TAXATION I INCOME STATEMEN Requisites for income to be taxable:

1. There must be gain or profit, whether in cash or its

Basis of Governments right to impose tax on income: equivalent. (Existence of income)
Partnership theory
2. The gain must be realized or received. Thus, not all
TAX ON INCOME economic gains constitute taxable income. (Realization of
Income all wealth which flows into the taxpayer other than income)
a mere return of capital. It includes the forms of income Gen. Rule: A mere increase in the value of property
specifically described as gains and profits including gains
without actual realization, either through sale or other
derived from the sale or other disposition of capital
assets disposition, is not taxable.
- a sale does not necessarily mean income.
- it includes both taxable and non-taxable income. A mere expectation of profits is not an income.
Exception: Economic benefit principle (BIR Ruling No.
Capital denotes the original investment or fund used in 029 98, March 19, 1998, Revenue Memorandum Circular
70-2010)
order to generate earnings (income).
- receipt here includes constructive receipt.
Gross Receipts receipts which may constitute capital as well
(Doctrine of Constructive Receipt of
as income
Income)
Revenue refers to all funds/income derived by the
- Income which is credited to the account of
government whether from tax or other sources.
or set apart for a taxpayer and which may
Revenue is to the government as income is to private
be drawn upon by him at any time is subject
persons or corporations.
(Commissioner vs. BOAC, 149 SCRA 395)
to tax for the year during which so credited
or set apart, although not then actually
Sources of Income reduced to possession.
Property - To constitute receipt in such a case, the
Labor (Service) income must be credited to the taxpayer
Sale/exchange of capital asset and activity without any substantial limitation or
restriction as to the time or manner of
For tax purposes, income from whatever source payment or condition upon which payment
forms part of the taxpayers income. is to be made. [Section 52, Revenue Regulations
2]
Examples:
1. Treasure found or punitive damages representing
Example: Partners distributive share in the
profits loss.
profits of a general professional partnership is
2. Amount received by mistake
regarded as received by the partner, although
3. Cancellation of the taxpayers indebtedness. (Sec.
not yet distributed.
50, RR. No.2)
a) Payment of income
Tests to determine whether income is earned:
b) Gift
a. Realization test (BIR Ruling 091-99, 8 July 1999);
c) Capital transaction
b. Claim of right doctrine or doctrine of ownership,
4. Payment of usurious interest
command or control (CIR vs. Javier, 199 SCRA 824);
5. Illegal gains - Moral turpitude is not a touchstone of
c. Economic benefit test or doctrine of proprietary
taxability. (P. Hsbough Milk Co., 26 T.C. 707)
interest (BIR Ruling 123-97, 10 Nov. 1997 and BIR
6. Tax refund
Ruling 029-98, 19 Mar. 1998);
7. Bad debt recovery
d. Severance test
e. All events test
Classifications of Income Subject to Philippine Income Tax
1. Compensation Income
3. The gain must not be excluded by law or treaty from
2. Professional Income
taxation. (Recognition of Income)
3. Business Income
4. Passive Income
Methods of Accounting (Recognition of Income)
5. Capital gains
a.) Cash method - recognition of income and
expense dependent on inflow or outflow of cash
Taxable Income means the pertinent items of gross income
(meaning, you recognize the income when you
specified in the Tax Code, less the deductions and/or personal
actually receive the cash payment for the sale, and
and additional exemptions, if any, authorized for such types
you recognize the expense when you actually pay
of income by the Tax Code or other special laws. (Sec. 31, NIRC
cash for the expense)
of 1997)

1
b.) Accrual method - method under which income,
gains and profits are included in gross income when
earned whether received or not, and expenses are
allowed as deductions when incurred, although not
yet paid. It is the right to receive and not the actual
receipt that determines the inclusion of the amount
in gross income
Case: CIR vs. Isabela Cultural Corp, 12 Feb. 2007
c.) Special Methods
i. Installment
* Sales of dealers in personal property
Under Rules and Regulations (R&R)
prescribed by the Sec. of Finance, upon
recommendation of the Commissioner: a
person who regularly sells or otherwise
disposes of personal property on the
installment plan may return as income
therefrom in any taxable year that
proportion of the installment payments
actually received in that year, which the
gross profit realized or to be realized when
payment is completed, bears to the
contract price.
Example: Sale in 2011 payable in 2 equal
annual installments. How to compute for income:
Contract Price/ Installments
Receivable P100,000
Cost 75,000
(GP) P 25,000
* installments payable in 2 equal annual
installments
GP/Contract Price ratio = 25T/100T = 25%
Collections in 2011 = P50T
Income for 2011 = P50T x 25% = P12,500
* Sales of realty and casual sales of personalty
a) in cases of:
(i) casual sale or other casual
disposition of personal property
(other than inventory on hand of
the taxpayer at the close of the
taxable year) for a price > P1,000,
or
(ii) sale or other disposition of real
property, if in either case the initial
payments do not exceed 25% of
the selling price
- income may be recognized same
as in sales of dealer in personal property in
(1)
* Sales of real property considered as capital asset
by individuals
- individual who sells of disposes of real property,
considered as capital asset & is otherwise qualified to
report the gain under (2) above may pay the capital
gains tax in installments under R&R to be promulgated
by the Sec. of Finance, upon recommendation of the
Commissioner
ii. Deferred payment
iii. Long-term construction contract percentage
of completion
iv. Farming
Income tax a tax on all yearly profits arising from property,
profession, trade or offices or as a tax on persons
income, emoluments, profits and the like.
Nature of Philippine Income Tax:
1. It is a/an
a. direct tax
b. progressive tax (mainly)
c. excise tax
2. It is based on income, either gross or net,
realized in one taxable year.
3. It is comprehensive.
4. It uses a semi-schedular or semi-global tax
system
Types of Philippine Income Tax
1. Net income tax
a. Graduated income tax on individuals
b. Normal corporate income tax on corporations
2. Gross income tax
a. Minimum corporate income tax of 2% of the gross
income
b. Improperly Accumulated Earnings tax of 10% on
improperly accumulated earnings
c. Optional Corporate Income Tax of 15% on Gross
Income.
d. Gross Philippine Billings Tax
e. Gross onshore income Tax
f. Final withholding tax on passive income
g. Capital gains tax
3. Fringe benefit tax
4. Branch profit remittance tax
Situs of Income Taxation
(Comprehensive Tax Situs)
- it is determined by the nationality (Citizenship
Principle), residence of the taxpayer (Residence
Principle), and source of income (Source Principle).
GENERAL CLASSIFICATION OF TAXPAYERS
Who is a taxpayer?
Under Sec 22(N), a taxpayer is any person subject to
[income] tax.
2
 Income taxpayers, with distinction based on the 2) Foreign corporations - Those created, organized or existing
amount of income subject to tax, or the applicable tax under any laws other than those of the Phils.
rates, or both, are classified as follows: a. Resident - Those foreign corporation engaged in trade
or business within the Phils.
Kinds of Individual Taxpayers
1) Citizens b. Non-resident - Those foreign corporation not engaged
a) Resident citizens - Those residing in the Philippines in trade or business within the Phils.
unless he qualifies as a non-resident under Sec. 22 (E)of
the NIRC. Prima Sub-classification/s
b) Non-resident citizens - Those not residing in the ry
Philippines. Classif
icatio
A non-resident citizens means
n
1.) One who establishes to the satisfaction of the
Commissioner of Internal Revenue (CIR) the fact of Citize Residents of the Philippines (5%-34%)
his physical presence abroad with a definite ns of
the
intention to reside therein. Not residents of the Philippines (5%-34%) Sec. 22(E)
Philip
2.) A citizen of the Phils. who leaves the country pines
during the taxable year to reside abroad, either as
immigrant or for employment or on permanent Residents of the Philippines (5%-34%) Sec. 22(F)
basis. Not Engaged in Trade or Business in the
3.) A citizen of the Phils. who works and derive Residents Philippines (5%-34%)
Alien
from abroad and whose employment thereat of the
s
Philippine
requires him to be physically present abroad most s Not engaged in Trade or Business in the
of the time (183 days) during the taxable year. Sec. 22 Philippines (25% of GI)
Indivi
4.) A citizen who has been previously considered duals
(G)
as non-resident citizen and who arrives in the Phils.
Individual Employed by Regional or Area Headquarters
at any time during the taxable year to reside and Regional
permanently in the country. Operating Headquarters of Multinational Companies
5.) A citizen who shall have stayed outside the Speci (15% of GI)
Phils. for 183 days or more by the end of the year. al
Individual Employed by Offshore Banking Units
class
(15% of GI)
es of
NOTA BENE: For purposes of income tax, an overseas Indivi Individual Employed by a foreign service contractor or by
contract worker who is a Filipino citizen and deriving duals a foreign service
income from abroad is deemed a non-resident citizen subcontractor engaged in petroleum operations in the
and therefore taxed only on income sourced within the Philippines
Philippines. However, in order to qualify as a non- (15% of GI)
resident citizen, the worker must be physically present
abroad most of the time or at least 183 days (continuous
or not) during the calendar year.
Estates
and Trusts
2) Aliens
a) Resident aliens - Those residing in the Philippines Domestic Corporations (30%) Sec. 22 (C )
though not a citizen thereof.
- Those who are actually present in the Phils. and Foreign Resident Foreign Corporations Sec. 22 (H)
Corporation
who are not mere transients or sojourners. s
Non-resident Sec. 22 (I)
Sec. 22(D)
b) Non-resident aliens - Those not residing in the Phils.
and who is not a citizen thereof. Proprietary educational institutions and
non-profit hospitals
(1) Engaged in trade or business comes and stays in
Corporatio
the Phils. For an aggregate period of more than ns Domestic Depositary Bank (Foreign
180 days during the calendar year. Special Currency Deposit Units)
-includes performance of personal services Classes
of Resident international carriers
within the Phils. Corporation
(2) Not engaged in trade or business Offshore Banking Units
s
Resident Depositary Bank (Foreign
Kinds of Corporate Taxpayers Currency Deposit Units)
1) Domestic corporations - Those created or organized in the
Regional or Area Headquarters Sec. 22( DD)
Phils. or under its laws.
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 and Regional Operating Headquarters Sec.
22 (EE) of Multinational Companies
Pertinent Items of
Non-resident cinematographic film owners,
GROSS INCOME
lessors or distributors

