Notes on Income Taxation

Based from the book of Justice Dimaampao

and Atty. Mamalateo
Income means all wealth that flows into the
taxpayer other than as a mere return of capital. It
includes the forms of income specifically described
as gains and profits including gains derived from
the sale or other disposition of capital assets.

within, Philippine territory, enjoying the protection

accorded by the Philippine Government, the same,
in consideration of such protection should share
the burden of supporting the government.

It is also the gain derived from capital, or from

labor, or from both capital and labor, including the
gain derived from the sale or exchange of capital
assets.

Theory of Favorable Business Climate

domestic corporations owe their corporate
existence and privilege to do business to the
government. They also benefit from the efforts of
the government to improve the financial market
and to ensure a favorable business climate. It is
therefore fair for the government to require them
to make a reasonable contribution to the public
expenses.

Income Tax tax on all yearly profits arising from

property, possessions, trade or business, or as a
tax on a persons income, emoluments, profits and
the like.

Capital is the fund, wealth or the tree whereas in

Income, it is the flow, service of such wealth or the
fruit.
Capital is a broader concept than Income.

It is based on income, either gross or net, realized

in one taxable year.

Revenue refers to all funds or income derived by

the government whether from tax or other sources.
Revenue is to the government as income is to the
private persons or corporations.

It is an excise tax in which it is not levied upon the

person or property but upon the right of a person
to receive income or profits.
Basis the basis of the right of the government to
tax income emanates from its partnership in the
production of income by providing the protection,
resources, incentive and proper climate for such
production. (Partnership Theory)
Protection Theory it dictates that when the
flow of wealth proceeded from, and occurred

Sources of Income is any property, activity, or

service that produced the income. It may also be in
the form of proceeds from sales of transport
documents.
Property (Capital)
Labor (Service)
Sale/Exchange of capital asset and activity

Under the Tax Code, however, income derived from

whatever source forms part of the taxpayers
income. This includes the following:
1. Treasure found or punitive damages
representing profits lost;
2. Amount received by mistake;
3. Cancellation of the taxpayers indebtedness;
4. Payment of usurious interest;
5. Illegal gains (gambling, theft, extortion,
fraud);
6. Tax refund (must be claimed as deduction
from gross income in the preceding year. It
means that the tax must be a deductible one.
7. Bad debt recovery (must be claimed as
deduction from gross income in the preceding
year. It assumes that the taxpayer has a net
income, not a net loss.
Requisites for an income to be taxable:
1. There must be gain or profit, whether in cash
or its equivalent;
2. The gain must be realized or received. It
implies that not all gains are incomes. Ex:
Mere increase in the value of the property
(unrealized increase in capital)
3. The gain must not be excluded by law or
treaty from taxation. It means that not all
income is required to be included in
computing the taxable income.
Doctrines on determination of Taxable
income:
Claim of Right Doctrine illegally acquired
income constitutes realized gain.

Severance Test Theory separation from

capital of something which is of
exchangeable value.
Control Test power to procure the
payment of income and enjoy the benefit
thereof.
Economic Benefit Principle flow of
wealth realized is taxable only to the extent
that the taxpayer is economically benefited.
Flow of Wealth test the determining
factor for the imposition of income tax is
whether any gain was derived from the
transaction.
Tax Rate:
SCHEDULAR Rate
Different tax rates
Different categories of
taxable income
Usually used in the
income taxation of
individuals
(Business income,
professional income,
passive income, illegal
income) You cannot add
all of them together

GLOBAL Rate
Unitary or single tax
rate
No need for
classification as all
taxpayers are subjected
to a single rate
Applied to corporations
All of them will be added
together subject it to
one tax rate

Taxpayers See Sec 24 of NIRC

INDIVIDUAL INCOME TAXATION

I.

According to Citizenship/Residence affects the coverage of taxable income,

allowable deductions and tax rates.

1. Resident Citizen - citizens of the

Philippines who are residing therein.
2. Non-resident Citizen citizens of the
Philippines who are physically present abroad
for an uninterrupted period covering an entire
taxable year. NRC means one who establishes
to the satisfaction of the BIR Commissioner
the fact of his physical presence abroad with
definite intention to reside therein, either as:
Immigrant, contract workers or an employee
on a more or less permanent basis.
3. Resident Alien non-citizens who reside in
the Philippines.
4. Non-resident Alien neither citizen nor
resident of the Philippines.
NRA-ETB a non-resident alien individual who
shall come to the Philippines and stay therein for
an aggregate period of more than 180 days during
any calendar year shall be deemed a non-resident
alien doing business in the Philippines.
NRA-Not ETB in general, his income is taxed
at 25% final tax based on gross or entire income.
However they are taxed at special rate of 15% if
employed by the ff:
Petroleum service contractors or sub-contractors
Offshore banking units established in the Phil.

