Local Tax Power

charges shall accrue exclusively to the local
governments.
GENERAL PRINCIPLES OF TAXATION
Pepsi Cola v. Municipality of Tanauan: Legislative

powers may be delegated to local governments in
respect of matters of local concern. This is sanctioned
by immemorial practice. By necessary implication, the
legislative power to create political corporations for
purposes of local self-government carries with it the
power to confer on such local governmental agencies
the power to tax.
A. Taxation
a. Definition
i. It is the power by which the sovereign raises revenue to
defray the expenses of the government. It is a way of apportioning
the cost of government among those who in some measure are
privileged to enjoy its benefits and must bear its burden.
Quezon City v. ABS-CBN: Municipal Corporation has a

general power to levy taxes and otherwise create
sources of revenue. They no longer have to wait for
the statutory grant for these powers. The taxing
power of the local government is limited in the sense
that Congress can enact legislation granting
exemptions.
b. Nature of the Power of Taxation

i. The power to tax is an attribute of sovereignty. It is
inherent in the State. As an incident of sovereignty, the power to tax
has been described as unlimited in its range, acknowledging in its
very nature no limits, so that security against its abuse is to be found
only in the responsibility of the legislature which imposes the tax on
the constituency who are to pay it. (MCIAA v. Marcos)
ii. Taxes are the lifeblood of the government. Without

taxes, the government can neither exist nor endure. The exercise of
taxing power derives its source from the very existence of the State
whose social contract with its citizens obliges it to promote public
interest and the common good. (CREBA v. Romulo)
iii. The power of taxation is an essential and inherent
attribute of sovereignty, belonging as a matter of right to every
independent government, without being expressly conferred by the
people. (Pepsi Cola v. Municipality of Tanauan)
Legislative prerogative
-
iv. It is legislative in character (Scope of Legislative Taxing

Power)
Determination of the Purpose

Determination of the Subjects and Objects of
Taxation
Determination of the Amount and Rate of Tax
Determination of the Kind of Tax to be Collected
Determination of the Apportionment of Tax
Determination of the Manner and Mode of
Enforcement and Collection
Determination of the Situs of Taxation
can only be questioned if it violated inherent and

constitutional limitations
pertains to the Wisdom, Object, Motive, Expediency and
Necessity (WOMEN)
c. Theory or Underlying Basis

i.
Life-Blood Theory/Necessity Theory/Governmental
The power of taxation proceeds upon the theory that

the existence of government is a necessity; that it
cannot continue without means to pay its expenses;
and that for these means it has a right to compel all
its citizens and property within its limits to contribute.
(71 Am. Jur. 2d 346)
Necessity
v. It is subject to constitutional and inherent limitations

vi. It is generally not delegated to the executive or judicial
department.
EXCEPTIONS:
Local Governments
Sec. 5, Art. X, Constitution: Section 5. Each local
government unit shall have the power to create its
own sources of revenues and to levy taxes, fees and
charges subject to such guidelines and limitations as
the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and
When allowed by the Constitution Under the

Constitution, Congress may expressly authorize the
President to fix within specified limits, and subject to
such limitations and restrictions as it may impose,
tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within
the framework of the national development program
of the Government. (Sec 28[2], Art. VI, Constitution)
When delegation merely relates to the administrative
implementation or implied from the policy and
purpose of the Act
ii.
Benefits
Received
Theory/Symbiotic Relationship Theory
Theory/Compensation
According to this theory, the State demands and

receive taxes from the subjects of taxation within its
jurisdiction so that it may be enabled to carry its
mandate into effect and perform the functions of the
government, and the citizen pays from his property
the portion demanded in order that he may, by
TAXATION NOTES I |marukoi.mhealler
means thereof, be secured in the enjoyment of the

benefits of organized society. (51 Am Jur. 42-43)
Taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for the
lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender
part of their hard earned income to the government,
every person who is able to must contribute his share
in the running of the government. The government,
for its part, is expected to respond in the form of
tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and
material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by
those in the seat of power. (CIR v. Algue)
The legislature, in adopting such measures in our tax
laws, only wanted to be assured that taxes are paid
and collected without delay. For taxes are the
lifeblood of government. Also such measures tend to
prevent collusion between the taxpayer and the tax
collector. By questioning a taxs legality without first
paying it, a taxpayer, in collusion with Bureau of
Internal Revenue officials, can unduly delay, if not
totally evade, the payment of such tax. (Phil Guaranty
Co. v. CIR)
The power to tax is the most potent instrument to
raise the needed revenues to finance and support
myriad activities of the local government units for the
delivery of basic services essential to the promotion
of the general welfare and the enhancement of
peace, progress, and prosperity of the people. (FELS
Energy, Inc. v. Province of Batangas)
d. Objectives
i. Revenue Basically, the purpose of taxation is to
provide funds or property with which the State promotes the
general welfare and protection of its citizens. (51 Am. Jur. 71-73)
The conservative and pivotal distinction between police
power and power of taxation rests in the purpose for which the
charge is made. If generation of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax. (Gerochi v.
DOE)
While it is true that the power of taxation can be used as
an implement of police power, the primary purpose of levy is
revenue generation. If the purpose is primarily revenue, or if
revenue is, at least, one of the real and substantial purposes, then
the exaction is properly called a tax. (Planters Products, Inc. v.
Fertiphil Corporation)
It is beyond serious question that a tax does not cease to
be valid merely because it regulates, discourages, or even definitely
deters the activities taxed. The tax imposed by the decree was
imposed primarily to answer the need for regulating the video
industry, particularly because of the rampant film piracy, the
flagrant violation of intellectual property rights, and the proliferation
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of pornographic video tapes. And while it was also an objective of

the decree to protect the movie industry, the tax remains a valid
imposition. (Tio v. Videogram)
ii. Non-Revenue
Regulation. Taxes may also be imposed for a

regulatory purpose as, for instance, in the
rehabilitation of a threatened industry which is
affected with public interest, like the oil industry.
(Caltex Phils. V. COA)
Promotion of General Welfare. Taxation may be used
as an implement of the police power in order to
promote the general welfare of the people. Thus, in
the case of Lutz v. Araneta, the SC upheld the validity
of the Sugar Adjustment Act, which imposed a tax on
milled sugar since the purpose of the law was to
strengthen an industry that is so undeniably vital to
the economy the sugar industry.
Reduction of Social Inequality. This is made possible
through the progressive system of taxation where the
object is to prevent the undue concentration of
wealth in the hands of a few individuals. Progressivity
is keystoned on the principle that those who are able
to pay should shoulder the bigger portion of the tax
burden.
Encouragement of Economic Growth. Taxation does
not only raise public revenue, but in the realm of tax
exemptions and tax reliefs, for instance, the purpose
is to grant incentives or exemptions in order to
encourage investments and thereby promote the
countrys economic growth.
Protectionism
Sumptuary purpose of taxation

More popularly known as the non-revenue or regulatory
purpose of taxation. While the primary purpose of taxation is to
raise revenue for the support of the government, taxation is often
employed as a devise for regulation by means of which certain
effects or conditions envisioned by the government may be
achieved.
For example, government may provide tax incentives to
protect and promote new and pioneer industries. The imposition of
special duties, like dumping duty, marking duty, retaliatory duty, and
countervailing duty, promote the non-revenue or sumptuary
purpose of taxation.
e. Aspects of Taxation
i. Levy Levy is the imposition of the tax which is a
legislative act. It involves the determination of the persons, property
or excises to be taxed, the sums to be raised.
ii. Assessment This involves the process where the tax
one is obligated to pay is being computed.
iii. Collection This consists of the manner of enforcement
of the obligation on the part of those who are taxed.
Levy is taxation, strictly speaking, while the second and

third aspects may be referred to as tax administration. These
aspects together constitute the taxation system.
B.
Taxes
a. Definition
Taxes are the enforced proportional contributions from

persons and property levied by the lawmaking body of the State by
virtue of its sovereignty for the support of the State and for all public
needs.
b. Nature of Taxes
i. It is a forced charge, imposition or burden. As such,
taxes operate in invitum, which means that it is in no way dependent
on the will or contractual assent, express or implied, of the person
taxed. They are not contracts but positive acts of the government.
ii. It is based on the taxpayers ability to pay. It is assessed
in accordance with some reasonable rule of apportionment, which
means that conformably with the constitutional mandate on
progressivity of a taxing system (Sec 28[2], Art. VI, 1987
Constitution), taxes must be based on ability to pay.
iii. It is generally payable in money. Unless qualified by law
(e.g. backpay certificates under Sec. 2, RA No. 304, as amended), the
term taxes or tax is usually understood to be a pecuniary burden
an exaction to be discharged alone in the form of money which
must be in legal tender.
admissible against demands for taxes levied for general or local

governmental purposes. The reason on which the general rule is
based, is that taxes are not in the nature of contracts between the
party and party but grow out of duty to, and are the positive acts of
the government to the making and enforcing of which, the personal
consent of individual taxpayers is not required. (Republic v.
Mambulao Lumber Co.)
Exception: SC allowed set off in the case of Domingo v. Garlitos

[8 SCRA 443] re. claim for payment of unpaid services of a
government employee vis-a-vis the estate taxes due from his estate.
The fact that the court having jurisdiction of the estate had found
that the claim of the estate against the government has been
appropriated for the purpose by a corresponding law shows that
both the claim of the government for inheritance taxes and the
claim of the intestate for services rendered have already become
overdue and demandable as well as fully liquidated. Compensation
therefore takes place by operation of law.
iv. It is imposed by the State on persons, property or
excises within its territorial jurisdiction applying the principles of
territoriality. The object to be taxed must be subject to the
jurisdiction of the taxing state. This is necessary in order that the tax
can be enforced.
Its laws may as to some persons found within its territory
no longer control. Nor does the matter end there. It is not precluded
from allowing another power to participate in the exercise of
jurisdictional right over certain portions of its territory. If it does so,
it by no means follows that such areas become impressed with an
alien character. They retain their status as native soil. They are still
subject to its authority. Its jurisdiction may be diminished, but it
does not disappear. So it is with the bases under lease to the
American armed forces by virtue of the military bases agreement of
1947. They are not and cannot be foreign territory. (Reagan v. CIR)
A taxpayer may not offset taxes due from the claims that
he may have against the government. Taxes cannot be subject of
compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgmenst as is allowed to be
set off. (Caltex Phils. v. COA)
v. It is levied by the lawmaking body. The power to tax is

a legislative power which under the Constitution only Congress can
exercise through the enactment of tax statutes.
Taxes cannot be subject to compensation for the simple

reason that the government and the taxpayer are not creditors and
debtors of each other. There is a material distinction between a tax
and a debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign
capacity. (Philex Mining Corp. v. CIR)
Section 28. (1) The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation.
A person cannot refuse to pay a tax on the ground that the

government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a
lawsuit against the government. (Francia v. IAC)
A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-off,
which are construed uniformly, in the light of public policy, to
exclude the remedy in an action of any indebtedness of the state or
municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they
do not arise out of the contract or transaction sued on. The genereal
rule base on grounds of public policy is well settled that no set-off
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Sec. 28, Art. VI, 1987 Constitution:
(2) The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it
may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework of
the national development program of the Government.
(3) Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used
for religious, charitable, or educational purposes shall be exempt
from taxation.
(4) No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
vi. It is levied for a public purpose. Taxation involves, and

a tax constitutes, a charge or burden imposed to provide income for
public purposes the support of the government, the administration
of the law, or the payment of public expenses. For this reason,
revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private persons.
The term public purpose is not defined. Xxx Jurisprudence
states that public purpose should be given a broad interpretation. It
does not only pertain to those purposes which are traditionally
viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes
designed to promote social justice. Thus, public money may now be
used for the relocation of illegal settlers, low-cost housing and urban
or agrarian reform.
While the categories of what may constitute a public
purpose are continually expanding in light of the expansion of
government functions, the inherent requirement that taxes can only
be exacted for public purpose still stands. Public purpose is the heart
of a tax law. When a tax law is only a mask to exact funds from the
public when its true intent is to give undue benefit and advantage to
a private enterprise, that law will not satisfy the requirement of
public purpose. (Planters Products v. Fertiphil Corporation)
The concept of public use is no longer confined to the
traditional notion of use by the public, but held synonymous with
public interest, public benefit, public welfare and public
convenience. The discount privilege to which our senior citizens are
entitled is actually a benefit enjoyed by the general public to which
these citizens belong. The discounts given would have entered the
coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent
reduction in their total revenues is a forced subsidy corresponding
to the taking of private property for public use or benefit. (CIR v.
Central Luzon Drug Corp.)
Once it is conceded, as it must, that the protection and promotion of
the sugar industry is a matter of public concern, it follows that the
legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. (Lutz v.
Araneta)
vii. It is personal to the taxpayer.
c. Tax distinguished from other fees/charges
ii. Tax v. Toll
A debt is generally based on contract, express or implied,

while a tax is based on law;
A debt is assignable, while a tax cannot generally be
assigned;
A debt may be paid in kind, while a tax is generally payable
in money;
A debt may be the subject of set-off or compensation,
while a tax is generally not;
A person cannot be imprisoned for non-payment of debt
(except when it arises from a crime), while imprisonment
is a sanction for non-payment of tax (except poll tax);
4
A toll is a demand of proprietorship, while a tax is a

demand of sovereignty;
A toll is paid for the use of anothers property, while a tax
is paid for the support of the government;
The amount of toll depends upon the cost of construction
or maintenance of the public improvement used, while
there is generally no limit on the amount of tax that may
be imposed; and
A toll may be imposed by the government or private
individuals or entities, while a tax may be imposed only by
the government.
iii. Tax v. License Fee
License or permit fee is a charge imposed under the police

power for purposes of regulation.
It is imposed for regulation, while a tax is levied for
revenue;
Its amount should be limited to the necessary expenses of
inspection and regulation, while there is generally no limit
on the amount of tax that may be imposed;
It is imposed on the right to exercise a privilege, while a
tax is imposed also on persons and property; and
Failure to pay a license fee makes the act or business
illegal while failure to pay a tax does not necessarily make
the act or business illegal but may be a ground for
prosecution.
iv. Tax v. Special Assessment
i. Tax v. Debt
A debt is governed by the ordinary periods of prescription,

while a tax is governed by the special prescriptive periods
provided for in the Tax Code; and
A debt draws interest when it is so stipulated or when
there is default, while a tax does not draw interest except
only when delinquent.
A tax, however, like a debt, is a liability or obligation.
Special assessment is an enforced proportional

contribution from owners of lands especially or peculiarly
benefited by public improvements.
A special assessment is levied only on land;
It is not a personal liability of the person assessed, i.e., his
liability is limited only to the land involved;
It is based wholly on benefits (not necessity); and
It is exceptional both as to the time and place. A tax, on
the other hand, has general application.
v. Tax v. Penalty
Penalty is any sanction imposed as a punishment for

violation of law or acts deemed injurious. Thus, the
violation of tax laws may give rise to imposition of penalty.
A penalty is designed to regulate conduct, while a tax is
generally intended to raise revenue; and
A penalty may be imposed by the government or private
individuals or entities, while a tax may be imposed only by
government.
a. Fiscal Adequacy
Doctrine of Equitable Recoupment

It means that when the refund of a tax supposedly due to
the taxpayer has already been barred by prescription, and the said
taxpayer is assed with a tax at present, the two taxes may be set-off
with each other. This doctrine is not applicable in our jurisdiction.
C.
INHERENT POWERS OF THE STATE, distinctions
The sources of government revenue must be sufficient to

meet government expenditures and other public needs. This is
essential in order to avoid budgetary deficits and to minimize
foreign and local borrowings.
Fiscal adequacy, which is one of the characteristics of a
sound tax system, requires that sources of revenue must be
adequate to meet government expenditures and their variations.
(Chavez v. Ongpin)
b. Theoretical Justice or Equality
i. Taxation v. Police Power

As to Purpose. Taxation is levied for the purpose of raising
revenue; police power is exercised to promote public welfare
through regulations.
As to Amount of Exaction. In taxation there is no limit; in
police power, the exaction should only be such as to cover the cost
of regulation, issuance of the license or surveillance.
As to Benefits Received. In taxation, no special or direct
benefit is received by the taxpayer other than the fact that the
Government only secures to the citizen that general benefit
resulting from the protection of his person and property and welfare
of all. As to police power, however, while no direct benefits are
received, a healthy economic standard of society known as
damnum absque injuria is attained.
As to Non-Impairment of Contracts. In taxation, the nonimpairment of contracts rule subsist. In the exercise of police power,
however, this limitation does not apply.
As to Transfer of Property Rights. In taxation, taxes paid
become part of the public funds; in police power, no transfer, but
only restraint on the exercise, of property rights exists.
ii. Taxation v. Eminent Domain

As to Nature of the Power Exercised. Taxation is exercised
in order to raise public revenue; eminent domain or expropriation is
the taking of private property for public use.
As to Compensation Received. In taxation, payment of
taxes results in the general benefit of all citizens and inhabitants of a
State; in eminent domain, a direct benefit results in the form of just
compensation to the property owner.
As to Non-Impairment of Contracts. In taxation, a contract
may not be impaired; this is not so in eminent domain.
As to Persons Affected. Taxation applies to all persons,
property and excises that may be subject thereto; in eminent
domain, only a particular property is comprehended.
D.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM

5
A good tax system must be based on the taxpayers ability

to pay. This suggests that taxation must be progressive conformably
with the constitutional mandate that Congress shall evolve a
progressive system of taxation. (Sec. 28[1], Art. VI, 1987
Constitution) It holds that similarly situated taxpayers should pay
equal taxes, while those who have more should pay more.
c. Administrative Feasibility
It means that tax laws should be capable of convenient,
just and effective administration or enforcement at a reasonable
cost.
d. Economic Efficiency
The system or power of collecting taxes should not exceed
the amount of tax collected.
Additional Notes:
Annual filing of individual taxpayers is pursuant to Administrative
Feasibility principle
The Quarterly payment of corporate income tax returns is pursuant
to the sound principle of Fiscal Adequacy (enough and timely taxes
for governmental service use)
The legislative prerogative may prevail over principles of a sound tax
system because they do not affect the validity of a tax law; they can
only dictate what is SOUND but they are not required for a tax law
to be valid.
Exception:
If the law violates theoretical justice then the law may be rendered
null and void because it also violates the constitutional provision on
uniform and equitable laws.
E.
INHERENT AND CONSTITUTIONAL LIMITATIONS
a. Inherent Limitations So called because they proceed from

the very nature of the taxing power itself.
i. Public Purpose
One test of determining the public purpose in a tax is

whether the thing to be furthered by the appropriation of public
revenue is something which is the duty of the State, as a
government, to provide. Another test is whether the proceeds of the
tax will directly promote the welfare of the community in equal
measure.
There is no power to tax an object which is not within the
purposes for which governments are established. Such purpose also
includes the promotion of social justice because it is the duty of the
State to protect those less in life; thus fulfilling the public purpose
requirement.
The term public purpose is not defined. Xxx It does not
only pertain to those purposes which are traditionally viewed as
essentially governmental functions, such as building roads and
delivery of basic services, but also includes those purposes designed
to promote social justice. Thus, public money may now be used for
the relocation of illegal settlers, low-cost housing and urban or
agrarian reform. (Planters Products v. Fertiphil Corp.)
The test of the constitutionality of a statute requiring the
use of public funds is whether the statute is designed to promote
public interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might
incidentally serve the public. (Pascual v. Sec. of Public Works)
ii. Non Delegation of the Legislative Power to Tax
The power of taxation is exclusively legislative.
Consequently, the taxing power as a general rule may not be
delegated.
Exceptions:
1.
2.
3.
Delegation to the President. Under the Constitution,

Congress may expressly authorize the President to fix
within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national
development program of the Government. (Sec. 28[2], Art.
VI, 1987 Constitution)
a. Flexible Tariff Clause
b. Emergency Powers
Delegation to Local Governments. Each local government
unit shall have the power to create its own sources of
revenues and to levy taxes, fees and charges subject to
such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments. (Sec. 5, Art. X, 1987
Constitution)
Delegation to Administrative Agencies. Administrative
agencies like the BIR and Bureau of Customs may be
delegated with respect to administrative purposes that
is, only for tax collection.
Iii. Exemption of Government Entities
As a matter of public policy, property of the State and of

its municipal subdivisions devoted to government uses and purposes
is generally deemed to be exempt from taxation although no
6
express provision in the law is made therefor. Such exemption is

upheld as long as the said property is devoted to government uses
and purposes. Further, it may be said that it is absurd to tax entities
which is actually funded by the revenues raised through taxation.
GOCCs are exempted unless they are performing
proprietary functions in which case such income derived therefrom
should be properly subjected to tax.
Exempt Entities: PHIC, SSS, GSIS, PCSO
iv. International Comity
The property of a foreign state or government may not be
taxed by another under the principle of sovereign equality among
states by virtue of which one state cannot exercise its sovereign
powers over another.
v. Territorial Jurisdiction
However broad the power of taxation may be as to its
character and no matter how searching it is in its extent, such power
is necessarily limited only to persons, property or businesses within
its jurisdiction.
b. Constitutional Limitations
i. Due Process of Law
Sec. 1, Art. III of the Constitution provides in part that
(n)o person shall be deprived of life, liberty or property without due
process of law.
Substantive Requirement. The tax law should be valid;
should not be harsh, oppressive or confiscatory; must be for a public
purpose and imposed within territorial jurisdiction.
Procedural Requirement. This involves the compliance
with the fair and reasonable methods of procedure prescribed by
law. There must be no arbitrariness in assessment and collection
and that the taxpayer is entitled to right to notice and hearing.
ii. Equal Protection of Laws
All persons subject to legislation shall be treated alike
under like circumstances and conditions both in the privileges
conferred and obligations imposed.
The Constitution prohibits class legislation which
discriminates against some and favors others. As long as there are
rational or reasonable grounds for so doing, Congress may,
therefore, group the persons or properties to be taxed and it is
sufficient if all of the same class are subject to the same rate and
the tax is administered impartially upon them.
Classification to be valid must:
-
Rest on substantial distinctions

Germane to the purposes of the law
Not be limited to existing conditions only
Equally apply to all members of the same class
The State has the inherent power to select the subject of

taxation ad inequalities which result from the singling out of one
particular class for taxation or tax exemption infringe no
constitutional limitation. (Sison v. Ancheta)
An exemption of impairment by law is when a tax

exemption based on a contract is revoked by a later taxing statute.
Note that when the government is a party to the contract granting
exemption, it cannot be withdrawn without violating the nonimpairment clause.
iii. Rule of Uniformity and Equity in Taxation

Uniformity in taxation means that all taxable articles or
properties of the same class shall be taxed at the same rate. This
means that there must be equality in burden and not necessarily
equality in amount. It does not signify an intrinsic, but simply a
geographic, uniformity.
A tax is uniform when it operates with the same force and
effect in every place where the subject of it is found. It does not
signify an intrinsic but simply geographic uniformity. A levy of tax is
not unconstitutional because it is not intrinsically equal and uniform
in its operation. The uniformity rule does not prohibit classification
for purposes of taxation. (British American Tobacco v. Camacho)
Equity in taxation involves the application of the ability to
pay principle. The concept of equity in taxation requires that such
apportionment be more or less just in the light of the taxpayers
ability to shoulder the tax burden (usually measured in terms of the
size of wealth or property and income, gross or net) and, if
warranted, on the basis of the benefits he receives from the
government.
Taxation may be uniform but inequitable when the
amount of tax imposed is excessive or unreasonable.
To insure and enhance the equity objective, the
Constitution enjoins Congress to evolve a progressive system of
taxation. This means that tax laws shall place emphasis on direct
rather than indirect taxation, with ability to pay as the principal
criterion.
However, non-impairment may not be invoked in the case

of a public utility franchise grantee; the legislature can impair a
grantees franchise since a franchise is granted under the
Constitutional condition that it shall be subject to amendment,
alteration or repeal by Congress when the public interest so
requires. (See Sec. 11, Art. XII)
Thus in the case of PPI v. Chato, the SC said that since the
law granted the press a privilege, the law could take back the
privilege anytime without offense to the Constitution. The reason is
simple: by granting exemptions, the State does not forever waive
the exercise of its sovereign prerogative. Indeed, in withdrawing the
exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject.
In Tolentino v. Sec. of Finance, CREBA, one of the
petitioners, alleged that the imposition of the VAT on sales and
leases of real estate by virtue of contracts entered into prior to the
effectivity of the law would violate the non-impairment of contracts
rule. The Court ruled that it is not enough to say that the parties to a
contract cannot, through the exercise of prophetic discernment,
fetter the exercise of the taxing power of the State. For not only are
existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a basic postulate of
the legal order. The policy of protecting contracts against
impairment presupposes the maintenance of a government which
retains adequate authority to secure the peace and good order of
society.
v. Prohibition against imprisonment for non-payment of
On the basis of the foregoing discussions, it can safely be

said that while equal protection refers more to like treatment of
persons in like circumstances, uniformity and equity refers to the
proper relative treatment for tax purposes of persons in unlike
circumstances.
poll tax
Absolute or perfect equality or uniformity and equity is, of

course, hardly attainable, if not impossible. No system has ever been
devised which has produced perfect equality and uniformity of
taxation as between persons or corporations or different classes of
property and such a result cannot reasonably be expected. (First
Nat. Bank v. Holmes, 92 N.E. 893.) Approximation to it is all that can
be had.
A poll tax refers to a personal or capitation tax; it is a tax of

a fixed amount on individuals residing within a specified territory,
whether citizen or not, without regard to their property or
occupation. Applying the said provision, no one may be sent to
prison for failure to pay the community tax. One should not be
punished on account of his poverty.
iv.
Prohibition against impairment of obligation of
contracts
The above proceeds from the constitutional provision that
No law impairing the obligation of contracts shall be passed. (Sec.
10, Art. III)
The obligation of a contract is impaired when its terms or
conditions are changed by law or by a party without the consent of
the other, thereby weakening the position or rights of the latter.
This principle is based on the provision of the Constitution

that No person shall be imprisoned for debt or non-payment of a
poll tax. (Sec. 20, Art. III)
Under the LGC, the only penalty for delinquency is the

payment of a surcharge in the form of interest at the rate of 24% per
annum which shall be added to the unpaid amount, from the due
date until it is paid.
vi. Non-infringement of Religious Freedom
Sec. 5, Art. III of the Constitution provides that (n)o law
shall be made respecting an establishment of religion or prohibiting
the free exercise thereof. The free exercise and enjoyment of
religious profession and worship without discrimination or
preference shall forever be allowed. No religious test shall be
required for the exercise of civil or political rights.
The general rule is that activities simply, purely and for

propagation of faith are exempt, as well as sales of bibles and
religious articles not for purposes of profit by a non-stock, non-profit
organization. However, as an exception, the Constitution does not
prohibit the imposition of a generally applicable tax on the sale of
religious materials when done by proprietary institution.
A municipal license tax on the sale of bibles and religious
articles by a non-stock, non-profit missionary organization at a little
profit constitutes curtailment of religious freedom and worship
which is guaranteed by the Constitution. The license tax is actually in
the nature of a condition or permit for the exercise of the right.
(American Bible Society v. City of Manila)
vii.
Prohibition against appropriation for religious
purposes
Sec. 29(2) of Art. VI of the Constitution provides that (n)o
public money or property shall be appropriated, applied, paid, or
employed, directly or indirectly, for the use, benefit, or support of
any sect, church, denomination, sectarian institution, or system of
religion, or of any priest, preacher, minister or other religious
teacher or dignitary as such, except when such priest, preacher,
minister or dignitary is assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium.
The above limitation is based on the requirement that
taxes can only be levied for a public purpose. Note that what the
Constitution prohibits is the use of public money or property for the
benefit of any priest, etc. as such. When so employed in the armed
forces, any penal institution, or government orphanage or
leprosarium, they may receive their corresponding compensations
for services rendered in their non-religious capacity without
violating the constitutional prohibition.
viii. Exemption of religious, charitable and educational
entities, non-profit cemeteries, and churches from property
taxation
Sec. 28(3), Art. VI of the Constitution provides: Charitable
institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.
Note that the exemption covers only property taxes and
not other taxes. (LLadoc v. CIR) The test of exemption is the use of
the property and not ownership. Thus, a property leased by the
owner to another who uses it exclusively for religious purposes is
exempt from property tax but the owner is subject to income tax on
rents received. Likewise, that if a property, although actually owned
by a religious, charitable or educational institution, is actually used
for a non-exempt purpose, the exemption from tax vanishes.
The use of the word exclusively is synonymous to solely.
What is exempted is not the institution itself, those
exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious,
charitable and educational purposes. Portions of the land leased to
private entities as well as those parts of the hospital leased to
private individuals are not exempt from such taxes. On the other
hand, the portions of the land occupied by the hospital and portions
8
of the hospital used for its patients, whether paying or non-paying,

are exempt from real property taxes. (Lung Center of the Phils. v.
Quezon City)
ix. Origin of Appropriation, Revenue and Tariff Bills
Sec. 24, Art. VI of the Constitution provides that (a)ll
appropriation, revenue or tariff bills, bills authorizing the increase of
the public debt, bills of local application and private bills shall
originate exclusively in the House of Representatives but the Senate
may propose or concur with amendments.
In the Tolentino E-VAT case, the SC said that (A) bill
originating in the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the whole. At this point,
what is important to note is that, as a result of the Senate action, a
distinct bill may be produced. To insist that a revenue statute and
not only the bill which initiated the legislative process culminating in
the enactment of the law must be substantially be the same as the
House bill would be to deny the Senates power not only to only
concur with amendments but also to propose amendments. It
would be to violate the co-equality of legislative power of the two
houses of Congress and in fact make the House superior to the
Senate.
x. Exemption of Non-stock, non-profit educational
institutions from taxation
The exemption covers (1) income tax, (2) property tax, (3)
donors taxes, and (4) custom duties.
To be exempt from tax or duty, the revenue, assets,
property or donations must be used actually, directly and exclusively
for educational purposes. In the case of religious and charitable
entities and non-profit cemeteries, the exemption is limited to
property tax.
Congress is authorized to grant similar exemption to
proprietary (for profit) educational institutions subject to limitations
provided by law including restrictions on dividends and provisions
for reinvestment. The restrictions are designed to insure that the tax
exemption benefits are used for educational purposes.
Lands, buildings, and improvements actually, directly, and
exclusively used for educational purposes are exempt from property
tax whether the educational institution is proprietary or non-profit.
Canteens and bookstores inside schools are exempt from
income tax as long as it operates within the school and is primarily
used by the school even if it caters to outsiders.
xi. Concurrence by a majority of all the members of
Congress for the passage of a law granting tax exemption
The requirement is obviously intended to prevent
indiscriminate grant of tax exemptions. The phrase a majority of all
the members of the Congress means at least one-half plus one of
all the members thereof voting separately. Such rule also applies to
a law authorizing refund of a tax already collected.
xii. Power of the President to veto any particular item or
items in a revenue or tariff bill
As a general rule, under the Constitution, the President

may not veto a bill in part and approve it in part. The exception lies
in the case of revenue or tariff bills whereby the vetoed items shall
simply be not given effect.
xiii. Non-impairment of the jurisdiction of the Supreme
Court in tax cases
The Constitution prohibits Congress from taking away the
jurisdiction of the SC as the final arbiter of tax cases.
F.
DOUBLE TAXATION
2.
Credit Method the tax aid in the state of source is

credited against the tax levied in the state of residence
3.
Deduction Method the tax paid in the state of source is

allowed as deduction from taxable income in the state of
residence
G. EXEMPTION FROM TAXATION

a. Definition
Exemption from taxation is the grant of immunity to
particular persons or corporations or to persons or corporations of a
particular class from a tax which persons and corporations generally
within the same state or taxing district are obliged to pay.
a. Prohibited sense v. Broad sense

(1) In its strict sense (referred to as direct duplicate taxation
or direct double taxation), double taxation means
taxing twice,
by the same taxing authority,
within the same jurisdiction or taxing district,
for the same purpose
in the same year (or taxing period),
for some of the property in the territory.