Non-resident owners or lessors of vessels

chartered by Philippine Nationals
Non-resident lessors of aircraft, machinery
and other equipment
Source Principle
In general, income may be earned from:
1. Within the Philippines
- compensation for labor/service derived from
Philippine sources
(Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue, 121 Phil. 579; 13 SCRA 601 (1965);
Commissioner of Internal Revenue v. British Overseas
Airways Corporation (BOAC), 149 SCRA 395;
Commissioner of Internal Revenue v. Baier-Nickel, G. R.
No. 153793, August 29, 2006; )
- interest on bonds, notes, deposits and the like
earned in the Philippines (residence of debtor)
- dividends declared by domestic corporations
- rentals and royalties from property located within
the Philippines
- gains, profits and income from sale of real
property located in the Phils. as well as from
personal property purchased in the Philippines.
(CIR vs. Japan Airlines, Inc., G.R. No. 60714, 6 March
1991, The Municipality of Jose Panganiban, Province of
Camarines Norte, etc. vs. The Shell Company of the Phils,
Ltd., G.R. No. L-18349, 30 July 1966)
2. Without the Philippines
- compensation for labor/service rendered outside
the Philippines
- interest on bonds, notes, deposits and the like
earned abroad
- dividends declared by non-resident foreign
corporations
- rentals and royalties from property located
outside the Philippines
- gains, profits and income from sale of real
property as well as from personal property outside
the Philippines
3. Partly within and partly without the Philippines
- transportation or other services rendered partly
within and partly outside
- the sale of personal property produced within the
sold outside, or vice versa
Tax on Individuals:
Subject to Final Tax
(i.e. passive income,
capital gains,
transaction tax)
EXCLUSIONS/EXEMP
TIONS
Gross Income means all income derived from whatever
source x x x (Sec. 32)
Income subject to final tax income collected through the
withholding tax system. It is a final settlement of the
income tax due on said income.
Exclusions - income received or earned but is not taxable as
income because it is exempted by law or by treaty.
- Income of individuals may either be subject to graduated
income tax rates or to preferential tax rates.
1. Compensation Income - is considered as having been
earned in the place where the service was rendered
and not considered as sourced from the place of
origin of the money;
- Payment for services, other than compensation
income, is considered as having been earned at the
place where the activity or service was performed;
- includes salaries, wages, commissions, fees, tips
amd gratuities, hazard and emergency pay,
overtime, emoluments, honoraria, bonuses, fixed or
variable allowances (BIR Ruling No. DA-233-2007, 17
Apr. 2007, BIR Ruling No. DA-018-2008, 16 Jan. 2008, BIR
Ruling No. DA-778-2009, 15 Dec. 2009) , fringe
benefits, pensions, retirement, separation pay,
proceeds from profit-sharing, COLA, PERA, etc.
- however, it does not include compensation for
services rendered by an independent contractor
and income derived from professional partnership.
A. Excluded/Exempt
1. Retirement benefits received under
Republic Act 7641 and those received by
officials and employees of private firms under a
reasonable private benefit plan maintained by
the employer which meets the following
requirements:
The plan must be reasonable;
4
 The benefit plan must be approved by the
BIR;
The retiring official must have been in the
service of the same employer for at least
ten (10) years and is not less than fifty (50)
years of age at the time of retirement, and
The retiring official or employee should not
have previously availed of the privilege
under the retirement benefit plan of the
same or another employer.
Sec. 32(B)(6)(a)
2. Any amount received by an employee or by his
heirs from the employer due to death, sickness or
other physical disability or for any cause beyond the
control of said employee, such as retrenchment,
redundancy or cessation of business. Sec.32(B)(6)(b)
3. Amounts received by reason of involuntary
separation will be exempt from income tax even if
the employee, at the time of separation, had
rendered less than ten (10) years of service and/or
is below fifty (50) years of age.
4. Social security benefits, retirement gratuities,
pensions and other similar benefits received by
residents or non-resident citizens or aliens who
come to reside permanently in the Philippines from
foreign government agencies and other institutions,
private or public.
5. Payment of benefits under the law of the United
States administered by the United States Veterans
Administration. Sec. 32(B)(6)(d)
6.Payment of benefits made under the Social
Security System. Sec. 32(B)(6)(e)
7.Benefits received from the GSIS Act of 1937, and
the retirement gratuity received by government
officials and employees. Sec. 32(B)(6)(f)
8. Compensation Income shall not include
remuneration paid for:
i. agricultural labor paid entirely in
products of the farm where the labor is
performed; or
ii. Domestic service in a private home; or
iii. Casual labor not in the course of the
employers trade or business; or
iv. Services by a citizen or resident of the
Philippines for a foreign government of
an international organization. Sec. 78 (A)
9. Actual, moral, exemplary and nominal damages in
connection with a final judgment or compromise
agreement arising out of or related to an employer-
employee relationship.
10. Life insurance proceeds paid to the heirs or
beneficiaries upon death of the employee. However,
interest payments agreed under the policy for the
amounts which are held by the insured will be
included in the gross income. Sec. 32(B)(1)
11. Amounts received by the insured as a return of
premium Sec. 32(B)(2)
12. Compensation for injuries or sickness Sec.
32(B)(4)
13. Income exempt under any treaty obligation
binding upon the Philippine government Sec.
32(B)(5)
14. Facilities or privileges are of relatively small value
which are offered or furnished by the employer
merely as a means of promoting the health,
goodwill, contentment or efficiency of his
employees.
15. Benefits, privileges, and facilities which are given
to employees for the exclusive benefit or
convenience of the employer. (Convenience of the
Employer Rule) (Revenue Audit Memo No. 1-87, 23
April 1987)
De minimis benefits [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as
amended by Rev. Regs. No. 8-2000]
a. Monetized unused vacation leave credits of private
employees not exceeding ten (10) days during the
year and the monetized value of leave credits paid to
government officials and employees;
b. Medical cash allowance to dependents of employees
not exceeding P750 per semester or P125 per month;
c. Rice subsidy of P1500 per month or one sack of 50 kg.
Per month amounting to not more than P1,500
granted by an employer to his employees (RR 5-
2008);
d. Uniforms given to employees by the employer not
exceeding P5,000 per annum; (R.R. 8-2012, effective 1
January 2012)
e. Medical benefits given to the employees by the
employer not exceeding P10,000 per annum;
BIR Ruling 019-02: To be considered de minimis
medical allowance, the ff. conditions must concur:
i. The amount given to the EE shall be for his own
medical expense;
ii. The amount actually given and actually spent
shall not exceed P10,000 in any given calendar
year;
iii. The EE must fully substantiate with or in his
name the medical allowance to be granted.
f. Laundry allowance of P300 per month;
g. Employee achievement awards, e.g. for length of
5
 service or safety achievement, which must be in .
the form of a tangible personal property other
than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received
by the employee under an established written
plan which does not discriminate in favor of highly
paid employees;
h. Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum;
i. Company picnics and sports tournaments in the
Philippines and are participated exclusively by
employees; and removed
j. Daily meal allowance for overtime work not exceeding
twenty-five (25%) of the basic minimum wage.
k. Flowers, fruits, books or similar items given to
employees under special circumstances, e.g. on
account of illness, marriage, birth of a baby, etc. [as
enumerated in RR 03-98, as amended by RR 10-00]
removed (R.R. 5-2011)
The amount of de minimis benefits conforming to
the ceilings herein prescribed shall not be considered in
determining the 82,000 of other benefits (#17).
However, if the employer pays more than the ceilings,
the excess shall be taxable to the employee if such
excess is beyond 82,000. (R.R. 3-2015)
15. Advances or reimbursements for travelling,
representation and other ordinary and necessary
expenses incurred by the employee in the performance
of his duties, if the employee is required to
account/liquidate for said expenses. The excess of actual
expenses over advances made shall be treated as
taxable income if such amount is not returned to the
employer.
16.GSIS, SSS, Medicare and Pag-ibig contributions and
union dues of individual employees. Sec. 32(B)(7)(f)
RMC 53-2011, RMC 27-2011
th
17.Thirteenth (13 ) month pay and other benefits such
as Christmas bonus, productivity incentive bonus, loyalty
awards, gifts and other benefits of similar nature to the
extent that the total amount thereof does not exceed
P82,000. Sec. 32(B)(7)(e)
* Revenue Regulation 3-2015
18. Anyone earning at least the minimum wage
(including holiday pay, overtime pay, hazard pay, and
night shift differential) in his/her region and has no
other reportable income will not pay income tax. (Sec.
6 of R.A. 9504)
19.Salaries and stipends in dollars received by non-
Filipino citizens serving as staff of the IRRI and the Ford
Foundation (R.A. 2707)
20.Tax exemption of allowances paid to military
personnel.
21. Tax exemption of qualified senior citizen
provided he qualifies to be a minimum wage earner in
accordance with R.A. 9504. (R.A. 9994, 27 July 2009)
B. Subject to Final Tax
Fringe Benefits Tax
Fringe benefits refer to any good, service,
or other benefit furnished or granted in cash or in
kind by an employer to an individual employee
(except rank and file employees). Sec. 33(B)
Rank and file employees shall mean all employees who are
holding neither managerial nor supervisory
position. Sec. 22 (AA)
Managerial employee is one who is vested with
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
discipline employees. (Labor Code)
Supervisory employees - those who, in the interest of the
employer, effectively recommend such managerial
actions if the exercise of such authority is not
merely routinary or clerical in nature but requires
the use of independent judgment. (Labor Code)
1. Housing
Taxable
(a) Lease of residential property for the use of the
employee as his usual place of residence.
(b) Residential Property owned by employer and
assigned to employee as his usual place of
residence.
(c) Residential property purchased by employer on
installment basis for the use of employer as his
usual place of residence.
(d) Residential property purchased by ER and
ownership is transferred to EE as his usual place
of residence.
(e) Residential property transferred to employee at
less than employers acquisition cost.
Not taxable
a. housing privilege of military officials of the AFP
located inside or near the military camps;
b. a housing unit which is situated inside or at most 50 m
from the perimeter of the business premises;
c. temporary housing for an employee for 3 months or
less;
6
2. Expense Account
Taxable
a. expenses incurred by the employee which
are paid or reimbursed by his employer not
supported by receipts in the name of the
employer
b. personal expense of the employee which
are paid or reimbursed by his employer w/n
supported by receipts in the name of the
employer
c. household expenses of the employee borne
by the employer.
Not taxable
a. Expenditures supported by receipts in the
name of the employer and expenditure that
do not partake the nature of a personal
expense attributable to the employee
b. Representation and Transportation
Allowances (RATA)
3. Motor Vehicle
Taxable when employer:
a. Purchase the motor vehicle in the name of
the employee;
b. provides the employee with cash for the
purchase of a motor vehicle in the name of
the employee;
c. shoulders a portion of the amount of the
purchase price of a motor vehicle in the
name of the employee
d. Purchases the car on installment in the
name of the employee;
e. owns and maintains a fleet of motor vehicle
not normally used in business
f. leases and maintains a fleet of motor
vehicles not normally used in business
g. the use of yacht whether owned and
maintained or leased by the employer
* How about use of aircraft (including helicopters)?
Not taxable
Motor vehicles used for sales, freight, delivery
service and other non-personal uses.
4. Interest on loan at less than market rate to the extent of
the difference between the market rate and actual rate
granted
5. Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or
other similar organizations
6. Expenses for foreign travel
Except:
Where the expenses for foreign travel paid by
the employer for the employee are for the purpose
of attending business meeting or convention. The
exemption covers only the following expenses:
a. Inland travel expenses except lodging cost
in hotel averaging US$ 300 or less per day;
and
b. Cost of economy or business class airline
ticket. Travel expenses should be supported
by documents proving the actual
occurrences of the meetings or
conventions. Likewise, documents and
evidence showing the business purpose of
the employees travel must be presented
otherwise, the entire cost will be
considered taxable fringe benefit.
However, if the ticket is a first class one, 30% of the
cost of the ticket shall be subject to a fringe benefit tax.
7. Holiday and vacation expenses
8. Educational assistance
a. Education granted to
employee
Requisites:
1) Educational grant whereby the study is
directly connected with the trade, business
or profession of the ER.
2) And there is a written contract obligating
the EE to remain under the employment for
a certain period.
a. Educational Assistance
granted to the dependents
of the employee through a
competitive scheme under
a scholarship program of
the company.
9. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
Except:
a. Contribution of the employer for the
benefits of the employee pursuant to
existing laws.
b. The cost of premium borne by the employer
for the group insurance of his employees.
Fringe Benefits Tax tax imposed on
fringe benefits which are granted or are paid by
an employer to an employee occupying
managerial or supervisory position.
It is a tax on the income of the employee
although paid by the employer on behalf of the
employee.
The employer can claim the fringe benefit
and the fringe benefit tax as a deductible
expense from his gross income.
7
 Tax Rate and Tax Base [Generally] 32% of
the grossed-up monetary value (GMV)
GMV represents the whole amount of
income realized by the employee.
Special Cases:
For fringe benefits received by non-resident
alien not engaged in trade of business
(NRANETB), the tax rate is 25% of thegrossed-
up monetary value (GMV).
For fringe benefits received by alien individuals
and Filipino citizens employed by regional or
area headquarters, regional operating
headquarters, offshore banking units (OBUs), or
foreign service contractor, the tax rate is 15% of
the grossed-up monetary value (GMV).
Benefits not subject to Fringe Benefits Tax:
1. Those that are exempted from income tax.
2. Contributions of the employer for the
benefit of the employee retirement,
insurance, and hospitalization benefit
plans.
3. Benefits granted to the rank and file,
whether granted under a CBA or not.
4. De minimis benefits
5. Benefits granted to employees as required
by the nature of, or necessary to the trade,
business or profession of the employer.
6. Benefits granted for the convenience of
the employer. (Convenience of the
Employer Rule)
CIR v. CA, 203 SCRA 72
c. Part of the Pertinent items of Gross Income
- compensation income that is neither
exempt/excluded nor subject to a final tax.
Allowed deductions from gross
compensation income:
1. Basic Personal exemption (R.A. 9504);
2. Additional exemption for qualified
dependent child (R.A. 9504);
a "dependent" means a legitimate,
illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if
such dependent is not more than twenty-one
(21) years of age, unmarried and not gainfully
employed or if such dependent, regardless of
age, is incapable of self-support because of
mental or physical defect.
1. Premium payments on health and/or
hospitalization insurance Sec. 34(M)
Withholding Taxes is a systematic way of
collecting taxes at source.
Types of withholding at source:
1) Final withholding tax; and
Under the final
withholding tax system the amount
of income tax withheld by the
withholding agent is constituted as
a full and final payment of the
income due from the payee on the
said income. [1st sentence, 1st par.,
Sec. 2.57 (A), Rev. Regs. No. 2-98]
2) creditable withholding tax
Under the creditable withholding
tax system, taxes withheld on certain
income payments are intended to equal
or at least approximate the tax due
from the payee on the said income. The
income recipient is still required to file
an income tax return and/or pay the
difference between the tax withheld
and the tax due on the income. [1st and
2nd sentences, Sec. 257(B), Rev. Regs.
No. 2-98]
Kinds of creditable withholding taxes:
a. taxes withheld on income
payments covered by the
expanded withholding tax;
and
b. taxes withheld on
compensation income.
Basic Rules on Compensation Withholding Taxes
As a general rule, all salaries earned by
persons as government or non-government
employees are subject to withholding tax, except of
the ff. items:
1. Commission paid by an insurance agent to
his sub-agents
2. Compensation for services by a citizen or
resident of the Phils. for a foreign
government or an international
organization.
3. Remuneration for casual labor not in the
course of the employers trade/ business
4. Remuneration for private service
performed by maids, cooks, gardener,
family drivers and the like
5. Remuneration paid to agricultural labor
and paid entirely in products of the farm.
6. Minimum wage earners
2. Income derived from the conduct of trade or
business or the exercise of a profession
Professional Income - Any other income that
is not derived from personal services or not related
to an employer employee relationship and is
generally subject to tax on net income basis.
8
 - The value derived from an exercise of
profession, business or utilization of capital assets.
Income from Business - Gains or profits derived from
rendering services, selling merchandise,
manufacturing products, farming and long- term
construction contracts.
A. Excluded/Exempt
1. The amount received by the
insured, as a return of premiums
paid by him under life insurance,
endowment, or annuity contracts,
either during the term or at the
maturity of the term mentioned in
the contract or upon surrender of
the contract. Sec. 32(B)(2)
2. The value of property acquired by
gift, bequest, devise, or descent:
Provided, however, That income
from such property, as well as gift,
bequest, devise or descent of
income from any property, in cases
of transfers of divided interest,
shall be included in gross income.
Sec. 32(B)(3)
3. 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. Sec. 32(B)(7)
(b)
4. Income derived from investments
in the Philippines in loans, stocks,
bonds or other domestic securities,
or from interest on deposits in
banks in the Philippines by (i)
foreign governments, (ii) financing
institutions owned, controlled, or
enjoying refinancing from foreign
governments, and (iii) international
or regional financial institutions
established by foreign
governments. 32(B)(7) (a)
5. Income exempt under any treaty
obligation binding upon the
Philippine government Sec.
32(B)(5)
6. Gains realized from the same or
exchange or retirement of bonds,
debentures or other certificate of
indebtedness with a maturity of
more than five (5) years.
7. Gains realized by the investor upon
redemption of shares of stock in a
mutual fund company as defined in
Section 22 (BB) of this Code.
8. Tax-exemption for 10-year period
of the income generated from
commercial sale of the invention of
inventors (R.A. 7459).
9. Income earned by Barnagay Micro
Business Enterprise (BMBE)
B. Income subject to final tax
C. Part of the Pertinent items of Gross
Income
GROSS INCOME derived from business shall be
equivalent to gross sales less sales returns, discounts
and allowances and cost of goods sold.
"Cost of goods sold' shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present location
and use.
GROSS INCOME = NET SALES COST OF GOODS SOLD/COST OF SALES
CLASSIFICATION OF GROSS INCOME FROM
BUSINESS/PROFESSION:
1. Manufacturing, merchandising, and
servicing
2. Farming
3. Long term contract
* The term trade or business includes the
performance of the functions of a public office.
[Section 22(S), NIRC]
In the case of taxpayers engaged in the sale
of service, 'gross income' means gross receipts less
sales returns, allowances and discounts.
For a trading or merchandising concern, 'cost of
goods' sold shall include the invoice cost of the
goods sold, plus import duties, freight in
transporting the goods to the place where the
goods are actually sold, including insurance
while the goods are in transit.
For a manufacturing concern, 'cost of goods
manufactured and sold' shall include all costs of
production of finished goods, such as raw
materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials
to the factory or warehouse.
Gross Income from Farming
Income from farming refers to earnings
derived from its operation by a person. It includes
the following:
1. Gross receipts from sale of livestock and
products purchased from others;
2. Cash received from sale of products raised
in the farm;
9
 3. Gains from sale of work animals and farm
equipment; and
4. Miscellaneous income such as rent
received on crop shares, proceeds of
insurance on growing crops, etc.
Methods of Computing Gross Income Derived from
Farming:
1. Cash basis
2. Accrual basis
Gross Income from Long Term Construction
Contracts
When income is derived from construction
contracts, the completion of which usually covers a
period over one year.
I. Expenses
Requisites for deductibility
1. BUSINESS TEST:
a) must be ordinary and
necessary,
b) must be paid or incurred
during the taxable year,
c) must be paid or incurred in
carrying on or which are
directly attributable to the
development, management,
operation and/or conduct
of the trade, business or
exercise of a profession,
d) must be reasonable, and
e) must not be against public
policy, public moral or law

