REVENUE REGULATIONS NO.

01-79 (Regulations governing the taxation of non-resident citizens)

Who are considered as nonresident citizens. —

The term "non-resident citizen" means one who establishes to the satisfaction of the Commissioner of Internal Revenue
the fact of his physical presence abroad with the definite intention to reside therein and shall include any Filipino who
leaves the country during the taxable year as:
a. Immigrant — one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa as such
has been secured.
b. Permanent employee — one who leaves the Philippines to reside abroad for employment on a more or less
permanent basis.
c. Contract worker — one who leaves the Philippines on account of a contract of employment which is renewed
from time to time within or during the taxable year under such circumstances as to require him to be physically
present abroad most of the time during the taxable year. To be considered physically present abroad most of
the time during the taxable year, a contract worker must have been outside the Philippines for not less than 183
days during such taxable year.

Any such Filipino shall be considered a non-resident citizen for such taxable year with respect to the income he
derived from foreign sources from the date he actually departed from the Philippines.

A Filipino citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any
time during the taxable year to reside therein permanently shall also be considered a non-resident citizen for the taxable
year in which he arrived in the Philippines with respect to his income derived from sources abroad until the date of his
arrival.

Proof of intention. — A Filipino citizen who leaves the Philippines to reside abroad either as an immigrant or for
permanent employment or a contract worker, shall submit to the Commissioner of Internal Revenue proof of his intention
of leaving the Philippines to reside permanently abroad. A returning non-resident citizen, on the other hand, must present
proof of his intention to return to and reside permanently in the Philippines. Such proof of intention shall be attached to his
income tax return (BIR Form No. 1701C) and may consist of the following:
a. In the case of an immigrant, photostat or xerox copy of his foreign visa.
b. In the case of one leaving for permanent employment abroad, a certificate from his employer showing the
nature and duration of his employment.
c. In the case of a contract worker —
a. Certificate of the employer; or
b. Copy of the contract of employment; or
c. Other documentary evidence.
d. In the case of a returning non-resident citizen —
a. Xerox copy of his passport bearing the stamp of Philippine immigration authorities showing that he is
a returning resident as distinguished from a mere Balikbayan.
b. Other documentary evidence.

Computation of income and tax. —

A. On income derived from all sources outside the Philippines. —
1. What to include as gross income. — The gross income of a non-resident citizen derived from
sources outside the Philippines includes all income enumerated under Section 29 of the National
Internal Revenue Code, whether or not such income is exempted from income tax in the foreign
country where it was derived.
If the income is in foreign currency other than US dollars, it shall first be converted into US dollars at
the average annual rate of exchange of the foreign currency and the US dollar for the year in which
the income was earned.

2. Rate of tax. — Beginning with the taxable year 1978, there shall be imposed on the adjusted gross
income of non-resident citizen a tax computed as follows:

On the amount not exceeding $6,000 1%

On the amount exceeding $6,000 but not exceeding $20,000 $60.00 plus 2% of excess
over $6,000.
On the amount exceeding $20,000 $340.00 plus 3% of excess
over $20,000.

3. Computation of Adjusted Gross Income. — The adjusted gross income is arrived at by deducting
from the gross income the following:
a. Personal exemption of $2,000 if the non-resident citizen is single or a married person legally
separated from his or her spouse, or $4,000 if married or head of a family;
b. The total amount of the national income tax actually paid to the national government of the
foreign country of his residence.
4. Head of Family. — The term "head of family" is defined as "an unmarried man or woman with one or
both parents, or one or more brothers or sisters, or one or more legitimate, recognized natural, or
adopted children living with and dependent upon him or her for their chief support where such
brothers, sisters, or children are not more than twenty-one years of age, unmarried and not gainfully
 employed or where such children are incapable of self-support because they are mentally or
physically defective.
5. Computation of tax. — The computation of the tax due from a non-resident citizen on income derived
abroad is illustrated as follows:

Mr. Juan de la Cruz, 35 years old, Filipino, married to Maria, with a dependent son, Jose and a resident of
Los Angeles, California. For U.S. Federal Income Tax purposes, he filed a joint return containing the
following data and claimed the optional standard deductions and used the optional tax tablets:

Income:
Wage, Salaries, Tips, Others $7,814.65
Dividends received from qualified U.S. domestic corporation —$482.50
(less exclusion ----$200.00) 282.50
Interest Income on savings deposit 110.17
Income other than wages (Wife's prize in photo contest) 200.00
————
TOTAL GROSS INCOME $8,407.32
LESS: Adjustment to income (moving expenses) 60.00
————
Adjusted Gross Income $8,347.32

TAX DUE PER IRS TABLES $ 325.00

Tax payments and credits
Total Federal income taxwithheld $484.30
Other payments (gasoline tax, etc.) 32.67
————
Total payments and credits $516.97
————
AMOUNT REFUNDABLE (191.97)
======

For Philippine income tax purposes, his income shall be computed as follows:
Gross Income $8,407.32
ADD: Excluded dividend income taxable
under Philippine Income Tax Law 200.00
————
Total Gross Income $8,607.32
LESS:
(a) Personal Exemption as married $4,000
(b) Foreign National Income Tax paid
(Attach copy of Federal Income Tax
Return and evidence of payment) 325
———
Total Deductions [add (a) & (b)] 4,325.00
————
ADJUSTED GROSS INCOME SUBJECT TO TAX $4,282.32
=======

Tax Due:
Adjusted Gross Income $4,282.32
At 1% rate (not over $6,000.00) x .01
————
Amount payable $42.82
————

On income derived from sources within the Philippines. — The tax due on income derived by a non-resident citizen from
sources within the Philippines shall be computed in the same manner as the income tax payable by resident citizens and
resident aliens.

RR 5-01 (Sec. 2) Filing of Information Returns no longer required -- Non-resident citizens exempt from tax with respect to
income derived from sources outside the Philippines in accordance with Section 23(B) and (C), in relation to Section 22
(E) and Section 51 (a)(2)(d) and (A)(3) of the Tax Code of 1997, but who are nevertheless mandated to file information
returns pursuant to RMO 30-99 and RR 9-99 shall no longer be required to file the same on their income derived from
sources outside the Philippines beginning taxable year 2001.

INCOME TAX; Overseas Contract Worker - Section 23(C) of the Tax Code of 1997 provides that an
individual citizen of the Philippines who is working and deriving income from abroad as an overseas
contract worker is taxable only on income from sources within the Philippines. Corollary thereto, Section
22(E)(3) of the same Code provides that a citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be physically present abroad most of the time during
the taxable year.
Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sourced income for
being a non-resident citizen or for being an overseas contract worker (CW). All employees whose services
are rendered abroad for being seconded or assigned for at least 183 days may fall under the first category
and are therefore exempt from payment of Philippine income tax. The phrase "most of the time" shall mean
that the said citizen shall have stayed abroad for at least 183 days in a taxable year. (Sec. (2)(c), Revenue
Regulations No. 1-79)
The same exemption applies to an overseas contract worker but as such worker, the time spent abroad is not
material for tax exemption purposes. All that is required is for the worker's employment contract to pass
through and be registered with the Philippine Overseas Employment Agency (POEA). (BIR Ruling No.
033-2000 dated September 05, 2000)

RR 2 (Secs 5 and 6)
SECTION 5. Definition. — A "non-resident alien individual" means an individual —
(a) Whose residence is not within the Philippines; and
(b) Who is not a citizen of the Philippines.
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for
purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and
nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute
him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes
to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose
is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his
home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his
domicile abroad when the purpose for which he came has been consummated or abandoned.
SECTION 6. Loss of residence by alien. — An alien who has acquired residence in the Philippines retains his
status as a resident until he abandons the same and actually departs from the Philippines. An intention to change his
residence does not change his status as a resident alien to that of a nonresident alien. Thus an alien who has acquired a
residence in the Philippines is taxable as a resident for the remainder of his stay in the Philippines.

REVENUE REGULATIONS NO. 10-98 issued September 2, 1998 prescribes the regulations to implement RA No. 8424
relative to the imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore Banking
Systems. Specifically, interest income which is actually or constructively received by a resident citizen of the Philippines or
by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The
depository bank will withhold and remit the tax. If a bank account is jointly in the name of a non-resident citizen, 50% of
the interest income from such bank deposit will be treated as exempt while the other 50% will be subject to a final
withholding tax of 7.5%. The Regulations will apply on taxable income derived beginning January 1, 1998 pursuant to the
provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was
actually or constructively received by a depositor starting January 1, 1998 is taxable.

REVENUE REGULATIONS NO. 02-82 (Taxation of Sales of Shares of Stock Classified as Capital Assets.)

Definition of Terms. — For the purpose of these regulations, the following definitions of terms are hereby adopted:
(a) "Stock classified as capital assets" shall mean all stocks and securities held by taxpayers other than dealers in
securities.
(b) "Dealer in securities" includes all persons who for their own account are engaged in the sale of stock, bonds,
exchange, bullion, coined money, bank notes, promissory notes, or other securities as licensed by the Securities and
Exchange Commission. Notwithstanding the foregoing, nothing in these regulations shall preclude the Commissioner of
Internal Revenue from treating other taxpayers engaged in similar activities but not licensed by the Securities and
Exchange Commission as a dealer in securities.
(c) "Gross selling price" is the total amount of money or its equivalent which the purchaser pays the vendor to receive or
get the goods.

Persons Liable to the Tax. — The following persons are liable to the tax provided for in Section 5 of these Regulations:
(a) individual taxpayer, citizens or alien;
(b) corporate taxpayer, domestic or foreign;
(c) other taxpayers not falling under (a) or (b), such as estate, trust, trust funds and pension funds among others.

Persons Not Liable to the Tax. — The taxes imposed herein shall not apply to the following:
(a) gains derived by dealers in securities;
(b) gains on sale of shares of stock to the extent invested in new shares of stock in banks, non-bank financial
intermediaries and corporations organized primarily to hold equities in banks, in accordance with Presidential Decree No.
1739 ; and
(c) all other gains which are specifically exempt from income tax under existing investment incentives and other
special law.

Imposition of the Tax. —

(a) Sales of shares of stock listed and traded through a local stock exchange. — A tax of 1/4 of 1% shall be
imposed on the gross selling price of the shares of stock sold, exchanged or transferred through the facilities of a stock
exchange registered with the Securities and Exchange Commission.
(b) Shares of stock not traded through a local stock exchange. — Net capital gains derived during the taxable year
from sales, exchanges, transfers or similar transaction shall be taxed as follows:
Not over P100,000 10%
Over P100,000 20%

Determination of Tax Base. — In determining the tax base, the following rules shall apply:
(a) Determination of selling price. — The selling price of the shares of stocks shall be the fair market value of the
shares of stocks transferred or exchanged and not the fair market value of the property received in exchange. If the total
consideration of the sale or disposition consists partly in cash or money and partly in kind, the selling price shall be the fair
market value of the shares disposed.
(1) In the case of shares traded through the stock exchange, "fair market value" shall consist of the actual selling price
as shown in the sales confirmation issued by the member of the stock exchange through whom the sale was effected.
(2) In the case of shares not traded through the stock exchange, but listed in one or more stock exchanges, the highest
closing price on the day when the shares are sold, transferred or exchanged, shall be the "fair market value." When no
sale is made in any stock exchange, the highest closing price on the day nearest to the day of sale, transfer or exchange
of the shares shall be the fair market value.
(3) In the case of sale, transfer or exchange of shares not listed in the stock exchange, the following rules shall be
observed:
(i) In general, the unlisted shares shall be valued at their book value nearest the valuation date. The book value
of these unlisted shares of stock shall be prima facie considered as their fair market value.
(ii) In case the shares are valued on a basis lower than their book values, a justification for the deviation from
the book value, together with the evidences in support thereof, should be submitted. The following factors are considered
relevant in the valuation of shares of stock of closed corporations.
A) The nature of the business and the financial history of the enterprise, from the date of
incorporation
B) The economic outlook in general and the business condition and outcome of the specific
industry in particular
C) The financial condition of the business
D) The earning capacity of the company
E) The dividend paying capacity
F) Goodwill
G) Sales of stocks and size of the block of stock to be valued
H) Market price of stocks of corporations engaged in the same or similar line of business to be
valued
I) Existence of corporate debts in favor of the family of the principal shareholder
J) Restrictive agreements impairing the alienability of the stock
K) Investments in business or property maintained at a deficit
L) Dividend arrearages
M) Voting rights of stockholders
N) Difficulty in liquidating the assets

If such lower fair market valuation is not clearly established and documented, the book value of the unlisted shares of
stock shall be adopted. If there have been previous sales/exchanges of the unlisted shares of stock, the price at which
these shares exchanged hands should be taken/considered as its fair market value/s.
(b) Determination of cost. — The cost basis for determining the capital gains or losses shall be the basis as
determined in accordance with the provisions of Section 35 of the National Internal Revenue Code, as amended, and its
implementing regulations applied in the following manner:
(1) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as
commission, documentary tax, transfer fees, etc.
(2) If the stocks cannot be properly identified, then the cost to be assigned shall be computed on the basis of the first-in,
first-out (FIFO) method. However -
(3) If books of accounts are maintained by the seller where every transaction of a particular stocks are recorded, then
the moving average method shall be applied rather than the first-in, first-out, (FIFO) method.
(4) In all cases, stock dividend received must be assigned a corresponding cost by allocating the original cost of
acquisition to the total number of shares composed of the original shareholdings plus the number of shares of stocks
received as stock dividend.
(c) In determining the deductibility of capital losses, the following rules shall apply:
(1) The provisions of Section 33 of the National Internal Revenue Code, as amended, and its implementing regulations
on the non-deductibility of losses on wash sales.
(2) The net capital losses sustained during the taxable year shall be allowed as a capital loss deductible in the same
taxable year only.
(3) The entire amount of capital gains and capital loss shall be considered without taking into account the period or
duration during which the stocks were held by the seller up to disposition for purposes of computing net capital gains.
(d) Installment sales of shares of stock not listed and traded through any local stock exchange. — In cases
of gains arising from installment sales of shares of stocks, the provisions of Section 43 of the National Internal Revenue
Code, as amended, and its implementing regulations shall apply.