Both taxes must be imposed on the same property or
subject matter.
(2) In its broad sense (referred to as indirect duplicate
taxation or indirect double taxation), double taxation is
taxation other than duplicate. It extends to all cases in
which there is a burden of two or more pecuniary
impositions. In other words, any of the elements in the
prohibited sense of double taxation is missing.
b. Concept applicable in this jurisdiction

There is no constitutional prohibition against double
taxation in the Philippines. It is something not favored but
nevertheless permissible. Such taxation should, whenever possible,
be avoided and prevented.
-
Doubts as to whether double taxation has been

imposed should be resolved in favor of the taxpayer.
The reason obviously is to avoid injustice or
unfairness.
When double taxation (in its narrow sense) occurs,
the taxpayer may seek relief under the uniformity
rule or the equal protection guarantee.
Tax Treaty as Mode of Eliminating Double Taxation

1.
Exemption Method the income or capital which is

taxable in the state of source or situs is exempted in the
state of residence, although in some instances it may be
taken into account in determining the rate of tax
applicable to the taxpayers remaining income or capital
(ex. Tax Sparing Credit Scheme)
It is an immunity or privilege; it is freedom from a financial

charge or burden to which others are subjected.
b. Nature of Exemption
(1) An exemption from taxation is a mere personal privilege of
the grantee. Thus, an exemption granted to a corporation
does not apply to its stockholders, the former being
considered as a legal entity with a personality separate and
distinct from the latter. Being personal in nature, a tax
exemption cannot be assigned or transferred by the person
to whom it is granted without the consent of the legislature.
(2) It is generally revocable by the government unless the
exemption is founded on a contract which is protected from
impairment. An exemption provided for in a franchise,
however, may be repealed or amended pursuant to the
Constitution.
(3) It implies a waiver on the part of the government of its right
to collect what otherwise would be due to it, and, in this
sense, is prejudicial thereto. Hence, it exists only by virtue of
an express grant and must be strictly construed.
(4) It is not necessarily discriminatory so long as the exemption
has a reasonable foundation or rational basis. Where,
however, no valid distinction exists, the exemption may be
challenged as violative of the equal protection guarantee or
the uniformity rule.
c. Nature of power to grant exemption

(1) National Government. Like the inherent power to tax, the
power to exempt from taxation is an attribute of sovereignty for the
power to prescribe who or what property shall be taxed implies the
power to prescribe who or what property shall not be taxed. Unless
restricted by the Constitution, the legislative power to exempt is as
broad as its power to tax.
(2) Local Governments. Municipal corporations, however, unlike
a sovereign state, are clothed with no inherent power to tax. Hence,
they have also no inherent power to exempt from taxation. But the
moment the power to impose particular tax is granted, they have
also the power to grant exemption therefrom unless forbidden by
some provision of the Constitution or law.
d. Grounds
(1) Contract. Tax exemption may be based on contract in
which case the public represented by the government is
supposed to receive a full equivalent therefor. Ordinarily, the
provisions of a contract of exemption from taxation are
contained in the charter of the corporation (law under which
is organized) to which the exemption is granted.
(2) Public Policy. It may be based on some ground of public
policy, such as, for example to encourage new and necessary
industries or to foster charitable and other benevolent
institutions. In this case, the government need not receive
any consideration in return for the tax exemption.
(3) Reciprocity. It may be created in a treaty on grounds of
reciprocity, or to lessen the rigors of international double or
multiple taxation which occurs where there are many taxing
jurisdictions.
e. Construction and Interpretation

i. General Rule
In the construction of tax statutes, exemptions are not
favored and are construed strictissimi juris against the taxpayer. An
exemption from the common burden cannot be permitted to exist
upon vague implication or inference.
Taxation is the rule and exemption is the exception.
Therefore, he who claims must be able to justify his claim or right
thereto, by a grant expressed in terms too plain to be mistaken and
too categorical to be misinterpreted.
ii. Exceptions
In the following cases, however, the exemption statutes
are liberally construed:
(1) When the law itself expressly provides for a liberal
construction;
(2) When the exemption is in favor of the government itself or
its agencies;
(3) When the exemption is in favor of religious, charitable and
educational institutions because the general rule is that
they are exempt from tax.
facto laws cannot be invoked. The constitutional prohibition applies

only to criminal or penal matters, and not to laws which concern civil
matters or proceedings generally, or which affect or regulate civil or
private rights.
b. Statutes imposing taxes are construed against the govt

No person or property is subject to taxation unless within
the terms or plain import of a taxing statute. In every case of doubt,
tax statutes are construed strictly against the government and
liberally in favor of the taxpayer.
The rule of strict construction as against the government is
not applicable where the language of the statute is plain and there is
no doubt as to the legislative intent. In such case, the words
employed are to be given their ordinary meaning.
c. Construction of Statute by Predecessors is not binding on the

Successors
The Secretary of Finance has the power to revoke, repeal
or abrogate the acts or previous rulings of his predecessors in office.
The reason for this is that the construction of the statute by those
administering it is not binding on their successors if thereafter the
latter becomes satisfied that a different construction should be
given. (Hilado v. Collector)
d. Tax statutes must be applied prospectively

i. General Rule
The general rule is that tax laws or amendments thereof
are prospective in operation. The reason is that the nature and
amount of the tax could not be foreseen and understood by the
taxpayer at the time of the transaction which the law seeks to tax
was completed.
ii. Exception
A statute may nevertheless operate retroactively provided
it is expressly declared or is clearly the legislative intent. As such,
increasing taxes on income already earned is not invalid.
iii. Exception to the Exception
H.
CONSTRUCTION OF TAX LAWS

a. Nature of Tax Laws
Tax laws are civil in nature. Not political. Hence, even

during the period of enemy occupation (such as, for instance, during
the Japanese occupation of the Philippines in World War II), tax laws
are continually enforced as they are deemed to be the laws of the
occupied territory and not of the occupying power.
Neither are tax laws penal in nature. Not being penal in
character, the rule in the Constitution against the passage of ex post
10
A tax law should be given retroactive application when it

would be harsh and oppressive, for in such case, the constitutional
limitation on due process would be violated. Where the increase is
made to apply to income earned long before the enactment of the
law, the proper tax of which has already been paid, such increase is
a violation of due process.
e. Publication
Not all sources of tax laws require publication as required
in Art. 2 of the Civil Code.
Interpretative regulations and those which are merely

internal in nature, i.e., those which regulate only the personnel of
the administrative agency and not the public, need not be published.
When an administrative agency renders an opinion by
means of a circular or memorandum it merely interprets a preexisting law and no publication is required for its validity. In one
case, a BIR Memorandum Circular was ruled as one which is only for
the internal administration of the BIR and not a regulation within the
contemplation of Sec. 245 of the Tax Code, and therefore, needs no
publication in the Official Gazette. (La Suerte Cigar v. CTA)
The term may be extended to include situations where a

person refrains from engaging in some activity or enjoying some
privilege in order to avoid the incidental taxation or to lower his tax
bracket for a taxable year. Thus, a man may change his residence to
avoid taxation or change the form of his property by putting his
money into non-taxable securities.
Where the tax evader breaks the law, the tax avoider
sidesteps it.
f. Special laws prevail over general laws

Tax laws are special laws. The tax code, as a special law,
prevails over a general law such as the Civil Code. But in case the
provisions of a special law are found to be deficient in a particular
situation, the Civil code shall apply. (See Art. 18, NCC)
I.
TAX EVASION v. TAX AVOIDANCE

a. Tax Evasion
Tax evasion is a term that connotes fraud thru the use of

pretenses and forbidden devices to lessen or defeat taxes. (Yutivo
Sons Hardware v. CTA)
It is the use by the taxpayer of illegal or fraudulent means
to defeat or lessen the payment of a tax. It is also known as tax
dodging. It is punishable by a law, subjecting the taxpayer to civil
and criminal liabilities.
Some tax evasion devices include the deliberate failure to
report taxable income or property and the deliberate reduction of
income that has been received.
Tax evasion connotes the integration of 3 factors:
-
The end to be achieved, i.e., payment of less than

that known by the taxpayer to be legally due, or in
paying no tax when it is shown that a tax is due;
An accompanying state of mind which is described as
being evil, in bad faith, willful or deliberate and not
accidental;
A course of action (or failure of action) which is
unlawful.
INTRODUCTION TO INCOME TAXATION
I.
Income Tax
Income tax is defined as a tax on all yearly profits arising

from property, professions, trades or offices, or as a tax on a
persons income, emoluments, profits and the like. Income tax is a
direct tax on actual or presumed income (gross or net) of a taxpayer
received, accrued, or realized during the taxable year.
II.
Income Tax Systems

1.
GLOBAL TAX SYSTEM

In a global tax system, all items of gross income,
deductions and personal and additional exemptions, if
any, are reported in one income tax return, and the
applicable tax rate is applied on the tax base.
This system treats indifferently the tax base and
generally treats in common all categories of taxable
income of the taxpayer without any distinction as to their
type or nature, and subjects them to a single set of
graduated or fixed tax rates.
All income from whatever source is recorded in
one return and only one rate is applied to the taxable
income.
Ex.:
Business Income
Passive Income
Compensation Income
Total Income
Less: Deductions
Taxable Income
Tax Rate
Tax
b. Tax Avoidance
Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length. (CIR v. The Estate of Toda)
Tax avoidance, often called tax planning or tax
minimization, is the use by the taxpayer of legally permissible
alternative tax rates or methods of assessing taxable property or
income, in order to avoid or reduce tax liability.
11
xx
xx
xx
xx
(xx)
xx
%
xx
Characteristics:
a.
Uniform corporation rule but with exceptions
b.
Not classified or categorized income
c.
Uniform tax rates

2.
Less: Deductions
Taxable Income
Tax Rate
Tax
SCHEDULAR TAX SYSTEM

Under the schedular tax system, different types
of incomes are subject to different sets of graduated or
flat income tax rates. The applicable tax rate(s) will depend
on the classification of the taxable income. A separate tax
return or computation is required for each type of income.
Each type of income is subjected to a different
rate and the taxpayer files different income tax returns.
Ex.:
3.
Passive Income
Tax Rate
Tax
xx
%
xx
Business Income
Tax Rate
Tax
xx
%
xx
Compensation Income
Tax Rate
Tax
xx
%
xx
*Some income are subject to global

tax system while some are schedular
tax system. (In short: mixed)
III.
Features of Income Tax

1.
In context, direct taxes are those that are

exacted from the very person who, it is intended or
desired, should pay them, they are impositions for which a
taxpayer is directly liable on the transaction or business he
is engaged in. (Silkair v. CIR)
On the other hand, indirect taxes are those that
are demanded, in the first instance, from, or are paid by,
one person in the expectation and intention that he can
shift the burden to someone else. Stated elsewise,
indirect taxes are taxes wherein the liability for the
payment of the tax falls on one person but the burden
thereof can be shifted or passed on to another person,
such as when the tax is imposed upon goods before
reaching the consumer who ultimately pays for it. When
the seller passes on the tax to his buyer, he, in effect,
shifts the tax burden, not the liability to pay it, to the
purchaser as part of the purchase price of goods sold or
services rendered. (Silkair v. CIR)
Under this system, the compensation income,

business or professional income, capital gain and passive
income not subject to final withholding income tax, and
other income are added together to arrive at the gross
income, and after deducting the sum of allowable
deductions from business or professional income, capital
gain, passive income and other income not subject to final
tax, in the case of corporations, as well as personal and
additional exemptions, in the case of individual taxpayers,
the taxable income (i.e., gross income less allowable
deductions and exemptions) is subjected to one set of
graduated tax rates (if an individual) or normal corporate
income tax rate (if a corporation). With respect to the
above incomes not subject to final withholding tax, the
computation of income tax is global.
Direct tax vis-a-vis indirect tax, the difference lies

in the liability to pay the tax and the burden to pay the tax.
Income tax is a progressive tax, since the tax
base increases as the tax rate increases (i.e. graduated
income tax rates 5-32%). It is founded on the ability to pay
principle and is consistent with the Constitutional
provision that Congress shall evolve a progressive system
of taxation. (See Sec 28*1+, Art. III, 1987 Constitution)
However, passive investment income subject to

final tax and capital gains from the sale or transfer of
shares of stocks of a domestic corporation and real
properties remain subject to different sets of tax rates and
covered by different tax returns. The schedular tax system
thus applies to the capital gains and passive income
subject to final tax at preferential tax rates.
is
applicable
in
On the other hand, in a regressive tax, fixed flat

rates are applied regardless of the ability to pay of
taxpayer or the lesser you earn the more your taxes. I.e.
Value Added Tax (VAT)].
PHILIPPINE
In the case of Tolentino vs. SOF, the SC said that
direct taxes are to be preferred and as much as possible,
indirect taxes should be minimized. Resort to indirect
taxes should be minimized but not avoided entirely
because it is difficult, if not impossible, to avoid them by
imposing such taxes according to the taxpayers ability to
pay.
Ex.:
12
Passive Income
Tax Rate
Tax
xx
%
xx
Business Income
Compensation Income
Total Income
xx
xx
xx
Direct Tax
The tax burden is borne by the income recipient
upon whom the tax is imposed. It is a tax demanded from
the very person who, it is intended or desired, should pay
it.
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM
This system
JURISDICTION.
(xx)
xx
%
xx
2.
Basis of Income Tax Imposition

Return of capital is not subject to income tax.

Thus, payment of loan principal is exempt from income
tax. Cost of sales of manufacturers and dealers of goods,
which represents return of capital, is not subject to income
tax.
Citizenship Principle
A citizen of the Philippines is subject to
Philippine income tax (a) on his worldwide income
from within and without the Philippines, if he resides
in the Philippines, or (b) only on his income from
sources within the Philippines, if he qualifies as a
nonresident citizen; hence, the income of a
nonresident citizen from sources outside the
Philippines shall be exempt from Philippine income
tax.
Residence Principle
An alien was subject to Philippine income tax on
his worldwide income because of his residence in the
Philippines. Thus, a resident alien is now liable to pay
Philippine income tax only on his income from
sources within the Philippines and is exempt from tax
on his income from sources outside the Philippines.
Source Principle
An alien is subject to Philippine income tax
because he derives income from sources within the
Philippines. Thus, a non-resident alien is liable to pay
Philippine income tax on his income from sources
within the Philippines, such as dividend, interest,
rent, or royalty, despite the fact that he has not set
foot in the Philippines.
3.
Self-assessment tax system is followed in the

Philippines. You have to file your tax return without need
of assessment from administrative agencies (i.e. BIR). You
are only assessed usually when there is suspicion that you
are understating your revenues or overstating your
deductions (consequently under-declaring your tax
liability)
IV.
Kinds of Individual Taxpayers
a.
CITIZENS
RC is a citizen of the Philippines residing therein
System of income taxation in the Philippines
NRC is a citizen of the Philippines who leaves

the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on
a permanent basis.
NRC is a citizen of the Philippines who works
and derives income abroad and whose employment
thereat requires him to be physically present abroad
most of the time during the taxable year (not less
than 183 days during the taxable year).
Origin of income taxation in the Philippines

The Philippine income tax law is a law of
American origin. Thus, the authoritative decision of the
American official charged with enforcing the U.S. Internal
Revenue Code has peculiar force and persuasive effect for
the Philippines. Great weight should be given to the
construction placed upon a revenue law, whose meaning
is doubtful, by the department charged with its execution.
5.
NRC is a citizen of the Philippines who has been

previously considered as non-resident citizen and
who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines
shall likewise be treated as a non-resident citizen for
the taxable year in which he arrives in the Philippines
with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
When is income taxable? (personal note ^^, )

Income, gain or profit is subject to income tax,
when the following requisites are present:
a.
There is income gain or profit;
b.
The income, gain or profit is received, accrued, or

realized during the taxable year; and
c.
The income, gain or profit is not exempt from income

tax.
13
Non-Resident Citizen (NRC)

NRC is a citizen of the Philippines who
established to the satisfaction of the CIR the fact of
his physical presence abroad with a definite intention
to reside therein.
The Philippines follows the semi-schedular or

semi-global system of income taxation, although certain
passive investment incomes and capital gains from sale of
capital assets, namely: (a) shares of stock of domestic
corporations; and (b) real property are subject to final
taxes at preferential tax rates.
4.
Resident Citizen (RC)
Overseas Contract Worker (OCW)

A citizen of the Philippines who is working and
deriving income from abroad by virtue of an
employment contract with an employer without the
Philippines (including a seaman who is a citizen of the
Philippines and who receives compensation as a
member of the compliment of a vessel engaged
exclusively in international trade).
b.
derived for each taxable year from all sources

within and without the Philippines be every
individual citizen of the Philippines residing
therein;
ALIENS
Resident Alien (RA) An alien who resides in the

Philippines on a more or less permanent basis (must
be actually present in the Philippines for more than
12 months from his arrival to the country).
Non-Resident Alien Engaged in Trade or Business in

the Philippines (NRA-ETB) An alien deriving income
in the Philippines and who stays therein for an
aggregate period of more than 180 days during any
calendar year.
Non-Resident Alien Not Engaged in Trade or Business

in the Philippines (NRA-NETB) An alien deriving
income in the Philippines and who stays therein for
an aggregate period of 180 days or less during any
calendar year.
(b) On the taxable income defined in Section 31

of this Code, other than income subject to tax
under Subsections (B), (C) and (D) of this Section,
within the Philippines by an individual citizen of
the Philippines who is residing outside of the
Philippines including overseas contract workers
referred to in Subsection(C) of Section 23 hereof;
and
(c) On the taxable income defined in Section 31
under Subsections (b), (C) and (D) of this Section,
within the Philippines by an individual alien who
is a resident of the Philippines.
[Section 25(A)(1), NIRC]
V.
(2) Rates of Tax on Taxable Income of Individuals The tax

shall be computed in accordance with and at the rates
established in the following schedule:
Taxability
Xxx
a.
Kind of Taxpayer, Source, Tax Base, Tax Rate

TAXPAYER
RC
NRC
OCW
RA
NRA-ETB
NRA-NETB
SOURCES OF
TAXABLE
INCOME
Within and
without
Within
Within
Within
Within
Within
TAX BASE
TAX RATE
Net Income
5% - 32&
Net Income
Net Income
Net Income
Net Income
Gross Income
5% - 32%
5% - 32%
5% - 32%
5% - 32%
25%
*Special Treatment:
- Resident citizens are the only taxpayers taxed for income
from sources within and without
- NRA-NETB are the only taxpayers subjected to a flat rate of
25% and tax base is gross income. The difference between net
income and gross income is that in gross income, deductions
and personal exemption are not yet availed of.
b.
Relevant NIRC provisions:
For married individuals, the husband and wife,

subject to the provision of Section 51 (D) hereof,
shall compute separately their individual income
tax based on their respective total taxable
income: Provided, That if any income cannot be
definitely attributed to or identified as income
exclusively earned or realized by either of the
spouses, the same shall be divided equally
between the spouses for the purpose of
determining their respective taxable income.
Provided, That minimum wage earners as defined
in Section 22 (HH) of this Code shall be exempt
from the payment of income tax on their taxable
income; Provided, further, That the holiday pay,
overtime pay, night shift differential pay and
hazard pay received by such minimum wage
earners shall likewise be exempt from income tax.
xxx.
SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the
Philippines. -
SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident
Alien of the Philippines.
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31
under Subsections (B), (C) and (D) of this Section,
14
(1) In General. - A nonresident alien individual engaged in

trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and
a resident alien individual, on taxable income received
from all sources within the Philippines. A nonresident alien
individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred
eighty (180) days during any calendar year shall be
deemed a 'nonresident alien doing business in the

Philippines'. Section 22 (G) of this Code notwithstanding.
1.
2.
3.
4.
5.
6.
Xxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. - There shall be levied, collected and paid for
each taxable year upon the entire income received from all sources
within the Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines as interest, cash
and/or property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other fixed
or determinable annual or periodic or casual gains, profits, and
income, and capital gains, a tax equal to twenty-five percent (25%)
of such income. Capital gains realized by a nonresident alien
individual not engaged in trade or business in the Philippines from
the sale of shares of stock in any domestic corporation and real
property shall be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.
c.
Gross Income vs. Net Income
Gross income means income, gain or profit subject to

tax. It includes compensation for personal and professional services,
business income, profits, and income derived from any source
whatever (whether legal or illegal), unless exempt from tax under
the Constitution, tax treaty or statute. In other words, gross income
is derived at without deducting expenses.
Net income means gross income less statutory
deductions and exemptions. It is referred to as taxable income.
Net income must be computed with respect to a fixed period. That
st
period is twelve months ending December 31 of every year, except
in the case of a corporation filing returns on a fiscal year basis, in
which case net income will be computed on the basis of such fiscal
year.
VI.
Resident Citizen
Non Resident Citizen
Resident Alien
Non Resident Alien Engaged in Trade or Business
Domestic Corporation
Resident Foreign Corporation
Graduated Income Tax
Section 28(1)(c), NIRC

TAXABLE INCOME
INCOME TAX
Not over P10,000
5%
Over P10,000 but not over

P30,000
P500+10% of the excess over

P10,000

P70,000
P2,500+15% of the excess over

P30,000

P140,000

P70,000

P250,000
22,500+25% of the excess over

P140,000

P500,000
50,000+30% of the excess over

P250,000
Over P500,000

P500,000
*Based on Ability to Pay Principle in that, the higher the taxable income, the
higher the tax rate
GROSS INCOME TAXATION

-
Not allowed deductions, no exemptions; tax base is

gross income
Applies to:
1.
2.
3.
4.
5.
6.
Non Resident alien not engaged in trade or business

(NRA- nETB) 25%
Regional Operations headquarters employees 15%
Offshore Banking Operations employees - 15%
Petroleum contractors and subcontractors 15%
Non-resident foreign corporation 30%
Special Non-resident foreign corporation
a. Distributor of cinematographic films 25%
b. Vessels chartered to Filipinos 4.5%
c. Aircraft, machinery and equipment 7.5%
NET INCOME TAXATION

-
Allows deductions and grants personal exemptions;

tax base is taxable income
Applies to:
15
EXAMPLE: how to get the tax base for one engaged in selling of
merchandise/goods?
Gross Sales
Cost of Goods Sold
Gross Income
Less:
Allowable Deductions/Operating Expense
Personal Exemptions
Net Income [taxable net income / basis (5-32%)]
VII.
200,000
100,000)
100,000
(40,000)
(50,000)
10,000
Income vs. Capital
The essential differences between capital and income are

as follows:
1.
Capital is a fund, while income is a flow;
2.
A fund of property existing at an instant of time is called

capital, while a flow of services rendered by that capital by
the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund
through a period of time is called income;
3.
Capital is wealth, while income is the service of wealth;
4.
Capital is the tree, while income is the fruit; labor is a tree,

income the fruit; property is a tree, income the fruit.
(Madrigal vs. Rafferty);
5.
Return of capital is not subject to income tax, while

income is subject to tax.
VIII.
Situs of Taxation
The source rules to determine whether the income shall

be treated as income from within or outside the Philippines can be
found in Section 42 of the 1997 Tax Code. Determining the situs or
incidence or place of taxation leads to the determination on
whether the income is taxable or not.
TYPE OF INCOME
Interest Income
Dividend Income from

Dividend Income from
Foreign Corporation
Service Income
Rent Income
Royalty Income
Gain on Sale of Real
Property
Gain on Sale of Personal

Property
16
SITUS
Residence of the Debtor
If the obligor or debtor is a
resident of the Philippines, the
interest income is treated as
income within the Philippines.
It does not matter whether
the loan agreement is signed
in the Philippines or abroad or
the loan proceeds will be used
in a project inside or outside
the country.
Income within
Income within, if 50% or more
of the GI of the FC for the
preceding 3 years prior to the
declaration of the dividend
was derived from sources
within the Philippines.
b. Income without, if less than
50% of the GI of the FC for the
preceding 3 years prior to the
declaration of the dividend
was derived from sources
within the Philippines
Place of Performance of the Service
If the service is performed in
the Philippines, the income is
treated as from sources within
the Philippines.
Location of Property
Place of use of intangible
Location of Real Property
If the real property sold is
located within the Philippines,
the gain is considered as
income from the Philippines
Purchase of personal property within
and its sale without the Philippines, or
purchase of personal property without
and its sale within the Philippines:
Any gain, profit or income
Gain
on
Sale
Domestic Shares
Stock
a.
of
of
shall be treated as derived

entirely from sources within
the country in which sold.
Accordingly, if the goods are
shipped in a foreign port
under Free-on-Board (FOB)
shipping point arrangement,
title to the goods is
transferred at the foreign port
and any gain from the sale of
such goods to a Philippine
importer shall be treated as
income from sources outside
the Philippines
Personal property produced (in whole
or in part) by the taxpayer within the
Philippines and sold without the
Philippines, or produced (in whole or in
part) by the taxpayer without and sold
within the Philippines:
Any gain, profit or income
shall be treated as derived
partly from sources within and
partly from sources without
the Philippines
Income within
Gain, profit or income is
treated as derived entirely
from sources within the
Philippines, regardless of
where the said shares are
sold. Thus, a NRA who owns
shares of stocks of a domestic
corporation acquired through
a foreign stock exchange is still
liable to the Philippine income
tax even if such shares are
sold also through a foreign
stock exchange.
Comprehensive Income Tax Situs doctrine that allows Phils. To

have jurisdiction on income abroad by residents
EXAMPLES:
1. INTEREST INCOME
Q: Mr. AAA (Non-Resident Citizen) lent money to Mr. BBB (resident
of Germany). Is the interest an income in the Phils? Taxable?
A: NO. Source of income is Germany (for interest income, situs of
taxation is the residence of the debtor)
Mr. AAA is the income earner (a Non-resident citizen). The source
of income is outside the Phils. NRC can only be taxed for income
within the Phils. Since situs of taxation is Germany, then such
interest income is not taxable in the Philippines.
Q: What if AAA is a Resident Citizen?
A: Then he is taxable. The income earner is a resident citizen and
thus, is taxed for income within and without the Philippines. Source
of income is Germany. Mr. X is taxed for worldwide income. Hence,

such interest income is taxable.
A: No. Only taxed for income within.

6. ROYALTY INCOME
2. DIVIDEND INCOME
Q: Shareholder of San Miguel, San Miguel now distributes
dividends to Mr. X (NRC), taxable?
A: YES. NRC is taxable for income within. Dividend income received
from San Miguel is an income within. Situs is within the Phils. Then
dividend income is taxable.
Q: Haruki Murakami (NRA-NETB) will now be receiving royalties for

the books sold in the Phils, will he be taxed for the royalties income
derived here?
A: YES, within. Situs is place of the intangibles (as in this case,
where he receives the royalties Phils.)
Another example is franchise.
Q: Mr. X (NRC) has shares in Coca Cola, will X be taxable for

dividends received?
A: First, determine if Coca Cola is domestic or not. It is foreign.
Hence, it is income without the Phils. Since Mr. X, being an NRC is
only taxed for income within, then the dividend from a foreign
corporation is not taxable in the Phils.
Q: if X is a Resident Citizen, will he be taxed for Coca Colas
dividend?
Q: Bos Coffee will expand in US, earnings there will now give
royalties to Bos in Phils. If owner is RC, will he be taxed for
royalties?
A: Yes. RC taxed for global income.
Q: if the owner is a Filipino Citizen residing in Canada for 185 days,
will he be taxed for US royalties?
A: YES. Taxable for income from all sources. GLOBAL.
A: NO. He is a now a Non Resident Citizen and only taxed for

income within.
3. DIVIDEND INCOME FROM FOREIGN CORPORATION
7. GAIN ON SALE OF REAL PROPERTY
Ex.: If Coca Cola declared dividends in 2011, for it to be considered

as income within, Gross Income from 2008, 2009, 2010 derived
from Phils should be 50% or more of the Global Income so that
majority of its income is derived from Phils. Hence, if it is less than
50%, it will not be considered as within but without.
Q: RC having properties abroad and sold it for a profit. Taxable?
Problem: Total Global Income of Coca Cola for the preceding 3

years prior to the declaration of dividends is 1B dollars; income
derived from Phils within that preceding 3 years is 501M. Income
within?
YES, because it is more than 50%.
4. SERVICE INCOME
Q: Mr. B (NRA-ETB) is a singer hired by Mr. X (NRC) in party held in
the Phils. Will Mr. B be taxed for income he receives for singing?
A: YES. Mr. B is the income earner; Since an NRA-ETB is taxed for
income within and the situs of service income is where B sang
which is in the Phils., then income from the singing is taxable.
Q: if he sang in Hong Kong, will he be subject to tax?
A; NO, because he is an NRA-ETB and performing the service
outside the Phils and we said NRA-ETB will be tax only for sources
within.
5. RENT INCOME
Q: Mr. X (RC) has properties in Australia and rents it out, will he be
taxed for such income?
A: Yes. Although situs is outside, he is a resident citizen. Hence, he
is taxed for income from within and without.
Q: if Mr. X (NRC, RA, NRA-ETB, NRA-NETB)?
17
A: YES. He is a RC.
Q: NRC having properties abroad and sold it for a profit. Taxable for
that profit?
A: NO. NRC will be tax only for sources derived within the Phils.
8. GAIN ON SALE OF PERSONAL PROPERTY where it was
purchased (location of sale)
Q: bought laptop in the US and sell it in Phils, RC will be tax?
A: YES. Doesnt matter, worldwide income.
Q: if NRC?
A: YES.
9. GAIN ON SALE OF PERSONAL PROPERTY
Q: bought laptop in the US and sold it in the Phils, RC will be tax?
A: YES. Doesnt matter, worldwide income.
Q: if NRC?
A: YES. Place of sale is in the Phils.
NOTE: You must analyze what kind of taxpayer he is and where
that income is derived.
CIR v. Callejo
President (German) asking for a refund because her alleged
income derived from abroad was withheld with tax. Shes saying
that since shes not a Resident Citizen, she should only be paying
taxes from source derived in the Phils. We said if its a service,

situs is where the service is performed. She said she performed
the service in Germany, why should the company withhold? I
should not pay tax! SC said, yes you are correct that if performed
outside, individuals other than RC will not be taxed as a rule. The
problem was that she could not prove that the services she
performed were indeed made in Germany. Court denied the
refund. Had she proven it, she should be entitled to the refund.
Why need to be proved?
right to the alleged gain and the absence of a

definite unconditional obligation to return or
repay that which would otherwise constitute a
gain. To collect a tax would give the government
an unjustified preference as to the part of the
money that rightfully and completely belongs to
the victim. The embezzlers title is void.
Requisites for income to be taxable:
a.
b.
Because tax refund is similar to tax exemptions (construed

strictissimi juris)
Situs based on:
a.
b.
c.
c.
Residence Resident Alien, Resident Foreign Corporation

Place Non-resident Alien, Non-resident Citizen, Nonresident Foreign Corporation
Nationality Resident Citizen, Domestic Corporation
There must be a gain or additional worth

The gain must be realized or received, actually or
constructively (recipient must have complete dominion)
The gain must not be excluded by law or treaty from
taxation
Increase in the value of the property is NOT RECOGNIZED as income,

this only constitutes an unrealized increase which becomes taxable
income only upon disposition and realization of gains. Same
situation as for stocks and stock dividends.
Additional Notes (Di-maampao)

Basis of taxation is the Partnership for the production providing
Protection and Proper Climate for production of income
Boac Doctrine (149 SCRA 395) offline international airline can still
be taxed even if it has no landing rights (because It is offline) since it
performed an activity here in the Phils. i.e. sale of travel documents
-
Flow of wealth happened in the Phils.

Enjoyed / gained protection from the State
South African Airways v. CIR (612 SCRA 665) offline international

airline but derived income from sale of transport documents here
IX.
it can be taxed as a Resident Foreign Corporation
Taxable Income
a.
Meaning
Taxable income means the pertinent items of
gross income specified in the Tax Code, less the
deductions and/or personal and additional exemptions, if
any, authorized for such types of income by the Tax Code
or other special laws. (Sec. 31, NIRC)
b.
All Sources Of Income (whether legal or illegal)
18
Wilcox Doctrine Embezzled money does not

constitute taxable income to the embezzler in
the year of embezzlement for the reason that
the money embezzled does not belong to the
embezzler.
James Doctrine Embezzled money is a taxable
income of the embezzler. The rule is founded on
the reason that the embezzler has no intention
of returning the money.
Claim of Right Doctrine A taxable gain is
conditioned upon the presence of a claim of
Assignment of income doctrine when one assigns to another

income to be received i.e. A assigns to B his salary for the month.
Both A and B will be taxable even if A din not actually receive the
salary. A constructively received the income because he was able to
assign it thus has complete control / dominion over it.
SEVERANCE TEST all transactions are completed and exchange
done
X.
Gross Income (Section 32, NIRC)

a.
Means all income from whatever source derived including

(but not limited to):
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
COMPENSATION for services (including fees,

commissions, and similar items);
GAINS derived from dealings in property;
INTEREST;
RENTS;
ROYALTIES;
DIVIDENDS;
ANNUITIES;
PRIZES and winnings;
PENSIONS;
PARTNERs distributive share of the gross income
of GPPs.
MEMORY TEASER: C.G.I.R.R.D.A.P.P.P.