Cases: Hospital De San Juan De Dios vs. CIR (10

Allowed deductions from gross May 1990);ESSO Standard Eastern Inc. vs. CIR (175
business/professional income SCRA 158-159); CIR vs. Isabela Cultural Corporation
Kinds of Deductions: (12 February 2007)
1. Itemized deductions
2. Optional standard deduction (OSD) 2. SUBSTANTIATION TEST:
3. Special deductions It must be substantiated with
sufficient evidence, such as official receipts
General rules: or other adequate records, showing:
a. Deductions must be paid or incurred in
connection with the taxpayers trade, business i. the amount of the expense
or profession being deducted, and
It must be directly connected with trade or ii. the direct connection or
business or profession of the taxpayer. relation of the expense being
deducted to the development,
b. Deductions must be supported by adequate management, operation
receipts or invoices and/or conduct of the trade,
The claimed deduction must be evidenced business or profession of the
by official receipts or other adequate records. taxpayer.

The evidence must establish the ff: * The tax required to be

a. the amount of expenses being deducted withheld on the amount paid or
b. the direct relation of such to the payable must have been paid to
development, management, operation, the BIR by the taxpayer, who is
and/or conduct of the trade, business or constituted as a withholding agent
profession of the taxpayer. of the government.

Note: Cohan Rule Principle KINDS OF BUSINESS EXPENSES:

1. Compensation for personal services
ITEMIZED DEDUCTIONS 2. Travelling expenses
I. Expenses 3. Representation and Entertainment
II. Interest expenses
III. Taxes 4. Advertising and Promotional expenses
IV. Losses 5. Rent expenses
V. Bad debts 6. Cost of material and supply
VI. Depreciation 7. Repairs
VII. Depletion Cases: Aguinaldo Industries vs. CIR (1982);
VIII. Charitable and other contributions
IX. Research and Development
X. Pension and trust contribution

10
 A private educational institution may, at its option, Interest on taxes. However, fines, penalties and
elect surcharges on taxes are not deductible
Interest paid by corporation on script dividends
a. to deduct expenditures otherwise considered as Interest on deposits paid by the authorized
capital outlays of depreciable assets incurred during bank of the CB
the taxable year for the expansion of school facilities Interest paid by legal or equitable owner on
b. to deduct allowance for depreciation thereof mortgage of real property
Sec. 34(A)(2)
Non deductible interest expenses
- It must be those referred under section 27 Interest paid on preferred stock which is
considered interest on capital by virtue of RMC
- Section 36(A)(2), (3) not applicable 17-71
General these expenditures are not deductible as Interest on undrawn salaries and bonuses
business expense exception private educational Interest on capital for cost keeping
institution can claim it under Sec. 34(A)(2) Interest paid where parties provide no
stipulation to pay interest in writing

BUSINESS EXPENSE ALLOWANCE FOR nteres
II. Interest
DEPRECIATION
Requisites for deductibility t on
a. there must be indebtedness. No carryover There is carryover indebt
b. the indebtedness must be that of the edness
taxpayer Can be claimed for Can claim it for a longer period if
one only year depending on the life span of incurr
c. the indebtedness must be connected with
the property ed to
the trade, business or profession of the
If the amount of It can accommodate all of the financ
taxpayer
capital outlay is expenses incurred e
d. the interest must have been paid or
substantial, it cannot
incurred during the taxable year petrol
accommodate all of
e. the interest must have been stipulated in eum
the expenses incurred
writing and on
f. the deduction for interest expense shall be interest paid on indebtedness paid in advance
reduced by an amount equal to 33% of the through discount or otherwise
interest income subject to final tax. (tax Section 34(B)(2)
arbitrage)
g. The interest payment arrangement must III. Taxes
not be between related taxpayers as Requisites for deductibility
mandated in Sec. 34(B)(2)(b), in relation
to Sec. 36(B), both of the Tax Code of 1997. 1. It must be paid or incurred within the taxable year.
2. It must be paid or incurred in connection with
*Interest between related taxpayers: the taxpayers trade, profession or business.
Members of the family Examples:
Individual and corp. a) Import duties
Between corps. b) Business taxes
Grantor and fiduciary (trustee) of c) Occupation taxes
any trust. d) Privilege and license taxes
Fiduciary and another fiduciary
e) Excise taxes
same grantor
f) Documentary stamp taxes
Fiduciary and beneficiary or such
g) Automobile registration fees
trust
h) Real property taxes
3. It must be imposed directly on the taxpayer.
h. The interest must not be incurred to
4. It must not be specifically excluded by law from
finance petroleum operations.
being deducted from the taxpayers gross income.
i) In case of interest incurred to acquire property used in
Limitation: In the case of a nonresident alien individual
trade, business or exercise of profession, the same was
engaged in trade or business (NRAETB) and a
not treated as a capital expenditure.
resident foreign corporation (RFC), the deductions for
*Optional treatment
taxes shall be allowed only if and to the extent that they
Deductible interest expenses:
11
 are connected with income from sources within the
Philippines.
Non-deductible taxes
1. Foreign income tax, if not claimed as tax credit
2. Final Taxes
3. Estate and donors taxes
4. Stock transaction tax on the sale, barter or exchange
of s/s listed and traded through the local stock
exchange.
5. Taxes assessed against local benefits tending to
increase the value of the property
6. Taxes which are not in connection with the trade,
business or profession of taxpayer.
7. Income tax imposed by the Philippine govt.
8. Value added Tax (VAT)
9. Energy Taxes
f) In the case of casualty loss, declaration of loss
must be filed within 45 days from the occurrence
of the casualty loss.
g) The loss must not be claimed as deduction for estate
tax purposes in the estate tax return.
Kinds of losses
1. Transaction losses losses arising from closed and
completed transaction in the conduct of trade and
business.
Example:
a. loss on sale of ordinary assets
b. foreign exchange losses
2. Casualty losses loss of properties used in trade,
business, or practice of profession. Arising from fires,
storms, shipwreck, or other casualties, or robbery, theft
or embezzlement.