… If a taxpayer elects and is qualified to pay the capital gains tax on stock transaction on installments, the amount of the
tax due on its installment payment shall be determined as follows:
The net capital gains tax shall be computed on the basis of the entire amount of gain realized from the sale or
disposition of shares of stock and the tax so computed may be paid in installments. The amount of the tax on each
installment shall be the proportion of the tax so determined which bears to the total installment payment received over the
total selling price or to the total contract price, in case of sale or mortgaged shares of stock or where the mortgage on
such shares is assumed by the purchaser.
For this purpose, installment received shall mean —
(i) On the date of sale or disposition. — First payment received, including the excess of the mortgage, if any,
assumed by the purchaser over the basis of the property sold.
(ii) Succeeding installments. — Installment payments actually received by seller.

Effect of Non-payment of Tax. — No sale, exchange, transfer or similar transaction intended to convey ownership of, or
title to any share of stock shall be registered in the books of the corporation unless the receipt of payment of the tax
herein imposed is filed with and recorded by the stock transfer agent or secretary of the corporation. It shall be duty of the
aforesaid persons to inform the Bureau of Internal Revenue in case of non-payment of tax.
Any stock transfer agent or secretary of the corporation who caused the registration in violation of the aforementioned
requirement shall be punished by a fine of not more than P2,000.00 or by imprisonment for not more than six months, or
both.

REVENUE REGULATIONS NO. 8-98 issued September 2, 1998 amends pertinent portions of Revenue Regulations Nos.
11-96 and 2-98 relative to the tax treatment of the sale, transfer or exchange of real property. Specifically, the Capital
Gains Tax (CGT) Return will be filed by the seller within 30 days following each sale or disposition of real property.
Payment of the CGT will be made to an Authorized Agent Bank (AAB) located within the Revenue District Office (RDO)
having jurisdiction over the place where the property being transferred is located. Creditable withholding taxes, on the
other hand, deducted and withheld by the withholding agent/buyer on the sale, transfer or exchange or real property
classified as ordinary asset will be paid by the withholding agent/buyer upon filing of the return with the AAB located within
the RDO having jurisdiction over the place where the property being transferred is located. Payment will have to be done
within 10 days following the end of the month in which the transaction occurred, provided, however, that taxes withheld in
December will be filed on or before January 25 of the following year.

REVENUE REGULATIONS NO. 13-99 issued September 14, 1999 prescribes the regulations for the exemption of a
citizen or a resident alien individual from the payment of the 6% Capital Gains Tax on the sale, exchange or disposition of
his principal residence. In order for a person to be exempted from the payment of the tax, he should submit, together with
the required documents, a Sworn Declaration of his intent to avail of the tax exemption to the Revenue District Office
having jurisdiction over the location of his principal residence within (30) days from the date of the sale, exchange or
disposition of the principal residence. The proceeds from the sale, exchange or disposition of the principal residence must
be fully utilized in acquiring or constructing the new principal residence within eighteen (18) calendar months from the
date of the sale, exchange or disposition. In case the entire proceeds of the sale is not utilized for the purchase or
construction of a new principal residence, the Capital Gains Tax will be computed based on the formula specified in the
Regulations.

If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-month reglementary period, his
right of exemption from the Capital Gains Tax did not arise on the extent of the unutilized amount, in which event, the tax
due thereon will immediately become due and demandable on the 31st day after the date of the sale, exchange or
disposition of the principal residence.

If the individual taxpayer's principal residence is disposed in exchange for a condominium unit, the disposition of the
taxpayer's principal residence will not be subjected to the Capital Gains Tax herein prescribed, provided that the said
condominium unit received in the exchange will be used by the taxpayer-transferor as his new principal residence.

REVENUE REGULATIONS NO. 14-2000 issued December 29, 2000 amends Sections 3(2), 3 and 6 of RR No. 13-99
relative to the sale, exchange or disposition by a natural person of his "principal residence".

The residential address shown in the latest income tax return filed by the vendor/transferor immediately preceding the
date of sale of said real property shall be treated, for purposes of these Regulations, as a conclusive presumption about
his true residential address, the certification of the Barangay Chairman, or Building Administrator (in case of condominium
unit), to the contrary notwithstanding, in accordance with the doctrine of admission against interest or the principle of
estoppel.
The seller/transferor's compliance with the preliminary conditions for exemption from the 6% capital gains tax under Sec.
3(1) and (2) of the Regulations will be sufficient basis for the RDO to approve and issue the Certificate Authorizing
Registration (CAR) or Tax Clearance Certificate (TCC) of the principal residence sold, exchanged or disposed by the
aforesaid taxpayer. Said CAR or TCC shall state that the said sale, exchange or disposition of the taxpayer's principal
residence is exempt from capital gains tax pursuant to Sec. 24 (D)(2) of the Tax Code, but subject to compliance with the
post-reporting requirements imposed under Sec. 3(3) of the Regulations.

REVENUE REGULATIONS NO. 4-99 issued March 16, 1999 further amends Revenue Memorandum Order No. 6-92
relative to the payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital
assets initiated by banks, finance and insurance companies. Where the right of redemption of the mortgagor exists, the
certificate of title of the mortgagor will not be cancelled yet even if the property had already been subjected to foreclosure
sale. Instead, only a brief memorandum will be annotated at the back of the certificate of title, and the cancellation of the
title and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the
mortgagor will redeem or not the mortgaged property within one year from the issuance of the certificate of sale. Thus, no
transfer of title to the highest bidder can be effected yet until and after the lapse of the one-year period from the issuance
of the said certificate of sale. In case the mortgagor exercises his right of redemption within one year from the issuance of
the certificate of sale, no Capital Gains Tax will be imposed because no capital gains has been derived by the mortgagor
and no sale or transfer of real property was realized. In case of non-redemption, the Capital Gains Tax on the foreclosure
sale shall become due based on the bid price of the highest bidder, but only upon the expiration of the one-year period of
redemption, and will be paid within thirty (30) days from the expiration of the said one-year redemption period. The
corresponding Documentary Stamp Tax will be levied, collected and paid by the person making, signing, issuing,
accepting or transferring the real property wherever the document is made, signed, issued, accepted or transferred where
the property is situated in the Philippines.

RA 9504: Amended Sec22, adding definitions (GG) and (HH); Sec24(A) on the Rate of Income Tax; 34(L) on Optional
Standard Reduction; Sec35(A) and (B) for Allowance of Personal Exemption for Individual Taxpayer (General and
Dependents); Sec79(A) on Requirement of Withholding

BIR RULING NO. 317-92

Gentlemen :
This refers to your letter dated July 13, 1992 stating that in June 1990, your client, Ayala Land, Inc. (ALI) and Appleyard
Properties, Inc. (API) entered into a Memorandum of Agreement (MOA) for the construction of an office building on that lot
owned by ALI located along Ayala Avenue, Makati, to be known as 6750 Ayala Office Tower (Building) or such other
name as the parties may subsequently adopt; that pursuant to the terms of the MOA, ALI and API each contributed equal
amounts to the construction costs of the office tower and 351 parking stalls, in consideration of each of them acquiring the
ownership of such numbers of specifically designated whole floors in the proportion of 60% (ALI) and 40% (API)
respectively, of the net leasable floor area of 22,335 square meters of the office tower, and the right to use the parking
stalls and storage spaces in the same proportion of 60%/40%; that while there would be separate ownership of
specifically designated whole floors, common areas expenses, maintenance and insurance costs, real estate taxes,
commercial center dues and expenses would be shared by ALI and the API in the same proportion; that upon the
expiration of the 48 year term of the MOA in year 2038, the ownership of all the floors or portions of the building allocated
to API shall automatically be transferred to ALI; that the principal objective of both ALI and API is to lease out to third party
tenants the specific floors separately owned by them; that considering the present softness in the market, they believe
that it would be to their mutual interest to pool together their respective floors in the Building for the purpose of leasing
them under standard rental rate, and to use a common agent to handle contract negotiations, tenant relations,
maintenance, accounting of income and expenses; that to carry out their common objectives, ALI and API now propose to
enter into another agreement, a Joint Venture Agreement (JVA); that under the JVA, ALI and API will contribute money to
a common fund for the initial and, if necessary, additional working capital of the joint venture; that ALI will be appointed as
manager of the joint venture and subject to the mutual control of ALI and API, shall be responsible, among others, for the
leasing of the Building floors or portions thereof owned by ALI and API; that irrespective of who owns the floor or floors, or
portions of the Building that are leased out, the JV will hold the rental receipts in a common pool and the net balance
every quarter, after deducting all expenses chargeable thereto, such as salaries of JV personnel and maintenance
expenses, shall be distributed to ALI and API in same proportion of 60%/40% as dividends; that the JV will have a life of
three years; and that upon its dissolution, each party will receive the rentals for the floors owned by it and shoulder its own
expenses, independently of the other. cdtai
In connection therewith, you now pose the following queries:
"1. Whether or not the Memorandum of Agreement entered into by and between ALI and API in 1990 providing for
the construction of the office tower has, by itself, created a separately taxable joint venture;
"2. Whether or not the joint venture to be subsequently entered into by and between ALI and API, for the leasing of
the Building floors or portions thereof separately owned by them will be considered as a corporation taxable as such,
separate and distinct from ALI and API;
"3. Whether or not the rentals to be paid by the tenants of the Building to the joint venture during the term of the
JVA are to be treated as income of the joint venture;
"4. Whether or not the distributions by the joint venture of the net income from its operations to ALI and API will be
considered as dividend distributions taxable to ALI and API."
In reply thereto, I have the honor to inform you that to constitute a "joint venture" certain factors are essential:
"(a) each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill,
knowledge, material or money;
"(b) profits must be shared among the parties;
"(c) there must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise;
"(d) usually, there is single business transaction rather than a general or continuous transaction" (Words and
Phrases, Vol. 23, p. 230)
Likewise, a joint venture was created when two corporations while registered and operating separately were placed under
one sole management which operated the business affairs of said companies as though constituted a single entity thereby
obtaining substantial economy and profits in the operation (Collector vs. Batangas Transportation et al. 102 Phil. 822; See
also BIR Ruling Nos. 020(b)-020-80-187-82 dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated
May 9, 1990 and 254-91 dated November 26, 1991).
The Memorandum of Agreement entered into by and between ALI and API in 1990 providing for the construction of the
aforementioned office tower has not by itself created a taxable joint venture. However, the joint venture to be
subsequently entered into by and between ALI and API, for the leasing of the Building floors or portions thereof separately
owned by them will create, a joint venture subject to tax under Section 24(a) of the Tax Code, as amended, separate and
distinct from ALI and API.
Moreover, the rentals to be received by the joint venture from the tenants in the Building are income to the joint venture.
Furthermore, the distribution by the joint venture of its net income to ALI and API are in the nature of dividends which are
not subject to tax under Section 24(e)(4) of the Tax Code, as amended.
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation the same
could not be substantiated then this ruling shall be considered null and avoid.

REVENUE MEMORANDUM CIRCULAR No. 76-2003

SUBJECT : Tax Exemptions of Non-Stock, Non-Profit Corporations Section 30, Tax Code of 1997 and Non-stock, Non-
Profit Educational Institutions under Paragraph 3, Section 4, Article XIV of the Constitution.