*The enumeration is not exclusive
Special treatment:
a. Forgiveness of indebtedness subject to donors tax not
income tax since the debt is forgiven without you doing
something in return. It is an act of liberality.
However, if forgiveness of debt is due to the performance
of service, then it now becomes subject to income tax as
COMPENSATION INCOME.
Also, if a corporation forgives you debt and you are a

stockholder, it may be considered as dividend.
1. Compensation
2. Donation
3.
Capital
transaction
b.
Situation
Creditor Er
Debtor Ee
(for services
rendered)
Debtor
Compensation
in whatever
form taxable
compensation
income
Creditor
condones
obligation
out
of
liberality
Creditor
Corporation
Debtor
stockholder
(Creditor
cancels
obligation)
Donee
not
subject
to
donees tax or
income tax
As to SH, it
may amount
to
taxable
individual
dividend and
treated
as
dividend
income
not subject to final income tax, and other income as well as personal
and additional exemptions, if qualified, the graduated income tax
rates ranging from 5% to 32% are applied on the resulting net
taxable income to arrive at the income tax due and payable.
Creditor
Other
compensation
for
service
rendered
deductible
expense
Donor subject
to donors tax
Corporation
interest
on
capital which
is
NOT
a
deductible
expense
Nature same
as dividend
The basic types of income are:
Compensation income (or wages);
Gross income from business, trade and profession;
Passive income;
Capital gains; and
Other income
1. COMPENSATION INCOME (OR WAGES)

a.
Meaning
The terms compensation income and gross
compensation income refer to all income payments, in
money or in kind, arising from personal (not corporate)
services under an employer-employee relationship.
Recovery of amounts previously written off

Taxable if there was tax benefit in the period the write-off
was claimed.
If there was no tax benefit in the period it was claimed,
then it is not taxable. (Refer to detailed discussion in
recovery of tax / accounts written-off in a later topic
below)
Compensation income means all remuneration

for services performed by an Ee for his Er, including the
cash value of all remuneration paid in any medium other
than cash.
Existence of Er-Ee relationship is essential.
Test of taxable income right to receive income and NOT the actual
receipt thereof
Legal restriction interest income from a garnished bank account is
NOT taxable because you cannot withdraw it anytime. Interest
income should be recognized when it is credited to your account and
right to receive is unconditional, valid and not subject to any
restrictions meaning you can withdraw it any time.
Amounts constructively received but should be recognized as
income:
a.
b.
c.
Cash / Property Dividend

Share of partner from a General Professional Partnership
Share of net income after tax of a partner in a taxable
partnership
XI.
Basic Types/Characters of Income; Filing of
ITRs and Payment of Tax
In general, it is important to know the types of income
realized by the taxpayer, since the Philippines has adopted the semiglobal or semi-schedular tax system. Under this tax system,
compensation income, business and professional income, capital
gains and passive income not subject to final income tax, and other
incomer are added together to arrive at the amount of gross income
of an individual, and after deducting the allowable deductions from
business and professional income, capital gains and passive income
19
b.
Income Tax Return

It is a statement or declaration of the taxpayers
income and the allowable deductions for the taxable year.
c.
Filing of ITRs and Payment of Tax
WHO FILES THE ITRS?

= Resident Citizen
= NRA
= Resident Alien
= NRAETB
The State requires the Er to withhold the tax upon
payment of the compensation income, such that at the end of the
calendar year, the Ee needs only to file a tax return and no tax is
paid because his total withholding tax during the year is equal to his
income tax liability. Beginning 2002, qualified Ees need not file their
income tax returns and the Er must file a substituted return for its
Ees.
In other words, the tax code requires that Er should
withhold the taxes owing the Ee and that Er shall pay the taxes.
(substituted filing of ITR) This is so since it would be very
*Letter a refers to income subject to final withholding

tax. No need to file income tax return anymore since you
already filed final withholding tax return every month.
You already paid the taxes therefore, no need to file
Income Tax return at the end of the year.
inconvenient and inefficient is all the Ees will have to file and pay
their taxes individually.
THE FOLLOWING INDIVIDUALS SHALL NOT BE REQUIRED TO FILE
AN INCOME TAX RETURN:
(a) An individual whose gross income does not exceed his
total personal and additional exemptions for dependents.
Except: RC, NRC and RA deriving income from
business or practice of profession in the
Philippines regardless of amount [they are
required to file income tax returns because it is
easier for them to conceal their income unlike
employees / purely compensation earners]
*Total Personal [fixed at 50,000 per individual]
and additional [25,000 for every child]
exemption is equal to or greater than the gross
income
(d) A minimum wage earner or an individual who is

exempt from an income tax, pursuant to the provisions of
the Tax Code and other general or special laws. (Sec.
51[A,2]).
WHEN TO FILE?
The return shall be filed in triplicate, two (2) copies for the
Bank/BIR Office and one (1) copy for the taxpayer Except in cases
where the Commissioner otherwise permits, the return shall be filed
with:
1. An authorized agent bank (AAB),
2. Revenue District Officer (RDO),
3. Revenue Collection Agent or
4. Duly authorized Treasurer (of the city or
municipality in which such person has his legal
residence or principal place of business in the
Philippines), or
5. Office of the Commissioner of Internal Revenue (if
there be no legal residence or place of business in the
Philippines)
Ex.: Gross Income is 100,000 and you have 3

children. Total personal and additional
exemption is 125,000 (50k + 75k). Hence no
need to file a return.
(b) An individual with respect to pure compensation
income from sources within the Phils. where income tax
on which has been correctly withheld by employer. [single
employer and does not exceed 60k]
Except:
a. Individual deriving compensation concurrently
from two or more employers
b. Individual whose compensation income
exceeds Sixty thousand pesos (P60,000)
(c) Regardless of the amount of income, the following
individuals are not also required to file an ITR since the
final income tax imposed thereon is to be withheld by the
payor-corporation and/or person and paid to the BIR:
WHEN TO FILE?
The return, covering income of the preceding taxable year,
shall be filed on or before April 15 of each year (Sec. 51[C]) or in
meritorious cases, within the extension which may be granted by
the Commissioner of Internal Revenue. (Sec 53)
On or before April 15 means Jan 1 Apr 15. You cannot file at an
earlier date than Jan 1 since the taxpayer may still earn income.
d.
a.
b.
c.
d.
20
Individuals whose income consists solely of

royalties, interests, prizes, winnings, dividends, etc.
and share of an individual person in a (business)
partnership or association, joint venture, or
consortium taxable as corporation. (See Sec.
24[B]);
Aliens employed by regional or area headquarters
and regional operating headquarters of
multinational corporations with respect to
compensation income;
Aliens employed by offshore banking units with
respect to compensation income; and
Aliens employed by foreign service contractors and
subcontractors engaged in petroleum corporation
in the Philippines with respect to compensation
income.
Requisites of Taxability
1.
There must be services rendered under an Er-Ee

relationship;
Payment must be for the services rendered;
The compensation for services rendered must be
reasonable.
2.
3.
e.
Forms of Compensation Income

FORM
1. PROPERTY
BASIS
Fair market value (FMV) of the
property
*If there is a price stipulated,
it is the price stipulated that
will be followed in the
absence of contrary evidence
2. PROMISSORY NOTE OR
OTHER
EVIDENCE
OF
INDEBTEDNESS
a. If discounted, it is the fair

discounted value of the
promissory note.
b. If not discounted, it is the
face value of the promissory
note
3. STOCKS
Fair market value (FMV) of the

shares of stock
4.
CANCELLATION
OF
INDEBTEDNESS IN FAVOR OF
SERVICES RENDERED
Value of the debt
5. TAX LIABILITY OF THE EE

PAID
BY
THE
ER
IN
CONSIDERATION OF SERVICES
RENDERED
Amount of tax liability
6. PREMIUMS PAID BY THE

EMPLOYER ON THE LIFE
INSURANCE POLICY OF THE EE
If the beneficiaries designated

are the heirs of the Ee or his
family, THE PREMIUMS ARE
TAXABLE
COMPENSATION
INCOME.
8. Holiday and vacation expenses;

9. Educational assistance to the Ee or his dependents; and
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
These benefits are extended to SUPERVISORY and
MANAGERIAL EES. Whatever the supervisory or managerial Ees
received on top of his salary which are of monetary value and given
as an incidence of his employment, are taxable income.
It is the Er who shall pay the taxes (tax liability) in regards
to the managerial Ees fringe benefits. However, the burden still falls
on the said Ee since the same benefits form part of his taxable
income.
ARE BENEFITS GIVEN TO RANK AND FILE EMPLOYEES SUBJECT TO
FBT?
On the other hand, if the

beneficiary designated is the
Er himself, THE PREMIUMS
ARE
NOT
TAXABLE
COMPENSATION INCOME.
7. FRINGE BENEFITS
NO. Their salary is usually lower, therefore, any benefit

given to them by the employer is a social welfare consideration,
hence, no need to tax those benefits.
WHAT IS THE SIGNIFICANCE OF KNOWING THAT SUCH BENEFITS
ARE FRINGE BENEFITS OR NOT?
Usually, income is subject to 5% - 32% depending on the amount.
However, Fringe benefits are subject only a fixed rate of 32%.
WHAT ARE EXEMPT FRINGE BENEFITS?
The following fringe benefits are NOT TAXABLE:
f.
Fringe Benefits
FRINGE BENEFIT means any good, service or other benefit

furnished or granted in cash or in kind by an Er to an individual Ee
(except rank and file Ee) such as but not limited to the following
(Memory Teaser HEVHIMEHEL [HIM and ME thru HEVen and
HEL]) :
1.
2.
3.
4.
5.
6.
7.
Housing (i.e. as benefits given to expats);

Expense account;
Vehicle of any kind;
Household personnel, such as maid, driver and others;
Interest on loan at less than market rate to the extent of
the difference between the market rate and actual rate
granted;
Ex. If the supposed interest expense from a loan
was 100,000 but since you loaned from the
employer, you were given a lesser rate and now
only have to pay an interest of 70,000, then the
amount of the benefit is 30,000.
Membership fees, dues and other expenses borne by the
Er for the Ee in social and athletic clubs or other similar
organizations;
Expenses in foreign travel;
21
1.
2.
3.
4.
5.
6.
Contributions of the Er for the benefit of the Ee to

retirement, insurance and hospitalization benefit plans;
Benefits given to the rank and file Ees, whether granted
under a CBA or not; and
De minimis benefits as may be defined by the Secretary of
Finance;
Fringe benefits which are exempted from tax under special
laws;
Fringe benefit that is required by the nature of, or
necessary to the trade, business or profession of the Er;
and
Fringe benefit that is for the convenience and advantage
of the Er.
WHAT ARE THE REQUISITES OF THE CONVENIENCE OF THE

EMPLOYER RULE?
They must be furnished within the premises of the Er; and

The Ee is required to accept the same as a condition of
employment.
Exempt Housing Benefits (RR NO. 3 -98):
a.
b.
c.
Housing unit within premises of employer (for

the convenience of the employer
Housing given to members of Armed Forces
within access of military camp so that they may
be on call
Temporary housing unit - 3 months or less stay
Gifts during Christmas and major anniversary celebrations

not exceeding P5,000 per Ee per annum;
Flowers, fruits, books or similar items given to Ees
circumstances, e.g. on account of illness, marriage, birth of
a baby, etc.; and
Daily meal allowance for overtime work not exceeding
25% of the basic minimum wage.
Expense account must be substantiated and related to business

NOTE: The importance of de minimis benefits is that it is
not considered taxable fringe benefit. You should know
the limits because amounts in excess of the limits are
taxable while those within the limits are not
Exempt:
a.
b.
c.
Cost of economy or business class ticket

If first class ticket, exempt only up to 70%, 30% is
taxable
Daily allowance, exempt only up to 300 dollars
Educational assistance:
a.
b.
Exempt if given as a scholarship grant to the employee and

he must remain employed for a particular period of time
Exempt if given to the employees dependent as long as
such dependent passed a competitive exam and passed
the requirements
WHAT IS THE NATURE OF A FRINGE BENFIT TAX?

The fringe benefit tax is a final income tax imposed on the
managerial or supervisory Ee and withheld by the Er who files the
return and remits the tax withheld to the BIR within 25 days from
the close of each calendar quarter each calendar quarter.
HOW IS A FRINGE BENEFIT TAX COMPUTED?
Life insurance subject to FBT except:

a.
b.
c.
GSIS life insurance policy

SSS Life insurance policy
Group insurance policy
WHAT ARE DE MINIMIS BENEFITS?

DE MINIMIS BENEFITS are limited to facilities or privileges furnished
or offered by the Er to his Ees merely as a means of promoting
health, goodwill, contentment or efficiency of Ees.
WHAT ARE EXAMPLES OF DE MINIMIS BENEFITS?
Monetized unused vacation leave credits of Ees not

exceeding ten (10) days during the year and the monetized
value of leave credits paid to government officials and Ees
Medical cash allowance to dependents of Ees not
exceeding P750.00 per Ee per semester or P125.00 a
month
Rice subsidy of P1,500.00 or one (1) sack of 50kg rice per
month amounting to not more than P1,500
Uniforms and clothing allowance not exceeding P4,000 per
annum
Actual yearly medical benefits not exceeding P10,000 per
annum
Laundry allowance not exceeding P300 a month
Ees achievement awards, e.g. for length of service or
safety achievement, which must be in the form of tangible
personal property other than cash or gift certificate, with
an annual monetary value not exceeding P10,000 received
by the Ee under an established written plan which does
not discriminate in favor of highly paid Ees;
22
Get the Grossed-Up monetary value which is [Monetary

value of fringe benefit/68%].
Provided that:
1. If ownership of property is transferred to the Ee, the
net monetary value is the FMV of the property (as
determined by the BIR Commissioner [zonal] or as
determined by the Local Assessor, whichever is
higher.
2. If ownership of the property is not transferred to the
Ee, the net monetary value is the depreciation value
of the property.
Get the fringe benefit tax which is [GUMV x 32%]
Grossed-up Monetary Value is simply a figure meant to

represent the entire income earned by the employee. This includes
the net amount of money received, the net monetary value of any
property received, and the amount of FBT received by the employee
from the employer.
EXAMPLE:
You are given an expense account of P68,000. It is presumed
that the amount given to you is already net of the Fringe
Benefits Tax (FBT), hence, you still have to get the grossed-up
monetary value (GUMV) of the P68,000. GUMV is equal to
P100,000 (68,000 / 68%). To get the FBT, just multiply the GUMV
with 32% or simply deduct the amount received from the GUMV.
The FBT is 32,000 (100k 68k or 100k x 32%)
Why assume that the Monetary Value of 68,000 is net of tax
already?
Look at the ordinary salary of employees. You signed in the
contract the gross amount of salary but it is not the amount you
actually receive but an amount which is net of tax. Such that
whatever the employer gives to the managerial/supervisory
employees should also be presumed net of tax. Thats why you

still have to compute for the GUMV since the amount being
received by the employee is still the net amount.
Representation
(RATA)
and
Transportation
allowance
G.R. : RATA is taxable (private entity)

HOW IS 68% DERIVED AT?
- Not subject to income tax provided:
It is derived from subtracting from 100% the applicable
rates of income tax under Sec. 25 which is in this case, 32%. The
tax code assumes that when EE received the fringe benefit, it is
already net of tax.
a. they are liquidated (supported by official

receipts)
b. in the ordinary course of business
EXAMPLES:
Q: Employee X applying for ABC Company and ABC is offering, upon
being hired, free board and lodging within the premises of the
employer ABC. X was given an option whether or not to stay in the
place where he is offered free board and lodging. X chose to avail of
that benefit. Will the monetary value of that benefit be considered
as FBT?
A: There is an option whether to avail of that benefit or not. If you
look at the convenience of the employer rule, the 2nd condition is
no longer present because employee must be required to accept as
a condition for employment. In the example, it is only an option. Not
under convenience of the employer rule. Otherwise, it is treated as
exempt fringe benefit.
Now, you have to check if X is a managerial/supervisory employee or
rank and file. If managerial, taxable as Fringe benefit. If rank and file,
not taxable.
Personal Emergency relief Allowance
Additional Compensation Allowance
2. GROSS INCOME FROM BUSINESS, TRADE AND

PROFESSION
a.
b.
Why? Even if it did not fall under convenience of employer rule,

there is another exception: benefits given to rank and file
employees. [fringe benefits are those given exclusively to
supervisory and managerial employees]
TRADE/BUSINESS INCOME
Manufacturing concern
Merchandising
Services
PROFESSIONAL INCOME
-
Refers to the fees received by a professional in the

practice of his profession, provided that there is no
Er-Ee relationship between him and his clients.
If Er-Ee is present, it becomes COMPENSATION

INCOME. As a consequence, there shall be no
allowable deductions except for personal exemptions.
TREATMENT OF THE FOLLOWING:
Terminal leave NOT subject to income tax

c.
Commutation of leave credits, more commonly

known as terminal leave, is applied for by an officer or
employee who retires, resigns or is separated from the
service through no fault of his own. In the exercise of
sound personnel policy, the Government encourages
unused leaves to be accumulated. The Government
recognizes that for most public servants, retirement pay is
always less than generous if not meager and scrimpy. A
modest nest egg which the senior citizen may look forward
to is thus avoided. Terminal leave payments are given not
only at the same time but also for the same policy
considerations governing retirement benefits. (Borromeo
v. CSC GR No. 96032)
In fine, not being part of the gross salary or
income of a government official or employee but a
retirement benefit, terminal leave pay is NOT subject to
income tax. (CIR v. CA, G. R. No. 96016)
NOTE: Terminal leave pay is not taxable; it is a social
welfare consideration.
FILING OF ITRs AND PAYMENT OF TAX

-
See XI(1)(c) above (p. 8)
3. PASSIVE INCOME
PASSIVE INCOME is an income received on a regular
basis, with little effort required to maintain it. It is also the income
from "trade or business activities in which you do not materially
participate or Earnings from a business that does not require direct
involvement from the owner or merchant. [DM]
Passive income must be sourced in the Philippines.
RATIONALE: if the income is earned abroad, there will be no
withholding agent to speak of. If the payor is from abroad who is not
registered under our own tax revenue then we will not have any
hold ever him whether he will withhold or not.
i. Subject to final withholding tax
- do not include passive income in the income of your
business or profession or in your compensation income, because
23
when you receive this income, the final tax has already been
imposed and deducted.
What is final withholding tax (FWT)?
FWT is a kind of withholding tax which is prescribed only
for certain payors and is not creditable against the income tax due of
the payee for the taxable year. Income Tax withheld constitutes the
full and final payment of the Income Tax due from the payee on the
said income.
FWT is an amount of income withheld by the payor
(withholding agent) from the payee. The payor pays this amount to
the government as an income tax due from the payee. The payee
need not file an income tax return for that particularly income
anymore, since the payor already paid it on his behalf.
Ex. Interest you receive from your bank deposits is net of
final withholding tax. (FWT Rate is 20%) If your interest income was
supposedly P1,000 for the month, you would only receive P800
because the bank would withhold the P200 and pay it to
government on your behalf.
Note: Withholding of taxes is pursuant to the Lifeblood
doctrine
tax but the same must be

included in other income)
Winnings derived from
sources
within
the
Philippines (except PCSO &
Lotto)
Interest on Bank Deposit
Substitutes, Trust Funds,
and
other
similar
arrangements***
Interest
from
Foreign
Currency Deposit Units
Dividends received from a
Share of a partner in the NI
after tax of a taxable
partnership
Cash Reward to Informers
(Sec. 282, NIRC) 10% of tax
discovered or 1,000,000
whichever is lower
20%
20%
25%
20%
20%
25%
7.5% (N/A
to NRC)
10%
20%
25%
10%
20%
25%
10%
10%
10%
*** However, if the depositor is an EE trust fund or accredited retirement

plan, such interest income, yield or other monetary benefit is exempt from
FWT.
ii. Types:
1.
2.
3.
4.
5.
6.
Royalties (i.e. franchises, books, musical and

literary compositions)
Prizes
Winnings
Interest on bank deposits, deposit substitutes,
trust funds and other similar arrangements
Dividend received from domestic corporation,
mutual fund insurance company, regional
headquarters of multi-national corporation and
other corporations
Share of a partner in the net income after tax of
a taxable partnership, joint account, joint
venture or concessions
(note that this now involves a taxable
partnership as distinguished from a general
professional partnership in which the income
therein forms part of the gross income)
*** If the foreign currency deposit is with a bank located outside

the Philippines, the interest income is subjected to graduated income tax
rates.
*** Interest income on foreign currency deposits with a bank
located outside the Philippines by a NRC, alien individual and foreign
corporation is exempt from income tax.
iv. Problem Areas:

o Income tax treatment of royalties received by resident citizens
from sources without the Philippines
Not subject to final tax but subjected to the graduated
income tax rate as part of Gross Income
o Income tax treatment of prizes and winnings received by
resident citizens from sources without the Philippines
NOT subjected to final tax but subjected to the graduated
income tax rate as part of Gross Income.
iii. Rates
Royalties (i.e. franchise),

general
Royalties, specific items
only
Prizes
exceeding
Php10,000 (if it is 10,000 or
less, it NOT subject to final
24
RC, NRC,
RA
20%
NRA-ETB
10%
10%
(literary
works,
books and
musical
compositio
ns)
(literary
works,
books and
musical
compositio
ns)
20%
20%
20%
NRANETB
25%
25%
o Income tax treatment of tournament prizes won by local and

foreign players or participants
Cash prizes won by local players or participants in
tournaments shall form part of their gross income subject to
the graduated income tax rates. The same is not passive
income subject to final tax since the players or participants are
engaged in the exercise of their profession or occupation.
Note: Distinguish if the person who won acquires such as a
result of his profession/occupation or not. If it is a result of his
profession/occupation, then it is part of his professional
income or compensation income, otherwise, it is considered
passive income. Example: one who plays tennis as a profession
wins P100,000 from a sports tournament. Then the 100,000

will be part of his gross income subject to 5%-32% rate and not
considered a passive income subject to 20% FWT.
Those won by foreign players or participants shall be subject

to 30% final tax withheld, being considered as non-resident
aliens not engaged in trade or business in the Philippines.
Example: In a billiards tournament sponsored by San Miguel in
the Philippines, if Earl Strickland will win, his earnings will be
subject to 30% FWT.
v. Additional Notes
Any income or gain derived on which a final tax is imposed

shall no longer be included in the taxable net income of the
taxpayer. The final tax is imposed without any deduction. The
provisions on personal and additional exemptions are likewise
inapplicable.
Fringe Benefit is not a passive income since it is an incident of

employment.
If you are earning a royalty income in the habit or in the

ordinary course of extending franchises, then it becomes an
ordinary income which is already subject to 5-32% or if the
one earning interest is a bank or a financial institution, it is
subject to the ordinary rate of 5-32%. Here, the income is not
considered a passive income since passive income refers to
such income in which you do not materially participate and
not to those part of the ordinary course of your business.
b.
Amount over Php 100,000.00 -
10%
EXAMPLES:
If property bought at Php 100T (original price) and sold at

Php 200T (selling price), there is capital gain of Php 100T.
Apply 5% if share is not listed and traded through local
stock exchange.
If original price is at Php 100T and sold at Php 300T, there

is a capital gain of 200T.
Apply 5% to the 100T and 10% for the excess of such
amount, which is, in this case, 100T
If you have a capital gain of P120,000, your capital gains

tax (CGT) will be P7,000.
Not over 100,000
100,000 x 5% = 5,000
Amount over 100,000 20,000 x 10% =
2,000
7,000
Usually refers to close corporations not more than 20
shareholders.
ARE THESE RATES APPLICABLE TO ALL TYPES OF SHARES?
NO. The rates apply only to those NOT LISTED AND
TRADED THROUGH THE LOCAL STOCK EXCHANGE
SHARES OF STOCK LISTED AND TRADED THROUGH LOCAL STOCK
EXCHANGE:
Reason why prizes and winnings are part of passive income

because you are not in the in the habit of joining raffle draws
and making business out of it.
o EXEMPT from income tax (Sec. 24(c), NIRC) but subject to

stock transaction tax of of 1% (or 0.005%) of the Gross
Selling Price (GSP)
Dividends from Non-resident foreign corporation:
*When we say traded through the local stock exchange, it should

not be over the counter.
(Check example under situs of taxation)

Example:
Here it is based on GSP and not on the capital gain only.
Hence, if you own shares in Jollibee Foods Corp. valued at
P50,000 and you sold it for P100,000, your basis for the stock
transaction tax is the P100,000 and not the P50,000. You will
now pay a stock transaction tax of P500 (100,000 x .005).
4. CAPITAL GAINS
Two types:
a. Capital Gains on sale of shares of stock
b. Capital Gains on sale of real property (capital assets)
Requisites of Capital Gains Tax:
1.
2.
3.
Property must be a real asset;

Property must be a capital asset; and
Property must be located in the Philippines.
i. Sale of Shares of Stock

WHAT IS THE RATE OF CAPITAL GAINS TAX ON SALES OF SHARES
OF STOCK?
The capital gain is subjected to income tax under the
following rates (applies to ALL individual taxpayers):
a.
Not over Php 100,000.00

25
5%
WHAT IF THERE ARE SEVERAL TRANSACTIONS INVOLVED? SOME

RESULTING TO GAIN, SOME RESULTING TO LOSS; HOW DO WE
APPLY THE RATES?
The rate must be applied to the NET CAPITAL GAIN. In
other words, the losses and gains of each transaction must be
considered. Such that if in three transactions, the GROSS CAPITAL
GAIN is 300T and the GROSS CAPITAL LOSSES amount to 100T, the
NET CAPITAL GAIN IS 200T. Apply the rates as in the first set of
examples.
WHAT HAPPENS IF THE GROSS CAPITAL LOSSES EXCEED THE GROSS
CAPITAL GAIN?
Losses to be deducted from the gain should only be up to
the extent of the latter. Such that, the result is a ZERO NET CAPITAL
GAIN. It can never be reported as a loss, in which case the taxpayer

absorbs the loss and could not claim it as a deduction.
Ex. of Capital asset: Idle land not used for business; House not
used for business and does not fall under the exception below
EXAMPLE:
Also includes:
If you have gross capital gain of Php 200T and the gross
capital losses amount to Php 400T, the result is ZERO NET CAPITAL
GAIN. The taxpayer cannot report such as losses nor claim for it to
be deductible from taxable income.
a. Discounting of Accounts Receivable

b. Investment securities gain
c. Goodwill
Note that in obtaining the net capital gain, the losses

should be deducted from the gain, but the former should only be up
to the extent of the latter.
WHEN IS CAPITAL GAINS TAX PAID?
Example: You bought a land worth P300,000 in 2009. You sold it in

2011 for P800,000. The zonal value of the land is P1,000,000.
For the sale, you will pay CGT of P60,000 (1,000,000 x 6%).
30 days from date of transaction

Note: At the end of the taxable year, you are required to
file a final adjusted return for all your stock transactions to get your
net capital gain for the end of the year
ii. Sale of Real Property
Tax Rate:
NOTE: CGT on sale of capital asset is computed even if you incur a

loss in such sale
NOTE: This rate is applicable only for real property situated in the
Philippines (sec. 24(D), NIRC).
-
Conditions:
With respect to sales of real property outside the

Philippines, the graduated income tax rate (5% to 32%)
shall apply for individuals and the normal corporate tax
rate of 30% for corporations.
It must be considered as a CAPITAL ASSET.

Capital assets means property held by the taxpayer
whether or not connected with his trade or business but does not
include:
1. Stock in trade of the taxpayer or other property of a kind in
which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year; or
2. Property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business; or
3. Property used in trade or business, of a character which is
subject to the allowance for depreciation [ex. Sales
warehouse]; or
4. Real property used in trade or business of the taxpayer [ex.
Printing press]
Note: The definition of capital assets is residual. Meaning all
assets other than those mentioned above are considered as
capital assets.
Memory aid - SOUR:
6% of the Gross Selling Price or Zonal Value (as

determined by the BIR), whichever is higher
Exceptions
o If the sale is made to the government or any of its political

subdivisions, or agencies or to GOCCs, the taxpayer has the
option to choose from the ff.:
-
Final tax of 6% based on GSP; or

Graduated Income Tax Rates under Section 24(a)
based on taxable NET income.
o Sale or dispositions of principal RESIDENCE of natural persons

-
EXEMPT under certain conditions:
1. Proceeds are fully utilized in acquiring or construction

a new principal residence within 18 months from the
date of sale or disposition;
2. Historical Cost or Adjustment Basis of the real property
sold or disposed shall be carried over to the new
principal residence built or acquired;
a. Stock in trade / inventoriable asset
3. Notice to the CIR shall be given within 30 days from

the date of sale or disposition; and
b. Ordinary property primarily held for sale
4. Exemption can be availed of once every 10 years.
c. Used in business - depreciable asset
d. Real Property used in business
If the proceeds of the sale were not fully utilized, the

portion of the gain presumed to have been realized
from the sale or disposition shall be subject to CAPITAL
GAINS TAX.
(Assets under 1 to 4 are known as ordinary assets)

26
TAXABLE PORTION =
GSP or FMV, whichever is higher x
[Unutilized Proceeds/GSP]
Any income earned from all other sources within the Philippines
shall be subject to pertinent income tax, as the case may be,
imposed under the NIRC
Example: You sold your family home in Cebu for P1,000,000

because you want to build a new house in Mandaue. For the
amount not to be subjected to CGT, the above conditions (1 to
4) shall be met. Note that if the newly constructed house will
only require P800,000, you will have to pay CGT of P12,000
(for the unutilized portion of 200,000 x 6%).
EXCLUSIONS FROM GROSS INCOME
Sale of ORDINARY GAINS

-
Shall be reported as part of ordinary income (part of

Gross Income) and subjected to graduated income tax
rates (5% to 32%).
So if the property you sold is an ordinary asset and
not a capital asset, then the gain from such sale is
considered an ordinary gain not subjected to CGT but
forms part of your gross income.
5. OTHER INCOME
1.
2.
3.
4.
Rent Income other than Royalties

Interest Income other than interest Income on bank
deposit
Dividend Income
Income from other sources
a. Bad debts recovered
b. Illegal gains derived from gambling
c. Tax refunds
d. Compensation for private property expropriated
by the government for public use
e. Damages
f. Cancellation of indebtedness
Addendum:
15% on the Gross Income
a.
Legal Basis
See Section 32(B), NIRC
b.
Nature
i. Smart vs. City of Davao (G.R. No. 155491, September 16,

2008)
An exclusion is, thus, also an immunity or privilege which
frees a taxpayer from a charge to which others are subjected.
Consequently, the rule that a tax exemption should be applied
in strictissimi juris against the taxpayer and liberally in favor of
the government applies equally to tax exclusions.
ii. Commissioner v. Mitsubishi (181 SCRA 214)
The exclusions are in the nature of tax exemptions, and it
behooves the taxpayer to establish them convincingly.
c.
Rationale
Some receipts are excluded from gross income because

they are not income. Even if they are definitionally income, the
exclusions are not subject to tax because of policy
considerations such as to avoid the effects of double taxation,
or to provide incentives for certain socially desirable activities.
Exclusion vs. Deduction
While they may differ in the definition, the effect is the

same both reduce the actual gross income, both
contemplates a removal of an object of income from computing
the totality of taxable income.
15% on the Gross Income

15%
on
salaries,
wages,
annuities,
compensation,
remuneration,
and
other
emoluments, such as honoraria
and allowances, received from
such
contractors
or
subcontractors
NOTE:
The same tax treatment shall apply to Filipino employees occupying
the same position as an alien employed in the following abovementioned MNCs (Multi National Corporations).
27
PRELIMINARY CONSIDERATIONS EXCLUSIONS
d.
Preferential Tax Rates to Certain NRA-BETB:

Aliens employed by regional or
are headquarters of MNCs
Aliens employed by offshore
banking units
Aliens employed by petroleum
service
contractors
and
subcontractors
I.
But for purposes of academic discussion, the differences

lie in the following:
EXCLUSION
DEDUCTION
Pertains to the computation

of Gross Income
Pertain to computation of Net

Income
Something received or earned

by the taxpayer which do not
form part of gross income
Something spent or paid in

earning gross income.
Flow of wealth to the

taxpayer which are not
treated as part of gross
The amounts which the law

allows to be subtracted from
gross income in order to arrive at
income for purposes of

computing the taxpayers
taxable income due to the
following reasons:
II.
a.
It is exempted by the
fundamental law;
b.
It is exempted by a
statute; and
c.
It does not fall within

the definition of
income.
Agricultural
multi-purpose
cooperative
registered with the Cooperative Development Authority
is exempt from ordinary income tax on its transactions
with members and non-members for a period of ten
years from the date of registration. Thereafter, the
income tax exemption shall be limited to business
transactions with members only.
net income
Note that deductions are outflow
of income since they represent
money spent or the taxpayers
expenses.
2. RA 7279 (Urban Development Housing Act of 1992)

The National Housing Authority is exempt from
all fees and charges of any kind, whether local or national
such as income and realty taxes, while the private sector
participating in socialized housing shall be exempt from
the following taxes:
a. Project-related corporate or individual income
taxes on income directly realized from the development
and/or improvement of socialized housing sites, slum
areas, resettlement areas, and/or construction and sale
of socialized housing units to qualified beneficiaries as
approved by the HLURB or LGU concerned. The
exemption shall be issued by the BIR on a per project
basis, and separate books of account shall be kept by the
contractor, developer, owner or seller of socialized
housing units.
Exclusions from Gross Income, In General
Reasons for granting Exclusions from Gross Income

a. Items representing return of capital
b. Items subjected to another internal revenue tax
To minimize the effect of double taxation,
certain flow of income is being removed from the gross
income.
b. Capital gains tax on sale of raw lands for use in

socialized housing project
Example:
3. RA 7653 (New Central Bank Act)
If a taxpayer receives a donation, he need not declare such

as part of his taxable income. Remember that the same
donation had already been taxed in the nature of a donors
tax.
The BSP is exempt from all national, provincial,

municipal and city taxes for a period of five years. It is
exempt from documentary stamp tax under RA 9243
(2003).
4. RA 7916 (PEZA Law)
c. Items expressly exempt from income tax
PEZA-registered enterprises are given income tax

holidays of six or four years from the date of commercial
operation, depending on whether their activities are
consider as pioneer or non-pioneer.
i. Under the Constitution