Tax Credit 3. Capital losses losses from capital asset other than
-- deducted from Phil income tax those subjected to capital gains tax. Deductible only up
-- all taxes are allowed to be deducted with the to the extent of capital gains.
exception of the taxes expressly excluded Examples:
Tax deduction a. sale or exchange of capital assets;
-- deducted from the gross income b. short sales of properties;
-- only foreign income taxes may be claimed as c. securities becoming worthless;
credits d. loss for failure to exercise option to buy
capital asset;
IV. Losses actually sustained during the taxable year and e. wagering/gambling losses.
not compensated for by insurance or other forms
of indemnity shall be allowed as deductions: 4. Net operating loss carryover (NOLCO) arises when
allowable deductions exceeds gross income.
a) If incurred in trade, Rules:
profession or business; a. carried over for the next 3 immediately succeeding
b) Of property connected with years;
the trade, business or b. not applicable under OSD;
profession, if the loss arises c. not applicable against MCIT;
from fires, storms, d. forms part of allowable deductions as a special
shipwreck, or other allowable deduction upon application.
casualties, or from robbery,
theft or embezzlement. 5. Special losses with special or specific rules based on
its nature.
Requisites for deductibility Example:
a. loss on voluntary removal of buildings;
a) The loss must be that of the taxpayer. b. loss from illegal transactions;
b) There must be an actual loss suffered in a closed and c. loss on exchange between related
completed transaction. parties;
c) The loss must be connected with the taxpayers trade, d. shrinkage of value of shares;
business or profession. e. write-off of inventories;
d) The loss must not be compensated for by insurance or f. abandonment of petroleum operations.
otherwise.
Preferential tax treatment for Capital Gain (Loss):
d) The loss must not be compensated for by insurance or 1. Net capital gain is added to ordinary gain
otherwise. but net capital loss is not deductible from
e) The loss must be actually sustained and charge off ordinary gain.
during the taxable year. 2. Net ordinary loss is deductible from net
capital gain.