NON-STOCK, NON-PROFIT CORPORATIONS

Organizations enumerated under Section 30 of the Tax Code of 1997 are exempt from the payment of income tax on
income received by them as such organization.
However, they are subject to the corresponding internal revenue taxes imposed under the Tax Code of 1997 on their
income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the
disposition thereof (i.e. rental payment from their building/premises), which income should be returned for taxation.
In addition, their interest income from currency bank deposits and yield or any other monetary benefit from deposit
substitute instruments and from trust funds and similar arrangement, and royalties derived from sources within the
Philippines are subject to the 20% final withholding tax: provided, however, that interest income derived by them from a
depository bank under the expanded foreign currency deposit system shall be subject to 7 1/2% final withholding tax
pursuant to Section 27(D)(1) in relation to Section 57(A), both of the Tax Code of 1997.
It shall also be constituted as a withholding agent for the government if they acts as an employer and any of their
employee receives compensation income subject to withholding tax under Section 79(A), Chapter XIII, Title II of the Tax
Code of 1997, as implemented by Revenue Regulations No. 2-98, or if they makes income payments to individuals or
corporations subject to the withholding tax provided for in Section 57 of the Tax Code of 1997, also as implemented by
Revenue Regulations No. 2-98.

NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS

The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes imposed by the National
Government on all revenues and assets used actually, directly and exclusively for educational purposes (Paragraph 3,
Section 4, Article XIV of the Constitution).
Furthermore, revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from
taxation provided they are owned and operated by the educational institution as ancillary activities and the same are
located within the school premises.
Pursuant to Section 109(m) of the Tax Code of 1997, private educational institutions shall be exempt from value-added
tax provided they are accredited as such either by the Department of Education, Culture and Sports or by the Commission
on Higher Education. However, this exemption does not extend to their other activities involving sale of goods and
services.
However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of
which is not related to the exercise or performance by such educational institutions of their educational purposes or
functions (Sec. 2, Finance Department Order No. 137-87 as amended by Finance Department Order No. 92-88) i. e.
rental payment from their building/premises.
Unlike non-stock, non-profit corporations, their interest income from currency bank deposits and yield from deposit
substitute instruments used actually, directly and exclusively in pursuance of their purposes as an educational institution,
are exempt from the 20% final tax and 7 ½% tax on interest income under the expanded foreign currency deposit system
imposed under Section 27(D)(1) of the Tax Code of 1997, subject to compliance with the conditions that as a tax-exempt
educational institution, they shall on an annual basis submit to the Revenue District Office concerned an annual
information return and duly audited financial statement together with the following:
(a) Certification from their depository banks as to the amount of interest income earned from passive investment
not subject to the 20% final withholding tax and 7 ½% tax on interest income under the expanded foreign
currency deposit system imposed by Section 27(D)(1) of the Tax Code of 1997;
(b) Certification of actual utilization of the said income; and
 (c) Board Resolution by the school administration on proposed projects (i.e., construction and/or improvement
of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of the money
deposited in banks or placed in money markets, on or before the 14th day of the fourth month following the end
of its taxable year (Sec. 3, Finance Department Order No. 137-87).
Finally, the exemption does not cover withholding taxes. As an educational institution, they are constituted as withholding
agents for the government required to withhold the tax on compensation income of their employees, or the withholding tax
on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997. In both cases, in order to
monitor the activities being conducted by these institutions, it is mandatory that they should maintain their respective set
of books of accounts as prescribed in Section 235 of the Tax Code of 1997.
Furthermore, both institutions are subject to the payment of the annual registration fee of P500.00 as prescribed in
Section 236(B) of the Tax Code of 1997. They are also required under Section 6(C) in relation to Section 237 of the same
Code to issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for
services rendered which are not directly related to the activities for which they are registered.

RR 2-82 (see page 3)

RR 8-98 (see page 5)

REVENUE REGULATIONS NO. 4-99 issued March 16, 1999 further amends Revenue Memorandum Order No. 6-92
relative to the payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital
assets initiated by banks, finance and insurance companies. Where the right of redemption of the mortgagor exists, the
certificate of title of the mortgagor will not be cancelled yet even if the property had already been subjected to foreclosure
sale. Instead, only a brief memorandum will be annotated at the back of the certificate of title, and the cancellation of the
title and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the
mortgagor will redeem or not the mortgaged property within one year from the issuance of the certificate of sale. Thus, no
transfer of title to the highest bidder can be effected yet until and after the lapse of the one-year period from the issuance
of the said certificate of sale. In case the mortgagor exercises his right of redemption within one year from the issuance of
the certificate of sale, no Capital Gains Tax will be imposed because no capital gains has been derived by the mortgagor
and no sale or transfer of real property was realized. In case of non-redemption, the Capital Gains Tax on the foreclosure
sale shall become due based on the bid price of the highest bidder, but only upon the expiration of the one-year period of
redemption, and will be paid within thirty (30) days from the expiration of the said one-year redemption period. The
corresponding Documentary Stamp Tax will be levied, collected and paid by the person making, signing, issuing,
accepting or transferring the real property wherever the document is made, signed, issued, accepted or transferred where
the property is situated in the Philippines.

REVENUE REGULATIONS NO. 9-98 issued September 2, 1998 prescribes the regulations to implement RA No. 8424
relative to the imposition of the Minimum Corporate Income Tax (MCIT) on domestic corporations and resident foreign
corporations. Specifically, an MCIT of 2% of the gross income as of the end of the taxable year is imposed upon any
domestic corporations beginning the 4th taxable year immediately following the taxable year in which such corporation
commenced its business operations. The MCIT will be imposed whenever such operation has zero or negative taxable
income or whenever the amount of MCIT is greater than the normal income tax due from such operation. In the case of a
domestic corporation whose operations or activities are partly covered by the regular income tax system and partly
covered under a special income tax system, the MCIT will apply on operations covered by the regular income tax system.

The Regulations will apply to domestic and resident foreign corporations on their aforementioned taxable income derived
beginning January 1, 1998 pursuant to the pertinent provisions of RA 8424, provided, however, that corporations using
the fiscal year accounting period and which are subject to MCIT on income derived pertaining to any month or months of
the year 1998 will not be imposed with penalties for late payment of the tax.

RR 15-02 (See book)

REVENUE REGULATIONS NO. 10-76 (Regulations governing taxation of Offshore Banks and Foreign Currency Deposit
Units of depository banks established under P.D. 1034 and 1035, respectively)

Definition of Terms. —
a. "Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds
principally from external sources and the utilization of such funds as provided in Presidential Decree No. 1034.
b. "Offshore Banking Unit" hereinafter referred to as OBU, shall mean a branch, subsidiary or affiliate of a foreign banking
corporation which is duly authorized by the Central Bank of the Philippines, as a separate accounting unit, to transact
offshore banking business in the Philippines in accordance with the provisions of P.D. 1034 as implemented by Central
Bank Circular No. 546.
c. "Deposits" shall mean funds in foreign currencies which are accepted and held by an off-shore banking unit in the
regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without
interest.
d. "Resident" shall mean —
(1) an individual citizen of the Philippines residing therein; or
(2) an individual who is not a citizen of the Philippines but is permanently residing therein; or
(3) a corporation or other juridical person organized under the laws of the Philippines.
(4) a branch, subsidiary, affiliate, extension office or any other unit of corporations or juridical persons organized under
the laws of any foreign country operating in the Philippines.
e. "Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of
"residents".
f. "Foreign Currency Deposit Unit" (FCDU) shall mean an accounting unit or department in a local bank or in an existing
local branch of foreign banks, which is authorized by the Central Bank of the Philippines to operate under the expanded
foreign currency deposit system, in accordance with the provisions of P.D. 1035, as implemented by Central Bank Circular
No. 547. The FCDU authority shall be distinguished from the authority to accept foreign currency deposits under R.A. No.
6426, as implemented by Central Bank Circular No. 343.
g. "Gross offshore income" shall mean all income arising from transactions allowed by the Central Bank of the Philippines
conducted by and between —
1) in the case of an offshore banking unit with another offshore banking unit or with an expanded Foreign Currency
Deposit unit or with a non-resident;
2) in the case of an expanded Foreign Currency Deposit Unit with another expanded Foreign Currency Deposit Unit or
with an Offshore Banking Unit or with a non-resident.
h. "Gross onshore income" shall mean gross interest income arising from foreign currency loans and advances to and/or
investments with residents made by Offshore Banking Units or expanded Foreign Currency Deposit Units. Such gross
interest income shall include all fees, commissions and other charges which are integral parts of the income from the
above transactions.

Rates of income tax to be imposed. —

The rates or income tax to be imposed, which shall be in lieu of all other taxes such as, but not limited to privilege tax,
gross receipts tax, documentary and science stamp tax and profit remittance tax, are as followers:
(a) On offshore income, there shall be imposed an income tax of five percent (5%) based on net offshore income as
computed in Section 4.
Income realized by offshore banking units on transactions with local commercial banks including branches of foreign
banks that may be authorized by the Central Bank of the Philippines to transact business with offshore banking units shall
likewise be subject to the same tax, except net income from such transactions as may be specified by the Secretary of
Finance, upon recommendation of the Monetary Board, to be subject to the usual income tax payable by banks.
(b) In the case of gross onshore income as defined in Section 2(h) above, the tax shall be ten percent (10%) thereof
and shall be a final tax.
(c) Income not covered by paragraphs (a) and (b) above shall be subject to the usual corporate taxes imposed by the
National Internal Revenue Code, as amended.

Manner of computation of net income. —

(a) Net offshore income for purposes of Section 3, paragraph (a) above, shall be the amount remaining after deducting
from the gross offshore income during the taxable year the following items:
1) the proportion of total interest expenses for the same period based on the ratio of offshore interest income
which bears to the total gross interest income;
2) the proportion of general administrative expenses based on the ratio of net offshore income which bears to
the total net income after deducting only interest expenses mentioned in sub-paragraph (1) above.
3) Likewise, there shall be allowed a reasonable amount of head office expenses in accordance with the ratio
specified in sub-paragraph (2) above.
(b) In the case of onshore income, the gross interest income without the benefit of any deduction corresponding to the
allocable onshore income, shall be the amount upon which the ten percent (10%) withholding income tax shall be
computed.
.....

Income of non-resident. —
Any income of non-residents from transactions with either an offshore banking unit or with an expanded Foreign Currency
Deposit Unit shall be exempt from any and all taxes.

Income of foreign personnel. —

There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual
employed by offshore banking units in the Philippines as salaries, wages, annuities, compensations, remunerations and
emoluments from such offshore banking units a tax equal to fifteen (15%) percent of such gross income. The aforesaid
tax shall be deducted and withheld at source in the same manner and condition as that provided under Supplement "A" —
Withholding on Wages of Commonwealth Act No. 466, as amended.

Privileges of the offshore banking units. —

The offshore banking units shall be exempt from all forms of local licenses, fees, dues, imposts or any other local taxes or
burdens. The license fee paid by offshore banking units shall be allowed as a deduction in accordance with Section 4 of
these regulations.
REVENUE REGULATIONS NO. 14-77 (Amending Revenue Regulations No. 10-76)

Section 2(h) is hereby amended to read as follows:

"SEC. 2(h). Gross onshore income shall mean gross interest income arising from foreign currency loans and
advances to and/or investments with residents made by offshore banking units or expanded foreign currency deposit
units. In the case of foreign currency loan transactions, such gross interest income shall refer only to the stipulated
interest and shall not include any and all fees, commissions and other charges which are integral parts of the income from
the above transactions."

Section 3(b) is hereby amended to read as follows:

"SEC. 3(b). In the case of gross onshore income as defined in Section 2(h) above, the tax shall be ten percent
(10%) thereof and shall be a final tax. Any and all fees, commissions and other charges which are integral parts of the
charges imposed on foreign currency loan transactions are exempt from the tax herein imposed."

Section 5(b) is hereby amended to read as follows:

"SEC. 5(b). For onshore income — In the case of onshore income realized by an offshore banking unit or by an
expanded Foreign Currency Deposit Unit, the income need not be included in the quarterly income tax return to be filed as
required above as the payor-borrower under Section 53, in relation to Section 54, of the National Internal Revenue Code,
is constituted as the withholding agent charged with the obligation of deducting, withholding and remitting to the
Commissioner of Internal Revenue the income tax due thereon within the period prescribed by law with the appropriate
return in accordance with existing revenue and Central Bank regulations. Regardless, therefore, of whether the
accounting method of an OBU-creditor in cash or accrual basis, the withholding tax will be withheld and remitted only after
the due date of payment of the interest incurred by an onshore borrower.