Regional or area headquarters of multi-national

corporations.
Only RCs are taxable for income derived from
sources within and without the Philippines. All
other individual income taxpayers are taxable only
for income derived from sources within the
Philippines.
Note: An overseas contract worker (OCW) is
taxable only on income derived from sources
within the Philippines.
A seaman is considered as an OCW provided that
he receives compensation for services rendered
abroad as a member of the complement of a
vessel; and such vessel is engaged exclusively in
international trade.
Sources of
Income
RC
Within and without
NRC
Within
RA
Within
NRA-BTE
Within
NRA-NBTE Within
II. According to Income

Tax Base
Taxable income
Taxable income
Taxable income
Taxable income
GROSS income
Earned

A.)Compensation Income all remuneration for

services rendered by an employee for his employer
unless specifically excluded under the Tax Code. It
includes:
Salaries
Wages

Emoluments
Honoraria
Bonuses
Allowances (Transportation, representation
etc.)
Fringe benefits (Monetary and non-monetary
fees)
Taxable pensions and retirement pay and
other income of similar nature.
Basis : designation or name of the remuneration
upon which it is paid and the manner of payment is
IMMATERIAL. What is important is that it is derived
from employer-employee relationship.
However, not every compensation income is
includible under the term gross compensation
income. Compensation for services rendered by an
independent contractor does not fall under the
legal category of gross compensation income.
Income derived by partner from professional
partnership does not form part of the gross
compensation income.
Requisites for Taxability:
1. Personal services actually rendered;
2. Payment is for such services rendered;
3. Payment is reasonable.
Forms of Compensation:
1. Cash or in money
2. Property or in kind (FMV)

3. Price is stipulated FMV of the compensation

in the absence of contrary evidence
4. Promissory notes or other evidence of
indebtedness
5. Cancellation or forgiveness of indebtedness
made in consideration of debtors services
rendered (amount of debt cancelled)
6. Premiums paid by employer on the life
insurance policy of employee whose family,
executor, administrator or his estate is the
beneficiary amount of the premium paid.
Other implications of premiums paid by employer:
Employer may claim the premiums as deductible
from gross income of the beneficiary designated is
the family, executor, administrator or the estate of
the employee
Employer is not allowed to claim premiums paid as
deductible if he is directly or indirectly designated
as beneficiary.
7. Income tax paid by employer in consideration
of the employees services rendered
amount of such tax paid.
8. Personal services performed partly within and
partly without apportion on the time basis.
9. Tax exempt compensation income (benefits,
privileges and facilities and the like)
Convenience of the Employer Rule it grants
exemption to benefits which are given for the
exclusive benefit or convenience of the employer.
Such as:

 If such quarters and other facilities exceed

the employees needs, only a retable part of
the value thereof as employee would have
spent therefor constitutes taxable income.
The remainder is considered expense of the
employer.
Lodging quarters furnished to an employee
by or on behalf of the employer shall be
excluded from employees gross income if
the living quarter is situated within the
business premises of the employer and the
employee is required to accept such lodging
facility as a condition of his employment.
The value of meal furnished to an employee
by or on behalf of his employer shall be
excluded from the employees gross income
if the meals are furnished in the business
premises of the employer and the meals are
for the convenience of the employer.
The monetary value of housing unit or the
rental value thereof is tax exempt if the
housing unit is situated within the business
premises of the employer. In such case, the
recipient must be a managerial or
supervisory employee.
De minimis Benefits these refers to facilities or
privileges furnished or offered by an employer to
his employees that are of relatively small value
and are offered or furnished by the employer
merely as a means of promoting health, goodwill,

contentment or efficiency of his employees. These

include the following:
Montized unused vacation leave credits of
private employees not exceeding 10 days
during the year and the monetized valued of
leave credits paid to govt officials and
employees.
Medical cash allowance to dependents of
employees not exceeding P750 per employee
per semester or P125 per month.
Rice subsidy of P1,500 or one sack of 50kg
rice per month amounting not more than
P1,500.
Uniform and clothing allowance not
exceeding P4,000 per annum.
Actual yearly medical benefits not exceeding
P10,000 per annum
Laundry allowance not exceeding P300 per
month
Employee achievement awards with an
annual monetary value not exceeding
P10,000 received by the employee under an
established written plan which does not
discriminate in favor of highly paid
employees;
Gifts given during Christmas and major
anniversary celebrations not exceeding
P5,000 per employee per annum
Flowers, fruits, books, or similar items given
to employees under special circumstances
ex. Illness, marriage, birth of a baby etc.
Daily meal allowance for overtime work not
exceeding 25% of the basic minimum wage.