1. Sec 4(3), Art. XIV, 1987 Constitution
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by
law.
5. RA 9178 (Barangay Micro Business Enterprise Act of

2002)
Barangay Micro Business Enterprise shall be
exempt from income tax for income arising from the
operation of the enterprise. BMBE refers to any business
entity or enterprise engaged in the production,
processing or manufacturing of products or commodities,
including agro-processing, trading and services, whose
total assets including those arising from loans but
exclusive of the land on which the particular business
entitys office plant and equipment are situated, shall not
be more than P3 million.
Proprietary educational institutions, including

those cooperatively owned, may likewise be entitled to
such exemptions, subject to the limitations provided by
law, including restrictions on dividends and provisions for
reinvestment.
ii. Under a Tax Treaty
iii. Under Special Laws
III.
Exclusions from Gross Income Under the NIRC
1. RA 6938 (Cooperative Code of the Philippines)
1. Life Insurance proceeds

28
Proceeds of life insurance policies, paid by reason of the

death of an insured to his estate or to any beneficiary (individual,
partnership, or corporation, but not a transferee for a valuable
consideration), directly or in trust, are excluded from the gross
income of the beneficiary. It is immaterial whether the proceeds are
received in a single sum or in installments.
ii. Conditions for exclusion
1.
2.
3.
Paid to heirs or beneficiaries

Paid upon the death of the insured
Paid in a single sum or in installments.
2. Amounts received by the insured as a return of

premiums paid under life insurance endowment or
annuity contracts
The premiums paid are return of capital. If the premiums
paid gain interest, the excess of such premiums shall form part of
taxable gross income.
ii. Conditions for Exclusion (Section 32[B][2]; NIRC)
iii. Reason for Exclusion
1.
2.
3.
Sec. 62, RR No. 2: Proceeds of life insurance are excluded from gross
income because they partake more of indemnity or compensation
rather than gain to the recipient.
4.
iv. Treatment of Interest

1. If proceeds are held by insurer under an agreement to pay
interest thereon, the interest payments must be included
in income. The interest income shall be taxed at the
graduated income tax rates.
2. Interests do not form part of the indemnity but are
earnings or income from use of capital (the insurance
proceeds which were not taken) which are taxable.
Received by the Insured

As a return of premiums paid by him
Under life insurance, endowment or annuity of
contracts
Either:
a. During the term
b. At maturity of the term mentioned in the
contract or
c. Upon surrender of the contract

-
Premiums paid are return of capital
iii. Treatment of Interest

-
Taxable
v. Effect of Revocability or Irrevocability of Beneficiary

- No effect (Sec. 85 [E] NIRC) [it is immaterial
3. Gifts, Bequests, Devises, Descent

-
vi. Life insurance proceeds that are to be included in Gross income

1.
Where the life insurance policy is used to secure a money

obligation
-
2.
IF DEBTOR INSURES HIS LIFE AND DESIGNATES

CREDITOR AS BENEFICIARY TO ENSURE
PAYMENT OF OBLIGATION The proceeds
should NOT be included in the taxable income of
creditor. But only to the extent of satisfying the
monetary obligation. In this case, there is only a
RETURN OF CAPITAL. If proceeds exceed that of
the obligation, only the excess is subjected to
tax.
Where the life insurance policy was transferred for a
valuable consideration.
a. Sec. 62, RR No. 2
In case of a transfer for a valuable consideration, by
assignment or otherwise, of a life insurance,
endowment or annuity contract or any interest
therein, only the actual value of such consideration
and the amount of the premiums and other sums
subsequently paid by the transferee shall be taxexempt.
gifts (donation), bequests (same as legacy personal

property through a will), devises (real property
through a will)
ii. Taxability:
1.
Not subjected to INCOME TAX if the payments/transfers of

property were made to show goodwill or kindness towards
the recipients (act of liberality). The gift is, however,
subjected to transfer tax. (ie. Donors tax, Estate tax)
2.
Subjected to INCOME TAX if the payments/transfers of

property were made as a recompense of services rendered
in the past, present or future (would tantamount to
compensation income).
3.
Pirovano v. CIR (G.R. No. L-19365, July 31, 1965)

A company was made beneficiary of insurance proceeds.
Proceeds were later assigned to heirs of the insured. SC
said that there was already a donation of the proceeds.
Had the company received the proceeds, it wouldve been
excluded from taxable income since the proceeds are
merely indemnification for a loss sustained. But since the
rights to the proceeds were assigned, the transfer from
company to heirs should be subjected to tax since what
transpired was donation.
From Vitug: If the amount received is on account of services

rendered, whether constituting a demandable debt or not (such as
29
remuneratory donations) or the use or opportunity to uses of

capital, the receipt is income.
4. Compensation or amounts of damage received for

personal injuries or sickness
This includes amounts received through accidents or
health insurance or under workmens compensation acts, as
compensation for personal injuries or sickness, plus the amounts of
any damages received, whether by suit or agreement, on account of
such injuries or sickness.
PAYMENT FOR DAMAGED PROPERTY Included! Taxable!

The damages excluded are only those which are personal
to the taxpayer.
5. Income exempt under treaty

Income of any kind, to the extent required by any treaty
obligation upon the Government of the Philippines, is exempt from
income tax.
Example:
1. Interest income from foreign currency loan
extended by Asian Finance and Investment
Corporation of Singapore is exempt from the 20%
final withholding tax under the tax treaty.
ii. Sources:
a. compensation paid by virtue of suit
2. Treaty of Vienna accords diplomatic privileges to

ambassadors of other countries such as tax
exemptions on their incomes, as well as, courtesies
of the port exempting their importation of
household and personal effects.
b. paid by virtue of health insurance, accident insurance or

Workmens compensation act
-
Amounts received are designed to compensate

the claimant for the actual injury suffered and not to
impose a penalty on the wrongdoer. The award is not
meant to enrich the complainant at the expense of
the defendant, but to enable the injured party to
obtain means, diversion or amusement that will serve
to obviate the moral suffering he has undergone.
(compensatory in nature)
Lucrum cessans (damages or compensation or

consideration recovered for loss of profit) in loss or
damage to property (not for death or injury) is taxable
income.
a.
Thus, damages paid for loss of income during the

period of victims treatment or recuperation shall be
excluded from gross income.
b.
Employer giving to employee-victim the cash

equivalent of earned vacation or sick leave credits is
subject
to income tax except the money
equivalent of ten days unutilized vacation leave
credits. Amounts of
vacation allowances or sick
leave credits which are paid to an employee
constitutes compensation (sec. 2.78[A][7], RR 2-98, as
amended by RR 10-2000 de minimis benefit)
Example:
Taxpayer X figured in an accident whereby he suffered
injuries. To avoid litigation, he was paid the following:
HOSPITAL EXPENSES excluded, not taxable
LOST SALARY FOR DURATION OF HOSPITALIZATION
excluded, not taxable
MORAL DAMAGES excluded, not taxable
30
Principle of Reciprocity and Comity among Nations.
6. Retirement Benefits, Gratuities, Pensions, Etc.

i. Rationale
-
iv. Exception
-
ii. Reason for Exclusion:
Social Welfare Consideration
ii. Items for Exclusion

1. Retirement benefits under RA 7641 or under a reasonable
private benefit plan
2. Separation Pay (due to death, sickness or other physical
disability or for any cause beyond the control of the said
official or employee) also includes terminal leave pays
-
this exemption holds regardless of the employees

age and length of service and unlike the rule on
retirement, it does not require that the exclusion be
enjoyed only once
3. Social Security benefits; retirement gratuities, pensions and

other similar benefits received by resident or non-resident
citizens or resident aliens from foreign institutions, whether
public or private.
4. US veterans benefits of persons residing in the Phils.
5. Benefits received from or enjoyed under the SSS
6. Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government
officials and employees
Recipient: Private employees or official of such private firm
iii. Conditions for Exclusion
a.
The private employer or official must be at least 50

years of age at the time of his retirement;
b.
He must have rendered at least 10 years of service to

the employer at the time of his retirement;
c.
There must be a reasonable private benefit plan

established by the employer;
d.
The reasonable private benefit plan must be approved

by the BIR;
e.
Reasonable private benefit plan must be in a nature of a

pension plan, profit-sharing plan, stock bonus plan or
gratuity;
f.
The employer must give the contributions and no

amount shall inure to the benefit of a particular
employee or official. This must be established for the
common benefit of the employees or officials; and
g.
Conditions:
d.
e.
(i) Benefits received by officials and employees of

the national and local government pursuant to Republic
Act No. 6686 (Annual Christmas Bonus);
(ii) Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
th
Memorandum Order No. 28, dated August 13, 1986 (13
Month Pay Law);
(iii) Benefits received by officials and employees
not covered by Presidential decree No. 851, as amended
by Memorandum Order No. 28, dated August 13, 1986;
and
a.
Income of foreign governments - Income derived from
investments in the Philippines in loans, stocks, bonds or other
domestic securities or from interest on deposits in banks in the
Philippines by:
b.
Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility or from the
exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision
thereof.
c.
Prizes and Awards in recognition of religious and
charitable accomplishments
31
th
13 month pay and other gross benefit
Sec 32(b)(7)(e) - Gross benefits received by officials and

employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph
shall not exceed Thirty thousand pesos (P30,000) which
shall cover:
7. Miscellaneous Items
institutions
Prizes and awards for sports competitions
th
*Interest earned and other income of the pension trust is, likewise
exempted from income tax (CIR v. CA GR No. 95022)
International or regional financial

established by foreign governments.
The recipient is NOT required to render substantial

future services as a condition to receiving prize or
award.
13 month pay and other gross benefits

received by officials and employees of public and private
entities, to the extent of P30, 000.
From Vitug: Reasonable private benefit plan means a pension,

gratuity, stock bonus or profit sharing plan maintained by an
employer for officials and employees, wherein contributions are
made by such employer for officials and employees, or both, for the
purpose of distributing to such officials and employees the earnings
and principal of the fund thus accumulated, and wherein it is
provided in said plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said officials and employees
(the income of the trust itself may be exempt under the conditions
expressed in Sec. 60 NIRC)
In the Phils. the National Sport Association is the

Philippine Olympic Committee
NOTE: If the second employer is the government EXEMPT
Foreign governments;
Financing institutions owned, controlled or enjoying
refinancing from foreign governments;
The recipient was selected without any action on his

part to enter the contest or proceeding; and
All prizes and awards granted to athletes in local

and international sports, competitions and tournaments
whether held in the Philippines or abroad and sanctioned
by their national sports associations.
This can be availed of only once. The subsequent

retirement benefits received from another private
employer is no longer exempt but subject to tax.
(iv) Other benefits such as productivity incentives

and Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased through
rules and regulations issued by the Secretary of Finance,
upon recommendation of the Commissioner, after
considering among others, the effect on the same of the
inflation rate at the end of the taxable year.
f.
GSIS, SSS, Medicare and Pag-ibig Contributions

GSIS, SSS, Medicare and PAG-IBIG Contributions
and union dues of individuals.
g.
Gains realized from the sale or exchange or retirement of
bonds
Gains realized from the sale or exchange or
retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than 5 years.
ii. Treatment of Interest

not exempted
II.
iii. Nippon Life Insurance Co. of the Philippines Inc. v. CIR

(G.R. No. 159612, Nov. 19 2003)
Recently, the Supreme Court declared that the
tax exemption on long-term gains realized from the
exchange or retirement of banks, debentures and other
Certificate of Indebtedness under the provision of law
does not include interest earned on these transactions.
h.
Gains realized by the investor upon redemption of shares
of stock in a mutual fund company as defined in Section 22 (BB)
or RA 8424.
(BB) The term 'mutual fund company' shall mean an openend and close-end investment company as defined under
the Investment Company Act
DEDUCTIONS vs. EXEMPTIONS
PERSONAL EXPEMPTIONS are arbitrary amounts allowed for

personal, living or family expenses of the taxpayer. The amount has
been calculated to roughly equivalent to the minimum of
subsistence.
ALLOWABLE
DEDUCTIONS
EXEMPTIONS
As to amount
Refer
to
actual
expenses incurred in
the pursuit of trade,
business or practice
of profession
Arbitrary
amounts
allowed by law
As to nature
Constitute
expenses
Pertain to
expenses
As to purpose
To
enable
the
taxpayer to recoup
his cost of doing
business
Allowed to cover
personal, family and
living expenses
As to claimants
Can be claimed by all

taxpayers, corporate
or otherwise
Can be claimed only by

individual taxpayers
EXEMPTIONS AND DEDUCTIONS FROM GROSS

INCOME
I.
DEDUCTIONS vs. EXCLUSIONS
business
personal
DEDUCTION is an outflow of wealth.

EXCLUSION is an inflow of wealth but is not considered as gross
income because there is a law which grants it as exempted from
gross income.
III.
BASIC PRINCIPLES GOVERNING DEDUCTIONS
EXCLUSION
DEDUCTION
(1) The taxpayer seeking a deduction must point to some

specific provisions of the statute authorizing the
deduction; and
Pertains to the computation

of Gross Income
Pertain to computation of Net

Income
(2) He must be able to prove that he is entitled to the

deduction authorized or allowed.
Something received or earned

by the taxpayer which do not
form part of gross income
Something spent or paid in

earning gross income.
Deductions have generally been deemed to be a matter of legislative

grace. They are allowed only where there is a clear provision in the
statute for the deduction claimed; and where particular deductions
are authorized by the statute, no others may be made.
Flow of wealth to the

taxpayer which are not
treated as part of gross
income for purposes of
computing the taxpayers
taxable income due to the
following reasons:
The amounts which the law

allows to be subtracted from
gross income in order to arrive at
net income
Note that deductions are outflow
of income since they represent
money spent or the taxpayers
expenses.
Note that the taxable gross income is affected by exclusions

because the latter are omitted from the former and are not reported
on the income tax return but it is not affected by deductions
because they are subtracted after gross income is determined and
are reported on the return.
d.
It is exempted by the
fundamental law;
e.
It is exempted by a
statute; and
1.
2.
3.
f.
It does not fall within

the definition of
income.
4.
32
IV.
KINDS OF ALLOWABLE DEDUCTIONS

OPTIONAL STANDARD DEDUCTION
ITEMIZED DEDUCTIONS (Section 34A K and Section 34M)
PERSONAL BASIC EXEMPTIONS AND ADDITIONAL
EXEMPTIONS
PREMIUMS ON HEALTH AND HOSPITAL INSURANCE
OPTIONAL STANDARD DEDUCTION

-
Default is itemized deduction. In lieu of the itemized

deduction (IDs), an individual taxpayer (i.e.
resident/non-resident citizen, resident alien, taxable
estate and trust) other than non-resident alien, may
elect optional standard deduction (OSD) in an amount
not exceeding 40% of his gross sales or gross receipts,
as the case may be.
e.
ITEMIZED DEDUCTIONS
-
If 40% OSD is higher than ID, then choose OSD in

order to arrive at a lesser net income
Who can avail?

a.
b.
Citizens who are purely engaged in trade or

business;
Citizens who are mixed earners both
compensation earners and engaged in trade,
business or profession;
c.
Resident aliens but only those expenses incurred

in the Philippines;
d.
Partners in GPPs;
e.
Corporations
b.
Non Resident Aliens;

Note that in IDs, NRA-ETB may claim such
deduction but not NRA-NETB. As to OSD, theres
no distinction. All NRAs are NOT allowed to
claim such deduction.
c.
Special employees
a.
Citizens of the Philippines (RC and NRC);
b.
Resident Aliens;
c.
Non-Resident Aliens Engaged in Trade or

Business in the Philippines;
d.
Estates and Trusts
NRA-NETB are taxed on the basis of their gross

income, hence cannot avail of the IDs.
As to corporations, only DC and RFC may claim

deductions. The latter being entitled only with
respect to expenses related to Philippine income
only.
Itemized Deductions:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
Who cannot claim OSD?

Individual taxpayer earning purely compensation
income;
Individuals entitled to avail of IDs are the following:
- Only DC, RFC can claim OSD
a.
An individual taxpayer who is entitled to and

claimed for OSD shall not be required to submit
with his return such financial statements
otherwise required by the Tax Code.
Expenses
Interests
Taxes
Losses
Bad Debts
Charitable Contributions
Research and Development
Contributions to Pension Trust
Depreciation
Depletion of oil, gas, wells and mines
PERSONAL BASIC EXEMPTIONS AND ADDITIONAL EXEMPTIONS

-
Individuals entitled to avail of PBE and AE are the

following:
a.
Resident citizens of the Philippines;
b.
Non-resident citizens with respect only to

income derived from Philippine sources;
c.
Resident aliens with respect only to income

derived from Philippine sources;
d.
Non-resident aliens engaged in trade, business

or in the exercise of a profession in the
Philippines with respect to income from
Philippine sources, provided there is reciprocity;
Conditions or Requisites:
a.
b.
c.
d.
33
OSD is available only to citizens or resident

aliens; thus non-resident aliens are NOT entitled
to claim the OSD;
The standard deduction is OPTIONAL (i.e. Unless
the taxpayer signifies in his return his intention
to elect the OSD, he shall be considered as
having availed himself of the IDs);
Such election, when made by a qualified
taxpayer, is irrevocable for the taxable year for
which the ITR is made; however, he can change
to IDs in succeeding year(s);
The amount of standard deduction is limited to
40% of taxpayers gross income; and
Reciprocity means that the foreign country

where the NRA-ETB is a citizen grants
exemptions to Filipinos not residing there
but doing trade or business therein. The
amount granted should NOT exceed the
amount of personal exemptions allowed
under our laws.
of self-support because of mental or

physical defect.
Example:
If US grants only 24K as exemptions, then
the Philippines grants US NRA-ETB only 24K
as exemption.
Change of Status (GR: interpret in favor of the taxpayer)

i.
If the taxpayer marries or should have additional

dependent(s) during the taxable year, the
taxpayer may claim the corresponding personal
or additional exemption, as the case may be, in
full for such year.
ii.
If the taxpayer dies during the taxable year, his

estate may still claim the personal and additional
exemptions for himself and his dependent(s) as
if he died at the close of such year.
iii.
If the spouse or any of the dependents dies or

any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully
employed during the taxable year, the taxpayer
may still claim the same exemptions as if the
spouse or any of the dependents died, or as if
such dependents married, become twenty-one
years old or become gainfully employed at the
close of such year.
If US grants 75K as exemptions, the

Philippines grants US NRA-ETB only 50K as
exemption.
e.
Estates and Trusts
Personal
Exemption
Additional
Exemption
RC
NRC
RA
NRA-ETB
within
within
subject
to rule
on
reciprocity
within
Personal Basic Exemption.

basic personal exemption
married individuals where
deriving gross income, only
the personal exemption
within
NRANETB
Each individual is allowed a

of P50,000. In the case of
only one of the spouses is
such spouse shall be allowed
Additional Exemption for Dependents. There is allowed an

additional exemption of P25,000 for each qualified
dependent not exceeding four (4).
-
The additional exemption for dependents shall be

claimed by only one of the spouses in case of married
individuals.
In the case of legally separated spouses, the

additional exemptions may be claimed only by the
spouse who has custody of the child or children.
The total amount of additional exemptions that may

be claimed by both shall not exceed the maximum
additional exemptions for four (4) dependents (Sec.
35 [A,B]) or 100,000.
Dependent means a legitimate, illegitimate or legally

adopted child
Conditions for a child to be considered a dependent:
34
Chiefly dependent upon the taxpayer for

support;
PREMIUMS ON HEALTH AND HOSPITAL INSURANCE

Limitations:
a.
It must not be more than P2,400.00 a year (or 200.00

a month). The P2,400.00 is the maximum amount
that can be claimed as deductions regardless of the
amount of the premiums actually paid.
b.
The family must have an income of not more than

P250,000.00 a year.
Family income means income of the immediate
family.
c.
The claimant must be the spouse claiming the

additional exemption.
Note: For the deductions to be allowed, the payments

should be on health and/or hospitalization insurance of
the individual taxpayer including his family.
V.
ENTITLEMENT TO DEDUCTIONS, In General
Living with the taxpayer;
Not more than twenty-one (21) years of

age;
Unmarried; and
Not gainfully employed or if such

dependent, regardless of age, is incapable
RC
NRC
RA
NRA-ETB
NRA-NETB
SPECIAL EMPLOYEES
DEDUCTIONS
TAX BASE
net income
net income
net income
net income
gross income
subject to 15% tax
rate on their income
in the form of
salaries, honoraria,
wages, emoluments
and remuneration
and other similar
income.
2.
Who are Special Employees?

-
These are employees occupying supervisory or

management position of technical knowledge.
3.
Any amount paid out for new buildings or for permanent

improvements, or betterments made to increase the value
of any property or estate;
-
These are capital expenditures which will increase the

value or quality of the taxpayers property and serve
as additional source of income.
These costs will have to be spread out over the life of

the property DEPRECIATION.
a.
Aliens employed by Regional Area HQ of Multinational

Companies
Any amount expended in restoring property or in making

good the exhaustion thereof for which an allowance is or
has been made;
b.
Aliens employed by Operating HQ
Also considered as capital expenditures.
c.
Aliens employed by Offshore Banking Unit
d.
Aliens employed by Petroleum Service Contractors and

Subcontractors
Such improvements must extend the life of the

property for more than one year. In other words,
such repairs must be extraordinary.
Expenses for repairs are DEDUCTIBLE if such repairs

are incidental or ordinary and do not materially add
to value of the property nor appreciably prolong its
life.
Note:
-
The same tax treatment shall apply to Filipino

employees occupying the same position as an alien
employed in the above-mentioned MNCs.
4.
Any income earned from all other sources within the

Philippines shall be subject to pertinent income tax
(5-32%), as the case may be, imposed under the NIRC.
Note:
Premiums paid on any life insurance policy covering the

life of any officer or employee, or of any person financial
interested in any trade or business carried on by the
taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy;
-
The foregoing special corporations shall be subjected

to 10% tax rate on their income except for the
RAHQs.
RAHQs are branches established in the Philippines by

MNCs and which headquarters do not earn or derive
income from the Philippines and which act as
supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the
Asia-Pacific Region and other foreign markets. RAHQs
only facilitate operations and not income-earning.
Hence, they are not taxable as opposed to ROHQs.
A person is said to be financially interested in the

taxpayers business if he is a stockholder thereof or
he is to receive as his compensation a share of the
property in the business.
Examples:
VI.
ROHQs earn income from performing administrative

and financial functions for affiliates, subsidiaries, or
branches in the Asia-Pacific Region and other foreign
markets.
NON-DEDUCTIBLE ITEMS
The following are not deductible in computing taxable net income:

1.
Personal, living or family expenses;

-
35
These are not deductible since the same are

considered as already contemplated under the
personal basic exemption.
5.
Where ABC Company paid premiums on the

life of Mr. Chairman, the premiums are nondeductible if ABC is the beneficiary since it
is as if it just transferred its money from
one pocket to another.
But where the beneficiary is the employee

or his family, the premiums paid by ABC
Company for the insurance of Mr. Chairman
is deductible.
Where a corporation is a family

corporation, the premiums paid by such
corporation on the life insurance policy
covering the life of its president with his
wife as the beneficiary are not deductible,
the corporation being indirectly the
beneficiary under the policy.
Losses from sales and exchanges of property directly or

indirectly.
-
This is to prevent simulated sales between related

taxpayers which results to tax avoidance.
a.
b.
Between members of a family (brother, sister of

half or full blood, spouse, ascendant, lineal
descendants);
Except in case of distributions in liquidation,
between an individual and a corporation more
than 50% in value of the outstanding stock of
which is owned directly, by or for such an
individual;
TRUST
-
II.
It is an arrangement whereby the trustor grants the

control of certain property in the person of the
trustee for the benefit of the beneficiary.
GROSS INCOME INCLUSTIONS ESTATES & TRUSTS
XYZ CORP
A 60%
B 10%
C 20%
D 10%
III.
Any loss derived from the sale between XYZ and

A shall be a non-deductible loss.
INCOME OF ESTATES AND TRUSTS WHICH ARE

INCLUDED FOR INCOME TAXATION
a.
Income accumulated in trust for the benefit of

unborn or unascertained person or persons with
contingent interests and income accumulated or
held for future distribution under the terms of
the will or trust.
b.
Income which is to be distributed currently by

the fiduciary to the beneficiaries, and income
collected by a guardian or an infant which is to
be held or distributed as the court may direct.
c.
Income received by estates of deceased persons

during the period of administration or
settlement of the estate.
d.
Income which, in the discretion of the fiduciary,

may be either distributed to the beneficiaries or
accumulated.
If XYZ sells to BCD at a loss, said loss is

deductible.
XYZ CORP
DEF CORP
A 10% B 10% C 10%
D 60% E 20%
j D 10%
DEF 60%
F 10%
G 10%
If XYZ sells to B at a loss, it is still deductible.

[10% + (60% x 60%) = 46%
c.
Except in case of distributions in liquidation,

between two corporations more than 50% in
value of the outstanding stock of each of which
is owned, directly or indirectly, by or for same
individual, if either one of such corporation is a
personal holding company or a foreign personal
holding company; or
d.
Between the grantor and a fiduciary of any trust;

or
e.
Between fiduciary of a trust and the fiduciary of

another trust, if the same person is a grantor
with respect to each trust; or
f.
Ex.
If there is an estate subject to settlement but not yet
partitioned:
Between a fiduciary of a trust and a beneficiary

of such trust
Any income generated will not be subjected to

any income estate tax
Each heirs will be taxed on their individual tax

return
If there are 4 apartments left to the heirs but the

heirs added two more apartments and generated an
income of 1M:
ESTATES AND TRUSTS
I.
The gross income of an estate is practically

the same as that of an individual taxpayer.
Treated as unregistered partnership, subject to

the 30% tax rate.
DEFINITION OF TERMS
ESTATE
IV.
GROSS INCOME DEDUCTIONS ALLOWED TO ESTATES

AND TRUSTS
a.
36
The mass of property, rights and obligation left

behind by the decedent upon his death. For purposes
of income tax, an estate may be one that is under
judicial administration or one that is not under
judicial administration.
The amount of the income of the estate or trust

for the taxable year which is to be distributed
currently by the fiduciary to the beneficiaries.
b.
c.
The amount of the income collected by a

guardian of an infant which is to be held or
distributed as the court may direct.
The amount of the income of the estate or trust
for its taxable year, which is properly paid or
credited during such year to the legatee, heir or
beneficiary.
CORPORATE INCOME TAXATION

I.
CORPORATION includes partnership no matter how created or

organized, joint account companies, insurance companies and other
associations except:
NOTE: The amount so allowed as a deduction

shall be included in computing the taxable
income of the heirs, beneficiaries or legatees,
whether distributed or not.
V.
INTRODUCTION AND DEFINITION OF TERMS
1.
General professional partnership
2.
Joint Venture for the purpose of undertaking

construction projects
-
Subject to tax on their separate income
If joint venture is not for construction, it will be

subject to 30% income tax
EXEMPTION ALLOWED TO ESTATES AND TRUSTS
P50,000 personal exemption just like an

individual taxpayer
3.
Ex.
DECEDENT
ESTATE INCOME
= 50K PBE
= can no longer
VI.
Aug 4
Dec 31
EXCEPTION FROM TAXATION

Employees trust which forms part of a pension,
stock, bonus or profit-sharing plan of an employer for
the benefit of some or all his employees shall be
exempt from income tax:
a.
b.
If contributions are made to the trust by such

employer, or employees or both, for the purpose
of distributing to such employees the earnings
and the principal of the fund accumulated by the
trust in accordance with such plan; and
i.
The partners in a partnership are considered as

stockholders for tax purposes. The profits distributed
to them are considered as dividends.
ii.
For taxation purposes, business partnerships are

taxable irrespective of whether it was orally
constituted or in writing and whether or not it is
registered with the SEC.
GENERAL PROFESSIONAL PARTNERSHIPS - partnerships formed by

person for the sole purpose of exercising their common profession,
no part of the income of which is derived from engaging in any
trade or business. Persons engaged in business as partners in a
GPP, shall be liable for income tax only in their separate and
individual capacities.
i.
For purposes of computing the distributive share of the

partners, the net income of the partnership shall be
computed in the same manner as a corporation. Each
partner shall report as gross income his distributive share,
actually or constructively received, in the net income of
the partnership. Income of a GPP is deemed constructively
received by the partners.
ii.
The undistributed shares will still be considered as

constructive income already taxable on the part of the
individual partners. Now, even if the GPP is not subject to
30% corporate tax rate on the net income, the net income
is considered as earned by the partners composing the
GPP. And taxable separately on such partners to 5%- 32%.
iii.
The partners and the GPP are required to file individual

ITR.
If under the trust instrument, it is impossible, at

any time prior to the satisfaction of all liabilities
with respect to employees under the trust, for
any part of the corpus or income to be used for
or diverted to purposes other than for the
exclusive benefit of the employees.
However, any amount actually distributed to any

employee or distributee shall be taxable to him in the
year which so distributed to the extent that it exceeds
the amount contributed by such employee or
distributee.
37
Must be with the government in order that it will

be exempt from 30% corporate income tax.
PARTNERSHIP an association of two or more persons where each

partner contribute money, property or industry to a common fund
with the intention of dividing profits among themselves
claim PBE
Jan 1
Joint consortium for the purpose of engaging in

petroleum, geothermal and other energy operations
pursuant to a consortium agreement with the
government
JOINT VENTURE created when 2 corporations, while registered

and operating separately, are placed under one sole management
which operated the business affairs of said companies as though
they constituted a single entity thereby obtaining substantial
economy and profits in the operation.
engaged in trade or business WITHIN the Philippines.