RR 10-98 (see page 3)

RA 9337, amending … intercorporate dividends (NIRC 1997)

BIR RULING [DA-145-07]

Gentlemen :
This refers to your letter dated December 27, 2006 requesting for confirmation of your opinion that the cash dividends
declared by SM Investment Corporation (SM Investments), a Philippine domestic corporation whose shares of stock are
traded and listed in the Philippine Stock Exchange (PSE), to Asia Opportunities Limited (Asia Opportunities), a
corporation organized and existing under the laws of the British Virgin Island (BVI), are subject to 15% preferential
withholding tax pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337.
In reply thereto, please be informed that Section 2 of R.A. No. 9337 reads as follows:
"SEC. 2. Section 28(A)(1) and (B)(1) and (5)(b) of the same Code, as amended, are hereby further amended to read as
follows:
SEC. 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation. —
xxx xxx xxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. —
xxx xxx xxx
(b) Intercorporate Dividends. — A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the
amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as
provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign
corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to twenty percent (20%), which represents the difference between the regular
income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph:
Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which
represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on
dividends;
xxx xxx xxx"
This Office had already occasioned to rule on the matter, when it said in BIR Ruling No. 208-89 dated September 28,
1989, as follows:
"Generally, under the above-quoted Section 24(b)(5)(B) of the Tax Code, as amended, dividend paid to a non-resident
foreign corporation is subject to withholding tax at the rate of 35%. However, if the country where the non-resident foreign
corporation is domiciled allows a credit against the tax due from the non-resident corporation taxes deemed to have been
paid in the Philippines in an amount equivalent to 20% of such dividend, or does not subject such dividend to taxation,
then dividend paid to such non-resident foreign corporation are taxed only at the rate of 15%.
Thus, since the International Business Companies Ordinance of the Territory of the British Virgin Islands . . . does not
impose any tax on dividend received from foreign sources, which logically would include those received from Philippine
corporations by foreign corporations domiciled therein, then said cash dividend . . . is subject only to the preferential
withholding tax rate of 15% imposed under then Section 25(B)(5)(B) of the Tax Code, as amended (now Section 28(B)(5)
(b) of the Tax Code of 1997)."
SUCH BEING THE CASE, this Office hereby confirms your opinion that the cash dividends received by Asia Opportunities
from SM Investments, a Philippine domestic corporation are subject to the 15% preferential withholding tax rate imposed
under Section 28(B)(5)(b) of the Tax Code of 1997, as amended by R.A. No. 9337.
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be
disclosed that the facts are different, then this ruling shall be considered null and void.

ITAD RULING NO. 102-02

Gentlemen :
This refers to your letter dated February 14, 2002 requesting confirmation of your opinion that the royalty payments by
your client, Energizer Philippines, Inc. (Energizer), to Eveready Battery Company, Inc. (Eveready) are subject to the
preferential tax rate of fifteen percent (15%) pursuant to the "most favored nation" clause of the RP-US tax treaty in
relation to the RP-Netherlands tax treaty.
It is represented that Eveready is a non-resident foreign corporation duly organized and existing under the laws of the
United States of America with principal office at Trust Center, 1209 Orange Street, City of Wilmington, Delaware; that it is
not registered either as a corporation or as a partnership licensed to do business in the Philippines its evidenced by the
Certificate of Non-Registration issued by the Securities and Exchange Commission dated February 20, 2002; that
Energizer is a corporation duly organized and existing under Philippine laws; that Eveready and Energizer entered into a
Renewal Agreement dated October 11, 1994 whereby Eveready granted to Energizer the right to use its trademarks and
patents, technical information, business information, data, and know-how relating to the manufacture, use and sale of
licensed products; that the said Agreement was duly registered with the then Technology Transfer Registry under
Certificate of Registration No. 1652 dated January 19, 1995 and was renewed for another 10 years ending on October 15,
2009; and that in consideration of the aforementioned rights granted to Energizer, Energizer shall pay Eveready a royalty
of three percent (3%), as amended, based on the net sales or net sale value of all the licensed products manufactured,
used, sold or assigned by Energizer during the term of the Agreement.
In reply, please be informed that Article 13 of the RP-US tax treaty reads as follows:
Article 13--ROYALTIES
(1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may
be taxed by both Contracting States.
(2) However, the tax imposed by that other Contracting State shall not exceed —
(b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties,
(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred areas of activities, and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar
circumstances to a resident of a third State. (Emphasis supplied)
(3) The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or
the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used
for radio or television broadcasting; any patent, trade mark, design or model, plan, secret formula or process, or other like
right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also
includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on
the productivity, use, or disposition thereof.
"xxx xxx xxx"
On the other hand, Article 12 of the RP-Netherlands tax treaty provides:
Article 12--ROYALTIES
1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State.
2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but
if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed.
(a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and
engaged in preferred areas of activities in that State; and
(b) 15 per cent of the gross amount of the royalties in all other cases.
"xxx xxx xxx"

Based on the foregoing, the tax imposed on royalties derived by a resident of the United States from sources within the
Philippines shall be the lowest rate of Philippine tax that may be imposed an royalties of the same kind paid under similar
circumstances to a resident of a third State. This is the "most-favored nation"` clause found in Article 13(2)(b)(iii) of the
RP-US tax treaty. In this connection, it must be noted that the royalties arising from the Philippines and paid to a resident
of the Netherlands may also be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross
amount of royalties in cases other than royalties paid by in enterprise registered in preferred areas of activities in the
Philippines.
The term "royalties" as used in this Article means any payment of any kind received as a consideration for the use of, or
right to use, any patent, trademark, design or model, secret formula or process, or for the use of, or the right to use of,
industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., and Court of Appeals, G.R. No. 127105
promulgated on June 25, 1999, the Supreme Court interpreted the "most-favored-nation" clause, particularly the phrase
"paid under similar circumstances," as referring to the manner of payment or taxes and not to the subject matter of the tax
which is royalties. Hence, the "most-favored-nation" clause of the RP-US tax treaty must be interpreted not only in relation
to Article 12 of the RP-Netherlands tax treaty but also in connection with the provisions on the elimination of double
taxation of both.
A perusal of the RP-US and the RP-Netherlands tax treaties, particularly their provisions on the avoidance of double
taxation, shows a similarity on the manner of payment of taxes, that is, the allowable foreign tax credit on both treaties is
the amount actually paid in the Philippines.
Such being the case, and since Energizer is not registered and engaged in preferred areas of activities in the Philippines,
this Office is of the opinion and so holds that the royalty payments by Energizer to Eveready are subject to the preferential
tax rate of 15% of the gross amount of royalties pursuant to the "most-favored-nation" provision of the RP-US tax treaty in
relation to the RP-Netherlands tax treaty. (BIR Ruling No. ITAD-54-00 dated March 7, 2000)
Moreover, the above royalty payments by Energizer shall be subject to the 10% value-added tax (VAT) under Section
108(A)(1) and (3) of the Tax Code of 1997. Section 4.102-1(b) of the implementing Revenue Regulation No. 7-95 provides
that:
"The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and
use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the
license. The license shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-
resident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. 1600 – Monthly
Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT
declaration/return is sufficient evidence in claiming input tax credit by the licensee."
Accordingly, Energizer shall be responsible for the withholding of income tax at the rate of 15% of the gross amount of
royalties. Moreover, Energizer shall also be responsible for the withholding of the value-added tax (VAT) at the rate of
10% of the contract amount by filing a separate return using BIR Form No. 1600, which, if duly validated, shall be
sufficient evidence in claiming input tax credit.
This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed
that the facts are different, then this ruling shall be considered null and void.

REVENUE REGULATIONS NO. 2 - 2001 (Implementing the Provision on Improperly Accumulated Earnings Tax Under
Section 29 of the Tax Code of 1997)

Concept of Improperly Accumulated Earnings Tax (IAET). - Pursuant to Section 29 of the Code, there is imposed for each
taxable year, in addition to other taxes imposed under Title II of the Tax Code of 1997, a tax equal to 10% of the
improperly accumulated taxable income of 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. The rationale is that if
the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the
distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the
corporation. Thus, a tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its
earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on
the earnings distributed to them by the corporation.
The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences
of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed
earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated
or undistributed earnings subject to the tax. However, if there is a determination that a corporation has accumulated
income beyond the reasonable needs of the business, the 10% improperly accumulated earnings tax shall be imposed.

Determination of Reasonable Needs of the Business. - An accumulation of earnings or profits (including undistributed
earnings or profits of prior years) is unreasonable if it is not necessary for the purpose of the business, considering all the
circumstances of the case. To determine the "reasonable needs" of the business in order to justify an accumulation of
earnings, these Regulations hereby adhere to the so-called "Immediacy Test" under American jurisprudence as adopted
in this jurisdiction. Accordingly, the term "reasonable needs of the business" are hereby construed to mean the immediate
needs of the business, including reasonably anticipated needs. In either case, the corporation should be able to prove an
immediate need for the accumulation of the earnings and profits, or the direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such accumulation would be deemed to be not for the reasonable needs of the
business, and the penalty tax would apply.
For purposes of these Regulations, the following constitute accumulation of earnings for the reasonable needs
of the business:
a. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of
Balance Sheet date, inclusive ofaccumulations taken from other years;
b. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as
approved by the Board of Directors or equivalent body;
c. Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent
body;
d. Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate
business agreement;
e. 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;
f. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for
investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence.
Coverage. The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly accumulated taxable income
earned starting January 1, 1998 by domestic corporations as defined under the Tax Code and which are classified as
closely-held corporations. Provided, however, that Improperly Accumulated Earnings Tax shall not apply to the following
corporations:
a. Banks and other non-bank financial intermediaries;
b. Insurance companies;
c. Publicly-held corporations;
d. Taxable partnerships;
e. General professional partnerships;
f. Non- taxable joint ventures; and
g. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. 7916, and enterprises
registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as other enterprises
duly registered 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.
For purposes of these Regulations, closely-held corporations are those corporations at least fifty percent (50%)
in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations
not falling under the aforesaid definition are, therefore, publicly-held corporations.
For purposes of determining whether the corporation is closely held corporation, insofar as such determination
is based on stock ownership, the following rules shall be applied:
1. Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or
trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.
2. Family and Partnership Ownership. – An individual shall be considered as owning the stock owned, directly or
indirectly, by or for his family, or by or for his partner. For purposes of this paragraph, the ‘family of an individual’ includes
his brothers or sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants.
3. Option to Acquire Stocks. - If any person has an option to acquire stock, such stock shall be considered as owned by
such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of option shall
be considered as an option to acquire such stock.
4. Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the application of paragraph
(1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but
stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as
owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such
stock.
Provided, however, that a branch of a foreign corporation is not covered by these Regulations, the same being
a resident foreign corporation.

Tax Base of Improperly Accumulated Earnings Tax. - For corporations found subject to the tax, the "Improperly
Accumulated Taxable Income" for a particular year is first determined by adding to that year’s taxable income the
following:
a. income exempt from tax;
b. income excluded from gross income;
c. income subject to final tax; and
d. the amount of net operating loss carry-over (NOLCO) deducted.

The taxable income as thus determined shall be reduced by the sum of:
a. income tax paid/payable for the taxable year;
b. dividends actually or constructively paid/issued from the applicable year’s taxable income;
c. amount reserved for the reasonable needs of the business as defined in these Regulations emanating from the
covered year’s taxable income.

The resulting "Improperly Accumulated Taxable Income" is thereby multiplied by 10% to get the Improperly Accumulated
Earnings Tax (IAET). Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later
years even if not declared as dividend. Notwithstanding the imposition of the IAET, profits which have been subjected to
IAET, when finally declared as dividends, shall nevertheless be subject to tax on dividends imposed under the Tax Code
of 1997 except in those instances where the recipient is not subject thereto.
For purposes of determining the source of earnings or profits declared or distributed from accumulated income
for each taxable year, the dividends shall be deemed to have been paid out of the most recently accumulated profits or
surplus and shall constitute a part of the annual income of the distributee for the year in which received pursuant to
Section 73(C) of the Code. Provided, however, that where the dividends or portion of the said dividends declared forms
part of the accumulated earnings as of December 31, 1997, or emanates from the accumulated income of a particular
year and, therefore, is an exception to the preceeding statement, such fact must be supported by a duly executed Board
Resolution to that effect.

Period for Payment of Dividend/Payment of IAET. - The dividends must be declared and paid or issued not later than one
year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter.

Determination of Purpose to Avoid Income Tax. - The fact that a corporation is a mere holding company or investment
company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Likewise, 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. In both instances, the
corporation may, by clear preponderance of evidence in its favor, prove the contrary.
For purposes of these Regulations, the term "holding or investment company" shall refer to a corporation having
practically no activities except holding property, and collecting the income therefrom or investing the same.

The following are prima facie instances of accumulation of profits beyond the reasonable needs of a business and
indicative of purpose to avoid income tax upon shareholders:
a. Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of
unrelated business;
b. Investment in bonds and other long-term securities;
c. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of
the business as defined in these Regulations.

In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the imposition
of the improperly accumulated earnings tax, the controlling intention of the taxpayer is that which is manifested at the time
of accumulation, not subsequently declared intentions which are merely the product of afterthought. A speculative and
indefinite purpose will not suffice. The mere recognition of a future problem or the discussion of possible and alternative
solutions is not sufficient. Definiteness of plan/s coupled with action/s taken towards its consummation are essential.