SPECIAL RULE ON FRINGE BENEFITS

Definition: refer to goods, services, or other
benefits, furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to
managerial or supervisory employees such as, but
not limited to the ff:
Housing
Expense account
Vehicle of any kind
Household personnel, such as maid, driver
and others
Interest on loan at less than market rate
Membership fees, dues and other expenses
borne by the employer for the employee in
social and athletic clubs or other similar
organizations;
Expenses for foreign travel
Holiday and vacation expenses
Educational assistance to the employee or his
dependents
Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows.
Not all benefits given by an employer to his
employees are subject to Fringe benefit tax.
The following are not subject to FBT: (the following
fringe benefits are not taxable under FBT)
De minimis benefits
Benefits given to the rank and file employee

Benefits granted for the convenience of the

employer
Benefits granted to employee as required by
the nature of, or necessary to the trade,
business or profession of the employer.
Fringe benefits which are authorized and
exempted from income tax under the code or
under special law.
Contributions of the employer for the benefit
of the employee to retirement, insurance,
and hospitalization benefit plans.
Benefits which are considered necessary to the
business of the employer or are granted for the
convenience of the employer.
The following fringe benefits are NOT subject to
FBT because they are given primarily for the
convenience of the employer:
Housing privilege of military officials of the
AFP located inside or near the military camps;
Temporary housing for an employee for 3
months or less;
Expenses of the employee which are
reimbursed by the employer if they are
supported by receipts in the name if the
employer and do not partake the nature of a
personal expense of the employee.
Motor vehicles used for sales, freight,
delivery service and other non-personal uses;
The use of aircraft owned and maintained by
the employer
Business expenses

Nature of Fringe Benefits Tax it is a tax

imposed on fringe benefits which are granted or
are paid by an employer to an employee occupying
a managerial or supervisory position.

The FBT is imposed on fringe benefits given or

furnished to managerial or supervisory employees
on or after Jan 1, 1988. Fringe benefits granted to
rank and file employees are not subject to FBT.

Purpose of the FBT to ensure that an income

tax is paid on Fringe benefits. If they were given in
cash, an income is automatically withheld and
collected by government. An additional
compensation which is given in non-cash form is
virtually untaxed, this situation has caused
inequity in the distribution of the tax burden. The
FBT can enhance the progressiveness and fairness
of the tax system.

Managerial Employees refer to those who are

given powers or prerogatives to lay down and
execute management policies and/or to hire,
transfer, suspend, lay-off, recall, discharge, assign
or discipline employees.

Who should pay the FBT? it is a tax on the

income of an employee which is paid by the
employer on behalf of the employee. The FBT is
collected from the employer even if the employer
is a tax-exempt corporation, or an instrumentality
of the government.
Why is the FBT collected from the employer?
- valuation of benefits is easier at the level of the
firm. The problem of allocating the benefits among
the individual employees is avoided. Collection of
the FBT is also ensured because the FBT is
withheld at source and does not depend on the
self-declaration of the individual.
The FBT is no an additional tax on the employer.
He can claim the fringe benefit and the FBT as a
deductible expense from his gross income.

Supervisory Employees those who effectively

recommend such managerial actions if the
exercise of such authority is not merely routinary
or clerical in nature but requires the use of
independent judgment.
Rank and File Employees mean all employees
who are holding neither managerial nor
supervisory position.
Doctrine of Cash Equivalent provides that any
economic benefit to the employee whatever may
have been the mode by which it is effected is
compensation income.
Allowable Deductions from Gross
Compensation Income
Personal Exemptions:
Basic Personal Exemption (RA 9504)
Each married individual P50,000
Head of family P50,000

Single or legally separated with no dependents

P50,000
Additional exemption for qualified dependent
child
P25,000 but not in excess of four or P100,000.
Personal exemptions are arbitrary amounts. They
are not intended to substitute for the disallowance
of personal family or living expenses.
Basis : the principle that the burden of income
taxation should be adjusted according to ones
capacity to pay.
Taxpayers Entitled:
1. RC
2. NRC
3. RA
4. NRA-ETB on the basis of reciprocity. This rule
applies only to basic personal exemption.
Conditions for the grant of basic personal
exemption to NRA-ETB
His foreign mother country has income tax
law
His foreign country allows personal
exemptions to citizen od the Philippines not
residing therein.
File an accurate return of his income from all
sources within the Phil on time.
Amount allowable not to exceed our
maximum allowable personal exemptions

Head of the Family an unmarried or legally

separated man or woman with one or both parents
or with one or more brothers or sisters or with one
or more legitimate or recognized illegitimate or
legally adopted children living with and dependent
upon him/her for chief support.
Provided that such bro/sis or children are not more
than 21 yrs of age, unmarried and not gainfully
employed or where such children, brothers or
sisters, regardless of age are incapable of selfsupport because of mental or physical defect.
Qualified Dependents:
1. Parents living with the taxpayer and
dependent on the taxpayer for chief support.
(Step parents, parents in law are excluded)
2. Brothers and Sisters (Full or Half Blood) Living with and dependent upon the taxpayer
for chief support; unmarried and not gainfully
employed not more than 21 yrs of age except
if incapable due to mental or physical defect.
3. Children (L, RIC, LA) same qualifications as
brothers and sisters
4. Senior Citizen 60 years old including those
who have retired from both govt offices and
private enterprises, and has an income of not
more than P60,000 per annum subject to
review by the NEDA every 3 years.
Dependent must be a member of the taxpayers
family by blood, by marriage or by adoption.
Living With does not connote actual or physical
togetherness. It means that taxpayer exercised
control based on some moral or legal obligation

