7e#ore the #i#teenth .1;
th
/ da) o# April@ or on or 7e#ore the #i#teenth .1;
th
/ da) o# the #ourth
.2
th
/ month #ollowing the close o# the #iscal )ear@ as the case ma) 7e.
.C/ Time o# Pa)ment o# the Income Tax. 5 The income tax due on the corporate Kuarterl) returns and the #inal
adHustment income tax returns computed in accordance with <ections $; and $N shall 7e paid at the time the
declaration or return is #iled in a manner prescri7ed 7) the Commissioner.
9here to #ile: same as indiiduals
9hen to #ile:
o (or Kuarterl) declarations: within N, da)s #ollowing the close o# the Kuarter
o (or #inal: on or 7e#ore April 1;@ or the 1;
th
da) o# the 2
th
month #ollowing the
close o# the #iscal )ear
9hen to pa): same as indiiduals
(iling o# return coering capital gains #rom shares o# stocE
!ec :" $)% 'eturn on +apital Gains 'eali!ed from /ale of /hares of /toc0 not Traded in the 1ocal
/toc0 Exchan#e. 5 %er) corporation deriing capital gains #rom the sale or exchange o# shares o# stocE not
traded thru a local stocE exchange as prescri7ed under <ections !2 .c/@ !; .A/.0/@ !$ .%/.!/@ !'.A/.'/.c/ and !'
.B/.;/.c/@ shall #ile a return within thirt) .0,/ da)s a#ter each transactions and a #inal consolidated return o# all
transactions during the taxa7le )ear on or 7e#ore the #i#teenth .1;th/ da) o# the #ourth .2th/ month #ollowing the
close o# the taxa7le )ear.
(or sale o# exchange o# stocE not traded thru local stocE exchanges@ within 0, da)s a#ter
each transaction and a #inal consolidated return o# A66 transactions during the )ear
&eturn o# corporations contemplating dissolutionDreorganiCation
!ec :"$C% 'eturn of +orporation +ontemplatin# Dissolution or 'eor#ani!ation. 5 %er) corporation shall@
within thirt) .0,/ da)s a#ter the adoption 7) the corporation o# a resolution or plan #or its dissolution@ or #or the
liKuidation o# the whole or an) part o# its capital stocE@ including a corporation which has 7een noti#ied o#
possi7le inoluntar) dissolution 7) the <ecurities and %xchange Commission@ or #or its reorganiCation@ render a
correct return to the Commissioner@ eri#ied under oath@ setting #orth the terms o# such resolution or plan and
such other in#ormation as the <ecretar) o# (inance@ upon recommendation o# the commissioner@ shall@ 7) rules
and regulations@ prescri7e.
The dissoling or reorganiCing corporation shall@ prior to the issuance 7) the <ecurities and %xchange
Commission o# the Certi#icate o# "issolution or &eorganiCation@ as ma) 7e de#ined 7) rules and regulations
prescri7ed 7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner@ secure a certi#icate o# tax
clearance #rom the Bureau o# Internal &eenue which certi#icate shall 7e su7mitted to the <ecurities and
%xchange Commission.
A#ter the corp adopts a plan or resolution #or its dissolution@ it must su7mit to the BI&@
within 0, da)s@ a return speci#)ing the terms o# the resolution and other in#ormation. It
must secure a tax clearance certi#icate #rom the BI& which it will su7mit to the <%C
7e#ore its dissolution. .<ec !22@ && !/
The) hae to su7mit to the BI&:
o A cop) o# the resolution
o Balance sheet at the date o# dissolution and the income statement coering the
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7eginning o# the )ear to the date o# dissolution
o 4ames and addresses o# the shareholders and their holdings
o >alue and a description o# the assets receied in liKuidation 7) each shareholder
.<ec !22@ && !/
The approal o# the <%C o# liKuidation is the starting point.
&eturn o# General Pro#essional Partnerships
!0C. ::. 'eturns of General Professional Partnerships. 5 %er) general pro#essional partnership shall #ile@
in duplicate@ a return o# its income@ except income exempt under <ection 0! .B/ o# this Title@ setting #orth the
items o# gross income and o# deductions allowed 7) this Title@ and the names@ Taxpa)er Identi#ication 4um7ers
.TI4/@ addresses and shares o# each o# the partners
General pro#essional partnerships and Hoint entures #or construction@ and other exempt
corporations are <TI66 &%:=I&%" to #ile their tax return@ which should speci#):
o The items o# gross income@
o The deductions allowed@ and
o The names@ TI4@ addresses and shares o# each partner
7. 7ithholdin( Tax
(inal 9ithholding Tax at <ource
<%C. ;$. 9ithholding o# Tax at <ource. 5
.A/ 9ithholding o# (inal Tax on Certain Incomes. 5 <u7Hect to rules and regulations the <ecretar) o# (inance ma)
promulgate@ upon the recommendation o# the Commissioner@ reKuiring the #iling o# income tax return 7) certain
income pa)ees@ the tax imposed or prescri7ed 7) <ections !2.B/.1/@ !2.B/.!/@ !2.C/@ !2."/.1/? !;.A/.!/@ !;.A/
.0/@ !;.B/@ !;.C/@ !;."/@ !;.%/@ !$."/.8/@ !$."/.!/@ !$."/.0/@ !$."/.;/@ !' .A/.2/@ !'.A/.;/@ !'.A/.$/.a/@ !'.A/
.$/.7/@ !'.A/.$/.c/@ !'.B/.1/@ !'.B/.!/@ !'.B/.0/@ !'.B/.2/@ !'.B/.;/.a/@ !'.B/.;/.7/@ !'.B/.;/.c/? 00? and !'!