It is subject to tax on its net taxable income from
sources within the Philippines.
-
Being engaged in business implies continuity of

commercial transactions or dealings; continuity of
business or continuity of intention to conduct
continuous (regular) business.
For tax purposes, for as long as it is formed,

organized, authorized under foreign laws and
engaged in business in Philippines, it is considered as
RFC even if 100% owned by Filipinos.
JOINT ACCOUNT created when 2 persons form or create a

common fund and such persons engages in a business for profit. This
may result in a taxable unregistered association or partnership
JOINT STOCK COMPANIES the midway between a corporation
and a partnership, a hybrid personality, somewhat a corporation
because this is managed by a Board of directors and such persons
may transfer their share/s without the consent of others, and
somewhat a partnership because it is an association, and persons or
members of the same contribute fund, money to a common fund.
EMERGENCY OPERATION these may be formed by 2 corporations
with separate personalities. If they form that emergency operation
(it is a really a special activity) to engage in a joint venture.
Corporation 1 may be taxed only from the income derived from such
business. The income derived from such emergency operation
should also be included in that taxable income subject to corporate
income tax. In the same way, that corporation 2, has a separate and
distinct personality; if its a part of that emergency operation, the
income derived from such special activity should also be included in
the income of that corporation 2, subject to corporate income tax,
even if it is not registered with the Securities and Exchange
Commission.
3.
NON-RESIDENT FOREIGN CORPORATIONS (NRFC) See Section

26B
-
A corporation formed, organized, authorized, or

existing (foae) under the laws of any foreign country.
It is subject to tax on its gross income from sources
WITHIN the Philippines.
Such gross income may include interests, dividends,

rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic, or
casual gains, profits, and income and capital gains,
EXCEPT, capital gains from the sale of shares of stock
not traded in the stock exchange.
CORPORATION
CO-OWNERSHIP
General Rule: As a rule, tax exempt, because a coownership is not a partnership but formed and organized not for
profit but for common enjoyment of the property or for the
preservation of the property. And any income as an incidence
thereof is taxed at 5-32% since it forms part of the ordinary income
of the co-owners. But the co-ownership itself is tax exempt.
Exceptions:
a.
b.
II.
1.
When there is no attempt to divide inherited

property for more than ten (10) years and the said
property was not under any administration
proceedings nor held in trust, an unregistered
partnership is deemed to exist, which is thereby
subjected to 30% corporate income tax.
FOREIGN
1. Philippine Laws (formed

and organized)
1. Foreign Laws
2. Abroad
2. Within and Without

3. Within
If allowed to deduct
expense depends on:
3. NET Taxable income

(allowed to deduct
expense within and
without)
Resident Foreign
Corporation
TAXABLE CORPORATIONS
Non-Resident Foreign
Corporation
DOMESTIC CORPORATIONS (DC) See Section 27

-
2.
When the income of the co-ownership is invested by

the co-owners in other income producing activities;
or
DOMESTIC
A corporation formed or organized under Philippine

laws. It is subject to tax on its net taxable income
from sources WITHIN and WITHOUT the Philippines.
RESIDENT FOREIGN CORPORATION (RFC) See Section 28A

38
1.
2.
3.
Taxed at NET
Allowed to
deduct expenses
WITHIN
Tax Rate: 30%
1.
2.
3.
Taxed at GROSS
NOT Allowed to
deduct expenses
Tax Rate: 30%
A corporation formed, organized, authorized or

existing under the laws of any foreign country, and
DC
Within and
Without
Net Taxable
Income
Expense
Deduction
Within and
Without
30%
Income
Tax Base
Expense
Deductions
Allowed
Tax Rate
RFC
Within
NRFC
Within
Net Taxable
Income
Expense
Deduction
Within
Gross Income
None Allowed
30%
30%
Non-Resident Foreign Corporation

-
Except: Capital gains on sale of shares of stocks which are

not listed and traded, which will be subject to the same
rate of: 5% and 10%
What makes a foreign corporation Resident and what makes it a

non-resident corporation?
-
If it is registered as a Philippine branch of a foreign

company, it is automatically considered as a resident
foreign corporation. However, non-registration is not
necessary to be considered as RFC. The criteria is WON
you are DOING BUSINESS IN THE PHILIPPINES
o
Doing business in the Philippines would require

the determination of whether the activity you are
doing in the Philippines is done in a continuous
basis or regular basis.
III.
Filing of an Income Tax Return (ITR)

-
Gross income of non-resident foreign corporations

includes the same gross income that has been enumerated
in non-resident aliens not engaged in trade or business,
such as (a) interests, (b) dividends, (c) rents, (d) royalties,
(e) salaries, (f) premiums (except reinsurance premiums),
(g) annuities, (h) emoluments or other fixed or
determinable annual, periodic or casual gains, profits and
income, and (i) capital gains, except capital gains subject
to tax under subparagraphs (C) and (d)
It did it not include in the exception the capital

gains on the sale of real property unlike NRANETB because NRFCs are not expected to have
real properties in the Philippines.
INCOME TAX EXEMPT ENTITIES, Section 30

a.
Sec. 22
b.
Sec. 30
c.
Sec. 72
Domestic corporations are required to declare their

income in a quarterly basis. These are mere estimates and
at the end of the year it is annualized. Done through Selfassessment (without waiting to be assessed by BIR)
1. General Professional Partnership
Resident foreign corporations are also required to file an

ITR at the end of the year and/or a quarterly basis.
2. Joint venture for the purpose of undertaking construction

projects.
Non-resident foreign corporations do not file quarterly or

annual ITR. Any payments made to non-resident foreign
corporations are subjected to final withholding tax.
Income remitted to NRFCs is already net of the withheld
tax in the Philippines.
3. Joint consortium for the purpose of engaging in petroleum,

geothermal and other energy operations pursuant to a
consortium agreement with the government
Payments to:
4. Labor, agricultural or horticultural organization not

organized principally for profit
Non-RFC - withhold 30% of the tax
May derive income from such business as long as it is

merely incidental (the organization is still exempt).
Non-resident aliens not engaged in trade or business

withhold 25%
It is important that in the articles of incorporation of this

tax-exempt organization, it must be clearly provided that it
is not formed or organized for profit.
(RFC will receive 70% free from tax already or 75% for
NRA-NETB)
39
REASON: the Philippine government does not

have jurisdiction over these taxpayers, hence,
the government cannot expect them to declare
their income at the end of the year or on a
quarterly basis. Any payor of the income,
meaning to whom these persons is transacting
with has the obligation of a withholding agent.
As a withholding agent, he will be liable for nonwithholding.
Withholding with finality it is the final
withholding tax considered as the full and final
payment of the tax.
5. Mutual savings bank not having capital stock represented

by shares and cooperative bank without capital stock
organized and operated for mutual purposes and without
profit
6. A beneficiary society, order or association, operating for the
exclusive benefits of the members such as fraternal
organization operating under the lodge system (one which
must operate under a parent and subsidiary associations), or a
payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order or
association, or non-stock corporation or their dependents
7. Cemetery company owned and operated exclusively for the

benefit of its members (must be a non-profit cemetery)
19. NAPOCOR (Special Law)
Requisites:
Condominium Corporations
a. Owned and operated exclusively for the benefit of its
owners
b. Not operated for profit
8. Non-stock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans; no part of its income or asset shall belong to or
inure to the benefit of any member, organizer, officer, or any
specific person
9. Business league, chamber of commerce, or board of trade,
not organized for profit, and no part of the net income of
which insures to the benefit of any private stockholder or
individual
Requisites:
a. This must be established for common business interest
General Rule:
Condominium Corporations are not subject to 30% income tax.
Collection of association dues, utility, common charges expense are
not for profit
Exception:
Once collections of condominium corporations exceed more than
that which they require for the maintenance of the building, it will
be subject to tax. (only the difference will be subject to tax)
3 Categories of Tax-Exempt Entities:
A.
Those which do not come within the definition of a

corporation
B.
Tax Exempt Entities under Section 30

Except:
b. No part of the income shall inure to the benefit of a

particular individual
1.
Income from the use of properties, real or

personal
10. Civic league or organization not organized for profit but

operated exclusively for the promotion of social welfare
2.
Income from activities conducted for profit
11. Farmers associations or like associations, organized and

operated as a sales agent, for the purpose of marketing the
products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the
basis of the quantity produce finished by them (must be a
non-profit association)
12. Farmers cooperative or other mutual typhoon or fire
insurance company, mutual ditch or irrigation company, or
like organization of a purely local character, the income of
which consists solely of assessments, dues, and fees collected
from members of the sole purpose of meeting its expenses
13. Government educational institution
14. Non-stock and non-profit educational institution
General
Rule:
All
corporations,
agencies
or
instrumentalities owned and controlled by the
government shall pay such rate of tax upon their taxable
income as are imposed upon corporations or associations
engaged in a similar business, industry of activity.
Exceptions:
15. GSIS (Government Service Insurance System)
16. SSS (Social Security System)
Example:
If there is a cemetery, and there is a big space rented out
for a concert, will the proceeds be subject to tax?
YES, it is taxable. Regardless of the use of the proceeds.
Legal basis
There is a caveat in the last paragraph

of Section 30, that notwithstanding
that these exempt entities have been
granted exemption from income taxes,
they will still be subject to income tax
if and when they realize income
coming from any of these three:
1.
The usage of a real property,

whether it is regular or not.
2.
The usage of a personal property,

whether regular or not.
3.
Any activity made for profit,

which is regular.
These are subject to income tax

regardless of how the proceeds will be
used or utilized.
17. PHIC (Philippine Health Insurance Corporation)

18. PCSO ( Philippine Charity Sweepstakes Office)
40
C.
From number 15-19 of outline, their exemption does not

come from Section 30, but from Section 27(c) which
covers domestic corporations.
GR: GOCCs are taxable entities
If Passive Income subject to 20% Fwt

If Active Income subject to 30% corporate income tax
e)
RENTS (2 Types)
Operating Lease
EXC:
GSIS
SSS
PHIC
PCSO
NAPOCOR
Filing of ITR
These exempt entities are still required to file ITR. Even if it is among
the tax exempt entities, but you are registered for BIR purposes, you
are expected to file an ITR year in year out. All you have to do is
simply put there the details, whatever proceeds there is, the
expense, and at the bottom that it is exempt.
If you want to avoid the reportorial requirements, anyway you are
not liable for income tax, you have to prove before the BIR, get a
ruling that you are exempt so that you will be taken out from the
coverage of those who are required to file an ITR.
a contract under which the asset is not wholly

amortized during the primary period of the lease, and
where the lessor does not rely solely on the rentals
during the primary period for his profits, but looks for
the recovery of the balance of his costs and for the
rest of his profits from the sale or the re-lease of the
returned assets at the end of the primary lease
period.
Normal rent/lease that we know.
What you are paying is for the temporary use of

property without the transfer of ownership at the end
of the lease period.
The owner of the property does not foresee

relinquishing ownership over it at the end of the
contract period, while the one using it is only paying
for the temporary usage of it.
It is for the operation of the business of the one

leasing it.
Financial Lease
IV.
TYPES/CLASSIFICATION OF INCOME
also called the full payout lease, a contract

involving payment over an obligatory period (also
called the primary or basic period) of specified rental
amounts for the use of a lessors property, sufficient
in total to amortize the capital outlay of the lessor
and to provide for the lessors borrowing costs and
profits. Obligatory period is primary non-cancellable
period of the lease which in no case shall be less than
730 days. Lessee exercises choice over the asset.
Lease to own in common term; A purchase of the

property
The owner will relinquish ownership over the

property at the end of the contract, while the one
leasing it will become the owner of the property.
The owner of the property is expecting that over the

lease period not to go below 730 days, he will recover
the full value of the property. So if youre in a
financial lease, whatever you are paying to the lessor
is an advance to the purchase price, you dont
recognize it as an expense in your books. If youre
into business and you lease out under financial lease,
whatever payments you are making is not an
expense, but is an advance payment, part of the
purchase price.
1. Gross Income, Inclusions

a)
COMPENSATION FOR SERVICES
b)
GROSS INCOME FROM TRADE OR THE EXERCISE OF A

PROFESSION
c)
GAINS DERIVED FROM DEALINGS IN PROPERTY
d)
INTERESTS
May or may not be subject to final withholding tax.
-
Interest on bank deposit/deposit substitutes/trust

fund and similar arrangement (subj. to FWT)
Interest from lending/interest income from bonds
Interest on foreign bonds/government bonds
Interest on treasury bills
Interest earned from deposits maintained under the

FCDU system (subj. to FWT)
Interest income of pawnshop operators
Determine if interests form part of the corporations active or

passive income:
41
f)
ROYALTIES
a.
Refer to Tax Code Section 42 (4) for complete list.

Royalties include supply of scientific, technical,
industrial or commercial, knowledge or information.
b.
Property in kind (All encompassing; whatever property

you would wish to give to your stockholders it will be
taxable.)
These are dividends paid in securities or other

property, in which the earnings of a corporation have
been invested are income to recipients to the amount
of the full market value of such property when
receivable by individual stockholders.
Note: A dividend paid in stock of another corporation

is not a stock dividend, even though the stock
distributed was acquired through the transfer by the
corporation declaring the dividends of property to the
corporation the stock of which is distributed as a
dividend.
It may also be in the form of common stocks held by

AA Corporation in BB Corporation that are given to
stockholders of AA Corporation. These common stocks
are held by AA Corporation as investments or assets.
Hence, assets/property of a corporation that are
distributed as dividends are property dividends even if
they may be stocks in another corporation.
Corporation will remit the FWT (final withholding tax)

in behalf of the recipient. The corporation will have to
collect in cash from the stockholders the value of the
FWT but the withholding agent is still the corporation.
Before the dividends will be given out, 10% will be
remitted to BIR, such being paid by the stockholder to
the corporation, who will in turn remit it to the
government.
How much is deducted from the books of the

Corporation?
If you purchase a software, it can be covered as

royalty payment or not.
It will be royalty payment if what you purchase is

customized, with the transfer of technical
knowledge.
But the software you purchase is an offshelf

available to all. You are not required to pay
royalty fees for that. It is simply the purchase of
an item.
c.
g)
2. Property dividends -
So royalties are more on the privilege of

having the right to use a scientific or
technical knowledge.
If you purchase a franchise, it may be subjected to

the normal 30% income tax if it becomes part of the
corporations regular activity. (i.e. McDonalds
franchises)
DIVIDENDS
-
Any distribution made by a corporation to its

shareholders out of its earnings on profits and payable
to its shareholders, whether in money or in other
property.
Requirements for dividend declaration, in general:

1.
Unrestricted retained earnings
2.
Board of Directors declaration
3.
Absence of prohibition in any loan agreement
Its really the value in the books (Book Value), not

the fair market value. For tax purposes, 10% will
be computed in the fair market value. But for the
books of the corporation, what will be deducted is
the actual cost that went out of its ownership.
Types of dividends
1. Cash dividends cash given as dividends.
If the recipient of the disguised dividend is an

individual
10% - for Resident citizens, Non-resident
citizens and resident aliens
3. Stock Dividends - transfer from profits to the capital.
Stock Dividend representing the transfer of surplus

to capital account shall not be subject to tax.
20% - for non-resident aliens engaged in trade

or business
25% - for non-resident aliens NOT engaged in
trade or business
42
If the recipient is a domestic corporation or resident

foreign corporation payments to such corporations
of dividends ARE NOT AS YET TAXABLE. (to be
discussed in succeeding topic)
If the recipient is a NRFC, dividends are subjected to
30% fwt
General Rule: Stock Dividends are NOT taxable.
Exception: Stock dividends will be taxable when:

1.
If subsequently cancelled and redeemed by the

corporation - If in order to avoid the tax on
dividends, you declare stock dividends and the
corporation will cancel or redeem it right after.
Imagine 20M will be declared as stock dividend.
As a rule, it is not taxable. But if behind that,
there is already an agreement that after
declaration it will be cancelled or redeemed by
the corporation, meaning as stockholders you
will surrender that, and the corporation will

redeem that thereafter, in lieu of Php1 M each in
cash. This amounts to circumventing the law
wherein instead of declaring outright the cash
dividend, you went through the path of stock
dividends first then exemption. That is subject to
tax, as if it was an automatic declaration of cash
dividends.
2.
These are payments which are equivalent to dividend

distribution. In the case of excessive payment by
corporations, if such payments correspond or bear a
close relationship to stockholdings, and are found to
be a distribution of earnings or profits, the excessive
payments will be treated as dividends.
Disguised dividends are payments made by the

corporation to the stockholders in any other form,
other than dividend payment.
If it leads to a substantial alteration in the

proportion of tax ownership in a corporation.
Capital
Million
40
Profits
Million
360
Declared 42 Million
as Stock Dividends
Examples: a. 1M for honorarium of BODs b.

Buying motor vehicles and distributing to
stockholders but recorded as an expense and not
as dividends
The point is, whenever there are huge amounts

of payments to the owners not considered as
dividends, they are actually disguised dividends.
Are disguised dividends taxable? Yes.
Illustration: 42 M as stock dividend

Beginiing Investment
Declared SD
39 (classmates)
= 1 M each
1M
=
Total
New investment
=
2M
1 (X)
=1M
3M
If given to stockholders, same as cash dividends
If given to non-stockholders, then it depends. If

given as compensation to employee, then it will
be subjected to 5-32% and appropriate
withholding tax should be withheld from such
compensation.
4M
5. Liquidating Dividends
2 Million
Whenever a corporation dissolves, liquidates and

winds up its business operations, it may happen that
assets will be left after paying all the creditors and
these assets will be distributed to the stockholders in
accordance with the proportion of ownership that they
have in the business and its called liquidating
dividends. It is taxable.
Liquidating dividends given can be in the form of cash

or properties or other remaining assets of the
corporation. It is NOT subject to the FWT of 10%, 20%
or 25%.
Liquidating dividends are treated as Capital Gains or

Losses but NOT the type which is subject to capital
gains tax. It si also not subject to FWT. They will be
considered as OTHER INCOME of the corporation.
Hence, for individuals it will be treated as OTHER
INCOME subject to 5-32% or 25% if NRA-NETB and for
corporations it is subject to 30%.
If the value you receive is less than your investment

then it is a loss while if it is higher than your
investment then it is a gain. The liquidating dividend is
not automatically treated as income but still needs to
be compared with your investment to determine if it is
gain or loss.
TAXABLE!!!
Say you want 42 M to be declared as stock

dividend. But the problem is, you are 40. All of
you 39 classmates will receive 1 M each. But the
1 person, X, will receive the 2 M remaining. It
will lead to an alteration of the interest of
proportional holdings in the corporation. Instead
of all of you equally owning the corporation
through shares, she will now have an advantage.
Her total investment will be 4 M. Her original 1
M plus the 3 M stock dividends. All the rest will
be having only 2 M. Since it lead to a substantial
alteration or dilution in your interest or
ownership, it will now be subject to tax.
But what is subject to tax is only the difference
of 1 M.
Rationale: Because she received an income
more than the other stockholders. What she will
be receiving is more than what you will be
receiving in the future. Substantial Alteration (as
long as there is dilution in the original proportion
of ownership)
4. Disguised dividends
43
h)
ANNUITIES
i)
PRIZES AND WINNINGS
j)
PENSIONS
k)
PARTNERS DISTRIBUTIVE SHARE FROM THE NET INCOME

OF THE GPP
l)
OTHERS
Optional Standard Deduction

-
A standard deduction available to corporation, except

non-resident, in an amount not exceeding forty percent
(40%) of the gross income, in lieu of itemized deductions.
Unless the taxpayer signifies in its return its intention to
elect the optional standard deduction, it shall be
considered as having availed of the itemized deductions.
Such election when made in the return shall be
irrevocable for the taxable year in which the return is
made. A taxpayer who is entitled to and claimed for the
optional standard deduction shall not be required to
submit with its tax return such financial statements
otherwise required in the Tax Code.
Can OSD be allowed as a deduction if the corporation is

not allowed to claim itemized deductions?
2. Gross Income Exclusions

Refer to NIRC Section 32 (B) [i.e. Life insurance, Amount Received by
Insured as Return of Premium, Gifts, Bequests, and Devises,
Compensation for Injuries or Sickness, Income Exempt under Treaty,
Retirement Benefits, Pensions, Gratuities, etc.]
V.
DEDUCTIONS
Fundamental Principles
i. The taxpayer must prove that there is a law authorizing
deductions
NO, OSD is in lieu of itemized deductions. So if a

corporation or any taxpayer is not allowed to
claim itemized deductions, there is no OSD
allowed.
Exception: NRA-ETB in the case of individuals,

allowed itemized deductions but not OSD
Benefit of claiming OSD is that there is no need

to substantiate it with receipts unlike if itemized
deductions then your books will be audited to
determine whether you really have incurred
such and whether it is substantiated with official
receipts, or invoices or in contracts.
ii. The taxpayer must prove that he is entitled to deductions

(requisites are met)
iii. If the law provides for requirement that the amount or the
expense payment needs to be withheld of tax, a tax should have
been withheld, otherwise, the deduction is not allowed
iv. Always, we construe it strictly against the taxpayer (strictissimi
juris)
Deductions and/or exemptions are available to individual
taxpayers
1. Personal and additional exemptions
2. Premiums on health and hospitalization insurance
3. Itemized deductions, or in lieu of such, optional

standard deductions (OSD)
Deductions and/or exemptions are available to corporations
Who are NOT allowed to claim itemized deductions?

-
1. Individuals, whoever that individual is, if he is

purely earning income from ER-EE relationship,
forget about itemized deduction because
itemized deduction is only in business, trade, or
profession.
2. If the individual is a NRA-NETB, no itemized

deduction.
3. NRFCs are never allowed itemized deduction

or OSD.
YES, But only DC and RFC. No deductions allowed for NRFC.
Itemized Expenses or in lieu of such, optional standard

deductions [EX.IN.TA.LO.BA.DEP.DEP.CHA.RE.PEN]
o
Rationale: Corporations venture into activities which

are for profit. Therefore, it is for business and with it
comes the incurrence of business expenses.
Exemptions are not available because it covers
personal and family living expenses and corporations
are not natural persons.
The default choice is ITEMIZED DEDUCTIONS, unless you

expressly opt for OSD. Option of choosing OSD is
irrevocable for one year. The option is made at the
beginning of the year on the ITR report of the first quarter.
-
For GPPs, the option of the GPP will also be the

option of the individual partners.
Additional Requirement for Deductibility of Certain Payments

-
OSD (optional standard deductions) can be claimed by

corporations except NRFC.
o
44
REASON for exception: Such corporation is taxed at

gross. It is not allowed deductions hence, since OSD is
in lieu of deductions, therefore NRFCs are not
allowed OSD also.
Any amount paid or payable which is otherwise deductible from, or

taken into account in computing gross income or for which
depreciation or amortization may be allowed, shall be allowed as a
deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the BIR. (Section 34k)
VI.
ITEMIZED DEDUCTIONS
the previous year, it is not deductible expense. So

your expense claims must be paid this year or if
not paid this year, it must have been incurred.
1. EXPENSES
Ordinary Expenses vs. Necessary Expenses
-
Ordinary expenses (OE) refers to the expenses which are

normal, usual or common to the business, trade or
profession of the taxpayer. An expense is ordinary when it
is commonly incurred in the trade or business of the
taxpayer as distinguished from capital expenditures. The
payments, however, need not be normal or habitual in the
sense that the taxpayer will have to make them often. The
payment may be unique or non-recurring to the particular
taxpayer affected.
iii.
It must be paid or incurred in connection with the trade,

business or profession of the taxpayer;
iv.
It must be reasonable in amount;
As a rule, the only proscription as regards the

amount claimed as deductible expense is that said
amount is reasonable.
Except:
Entertainment,
Amusement
and
Recreation expense (EAR expense) has a limit as
provided by tax rules and regulations since this
type of expense has been abused.
Necessary expenses (NE) one which is useful and

appropriate in the conduct of the taxpayers trade or
profession.
Business Expense - refer to all ordinary and necessary

expenses paid or incurred during the taxable year in
carrying on or which are directly attributable to the
development, management, operation and/or conduct of
the trade, business or the exercise of a profession.
Capital Expenses - are expenditures for the extraordinary

repairs which are capitalized and subject to depreciation.
These are expenses which tend to increase the value or
prolong the life of the taxpayers property. Not deductible
OUTRIGHT.
REASON for the difference: Because those

engage in services usually needs more
representation expense to entertain their
clients or treat them over meetings, lunch
meetings, etc. But if it is goods or
properties, so long as you have the
product, you can sell it.
If you are engaged in both sale of goods

and services, then still apply the formula
to the corresponding nature of sale.
Salaries or bonuses of directors as provided under

the Corporation Code should not exceed 10% of
the net income of the corporation because if it
exceeds, it will be considered already as disguised
dividends.
What important requisite for the deductibility of an expense is not

complied with by a capital expenditure making it non-deductible on
the year of incurrence?
Capital expenditures are extraordinary expenses which
prolong the life of an asset that has been repaired. It either
increases the value or increases the life or prolongs the life
of the asset such that it violates the rule for an expense to
be deductible, it must be paid or incurred during the
taxable year. Taking into consideration the Matching
Principle, only a fraction of such capital expenditures are
treated as deductible each year. They are deductible in the
form of amortization and depreciation expense.
Common Requisites for Deductibility of Ordinary and Necessary

Expenses
i.
The expenses must be ordinary and necessary;
ii.
It must be paid or incurred during the taxable year

(whether calendar or fiscal year);
45
The limits are: to the extent only of 1%

of the net sales if the corporation is
engaged in services. And 0.5% of the net
sales if the corporation is into the sale of
goods or properties.
Extra-Ordinary Expenses - these are amortized or

depreciated. They are deductible as amortization or
depreciation expense.
Business Expense vs. Capital Expense
Exception: NET OPERATING LOSS CARRY-OVER
If the expense that youre claiming as a deductible

item this year is an expense for the operation of
v.
It must be substantiated by sufficient evidence such as

official receipts and other official records;
Official receipts
Adequate records
Amount of expense being deducted
Date and place where such expense is paid or

incurred
Nature of expense direct connection or relation of

the expense being deducted to the development,
management, operation and/or conduct of the trade,
business, or profession of the taxpayer
The evidence must be recognized or produced

by the third party. If the evidence solely
comes from the company, it is self-serving so
it is not sufficient evidence. If no OR or invoice
then it can be supported by contracts or

acknowledgment receipts.
However:
Under the COHAN RULE, some expenses need not be
supported by official receipts or sales invoice for as
long as it can be substantiated with other adequate
records proving that in fact it has been purchased by
the company and the goods received by the company
were actually converted to the product sold. Such are
enough proof that expenses had been paid or
incurred. But this does not apply in all instances.
-
vi.
This requisite need not be complied with if claiming

for OSD because the law in OSD says, whether or not
you have incurred actual expenses.
It must not be against law, morals, public policy or public

order
Example: Bribes and kickbacks given to

government personnel and revolutionary taxes
given to rebels are not deductible
Compensation For Services Rendered
NOT DEDUCTIBLE for the current year but such expense is

amortized up to the useful life of the advertisement
Rental Expenses
This only pertains to Operating Leases
i.
The rental payment is required as a condition for

continued use or possession;
ii.
The purpose is for trade, business or profession;
iii.
The taxpayer must not be the owner of the property

or he has no equitable title over the property. The
taxpayer must not be taking title to the property.
iv.
This is subject to withholding tax.
Entertainment, Amusement And Representation Expenses (EAR)

Special Requisites for Deductibility of EAR Expenses:
i.
Reasonable in amount;
ii.
Incurred during the taxable period;
iii.
Directly connected to the development, management

and operation of the trade, business, or profession of
the taxpayer, or that are directly related to or in
furtherance of the conduct of his or its trade,
business or profession;
iv.
Not to exceed such ceiling as the Secretary of Finance

may, by rules and regulations, prescribe; and
Special Requisites for Deductibility of these Expenses:

i. This must be reasonable, meaning, this must not
be ostensible; and
ii. These are, in fact, payments for personal
services actually rendered.
- of 1% of net sales for sellers of goods
Special Requisites for Deductibility of Bonuses to

Employees:
i.
The bonuses are made in good faith;
- 1% of net sales for sellers of services

v.
ii. They are given for personal services actually

rendered; and
iii. They do not exceed a reasonable compensation
for the services rendered, when added to the
stipulated salaries, measured by the amount and
quality of services performed in relation to the
taxpayers business.
Bonuses must be given in good faith and in determining
whether bonuses will form part of the compensation for
services rendered, you have to consider the (1) nature of
the business, (2) the financial capacity of the taxpayer and
(3) the extent of the services rendered.
Repairs And Maintenance Expense

-
Expenses for repairs are deductible if such repairs are

incidental or ordinary, that is, made to keep the property
used in the trade or business of the taxpayer in an
ordinarily efficient operating condition.
Repairs in the nature of replacement to the extent that

they arrest deterioration and prolong the life of the
property are capital expenditures and should be debited
against the corresponding allowance for depreciation.
Advertising And Promotional Expense (APE)

-
It must be reasonable. As long as it is beneficial for the

current year, it is deductible.
Advertising expense to build the goodwill of the business,

or creating a name for the company, future recall, etc
(usually if it is excessive i.e. CLEAR advertisements) are
46
Any expense incurred for entertainment amusement

or recreation which is contrary to law, morals, public
policy, or public order shall in no case be allowed as a
deduction.
NOTE: if the cost of the repair increases the life of an asset

for a period of more than (1) year, that amount is
considered
extra-ordinary repair. Otherwise, it is
considered ordinary repair.
Supplies And Materials
-
This must be actually consumed during the taxable year.

Litigation Expenses
-
Litigation expenses defrayed by a taxpayer to collect

apartment rentals and to eject delinquent tenants are
ordinary and necessary expenses in pursuing his business.
However, litigation expenses that are incurred in the
defense or protection of title are capital in nature and not
deductible.
Travel Expenses (TE)
vi.
This must not be between related taxpayers.

Additional requisites:
vii.
There must be an obligation which is valid and

subsisting
viii.
There must be an agreement in writing to pay the

interest
ix.
It must observe the limitation under the Arbitrage

Rule
x.
This must not be between related taxpayers
Special Requisites for Deductibility of Traveling Expenses:

i.
The expenses must be reasonable and necessary;
ii.
They must be incurred or paid while away from home;

and
Delinquency Interest on Tax Payments
iii.
They must be paid or incurred in the conduct of trade or

business.
iv.
TE are deductible even if its not receipted because theyre

TE that we incur without having a receipt from the
carriers, etc
Allowed as a deduction. This type of interest meets the

above requisites. Only the interest is deductible and does
not include the compromise and surcharge.
Interest Expenses which are Non-Deductible

i.
Interest expense on preferred stock.

-
As a rule, interest on preferred stock is not

deductible because there is no obligation to
speak of. It is in effect an interest on dividend.
Reason: the payment is dependent upon the
profits of the corporation. It will only be paid if
the corporation earns profits. Not an actual loan
of money.
BUT if it is not dependent upon corporate profits

or earnings, it is deductible. If it is payable on a
particular date or maturity without regard to the
corporate profits, it is deductible.
SCRIP DIVIDEND is a dividend given by a

corporation in the form of a promissory note.
The interest paid thereon is actually interest on
the corporations indebtedness to the
stockholder. As such, the interest paid on scrip
dividend is a deductible expense on the part of
the corporation.
Option To Private Educational Institution (OPEI)

In addition to the allowable deductions, a private educational
institution may, at its option, elect either:
A. Deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the taxable
year for the expansion of school facilities; or
B. To deduct allowance for depreciation thereof.
2.
PEIs have the option to deduct capital expenditures in the

year it was paid or incurred or the other option is to
depreciate the expense over the useful life of the asset.
INTEREST EXPENSE (IE)
The amount of interest paid or incurred within a taxable

year on indebtedness in connection with the taxpayers
profession, trade or business shall be allowed as deduction
from gross income.
ii.
When there is no agreement in writing to pay

interest.
Requisites for Deductibility

i.
This must be paid or incurred during the taxable year;
ii.
This must be incurred in connection with the trade,

business or profession of the taxpayer;
iii.
There must be an obligation which is valid and

subsisting;
iv.
There must be an agreement in writing to pay

interest;
v.
This must observe the limitation under the arbitrage

rule; and
47
This does not meet the requisite for deductibility

iii.
Interest expense on loan entered into between

related taxpayers
Related taxpayers:
a.
Members of the same family which includes:

a.1. spouses
a.2. brothers and sisters
a.3. descendants and ascendants
b.
Between 2 corporations owned or controlled by one

individual. He must have a controlling interest over
these 2 corporations. OR if one corporation is
considered as personal holding company of another
corp.
arbitrage rule applies since Co. A is earning

interest income subjected to final tax. If there is
no such interest income, the arbitrage will not
apply, hence, automatically deduct interest
payment in full.
Controlling interest means more than 50%
c.
Between a corporation and an individual; that

individual owns or controls more than 50% of the
outstanding capital stock of such corporation
d.
Parties to a trust;
d.1. grant or fiduciary
Co. B can fully claim the 600K as a deductible IE

since its interest income is not subjected to final
tax. Interest income subjected to final tax is only
those coming from the banking institutions.
Co. C can fully claim the 600K as a deductible IE

since it is not earning interest income.
RATIONALE:
d.2. fiduciary of one trust and fiduciary of another

trust but there is only one grantor
d.3. beneficiary and fiduciary

iv.
Interest paid
purposes.
or
calculated
v.
Interest paid in advance through discount or

otherwise by an individual taxpayer reporting
income on the cash basis. Such interest shall be
allowed as a deduction in the ear the indebtedness
is paid.
obligation
to
for
finance
cost-keeping
If the IE is 100K, interest income subject to final

tax is 100K, do you have a deductible IE? YES.
You have a deductible IE of 67K (100K [33% x
100K]).
If the interest income is 500K subject to final tax,

IE is 100K, do you have a deductible IE? NO. 33%
of 500K is 165K. So the 165K will be deducted to
100K, which results to no deductible IE.
vi.
Interest on
exploration
petroleum
vii.
Interest on unclaimed salaries of the employees
Theoretical interest
viii.
33% of the interest income subjected to final tax

(arbitrage rule when applicable)
Arbitrage Rule
-
The taxpayers allowable deduction for IE shall be reduced

by an amount equal to 33% of the interest income earned
by him which has been subjected to final tax.
Example: Lets say that the company has an IE of 600K

but it has no interest income, is the IE deductible
fully? YES. Say for example, Co. A (earning interest
income of 100K subject to 20% final tax), Co. B
(earning 100K interest income from loans to
employees) and Co. C (no interest income). All of
them obtained the 1M loan running for 10 years
wherein they would be liable each for 600K annually
as IE. Which of the 3 corporations can claim the full
600K as expense and which cannot?
48
Co. A cannot claim fully the 600K as a deductible

IE but only 567K (600K [33% x 100K]). The
Its an interest which is computed or calculated, not paid or

incurred, for the purpose of determining the opportunity cost
of investing in a business. Its not real. Theres no payment at
all. Thus, its neither deductible nor taxable.
Imputed interest
-
Sec. 50 of the tax code Allocation of Income and Deductions

In the case of 2 or more organizations, trades or businesses
(whether or not incorporated and whether or not organized in
the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to
distribute, apportion, or allocate gross income or deductions
between or among such organization, trade or business, if he
determines that such distribution, apportionment, or allocation
is necessary in order to prevent evasion of taxes or clearly to
reflect the income of any such organizations, trades or
businesses.
Such provision is powerful in the sense that the BIR can do

anything with it so long as it sees relationships between
corporations.
The arbitrage rule automatically limits the deductibility of

the IE by reducing 33% of the interest income subject to
final tax, whether or not engaged in back-to-back loan
transactions. [Only applicable when there is interest
income subject to final tax i.e. interest income from
deposits in banks and other financial institutions or FCDUs]
To discourage Back-to-Back loan

transactions obtaining loan from one
bank and invest it to another bank in
order to benefit the difference
between the tax due on interest
income and the tax benefit from the IE.
Example: If Co. A is related to Co. B as the

controlling or fully owning the other corporation,
any expense loan (lets say 1M) to Co. B, which is
interest-free, so Co. A did not earn any interest
income. Can Co. B deduct IE? Here, no IE can be
claimed because IE must be stipulated in writing

and there is no interest payment made. But the
BIR can impute an interest based on the legal
rate of 12% and subject such interest income on
the part of Co. A to tax. But Co. B is absolutely
not allowed to claim the IE for no interest has
been paid and there is no stipulation in writing.
3.
vi. Electric Energy Consumption Tax (BP No. 36)