and makes the taxpayers home as his principal

place of abode.
Chief Support means principal or main support
not just partial support. It must be more than 50%
of the dependents need pertaining to food,
clothing and shelter.
Certain Rules on Change of Status:
Death of the taxpayer estate may claim the
appropriate personal exemptions
Death of the dependent taxpayer is still
entitled to additional exemption
Additional dependent taxpayer is still
entitled to additional exemption
Dependent becoming more than 21 yrs
taxpayer can still claim him as her as
dependent
Marriage of the taxpayer taxpayer is
entitled to full exemption for the particular
taxable year.
Death of the spouse surviving spouse may
still claim the full amount of P32,000.
New Rules under Sec 35
Marriage of dependent taxpayer can still
claim him or her as dependent for the
particular taxable year
Gainful employment of dependent taxpayer
can still claim him or her as dependent for
the particular taxable year.
Premium payments on health and/or
hospitalization insurance
Claimant: spouse claiming the additional
exemption for dependents.

Amount Allowed: P2,400 per annum or P200 a

month.
Limitation: family gross income must NOT BE
more than P250,000 for the taxable year.
B.) Engaged in Business/Trade/ or Practice of
Profession
Income Covered:
1. Income derived by self-employed from trade
or business (trading, manufacturing,
merchandising, farming, and others).
Self-employment income consists of the
earnings derived by the individual from the
practice of profession or conduct of trade or
business carried on by him as a sole
proprietor or by a partnership of which he is a
member.
A person is self-employed if he is engaged in
trade or business or performs services for
others for a fee and who derived personal
income from such trade or business or from
the performance of such services.
In manufacturing, merchandising, or mining
business, the gross income is computed by,
total sales less the cost of goods sold plus
any income from investments and incidental
operations.
How is income from long-term contracts
(more than 1yr) treated for income tax
purposes?
Percentage of Completion basis gross
income already earned though not yet received,
based on the estimates of architects or engineers

Completed Contract basis taxpayer reports

his income and deductions in the year the contract
is finally completed.
2. Income derived by professionals from the
practice of professions.
Professionals are those persons who derive
their income from the practice of their
profession. It includes persons who are
registered with PRC. Also refers to those
persons who pursue art and makes living
therefrom such as artists, athletes etc.
3. Gross income of farmers include:
Sale of livelihood and farm products received
from the farm;
Value of merchandise and other property
received from such sales;
Profit from the sale of livestock and other
items purchased;
Gross income from all other sources, rent
received on crop shares, proceeds of income
of growing crops.
Interest Income - amount of compensation paid
for the use of money or forbearance from such use.
It includes such interest arising from indebtedness
(business or not, legal or not, usurious or not)
Interest on govt securities taxable
Interest on savings deposit, time deposits and
deposit substitutes subject to 20% final tax.

Rental Income fixed sum either in cash or

property equivalent, to be paid at a definite period
for the use or enjoyment of a thing or right.
Scope of Rental Income:
All rentals (inc. royalties) derived from lease
of property, whether used in business or not,
from real estate or personal property;
Earnings from copyrights, trademarks,
patents and natural resources under lease.
Items considered as rental income:
Obligations of lessor to 3rd parties assumed
by the lessee such as: real estate taxes on
leased premises, insurance premiums paid by
lessee on property, dividends paid by lessee
to stock-holders of lessor-corporation.
Value of permanent improvements made by
lessee on leased property that will become
the property of the lessor upon the expiration
of the lease. The lessor shall report such an
income under any of the following methods:
Outright Method Fair market value of the
completed building or improvement shall be
reported as additional rent income.
Spread out Method allocate the depreciated
value over the remaining term of the lease
contract.
Advance rentals/Prepaid rentals - taxable if
received under a claim of right and without
restriction as to its use.

 Different classes of stock were issued.

Security deposit not taxable, it is taxable if the

lessee violates any provisions of the contract.