o# this Code on speci#ied items o# income shall 7e withheld 7) pa)or5corporation andDor person and paid in the
same manner and su7Hect to the same conditions as proided in <ection ;' o# this Code.
Income su7Hect to #inal tax re#ers to income wherein the tax due is #ull) collected
through the withholding tax s)stem@ wherein the pa)or o# the income withholds the tax
and then remits it to the goernment.
Once #ull pa)ment has 7een withheld and remitted@ there is no more tax o7ligation.
The withholding agent is entitled to re#und or tax credit. .CI& 9ander/
Principles o# (inal 9ithholding Tax .!ection ".:= $A%/ RR ",-.%
o The amount o# tax withheld is #ull and #inal.
o The lia7ilit) #or pa)ment o# the tax rests primaril) on the withholding agent as
pa)or.
i. In case he #ails to withhold@ he will 7e lia7le #or the de#icienc).
o The pa)ee is not reKuired to #ile and income tax return #or the particular income.
o The #inalit) o# the withheld tax is limited on that particular income and will not
extend to the pa)eesB other tax lia7ilit) on said income.
i. (or example a 7anE receied income su7Hect to #inal withholding tax@ the
same income can still 7e su7Hect to a percentage tax.
Basicall)@ items under passie income are su7Hect to (I4A6 TAU. And then )ou hae
other (I4A6 TAU%< here and there .liEe the (BT@ BP&T@ Capital Gains Tax@ etc/. An)wa)@
hereBs a rundown. Again@ these ma) or ma) not 7e complete.
Income subDect to 'inal 7ithholdin( Tax o& CITII0;! and
R0!I)0;T A<I0;!
'inal Tax
!,P
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'. Capital gains #rom &%A6 P&OP%&TI located here classi#ied as CAPITA6
assets
+. Capital gains #rom sale o# shares o# stocE o# a domestic corporation@
not listed and traded thru a local stocE exchange
1,P
NP
;PD1,P
;O;,R0!I)0;T A<I0; 0;GAG0) I; TRA)0 OR BII
1. Interest under the expanded #oreign currenc) deposit s)stem 9*empt,
!,P
G?@
'. Capital gains #rom &%A6 P&OP%&TI located here classi#ied as CAPITA6
assets
NP
+. Capital gains #rom sale o# shares o# stocE o# a domestic corporation@
;PD1,P
Basicall)@ citiCensDresident aliens and non5resident aliens are the same except #or the
italici&ed items
;on,resident Alien ;OT en(a(ed in trade or biz
On income #rom A66 sources within the Philippines .important8/ !;P
Capital gains #rom &%A6 P&OP%&TI located here classi#ied as CAPITA6
assets
Capital gains #rom sale o# shares o# stocE o# a domestic corporation@ not
listed and traded thru a local stocE exchange
NP
;PD1,P
!pecial Aliens
%mplo)ed 7) &O*: 1;P .except
income su7Hect
to (BT/
%mplo)ed 7) OB= 1;P
%mplo)ed 7) (oreign Petroleum <erice Contractors R <u7contractors 1;P
)omestic Corporations 'inal Tax
o &o)alt) #rom a7roadG %nters the taxa7le income 0,P tax rate
!,P
!,P
2. Income BI A "%PO<ITO&I BA43 under the (C"= 1,P
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;. Capital gains #rom &%A6 P&OP%&TI located here classi#ied as CAPITA6
assets
NP
N. Capital gains #rom sale o# shares o# stocE o# a domestic corporation@
;PD1,P
'orei(n Resident Corporations
o &o)alt) #rom a7roadG 0xempt. .remem7er@ onl) taxed #rom
sources within the Philippines/
!,P
!,P
2. Capital gains #rom &%A6 P&OP%&TI located here classi#ied as CAPITA6
assets
NP
;. Capital gains #rom sale o# shares o# stocE o# a domestic corporation@
;PD1,P
N. Branch Pro#it &emittances 1;P
$. O##shore BanEing =nit 1,P
'orei(n ;on,resident Corp
1. income #rom A66 <O=&C%< within the Philippines 0!P
!. 7) a non5resident cinematographic #ilm ownerDdistri7utor !;P
0. gross rentals@ lease and charter #ees 7) a non5resident owner or lessor
o# essels to (ilipino citiCens or corps
2.;P
2. diidends #rom a domestic #oreign corp .su7Hect to mutual tax credit/ 1;P
;. interest on #oreign loans !,P
Others
(ringe Bene#it Taxes 0!P on grossed
up monetar)
alue
In#ormerBs reward 1,P
Credita7le 9ithholding Tax
$B% %ithholdin# of +redita&le Tax at /ource. 5 The <ecretar) o# (inance ma)@ upon the recommendation o#
the Commissioner@ reKuire the withholding o# a tax on the items o# income pa)a7le to natural or Huridical
persons@ residing in the Philippines@ 7) pa)or5corporationDpersons as proided #or 7) law@ at the rate o# not less
than one percent .1P/ 7ut not more than thirt)5two percent .0!P/ thereo#@ which shall 7e credited against the
income tax lia7ilit) o# the taxpa)er #or the taxa7le )ear.