IMPROPERLY ACCUMULATED EARNINGS TAX; publicly-held corporation - Abbot-Phils., as a wholly-owned

subsidiary of Abbot-US, will be considered as being owned proportionately by Abbott-US shareholders. The ownership of
a domestic corporation, for purposes of determining whether it is a closely-held corporation or a publicly-held corporation,
is ultimately traced to the individual shareholders of the parent company. Accordingly, Abbot-Phils. is considered a
publicly-held corporation exempt from the Improperly Accumulated Earnings Tax. This is based on the representation that
as of the year end 2000, Abbot-US had 101 to 272 shareholders holding a combined 1,545,937,133 shares of common
stock, and the twenty largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1% of Abbot-
US issued as outstanding shares. Based on Section 4 of Revenue Regulations No. 2-2001, closely-held corporations are
those corporations at least 50% in value if the outstanding capital stock or at least 50% of the total combined voting power
of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Abbot-Phils.
does not fall under the definition of a closely-held corporation. (BIR Ruling No. 025-2002 dated June 25, 2002)

EO 226--Article 39. Incentives to Registered Enterprises. All registered enterprises shall be granted the following
incentives to the extent engaged in a preferred area of investment;

(a) Income Tax Holiday.

(1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered
firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be
prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases:

i. the project meets the prescribed ratio of capital equipment to number of workers set by the Board;

ii. utilization of indigenous raw materials at rates set by the Board;

iii. the net foreign exchange savings or earnings amount to at least US$500,000.00 annually during the first three (3)
years of operation.

The preceding paragraph notwithstanding, no registered pioneer firm may avail of this incentive for a period exceeding
eight (8) years.

(2) For a period of three (3) years from commercial operation, registered expanding firms shall be entitled to an exemption
from income taxes levied by the National Government proportionate to their expansion under such terms and conditions
as the Board may determine; Provided, however, That during the period within which this incentive is availed of by the
expanding firm it shall not be entitled to additional deduction for incremental labor expense.

(3) The provision of Article 7 (14) notwithstanding, registered firms shall not be entitled to any extension of this incentive.

(b) Additional Deduction for Labor Expense. For the first five (5) years from registration a registered enterprise shall be
allowed an additional deduction from the taxable income of fifty percent (50%) of the wages corresponding to the
increment in the number of direct labor for skilled and unskilled workers if the project meets the prescribed ratio of capital
equipment to number of workers set by the Board: Provided, That this additional deduction shall be doubled if the activity
is located in less developed areas as defined in Art. 40.

(c) Tax and Duty Exemption on Imported Capital Equipment. Within five (5) years from the effectivity of this Code,
importations of machinery and equipment and accompanying spare parts of new and expanding registered enterprise
shall be exempt to the extent of one hundred percent (100%) of the customs duties and national internal revenue tax
payable thereon: Provided, That the importation of machinery and equipment and accompanying spare parts shall comply
with the following conditions:

(1) They are not manufactured domestically in sufficient quantity, of comparable quality and at reasonable prices;

(2) They are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its
products, unless prior approval of the Board is secured for the part-time utilization of said equipment in a non-registered
activity to maximize usage thereof or the proportionate taxes and duties are paid on the specific equipment and machinery
being permanently used for non-registered activities; and

(3) The approval of the Board was obtained by the registered enterprise for the importation of such machinery, equipment
and spare parts.

In granting the approval of the importations under this paragraph, the Board may require international canvassing but if
the total cost of the capital equipment or industrial plant exceeds US$5,000,000, the Board shall apply or adopt the
provisions of Presidential Decree Numbered 1764 on International Competitive Bidding.

If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts without prior
approval of the Board within five (5) years from date of acquisition, the registered enterprise and the vendee, transferee,
or assignee shall be solidarily liable to pay twice the amount of the tax exemption given it.

The Board shall allow and approve the sale, transfer or disposition of the said items within the said period of five (5) years
if made:

(aa) to another registered enterprise or registered domestic producer enjoying similar incentives;

(bb) for reasons of proven technical obsolescence; or

(cc) for purposes of replacement to improve and/or expand the operations of the registered enterprise.

(d) Tax Credit on Domestic Capital Equipment. A tax credit equivalent to one hundred percent (100%) of the value of the
national internal revenue taxes and customs duties that would have been waived on the machinery, equipment and spare
parts, had these items been imported shall be given to the new and expanding registered enterprise which purchases
machinery, equipment and spare parts from a domestic manufacturer: Provided, That (1) That the said equipment,
machinery and spare parts are reasonably needed and will be used exclusively by the registered enterprise in the
manufacture of its products, unless prior approval of the Board is secured for the part-time utilization of said equipment in
a non-registered activity to maximize usage thereof; (2) that the equipment would have qualified for tax and duty-free
importation under paragraph (c) hereof; (3) that the approval of the Board was obtained by the registered enterprise; and
(4) that the purchase is made within five (5) years from the date of effectivity of the Code. If the registered enterprise sells,
transfers or disposes of these machinery, equipment and spare parts, the provisions in the preceding paragraph for such
disposition shall apply.

(e) Exemption from Contractor's Tax. The registered enterprise shall be exempt from the payment of contractor's tax,
whether national or local.

(f) Simplification of Customs Procedure. Customs procedures for the importation of equipment, spare parts, raw materials
and supplies, and exports of processed products by registered enterprises shall be simplied by the Bureau of Customs.

(g) Unrestricted Use of Consigned Equipment. Provisions of existing laws notwithstanding, machinery, equipment and
spare part consigned to any registered enterprises shall not be subject to restrictions as to period of use of such
machinery, equipment and spare parts Provided, that the appropriate re-export bond is posted unless the importation is
otherwise covered under subsections (c) and (m) of this Article. Provided, further, that such consigned equipment shall be
for the exclusive use of the registered enterprise.

If such equipment is sold, transferred or otherwise disposed of by the registered enterprise the related provision of Article
39 (c) (3) shall apply. Outward remittance of foreign exchange covering the proceeds of such sale, transfer or disposition
shall be allowed only upon prior Central Bank approval.

(h) Employment of Foreign Nationals. Subject to the provisions of Section 29 of Commonwealth Act Number 613, as
amended, a registered enterprise may employ foreign nationals in supervisory, technical or advisory positions for a period
not exceeding five (5) years from its registration, extendible for limited periods at the discretion of the Board: Provided,
however, That when the majority of the capital stock of a registered enterprise is owned by foreign investors, the position
of president, treasurer and general manager or their equivalents may be retained by foreign nationals beyond the period
set forth herein.

Foreign nationals under employment contract within the purview of this incentive, their spouses and unmarried children
under twenty-one (21) years of age, who are not excluded by Section 29 of Commonwealth Act Numbered 613, as
amended, shall be permitted to enter and reside in the Philippines during the period of employment of such foreign
nationals.
A registered enterprise shall train Filipinos as understudies of foreign nationals in administrative, supervisory and
technical skills and shall submit annual reports on such training to the Board.

(i) Exemption on Breeding Stocks and Genetic Materials. The importation of breeding stocks and genetic materials within
ten (10) years from the date of registration or commercial operation of the enterprise shall be exempt from all taxes and
duties: Provided, That such breeding stocks and genetic materials are (1) not locally available and/or obtainable locally in
comparable quality and at reasonable prices; (2) reasonably needed in the registered activity; and (3) approved by the
Board.

(j) Tax Credit on Domestic Breeding Stocks and Genetic Materials. A tax credit equivalent to one hundred percent (100%)
of the value of national internal revenue taxes and customs duties that would have been waived on the breeding stocks
and genetic materials had these items been imported shall be given to the registered enterprise which purchases
breeding stocks and generic materials from a domestic producer: Provided, 1) That said breeding stocks and generic
materials would have qualified for tax and duty free importation under the preceding paragraph; 2) that the breeding
stocks and genetic materials are reasonably needed in the registered activity; 3) that the approval of the board has been
obtained by the registered enterprise; and 4) that the purchase is made within ten (10) years from date of registration or
commercial operation of the registered enterprise.

(k) Tax Credit for Taxes and Duties on Raw Materials. Every registered enterprise shall enjoy a tax credit equivalent to the
National Internal Revenue taxes and Customs duties paid on the supplies, raw materials and semi-manufactured products
used in the manufacture, processing or production of its export products and forming part thereof, exported directly or
indirectly by the registered enterprise: Provided, however, that the taxes on the supplies, raw materials and semi-
manufactured products domestically purchased are indicated as a separate item in the sales invoice.

Nothing herein shall be construed as to preclude the Board from setting a fixed percentage of export sales as the
approximate tax credit for taxes and duties of raw materials based on an average or standard usage for such materials in
the industry.

(l) Access to Bonded Manufacturing/Trading Warehouse System. Registered export oriented enterprises shall have
access to the utilization of the bonded warehousing system in all areas required by the project subject to such guidelines
as may be issued by the Board upon prior consultation with the Bureau of Customs.

(m) Exemption from Taxes and Duties on Imported Spare Parts. Importation of required supplies and spare parts for
consigned equipment or those imported tax and duty free by a registered enterprise with a bonded manufacturing
warehouse shall be exempt from customs duties and national internal revenue taxes payable thereon, Provided, However,
That at least seventy percent (70%) of production is exported; Provided, further, that such spare parts and supplies are
not locally available at reasonable prices, sufficient quantity and comparable quality; Provided, finally, That all such spare
parts and supplies shall be used only in the bonded manufacturing warehouse of the registered enterprise under such
requirements as the Bureau of Customs may impose.

(n) Exemption from Wharfage Dues and any Export Tax, Duty, Impost and Fee. The provisions of law to the contrary
notwithstanding, exports by a registered enterprise of its non- traditional export products shall be exempted of its non-
traditional export products shall be exempted from any wharfage dues, and any export tax, duty, impost and fee.

RA 7916 (Secs.23-25)
Fiscal Incentives. – Business establishments operating within the ECOZONES shall be entitled to the fiscal incentives as
provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided
under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as Inputs shall enjoy the same benefits provided for in the
Export Development Act of 1994.

Exemption from National and Local Taxes.- Except for real property taxes on land owned by developers, no taxes, local
and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent
(5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows:
a. Three percent (3%) to the National Government;
b. Two percent (2%) which shall be directly remitted by the business establishments to the treasurer’s office of the
municipality or city where the enterprise is located.

Applicable National and Local Taxes. – All persons and services establishments in the ECOZONE shall be subject to
national and local taxes under the National Internal Revenue Code and the Local Government Code.

REVENUE MEMORANDUM ORDER NO. 63-99 issued August 13, 1999 prescribes the policies and guidelines on the
determination of taxable income on inter-company loans or advances pursuant to Section 50 of the Tax Code, as
amended. The arm's length bargaining standard will be used as the ultimate test for determining the correct gross income
and deductions between two or more enterprises under common control.
RR 2 (Sec.49)
Improvements by lessees. — When buildings are erected or improvements made by a lessee in pursuance of an
agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may
at his option report the income therefrom upon either of the following bases;
(a) The lessor may report as income at the time when such buildings or improvements are completed the fair market
value of such buildings or improvements subject to the lease.
(b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements
at the termination of the lease and report as income for each year of the lease an aliquot part thereof.
If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that
the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease,
the lessor receives additional income for the year in which the lease is so terminated to the extent that the value of such
buildings or improvements when he became entitled to such possession exceeds the amount already reported as income
on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the
premature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to
the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the
amount previously reported as income because of the erection of such buildings or improvements, less any salvage value
subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings or improvements
destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease
to the extent that such loss was not compensated for by insurance.

RR 2 (Secs. 250-256)
Dividends. — Dividends, for the purpose of the law, comprise any distribution whether in cash or other property, in the
ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign corporation,
joint-stock company, partnership, joint account (cuentas en participacion), association, or insurance company to the
shareholders or members out of its earnings or profits accumulated since March 1, 1913.
Although interest on certain Government bonds and other similar obligations is not taxable when received by a
corporation, upon amalgamation with the other funds of the corporation, such income loses its identity and when
distributed to shareholders, is taxable to the same extent as other dividend.
A taxable distribution made by a corporation to individual stockholders or members shall be included is the gross income
of the distributees when the cash of other property is unqualifiedly made subject to their demand. Dividends, in cash or
other property received by an individual, are subject to tax in his hands in the same manner another income.
Dividends, whether in cash or other property, received by a domestic or resident foreign corporation from a domestic
corporation are taxable only to the extent of 25 per cent thereof in accordance with Section 24 of the Code. Dividends
received by a domestic corporation from a foreign corporation, whether resident or nonresident, are taxable to the extent
that they constitute income from sources within the Philippines, as provided in Section 37 (a) (2) (b) of the Code.
Dividends paid by the domestic corporation to a nonresident foreign corporation are taxable in full. (For definition of the
different classes of corporations, see Section 84 of the Code).

Dividends paid in property. — Dividends paid in securities or other property (other than its own stock), in which the
earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such
property when receivable by individual stockholders. When receivable by corporations, the amount of such dividends
includible for purposes of the tax on corporations are specified in Section 24 of the Code. (See also Section 250 of these
regulations). 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. Where a corporation declares a dividend payable in a stock of another corporation, setting aside
the stock to be so distributed and notifying the stockholders of its action, the income arising to the recipients of such stock
is its market value at the time the dividend becomes payable. Scrip dividends are subject to tax in the year in which the
warrants are issued.