Inter-corporate dividend: Exempt from tax

Loan not taxable

Corporation paying dividend: Domestic

corporation

Dividend Income - corporate profit set aside,

declared and distributed by the director of a
corporation to be paid to stockholders on demand
or at a fixed time.
Kinds of Dividend:
Cash Dividend paid in given sum of money
Property Dividend paid by corporation in
securities or other property
Stock Dividend paid by a corporation with
its own stock. It represents transfer of surplus
to capital account
As a GENERAL RULE stock dividends are not
taxable. They are considered unrealized gain, and
cannot be subjected to income tax until that gain
has been realized. They are nothing but an
enrichment through increase of capital
investments.
EXCEPTIONS:
Change in the stockholders equity
Recipient is other than shareholder. Stock
dividend is taxable to usufructuary
Cancellation or redemption of shares of stock
Distribution of treasury stocks
Dividends declared in the guise of treasury
stock dividend to avoid the effects of income
taxation

Recipient of dividend: Another domestic

corporation or resident foreign corporation
Dividend paid to non-resident foreign corporation
Corporation paying dividend: Domestic corporation
M

Recipient of dividend - Foreign head office

makes direct investment in Phil company: 15%
FWT. Phil branch of foreign corporation makes
investment in Phil company exempt from income
tax
Tax-Sparing provision - If foreign country does not
impose income tax on dividend paid by foreign
corporation

Scrip Dividend one that is paid in the form of

promissory notes.
Indirect Dividend one made through the
exercise of right or other means of payment.
(cancellation or condonation of debts)
Liquidating Dividend one resulting from the
distribution by a corporation of all its property or
assets in complete liquidation or dissolution.

Giver
Domestic
Domestic

Recipient
Domestic/RFC
RC,NRC,RA

Domestic
Domestic
Domestic

NRA-ETB
NRA-NETB
NRFC

Tax Rate / Exempt

Tax exempt
10% effective
taxable year 2000
20%
25%
15% subject to
allowance for tax
credit

Passive Investment Income it is an income

subject to final withholding tax. The withholding
agent withholds the tax and remits the same to the
BIR. Both the recipient and the taxpayer are not
required to include it in the taxable income.
The tax withheld constitutes final settlement of the
tax liability on the income.
Examples of income subject to final tax:
Interest income from bank deposit
Royalties
Winnings Except sweepstakes and lotto
Prizes amounting to more than P10,000
4. Other Sources:
Capital gain from sale of shares of stock
Acquisition and disposition of capital stock
which include sales and retirement of bonds
Illegal gains (gambling, fraud, etc)
Recovery of damages taxable represents
lost profit

Bad debts recovery taxable if it results in

reduction of the taxpayers tax liability in the
previous year. (Tax benefit rule applies)
Tax refund taxable if it results in reduction
of the taxpayers liability in the preceding
year.
TRUSTS AND ESTATES
Estates under Judicial Settlement
GR: An estate under judicial settlement is subject
to income tax in the same manner as individuals.
Its status is the same as the status of the decedent
prior to his death.
EXC:
1. The entitlement to personal exemption is
limited only to P20,000.
2. No additional exemption is allowed.
3. The distribution to the heirs during the
taxable year of estate income is deductible
from the taxable income of the estate. Such
income distributed shall form part of the
respective heirs taxable income.
Estates NOT under Judicial Settlement
Subject to income tax as co-ownership. The tax
treatment is similar to general professional
partnership. The tax liability on income is levied
directly on the co-owners.
Irrevocable Trusts (irrevocable both as to
corpus and as to income) taxed exactly in the
same way as estates under judicial settlement and
its status as an individual is that of the trustor. It is

entitled to the minimum personal exemption

(P20,000) and distribution of trust income during
the taxable tear to the beneficiaries is deductible
from the trusts taxable income.
Revocable Trusts the trustor, not the trust
itself, is subject to the payment of income tax on
the trust income.

Unregistered or Registered Partnership

taxable provided that:
1. Agreement, oral or writing, to contribute
money property or industry to a common
fund.
2. Intention to divide the profits
Joint accounts or joint ventures formed for
profits

CORPORATE INCOME TAXATION

Corporation includes partnerships, no matter how
created or organized, joint stock companies, joint
accounts, associations or insurance companies
except:
Joint construction venture;
General professional partnership
Joint venture for engaging in petroleum, coal,
and other energy operations with the
government by agreement.
GPPs are not subject to income tax. It means a
partnership formed by persons for the sole purpose
of exercising their common profession; and no part
of the income of which is derived from engaging in
any trade or business.
Members of the GPP are liable for income tax only
in their separate and individual capacity. Each
partner shall report as gross income his distributive
share, actually or constructively received in the net
income of the partnership.

Joint Emergency Operation (no legal

personality) operates the business affairs of the
two companies as though they constitute a single
entity thereby obtaining substantial economy and
profit in operation taxable
Joint Stock Companies classified as a
partnership possessing some of the characteristics
of a corporation. They partake the nature of
partnership.
Major groups of Corporation for Income Tax
Purposes:
1. Domestic Corporations
Source: within and without
Tax Base: Taxable Income
Tax Rate: 35% effective July 1, 2005; 30%
effective January 1, 2009. (RA 9337)
Special Domestic Corporations:
Private Educational Institution is any
private school maintained and administered

by private individuals or groups issued a

permit to operate by Secretary of DECS in
accordance with existing laws.
Subject to 10% on their taxable income
provided that its gross income from unrelated
trade, business or other activity does not exceed
50% of the total income. Conversely, it is subject
to 35% if its income from unrelated trade or
business exceeds 50% of the total (gross) income.
Unrelated trade business, or other activity is not
substantially related to the exercise or
performance of such educational institution.
Related activities include income derived from
auxiliary activities school owned canteen,
cafeteria, dormitory and bookstore.
Non-Profit Hospital
Same rules as private educational institution.
2. Resident Foreign Corporations
Source: within
Tax Base: Taxable income
Tax Rate: 35% effective July 1, 2005; 30%
effective January 1, 2009. (RA 9337)
Special Resident Foreign Corporations
International Carriers within Gross Phil.
Billings 2.5%
Offshore banking unit- within Gross onshore
income 10%