12
 3. Capital losses are deductible only to the
extent of the capital gain.
4. For the individual the reportable
percentages of capital gain or loss shall be:
a. 100% if the capital asset is held for one
year or less
b. 50% if the capital asset is held for more
than one year
V. Bad debts - Debts due to the taxpayer when actually
ascertained to be worthless and charged-off within the
taxable year.
Requisites for deductibility
1) There must be a valid and subsisting debt.
2) The same must be connected with the taxpayers trade,
business or practice of profession.
3) The same must not be sustained in a transaction entered
into between related parties enumerated under Sec. 36
(B) of the NIRC.
4) The same must be actually charged-off the books of
accounts of the taxpayer as of the end of the taxable
year.
VI. Depreciation - The gradual diminution in the useful
value of tangible property used in trade or business
resulting from exhaustion, wear and tear, and normal
obsolescence.
The term is also applied to amortization of value of
intangible assets the use of which in trade or business is
definitely limited in duration. (Basilan Estates, Inc. vs.
Comm., 5 September 1967)
Requisites for deductibility
The allowance for depreciation must be
reasonable
It must be for property arising out of its use or
employment in the business or trade, or out of
its not being used temporarily during the year
It must be charged-off during the taxable year;
A statement on the allowance must be
attached to the return.
The property must have a limited useful life.
VII. Depletion of oil and gas well and mines
Depletion is the exhaustion of natural resources due to
production. It is the reduction of cost or value of natural
resources such as oil and gas wells and mines as the
resources are converted into inventories.
Limitation: A reasonable allowance for depletion
computed using the cost-depletion method shall be
granted provided that the allowance for depletion shall
not exceed the capital invested.
VIII. Charitable and other contributions
Requisites for deductibility
The contribution must actually be paid or made
to the Phil. Government or any of its agencies
or political subdivision or to any domestic
corporations or associations specified by the
Tax Code or other entities as allowed by the Tax
Code and existing special laws.
It must be made within the taxable year;
It must not exceed 10% of the individuals
taxable income and 5% of the corporations
taxable income before deducting the
contribution (applicable only to contributions
with limit); and
It must be evidenced by adequate records or
receipts.
The following are subject to limit:
Donations to the Philippine government or any
of its agencies or any political subdivision
thereof exclusively for public purposes;
Donations to accredited domestic corporations
or associations organized and operated
exclusively for:
Religions;
Charitable;
Scientific;
Youth and sports development;
Cultural; or
Educational purposes; or for the
Rehabilitations of veterans; and
Donations to social welfare institutions or to
non-government organizations in accordance
with rules and regulations promulgated by the
Secretary of Finance provided, no part of the
net income of which inures to the benefit of
any private stockholders or individual.
Contributions deductible in full under the Tax Code:
Donations to the government of the Philippines
or to any of its agencies or political subdivisions
including fully-owned government corporations
exclusively to finance, to provide for, or to be
used in undertaking priority activities in:
Education;
Health;
Youth and sports development;
Human settlements;
Science and culture; and
Economic development
According to the national priority plan
determined by NEDA provided, that donations
not in accordance with the said annual priority
plan shall be with limit;
Donations to foreign institutions or
international organizations in pursuance or
13
 compliance with agreements, treaties, or
commitments entered into by the government
of the and the foreign laws or international
organizations or in pursuance of special laws,
and
Donations to certain accredited non-
government organization.
IX. Research and development - are for improvements
of processes and formulas as well as the development of
improved or new products. As a general rule, R&D only
extends from the laboratory or drawing board to
prototype status; i.e., so long as an activity still contains
an element of uncertainty/technical risk, it is within the
realm of R&D.
R&D expenditures which are paid or incurred by a taxpayer
during the taxable year in connection with his trade,
business or profession may be treated EITHER as:
1. Ordinary and necessary expenses allowed as
deduction during the taxable year when paid or incurred
(i.e., as an outright deduction for the full expenditure),
or
2. Deferred asset (or deferred expense) which is
periodically subject to amortization
Limitations on Deduction: The above tax treatment of
R&D expenses does NOT apply to:
1. Any expenditure for the acquisition or improvement
of land or the improvement of depreciable property,
used in connection with research and development.
2. Any expenditure incurred in ascertaining the
existence, location, extent, or quality of any deposit of
ore or other mineral, including oil or gas.
X. Pension trust
Requisites for deductibility
The employer must have established a pension
or retirement plan to provide for the payment
of reasonable pensions to its employees;
The pension plan is reasonable and actuarially
sound;
It must be funded by the employer; i.e., the
employer contributes cash to the plan;
The amount contributed must no longer be
subject to its control or disposition; and
The payment has not therefore been allowed as
a deduction.
OPTIONAL STANDARD DEDUCTION as
amended by R.A. 9504
- may be taken by an individual, in lieu of itemized
deductions
REQUISITES:
a. Available only to citizens, resident aliens, domestic
corporations and resident foreign corporations;
b. The standard deduction is optional;
i.e., unless the taxpayer signifies in his return his
intention to elect this deduction, he is considered as
having availed of the itemized deductions.
c. Such election, when made by the qualified taxpayer, is
irrevocable for the year in which made; however, he can
change to itemized deductions in succeeding years.
*Since an individual in business or in the practice of
profession is required to file quarterly income tax
returns, can he choose the OSD in his quarterly returns
and then choose the itemized deductions in his annual
income tax return, or vice versa?
YES, the OSD or Itemized Deductions is against the gross
income of the year. Quarterly income tax returns are
only interim computations on the taxable income for the
year
d. The amount of standard deduction is limited to forty
percent (40%) of:
Gross income DC and RFC
Gross sales or receipts RC, NRC, RA
[However, OSD is not available against compensation
income arising out of an employer-employee
relationship.]
*NOTE: The cost of sales in case of individual seller of
goods, or the cost of services in the case of individual
seller of services, is not allowed to be deducted for
purposes of determining the basis of the OSD.
e. Proof of actual expenses is not required, but the
taxpayer should keep records pertaining to his gross
income during the taxable year.
Special Deductions
1. Premiums paid on hospitalization
insurance. [Sec. 34 (M)]
2. Income currently distributed to
beneficiaries under estates and trusts.
[Sec. 61 (A)]
3. Section 37 of the NIRC
e.i. Net additions, if any, required by law to be
made within the year to reserve funds and the sums
other than dividends paid within the year on policy
and annuity contracts (non-life insurance) [Sec. 37
(A)]
4. Basic and Personal Exemptions
3. Gains derived from dealings in property
- includes all gains or losses derived from the disposition
of property (real, personal or mixed) for money in case of
sale, or for property in case of exchange, or from a
combination of both sale and exchange.
Measurement of gain/loss [Section 40(A)]
14
 - excess of the amount realized therefrom over the basis
or adjusted basis for determining gain, and
-excess of the basis or adjusted basis over the amount
realized for determining loss
Amount realized = sum of money received plus
the fair market value of the property (other
than money) received [Sec. 40 (A)]
Basis of property [Sec. 40 (B)]
depends primarily on the manner in which the
taxpayer acquired the property.
1. By purchase:
a.) acquired before 1 March 1913 FMV on such
date
b.) acquired on or after 1 March 1913 Cost plus
expenses of acquisition (Sec. 136, Rev. Reg. No. 2)
2. Included in the inventory latest inventory value (Sec. 136,
Rev. Reg. No. 2)
3. By devise, bequest or inheritance FMV or value of such
property at the time of the acquisition (death of
decedent) (Sec. 139, Rev. Reg. No. 2)
4. By gift same basis as it would have been in the hands of
the donor or the last preceding owner by whom it
was not acquired by gift, except that if such basis is
greater than the FMV of the property at the time of
the gift, then for the purpose of determining loss
shall be such fair market value.
5. Acquired (other than capital assets) for less than an
adequate consideration in money or moneys worth
amount paid by the transferee
6. Stock or security or property received if the exchange is
one where gain/loss may be recognized same as
the basis of the stock, or security or property given
in exchange
7. Stock or security or property received if the exchange is
one where the gain, if any, but not the loss is to be
recognized- basis of the property, stock or security
given in exchange less cash and FMV of property
given in exchange add dividend and/or gain
recognized
8. Property transferred in the hands of transferee if the
exchange is one where the gain, if any, but not the
loss is to be recognized same basis as it would be
in the hands of transferor increased by the amount
of gain recognized to the transferor on the transfer.
Two kinds of assets/properties:
1. Ordinary assets [Sec. 39 (A)]
- Refer to properties held by the taxpayer in the pursuit
of his profession, trade or business, they are:
Stock in Trade;
Property of a kind which would properly be
included in the inventory if on hand at the
close of the taxable year;
Property held by the taxpayer primarily for
sale to customers in the ordinary course of
trade or business;
Property used in trade or business which in
subject to the allowance for depreciation;
and
Real property used in trade or business
2. Capital assets
Property held by the taxpayer (whether or not
connected with his trade or business) but does not include:
Stock in trade;
Property of a kind which would properly be
included in the inventory if on hand at the
close of the taxable year;
Property held by the taxpayer primarily for
sale to customers in the ordinary course of
trade or business;
Property used in trade or business which in
subject to the allowance for depreciation;
and
Real property used in trade or business.
Classification of Capital assets for income tax purposes:
1. Sale of shares of stock of a domestic
corporation not listed and traded through a
local stock exchange
2. Sale of real property
3. Sale of capital assets other than stocks and
real property (sale of personal property
considered as capital asset other than
shares of stock)
Types of Gains from dealings in property
(1) Ordinary income vis--vis Capital gain
Includes any gain from the sale or exchange of property
which is not a capital asset.
(2) Actual gain vis--vis Presumed gain
(3) Long term capital gain vis--vis Short term capital gain
(4) Net capital gain, Net capital loss
Net Capital gainis the excess of the gains from sales or
exchange of capital assets over the losses from such
sales or exchanges.
15
Net capital Lossis the excess of the losses from sales or
exchanges of capital assets over the gains from such
sales or exchanges.
A. Excluded/Exempt [Sec. 40 (C)(2)]
1. Exchange solely in kind in legitimate
mergers and consolidation which
includes:
a. Between corporation which are
parties to a merger or consolidation
(property for stock)
b. Between a stockholder of a
corporation party to a merger or
consolidation and the other party
corporation (stock for stock)
c. Between a security holder of a
corporation which is a party to a
merger or consolidation and the other
corporation (securities for securities or
stock)
2. Transfer or exchange of property for
stock resulting in acquisition of corporate
control (Property for stock)
[Sec. 40 (C)(2)]
3. Sale/disposition of principal residence
[Sec.24 (D)(2)]
4. Shares listed and traded in the stock
exchange
B. Income subject to final tax
1. Sale, barter, exchange or other
disposition of shares of stock in a
domestic corporation not listed
and traded through a local stock
exchange. [Sec. 24(C)]
- If the transferor of the shares is an
individual, the rule on holding period and
capital loss carry-over will not apply,
notwithstanding the provisions of Section
39 of the Tax Code , as amended. (Rev.
Reg. No. 6-2008)
1. Sale, barter, exchange or other disposition
of real property located in the Philippines,
classified as capital assets. [Sec. 24(D)(1)]
D. Part of the Pertinent items of Gross
Income
1. Gain from sale, exchange, or
other disposition of real
property classified as
ordinary assets (although
subject to creditable
withholding tax)
2. Gain from sale, exchange or