=nder the credita7le withholding tax s)stem@ taxes withheld on certain income pa)ments
are intended to eKual or at least approximate the tax due o# the pa)ee on said income.
Credita7le tax must 7e withheld AT <O=&C%@ 7ut should still 7e included in the tax
return o# the recipient.
o An) excess shall 7e re#unded and an) de#icienc) shall 7e paid 7) the taxpa)er.
The lia7ilit) to withhold tax arises upon the accrual@ not upon actual remittance. The
purpose o# the withholding tax is to compel the agent to withhold under all
circumstances.
o Thus@ it is when the right to receie income arises that determines when to
include that income as gross income@ and when to appl) withholding tax.
.(ilipinas <)nthetic CA/
Credita7le withholding tax intends to approximate the tax on the pa)ee.
The su7seKuent remittal does not remoe the 7urden on the income recipient. *e still
has to #ile #or the credit.
The pa)or withholds@ and the pa)ee gets credit. This is done so that the pa)or has
expenses that can 7e deducted@ according to <ection 02 .E/
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Three t)pes o# credita7le withholding taxes:
o %xpanded withholding tax on certain income pa)ments made 7) priate persons
to resident taxpa)ers
o 9ithholding tax on compensation income done in the Philippines
o 9ithholding tax on mone) pa)ments o# the goernment
9hen expanded withholding tax will appl):
o %xpense is paid 7) the taxpa)er@ which is income to the recipient thereo# su7Hect
to income tax
o Income is #ixed or determina7le at the time o# pa)ment
o Income is one o# the income pa)ments listed in the regulations
o Income recipient is a resident o# the Philippines lia7le to income tax
i. 9hat i# the recipient is a non5resident taxpa)erG
Then income pa)ment su7Hect to #inal withholding tax@ not
credita7le.
o Pa)or5withholding agent is also a resident o# the Philippines
i. <o #oreign em7assies in the Philippines and nonresident #oreign corps
cannot 7e compelled to act as withholding agents .since goernment
cannot en#orce its tax laws on them/
The withholding o# credita7le withholding tax shall not appl) to income pa)ments made
to the #ollowing:
o 4ational goernment and its instrumentalities and pu7lic municipal corporations
i. %UC%PT GOCCs
o Those enHo)ing exemption #rom pa)ment o# income taxes pursuant to law
9ho are reKuired to deduct and withhold #or the credita7le withholding taxesG .&& !5+'/
o An) Huridical person@ whether or not engaged in trade or 7usiness
o An indiidual@ with respect to pa)ments made in connection with his trade or
7usiness
i. But #or the disposition o# real propert)@ een those not engaged in trade
or 7usiness are withholding agents
o All goernment o##ices including goernment5owned or controlled corporations@
as well as proincial@ cit) and municipal goernments.
!ome Income !ubDect to CR0)ITAB<0 7ithholdin( Tax $!ection
".:=B & ".:=."/ RR ",-.%
pro#essional #ees@ talent #ees@ rendered 7) indiiduals and athletes
gross income exceeds P$!,@,,,
gross income does not exceed P$!,@,,,
1;P
1,P
Pro#essional #ees@ talent #ees #or serices 7ut rendered 7) Huridical persons 1,P
&entals #or continued use or possession o# real properties used in 7iC@ which
the pa)or has not taEen title
Also applies to rentals o# personal propert)@ 7ill7oards@ transmission
#acilities
;P
cinematorgraphic #ilm rentals and other pa)ments ;P
Income pa)ments to certain contractors@ general engineering@ general
7uilding@ specialt) and other contractors
1P
Income distri7uted to the 7ene#iciaries o# estates R trusts .except i# alread)
su7Hect to #inal withhold or tax5exempt/
1;P
Income pa)ment to certain 7roEers R agents@ customs@ insurance@ real
estate R commercial 7roEers R #ees o# agents o# pro entertainers
;P
Pro #ees paid to medical practitioners 7) hospitals or clinics or 7) patients
.see && 1!5+' 7elow/
1,P
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&eal propert) which are 4OT capital assets sold 7) a person engaged in the
real estate 7iC
I# 4OT engaged in real estate 7iC .see p. +/
1.;PD0PD;P
$.;P
On additional pa)ments 7) importers@ shipping R airline companies to
goernment personnel #or oertime serices
1;P
On the amount paid 7) an) credit card compan) to an) 7iC entit)
representing the sale o# goods@ serices made 7) them to cardholders
.;P
Pa)ments made 7) an) o# the top ;@,,, corporations to their local supplier
o# goods
1P
Pa)ments 7) the goernment to local supplier o# goods .except i# 7elow
P1,@,,,/
1P
I# the serice 7) a medical practitioner was thru a pro partnership o# the
medical pro#ession $RR *",-.%
The hospitalDclinic must withhold the tax
4o withholding tax applies i# there is proo# that no pro#essional #ee has
7een charged
;P
I# the pa)or is a 6A&G% TAUPAI%&@ all pa)ments are su7Hect to withholding tax o#
o 1P i# engaged in goods or
o !P i# engaged in serices@ i# no speci#ic rates under !5+'.