Foreign currency deposit unit within Gross

onshore income 10%
Transacting Business means continuity of
commercial dealings and arrangements
Gross Philippine Billings refers to the amount
of gross revenue, released from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and
interrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or
passage document.
Foreign airline companies without flights
starting from or passing through any point in
the Philippines
An off-line airline having a branch office or a sales
agent in the Philippines which sells passage
documents for compensation or commission to
cover off-line flights of its principal or head office,
or for other airlines covering flights originating,
from Philippine ports or off-line flights is NOT
CONSIDERED engaged in business as an
international air carrier in the Philippines and is,
therefore, not subject to Gross Philippine Billings
Tax provided for in Sec 28(a)(3a) of the code nor to
the 3% common carriers tax under Sec 118(a) of
the same code.
International Air Carrier and International
Shipping shall be taxed on the basis of their
Gross Philippine Billings.

Off-line International Airline is subject to

corporate
Income tax Sec 28(a)(3a) of the NIRC does not
exempt all international air carriers from the
coverage of Sec 28 (A1) of the same code. The
logical interpretation of such provisions is that, if
Sec 28(a)(3a) is applicable to a taxpayer, then the
GR under Sec 28 (A1) would not apply. If, however,
Sec. 28(a)(3a) does not apply, a resident foreign
corporation, whether an international air carrier or
not, would be liable for the tax under Sec. 28(A1).
South African Airways v. CIR 612 SCRA 665
(2010)
The GR is that Resident Foreign Corporations shall
be liable for a 30% income tax on their income
from within the Philippines, EXCEPT for resident
foreign corporations that are international carriers
that derive income from carriage of persons,
excess baggage, cargo and mail originating from
the Philippines which shall be taxed at 2.5% of
their Gross Philippine Billings.
An international carrier with no flights originating
from the Philippines, does not fall under the
exception. As such, must fall under the General
Rule.
Firmat regulam in casibus non exceptis a thing
not being excepted must be regarded as coming
within the purview of the general rule.

If an international air carrier maintains flights to

and from the Philippines, it shall be taxed at the
rate of 2.5% of its Gross Philippines Billings, while
international air carriers that do not have flights to
and from the Philippines but nonetheless earn
income from other activities in the country will be
taxed at the rate of 30% of such income.
3. Non-Resident Foreign Corporation
Source: within
Tax Base: Gross Income
Tax Rate: 35% effective July 1, 2005; 30%
effective January 1, 2009 (RA 9337)
Special Non-Resident Foreign Corporations:
Non-resident Cinematographic Film Owner,
Lessor or Distributor shall pay a tax of 25%
of its gross income from all sources within the
Philippines.
Non-resident Owner or Lessor of Vessels
Chartered by Philippine Nationals shall be
subject to a tax of 4.5% of gross rentals,
lease or charter fees from leases or charters
to Filipino citizens or corporations.
Non-resident Owner or Lessor of Aircraft,
Machineries and other Equipment subject to
a tax of 7.5% of gross rentals or fees.
MINIMUM CORPORATE INCOME TAX
Concept: Domestic corporations owe their
corporate existence and their privilege to do
business to the government. They also benefit
from the efforts of the government to improve the

financial market and to ensure a favorable

business climate. It is therefore fair for the
government to require them to make a reasonable
contribution to the public expenses.
Purpose: It is designed to forestall the prevailing
practice of corporations of over claiming
deductions in order to reduce their income tax
payments.
Nature of MCIT: It is an estimate of the income
tax that is due from a firm. It is equal to 2% of the
gross income of a corporation at the close of each
taxable quarter.
Being a minimum income tax, the corporation
should pay the MCIT whenever its regular income
tax is lower than the MCIT, or when the firm
reports a net loss in its tax return. Conversely, the
regular income tax is paid when it is higher than
the MCIT.
MCIT is not an additional tax to the regular or
normal income tax
Newly established firms or those which are on their
1st 3years of operations are not covered by the
MCIT.
Coverage: It covers domestic and resident foreign
corporations which are subject to the regular
income tax.
The tax rate is
33% for 1999