other disposition of personal
property classified as
ordinary assets except
shares of stock.
3. Gain from sale, exchange or
other disposition of other
personal property classified
as capital asset.
4. Interests
- An earning derived from depositing or lending of
money, goods or credits.
General rule: Interest received by a taxpayer, whether
usurious or not, is subject to income tax.
Except: When interest income is exempted by law from
income tax.
A. Excluded/Exempt
1. Interest income from long-term
deposit or investment in the form
of savings, common or individual
trust funds, deposit substitutes,
investment management accounts
and other investments evidenced
by certificates in such form
prescribed by the BSP. [Sec.
24(B)(1)]
2. These must have a maturity period
of not less than five years and must
be issued by banks in
denominations of P10,000.
3. Applicable only to individual
taxpayers except NRANETB
4. If the holder pre-terminate before
the 5th year, a tax shall be imposed
on the entire income (final tax)
Interest earned if received from:
a. By members from duly-registered cooperative
(Rev. Regs. No. 20-2001);
b. BSP prescribed form of investments maturing
more than 5 years;
c. Expanded foreign currency deposit system by
nonresidents; and
d. A tenant who paid to a landowner on the price
of land under a tenant-purchaser agreement
as part of CARP.
B. Income subject to final tax
1. Interest income from any currency
bank deposit or yield or any other
monetary benefit from deposit
substitutes and from trust funds
and similar arrangements. 20%
[Sec. 24(B)(1)]
2. Interest income from a depositary
bank under the expanded foreign
currency deposit system. 7 %
[Sec. 24(B)(1)]
16
 3. Interest earnings from long-term
deposits or investments where the
holder of the certificate pre-
terminate the deposit or
investment before the fifth year, a
final tax shall be imposed on the
entire income and shall be
deducted and withheld by the
depository bank from the proceeds
of the long-term deposit or
investment certificate. [Sec.
24(B)(1)]
C. Part of the Pertinent items of Gross
Income
1. Interests on bonds, notes or
other interest-bearing
obligation of residents,
corporate or otherwise
(lending is the main course
of business or merely
incidental and not subjected
to final withholding tax )
CIR v. Mitsubishi, G.R. No. L-54908, Jan. 22, 1990
5. Rents
- Refers to earning derived from leasing real estate as
well as personal property. It includes all other
obligations assumed to be paid by the lessee to the third
party in behalf of the lessor.
* Tax treatments of leasehold improvements, advance rent
and taxes paid by lessee to or for a lessor?
Prepaid Rent if the advance payment is received
without restrictions as to its use, the entire amount is
taxable in the year it is received. If the advance payment
is a security deposit which restricts the lessor as to its
use, then such amount should be excluded in the
determination of rental income.
Leasehold improvement when the lessee erected or built
permanent improvements on the leased property which
will become the property of the lessor upon the
expiration of the lease, the value of the improvements
should be reported as income of te lessor.
A. Excluded/Exempt none
* however, take note of a CTA case
(Commissioner of Internal Revenue v. De la Salle
University, Inc., CTA EB No. 622, December 10, 2010)
B. Income subject to final tax none
C. Part of Pertinent items of gross income
6. Royalties
- These are the compensations or payments
for the use of property and are paid to the
owner of a right.
A. Excluded/Exempt
1. Income exempt under any treaty
obligation binding upon the
Philippine government Sec.
32(B)(5)
C. Income subject to final tax
1. Royalties on books, literary works
and musical compositions 10%
[Sec. 24(B)(1)] -paid by domestic
corp.
2. Other royalties (eg. Those derived
from natural resources or products
such as coal, gas, oil, copper, silver,
gold, and other similar products)
20% [Sec. 24(B)(1)] paid by
domestic corp.
*NRANETB = 25% FWT, NRFC = 32% FWT
C. Part of the Pertinent items of Gross
Income
1. Royalties paid by a foreign
corporation to resident
citizens and domestic
corporations.
7. Dividends - any distribution made by a corporation to
its shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in
other property
KINDS:
(1) Cash dividend - A dividend paid in cash and is taxable
to the extent of the cash received.
(2) Stock dividend - Involves the transfer of a portion of
retained earnings to capital stock by action of
stockholders. it simply means the capitalization of
retained earnings.
(3) Property dividend - A dividend paid in property of a
corporation such as stock investment, bands or
securities held by the corporation and to the extent of
the FMV of the property received at the time of the
distribution.
(4) Liquidating dividend - A dividend distributed to the
shareholders upon dissolution of the corporation.
General rule: A mere issuance of stock dividends is not
subject to income tax, because it merely represents
capital and it does not constitute income to its recipient.
Before disposition thereof, stock dividends are nothing
but a representation of interest in the corporate entity.
Exceptions: When stock dividends are subject to tax;
a) These shares are later redeemed for a
consideration by the corporation or otherwise conveyed
by the stockholder to the extent of such contribution.
17
 Under the NIRC, if a corporation, after the distribution of Return of insurance premium
a non-taxable stock dividend, proceeds to cancel or
redeem its stock at such time and in such manner as to A. Excluded/Exempt
make the distribution and cancellation or redemption 1. Income exempt under any treaty
essentially equivalent to the distribution of a tax of a obligation binding upon the
taxable dividend, the amount received in redemption Philippine government Sec.
CIR v. A. Soriano Corp., G.R. No. 108576, Jan. 20, 1999 32(B)(5)
C. Income subject to final tax
or cancellation of the stock shall be treated as a taxable 1. The proceeds of life insurance
dividend to the extent that it represents a distribution of policies paid to the heirs or
earnings or profits. (Sec.73 (B), NIRC). Depending on the beneficiaries upon the death of the
circumstances, corporate earnings may be distributed insured, whether in a single sum or
under the guise of initial capitalization by declaring the otherwise. [Sec. 32(B)(1)]
stock dividends previously issued and later redeem or 2. The amounts received by the
cancel said dividends by paying cash to the stockholder. insured, as a return of premiums
This process amounts to distribution of taxable paid by him under life insurance,
dividends which is just delayed so as to escape the tax. endowment, or annuity contracts,
(CIR vs. CA, 301 SCRA 152) either during the term or at
b) The recipient is other than the stockholder. maturity of the term mentioned in
(Bachrach vs. Seifert, 57 PHIL 483) the contract or upon surrender of
the contract. [Sec. 32(B)(2)]
c) A change in the stockholders equity results by C. Part of the Pertinent items of Gross
virtue of the stock dividend issuance. Income
1. Any excess of the return of
A. Excluded/Exempt premiums
1. Pure stock dividends
2. Intercorporate dividends (DC to DC 8. Prizes and awards
or RFC) -reward for a contest/competition.
3. Income subject to final tax - Contest prizes and awards received are generally
4. cash and/or property dividends2 taxable. Such payment constitutes gain derived from
actually or constructively received labor.
by an individual from:
5. a domestic corporation A. Excluded/Exempt
6. a joint stock company 1. Prizes and awards
7. insurance or mutual fund received in recognition of
companies religious, charitable,
8. regional operating headquarters of scientific, educational,
multinational companies [Sec. artistic, literary or civic
24(B)(2)] achievements are
9. C or RA = 10% FWT, NRAETB = 20% exclusions from gross
FWT, NRANETB = 25% FWT, NRFC = income if:
15%
C. Part of the Pertinent items of Gross a. The recipient was selected without any action
Income on his part to enter a contest or proceedings;
1. Dividends received from a and
foreign corporation
b. The recipient is not required to render
7. Annuities, Proceeds from life insurance or other types of substantial future services as a condition to
insurance receiving the prize or award. [Sec. 32 (B)(7)(c)]
Annuities - amounts payable yearly or at other regular
intervals for a certain or uncertain period.They also 1. Prizes and awards granted to
represent as installment payments for life insurance sold athletes in local and intl sports
by insurance companies. competitions and tournaments
held in the Philippines and abroad
Proceeds of life insurance paid by reason of the death of and sanctioned by their national
the insured to his estate or to any beneficiary, directly or associations. [Sec. 32 (B)(7)(d)]
in trust.
C. Income subject to final tax
18
 1. Prizes that are
more than
P10,000 20%
C. Part of the Pertinent items of Gross
Income
1. Prizes of P10,000 and below
2. Prizes won abroad
9. Winnings a reward for an event that depends
on chance.
A. Excluded/Exempt
1. Philippine Charity Sweepstakes and
Lotto winnings [Sec. 24(B)(1)
C. Income subject to final tax
1. All winnings
regardless of
amount 20%
C. Part of the Pertinent items of Gross
Income
1. Winnings won outside of the
Philippines
10. Pensions retirement benefit, or separation pay
- Pension refers to allowance paid regularly to a person
on his retirement or to his dependents on his death, in
consideration of past services, meritorious work, age,
loss or injury.
A. Excluded/Exempt
1. Retirement benefits received
under RA 7641 and those
received by officials and
employees of private firms in
accordance with a reasonable
private benefit plan maintained
by the employer. [Sec.
32(B)(6)(a)]
2. Any amount received by an
employee or by his heirs from
the employer as a consequence
of separation of such official or
employee from the service of
the employer because of death,
sickness, other physical
disability or for any cause
beyond the control of the
employee. [Sec. 32(B)(6)(b)]
3. The social security benefits,
retirement gratuities, pensions
and other similar benefits
received by resident or
nonresident citizens of the
Philippines or aliens who come
to reside permanently in the
Philippines from foreign
government agencies and other
institutions. [Sec. 32(B)(6)(c)]
4. Payments of benefits due or to
become due to any person
residing in the Philippines under
the laws of the United States
administered by the United
States Veterans Administration
[Sec. 32(B)(6)(d)]
5. Benefits received from or
enjoyed under the Social
Security System. [Sec.
32(B)(6)(e)]
6. Benefits received from the GSIS,
including retirement gratuity
received by government
officials and employees. [Sec.
32(B)(6)(f)]
B. Income subject to final tax - none
C. Part of the Pertinent items of Gross
Income
1. Pensions that do not comply
with the requirements for
exemption provided under
[Sec. 32 (6)]
11. Forgiveness of debt
The cancellation and forgiveness of indebtedness
may, dependent upon the circumstances, amount to:
1. a payment of income;
2. a gift; or
3. a capital transaction.
A. Excluded/Exempt
1. When a creditor merely desires to
benefit a debtor and without any
consideration cancels the debt, the
amount of the debt is a gift not
subject to income tax.
C. Income subject to final tax
1. If a domestic corporation to which a
stockholder is indebted forgives the
debt, the transaction has the effect of
the payment of a dividend, thus
subject to a final tax.
D. Part of the Pertinent items of Gross
Income
1. When an individual
performs services for a
creditor, who, in
consideration thereof
cancels the debt.
19
 Primary Sub-classification/s
Kinds of Individual Taxpayers Classification
1) Citizens
Residents of the Philippines (5%-34%)
Citizens of
a) Resident citizens - Those residing in the Philippines the
unless he qualifies as a non-resident under Sec. 22 (E)of Philippines Not residents of the Philippines (5%-34%)
the NIRC. Sec. 22(E)
b) Non-resident citizens - Those not residing in the Residents of the Philippines (5%-34%) Sec.
Philippines. 22(F)
A non-resident citizens means Engaged in Trade or
1.) One who establishes to the satisfaction of the Business in the
Commissioner of Internal Revenue (CIR) the fact of his Aliens Philippines (5%-34%)
Not Residents of
physical presence abroad with a definite intention to the Philippines
Not engaged in
reside therein. Sec. 22 (G)
Trade or Business in
the Philippines (25%
Individuals of GI)
2.) A citizen of the Phils. who leaves the country during
the taxable year to reside abroad, either as immigrant or Individual Employed by Regional or Area
for employment or on permanent basis. Headquarters and Regional
Operating Headquarters of Multinational
Companies
3.) A citizen of the Phils. who works and derive from (15% of GI)
abroad and whose employment thereat requires him to
Special Individual Employed by Offshore Banking
be physically present abroad most of the time during the classes of Units
taxable year. Individuals (15% of GI)
4.) A citizen who has been previously considered as non- Individual Employed by a foreign service
resident citizen and who arrives in the Phils. at any time contractor or by a foreign service
during the taxable year to reside permanently in the subcontractor engaged in petroleum
operations in the Philippines
country. (15% of GI)