Stock dividends. — A stock dividend which represents the transfer of surplus to capital account is not subject to income
tax. However a dividend in stock may constitute taxable income to the recipients thereof notwithstanding the fact that the
officers or directors of the corporation (as defined in Section 84) choose to call such distribution as a stock dividend. The
distinction between a stock dividend which does not, and one which does, constitute income taxable to the shareholder is
the distinction between a stock dividend which works no change in the corporate entity, the same interest in the same
corporation being represented after the distribution by more shares of precisely the same character, and a stock dividend
where there either has been a change of corporate identity or a change in the nature of the shares issued as dividends
whereby the proportional interest of the shareholders after the distribution is essentially different from his former interests.
A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stock
holdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interests
than did the old — the new certificates plus the old representing the same proportionate interest in the net assets of the
corporation as did the old.

Sale of stock received as dividends. — Stock issued by a corporation, as a dividend, does not constitute taxable income
to a stockholder in such corporation, but gain may be derived or loss sustained by the stockholder, whether individual or
corporate, from the sale of such stock, which gain or loss will be treated as arising from the sale or exchange of a capital
asset. (See Section 34 of the Code.) The amount of gain derived or loss sustained from the sale of such stock, or from the
sale of the stack with respect to which it is issued, shall be determined in accordance with the following rules:
(a) Where the stock issued as dividend is all or substantially the same character or preference as the stock upon which
the stock dividend is paid, the cost of each share (or when acquired prior to March 1, 1913, the fair market value as of
such date) will be the quotient of the cost (or such fair market value) of the old shares of stock divided by the total number
of the old and new shares.
(b) Where the stock issued as a dividend is in whole or in part of a character or preference materially different from the
stock upon which the stock dividend is paid, the cost (and when acquired prior to March 1, 1913, the fair market value as
of such date) of the old shares of stock shall be divided between such old stock and the new stock, in proportion, as
nearly as may be, to the respective value of each class of stock, old and new, at the time the new shares of stock are
issued, and the cost (or when acquired prior to March 1, 1913, the fair market value as of such date) of each share of
stock will be the quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share
belongs divided by the number of shares in that class.
(c) Where the stock with respect to which a stock dividend is issued was purchased at different times and at different
prices and the identity of the lots can. not be determined, any sale of the original stock, will be charged to the earliest
purchases of such stock, and any sale of dividend stock issued with respect to such stock will be presumed to have been
made from the stock issued with respect to the earliest purchased stock, to the amount of the dividend chargeable to such
stock.
(d) Where the stock with respect to which a stock dividend is declared was purchased at different times and at different
prices, and the dividend stock issued with respect to such stock can not be identified as having been issued with respect
to any particular lot of such stock, then any sale of such dividend stock will be presumed to have been made from the
stock issued with respect to the earliest purchased stock, to the amount of the stock dividend chargeable to such stock.

Declaration and subsequent redemption of a stock dividend. — A true stock dividend is not subject to tax on its receipt in
the hands of the recipient. Nevertheless, if a corporation, after the distribution of a stock dividend, proceeds to cancel or
redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially
equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stocks shall
be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation since March 1,
1913.

Sources of distribution. — For the purpose of income taxation every distribution made by a corporation is made out of
earnings or profits to the extent thereof and from the most recently accumulated earnings or profits. In determining the
source of a distribution, consideration should be given first, to the earnings or profits of the taxable year; second, to the
earnings or profits accumulated since February 28, 1913, only in the case where, and to the extent that, the distribution
made during the taxable year are not regarded as out of the earnings or profits of the taxable year and all the earnings or
profits accumulated since February 28, 1913, have been distributed; and, fourth, to sources other than earnings or profits
only after the earnings or profits have been distributed.

Distribution in liquidation. — In all cases where a corporation (as defined in Section 84) distributes all of its property or
assets in complete liquidation or dissolution, the gain realized from the transaction by the stockholder, whether individual
or corporate, is taxable to the extent recognized in Section 34(b) of the Code. For this purpose, the term "complete
liquidation" includes any one of a series of distributions made by a corporation in complete cancellation or redemption of
all of its stock in accordance with a bona fide plan of liquidation under which the transfer of all the assets under liquidation
is to be complete within a reasonable time from the date of the first distribution, usually not to exceed one year from the
time of such first distribution. If the amount received by the stockholder in liquidation is less than the cost or other basis of
the stock, the loss in the transaction is deductible to the extent allowed in Section 34(c) of the Code.

BIR RULING NO. 322-87

Gentlemen :
This refers to your letter dated July 23, 1987 stating that your company is a trading concern and at present it is in the
process of liquidation; and that your individual stockholders will receive their liquidating dividends in excess of their
investment.
In reply, I have the honor to inform you that since the individual stockholders of your company will receive upon its
complete liquidation all its assets as liquidating dividends, they will thereby realize capital gain or loss. The gain, if any,
derived by the individual stockholders consisting of the difference between the fair market value of the liquidating
dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation (Sec. 83 (a),
Sec. 256, Income Tax Regulations) shall be subject to income tax at the rates prescribed under Section 21(a) of the Tax
Code, as amended by Executive Order No. 37. cda
Moreover, pursuant to Section 34(b) of the Tax Code, as amended by Executive Order No. 37, only 50% of the
aforementioned capital gain is reportable for income tax purposes if the shares were held by the individual stockholders
for more than twelve months and 100% of the capital gains if the shares were held for less than twelve months.

RR 2 (Sec.50)
Forgiveness of indebtedness. — The cancellation and forgiveness of indebtedness may amount to a payment of income,
to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for
a creditor, who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as
compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration
therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the
latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of
the payment of a dividend.
REVENUE MEMORANDUM CIRCULAR NO. 13-80 (Treatment of Tax Refunds and Tax Credits When Received.)

1. Refunds/Tax Credits under Section 295 of the Tax Code. — Taxes previously claimed and allowed as deductions, but
subsequently refunded or granted as tax credit pursuant to Section 295 of the Tax Code, should be declared as part of the
gross income of the taxpayer in the year of receipt of the refund or tax credit. However, the following taxes, when
refunded or credited, are not declarable for income tax purposes inasmuch as they are not allowable as deductions:
a. Income tax imposed in Title III of the Tax Code;
b. Income, war-profit and excess profits taxes imposed by authority of a foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit for taxes of foreign countries);
c. Estate and gift taxes;
d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed;
e. Stock transaction tax;
f. Energy tax; and
g. Taxes which are not allowable as deductions under the law.
2. Special Tax Credits granted under R.A. 5186; R.A. 6135 and P.D. 535. — These tax credits and their tax
consequences are as follows:
a. Sales, compensating and specific taxes are paid on supplies and raw materials imported by a registered export
producer. Said taxes are given as tax credit to be used in the payment of taxes, duties, charges and fees due to the
national government in connection with its operations. (Sec. 7(a), R.A. No. 6135)
The tax credits granted should form part of the gross income to the enterprise in the year of receipt of tax credit as said
taxes paid are considered allowable deductions for income taxes purposes.
b. In some cases, a registered BOI and tourism enterprise assumes payment of taxes withheld and due from the
foreign lender-remittee on interest payments on foreign loans. In such cases, the enterprise is given a tax credit for taxes
withheld subject to certain conditions. (Sec. 7(f), R.A. No. 5186; Sec. 8(c), P.D. No. 535)
Said taxes assumed by the registered enterprise represent necessary and ordinary expenses incurred by the enterprise;
hence, deductible from its gross income. Therefore, the tax credits granted necessarily constitute taxable income of the
enterprise.

REPUBLIC ACT No. 4917 (AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES OF PRIVATE
FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY, EXECUTION, OR ANY TAX WHATSOEVER.)

Section 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or
seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned
to the private benefit plan or that arising from liability imposed in a criminal action: Provided, That the retiring official or
employee has been in the service of the same employer for at least ten (10) years and is not less than fifty years of age at
the time of his retirement: Provided, further, That the benefits granted under this Act shall be availed of by an official or
employee only once: Provided, finally, That in case of separation of an official or employee from the service of the
employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or
employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall
likewise be exempt as hereinabove provided.

As used in this Act, the term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit sharing
plan maintained by an employer for the benefit of some or all of his officials and employees, wherein contributions are
made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees
the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any
part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of
the said officials and employees.

REPUBLIC ACT NO. 7833 (AN ACT TO EXCLUDE THE BENEFITS MANDATED PURSUANT TO REPUBLIC ACT NO.
6686 AND PRESIDENTIAL DECREE NO. 851, AS AMENDED, AND OTHER BENEFITS FROM THE COMPUTATION
OF GROSS COMPENSATION INCOME FOR PURPOSES OF DETERMINING TAXABLE COMPENSATION INCOME,
AMENDING FOR THE PURPOSE SECTION 28(B)(8) OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED)

SECTION 1. A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the end of Section 28(b)(8) of
the National Internal Revenue Code, as amended, which shall read as follows:

"(F) 13th month pay and other benefits.

"(i) Benefits received by officials and employees of the national and local governments pursuant to Republic Act No.
6686;
 "(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986;
"(iii) Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended; and
"(iv) Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve
thousand pesos (P12,000) which shall be integrated in the 13th month pay solely for purposes of this Act."
"Provided, however, That the exclusion shall only apply to the first Thirty thousand pesos (P30,000)."

Sec. 2. The exclusion herein provided shall cover benefits paid or accrued beginning January 1, 1994.
For purposes of reimbursing the officials or employees who may have received the benefits covered by this Act before its
effectivity, the withholding agents are hereby authorized not to deduct the withholding taxes in the immediately
succeeding payroll periods corresponding to the amount previously withheld from the benefits.

Sec. 3. The Secretary of Finance shall, upon the recommendation of the Commissioner of Internal Revenue, promulgate
the necessary rules and regulations for the effective implementation of the provision of this Act.

REVENUE REGULATIONS NO. 02-95 (Implementing Republic Act No. 7833, An Act to Exclude the Benefits Mandated
Pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as Amended, and other Benefits from the
Computation of Gross Compensation Income for the Purposes of Determining Taxable Compensation Income, Amending
for the Purpose Section 28 (b) (8) of the National Internal Revenue Code, as Amended)

Definition of Terms. — For purposes of these Regulations, the following definitions of words and phrases are hereby
adopted:
a) "Act" — refers to Republic Act No. 7933.
b) "Exclusions" — shall mean the total benefits which are not included in the computation of gross compensation income
for purposes of determining taxable compensation income and are, therefore, exempt from the withholding tax on wages.
c) "Gross compensation income" — means all remunerations for services performed by an employee for his employer,
whether paid in cash or in kind, unless specifically excluded under Secs. 27 and 28 of the NIRC, as amended.
d) "Immediately succeeding payroll period" — refers to the payroll period beginning January, 1995.
e) "Other benefits" — refer to all benefits other than the 13th month pay, such as, the annual Christmas bonus given by
private offices, 14th month pay, mid-year productivity incentive bonus, gifts in cash or in kind and other similar benefits
received by an official or employee for one calendar year in an amount not exceeding Twelve Thousand Pesos
(P12,000.00) as maximum limit.
f) "Taxable compensation income" — means gross compensation income less personal and additional exemptions
provided for under Sec. 29 (l) of the NIRC, as amended.
g) "13th month pay" — refers to the mandatory one month basic salary of an official or employee of the National
Government, Local Government Units, agencies and instrumentalities, including government-owned and -controlled
corporations, and of private offices received after the 12th month pay.
h) "Total benefits" — refer to the sum of all the benefits received by an official or employee for one calendar year in
accordance with the provisions of the "Act."
i) "Which shall be integrated in" — shall mean "which shall be added to".

Benefits Exempted from Income Tax. — For purposes of determining the taxable compensation income, the following
benefits shall be excluded from the gross compensation income, viz:
a) 13th month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the Government
(whether national or local), including government-owned and -controlled corporations, and of private offices received after
the 12th month pay beginning CY 1994; and
b) Other benefits, such as, Christmas bonus given by, private offices to their officials and employees, productivity
incentives bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials
and employees of both Government and private offices in an amount not exceeding Twelve Thousand Pesos (12,000.00)
for one (1) calendar year.
The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January 1, 1994 but
shall be limited only to an amount not exceeding Twelve Thousand Pesos (P12,000.00) in the case of the "other benefits"
contemplated under paragraph (b) above, provided, however, that when added to the 13th month pay, the total amount of
tax exempt benefits shall not exceed Thirty Thousand Pesos (P30,000.00).

ILLUSTRATIONS:
CASE NO. 1.
During CY 1994, Mr. "A", and official of a private corporation, received the following 13th month pay and other benefits
from his employer, such as:

13th month pay P30,000.00

Other benefits:
Christmas bonus P15,000.00
14th month pay 30,000.00
Mid-year productivity
bonus 10,000.00 55,000.00
———— ————
TOTAL BENEFITS RECEIVED
for CY 1994 P85,000.00
 ========
In this illustration, Mr. "A" shall only be exempted on his 13th month pay of P30,000. His "other benefits" amounting to
P55,000 are subject to the withholding tax on wages.