<o that a pa)or can 7e exempt #rom withholding tax@ the pa)ee should also 7e exempt.
&eturn and Pa)ment o# Tax
<%C. ;'. &eturns and Pa)ment o# Taxes 9ithheld at <ource. 5
.A/ :uarterl) &eturns and Pa)ments o# Taxes 9ithheld. 5 Taxes deducted and withheld under <ection ;$ 7)
withholding agents shall 7e coered 7) a return and paid to@ except in cases where the Commissioner otherwise
permits@ an authoriCed Treasurer o# the cit) or municipalit) where the withholding agent has his legal residence
or principal place o# 7usiness@ or where the withholding agent is a corporation@ where the principal o##ice is
located.
The taxes deducted and withheld 7) the withholding agent shall 7e held as a special #und in trust #or the
goernment until paid to the collecting o##icers.
The return #or #inal withholding tax shall 7e #iled and the pa)ment made within twent)5#ie .!;/ da)s #rom the
close o# each calendar Kuarter@ while the return #or credita7le withholding taxes shall 7e #iled and the pa)ment
made not later than the last da) o# the month #ollowing the close o# the Kuarter during which withholding was
made: Proided@ That the Commissioner@ with the approal o# the <ecretar) o# (inance@ ma) reKuire these
withholding agents to pa) or deposit the taxes deducted or withheld at more #reKuent interals when necessar)
to protect the interest o# the goernment.
.B/ <tatement o# Income Pa)ments -ade and Taxes 9ithheld. 5 %er) withholding agent reKuired to deduct and
withhold taxes under <ection ;$ shall #urnish each recipient@ in respect to his or its receipts during the calendar
Kuarter or )ear@ a written statement showing the income or other pa)ments made 7) the withholding agent
during such Kuarter or )ear@ and the amount o# the tax deducted and withheld there#rom@ simultaneousl) upon
pa)ment at the reKuest o# the pa)ee@ 7ut not late than the twentieth .!,th/ da) #ollowing the close o# the
Kuarter in the case o# corporate pa)ee@ or not later than -arch 1 o# the #ollowing )ear in the case o# indiidual
pa)ee #or credita7le withholding taxes. (or #inal withholding taxes@ the statement should 7e gien to the pa)ee
on or 7e#ore 1anuar) 01 o# the succeeding )ear.
.C/ Annual In#ormation &eturn. 5 %er) withholding agent reKuired to deduct and withhold taxes under <ection
;$ shall su7mit to the Commissioner an annual in#ormation return containing the list o# pa)ees and income
pa)ments@ amount o# taxes withheld #rom each pa)ee and such other pertinent in#ormation as ma) 7e reKuired
7) the Commissioner. In the case o# #inal withholding taxes@ the return shall 7e #iled on or 7e#ore 1anuar) 01 o#
the succeeding )ear@ and #or credita7le withholding taxes@ not later than -arch 1 o# the )ear #ollowing the )ear
#or which the annual report is 7eing su7mitted. This return@ i# made and #iled in accordance with the rules and
regulations approed 7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner@ shall 7e su##icient
compliance with the reKuirements o# <ection N' o# this Title in respect to the income pa)ments.
The Commissioner ma)@ 7) rules and regulations@ grant to an) withholding agent a reasona7le extension o# time
to #urnish and su7mit the return reKuired in this <u7section.
."/ Income o# &ecipient. 5 Income upon which an) credita7le tax is reKuired to 7e withheld at source under
<ection ;$ shall 7e included in the return o# its recipient 7ut the excess o# the amount o# tax so withheld oer the
tax due on his return shall 7e re#unded to him su7Hect to the proisions o# <ection !,2? i# the income tax
collected at source is less than the tax due on his return@ the di##erence shall 7e paid in accordance with the
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proisions o# <ection ;N.
All taxes withheld pursuant to the proisions o# this Code and its implementing rules and regulations are here7)
considered trust #unds and shall 7e maintained in a separate account and not commingled with an) other #unds
o# the withholding agent.