Requisites for deductibility of taxes
a.
Ergo, one company can be compelled to pay

taxes on interest income but the other company
cannot claim such as interest expense.
Optional treatment of IE (OTIE)

-
v. Value-Added Tax indirect tax, tax that is shouldered by

the customers
b.
This must be paid or incurred within the taxable

year; and
This must be taxes paid or incurred in
connection with the trade, business or
profession of the taxpayer.
Tax Deduction v. Tax Credit

At the option of the taxpayer, interest incurred
to acquire property used in trade, business or
exercise of a profession may be allowed as a
deduction or treated as a capital expenditure.
Same concept as capitalizable repairs and
maintenance.
a. Taxes, as deductions include those taxes which are paid

or incurred in connection with the trade, business or
profession of the taxpayer. However, the source of a tax
credit is foreign income tax paid, war profit tax, excess
profit tax paid to a foreign country.
b. Taxes, as deductions, may be claimed as deductions
from gross income in computing the net income WHILE tax
credit is a deduction from Philippine Income Tax.
TAXES
General Rule:
c. The foreign income tax paid to the foreign country is not

always the amount that may be claimed as tax credit
because under the limitation provided under the Tax Code,
it must not be more than the ratio of foreign income to
the total income multiplied by the Philippine Income Tax.
All taxes, national or local, paid or incurred within the taxable

year in connection with the taxpayers trade, business or
profession are deductible from gross income.
Exception:
i. Special Assessment on Real Properties tax imposed on the
improvement of a parcel of land
ii. Income Tax Philippine and Foreign Income Tax
- However, Foreign Income tax, at the option of
the taxpayer, may be claimed as tax expense (if RC or DC,
bec. They are taxable for global income) or tax credit
If the foreign tax is claimed as

credit, you cannot claim it as
expense. But if you claim it as
expense, you cannot claim it as
credit.
Claiming it as a tax credit, you can claim

the full benefit of the tax paid abroad
since tax credit is a deduction from
Philippine income tax. But if you claim it
as an expense, only to the extent of 30%
of that foreign tax will it reduce the tax
due since tax deduction, as an expense, is
a deduction from gross income in
computing the net income. Thus, tax
credit is more beneficial.
a
a
a
a
tax
tax
tax
tax
iii. Taxes which are not connected with the trade, business or
profession of the taxpayer
-Example: Revolutionary taxes
TAX DEDUCTION
TAX CREDIT
Sales
Less: Direct Cost
____________
Gross Income
Less: Expenses
(incl. taxes as deduction)
__________
Taxable income
Tax rate 30%
___________
Tax Due
Sales
Less: Direct Cost
____________
Gross Income
Less: Expenses
__________
Taxable income
Tax rate 30%
___________
Tax Due
Less: Tax Credit
___________
Tax Payable
Is the real property tax (local tax) payment made by the

corporation on its real property used in trade or business a
deductible expense for purposes of computing income tax
liability, not real property tax liability?
-
YES. Real property taxes (and other taxes

allowed as expenses i.e. custom duties) are
deductible so long as:
1. It is ordinary and necessary
2. Reasonable in amount
iv. Transfer Estates Estate Tax and Donors Tax; not related
to trade or business
49
3. It has been paid or incurred during

the taxable
4. It has been paid or incurred in

connection with trade, business or
profession
5. Substantiated with O.Rs
6. Its not contrary to law, public policy

or morals
Same facts, can Mr X claim 300,000 as foreign tax

credit? The amount claimed is subject to Global and
Per Country limitations
MR. X, Resident Corporation:

Tax Due
Within = 1,000,000 = 300,000
Without = 1,000,000 = 300,000
1 million
What type of taxpayer can offset the foreign taxes directly

by 100% against the Philippine tax due?
-
2 million
Therefore, of 300,000 is recognized by

Philippine government.
i. Resident Citizens since liable of income

within and without to avoid double taxation
NRC not included because liable of

income within only no double
taxation
ii. Domestic corporations since liable of

income within and without to avoid double
taxation
iii. Members of GPPs
iv. Beneficiaries of estates and trusts
The amount of the credit taken shall be subject to each of

the following limitations:
-
Per country Limitation the amount of credit in

respect to the tax paid or incurred to any country
shall not exceed the same proportion of the tax
against which the credit is taken, which the taxpayers
taxable income from sources within such country
bears to his entire taxable income for the same
taxable year; and
Global Limitation the total amount of credit shall

not exceed the same proportion of the tax against
which such credit is taken, which the taxpayers
taxable income from sources without the Philippines
taxable under this title bears to his entire taxable
income for the same taxable year.
In the case of a NRA-ETB in the Philippines and a RFC,

deductions for taxes shall only be allowed only if and to
the extent that they are connected with income from
sources within the Philippines.
Foreign tax credit can only be claimed or offsetted against the
Philippine tax due if the Philippine tax due is that of a resident
citizen or domestic corporation because these two types of
taxpayers are taxable on income within and income without. If you
say within and without, the Philippine tax already comprises of tax
on the Philippine income and tax on the foreign income. Therefore,
component of that is a foreign tax, which should rightfully be
managed.
50
Yes, since a resident citizen is taxable within

and without, and required to declare the
total global income, he can also claim it as
an expense or as a tax credit, directly
offsetted against the Philippine income tax
due.
The tax credit that shall be allowed only be to

the extent of the foreign tax component in the
Philippine tax due. [since it will decrease taxes to
be paid to the government, amount claimed as
tax credit is whichever is lower; Lifeblood
doctrine]
Limitations on Credit
NRC, NRAs, RFC and NRFCs cannot claim as
deductions foreign tax expenses paid since
they pertain to income earned outside the
Philippines.
Say for example, this is a resident citizen, lets say

income within is 1M, income without is 1M.
Philippine tax is still at 300,000, for income within and
without. Foreign tax paid is 300,000. Can the taxpayer
claim the foreign income tax as an expense deduction
or offsetted as a tax credit?
Formula: -
Limitations on deductions for NRA-ETB and RFC:
X 300,000 = Max 150,000
Country
Taxable
Income
Tax Due
Per
Country
Limit
1,000,000
400,000
300,000
2,000,000
500,000
600,000
Phils
3,000,000
1,800,000
Global
Limit
900,000
Tax Credit
allowed
300,000
500,000
Total:
800,000
*1M + 2M + 3M = 6M * 30% = 1.8M
Per Country
Limitation
LIMIT
Country A
Per Country
Income
1,000,000
Global
Income
6,000,000
x
1,800,000
=
300,000
Actual
Lower
Amount
Gross Income
Less: Expenses
200,000
x
1,800,000
=
600,000
3,000,000
2,000,000
300,000
500,000
Lets put that into illustration. In 2008, of the 1M tax expense,

you have overpaid 500K in Real property taxes. If such amount
is refunded in year 2009, the whole 500K would be taxable.
500,000
6,000,000
Sales
Cost
800,000
Year 2010
10,000,000
9,000,000
Gross Income
Less: Expenses
Global
Limitation
1,000,000
2,000,000
Net Taxable Income 0
LIMIT
All Foreign
Income
3,000,000
Global
Income
6,000,000
x
1,800,000
=
900,000
Lower
Amount
(PCL)
800,000
Tax
Credit
800,000
Hence, the tax credit allowed is 800,000.

In effect, you will only be liable to tax amounting to 1,000,000 to the
BIR
However, if the amount of a tax refunded is a tax which is nondeductible (i.e. VAT or income tax), then such will surely not be
taxable in the year they are refunded since you did not receive
a benefit from them (they are non-deductible).
1,800,000
Less: Tax Credit
800,000
4. LOSSES
Tax Payable
1,000,000
Classification of Losses
Proof of Credits (Tax Credits)

The credits shall be allowed only if the taxpayer establishes to the
satisfaction of the Commissioner the following:
a.
The total amount of income from sources without the

Philippines
b.
The total amount of income derived from each country, paid

or incurred to which is claimed as a credit; and
c.
All other information necessary for the verification and

computation of such credits.
Tax Subsequently Refunded of Credited

Taxes previously allowed as deductions, when refunded or credited,
shall be included as part of gross income in the year of receipt to the
extent of the income tax benefit of such deduction.
Tax Expense
1,000,000
Assuming in 2010, you have overpaid 500K in Real property

taxes. If such amount is refunded in year 2011, the whole 500K
would NOT be taxable. You have not benefitted from the
claiming of Real property tax (RPT) as deductions since even
without the RPT, you would still have a taxable income of zero
in year 2010. No income tax benefit in the year 2010 from the
tax expense deduction.
Tax Due
51
Tax Expense
1,000,000
Net Taxable Income 1,000,000

400,000
Country B
Per Country
Income
Global
Income
Year 2008
10,000,000
7,000,000
Sales
Cost
a.
Ordinary Losses losses sustained in the course of trade,

business or profession of the taxpayer
- can be claimed as deductible expense
-
Net operating loss the excess allowable deduction

over gross income of the business in a taxable year
Net operating loss carry over (NOLCO) shall be

carried over as a deduction from the gross income for
the next 3 consecutive taxable years immediately
following the year of loss. Such loss shall be allowed
as a deduction if it had not been previously offset as a
deduction from gross income. However, any loss
incurred in a taxable year during which the taxpayer
was exempt from income tax shall not be allowed as a
deduction.
YEAR 1
YEAR 2
YEAR 3
Sales
Less: Cost
Gross Income
Less: Expenses
Net Taxable Income
10,000,000
8,000,000
2,000,000
5,000,000
(3,000,000)
10,000,000
8,000,000
2,000,000
4,000,000
(3,000,000)
10,000,000
4,000,000
6,000,000
2,000,000
4,000,000
Taxable Income
-0-
-0-
-0-
corporation, is held by or on behalf of

the same persons.
XYZ Corporation and ABC Corporation, both companies owned

80% by A. Shown below are the list of shares in each company.
A 80%
A 80%
ABC Corp
XYZ Corp
U 5%
No taxable income because:
Net Taxable Income: 4,000,000
Less:
Loss on Year 1:
3,000,000
Loss on Year 2:
1,000,000
No Taxable Income
Year 1
V 5%
LOSS
W 5%
X 5%
The 3M loss in year 1 and year 2 is carried over to the next 3

consecutive years. Consequently, the NOLCO can be fully
applied in year 3. Therefore, your taxable income would be
zero. The NOLCO can only be applied in the year you obtain an
income (that is why in year 2, you just accumulate it).
If the loss in the first year, is not used up the next 3 years,
whether fully or partially, it goes down the drain, it is no longer
th
usable in the 4 year after it has been suffered as a loss. Only 3
years at a time. Year 1 is allowed 3 years. Year 2 has a life of 3
years.
Lets change the facts. This is XYZ Corporation, it has been given
4 years income tax holiday. For the first 4 years of operation, it
th
totally suffered annual operating losses. In the 5 year of
operation, it earned income. Can the losses suffered in the
previous years be used up to offset against the taxable income
th
in the 5 year? No.
Why? Whats the reason? Whenever a corporation is
at a stage or it is granted exemption from income
taxes, any losses suffered during those years covered
by the exemption cannot be considered as a loss or
carry over. It will not benefit years that the
corporation will subsequently be taxable.
NOLCO shall be allowed only if there has been no substantial

change in the ownership of the business or enterprise.
-
ii.
52
E 5%
In this case, ABC has been paying huge income taxes.

So what stockholders of both corporation decided was
to merge in the hope of using the losses of XYZ
Corporation to offset against the income of ABC
Corporation and claim it as a deductible expense.
Is it allowed? Yes as long as the change in ownership is

not less than 75%.
Should it be more than 75%? Which means? Not less

than 75% is 75% or above.
Not less than 75% in nominal value of

outstanding issued shares, if the
business is in the name of a
corporation, is held by or on behalf of
the same persons; or
Not less than 75% of the paid up
capital of the corporation, if the
business is in the name of the
So if the facts above is changed to 75% ownership: Can the

loss be considered as deductible in the merged
corporation? Yes. It is still deductible because after the
merger, the ownership is still owned by A at 75%.
Combining corporations in order to use up the losses

suffered by 1 corporation is allowed so long as there is no
substantial change in ownership from the individual
corporations down to the merged corporation.
b.
There is no substantial change when:

i.
D 5%
A total of 100% ownership for both companies. Year 1 until

year 5, operate at a loss. Year 1 to year 5 for ABC
Corporation operated positive. The stockholders of XYZ
Corporation could not use the losses suffered in year 1 to
the next 3 years nor the losses in year 2 to the next years.
Why? Because it consistently operated at a loss.
*Running of NOLCO is not tolled by the use of OSD
Year 5
Year 5
C 5%
-0-
Year 1
INCOME
B 5%
Capital Losses governed by rules on loss from sale or

exchange of capital assets. Losses from sales or exchanges
of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges.
- cannot be claimed as deductible expenses
Net Capital Loss the excess of capital loss over capital gains
Net capital loss carry over (NCLCO) not available to corporate

tax payers
Capital Losses include the following:
i.
Loss arising from failure to exercise privilege to sell or

buy property (option money not availed)
ii.
Securities becoming worthless (investment in a

corporation which is dissolving; can be in the form of
Liquidating dividends that is lesser than your initial
investment) Exc. If you are into trading of securities
iii.
Abandonment losses in the case of natural resources

(wherein you have invested in a property hoping to
find natural resources or minerals only to find out
that there is none. So abandonment losses are
treated as capital loss because you are not yet in the
operation of the mining business. You are still in the
exploratory stage.)
iv.
Loss from wash sale or stock securities
Wash sale occurs where it appears that within a period

beginning 30 days before the date of the sale or disposition of
shares of stock or securities ending 30 days after such date, the
taxpayer has acquired (by purchase or exchange) or has
entered into a contract or option to so acquire, substantially
identical stock or securities. No deduction for loss shall be
allowed for wash sales unless the claim is made by a dealer in
stock or securities and with respect to a transaction made in
the ordinary course of the business of such dealer.
Capital Loss Carry Over. Carry over of Losses from sale or

exchange of capital assets for one year (only to the next year
not 3 years) which can only be availed of by individuals
-
CAPITAL ASSETS:
Applicable NCLCO?
1. Real Property
6% Capital Gains Tax
X
2. Shares of Stock 5% / 10%
3. All other MV (personally own)
Bought
4Million
Sold
2Million
Capital Loss
2Million
NCLCO can only be carried over the NEXT YEAR ONLY!
NOLCO
Operating Loss
Carried over to the next 3
succeeding years
Allowed to both individual and
corporate taxpayer
Sale of real properties classified as capital

assets.
Sale of shares of stock wherein you are

not a broker of securities subject to
capital gains tax.
And ALL other capital assets.
Real properties are taxable on the gross selling price

or fair market value whichever is higher. So any loss
that you suffered from the sale of this property
cannot be carried over because it is on a per
transaction basis and you are never taxed on the
profit alone. You are taxable on the gross selling price
or the fair market value itself.
But on the other 2, you can have capital losses.

(Meaning capital losses can only arise in sales of
shares of stocks and all other capital assets. Never on
the sale of real properties.)
o
Motor vehicle that you personally own.

So if you sell a motor vehicle that you
personally own. You are not in the
Carry this
over the
NEXT
YEAR!
NCLCO
Capital Loss
Carried over only to the next
succeeding year
Not allowed for corporations,
only individual taxpayer
c.
Wagering or gambling losses the amount that is

deductible must not exceed the gains. Capital losses can
NEVER BE DEDUCTED AGAINST ORDINARY INCOME.
Capital losses can be charged against capital gains to the
extent of the gain. Any excess so long as it is NOT ILLEGAL
losses can be carried over as an individual taxpayer to the
next year.
d.
Casualty losses include losses from fire, storm

shipwreck, other casualty losses, robbery, embezzlement
and theft. Must meet the requirements below in order to
be deductible.
e.
Abandonment losses in the event that a contract area

where petroleum operations are undertaken is partially or
wholly abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be
allowed as deduction. (only pertains to Petroleum
operations)
f.
Special losses i.e. loss arising from voluntary removal of

buildings as an incident to renewal or replacement
There are only 3 types of capital assets which can give

rise to capital transactions.
53
business of leasing or buying or selling of

motor vehicles. You bought it at Php
4million and sold it at Php 2Million, you
suffered a loss. This is capital loss (which
may be subject to NET CAPITAL LOSS
CARRY OVER)
Common Requisites for deductibility of losses

1.
The loss must be incurred by the taxpayer in the

course of his trade, business or profession
2.
Loss must be actually sustained and charged off

within the taxable year, and not mere anticipated
losses;
3.
Must be evidenced by a closed and complete

transaction (fixed identifiable event)
4.
Must not be compensated by insurance or other

forms of indemnity. If it is partly compensated, only
the amount not compensated by insurance is
deductible
5.
The loss is not claimed as a deduction for estate tax

purposes; and
6.
If it is a casualty loss, the taxpayer has filed a sworn

declaration of loss within 45 days after the date of
discovery of the casualty or robbery, theft or
embezzlement. [state the nature or event, the
property lost or damaged, value estimation and
insurance, if any]
MATCHING PRINCIPLE the losses if incurred in past
year should only be claimed as expense during that
year and not on the year of discovery. If loss is caused
by an employee, remedy is to treat that as a bad debt
expense against the erring employee in the year of
discovery.
1.
There must be a statement of account sent to

the debtor
2.
A collection letter
3.
If he failed to pay, refer the case to a lawyer
4.
If lawyer may send a demand letter to the

debtor
5.
If the debtor still fails to pay the same, file an

action in court for collection
Bad debts charged off subsequently collected

-
If the recovery of bad debts, resulted in a tax benefit to

the tax payer, that is taxable. If it did not result in any tax
benefit to the taxpayer, that is not taxable.
Here, follow the rule in TAX REFUNDS
6. DEPRECIATION
-
The gradual diminution of the useful value of the property

used in trade, business or profession of the taxpayer,
arising from wear or tear or natural obsolescence. The
term is also applied to amortization of the value of
intangible assets, the use of which in trade or business is
definitely limited in duration.
Requisites for deductibility of depreciation

5. BAD DEBTS
-
These debts are due to the taxpayer which are usually

ascertained to be worthless and charged off within the
taxable year. (meaning it is very much doubtful that the
borrower will pay. Therefore you must take the necessary
steps to prove worthlessness and support it by proper
substantiation in order to claim it as expense)
a.
The property must be used in the trade, business

or profession of the taxpayer
b.
There must be depreciable properties

The non-depreciable properties are:
*The death of the borrower does not render the payable

worthless since you can still go after the estate.
Requisites for deductibility of bad debts
a.
It must be
indebtedness
for
valid
and
b.
Must be ascertained to be worthless
subsisting
(if you are an insurance company, the borrower

should be declared insolvent or dissolved)
c.
Must be charged off and uncollectible within the

taxable year
d.
Must be uncollectible in the near future and
e.
Must arise from trade, business or profession of

the taxpayer
f.
Must not be between related taxpayers
i.
Personal property not used in trade

business or profession of the taxpayer
ii.
Inventoriable stock and securities
iii.
Land
iv.
Mining and other natural resources
c.
The allowance for

reasonable
d.
This must be charged off during the taxable year
e.
A statement on the allowance must be attached

to the return
f.
The method in computing the allowance for

depreciation must be in accordance with the
method prescribed by the Secretary of Finance
upon the recommendation of the BIR
Commissioner. This method includes:
i.
depreciation must be
Declining Balance Method
Steps to prove worthlessness

54
ii.
Sum of Years Digit Method
iii.
Straight line Method
iv.
Any other method as may be

prescribed by the Secretary of Finance
upon the recommendation of the BIR
Commissioner.
7. DEPLETION
-
Requisites for deductibility of depletion
Agreement as to useful life on which Depreciation Rate is based

-
The exhaustion of natural resources like mines and oil and

gas wells as a result of production or severance from such
mines or wells. These are non-replaceable assets.
where the tax payer and the CIR (Commissioner of Internal

Revenue/ BIR Commissioner) have entered into an
agreement in writing specifically dealing with the useful
life and rate of depreciation of the property, the rate so
agreed upon shall be binding on both the taxpayer and the
National Government in the absence of facts and
circumstances not taken into consideration during the
adoption of such agreement. The responsibility of
establishing the existence of such facts and circumstances
shall rest with the party initiating the modification.
Same as that of depreciation, except that the

properties involved are natural resources
Depletion v. depreciation
Depletion and Depreciation are predicated on the

same basic premise of avoiding tax on capital.
Deletion is based upon the concept of the exhaustion
of a natural resource whereas depreciation is based
upon the concept of the exhaustion of the property,
not otherwise a natural resource, used in a trade or
business or held for the production of income. Thus,
depletion and depreciation are made applicable to
different types of assets.
Determination of amount of depletion cost

*If there is a change in Estimated Useful Life
-
Essential Factors:
G.R. No need for approval from BIR

a.
The basis of the property
b.
The estimated total recoverable units in the

property; and
c.
The number of units recovered during the

taxable year.
Exception : When there was previous agreement with CIR

*If the property is appraised and you found out
that the value of the property has substantially increased. You
will not change the amount of depreciation. The appraisal will
only affect the value of the property when sold but not for
depreciation purposes.
Intangible cost in petroleum operations

Deduction for obsolescence
if the whole or any portion of physical property is clearly

shown by the taxpayer as being affected by economic
conditions that will result in its being abandoned at a
future date prior to the end of its natural life, so that
depreciation deductions alone would be insufficient to
return the cost at the end of its economic terms of
usefulness, a reasonable deduction for obsolescence, in
addition to depreciation, may be allowed.
Depreciation of patent or copyright

-
In computing a depreciation allowance in the case of

patent or copyright, the capital sum to be replaced is the
cost or other basis of the patent or copyright. The
allowance should be computed by an apportionment of
the cost or other basis of the patent or copyright over the
life of the patent or copyright since its grant, or since its
acquisition by the taxpayer, or since March 1, 1913 as the
case may be.
NOTE : If tangible property depreciation expense; if intangible (i.e.

patents/copyright, purchased goodwill) amortization expense
55
any cost incurred in petroleum operations which in

itself has no salvage value and which is incidental to
and which is incidental to and necessary for the
drilling of wells and preparation of wells for the
production of petroleum.
NOTE:
Depletion refers only to natural resources. It is easier to depreciate
than to deplete. Depreciation is an exact computation. You only
have a formula. If it will exist for 10 years, then divide it for ten
years.
-
Natural resource is sometimes undetermined. You

will have to depend on how much the estimated
produce from that parcel of land.
If you think you can produce 10 truck loads

of diamonds in 10 years, you cannot divide
it for over 10 years. The only thing that you
can do if you expect 10 truckloads of
diamonds is if you can produce this year 2
truckloads, over 10 expected, then 20% of
your cost of your property should be
depleted already.
If you produce 5 truckloads in the

first year, estimated is 10. So of
the natural resources should be
depleted as of that year.
-
d.
Foreign government or institution and

international civic organizations (i.e UNICEF,
WHO)
e.
Accredited NGO
NGO means non-profit Domestic Corporation which are formed

and organized for any of the following purposes
8. CHARITABLE CONTRIBUTIONS
Kinds of Charitable contributions
a.
Ordinary those which are subject to limitations as to the

amount deductible from gross income
-
b.
Limitations: it must not exceed 10% in the case

of an individual and 5% in the case of a
corporation of the taxpayers taxable income
(except where donation is deductible in full) to be
determined without the benefit of the
contribution
i.
Research Health
ii.
Education
iii.
Charitable, Cultural, Character Building
iv.
Sports Development
Welfare
*Who accredits them? DepEd,

(corresponding govt branch)
CHED,
and
Social
DSWD,
DOST
For NGO to be accredited - Not more than 30% of its funding or

donations or contributions would be used for administrative
purposes.
Special those which are deductible in full from gross

income
Requisites for deductibility of charitable and other contributions

1.
The contribution must actually be paid or made to the

Philippine Government or any political subdivision or to
any of the domestic corporations or associations specified
by the Tax Code;
Special Contributions Deductible

Govt, Foreign Govt,
Accredited NGO
Not inure to benefit of
a private stockholder
Within Taxable Year
Adequately Supported
Fully Deductible
(100%)
1
2
2.
No part of the Net Income of the beneficiary must inure to

the benefit of any private stockholder or individual
3.
It must be made within the taxable year
4.
It must not exceed 10% in the case of an individual and 5%

in the case of a corporation of the taxpayers taxable
income (except where the donation is deductible in full) to
be determined without the benefit of the contribution;
and
5.
It must be evidenced by adequate record or receipts
3
4
5
Sales
Cost
11Million
9 Million
Gross Income
Less: Expenses
2 Million
1 Million
Taxable/
Net Income
CD
Tax Due
c.
- 0 c-
If OC-D (partially deductible):

Note:
Expenses
here do
not
include
charitabl
e
donation
s
Sales
Cost
11Million
9 Million
Gross Income 2 Million

Less: Expenses 1 Million
Taxable/
Net Income
CD
1 Million
50,000
Tax Due
950,000
Government or to any of its agencies or political

subdivisions, including GOCCs, exclusively to
finance, to provide for, or to be used in
undertaking priority projects (SHE):
i.
56
1 Million
(1Million)
Contributions NonDeductible
All others (i.e. to politicians)
Not inure to benefit of a

private stockholder
Within Taxable Year
Sufficient Records
Partially Deductible (5%,
10%)
If fully deductible:
Charitable and other contributions which are fully deductible

If the Contributions are given to the following:
Ordinary Contributions
Deductible
NGOs
Sports Development,
Invention
Science
ii.
Health and Human Settlement
iii.
Educational
Development
and
and
Economic
Another exception provided by your special law is when you

adopt a school [adopt-a-school program]. You provide books,
computer equipment etc, and whenever you do that, have
yourself accredited and whatever your donation to that school
is, its fully 100% deductible plus 50% deductible. This is beyond
the tax code, this is special law. So if you donate 1M in books to
a school that you have adopted, your deductible donation is
1.5M.
b.
The pension must be reasonable and actually

sound
c.
Contribution must be given by the employer to

that pension plan
d.
The amount contributed must no longer be

subject to the control or disposition of the
employer
e.
The payment has not yet been allowed as a

deduction
f.
This must be for the benefit of the employees
g.
This deduction is apportioned in equal parts over

a period of ten (10) consecutive years beginning
with the year in which the transfer or payment is
made
9. RESEARCH AND DEVELOPMENT EXPENSES

-
Research and Development Expense can be capitalized or

deducted as expense outright
- if capitalized, it is claimed as expense in 5 years as

amortization expense (expense / 5)
Amortization of Certain Research and Development Expenditures

(capitalized)
a.
Paid or incurred by the taxpayer in connection with

his trade, business or profession;
b.
Not treated as an expense
c.
Chargeable to capital account but not chargeable to

property of a character which is subject to
depreciation or depletion (bec. the property may
have a different depreciable life. For R & D, it must be
5 years)
Every corporation is encouraged to have a retirement plan in order

to provide for retiring employees
Non-deductible Research and Development Expenditures

Corporation
a.
b.
Amount spent for the acquisition or

improvements of land or for the improvement or
development of natural resources (capitalized
hence not deductible outright)
Amount paid or incurred for the purpose of
ascertaining the existence, location, extent or
quality of any natural resources like deposits of
ore or other minerals including oil gas.
Retirement
Plan
Employees
Separate Entity
Deductible Expense? Yes!
10. PENSION TRUST CONTRIBUTIONS

a)
b)
Contributions
a.
Current Year the contribution is considered as

ordinary and necessary expenses fully deductible
b.
Past Years if it refers to the services rendered

for the past 10 years, the contribution is
deductible but apportioned over the next 10
years (i.e. 1/10 deductible every year)
Requisites for deductibility of Contributions to Pension

Trusts
a.
There must be a pension or retirement plan

established by the employer (reasonable private
benefit plan)
- must be approved by the BIR
57
2010
This is the retirement plan, this is the corporation. If you

have a retirement plan, any money that is placed by the
corporation here, for whose benefit is this? For the
employees. This is a separate entity from the corporation.
If the corporation puts in money to this retirement plan
for the exclusive benefit of its employees, this is totally a
separate entity and any income earned from this plan is
not an income of the corporation. Mind you, the income of
this retirement plan is totally tax free. Would the transfer
of funds to this retirement plan by the corporation be a
deductible expense?
VII.
Reasonable, the contribution

must be given by the employer
and the amount contributed must
no longer be under the control of
the corporation. Once the
corporation has transferred the
money, the corporation may no
longer get back the money or use
it in their operations.
Second requisite, the payment
has not yet been allowed as a
deduction it cannot be deducted
twice. And plan is for the benefit
of the employees and deductions
apportioned in equal portions
over 10 consecutive years
beginning in the year in which the
transfer was first made.
Past service cost = divide by 10 ( claim only

1/10 for the year)
Sources
Tax base
Entitled
Deduction
Tax Rate
DC
Within &
without
Taxable
Income
Yes
30%
RFC
Within
Taxable
Income
Yes
30%
NRFC
Within
Gross
Income
No
30%
1.
2.
3.
4.
A tax effort ratio of 20% of the GNP

A ratio of 40% of income tax collection to
total tax revenues
A VAT tax effort ratio of 4% of the GNP
A 0.9% ratio of the Consolidated Public
Sector Financial Position to GNP
This is available to firms whose ration of cost of sales to

gross sales or receipts from all sources do not exceed 55%.
Once elected by the corporation, the option shall be
irrevocable for the 3 consecutive years (NOTE: not next
three consecutive years but 3 consecutive years which
means it includes the current year).
-
58
Classifications
Conditions before exercising the option:
If it is for that year, it can be deductible if it

is considered as ordinary expense for that
year. But if such deductions were made for
services that have been rendered for the
past years, you can have it amortized over a
period of 10 years. Divide the amount to be
paid over the next 10 years.
Current service cost = deductible in full
TAX RATES
Optional: Domestic Corporations and Resident Foreign

Corporations have the option to be taxed at 15% of gross
income, provided certain conditions are satisfied.
Distinguish between CURRENT

SERVICE COST and PAST SERVICE
COST
2Million
General Rule: 30% effective January 1, 2009 (except in special cases)
Are all contributions made by a corporation to a

retirement plan deductible? No.
100% Deductible
1/10 DR
Ex. In your retirement plan, 1M must be contributed per year. If

you skipped the 2010 contributions and contributed 2M in
2011, then your deductible expense for 2011 is 1.1M (1M
+ 100K which is 1/10 of 1M)
Yes. In order for the contributions to be

deductible, the amount contributed to the
plan must be:
o
Contribution:
2011
1Million For Current Year
1Million For Past year
Where shall you apply the 15%?