CASE NO. 2.
On the other hand, Mr. "B", a government employee, received the following 13th month pay and other benefits, such as:

13th month pay/Christmas bonus P8,000.00

Other benefits:
Productivity incentives bonus P12,000.00
Cash gift 1,000.00
13,000.00
———— ————
TOTAL BENEFITS RECEIVED
for CY 1994 P21,000.00
========

Mr. "B" shall only be exempt on a total of P20,000.00, representing 13th month pay of P8,000.00 plus "other benefits" of
P12,000.00 only.

Computation of Refundable/Creditable Taxes Withheld on the Exempt 13th Month Pay and Other Benefits. — (a) In
general. — The employer shall compute the refundable/creditable amount of taxes withheld on the exempt 13th month
pay and other benefits of employees through the annualized computation prescribed in Section 71(8)(2)(b) of Revenue
Regulations No. 6-82, as amended by RR No. 4-93, implementing R.A. No. 7497, otherwise known as the "Final
Withholding Tax on Compensation Income."
(b) Refund/Credit to Employees of Excess Taxes Withheld. — Any excess in the taxes withheld resulting from the
annualized computation shall be credited/refunded to the employees. In return, the employer is entitled to deduct the
amount refunded/credited from the remittable amount of taxes withheld from compensation income in the current month in
which refund/credit was made, and in the succeeding months thereafter until the amount refunded/credited by the
employer is fully repaid.

ILLUSTRATIONS:
1. The year-end adjustment computation resulted to a REFUND.
(aa) Employee with Only One Employee During the Year.

ABC COMPANY
Employee "A" (single)
—————————
Salaries P78,000.00
13th month pay 12,000.00
Other Benefits 10,000.00
—————
Gross Compensation Income P100,000.00

Less: Non-taxable Benefits:

13th month pay P12,000
Other benefits 10,000 22,000.00
——— ————
P78,000.00

Less: Personal Exemption

9,000.00
—————
Taxable Compensation P69,000.00
Tax Due P7,785.00
Less: Tax Withheld (13,675.00)
—————
AMOUNT TO BE REFUNDED by (P5,890.00)

ABC CO. to Employee "A" ========

on or before JANUARY 25, 1995 OR TO BE CREDITED against Taxes Withheld due from the Employee for Succeeding
Month/s Beginning following Sample Computation

No. 1 (cc).(bb) Employee with Successive Employment Within the Year.

Employee "B" (single)

—————————
ABC Co. DEF. Co.
(Previous Employer) (Present Employer)
Jan.-June, 1994 Nov.-Dec., 1994
 Salaries/Allowances P78,000.00 Salaries P20,000.00
13th Month Pay 12,000.00 13th month pay 8,000.00
Other Benefits 10,000.00 Other Benefits 3,000.00
————— —————
P100,000.00 P31,000.00

Less: Personal ADD: Income From

Exemption 9,000.00 Previous Employer 100,000.00
————— —————

LESS:
Net Taxable Non Taxable
Income 91,000.00 Benefits:
13th Month Pay

TAX DUE P11,965.00 ABC Co. P12,000

TAX WITHHELD P11,965.00
DEF Co. 8,000 P20,000

*Other Benefits
ABC Co. P10,000
DEF Co. 3,000
———
P13,000 10,000 30,000.00
——— ————
P101,000.00
LESS: Personal Exemption 9,000.00
————
Taxable Compensation
Income P92,000.00

TAX DUE P12,155.00

TAX WITHHELD
ABC Co. P11,965.00
DEF Co. 3,279.66 (15,244.66)

AMOUNT TO BE REFUNDED BY DEF Co.

to EMPLOYEE "B" on or before (P3,089.66)
JANUARY 25, 1995 —————
OR
TO BE CREDITED against Taxes Withheld
due from Employee for Succeeding Month/s
beginning January 1995. (Please see
Sample Computation No. 1 (cc).

(cc) Crediting of Refundable Amounts Against Taxes Withheld Due From Employees For The Succeeding Month/s.

Amount of refund to be credited against taxes withheld due from Employee "B" [Based on Sample Computation No. 1 (bb)
above) beginning January, 1995 — P 3,089.66
——————————————————————————————
Computation of Taxes Withheld for the month of January, 1995
Salaries/Allowances
Taxable: P10,000.00
——————————————————————————————
Tax Required to be Withheld for the month of January, 1995
(Use Line 2 Col. 8 of the
Withholding Tax Table): P1,359.66

Less: Refund for CY 1994 due to

Non-Taxability of Bonus and
Other Benefits beginning
Jan. 1995 (3,035.66)
————
Balance to be credited in succeeding
month/s (P1,730.00)

February. 1995
Tax Required to be Withheld for the month of February P1,359.66
Amount to be credited
for February (1,730.00)
 ————
Balance of Amount to be Credited for the Month
of March (P370.34)

March. 1995
Tax Required to be Withheld for the Month
of March P1,359.66
Amount to be Credited
for March (370.34)
————
Amount to be Remitted for March on or before
April 10, 1995 P989.32
=======

2. The year-end adjustment resulted to a COLLECTIBLE AMOUNT (instead of a refund).

During CY 1994, an employee (single) of a private corporation, received the following compensation, month pay and other
benefits:

Salaries/allowances P5,000/mo. x 12 mos. P60,000.00

13th Month pay 5,000.00
Gift in kind 5,000.00
Cash gift 10,000.00
Christmas Bonus 5,000.00
—————
Total Gross Compensation Income P85,000.00

Less: 13th Month Pay P5,000

Other Benefits 12,000 17,000.00
——— ————
Gross Compensation Income After
Deducting Exclusions Under RA 7333 68,000.00
Less: Personal Exemption 9,000.00
————
Taxable Compensation Income P59,000.00
Tax Due P3,925.00
Tax Withhold
Jan.-Nov., 1994 P393.80/mo. x 11 mos. (4,331.80)
—————
Tax Collectible to be Withheld from P1,593.20
December salary =========

Note: NO REFUND OF WITHHOLDING TAX FOR BONUS AND OTHER BENEFITS WOULD RESULT DUE TO UNDER
WITHOLDING IN PREVIOUS MONTHS OF THE YEAR.

Refund/Credit of Taxes Withheld from employees Separated from Employment. — a) An employee separate from the
service of his previous employer but is presently employed by another employer shall be refunded/credited the taxes
withheld on his exempt 13th month pay and other benefits by his present employer. The present employer shall compute
the aforesaid excess withholding tax using the annualized computation set forth in Section 7I (B) (2) (b) of RR No., 6-82,
as amended by RR No. 4-93.
(b) An employee who has been separated from a previous employer but has no present employment shall claim his
refund of excess tax withheld on his 13th month pay and other benefits by filing with the BIR a refundable income tax
return for CY 1994, provided that the refundable ITR for 1994 reflects the taxes withheld on his 13th month pay and other
benefits.

Concurrent Multiple Employments. — An employee is employed by two or more employers at the same time during the
taxable year shall be refunded/credited the taxes withheld on his 13th month pay and "other benefits" by his main
employer, e.g., the employer paying the highest wage/salary. The said main employer shall determine the maximum
allowable 13th month pay and "other benefits" received from both main and secondary employer/s in annualizing the
taxable compensation income at year-end adjustment. For this purpose, the secondary employer/s shall furnish the main
employer a certification as to the amount of the 13th month pay and other benefits received by the employee.

The Employee's Withholding Statement (W-2). — The employer shall furnish each employee with the original and
duplicate copies of BIR Form W-2 showing the name and address of the employer, employer's TIN, name and address of
the employee, taxpayer/employee's TIN, amount of exemptions claimed, the sum of compensation paid (excluding the
total non-taxable benefits), the amount of tax due and the amount of tax withheld during the calendar year.
The statement must be signed by both the employer or other authorized officer and the employee and shall contain a
written declaration that it is made under the penalties of perjury.
If the employer is the Government of the Philippines, its political subdivision, agency or instrumentality or
government-owned or controlled corporation, the statement shall be signed by the duly designated officer or employee.
Footnotes
- The maximum allowable deduction for "Other Benefits" is P12,000.00. However, since the total 13th month pay and
'other benefits' should not exceed P 30,000, only P10,000.00 'other benefits" can be added to P 20,000, representing Mr.
"B's" total 13th month pay from his previous and present employers.

REVENUE MEMORANDUM CIRCULAR NO. 36-94 (Publishing the full text of Republic Act No. 7833 — an Act excluding
the benefits mandated pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as amended, and other
benefits from the computation of gross compensation income for purposes of determining taxable compensation income,
amending for the purpose Section 28 (b) (8) of the National Internal Revenue Code, as amended.

SALIENT FEATURES (of RA 7833)

1. Before the amendment of Section 28 (b) (8) of the National Internal Revenue Code (NIRC) by R.A. No. 7833, the
following benefits received by officials and employees of both public (national and local) and private offices, viz:
(F) 13th month pay and other benefits.
a. Annual Christmas bonus equivalent to one (1) month basic salary and additional cash gift of One Thousand Pesos
(P1,000.00) received by National and Local Government officials and employees starting CY 1988 in accordance with
R.A. No. 6686;
b. Benefits received by employees pursuant to P.D. No. 851 , as amended by Presidential Memorandum Order No. 28
dated August 13, 1986 requiring all employers to pay all their rank-and-file employees a 13th month pay not later than
December 24 of every year;
c. Benefits received by officials and employees not covered by P.D. No. 851, as amended; and
d. Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve Thousand
Pesos (P12,000.00) which shall be integrated in the 13th month pay solely for purposes of R.A. No. 7833 were taxable
compensation income under Section 21(a) in relation to Section 72, both of the NIRC, as amended, subject to withholding
tax under Revenue Regulations No. 6-82, as amended by Revenue Regulations No. 4-93.

2. Under sub-paragraph (F) of Section 28 (b) (8) of the NIRC, as amended by R.A. No. 7833, the 13th month pay and
other benefits aforestated, received by officials and employees of the National Government, Local Government Units and
agencies, including government-owned and controlled corporations, as well as by officials and employees of private
corporations and entities, are exempt from income tax, and consequently from the withholding tax on wages. Provided,
that the exclusions/exemptions from gross compensation income shall cover the 13th month pay and "other benefits" in
the aggregate amount not exceeding P30,000 received by the officials and employees paid or accrued beginning January
1, 1994. The aforesaid "other benefits " as contemplated under Section 1 (F) (iv) of R.A. No. 7833 shall not exceed
P12,000, which amount shall be integrated in the 13th month pay. Accordingly, benefits in excess of P30,000.00 shall be
taxable and subject to the withholding tax only insofar as the amount in excess of P30,000.00.

Illustration:
During CY 1994, Mr. "X", an employee of a private corporation, received the following 13th month pay and other benefits
from his employer, such as:

13th month pay P15,000.00

Christmas bonus 10,000.00
Other benefits:
Gift in kind 2,000.00
Additional cash gift 1,000.00
Mid-year productivity
incentive bonus 5,000.00
_________
TOTAL P33,000.00
========

Under the amendment introduced by R.A. No. 7833 to Section 28(b)(8) of the NIRC, wherein sub-paragraph (F) has been
inserted at the end thereof, the computation of the amount of the benefits which shall be excluded/exempted from the
taxable compensation income and/or those subject to withholding tax on wages, if any, shall be as follows:

I. Computation of whether the full amount of subject "other benefits", as

contemplated under Section 1 (F) (iv) of RA 7833, is exempt from
withholding tax on wages.

Christmas bonus P10,000

Plus: Other benefits:
Gift in kind P 2,000
Additional cash gift 1,000
Mid-year productivity
incentive bonus 5,000 8,000
--- ---
TOTAL P18,000
 Less: P12,000 maximum exemption
for "other benefits" as
contemplated under Sec.
1(F)(iv) of RA 7833 (12,000)
---
TAXABLE "OTHER BENEFITS"
SUBJECT TO WITHHOLDING TAX
ON WAGES P 6,000
======

II. Computation of total benefits excluded/exempted from withholding tax on

wages when the "other benefits" are integrated in the 13th month pay.

13th month pay P15,000

Plus: Maximum allowable exemption/
exclusion of P12,000 for
"other benefits" as contemplated
under Sec. 1 (F) (iv) of RA 7833
(please refer to Computation
No. I above) 12,000
---
TOTAL EXCLUSIONS/EXEMPTION FROM
TAXABLE COMPENSATION INCOME P27,000
======

3. For purposes of reimbursing the officials and employees of the income taxes withheld and already remitted to the BIR,
the following guidelines shall be followed:
a. Employers who have already given the 13th month pay and other benefits to their employees, and had withheld and
remitted the tax due thereon prior to the approval of R.A. No. 7833 (December 8, 1994) shall, in annualizing and
computing the annual income and the tax due from their employees, exclude the 13th month pay and other benefits. Any
excess in the tax withheld shall be refunded by the employer to the respective employees or credited against the tax
required to be withheld from the compensation of the employees beginning January, 1995. The employer shall then be
allowed to credit and deduct from its subsequent remittances of taxes withheld on compensation income of their
employees for the succeeding months;
b. Taxes withheld on the 13th month pay and other benefits given last November, which should otherwise be remitted
by the employer-withholding agent on December 12, 1994, shall no longer be remitted to the BIR. Said withheld amount
should be refunded to the employees concerned; and
c. The exemption/exclusion provided for under R.A. No. 7833 shall cover the 13th month pay and "other benefits" in the
aggregate amount not exceeding P30,000 received by the officials and employees paid or accrued beginning January 1,
1994, provided, however, that the aforesaid "other benefits" as contemplated under Sec. 1 (F) (iv) of R.A. No. 7833 shall
not exceed P12,000 which amount shall be integrated in the 13th month pay.