.%/ &egistration with &egister o# "eeds. 5 4o registration o# an) document trans#erring real propert) shall 7e
e##ected 7) the &egister o# "eeds unless the Commissioner or his dul) authoriCed representatie has certi#ied
that such trans#er has 7een reported@ and the capital gains or credita7le withholding tax@ i# an)@ has 7een paid:
Proided@ howeer@ That the in#ormation as ma) 7e reKuired 7) rules and regulations to 7e prescri7ed 7) the
<ecretar) o# (inance@ upon recommendation o# the Commissioner@ shall 7e annotated 7) the &egister o# "eeds in
the Trans#er Certi#icate o# Title or Condominium Certi#icate o# Title: Proided@ #urther@ That in cases o# trans#er o#
propert) to a corporation@ pursuant to a merger@ consolidation or reorganiCation@ and where the law allows
de#erred recognition o# income in accordance with <ection 2,@ the in#ormation as ma) 7e reKuired 7) rules and
regulations to 7e prescri7ed 7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner@ shall 7e
annotated 7) the &egister o# "eeds at the 7acE o# the Trans#er Certi#icate o# Title or Condominium Certi#icate o#
Title o# the real propert) inoled: Proided@ #inall)@ That an) iolation o# this proision 7) the &egister o# "eeds
shall 7e su7Hect to the penalties imposed under <ection !N+ o# this Code.
9ithholding agents must #ile a return and pa) to:
o An authoriCed agent 7anE
o &eenue district o##icer
o Collection agent
o "ul) authoriCed treasure o# the cit) or municipalit) where he resides or has his
place o# 7iCness
These taxes must 7e maintained in a separate account and 4OT co5mingled with an)
other #unds o# the withholding agent
9hen to #ile and pa)
o (or (I4A6 withholding tax@ within !; da)s #rom the close o# each calendar Kuarter
o (or C&%"ITAB6% withholding tax@ not later than the last da) o# the month
#ollowing the close o# the Kuarter which withholding was made
I# there is an) excess@ it shall 7e either credited or re#unded.
I# there is de#icienc)@ then it shall 7e paid 7) the taxpa)er.
Tax deemed paid on diidends: see discussion on inter5corporate diidends to non5
resident #oreign corporations .page 01/
In -aru7eni CI& .1++,/@ -aru7eni@ a 1apanese corporation licensed to do 7usiness
here@ receied diidends #rom a local corporation. The <C said that the usual gross
income rate o# 0;P was not applica7le since there was a tax treat) with 1apan. The
treat)@ read with the 4I&C proision on diidends@ allowed -aru7eni a discounted rate o#
1;P on the diidends receied #rom the local corporation since 1apan extended in #aor
o# -aru7eni a tax credit o# not less than !,P o# the diidends it receied. This was
within the max ceiling o# !;P o# the gross amount o# diidends as prescri7ed 7) the tax
treat). ."idnBt reall) understand what I Hust wrote./
(or withholding tax on ro)alties and the -(4 clause 7ased on &P5China Treat) .&-C 2N5
!,,!@ see CI& <C 1ohnson and 1ohnson .page 01/
9ithholding on 9ages
Applies to A66 %-P6OI%" indiiduals whether citiCens or aliens deriing income #rom
compensation #or serices rendered in the Phil
!0C. =.. Definitions. 5 As used in this Chapter:
$A% %a#es. 5 The term QwagesQ means all remuneration .other than #ees paid to a pu7lic o##icial/ #or serices
per#ormed 7) an emplo)ee #or his emplo)er@ including the cash alue o# all remuneration paid in an) medium
other than cash@ except that such term shall not include remuneration paid:
.1/ (or agricultural la7or paid entirel) in products o# the #arm where the la7or is per#ormed@ or
.!/ (or domestic serice in a priate home@ or
.0/ (or casual la7or not in the course o# the emplo)erQs trade or 7usiness@ or
.2/ (or serices 7) a citiCen or resident o# the Philippines #or a #oreign goernment or an international
organiCation.
I# the remuneration paid 7) an emplo)er to an emplo)ee #or serices per#ormed during one5hal# .1D!/ or more o#
an) pa)roll period o# not more than thirt)5one .01/ consecutie da)s constitutes wages@ all the remuneration
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paid 7) such emplo)er to such emplo)ee #or such period shall 7e deemed to 7e wages? 7ut i# the remuneration
paid 7) an emplo)er to an emplo)ee #or serices per#ormed during more than one 5hal# .1D!/ o# an) such pa)roll
period does not constitute wages@ then none o# the remuneration paid 7) such emplo)er to such emplo)ee #or
such period shall 7e deemed to 7e wages.
$B% Payroll Period. 5 The term Qpa)roll periodQ means a period #or which pa)ment o# wages is ordinaril) made
to the emplo)ee 7) his emplo)er@ and the term /miscellaneous payroll period/ means a pa)roll period other than@
a dail)@ weeEl)@ 7iweeEl)@ semi5monthl)@ monthl)@ Kuarterl)@ semi5annual@ or annual period.