32% for 2000

35% effective July 1, 2005
30% effective January 1, 2009
Corporations which are subject to a special
corporate tax system do not fall within the
coverage of MCIT:
Schools, hospitals, income of offshore
banking units, foreign currency deposit unit
form foreign currency transactions;
Regional operating headquarters
A corporation starts to be covered by the MCIT on
the 4th year of its business operation. The period of
reckoning is the start of its business operations is
the year when the corporation was registered with
the BIR.
Suspension of Payment: The SoF, upon the
recommendation of the BIR Commissioner, may
suspend the imposition of the MCIT on a
corporation in any of the following cases:
Sustained losses form prolonged labor
dispute means losses arising from a strike
staged by employees which lasted for more
than 6 months which has caused the
temporary shutdown of business operations;
Force majeure acts of God or Man (war,
insurgency)
Legitimate business reverses include
substantial losses due to fire, robbery theft,
embezzlement, or of other economic reason.

How is the MCIT Computed? The MCIT is equal

to 2% of the gross income of the corporation at the
end of the taxable year.
MCIT shall be paid in the same manner prescribed
for the payment of the normal corporate income
tax which is on a quarterly and on a yearly basis.
The taxpayer shall pay the MCIT whenever it is
GREATER THAN the regular or normal corporate
income tax which is imposed under Sec 27(a) and
Sec 28(A1) of the code.
Since the MCIT is an estimate of the normal
income tax, it cannot be claimed as deduction.
Carry-Forward Provision any excess of the
MCIT over the normal income tax may be carried
forward on an annual basis and be credited against
the normal income tax for the 3 immediately
succeeding taxable years.
IMPROPERLY ACCUMULATED EARNINGS TAX
If the earnings and profits were distributed, the
shareholders would then be liable to income tax
thereon, whereas if the distribution were not made
to them, they would incur no tax in respect to the
undistributed earnings and profits of the
corporation. Thus, a tax is being imposed in the
nature of a penalty to the corporation for the
improper accumulation of its earnings, and as a
form of deterrent to the avoidance of tax on
shareholders who are supposed to pay dividends

tax on the earnings distributed to them by the

corporation.
Coverage: The 10% IAET is imposed on
improperly accumulated taxable income earning
starting January 1, 1998 domestic corporation as
defined under the Tax Code and which are
classified as closely held corporations.
Closely-held Corporations are those
corporations at least 50% in value of the
outstanding capital stock or at least 50% of the
total combined voting power of all classes of stock
entitled to vote is owned directly or indirectly by
not more than 20 individuals.
Corporations not subject to IAET:
Banks and other non-bank financial
intermediaries
Insurance companies
Publicly-held corporations
Taxable partnerships
General professional partnerships
Non-taxable joint ventures.
Other Corporate Tax Rates
1. Common Tax Rates
Capital gain from sale of share of stock a final tax
at the rates prescribed below is imposed upon the
net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation,

except shares sold, or disposed of through the

stock exchange:
Not over P100,000 5%
On any amount in excess of P100,000 10%
2. Domestic Corporations
Corporations have the option to be taxed at 15% of
Gross Income. In this regard, the President may,
upon the recommendation of the Secretary of
Finance, effective Jan 1, 2000, allow corporations
the option to be taxed at 15% of Gross income,
after the following conditions have been satisfied:
A tax effort ratio of 20% of GNP
A ratio of 40% of income tax collection to
total tax revenues
A VAT tax effort of 4% if GNP
A 0.9% ratio of Consolidated Public Sector
Financial Position to GNP
Interest on currency deposit and royalties derived
from sources within the Philippines 20% final tax
3. Resident Foreign Corporations
Branch Profit Remittance Tax
Tax Base: Profits applied or earmarked for
remittance
Tax Rate: 15% final tax
Condition: branch profits are effectively
connected with the conduct of its trade or business
in the Philippines.

Exempt Profits Remitted: derived from activities

registered with the Philippine Economic Zone
Authority.
4. Non-Resident Foreign Corporations
Interest on foreign loan 20% Final tax
Dividend received from domestic corporation (Tax
sparing credit rule) Sec 28 B 5(b) NIRC
Tax Rate: 15% of final tax
Condition: Foreign government shall allow a
credit against the tax due from the foreign
corporation taxes deemed to have been paid.
Tax Credit Allowed: 20% effective July 1, 2005;
15% effective January 1, 2009
Purpose of Tax Sparing Credit: to encourage
foreign investments and to attract foreign
investors.
TAX EXEMPT INDIVIDUAL/ENTITIES
Sec. 30 NIRC
The following organizations shall not be taxed
under this title in respect to income received by
them as such:
1. Labor, Agriculture, or Horticultural
Organization Not Organized Principally
for Profit;
2. Mutual savings Banks and Cooperative
Banks
Requisites for Exemption:
No capital stock represented by shares;

 Earnings, less only the expenses of operating

are distributable wholly among the
depositors;
Operated for mutual purposes and without
profit.
The exemption applies to foreign as well as
domestic banks.
3. Fraternal Beneficiary Society, Order or
Association;
Requisites for Exemption:
Operated under lodge system or for the
exclusive benefit of the members of a
society;
Established system of payment to its
members or their dependents of life, sick ,
accident, or other benefits;
No part of the net income inures to the
benefit of the stockholders or members.
Grand lodge is established for the care of the
members, their dependents, and members of an
affiliated lodge unable to earn a livelihood by
reason of the infirmities of age was held tax
exempt.
4. Cemetery Companies
Requisites for Exemption:
Owned and operated exclusively for the
benefit of its owners;
Not operated for profit.