5.) A citizen who shall have stayed outside the Phils. for
180 days or more by the end of the year.

2) Aliens

a) Resident aliens - Those residing in the Philippines

though not a citizen thereof.

- Those who are actually present in the Phils. and

who are not mere transients or sojourners.
b) Non-resident aliens - Those not residing in the Phils.
and who is not a citizen thereof.
(1) Engaged in trade or business comes and stays in
the Phils. For an aggregate period of more than 180 days
during the calendar year.
-includes performance of personal services
within the Phils.
(2) Not engaged in trade or business

20
 Category of Income Resident Nonresident
Estates
and Trusts CITIZ ALIE CITIZE NRAEB NRANEB
EN N N T T
Domestic Corporations Sec. 22 (C ) 30% on Taxable Income
all Within Within Within within
Foreign Resident Foreign Corporations Sec. 22 (H) - 30% on sourc
Corporatio Taxable Income es
ns
Sec. 22(D) Non-resident Sec. 22 (I) - 30% on Gross Income Compensation,
Business/Profession
Proprietary educational institutions and non-profit GIW 25%
hospitals 10% of their taxable income Prizes of P10,000 or
Schedular Normal Tax Rate
less
Domestic Depositary Bank (Foreign Currency Deposit
Units) 10% of gross onshore income Proprietary,
N/A
educational/Hospital
Resident international carriers 2.5% Gross
Philippine Billings Cinematographic GIW
Film and the like 25%
Corpo- Offshore Banking Units 10% of gross onshore
rations income Interest, Royalty,
Special Winnings/Prizes of 20% FINAL WITHHOLDING TAX (FWT)
Classes Resident Depositary Bank (Foreign Currency Deposit P10,000 & below
of Units) - 10% of gross onshore income
Corporatio Royalties-books, GIW 25%
ns Regional or Area Headquarters Sec. 22( DD) and 10% FINAL WITHHOLDING TAX (FWT)
literary, musical
Regional Operating Headquarters Sec. 22 (EE) of
Multinational Companies Interest (long term
EXEMPT
investment)
Non-resident cinematographic film owners, lessors or
distributors - 25% final tax Cash/Property GIW
6%(1998); 10%(2000), FWT
dividends 20%
Non-resident owners or lessors of vessels chartered
by Philippine Nationals 4.5% final tax Interest (Foreign
currency deposit GIW 7.5% FWT EXEMPT
Non-resident lessors of aircraft, machinery and other sys.)
equipment - 7.5% final tax
Capital gains on sale 5% (not over P100,000); 10% (in excess of P100,000) FWT
of shares on net capital gains