$C% Employee. 5 The term Qemplo)eeQ re#ers to an) indiidual who is the recipient o# wages and includes an
o##icer@ emplo)ee or elected o##icial o# the Goernment o# the Philippines or an) political su7diision@ agenc) or
instrumentalit) thereo#. The term /employee/ also includes an o##icer o# a corporation.
$)% Employer. 5 The term /employer/ means the person #or whom an indiidual per#orms or per#ormed an)
serice@ o# whateer nature@ as the emplo)ee o# such person@ except that:
.1/ I# the person #or whom the indiidual per#orms or per#ormed an) serice does not hae control o# the
pa)ment o# the wages #or such serices@ the term /employer/ .except #or the purpose o# <u7section .A/ means
the person haing control o# the pa)ment o# such wages? and
.!/ In the case o# a person pa)ing wages on 7ehal# o# a nonresident alien indiidual@ #oreign partnership or
#oreign corporation not engaged in trade or 7usiness within the Philippines@ the term /employer/ .except #or the
purpose o# <u7section .A/ means such person.
9ages are all remuneration other than #ees paid to a pu7lic o##icial #or serices
per#ormed 7) an emplo)ee #or his emplo)er .cash or Eind/.
o %UC%PT
i. Agricultural la7or paid entirel) in products o# the #arm where the la7or is
per#omed
ii. "omestic serice in a priate home .maids/
iii. Casual la7or not in the course o# the emplo)erBs trade or 7iC
i. <erices 7) a citiCen or resident o# the Phil #or a #oreign go or
international org
!0C. =-. Income Tax +ollected at /ource.-
$A% 'e(uirement of %ithholdin#. 8 %xcept in the case o# a minimum wage earner as de#ined in <ection
!!.**/ o# this code@ eer) emplo)er maEing pa)ment o# wages shall deduct and withhold upon such wages a tax
determined in accordance with the rules and regulations to 7e prescri7ed 7) the <ecretar) o# (inance@ upon
recommendation o# the Commissioner r
$B% Tax Paid &y 'ecipient. 5 I# the emplo)er@ in iolation o# the proisions o# this Chapter@ #ails to deduct and
withhold the tax as reKuired under this Chapter@ and therea#ter the tax against which such tax ma) 7e credited is
paid@ the tax so reKuired to 7e deducted and withheld shall not 7e collected #rom the emplo)er? 7ut this
<u7section shall in no case reliee the emplo)er #rom lia7ilit) #or an) penalt) or addition to the tax otherwise
applica7le in respect o# such #ailure to deduct and withhold.
$C% 'efunds or +redits. 8
.1/ 9mployer. 5 9hen there has 7een an oerpa)ment o# tax under this <ection@ re#und or credit shall 7e made
to the emplo)er onl) to the extent that the amount o# such oerpa)ment was not deducted and withheld
hereunder 7) the emplo)er.
.!/ 9mployees. 5The amount deducted and withheld under this Chapter during an) calendar )ear shall 7e
allowed as a credit to the recipient o# such income against the tax imposed under <ection !2.A/ o# this Title.
&e#unds and credits in cases o# excessie withholding shall 7e granted under rules and regulations promulgated
7) the <ecretar) o# (inance@ upon recommendation o# the Commissioner.
An) excess o# the taxes withheld oer the tax due #rom the taxpa)er shall 7e returned or credited within three
.0/ months #rom the #i#teenth .1;
th
/ da) o# April. &e#unds or credits made a#ter such time shall earn interest at
the rate o# six percent .NP/ per annum@ starting a#ter the lapse o# the three5month period to the date the re#und
o# credit is made.
&e#unds shall 7e made upon warrants drawn 7) the Commissioner or 7) his dul) authoriCed representatie
without the necessit) o# counter5signature 7) the Chairman@ Commission on Audit or the latterQs dul) authoriCed
representatie as an exception to the reKuirement prescri7ed 7) <ection 2+@ Chapter '@ <u7title B@ Title 1 o#
BooE > o# %xecutie Order 4o. !+!@ otherwise Enown as the Administratie Code o# 1+'$.
$)% Personal Exemptions. 8
$*% In General. 5 =nless otherwise proided 7) this Chapter@ the personal and additional exemptions applica7le
under this Chapter shall 7e determined in accordance with the main proisions o# this Title.
$"% Exemption +ertificate. 8
.a/ When to -ile. 5 On or 7e#ore the date o# commencement o# emplo)ment with an emplo)er@ the emplo)ee
shall #urnish the emplo)er with a signed withholding exemption certi#icate relating to the personal and additional
exemptions to which he is entitled.
.7/ 6hange of Status. 5 In case o# change o# status o# an emplo)ee as a result o# which he would 7e entitled to a
-icEe) Ingles
Ateneo 6aw !,1!