Any cemetery corporation chartered solely for

burial purposes and not permitted by its charter to
engage in any business not necessarily incident to
that purpose, is exempt from income, provided
that no part of its net earnings inures to the benefit
of any private shareholder or individual.
Cemetery having a capital stock represented by
shares, or which is operated for profit or for the
benefit of persons other than its members, does
not come within the exempted class.
5. Religious, Charitable, Scientific, Athletic
or Cultural Corporations;
Requisites for Exemption:
Organized and operated for one or more of
the specified purposes;
No part of its net income must inure to the
benefit of private stockholders or individuals.
Income from the conduct of strictly religious
activities, such as fees received for administering
baptismal, solemnizing marriages, attending
burials, holding masses, and other like income is
exempt.
Scientific corporation includes an association for
the scientific study of law with a view to improving
its administration.
6. Business League, Chamber of
Commerce, or Board of Trade;
Requisites for Exemption:

 Association of persons having some common

business interest;
Limited its activities to work for such
common interests;
Not engaged in a regular business for profit;
No part of the net income inures to the
benefit of any private stockholder or
individual.
Ceases to be tax exempt if it engages in a regular
business for profit even if it conducts business on a
cooperative basis or produces only sufficient
income.
Makati Stock Exchange is not a business league,
chamber of commerce, or board of trade and must
pay income tax on its taxable income. Earnings
inure to the benefit of its members.
7. Civil League;
Requisites for Exemption:
Not organized for profit but operated
exclusively for purposes beneficial to the
community as a whole. Promoting the welfare
of mankind.
Sworn affidavit with the BIR showing the ff:
Character of the League, purpose of which it
was organized, actual activities, sources of income,
all facts relating to the operation.
The copy of articles of incorporation, by-laws,
and financial statements should be attached
to the sworn affidavit.
8. Non-Stock, Non-profit Educational
Institutions;

They are subject to internal revenue taxes on

income from trade, business or other activity to
which it is not related to the exercise or
performance by such educational institution. Ex.
Rental payment
9. Government Educational Institution;
UP is subject to 20% final tax. Other government
educational institutions are likewise subject there
to. Income from properties, real or personal, or
from any of their activities conducted for profit,
regardless of the disposition made of such income
shall be subject to tax.
ORDINARY ASSET vs. CAPITAL ASSET
Ordinary Asset are property held by the
taxpayer used in connection with his trade or
business which includes the following:
Stock in trade of the taxpayer or other
property of a kind which would properly be
included in the inventory of the taxpayer if on
hand at the close of the taxable year.
Property held by the taxpayer primarily for
sale to customers in the Ordinary course of
trade or business
Property used in the trade or business of a
character which is subject to the allowance
for depreciation provided in the NIRC.
Real property used in trade or business of the
taxpayer
Examples:

 Condominium building owned by a realty

company, the units of which are for rent or
for sale
Machinery and equipment of a manufacturing
concern subject to depreciation
The motor vehicles of a person engaged in
transportation business.
Capital Asset
All other assets, whether or not used in trade
or business, other than the above assets.
Examples:
Jewelries not used for trade or business
Residential houses and lands owned and used
as such
Automobiles not used in trade or business
Stock and securities held by taxpayers other
than dealers in securities
The term capital asset is defined by an exclusion of
all ordinary assets. Thus, those properties not
specifically included in the statutory definition
constitutes capital assets, the profits or losses on
the sale of the exchange of which are treated as
capital gains or capital losses. Conversely, all those

properties specifically included are considered as

ordinary assets and the profits or losses realized
must have to be treated as ordinary gains or
ordinary losses.
Significance in determining whether the
asset is ordinary or capital asset: They are
subject to different rules. There are special rules
that apply only to capital transactions.
Capital Loss Limitation Rule under this rule,
capital loss is deductible only to the extent of
capital gain but not to an ordinary gain.
Net Capital Loss Carry Over - if any taxpayer
other than a corporation, sustains in any taxable
year a net capital loss, such loss shall be treated in
the succeeding taxable year as a loss from the sale
or exchange of a capital asset held for not more
than 12 months.
A capital asset may be reclassified as ordinary
asset. Property initially classified as capital asset
may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tends to
show that the activity was in furtherance of or in
the course of the taxpayers trade or business