TAXATION NOTES - FINALS| |marukoi.mhealler
Sales
Cost
minimum income tax is greater than the normal income

tax.
11,000,000
9,000,000
15% Gross Income

Less
2,000,000 = 300,000
500,000
30% Net Income
1,500,000 = 400,000
55% of 11M is
6,050,000.
Commencement of business operation shall mean the

registration of the business with the BIR
An entity liable for 30% NCIT is liable for MCIT; entities

NOT liable for 30% NCIT is not liable for MCIT
Since the cost of sales exceed 55% or

P6,050,000, then Gross Income Taxation
cannot be availed.
Would everybody be allowed to choose 15% gross

income taxation? NO.
Only available to domestic corporations and

resident foreign corporations.
Non-resident foreign corporations are not

expected to file these tax returns and are
subject to final withholding tax of 30%.
Ex. If the business started on 2009,

MCIT is applicable beginning 2013
If the corporation is not subject to the 30%

normal corporate income tax (NCIT), then it
will not also be subject to the MCIT. Hence,
if the corporation is under another tax
regime other than 30% NCIT, then MCIT will
not apply.
MCIT will not apply in the following

instances
a.
The corporation is a Private

Educational Institution or Nonprofit Hospital subject to 10%.
However, if income from
unrelated activities exceeds 50%
of total income then it will now
be subject to 30%. Consequently,
MCIT
will
now
apply.
[Predominance test]
b.
Subject to Income Tax Holiday

(ITH). However, after the ITH, it
will now be subject to NCIT and
also MCIT if applicable.
c.
Subject to 5% income tax for

PEZA-registered or Subic Bay
free Port-registered corporation
for registered activities. If
company
ventures
into
unregistered activities, subject to
30% NCIT and 2% MCIT.
Exceptions to the General Rule:

a.
b.
MCIT- a minimum corporate income tax of 2% of the gross

income as of the end of the taxable year. It is imposed on a
taxable corporation beginning on the 4ht taxable year
immediately following the year in which such corporation
commenced its business operations, when the minimum
income tax is greater than the normal income tax. The 30%
rate may not be applied if it is lower than the 2% of gross
income of such corporate taxpayer.
Special Rates
i.e. Proprietary Educational Institution 10% etc.
MINIMUM CORPORATE INCOME TAX

-
The minimum corporate income tax rate of 2% of gross

income means that the corporate income taxpayer must
pay corporate income tax not lower than 2% of its gross
income. If the normal corporate income tax (subjected to
30%) is lower than the 2% MCIT, the corporation must pay
the 2% minimum.
In other words, the normal income tax rate of 30% shall
not be applied if this results to a lower tax due than when
the 2% MCIT is applied on gross income
Applicable only to DOMESTIC CORP. and RESIDENT
FOREIGN CORP.
2% of the gross income as of the end of the taxable year is
th
imposed on a taxable corporation beginning the 4
taxable year immediately following the year in which the
corporation commenced its business operations, when the
59
A corporation is required to pay the MCIT if:

a. the normal corporate income tax (30% of taxable
income) is less than the 2% of gross income tax [NCIT
< MCIT] or
b. the corporation is operating at a loss.
-
NCIT and MCIT are mutually exclusive. You cannot be

liable for both at the same time.
Your actual tax liability to the government is

always the 30% tax. But in years wherein
the corporation is operating at a loss, you
dont have 30% tax, you will have to pay the
2% MCIT. Or in years wherein the
corporations regular tax on net income is
lower than 2% MCIT, you have to pay the
2% MCIT. Whichever is more favorable and

higher in taxes to the government for your
operations, you have to pay it to the
government. (Life-blood doctrine). MCIT is
only a temporary tax, in the long run, unless
there are expired MCIT, the taxes paid over
the years will always equal the NCIT paid
since the excess of MCIT over NCIT can be
carried-over.
-
When do you begin to impose the MCIT? In the fourth

taxable year immediately following the year the
corporation has commenced (pertains to registration with
BIR) business operations.
So, in 2005 December 24: you registered your business.

When should you start comparing your 2% MCIT against
your 30% normal corporate tax? In 2009.
COST OF GOODS shall include all business expenses

directly incurred to produce the merchandise to bring
them to their present location and use (Section 27A and
27E)
For trading concern: Cost of goods sold shall include the
invoice cost of goods sold, plus import duties, freight in
transporting the goods to the place where the goods are
actually sold, including insurance while the goods are in
transit. (Section 27A and 27E)
Rationale: Corporations are abusing the claiming of

expenses. They bloat the expenses (overstate) resulting to
either minimal net taxable income or they bloat this to the
extent of reporting a loss, therefore there will be no
income tax. And normally you dont exist for 10 years at a
loss, you should have closed your business already. This is
what the BIR was looking into since there are corporations
which were operating at a loss for more than 10 years. The
problem was there was over-claiming of expenses, now at
least the BIR is assured, if you report a loss, there is still
collection of 2% of gross income.
For taxpayers engaged in sale of services, gross income

means gross receipts less sales returns, allowances and
discounts, and cost of services
Its the fourth year after 2005. Beginning the fourth

taxable year following the year in which you commenced
your business operations.
You registered your business with BIR in 2005, assuming
you follow the calendar year, when is the year after you
commenced business operations 2006. So fourth year is
2009. [Tip: Just add 4 to the year you registered your
business with the BIR. No need to count ^_^ i.e 2005 + 4 =
2009]
For manufacturing concern: Cost of goods manufactured

and sold shall include all costs of production of finished
goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance and other
costs incurred to bring raw materials to the
factory/warehouse. (Section 27A and 27E)
For a service concern: Cost of services shall mean all direct
costs and expenses necessarily incurred to provide the
services required by the customers and clients including:
(A) salaries and employee benefits of personnel,
consultant specialists directly rendering the service and
(B) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost
of supplies. Provided, however, that in case of banks,
cost of services shall include interest expense.
Carry Forward of Excess Minimum Tax
Any excess of the minimum corporate income tax over the normal
income tax shall be carried forward and credited against the normal
income tax for the 3 immediately succeeding taxable years.
Can you offset the excess MCIT against MCIT?

o
The 2% MCIT is based on gross income.

4th
year
5th
year
6th
year
7th
year
8th
year
9th year
Sale
Less: Cost
10M
5M
10M
2M
10M
2M
10M
3M
10M
4M
10M
4M
Gross
income
(2% MCIT)
Less: Expenses
5M
8M
8M
7M
6M
6M
5M
7.8M
7.7M
6.8M
5.5M
5.6M
200K
300K
200K
500K
400K
due
60K
90K
60K
150K
120K
MCIT (2%)
Paid
to
the
government
0
0
160K
160K
160K
160K
140K
140K
120K
0
120K
20K
Excess MCIT
100K
170K
250K
100K
Relief from MCIT under certain conditions:

The Secretary of Finance may suspend the imposition
of the MCIT on any corporation which suffers losses
on account of:
(1) prolonged labor dispute (more than 6
months);
(2) force majeure; and
Net
income
NCIT)
(3) legitimate business reverses
30% tax
(NCIT)
Definition of Terms
GROSS INCOME derived from business shall equivalent to
gross sales less sales returns, discounts and allowances
and cost of goods sold (Sec. 27A and 27E)
60
NO. Only to the NCIT
taxable
(30%
th
th
Technically, you apply MCIT on the 5 year which is the 4 year

immediately following the year you commenced business operation.
-
the NCIT supposedly. But since in this case, you have

an existing 250K total of excess MCIT, such excess is
offsettable against the 150K NCIT, so the remaining
reserve is 100K [250K-150K]. First-in, First-out (FIFO)
th
Given the table above, in the 4 year, how much are you going
to pay to the government?
-
Remember, when do we commence computing

MCIT?
th
MCIT? 120K. NCIT? 120K.
So, therefore, you pay 20K to the government [120K100K]
You only pay the MCIT if the company is operating at

a loss or when NCIT is lower than MCIT. In this case,
its equal, so you still pay the NCIT. But since you have
an excess reserve still of 100K coming from the prior
years, you can offset it against the 120K, which is the
NCIT, so therefore, you only pay 20K.
th
Beginning the 4 taxable year following the

year that you commence business
operations or which means to say, following
the year you registered your business for
BIR purposes.
th
In the 9 year, how much will you pay to the government?
So in the 4 year, how much is your tax liability?

ZERO. MCIT is zero. At this point, youre not yet liable
th
to MCIT because MCIT will commence at the 4
taxable year following the year that you commence
th
business operations, which in fact is the 5 year. In
th
this case, it is still the 4 year.
At any point, did any excess MCIT expire? Was there an

expiration of excess MCIT, meaning, it was carried forward for 3
years but was never used? NO
How much is your total tax due (NCIT) from the 5 year to the
th
9 year? 480K
th
Lets go to the 5 year. How much is your liability to the

government? 160K. Whichever is HIGHER between MCIT &
NCIT
-
How much is your excess MCIT to be carried forward?

100K.
Your true tax liability to the government is only the

NCIT, but you paid the MCIT of 160K because MCIT is
higher than NCIT. Therefore, you have a reserve of
100K that is creditable against your future tax liability
in the succeeding 3 consecutive years. However, this
can only be creditable against NCIT not against MCIT.
th
How much did you actually pay to the government?

480K still. (They are equal as long as there is no
expired MCIT)
The difference is that your true tax liability is always

the 30% NCIT. But at any point that you operated at a
loss or your NCIT is lower than MCIT, you will be
required by the government to pay MCIT as an
advance payment for future years. Whatever excess
MCIT that you pay to the government will be
creditable to the next 3 years.
th
Lets go to the 6 year. How much will you pay to the

government? 160K because MCIT is higher than NCIT
Example: Where MCIT expires

-
Can you not deduct your reserve of 100K?
NO, because excess MCIT is only offsettable

against the NCIT. It cannot be credited
against the MCIT. You always have to pay
the MCIT, whatever it is. But once you reach
to the point that your liability is already the
NCIT, its when you can use the reserve. In
this case, your payment to the government
is MCIT so, therefore, you cannot deduct
the reserve yet.
So how much is your reserve at this point? 170K.

th
. Lets go to the 7 year. How much is MCIT? 140K

-
How much are you going to pay to the government?

140K because MCIT is higher than the NCIT.
How much is your reserve now? 250K.

th
In the 8 year, how much will you pay to the government?

61
ZERO. Here, the NCIT is higher than the MCIT,

therefore, you dont need to pay the MCIT. You pay
4th
year
5th
year
6th
year
7th
year
8th
year
9th
year
Sale
10M
10M
10M
10M
10M
10M
Less: Cost
5M
2M
2M
3M
4M
4M
Gross income
(2% MCIT)
5M
8M
8M
7M
6M
6M
Less:
Expenses
5M
7.8M
7.7M
6.8M
5.7M
5.4M
Net taxable
income (30%
NCIT)
200K
300K
200K
300K
600K
30% tax due

(NCIT)
60K
90K
60K
90K
180K
MCIT (2%)
160K
160K
140K
120K
120K
Paid to the
government
160K
160K
140K
120K
Excess MCIT
100K
170K
250K
180K*
th
*Excess MCIT as of 7 year
250 K
th
Less: Expired MCIT from 5 year
activity exceeds
50% of its total
gross income)
(100K)
th
Add: Excess MCIT for 8 year (120K 90K)
30 K __
th
Excess MCIT as of 8 year
Proprietary Educational Institution
180K
th
th
The 100K excess MCIT from the 5 year expires in the 8 year if
unused. [Can only be carried forward to next 3 consecutive
years]
-
When excess MCIT expires, your total tax payment

over the years will no longer correspond to your NCIT
for such years because some of the MCIT paid were
not offsetted from the NCIT. This is the reason why if
rd
some companies feel that on the 3 year of the
excess MCIT, something is expiring, report a higher
NCIT so you can utilize your excess MCIT
1.
2.
ProprietaryEducational
Institution
Non-ProfitHospital
Within
without
Within
without
and
-
and
-
Taxable
Income
Taxable
Income
10%
(if
its
income derived
from unrelated
trade, business
or activity does
not exceed 50%
of its total gross
income); or
30%
(if
its
income
from
unrelated trade,
business
or
activity exceeds
50% of its total
gross income)
62
10%
(if
its
income derived
from unrelated
trade, business
or activity does
not exceed 50%
of its total gross
income); or
30%
(if
its
income
from
unrelated trade,
business
or
NPH can be tax exempt if they

operate for charitable purposes
(Lung Center case)
Unrelated trade business or other activity

-
Means any trade, business or other activity, the conduct of

which is not substantially related to the exercise or
performance of such educational institution or hospital of
its primary purpose or function
Note: Use the PREDOMINANCE TEST (whichever income is greater).

Hence, if equal, apply 10%. All or nothing. Do not apportion
10% or 30%. Everything subjected to 10% or 30% depending on
which income is greater. ALWAYS base on GROSS INCOME not
net income.
Tax Rate
-
(should be non-profit) same rule as Proprietary

Educational Institutions
SPECIAL DOMESTIC CORPORATIONS

Tax base
If
government
educational
institutions exempt (one of the
exempt entities)
Non-Profit Hospitals
MCIT means that you are required to pay regularly to

the government. Its just an advance payment. You
can utilize it afterwards. Its in order to plug the
loophole in the tax code wherein the taxpayer is
abusing the expenses that they claim as deductible.
You can zero out your net taxable income by claiming
huge expenses then when you zero out your net
taxable income, youre not required to pay any
income tax due. But because of the MCIT, you will be
paying MCIT due. And in order to avoid expiring the
rd
MCIT, at some point, in the 3 year, you will be
honest enough to declare your true income tax in
order to be liable for NCIT.
Sources
any private school maintained and administered by private

individual or group with an issued permit to operate from
DECS or CHED or TESDA as the case may be.
RATIONALE: Because of the vital social functions these corporations

perform, the law encourages them to engage in unrelated trade,
business or activity, subject to limitation, while enjoying a lower rate
of 10%
SPECIAL RESIDENT FOREIGN CORPORATIONS

Sources
1.
International
Carrier
2.
International
Shipping
Within
Tax Base
Gross
Billings
Phil.
Gross
Billings
Phil.
Within
Tax Rate
2.5%
2.5%
For purposes of International Air carrier, Gross Philippine Billings refer to the
amount of gross revenue derived from (a) carriage of persons, (b) excess
baggage, (c) cargo and (d) mail originating from the Philippines in a
continuous and uninterrupted flight irrespective of the place of sale or issue,
and the place of payment of the ticket or passage document. Tickets
revalidated, exchanged and/or endorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane in a
port or point in the Philippines. (Refuelling is not considered an interruption)
For purposes of International Shipping, Gross Philippine Billings means gross

revenue whether from (a) passenger, (b) cargo or (c) mail originating from
already engaged in selling tickets. On the

normal basis, it becomes subject to the 30%
tax.
the Philippines up to final destination, regardless of the place of sale or

payments of the passenger or freight documents.
3.
Offshore
Banking Units
Within
Income derived
from
foreign
currency
transactions with
nonresidents,
offshore banking
units
in
the
Phils.,
local
commercial
banks,
inc.
branches
of
foreign
banks
that may be
authorized
by
the
BSP
to
transact business
with OBUs.
Exempt
Income derived
from
foreign
currency loans
granted
to
residents.
Exempt
Regional Operating Headquarters (ROHQs)

-
A branch established in the Philippines by multinational

companies which are engaged in any of the ff. services:
general administration and planning; business planning
and coordination; sourcing and procurement of raw
materials and components; corporate finance advisory
services; marketing control and sales promotion; training
and personnel management; logistic services; research
and development services and product development;
technical support and maintenance; data processing and
communications; and business development.
They are subject to 10% tax. They generate profits.

However, if they perform activities not related to the
purpose for which they were established, they will now be
subject to 30%. 10% special rate only applies to activities
for which they were established.
Remember also that employees of these ROHQs of

multinational corporations are given the preferential rate
of 15% so long as theyre occupying, if foreigner,
managerial or technical, if Filipino, managerial and
technical positions. (ROHQs still required to withhold on
compensation of their employees)
10%
Income of nonresidents
(individual/
corporation)
from OBUs
4.
Tax on branch
profits
remittances
5.
RAHQs
6.
ROHQs
Within
Total
profits
applied or
earmarked
for
remittance,
without
deduction
for the tax
component
s thereof.
15%
N/A
Exempt
Taxable
Income
10%
Regional or Area Headquarters (RAHQs)
International Air Carrier (IAC) and International Shipping (IS)

-
taxable within on their tax base of Gross Phil. Billings (GPB)

at the tax rate of 2.5%.
What is important is that the flight or voyage originates

from the Philippines irrespective of place of sale or
payment
63
If the existence of such corporation is really

to sell tickets, whatever the port of origin or
airport of origin is, it will be subject to the
normal tax of 30% because the 2.5% on GPB
refers only to the revenues based on a flight
originating from the Phil. in a continuous
and uninterrupted flight.
Now, if and when a foreign corporation, like

SILKAIR or QATAR AIRWAYS, open up an
agency or outlet here in the Phil. selling
tickets, whatever the destination is or the
port of origin or airport of origin, it will
already be covered by the normal tax rate
for RFC, not the special rate. Why? Its
A branch established in the Philippines by multinational

companies and which headquarters do not earn or derive
income from the Philippines and which act as supervisory,
communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets.
Being non-operational, it is not subject to income tax.
Off-shore Banking Units (OBUs)

-
extensions of foreign banks
They are RFCs and thus taxable only on income derived

within the Philippines
But what type of income is subject to tax?
Income derived by the OBUs from foreign

currency loans to residents is subject to the
preferential rate of 10%.
If derived from foreign currency loans or

transactions to
a. non-residents, b. other OBUs, c. local

commercial banks - it will be exempt.
If income derived from investments or
deposits or other loans to non-residents,
whether individual or corporation, it is
exempt.
Rationale: If it is a loan, situs is the
residence of the borrower
G.R. If income derived from non-residents

(incl. Other OBUs) exempt.
Exception local commercial banks (even if

local, it is still exempt)
2.
Non Resident
Owner or Lessor of
Vessels Chartered to
Filipino nationals or
Corporations
Within
Gross rentals,
lease or
charter fees
4.5%
Within
Gross rentals
or fees
7.5%
The Charter Agreement of

which is approved by
Marine Industry Authority
3.
Non-Resident
Owner or Lessor of
aircraft, Machinery and
Equipment
Non-Resident Cinematographic Film Owner, Lessor Or Distributor

BRANCH PROFITS REMITTANCE TAX (BPRT)
Tax on profits remitted by branches of NRFC. Hence, it

presupposes a Head Office (NRFC) Branch (RFC) relationship.
-
taxed at 25% on their gross income derived from within.

o
NRFC can either:

1. Establish a subsidiary corporation in the Phils which
is a domestic corporation (has its own set of
stockholders and own set of Board of Directors and is
a separate corporation distinct from the parent corp)
or
Non-Resident Owner Or Lessor Of Vessels Chartered To Filipino

Nationals Or Corporations
-
2. Create a branch in the Phils. which is a resident

foreign corporation (do not have its own stockholders
or BOD).
-
Branch profit remittance tax only apply to a Head

Office (NRFC) Branch (RFC) relationship (Single
Entity Concept)
The relationship of NRFC with domestic corp is called

parent-subsidiary relationship and not subject to
BPRT
Hence, if profits are remitted by branch to

head office (NRFC), then it is subject to 15%
BPRT. However, if it is the subsidiary
corporation who would remit to the parent,
such will be considered as dividends subject
to 15% tax.
A cinematographic film owner, lessor or

distributor does not include leasing out DVDs or
CDs. What it includes is only films one which is
used for movies.
taxed at 4.5% on gross rentals, lease or charter fees

derived from within
o
The Charter Agreement of which is approved by

Maritime Industry Authority.
Whatever the arrangement is with the lease,

whether it be by bareboat charter or demise
charter, whether its with crew or not, its
covered by the 4.5% on gross income for the
lease payments.
Non-Resident Owner Or Lessor Of Aircraft, Machinery And

Equipment
taxed at 7.5% on gross rentals or fees derived from within
REMEMBER: These are NRFC so these taxes are withheld in advance.

Income pertains to income derived within the Phils.
NOTE: If there is a conflict between a tax treaty and a municipal

law, that which benefits the taxpayer shall prevail
SPECIAL NON-RESIDENT FOREIGN CORPORATIONS (NRFCS)
1.
Non Resident
Cinematographic Firm
Owner,
Lessor
Distributor
64
Sources
Tax base
Tax Rate
Within
Gross Income
25%
or
PASSIVE INCOME
(These incomes must be derived from the Philippines)
DC
NRFC
This should be included in its gross
income subjected to 30% tax. BUT
in the case of interest on loans
which have been made on or after
August 1, 1986, the same is subject
to 20% final tax.
Interest Income on bank Deposit
2.
Interest income on Bank Deposit

Under the Expanded Foreign
Currency Deposit
System
FCDU (Foreign currency deposit
unit)
7.5%
7.5%
3.
A. Royalties Derived Within the

Philippines (General)
20%
20%
30%
B. Royalties Derived Within the

Philippines (Literary works,
books and musical composition)
10%
10%
30%
4.
a.
Capital Gains Derived From its

Sale of Shares of Stock
If it is listed and traded thru
local stock exchange:
of 1% of the Gross Selling
Price
b.
20%
If income is derived from outside
sources, it is treated as OTHER INCOME
subj. to 30% bec. there is no w/holding
agent abroad
RFC
20%
If it is an OBU and earns interest
from a NRFC, then it is exempt. Such
will be considered income derived
w/out
1.
Tax exempt
Rationale: Just like placing your
deposit or investment in an OBU. Its
offshore. Its outside the jurisdiction
of the Phils.
This rule applies BOTH to corporate and individual taxpayers.

Note: Only the first sale for the year amounting to 100K is subject to 5%; the subsequent sales are subject to 10%
If it is NOT listed or traded thru

local stock exchange:
Not over P100,000: 5%
Over P100,000:
10%
5.
6.
Capital gains Derived from the

Sale of Real Property Which is
not Used in Trade or Business
Branch Profit remitted by a
branch office
(Exception: If you are enjoying
income tax holiday or PEZA-
65
6% of the GSP or ZV (or FMV)

whichever is higher
Not Applicable
Should be treated as OTHER INCOME SUBJECT TO 30%
Subject to Branch Profit Remittance

tax of 15%, the basis of the tax is the
amount applied for or earmarked for
remittance
Not Applicable
7.
registered or special economic

zones not subject to 15% BPRT
but 5% special tax, unless for
unregistered activities)
Dividends
Received
from
Exempt
NOTE: Royalties should be considered first as a

passive income before you apply the special
rates of 10%, 20% and 30%. If the royalty income
is already an active income that is earned in the
usual course of trade or business of the
corporation, it will be subject to the ordinary tax
rate of 30%. (i.e. McDo franchises are
considered as active income)
Exempt
Branch Profits Remittance Tax (BPRT)

-
Can a DC be liable for the 15% BPRT? NO. BPRT is only

applicable to RFC. DC Can never be subject to BPRT.
When is BPRT due to the government?

o
For capital gains derived from the sale of shares of stock:

o
If it is listed and traded thru local stock

exchange: of 1% of the GSP
- listed means enlisted with the Philippine Stock
Exchange
BPRT is due to the government when a RFC,

which is a home-office branch here in the
Philippines of a NRFC remits profits to such
NRFC.
BPRT vis--vis intercorporate dividends or under the tax

sparing credit rule. What is the difference between the
two?
NRFC
If it is not listed or traded thru local stock

exchange:
Not over 100K 5% and over 100K 10%
Same rate applicable to individual

taxpayers. Note that whether the seller
is DC, RFC or NRFC, the same rate
applies. This is an exception for
NRFCs.?
If you have many transactions for the
year, the 5% is applied only to the first
100,000. The subsequent sales are
already subjected to 10%.
Capital gains derived from the sale of real property.
66
These dividends received from DC by

NRFC is subject to 15% Final tax
IF: the foreign government of that
foreign corp. allows a tax credit at
least 15% of the taxes deemed paid
in the Philippines by NRFC.
For DC 6% of the GSP or Zonal Value,

whichever is higher
For RFC and NRFC should be treated as OTHER

INCOME subject to 30%
100%
DC
RFC
Subsidiary Corp.
Phil. Branch
A. Relationship between NRFC and DC is Parentsubsidiary relationship. Remittance of income to

NRFC is considered a dividend subject to 15%
B. relationship between NRFC and RFC is Head

Office- Branch relationship applying the SINGLE
ENTITY CONCEPT. Here, remittance of income is
subject to 15% BPRT.
So either way, the amount received by the NRFC

will be net of the 15% tax.
Would all Phil. branches of a NRFC, when it earmarks

profits for remittance abroad, be liable for the 15% BPRT?
o
As a rule, Phil. branches of a NRFC is liable for 15% BPRT
on the total profits that it earmarks for remittance abroad
except if the Phil. branch is located within the economic
zone that is legally recognized by the government.
NOTE: The basis of BPRT is not the actual amount remitted
but the profits that are EARMARKED or APPLIED FOR
Remittance.
The reason why intercorporate tax on dividends

is at 15% are:
1. In order to equal the rate of the

BPRT (also 15%)
2. As a rule, NRFC will be taxed at 30%

on gross income including dividends
earned from a DC. But if there is a tax
credit that is granted by the foreign
country to Phil. corporations, not a
resident there, equivalent to 15% then,
we can only impose tax of 15% as well.
It means to say that 30% tax rate of
NRFC less the tax credit that is
expected to be granted by the foreign
country to Phil. corporations at 15% so the difference is 15%. The
difference of 15% is the rate of
intercorporate tax on dividends. TAX
SPARING CREDIT PRINCIPLE
Ex. It could be that the RFC will earmark 2M as remittance

but will only actually remit to the NRFC 1.5M. The 500K
will be used by the RFC to further its operations. The
amount subject to BPRT is the 2M profit that was
earmarked.
NOTE: There was a case decided by BIR pertaining to
remittance by a branch (RFC) to Head Office (NRFC)
wherein such amount included previous advances given by
the Head Office pertaining to construction projects. Such
amount is not subjected to 10% BPRT since they are not
profits remitted but consists of return of excess funds
previously advanced
Inter-Corporate Dividends
NOTE: Intercorporate dividends of (a) DC to DC or (b) DC to RFC
are exempt from taxes. These will further be distributed to
individuals and it is upon such distribution wherein tax will be
applied. It has not yet reached the ultimate recipient which are
the stockholders/individuals. Otherwise, there will be double
taxation.
NOTE: In a case, where there is a RFC owned by a NRFC and then

both of them invested in a DC, the SINGLE ENTITY CONCEPT will not
apply to dividends distributed by DC to both RFC and NRFC. The
dividends distributed by DC to RFC is exempt while the dividends
distributed by DC to NRFC is subject to 15% intercorporate
dividends. NRFC cannot say that it should also be exempt under
justification that the RFC and NRFC is a single entity concept.
VIII.
TAX ON IMPROPERLY ACCUMULATED EARNINGS
TAX SPARING CREDIT (Sections 28B (5)b)- 15%

Sec. 29, Tax Code. See also similar provision in the Corporation Code.
Purpose: To attract investors in the Philippines
There is no statutory provision that requires actual grant of tax
credit by the foreign government. Neither is there a Revenue
Regulation requiring actual grant. It is clear that the provision of the
law says allows. (As long as allowed, you can already claim the tax
credit, it need not be actually granted) So, it is enough to prove that
the foreign government allows tax credit. It is not incumbent upon
the foreign government to prove the amount actually granted.
o
All income received by a NRFC will be subject to

30% tax except capital gains from the sale of
shares of stock, not traded in the stock
exchange.
However, for dividends declared and paid by a
subsidiary corporation to a NRFC, such amount
will be subject to 15% tax.
If the foreign government of such NRFC allows or
grants tax credit to Phil. corporations located
abroad, the intercorporate dividends would be
subject to 15% tax, not the 30% tax. (Even before
when our tax was 35%, the tax sparing credit
rule still applied and 15% tax was still applicable
on dividends but the tax credit was 20%)
67
In addition to the other income taxes, there is hereby imposed for

each taxable year on the improperly accumulated taxable income of
each corporation an improperly accumulated earnings tax equal to
10% of the improperly accumulated taxable income.
NOTE: BIR subjects 10% of Improperly accumulated earnings
NOTE: SEC subjects you to 10,000 fixed rate for every year of
violation (for improperly accumulating earnings)
1.
Coverage
For corporations using the calendar basis, the
accumulated earnings tax shall not apply on improperly
accumulated income as of December 31, 1997.
For corporations adopting the fiscal year accounting
period, the improperly accumulated income not subject to
this tax shall be reckoned as of the end of the month
comprising the 12-month period of FY 1997-98
Average for the dividends or

accumulated earnings that is a
probable area for imposing the 10%
IAET would only start from 1998. Your
dividends or accumulated earnings
from Dec. 31 down would still be free

from the IAET because this kind of tax
has already been effective Jan. 1, 1998.
And if youre operating on a fiscal year
basis, which means that you start at
any day other than Jan. 1, your free
coverage from IAET would be starting
from the last month in 1998 which is
the end of your fiscal year. So if your
fiscal year is Nov. 1 ending in Oct. 31.
Oct. 31, 1998 down would still be free
from IAET. So you will be subject to
IAET starting Nov. 1, 1998.
2.
3.
Exceptions to IAET
The IAET shall not apply to:

a.
Publicly held corporations (PHC)

Rationale: IT is difficult to come into agreement to retain /
accumulate earnings. Usually earnings are declared as
dividends
-
Includes all publicly listed companies (all PLC are PHC

but not all PHC are PLC)
A PHC is such that is not a closely held corporation. A

closely held corporation is one where at least 50% of
the capital stock or voting power is held by not more
than 20 individuals. Closely held corporations are
subject to 10% IAET. It is important to differentiate
because only Publicly held corporations are not
subject to IAET
All family corporations are closely-held corporation

but not all closely held corporations are family
corporations
Corporations Subject to Improperly Accumulated Earnings Tax

(IAET)
The IAET shall apply to every corporation formed or
availed for the purpose of avoiding the income tax with
respect to shareholders or the shareholders of any other
corporations, by permitting earnings and profits to
accumulate instead of being distributed or divided.
Assets
100M
Liabilities
80M
Net worth
20M
50%
Capital Stock 1M
1M as capital stock
50%
More than
CLOSELY-HELD
CORPORATION
1 individual
20 individuals
Profits (retained earnings) 19M

18M for future expansion
RATIONALE FOR IAET: Improper accumulation of profits. Profits

could have been distributed to stockholders and thereby subjected
to 10% tax for such dividends. This serves as a penalty.
-
Profits improperly accumulated which are already

subjected to 10% tax when distributed as dividends are
still subject to 10% on such dividends or 20%/25%
(depending on recipient). This will not constitute double
taxation because they are taxed for different purposes.
If you accumulate profits more than 100% of your paid-in
capital (1M in the illustration), then it will serve as an
indicator or red flag that you may be improperly
accumulating earnings. However, the tax base is not the
whole profits. (See formula below)
68
So the basis of the 10% IAET is not the

retained earnings in the illustration
given above but the formula on the
TAX BASE (IAE).
b.
Banks and other non-bank financial intermediaries

- For liquidity purposes. Liquidity pertains to the
availability of cash to pay sudden withdrawals of clients
c.
Insurance companies
d.
- Not covered by IAET because theyre

required to maintain some reserves
and regulated with the Insurance
Commission
Revenue Regulations No. 2-01

i.
Taxable partnerships [no capital stock]
ii.
GPP [exempt under tax code]
iii.
Non-taxable Joint ventures [exempt under tax

code]
iv.
Branch (RFC) of NRFC, since they do not have

capital stock
v.
Enterprise Duly Registered With PEZA (RA 7916)

And Pursuant To Bases And Conversion
Development Act Of 1992 (RA 7227) And Under
Special Economic Zones
5.
Subsidiaries required to maintain certain amount to

make investments in other corporations
Computation of Improperly Accumulate Taxable Income

Taxable Income adjusted by (these items are added):
They are subject to 5% on registered

activities in lieu of national taxes, but if they opt
to be subjected to 30% then they will now be
subject to 10% IAET. Reason they may opt to be
subject to 30% is when they have huge operating
expense
4.
Evidence of Purpose to Avoid Income Tax

Prima Facie evidence: The fact that any corporation is a
mere holding company or investment company
Evidence Determinative of Purpose: The fact that the
earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation,
by clear preponderance of evidence, shall prove the
contrary.
The term reasonable needs of the business includes the reasonably

anticipated needs of the business.
-
Immediate needs of the business including reasonably

anticipated needs
Corp. should prove an immediate need for the

accumulation or direct correlation of anticipated needs to
such accumulation of profits
Examples:
Allowance for the increase in the accumulation of

earnings up to 100% paid-up capital of the
corporation
Earnings reserved for definite corporate expansion

projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or
equivalent body (should be proven by board
resolution, blueprints and other sufficient supporting
documents)
Building, plants or equipment acquisition as approved

by Board of Directors (in a board resolution)
Earnings reserved for compliance with any loan

covenant or pre-existing obligation established under
a legitimate business agreement Required by law to
be retained
Earnings required by law or applicable regulations to

be retained by the corporation or in respect of which
there is legal prohibition against its distribution
69
These are added to reflect the true earnings of the

Corporation. Letter A-C are income that are not
included in the computation of the taxable income so
they should be added back. Letter D results to a
deduction in the present taxable income based on
losses from previous years. This should be added back
to reflect the true income for the year.
a.
Income exempt from tax
b.
Income excluded from gross income
c.
Income subject to final tax
d.
Amount of net operating loss carry over

deducted (NOLCO)
And reduced by the sum of (these items are deducted):

-
Dividends are deducted from the time of the date of

declaration in the books of the Corporation. Income
tax is a non-deductible expense in the computation of
taxable income however it should be deducted for
purposes of computing IAE.
a.
Dividends actually or constructively paid; and
b.
Income tax paid for the taxable year.
Formula:
Taxable Income + Income exempt from tax + Income
excluded from gross income + income subject to final tax +
amount of NOLCO deducted dividends actually or
constructively paid income tax paid for the taxable year
= Tax base subjected to 10% IAET
Remedy (to avoid being subjected to IAET):
1. Having a Board resolution for expansion projects (supported
by blue prints, etc.)
2. Having a Board Resolution for declaring dividends within one
year after taxable year (date of declaration of dividends already
decreases the amount of earnings)
IAET when paid? 15 days after the end of the taxable period
the real estate business of the deceased parent, such

properties which are ordinarily held for sale for
customers maybe converted into capital assets.
CAPITAL TRANSACTIONS
I.
INTRODUCTION
CAPITAL TRANSACTIONS
-
Involve the sale or exchange of capital assets:

1.
Real Properties (6% CGT)
2.
Shares of Stock (1/2 of 1% of GSP or

5%/10%)
3.
Other Capital Assets (5-32% if individual;

30% if corporation)
CAPITAL ASSET
-
B.
Capital Assets
a.
Properties not considered as ordinary assets (all

assets other than the 4 things mentioned above)
b.
Properties used in trade or business classified as

capital assets:
Accounts receivable
1.
Unless you are in a business

of
selling
accounts
receivable, it is considered as
capital asset.
2.
If you have an accounts

receivable or collectible from
your customer and you are
short of cash and would like
to assign that receivable or
collectible
to
another
corporation by selling your
right to collect. Even if the
Accounts receivable pertains
to collectibles arising from
trade, business or profession
but because youre not into
selling
receivable
or
collectible,
its
still
considered
as
capital
transaction.
Property held by the taxpayer whether or not connected

with his trade or business except ordinary assets.
CAPITAL GAIN
-
Gain from the sale or exchange of capital asset
CAPITAL LOSS
-
Loss incurred from the sale or exchange of capital asset
NET CAPITAL GAIN

-
The excess of capital gain over capital loss
NET CAPITAL LOSS

-
The excess of capital loss over capital gain
Property for investment in stock

1.
II.
A.
ASSETS
Ordinary Assets, Section 39 (A)(1)

a.
Stock in trade or property of the taxpayer which

may be properly included in the inventory at the
end of the taxable.
b.
Property primarily held for sale to customers in

the ordinary course of trade or business
c.
Property used in trade or business subject to

depreciation, which means that this must be
depreciable property
d.
Real property used in trade or business
If you have a business and

youd like to invest in
another business, so long as
youre not a
holding
company
engaged
in
investing another business,
the investment in capital
stock is still considered as
capital asset if you are not
into trading shares. But if
youre a broker of shares,
thats
automatically
considered
as
ordinary
assets.
Subdivision lots to tenants at the

instance of the government
Interest of a partner in a partnership
Can an OA be converted into a CA?