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lesser or greater amount o# exemption@ the emplo)ee shall@ within ten .1,/ da)s #rom such change@ #ile with the
emplo)er a new withholding exemption certi#icate re#lecting the change.
.c/ :se of 6ertificates. 5 The certi#icates #iled hereunder shall 7e used 7) the emplo)er in the determination o#
the amount o# taxes to 7e withheld.
.d/ -ailure to -urnish 6ertificate. 5 9here an emplo)ee@ in iolation o# this Chapter@ either #ails or re#uses to #ile
a withholding exemption certi#icate@ the emplo)er shall withhold the taxes prescri7ed under the schedule #or Cero
exemption o# the withholding tax ta7le determined pursuant to <u7section .A/ hereo#.
$0% %ithholdin# on $asis of Avera#e %a#es. 5 The Commissioner ma)@ under rules and regulations
promulgated 7) the <ecretar) o# (inance@ authoriCe emplo)ers to:
.1/ estimate the wages which will 7e paid to an emplo)ee in an) Kuarter o# the calendar )ear?
.!/ determine the amount to 7e deducted and withheld upon each pa)ment o# wages to such emplo)ee during
such Kuarter as i# the appropriate aerage o# the wages so estimated constituted the actual wages paid? and
.0/ deduct and withhold upon an) pa)ment o# wages to such emplo)ee during ?such Kuarter such amount as
ma) 7e reKuired to 7e deducted and withheld during such Kuarter without regard to this <u7section.
$'% Hus&and and %ife. 5 9hen a hus7and and wi#e each are recipients o# wages@ whether #rom the same or
#rom di##erent emplo)ers@ taxes to 7e withheld shall 7e determined on the #ollowing 7ases:
.1/ The hus7and shall 7e deemed the head o# the #amil) and proper claimant o# the additional exemption in
respect to an) dependent children@ unless he explicitl) waies his right in #aor o# his wi#e in the withholding
exemption certi#icate.
.!/ Taxes shall 7e withheld #rom the wages o# the wi#e in accordance with the schedule #or Cero exemption o#
the withholding tax ta7le prescri7ed in <u7section ."/.!/.d/ hereo#.
$G% "onresident Aliens. 5 9ages paid to nonresident alien indiiduals engaged in trade or 7usiness in the
Philippines shall 7e su7Hect to the proisions o# this Chapter.
$3% 8ear-End Ad2ustment. 5 On or 7e#ore the end o# the calendar )ear 7ut prior to the pa)ment o# the
compensation #or the last pa)roll period@ the emplo)er shall determine the tax due #rom each emplo)ee on
taxa7le compensation income #or the entire taxa7le )ear in accordance with <ection !2.A/. The di##erence
7etween the tax due #rom the emplo)ee #or the entire )ear and the sum o# taxes withheld #rom 1anuar) to
4oem7er shall either 7e withheld #rom his salar) in "ecem7er o# the current calendar )ear or re#unded to the
emplo)ee not later than 1anuar) !; o# the succeeding )ear.
General rule: %er) emplo)er maEing pa)ment o# wages shall deduct #rom R withhold
tax
o %xcept: #or -inimum 9age %arners
&e#unds or credits
o To the emplo)er Fw hen there was an oerpa)ment 7ut onl) to the extent that
the amount o# oerpa)ment was not withheld 7) the emplo)er
o To the emplo)ee F an) excess o# taxes withheld shall 7e returned or credited
within 0 months #rom April 1;@ these re#unds will earn interest at NP per annum
a#ter the lapse o# the 0 month period
Be#ore the start o# emplo)ment@ the emplo)ee should #urnish the emplo)er with a signed
withholding exemption certi#icate and additional exemptions to which he is entitled.
o I# he doesnBt@ the emplo)er shall withhold tax under T%&O exemption.
9ages paid to non5resident aliens engaged in trade or 7iC are also paid su7Hect to
withholding tax.
<ee codal #or hus7and and wi#e.
!0C. .+. 1ia&ility for Tax. .
$A% Employer. F The emplo)er shall 7e lia7le #or the withholding and remittance o# the correct amount o# tax
reKuired to 7e deducted and withheld under this Chapter. I# the emplo)er #ails to withhold and remit the correct
amount o# tax as reKuired to 7e withheld under the proision o# this Chapter@ such tax shall 7e collected #rom the
emplo)er together with the penalties or additions to the tax otherwise applica7le in respect to such #ailure to
withhold and remit.
$B% Employee. 5 9hFre an emplo)ee #ails or re#uses to #ile the withholding exemption certi#icate or will#ull)
supplies #alse or inaccurate in#ormation thereunder@ the tax otherwise reKuired to 7e withheld 7) the emplo)er
shall 7e collected #rom him including penalties or additions to the tax #rom the due date o# remittance until the
date o# pa)ment. On the other hand@ excess taxes withheld made 7) the emplo)er due to:
.1/ #ailure or re#usal to #ile the withholding exemption certi#icate? or
.!/ #alse and inaccurate in#ormation shall not 7e re#unded to the emplo)ee 7ut shall 7e #or#eited in #aor o# the
Goernment.