Corporations, as used in income taxation, includes Sale of shares EXEMPT

partnerships, no matter how created or organized, Capital gains on sale
6% FWT of Gross Selling Price or FMV whichever is higher
joint stock companies, joint accounts (cuentas en of real property
participacion), and associations or insurance Winnings on Phil.
companies. EXEMPT
Sweepstakes/Lotto
However, it does not include: Corporations may be subjected to the following income taxes:
1. a general professional partnership; and 1. Normal Corporate Income Tax (NCIT)
2. a joint venture or consortium formed for the 30% or Minimum Corporate Income Tax
purpose of undertaking construction projects or (MCIT) 2% or Gross Income Tax (GIT)
engaging in petroleum, coal, geothermal and other 15%
energy operations pursuant to an operating or 2. Improperly Accumulated Earnings Tax
consortium agreement under a service contract with the (IAET) 10%
government. 3. Brach remittance profit
4. Capital Gains Tax on sale of real property
or on sale of shares of stock
Kinds of Corporate Taxpayers 5. Final tax on passive income
1) Domestic corporations - Those created or organized in the
Phils. or under its laws.
Minimum Corporate Income Tax (MCIT) is an
2) Foreign corporations - Those created, organized or existing estimate of the income tax that is due from a firm.
under any laws other than those of the Phils. It is equal to 2% of the gross income of a
a. Resident - Those foreign corporation engaged in trade corporation at the close of each taxable quarter.
or business within the Phils. -covers domestic and resident foreign corporations
which are subject to NCIT.
b. Non-resident - Those foreign corporation not engaged -taxpayer shall pay the MCIT whenever it is greater
in trade or business within the Phils. than the NCIT.
th
- it starts on the 4 year of its business operations.
21
 - carry-forward provision
*The Secretary of Finance is authorized to suspend the
imposition of the minimum corporate income tax on any
corporation which suffers LOSSES:
-on account of prolonged labor dispute (losses from a strike
staged by employees that lasts for more than 6 months
and caused the temporary shutdown of operations), or
-because of force majeure (acts of God and other calamity;
includes armed conflicts like war or insurgency), or
-because of legitimate business reverses (substantial losses
due to fire, robbery, theft or other economic reasons).
Gross Income Tax (GIT)
- The President, upon the recommendation of the
Secretary of Finance, may allow domestic corporations
the option to be taxed at fifteen percent (15%) of gross
income, after the following conditions have been
satisfied:
- The election of the gross income tax option by the
corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified
under the scheme.
Improperly Accumulated Earnings Tax (IAET)
There is imposed for each taxable year, in
addition to other taxes, a tax equal to 10% of the
improperly accumulated taxable income of
domestic and closely held corporations formed or
availed of for the purpose of avoiding the income
tax with respect to its shareholders or the
shareholders of any other corporation, by
permitting the earnings and profits of the
corporation to accumulate instead of dividing them
among or distributing them to the shareholders.
- Only domestic and closely-held corporations are liable for
IAET.
Exception:
The use of undistributed earnings and profits for
the reasonable needs of the business would not
generally make the accumulated or undistributed
earnings subject to the tax. What is meant by
reasonable needs of the business is determined
by the IMMEDIACY TEST.
Immediacy Test - It states that the reasonable
needs of the business are the
1) immediate needs of the business; and
2) reasonably anticipated needs.
Exempt Corporations:
1. Banks and other non-bank financial intermediaries;
2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
5. General professional partnerships;
6. Non- taxable joint ventures; and
7. Enterprises that are registered:
a. with the Philippine Economic Zone Authority
(PEZA) under R.A. 7916;
b. pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227; and
c. under special economic zones declared by law
which enjoy payment of special tax rate on their
registered operations or activities in lieu of other
taxes, national or local.
Branch Profit Remittance Tax
Tax base: Profits applied or earmarked for
remittance
Tax Rate: 15% final tax
Condition: Branch profits are effectively
connected with the conduct of its trade or business
in the Philippines.
Tax effort ratio 20% of GNP
Ratio of IT collection to total tax 40%
revenue
VAT tax effort 4% of GNP
Ratio of Consolidated Public Sector 0.90%
Financial Position (CPSFP) to GNP
Ratio of the Corporations Cost of 55%
Sales to Gross Sales Does not
exceed
Exempt: Profits remitted derived from
activities registered with the Philippine Economic
Zone Authority (PEZA)
Tax Exempt Corporations (NIRC):
1. Labor, agricultural or horticultural organization not
organized principally for profit;
2. Mutual savings bank not having a capital stock
represented by shares, and cooperative bank
without capital stock organized and operated for
mutual purposes and without profit;
3. A beneficiary society, order or association,
operating for the exclusive benefit of the members
such as a fraternal organization operating under the
lodge system, or mutual aid association or a non-
stock corporation organized by employees
providing for the payment of life, sickness, accident,
or other benefits exclusively to the members of
such society, order, or association, or non-stock
corporation or their dependents;
4. Cemetery company owned and operated
exclusively for the benefit of its members;
5. Nonstock corporation or association organized and
operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the
22
 rehabilitation of veterans, no part of its net income
or asset shall belong to or inures to the benefit of
any member, organizer, officer or any specific
person;
6. Business league chamber of commerce, or board of
trade, not organized for profit and no part of the
net income of which inures to the benefit of any
private stock-holder, or individual;
7. Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
8. A nonstock and nonprofit educational institution
9. Government educational institution;
10. Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like
organization of a purely local character, the income
of which consists solely of assessments, dues, and
fees collected from members for the sole purpose
of meeting its expenses; and
11. Farmers', fruit growers', or like association
organized and operated as a sales agent for the
purpose of marketing the products of its members
and turning back to them the proceeds of sales, less
the necessary selling expenses on the basis of the
quantity of produce finished by them;
Tax Exempt GOCCs:
1. GSIS
2. SSS
3. PHILIPPINE HEALTH INSURANCE CORP.
4. PCSO
Tax Exempt Corporations under Special laws:
1. Cooperatives (Rev. Mem. Cir. 48-91)
2. Foundation created for scientific advancement (Sec.
24, R.A. 2067)
Taxation of Partnerships
Rules:
1. The partnership is subject to the same rules on
corporations (capital gains tax, final tax on passive
income, normal tax, minimum corporate income tax
[MCIT] and gross income tax [GIT]), but is not subject to
the improperly accumulated earnings tax [IAET]. The
partnership must file quarterly and year-end income tax
returns.
2. The taxable income of the partnership, less the
normal corporate income tax thereon, is the
distributable net income of the partnership.
3. The share of a partner in the partnerships
distributable net income of a year shall be deemed to
have been actually or constructively received by the
partners in the same taxable year and shall be taxed to
them in their individual capacity, whether actually
distributed or not. Such share will be subjected to a final
tax of 10% to be withheld by the partnership.
Taxation of General Professional Partnerships
Rules:
1. A GPP as such shall not be subject to the income tax.
2. The partners shall only be liable for income tax only
in their separate and individual capacities.
3. For purposes of computing the distributive share
of the partners, the net income of the GPP shall be
computed in the same manner as a corporation.
4. Each partner shall report as gross income his
distributive share, actually or constructively received, in
the net income of the partnership.
The share of a partner shall be subject to a
creditable withholding income tax of 15%.
Taxation on Estates and Trusts
a) Application: The tax imposed upon individuals shall apply
to the income of estates or of any kind of property held
in trust, including:
1. Income accumulated in trust for the benefit of
unborn or unascertained person or persons with
contingent interests, and income accumulated or held
for future distribution under the terms of the will or
trust;
2. Income which is to be distributed currently by the
fiduciary to the beneficiaries, and income collected by a
guardian of an infant which is to be held or distributed
as the court may direct;
3. Income received by estates of deceased persons
during the period of administration or settlement of the
estate; and
4. Income which, in the discretion of the fiduciary, may
be either distributed to the beneficiaries or
accumulated.
b) Exception
The tax shall not apply to employee's trust which
forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or
all of his employees:
i. if contributions are made to the trust by such
employer, or employees, or both for the purpose of
distributing to such employees the earnings and
principal of the fund accumulated by the trust in
accordance with such plan, and
23
ii. 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 his
employees.

24