YES. The properties of a taxpayer engaged in real
estate business are considered as ordinary assets. If
the taxpayer dies, these properties will be
transmitted to the heirs. Should the heirs discontinue
70
Note:
All properties not used in trade or business are
generally considered as Capital Assets
Can a CA be converted into an OA?
YES. Land inherited by the heirs from their deceased

parents is considered as capital asset. In the event
that this property is substantially improved by the
heirs and sold at a profit, said capital asset may be
converted into an ordinary asset. The profit derived
from the sale of the land is already considered as
ordinary gain.
identical the same stocks or securities. Sale may also

include exchange or option to sell securities.
Tax Consequence:
The gain is taxable as capital gain, because the seller is
not engaged in such business (the seller here is not a
dealer in securities). If there is a loss, since it is classified
as capital transaction, such is considered capital loss.
The capital gain is taxable but the capital loss incurred
from wash sale transaction is not deductible. A
different rule applies if it is entered into by a dealer in
securities, as it becomes a transaction made in the
regular course of trade or business. (This is an
exception, where loss is not deductible)
Even if you are not registered as engaging in real estate

business, real assets can still be considered as ordinary asset if
you have been regularly selling real assets
Therefore, if you sold house and lots 12 times

last year every month, can you already be
subject to the OT of 5-32% as an individual or
will you still be covered 6% CGT?
Because of the regularity and the continuity of

the conduct of the buying and selling of real
estate properties, you will already be considered
as engaging in ordinary transactions of buying
and selling real estate properties. CGT of 6% will
no longer apply.
Registration of activities as real estate business is

not necessary for you to be covered by 5-32%.
BIR has already set the limit. If you are able to sell at
least 6 real properties in one year on your individual
capacity without registration, you will be considered
as in the regular conduct of selling real properties
ordinary transactions. If you sell lower than 6 during
the calendar year, still capital transactions, without
BIR registration. So you stop at 5.
NOTE: Mere amendment of the purpose of its business does not

convert OA to CA. As long as you were initially engaged in real Estate
Business, abandonment of the assets does not convert OA to CA. On
the other hand, if you were never into real estate business, then 2
years abandonment of the property, or if the property was idle 2
years before the sale, the property if initially treated as OA can be
converted into CA (upon showing of proof).
C.
6.
Failure to exercise option or privilege to buy or sell

property
2.
Distribution of assets or shares of stock to stockholder

upon liquidation of a corporation (5-32% if individual;
30% if corporation)
3.
Readjustment of partners interest in a partnership
4.
Retirement bonds So long as taxpayer is not a dealer

of bonds. Otherwise, it is an ordinary transaction.
5.
Wash Sale
61 days sale 30 days before the sale, the seller
acquired substantially identical securities OR 30 days
after the sale, he acquired identical or substantially
71
Your reckoning point is WON 30 days before

the sale, you acquired the same or
substantially similar shares or 30 days after.
Its a wash sale. It is in effect a simulated sale.
Is the gain taxable or is the loss deductible in
this kind of transaction?
In all cases, the question whether the gain is

taxable or not, lifeblood doctrine, the gain is
taxable and the loss, being a simulated sale, is
not deductible.
Short Sale
A transaction wherein a person sells securities which he
does not own yet (provided however, that he has
ownership of the securities at the time of delivery he
has the right to transfer ownership)
Selling something you do not own yet however when
you are going to transfer the property, you should have
the right of ownership (because you cannot sell what
you do not own)
Is the gain taxable and is the loss deductible?
Special Capital Transactions

1.
YES. The gain is taxable and the loss is

deductible.
Tax Consequence:
Gains or losses from short sales of property shall be
considered as gains or losses from sales or
exchanges of capital assets. If there is a gain, the
gain is taxable. If there is a loss, the loss is
deductible.
Wash Sale vs. Short Sale
-
Both may be classified as capital transactions.
- In wash sale, the loss that may be incurred is not

deductible, whereas in short sale, the loss is
deductible.
RULE: Capital transactions, whenever a loss is

deductible, only offset it against the capital gains. Do
not cross the border of offsetting the capital losses from
ordinary income.
D.
property was with the seller the

holding period (for how many months
was it with the taxpayer whos selling
it). If the taxpayer sold it within a few
months, 12 months or less, everything
is taxable and deductible (100%). If the
property has been held on to by the
taxpayer for more than 12 months,
only 50% is taxable or 50% is
deductible.
Rules Governing Capital Transactions
1. Holding-period rule
Applies only to individual taxpayers because the capital

gain derived from capital transaction of corporate
taxpayers is always 100% recognized irrespective of the
number of months during which the property was in the
possession of the corporate taxpayer.
In the case of the 1 parcel of land, you

gained 500K and 100% of 500K, which
is 500K, is taxable because such land
was held on to for 12 months. While
nd
the 2 parcel of land, you gained 1M
but only 50% of 1M, which is 500K, is
taxable because such land was held for
more than 12 months.
The reason for such rule is that

whenever you purchase a personal
property, you are not expected to
dispose of it easily. When you dispose
of personal property more often within
1 year, you are considered to be in
trade or business but not necessarily.
So gain 100% is taxable or 50% is
taxable. Its the same way that the loss
is only 50% deductible or 100%
deductible.
- For capital transactions of corporations, always 100%
If the property has been held by the taxpayer for a period

of not more than 12 months, the gain or loss is 100%
recognized.
RATIONALE: To penalize you for selling it early (within 12
months), since capital assets are supposed to be kept for a
long period of time
If the property has been held for more than 12 months,

the gain or loss is 50% recognized.
2 parcel of Lands acquired on June 31, 2009 each having a
Cost of 1M
Gain
1) December 31, 2009

Selling price 1.5M
2) October 5, 2010
Selling price 2M
100% of 500K
500K
50% of 1M
500K
nd
Another example: Lets change the facts. The 2

parcel of land was sold for .5M. Other facts are
the same with the preceding example. What will
happen?
Change of facts:
1) Dec. 31, 2009
Selling price 1.5M
2) Oct. 5, 2010
Selling price .5M
100% of 500K
500K
50% of (500K)
(250K)
st
nd
In this case, the sale of the 2 parcel

of land constitutes a loss of (500K).
50% of (500K) is (250K). Is the (250K)
recognized loss deductible on the
capital gain of 500K from the sale of
st
the 1 parcel of land?
Not deductible against 500K

bec. not on the same year
Example: You have 2 parcels of land. Youre not

engaged in the real estate business or in any
other businesses wherein the land is used in
trade or business. You purchased such lands Jan.
ST
31, 2009 for a cost of 1M each. The 1 parcel of
land, you sold it at Dec. 31, 2009 for the selling
nd
price of 1.5M. The 2 parcel of land, you sold it
on Oct. 5, 2010 for the selling price of 2M.
72
For individual taxpayers holding capital

assets which they sell, you have to
consider the period within which the
NO.
The
loss
is
deductible but not
against such 500K. The
loss
is
deductible
against the capital gain
that has been earned in
2010 but not against the
500K because such 500K
was earned a year ago,
in 2009.
Assuming that you had no other

transactions in 2010, no other sale,
you have a loss of (250K), can you carry
forward such loss?
NO. The net capital loss

carry-over rule cannot
be applied.
The net capital loss carryover rule provides that if any

individual taxpayer sustains
in any taxable year a net
capital loss, such loss (in an
amount not in excess of the
net income for such year)
shall be treated in the
succeeding taxable year as a
loss from the sale or
exchange of a capital asset
held for not more than 12
months.
a loss from the sale or exchange of a capital

asset held for not more than 12 months.
General Rule: Expenses must be paid or incurred during the
taxable year.
Exception: Net Capital Loss Carry-Over.
REQUISITES
1. Its a capital loss. Its the excess of the loss over the
capital income or capital gains.
2. It only applies to individuals.
In this case, since the loss of

(250K) was from the sale of a
capital asset held for more
than 12 months, the net
capital loss carry-over rule
cannot be applied.
3. It only applies to capital assets held for not more than 1

year.
4. It can be carried over only to the succeeding next year
by an individual. If it remain unutilized, it will no longer be
nd
usable the 2 year succeeding.
2. Net Capital Loss Carry Over Rule

-
applies only to assets held for not more than 12 months
It only applies to capital transactions subjected to 100%

under the Holding Period rule and not to those subjected
to 50%. (Please see immediately preceding example)
5. Limited to an amount NOT in excess of the net income

in the year incurred.
You have to consider that it should not exceed the net income
from the ordinary transactions of the year when such loss is
incurred. You have to look into how much is the net income
from ordinary transactions in the year such loss is incurred.
3. Capital loss limitation rule

-
Capital losses are deductible only to the extent of capital

gains during the year on a yearly basis.
There is a wall between capital transactions and ordinary

transactions. You cannot commingle them. Capital loss can
be deductible only up to capital gain. So if you have capital
loss of 2M and capital gain of 1M. Only 1M of capital loss
should be applied to the capital gain to have a net capital
gain of zero. If you are an individual, you can carry over
the capital loss (subject to requisites), however if you are a
corporation, then you cannot carry over excess capital loss
and such will no longer be deductible.
Can capital loss limitation rule apply to corporations as

well?
YES. Such rule applies to both individual and

corporate taxpayers, EXCEPT on banks and trust
companies (because they are considered as
dealer in securities)
4. Net capital loss carry-over rule

Applies only to individual taxpayers
-
73
If any individual taxpayer sustains in any taxable

year a net capital loss, such loss (in an amount
NOT in excess of the net income for such year)
shall be treated in the succeeding taxable year as
Example: Assuming that the (250K)

net loss arose from the sale of capital
assets held for not more than 12
months. If the ordinary net income in
2010 is 250K, you can carry-over such
(250K) loss in the succeeding taxable
year. If the ordinary net income is
only 200K in 2010, you can carry-over
only 200K. If the ordinary net income
is 500K, you can carry-over 250K it
should not exceed.
TWO IMPORTANT LIMITATIONS IN NCLCO

-
Limit as to period applied only to next succeeding year
Limit as to amount applied only in an amount not

exceeding net income (from ordinary transactions) in the
year incurred
The difference between net operating loss carryover (NOLCO) and net capital loss carry-over
(NCLCO) is that:
a. NOLCO can be carried over for the succeeding 3
consecutive years but net capital loss carry-over
can be carried only to the next year.
b. NOLCO involves loss arising from ordinary
transactions while net capital loss carry-over
involves loss arising from capital transactions.
c. Net capital loss carry-over can only be availed
of by individual taxpayers while NOLCO can be
availed of both by individual and corporate

taxpayers so long as theyre registered for
business.
would result to a higher

consequently higher taxes.
-
d. NCLCO is limited as to amount while NOLCO

has no such limitation
E.
Gains Derived from Dealings in Property
This may include sale or exchange of goods or properties.

-
if the property is sold for cash: sale
If its property for another property: exchange
the property received must have a fair market value;
b.
the property disposed of must be substantially

different from the property received.
It simply means that if youre selling a property

today, Oct. 5, 2010. Youre selling it at 1M. The
property that youre selling has been donated to
you. The law says that the amount that you have
to deduct as cost in determining your income
subject to tax would be the amount as if it is in
the hands of the donor. It means at the time it
was donated. If at the time it was donated, its
value was 500K. Then you deduct it from the 1M,
so you get an income of 500K taxable.
But theres an exception to the rule. If the 500K

that youre deducting (FMV at the time of
donation) is greater than the FMV today, Oct. 5,
2010, say for example, the FMV of the property
today is 200K so you use such 200K. Lifeblood
doctrine. Why? If you use 200K, the taxable
income is 800K. [This is from last year. NO
example given by Ms. Tiu. Im not sure if this is
how the exception should be interpreted, basta
bottom line, use the lower FMV as cost. The law
is in favor of higher profits]
What type of property do you think that the

FMV is lower today than the time it was
donated?
Depreciable assets.
Example: Motor vehicles.
Basic Formula in Determining the Gain or Loss (Sale or

Exchange of Property)
Amount Received or Realized LESS Cost or
Adjusted Basis
Determination of the Cost or Adjusted Basis, Section 40B
It depends upon the manner of acquisition:
a.
If it was acquired through purchase: cost of property.
b.
If the property sold was previously acquired through

inheritance: the fair market value (FMV) of the
property at the acquisition. (acquisition in inheritance
is at the moment of death)
c.
If the property sold was acquired through donation:

the same as if it would be in the hands of the donor
(this is not necessarily the same as the FMV at the
time of donation)
Exception to the General Rule: if the basis is
greater than the FMV of the property at the time
of the donation/gift then, for the purpose of
determining loss, the basis shall be such FMV.
RATIONALE for the exception: The lesser FMV is
used. This would result to a higher profit from
such transaction since the minuend is lesser.
Higher profit results to higher taxes.
d.
If the property sold was acquired for less than an

adequate consideration in money or moneys worth:
the amount paid by the transferee for the property.
Ex. Acquisition cost = Php 10, Selling price = 1M,
Fair Market value = 500K
Profit from this sale is computed using this
formula: SP AC. Hence profit is 999,990 (1M
10). Use the acquisition cost of the property. This
74
and
The basic formula in determining the gain that you derived

from selling your real property or property, in general, is
the amount that you received as consideration for the
property. This is basically the GSP or any consideration. It
may be exchange of property or may be sale of property.
But as to how much is subject to tax, you have to
determine what the basis of the cost of the property is.
The cost of the property that youre selling or exchanging
would differ according to how you acquired your property.
Gains from Exchange of Property, Requisites

a.
income
No Gain, No Loss Recognized

General Rule: in the sale or exchange of property, the gain
is taxable and the loss is deductible.
Exception: No gain or loss shall be recognized
a) Transactions made pursuant to plan of merger or
consideration.
Otherwise known as Tax Exempt Transactions or
Transactions Solely in Kind
i.
A corporation, party to a merger or

consolidation exchanges its properties
solely for stock in a corporation, which is a
party to the merger or consolidation.
ii.
A stockholder of a corporation party to a

merger or consolidation exchanges his stock
solely for stock in another corporation,
party to that merger or consolidation.
ABC
7M
Corp.
2M
- this is analogous to transaction between

related taxpayers
b) If a person (natural or juridical), alone or together
with others or not exceeding four (4), exchanges his
property for stock in a corporation and this person
or persons, after this exchange, acquired controlling
interest over that corporation. This means that they
acquired at least 51% of the shares of stock of such
corporation.
9M
7
5 people
12 people
LAND
This is also a transaction solely in kind.
ABC
Corp.
(5M cap)
46M
7M
Change of facts: ABC Corp. has a capitalization of

2M owned equally by 5 people/stockholders.
You together with 6 others have a 7M parcel of
land. You want to invest in ABC Corp. So you
want to put in the parcel of land so youll be
given 7M worth of shares of stock. So the total
capitalization of ABC Corp. is 9M [2M + 7M]
owned by 12 people [5 + 7]. Is the gain from the
exchange of property subject to CGT? Is it
covered under the tax-free exchange?
YES, but partially.
If more than 5 people contribute, do not

automatically consider it as already not under
the exception. First, determine whether any 5 of
them meet the requisite. Use any 5 of them (first
highest 5). If at most 5 of them contribute at
least 51% of the total shares of stock then, the
gain or loss is not taxable/deductible.
In this case, the first 5 transfers amounts to 5M

(1M each individual). 5M over 9M total capital
stock is 55.55%. [5M/9M = 55.55%]. Thus, the
first 5 transfers acquired more than 51% so that
they have acquired controlling interest over the
capital stock of ABC Corp. Therefore, even if the
transfer numbers more than 5 people, so long as
the first highest 5, would acquire controlling
interest over the new capital stock of the
corporation, they (the first highest 5) will be
granted exemption from the 6% CGT. Since in
this case, the 7M is equally owned by the 7
people, so you know that the first 5 would have
5M. And 5M/9M is more than 51%. Therefore,
the gains from the exchange of property will not
be subject to the 6% CGT with respect only to
the first 5.
5M
51M
4 ( U & 3)
exch. Land
for stocks
4 people
5 persons (ABC)
9 people
LAND
46M
So that the facts would be that there are 4

people who invested 46M parcel of land in
exchange for the 46M shares in ABC Corp. So the
total capitalization is 51M and there are already
9 people owning ABC Corp.
In this case, the 5 people acquired controlling
interest over ABC Corp. because they own 46M
shares out of the total 51M shares from the
exchange of property (more than 51%), so
therefore, this case is covered by the exception,
and as such, the 46M parcel of land is exempted
from the 6% CGT and documentary stamp tax.
*Note: maximum of 5 persons, not necessarily 5
*Note: at least 51%, not just more than 50%. If
50.5% then it did not meet the requisite.
75
7 people
U&6
Instances where gain is recognized and loss is not recognized:

o
1. Wash sale
2. Illegal transactions
3. Those transactions involving related taxpayers
4. Transactions not solely in kind
ACCOUNTING PERIODS
METHODS OF ACCOUNTING
TAX RETURNS AND TAX PAYMENTS
I.
HOLDING
PERIOD
NONDEDUCTIBI
LITY
OF
CAPITAL
LOSSES
NET
CAPITAL
LOSS
CARRY
OVER
It means to say that transactions not

solely in kind is when the transfer
involves cash. If cash, in addition to
property, is transferred, in exchange
for shares, its no longer exchange
solely in kind, therefore, no exemption
from CGT.
INDIVIDUAL
CORPORATION
The percentages of gain or

loss to be taken into account
shall be the ff:
a.
100% - if the capital
assets have been
held for 12 mos or
less; and
b. 50% - if the capital
asset has been held
for more than 12
mos.
Capital losses are allowed
only to the extent of the
capital gain; hence, the net
capital
loss
is
NOT
deductible
Capital gains and losses

are 100% recognized.
(There is no holding
period)
ALLOWED
The net capital loss (in an
amount not in excess of the
taxable
income
before
personal exemption for such
year) shall be treated in the
succeeding year (but not
beyond 12 months) as a
deduction as short-term
capital loss (at 100%) from
the net capital gains.
ACCOUNTING PERIODS
1.
a.
Calendar year January 1 to December 31
b.
Fiscal Year an accounting period of 12 months

ending on the last day of any month other than
December
(starting any day of the year and
ending 365/366 days after)
2.
Taxable Year
-
3.
Capital losses are allowed

to the extent of the
capital gains; hence, the
net capital loss is NOT
deductible.
Except:
If any domestic bank or
trust
company,
a
substantial part of whose
business is the receipt of
deposits, sells any bond,
debenture,
note
or
certificate
or
other
evidence of indebtedness
issued by any corporation
(including one issued by a
government or political
subdivision)
NOT ALLOWED
4.
II.
The calendar or the fiscal year ending during

such calendar year, upon the basis of which the
net income is computed.
When Calendar Year is Used

a.
If the taxpayer chooses the calendar year
b.
If the taxpayer has no annual accounting period
c.
If the taxpayer does not keep its books
d.
If the taxpayer is an individual (if individual, no

choice. It would only be Calendar Year)
When the Commissioner is Authorized to Terminate

the Taxable Period (the CIR can implement Jeopardy
assessment)
a.
When the taxpayer retired form business subject

to tax
b.
When he intends to leave the Philippines
c.
When he removes his property from the

Philippines
d.
When he hides or conceal his property
e.
When he performs any act tending to obstruct

the proceedings for the collection of the tax for
the past or current quarter or year
f.
When he renders the collection of the tax totally

or partly ineffective
METHODS OF ACCOUNTING
1.
76
Two Kinds
Two Kinds
a.
Calendar year January 1 to December 31
b.
Fiscal Year an accounting period of 12 months

ending on the last day of any month other than
December
(starting any day of the year and
ending 365/366 days after)
d.
NOTE: Only NRA-NETB are not required to file

returns. They are subject to final withholding tax. Tax with finality
hence, no need to file returns.
2.
2.
3.
4.
III.
Taxable Year
Instances when Individuals are Not Required to File

Returns
a.
An individual whose gross income does not

exceed his total personal and additional
exemptions. However, a Filipino Citizen and any
alien individual engaged in business or practice
of profession within the Philippines shall file an
income tax return, regardless of the amount of
gross income.
b.
An individual with respect to pure compensation

income derived from sources within the
Philippines, the income on tax on which has
been correctly withheld.
The calendar or the fiscal year ending during

such calendar year, upon the basis of which the
net income is computed.
When Calendar Year is Used

a.
If the taxpayer chooses the calendar year
b.
If the taxpayer has no annual accounting period
c.
If the taxpayer does not keep its books
d.
If the taxpayer is an individual (if individual, no

choice. It would only be Calendar Year)
a.
When the taxpayer retired form business subject

to tax
b.
When he intends to leave the Philippines
c.
When he removes his property from the

Philippines
d.
When he hides or conceal his property
e.
When he performs any act tending to obstruct

the proceedings for the collection of the tax for
the past or current quarter or year
f.
When he renders the collection of the tax totally

or partly ineffective
Individuals Required to File Returns
General Rule:
77
HOWEVER, an individual deriving compensation

concurrently from two or more employers at any
time during the taxable year shall file an income
tax return. Further, an individual whose pure
compensation income derived from sources
within the Philippines exceeds P60,000 shall also
file an income tax return.
When the Commissioner is Authorized to Terminate

the Taxable Period (the CIR can implement Jeopardy
assessment)
RETURNS AND PAYMENT OF TAX

1.
Every non-resident alien engaged in trade or

business or in the exercise of a profession in the
Philippines
a.
Every Filipino Citizen residing in the Philippines
b.
Every Filipino citizen residing outside the

Philippines, on his income from sources within
the Philippines
c.
Every alien residing in the Philippines, on income

derive for sources within the Philippines
3.
c.
An individual whose sole income has been

subjected to a final withholding tax.
d.
An individual who is exempt from income tax

(i.e. minimum wage-earners)
Substituted Filing of Income Tax Returns

Individual
taxpayers
receiving
purely
compensation, regardless of amount, from only
one employer in the Philippines for the calendar
year, the income tax of which has been withheld
correctly by the employer (tax due = tax withheld)
shall not be required to file the Individual Income
Tax Return.
Requisites:
1. Employer-Employee relationship (you are an
employee)
2. One employer
3. Taxes correctly withheld
A senior citizen who is a compensation income
earner deriving from only one employer an annual
taxable income exceeding the poverty level or the
amount determined by the NEDA thru the NSCB
on a particular year, but whose income had been
subjected to the withholding tax on
compensation, shall, although not exempt from
income tax, be entitled to the substituted filing of

income tax return under Revenue Regulations No.
2-98, as amended.
4.
of income but the returns so filed shall be

consolidated by the BIR for the purposes of
verification foe the taxable year.
Individuals Not Qualified for Substituted Filing
Return of parent to include the income of children
a.
Individuals deriving compensation form 2 or

more employers concurrently or successively at
anytime during the taxable year (it includes
changing jobs within the year)
b.
Employees deriving compensation income,

regardless of the amount, whether from a single
or several employers during the calendar year,
the income tax of which has not been withheld
correctly, resulting to collectible or refundable
return.
The income of unmarried minors derived from

property received form a living parent shall be
included in the return of the parent, except when
the donors tax has been paid on such property or
when the transfer of such property is exempt from
donors tax.
c.
6.
Self-employed Individuals
Every individual subject to income tax, who is
receiving self-employment income, whether it
constitutes the sole source of his income or in
combination with salaries, wages and other fixed
or determinable income, shall make and file a
declaration of his estimated income for the
current taxable year on or before April 15 of the
same taxable year.
Employees whose gross compensation income

do not exceed the statutory minimum wage or P
5,000 per month (P60,000 a year), whichever is
higher, including employees of the government
of the Philippines, or any of its political
subdivisions, agencies or instrumentalities, with
salary grades 1 to 3.
Non-resident Filipino citizens with respect to

income from without the Philippines and nonresident aliens not engaged in trade or business in
the Philippines are not required to render a
declaration of estimate income tax.
The statutory minimum wage of minimum wage

earners, including overtime pay, holiday pay,
night differential and hazard pay, are exempt
from income tax.
7.
d.
Individuals deriving other non-business, nonprofessional-related income in addition to

compensation income not otherwise subject to
final tax.
e.
Individuals receiving purely compensation

income from a single employer, although the
income tax of which has been correctly withheld,
but whose spouse fails under a), b), c) and d)
above.
f.
Non-resident aliens engaged in trade or business

in the Phils deriving purely compensation
income, or compensation income and other nonbusiness, non-professional-related income.
8.
When to File Returns

a.
On or before April 15 of each year covering

income from the preceding taxable year
b.
Thirty (30) days from each transaction and a final

consolidated return on or before April 15
covering all stock transactions of the preceding
year in case of sale or exchange of stock not
traded through a local stock exchange
c.
Thirty (30) days following each sale or other

disposition in case of sale or disposition or real
property.
Payment of Estimated Income Tax by Individuals

Four (4) installments:
Employees not qualified for substituted filing but are

required to file the Income Tax Return shall file the
same not later than April 15 of the year immediately
following the taxable year. Provided, that employees
with previous/successive employer/s within the
taxable year shall furnish their new employer with BIR
Form No. 2316 issued by the previous employer/s.
5.
Husband and Wife

Married individuals, whether citizens, residents or
non-resident aliens, who do not derive income
purely from compensation, shall file a return for the
taxable year to include the income of both spouses.
However, if it is impracticable for the spouses to file
one return, each spouse, may file a separate return
78
Estimated Tax the amount which the individual

declared as income tax in his final adjusted and
annual income tax return for the preceding year
minus the sum of the credits allowed against said
tax. If, during the current taxable year, the taxpayer
reasonably expects to pay a bigger income tax, he
shall file an amended declaration during any interval
of installment payment dates.
a.
Quarterly income tax return; and
The tax computed shall be decreased by the

amount of tax previously paid or assessed during
the preceding quarters and shall be paid not
later than 45 days from the close of each of the
9.
first 3 quarters of the taxable year. Whether

calendar or fiscal year
- only if income tax due exceeds 2,000 and applies

only to INDIVIDUALS and not to corporations
b.
Final or adjusted return
- 1 payment on/or before April 15
If the sum of the quarterly tax payments made

during the said taxable year is not equal to the
total tax due on the entire taxable income of
that year, the corporation shall either:
- 2 payment on/or before July 15
i.
Pay the balance of tax still due; or
ii.
Carry-over the excess credit; or
iii.
Be credited or refunded with the

excess amount paid.
Return and Payment of Estimated Income Tax by

Corporations
Every corporation subject to income tax,
except foreign corporations not engaged in
trade or business in the Phils, shall render in
duplicate, a true and accurate:
st
nd
b.
Payment of Capital Gains Tax
It shall be paid on the date the return is filed. In

case the taxpayer elects and is qualified to
report the gain by installments, the tax due from
each installment shall be paid within the 30 days
from the receipts of such payments.
Every corporation deriving capital gains from the
sale or exchange of shares of stock not traded
through a local stock exchange shall file a return
within thirty (30) days after each transaction and
a final consolidated return of all transactions
th
during the taxable year on or before the 15 day
th
of the 4 month following the close of the
taxable year.
- PAY AS YOU FILE
A. Quarterly income tax return; and

-
The tax computed shall be decreased by the

amount of tax previously paid or assessed during
the preceding quarters and shall be paid not
later than 60 days from the close of each of the
first 3 quarters of the taxable year, whether
calendar or fiscal
c.
Where to file Returns

a.
Authorized agent bank
b.
Revenue district officer
c.
Collection agent
B. Final or adjusted return
d.
If the sum of the quarterly tax payments made

during the said taxable year is not equal to the
total tax due on the entire taxable income of
that year, the corporation shall either:
Duly-authorized treasurer of the city or

municipality in which such person has
his legal residence or principal place of
business in the Philippines
e.
Office of the CIR if there be no legal

residence or place of business in the
Philippines.
i.
Pay the balance of tax still due; or
ii.
Carry-over the excess credit; or
iii.
Be credited or refunded with the

excess amount paid.
- END -
NOTE: if individuals file quarterly returns 45 days after end of

quarter (April 15, August 15, November 15 and April 15 (annual ITR))
If Corporation file quarterly returns 60 days after end of
quarter
a.
Installment Payments
A taxpayer, other than a corporation, may opt to

pay the tax in 2 equal installments when the tax
due is in excess of Php 2,000. In such cases, the
first installment shall be paid at the time the
return is filed and the second installment on or
before July 15 following the close of the calendar
year.
79

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charges shall accrue exclusively to the local

GENERAL PRINCIPLES OF TAXATION

Pepsi Cola v. Municipality of Tanauan: Legislative

Quezon City v. ABS-CBN: Municipal Corporation has a

b. Nature of the Power of Taxation

ii. Taxes are the lifeblood of the government. Without

iv. It is legislative in character (Scope of Legislative Taxing

Determination of the Purpose

can only be questioned if it violated inherent and

c. Theory or Underlying Basis

Life-Blood Theory/Necessity Theory/Governmental

The power of taxation proceeds upon the theory that

v. It is subject to constitutional and inherent limitations

When allowed by the Constitution Under the

According to this theory, the State demands and

means thereof, be secured in the enjoyment of the

of pornographic video tapes. And while it was also an objective of

Regulation. Taxes may also be imposed for a

Sumptuary purpose of taxation

TAXATION NOTES I |marukoi.mhealler

Levy is taxation, strictly speaking, while the second and

Taxes are the enforced proportional contributions from

admissible against demands for taxes levied for general or local

Exception: SC allowed set off in the case of Domingo v. Garlitos

v. It is levied by the lawmaking body. The power to tax is

Taxes cannot be subject to compensation for the simple

A person cannot refuse to pay a tax on the ground that the

Sec. 28, Art. VI, 1987 Constitution:

TAXATION NOTES I |marukoi.mhealler

vi. It is levied for a public purpose. Taxation involves, and

c. Tax distinguished from other fees/charges

ii. Tax v. Toll

A debt is generally based on contract, express or implied,

A toll is a demand of proprietorship, while a tax is a

License or permit fee is a charge imposed under the police

A debt is governed by the ordinary periods of prescription,

Special assessment is an enforced proportional

Penalty is any sanction imposed as a punishment for

TAXATION NOTES I |marukoi.mhealler

Doctrine of Equitable Recoupment

INHERENT POWERS OF THE STATE, distinctions

The sources of government revenue must be sufficient to

i. Taxation v. Police Power

ii. Taxation v. Eminent Domain

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

A good tax system must be based on the taxpayers ability

INHERENT AND CONSTITUTIONAL LIMITATIONS

a. Inherent Limitations So called because they proceed from

TAXATION NOTES I |marukoi.mhealler

One test of determining the public purpose in a tax is

Delegation to the President. Under the Constitution,

As a matter of public policy, property of the State and of

express provision in the law is made therefor. Such exemption is

Rest on substantial distinctions

The State has the inherent power to select the subject of

An exemption of impairment by law is when a tax

iii. Rule of Uniformity and Equity in Taxation

However, non-impairment may not be invoked in the case

On the basis of the foregoing discussions, it can safely be

Absolute or perfect equality or uniformity and equity is, of

A poll tax refers to a personal or capitation tax; it is a tax of

Prohibition against impairment of obligation of