%mplo)er lia7le i# he #ails to withhold R remit. It shall 7e collected #rom him with
penalties.
-icEe) Ingles
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%mplo)ee lia7le i# he #ails to #ile the withholding tax certi#icate. The tax withheld 7) the
emplo)er shall 7e collected #rom the emplo)ee including penalties. %xcess taxes withheld
7ecause o# his re#usal to #ile certi#icate or giing #alse in#ormation shall 7e #or#eited to
the goernment.
!0C. .*. -ilin# of 'eturn and Payment of Taxes %ithheld. 5 %xFept as the Commissioner otherwise
permits@ taxes deducted and withheld 7) the emplo)er on wages o# emplo)ees shall 7e coered 7) a return and
paid to an authoriCed agent 7anE? Collection Agent@ or the dul) authoriCed Treasurer o# the cit) or municipalit)
where the emplo)er has his legal residence or principal place o# 7usiness@ or in case the emplo)er is a
corporation@ where the principal o##ice is located.
The return shall 7e #iled and the pa)ment made within twent)5#ie .!;/ da)s #rom the close o# each calendar
Kuarter: +rovided, however, That the Commissioner ma)@ with the approal o# the <ecretar) o# (inance@ reKuire
the emplo)ers to pa) or deposit the taxes deducted and withheld at more #reKuent interals@ in cases where such
reKuirement is deemed necessar) to protect the interest o# the Goernment.
The taxes deducted and withheld 7) emplo)ers shall 7e held in a special #und in trust #or the Goernment until
the same are paid to the said collecting o##icers.
<hould 7e #iled and paid within !; da)s #rom the close o# each calendar Kuarter.
!0C. .". 'eturn and Payment in +ase of Government Employees. 5 I#Fthe emplo)er is the Goernment o#
the Philippines or an) political su7diision@ agenc) or instrumentalit) thereo#@ the return o# the amount deducted
and withheld upon an) wage shall 7e made 7) the o##icer or emplo)ee haing control o# the pa)ment o# such
wage@ or 7) an) o##icer or emplo)ee dul) designated #or the purpose.
9ithholding tax 7) goernment agencies:
o Income pa)ments@ except an) single purchase o# P1,@,,, R 7elow@ made 7) a
goernment o##ice@ national or local@ including GOCCs@ on their purchase og #oods
#rom local suppliers su7Hect to withholding tax o# 1P
!0C. .9. /tatements and 'eturns. 8
$A% 'e(uirements. 5 %er) emplo)er reKuired to deduct and withhold a tax shall #urnish to each such
emplo)ee in respect o# his emplo)ment during the calendar )ear@ on or 7e#ore 1anuar) thirt)5#irst .01
st
/
o#
the
succeeding )ear@ or i# his emplo)ment is terminated 7e#ore the close o# such calendar )ear@ on the same da) o#
which the last pa)ment o# wages is made@ a written statement con#irming the wages paid 7) the emplo)er to
such emplo)ee during the calendar )ear@ and the amount o# tax deducted and withheld under this Chapter in
respect o# such wages. The statement reKuired to 7e #urnished 7) this <ection in respect o# an) wage shall
contain such other in#ormation@ and shall 7e #urnished at such other time and in such #orm as the <ecretar) o#
(inance@ upon the recommendation o# the Commissioner@ ma)@ 7) rules and regulation@ prescri7e.
$B% Annual Information 'eturns. 5 %er) emplo)er reKuired to deduct and withhold the taxes in respect o#
the wages o# his emplo)ees shall@ on or 7e#ore 1anuar) thirt)5#irst .01
st
/
o#
the succeeding )ear@ su7mit to the
Commissioner an annual in#ormation return containing a list o# emplo)ees@ the total amount o# compensation
income o# each emplo)ee@ the total amount o# taxes withheld there#rom during the )ear@ accompanied 7) copies
o# the statement re#erred to in the preceding paragraph@ and such other in#ormation as ma) 7e deemed
necessar). This return@ i# made and #iled in accordance with rules and regulations promulgated 7) the <ecretar)
o# (inance@ upon recommendation o# the Commissioner@ shall 7e su##icient compliance with the reKuirements o#
<ection N' o# this Title in respect o# such wages.
$C% Extension of time. F The Commissioner@ under such rules and regulations as ma) 7e promulgated 7) the
<ecretar) o# (inance@ ma) grant to an) emplo)er a reasona7le extension o# time to #urnish and su7mit the
statements and returns reKuired under this <ection.
%mplo)ees must su7mit annual return on or 7e#ore 1an 01 o# the succeeding )ear
containing all releant emplo)ee in#o.
-or ta*ation of software payments, see p. H=.
IO= -A"% IT888 9OO*OOO88888 .unless )ou want to reiew again@ then good lucE8/
Please pa) it #orward.
-icEe) Ingles
Ateneo 6aw !,1!
1,'

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