REVENUE REGULATIONS NO. 10-2000 issued December 29, 2000 amends further RR Nos. 2-98, 3-98 and 8-98 with
respect to the exemption of monetized leave credits of government officials and employees and the enumeration of "de
minimis" benefits which are exempt from income tax on compensation and from fringe benefits tax.

REVENUE REGULATIONS NO. 10-00 (Further Amendments to Revenue Regulations No. 2-98 and 3-98, as Last
Amended by Revenue Regulations No. 8-2000)

Section 2.78.1(A)(3), (6)(b)(ii) and (7) of Revenue Regulations No. 2-98, as last amended by Revenue Regulations No. 8-
2000, is hereby further amended to read as follows:
"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. —
"(A) ...
"(1) Compensation paid in kind. — . . .
"xxx xxx xxx
"(3) Facilities and privileges of relatively small value. —
"xxx xxx xxx
"The following shall be considered as "de minimis" benefits not subject to INCOME TAX AS WELL AS withholding tax on
compensation income of both managerial and rank and file employees:
(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 P750.00 per employee per semester or
P125 per month;
(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;
(d) Uniform and clothing allowance not exceeding P3,000 per annum;
(e) Actual yearly medical benefits not exceeding P10,000 per annum;
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g., for length of 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) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per
annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of
illness, marriage, birth of a baby, etc., and
(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage."
"xxx xxx xxx
"(6) Fixed or variable transportation, representation and other allowances —
"xxx xxx xxx
"(b) ...
"(i) ...
"(ii) The employee is required to account/liquidate for the expenses in accordance with the specific requirements of
substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of ADVANCES MADE over
ACTUAL EXPENSES shall constitute taxable income if such amount is not returned to the employer. Reasonable
amounts of reimbursements/advances for travelling and entertainment expenses which are pre-computed on a daily basis
and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of
substantiation and to withholding."
"(iii) ...
"(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to
an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which IS paid
notwithstanding his absence from work constitutes compensation. However, the monetized value of unutilized vacation
leave credits of ten (10) days or less which ARE paid to PRIVATE employees during the year AND THE MONETIZED
VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES SHALL NOT BE SUBJECT TO
INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX."
"xxx xxx xxx

Section 2.33 (C) of Revenue Regulations No. 3-98, as last amended by Revenue Regulations No. 8-2000, is hereby
further amended to read as follows:
"Sec. 2.33. Special Treatment of Fringe Benefits
(A) Imposition of Fringe Benefits Tax —
xxx xxx xxx
(B) Definition of Fringe Benefit —
xxx xxx xxx
(C) Fringe Benefits Not Subject to Fringe Benefits Tax — In general, the fringe benefits tax shall not be imposed on
the following fringe benefits:
(1) ...
(2) ...
(3) ...
(4) De minimis benefits as defined in these Regulations;
(5) ...
(6) ...
xxx xxx xxx
The term "DE MINIMIS" benefits which are exempt from the fringe benefits tax shall, in general, be limited to facilities or
privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or
furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees such as the following:
(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 P750.00 per employee per semester or
P125 per month;
(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;
(d) Uniform and clothing allowance not exceeding P3,000 per annum;
(e) Actual yearly medical benefits not exceeding P10,000 per annum;
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g., for length of 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 in which does not discriminate in favor of highly paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per
annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of
illness, marriage, birth of a baby, etc., and
(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage."

REVENUE REGULATIONS NO. 03-98 (Implementing Section 33 of the National Internal Revenue Code, as Amended by
Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits)

SPECIAL TREATMENT OF FRINGE BENEFITS

(A) Imposition of Fringe Benefits Tax — A final withholding tax is hereby imposed on the grossed-up monetary value of
fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees as defined in
these Regulations, whether such employer is an individual, professional partnership or a corporation, regardless of
whether the corporation is taxable or not, or the government and its instrumentalities except when: (1) the fringe benefit is
required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit
is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the following rates:
Effective January 1, 1998 - 34%
Effective January 1, 1999 - 33%
Effective January 1, 2000 - 32%

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the employee which shall be
withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax
on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code.
The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of the fringe
benefit by the following percentages and in accordance with the following schedule:
Effective January 1, 1998 - 66%
Effective January 1, 1999 - 67%
Effective January 1, 2000 - 68%

The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee
which includes the net amount of money or net monetary value of property which has been received plus the amount of
fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee,
pursuant to the provisions of this Section.

Coverage — These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory
employees and not to the rank and file.
The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory
position. The Labor Code of the Philippines, as amended, defines "managerial employee" as 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. "Supervisory employees" are 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.
Moreover, these regulations do not cover those benefits properly forming part of compensation income subject
to withholding tax on compensation in accordance with Revenue Regulations No. 2-98. Fringe benefits which have been
paid prior to January 1, 1998 shall not be covered by these Regulations.

Determination of the Amount Subject to the Fringe Benefit Tax — In general, the computation of the fringe benefits tax
would entail (a) valuation of the benefit granted and (b) determination of the proportion or percentage of the benefit which
is subject to the fringe benefit tax. That the Tax Code allows for the cases where only a portion (i.e. less than 100 per
cent) of the fringe benefit is subject to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which
stipulates that fringe benefits which are "required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe
benefit tax. Thus, in cases where the fringe benefits entail joint benefits to the employer and employee, the portion which
shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are defined under these
rules and regulations.
Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as follows:
(1) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or
paid for.
(2) If the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred
to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined
in accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real Property Values).
(3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not
transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property.
Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or business in the
Philippines — A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of the
fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per
cent (75%).
Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a
multinational company or by regional operating headquarters of a multinational company; (2) an alien individual employed
by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed by a foreign
service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines; and (4) any of
their Filipino individual employees who are employed and occupying the same position as those occupied or held by the
alien employees. — A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up monetary value of
the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five
per cent (85%).

Taxation of fringe benefit received by employees in special economic zones — Fringe benefits received by employees in
special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are
also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15%
as provided above.
Definition of Fringe Benefit — In general, except as otherwise provided under these regulations, for purposes of this
Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer in
cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these
regulations) such as, but not limited to the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual
rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic
clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the
law allows.
For this purpose, the guidelines for valuation of specific types of fringe benefits and the determination of the monetary
value of the fringe benefits are give below. The taxable value shall be the grossed-up monetary value of the fringe benefit.
(1) Housing privilege —
(a) If the employer leases a residential property for the use of his employee and the said property is the usual place of
residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as
evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the
benefit.
(b) If the employer owns a residential property and the same is assigned for the use of his employee as his usual place
of residence, the annual value of the benefit shall be five per cent (5%) of the market value of the land and improvement,
as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to
Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The
monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. cda
The monetary value of the housing fringe benefit is equivalent to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE
(c) If the employer purchases a residential property on installment basis and allows his employee to use the same as
his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the acquisition cost, exclusive of
interest. The monetary value of fringe benefit shall be fifty per cent (50%) of the value of the benefit.
(d) If the employer purchases a residential property and transfers ownership thereof in the name of the employee, the
value of the benefit shall be the employer's acquisition cost or zonal value as determined by the Commissioner pursuant
to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The
monetary value of the fringe benefit shall be the entire value of the benefit.
(e) If the employer purchases a residential property and transfers ownership thereof to his employee for the latter's
residential use, at a price less than the employer's acquisition cost, the value of the benefit shall be the difference
between the fair market value, as declared in the Real Property Tax Declaration Form, or zonal value as determined by
the Commissioner pursuant to Sec. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values),
whichever is higher, and the cost to the employee. The monetary value of the fringe benefit shall be the entire value of the
benefit.
(f) Housing privilege of military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the
Philippine Army, Philippine Navy and Philippine Air Force shall not be treated as taxable fringe benefit in accordance with
the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible from
the military camp so that they can be readily on call to meet the exigencies of their military service.
(g) A housing unit which is situated inside or adjacent to the premises of a business or factory shall not be considered
as a taxable fringe benefit. A housing unit is considered adjacent to the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the business premises.
(h Temporary housing for an employee who stays in a housing unit for three (3) months or less shall not be considered
a taxable fringe benefit. cdasia

(2) Expense account —

(a) In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe
benefits, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do
not partake the nature of a personal expense attributable to the employee.
(b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits except only
when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the
nature of a personal expense attributable to the said employee.
(c) Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and
his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of
the employee whether or not the same are duly receipted for in the name of the employer.
(d) Representation and transportation allowances which are fixed in amounts and are regular received by the
employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same shall
be considered as taxable compensation income subject to the tax imposed under Sec. 24 of the Code.
(3) Motor vehicle of any kind —
(a) If the employer purchases the motor vehicle in the name of the employee, the value of the benefit is the acquisition
cost thereof. The monetary value of the fringe benefit shall be the entire value of the benefit, regardless of whether the
motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer.
(b) If the employer provides the employee with cash for the purchase of a motor vehicle, the ownership of which is
placed in the name of the employee, the value of the benefits shall be the amount of cash received by the employee. The
monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used
by the employee partly for his personal purpose and partly for the benefit of his employer, unless the same was subjected
to a withholding tax as compensation income under Revenue Regulations No. 2-98.
(c) If the employer purchases the car on installment basis, the ownership of which is placed in the name of the
employee, the value of the benefit shall be the acquisition cost exclusive of interest, divided by five (5) years. The
monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used
by the employee partly for his personal purpose and partly for the benefit of his employer.
(d) If the employer shoulders a portion of the amount of the purchase price of a motor vehicle the ownership of which is
placed in the name of the employee, the value of the benefit shall be the amount shouldered by the employer. The
monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used
by the employee partly for his personal purpose and partly for the benefit of his employer. Cdpr
(e) If the employer owns and maintains a fleet of motor vehicles for the use of the business and the employees, the
value of the benefit shall be the acquisition cost of all the motor vehicles not normally used for sales, freight, delivery
service and other non-personal used divided by five (5) years. The monetary value of the fringe benefit shall be fifty per
cent (50%) of the value of the benefit.
The monetary value of the motor vehicle fringe benefit is equivalent to the following:
MV = [(A)/5] X 50%
where:
MV = Monetary value
A = acquisition cost
(f) If the employer leases and maintains a fleet of motor vehicles for the use of the business and the employees, the
value of the benefit shall be the amount of rental payments for motor vehicles not normally used for sales, freight, delivery,
service and other non-personal use. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of
the benefit.
(g) The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as business use
and not be subject to the fringe benefits tax.
(h) The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe
benefit. The value of the benefit shall be measured based on the depreciation of a yacht at an estimated useful life of 20
years.
(4) Household expenses — Expenses of the employee which are borne by the employer for household personnel, such
as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for
homeowners association dues, garbage dues, etc.) shall be treated as taxable fringe benefits.
(5) Interest on loan at less than market rate
(a) If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%), such
interest foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per
cent (12%) shall be treated as a taxable fringe benefit.
(b) The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation.
(c) This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%)
starting January 1, 1998. prcd
(6) Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs or
other similar organizations. — These expenditures shall be treated as taxable fringe benefits of the employee in full.
(7) Expenses for foreign travel —
(a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the
purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance,
inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or
similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax.
The expenses should be supported by documents proving the actual occurrences of the meetings or conventions.
The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of
the cost of first class airplane ticket shall be subject to a fringe benefit tax.
(b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with
business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other
expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings
shall be evidenced by official communications from business associates abroad indicating the purpose of the meetings.
Business conventions shall be evidenced by official invitations/communications from the host organization or entity
abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the
employee.
(c) Travelling expenses which are paid by the employer for the travel of the family members of the employee shall be
treated as taxable fringe benefits of the employee.
(8) Holiday and vacation expenses — Holiday and vacation expenses of the employee borne by his employer shall be
treated as taxable fringe benefits.
(9) Educational assistance to the employee or his dependents —
(a) The cost of the educational assistance to the employee which are borne by the employer shall, in general, be
treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as
taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or
profession, and there is a written contract between them that the employee is under obligation to remain in the employ of
the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as
incurred for the convenience and furtherance of the employer's trade or business.
(b) The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as
taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the
scholarship program of the company. cda
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows
— The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee
shall be treated as taxable fringe benefit, except the following: (a) contributions of the employer for the benefit of the
employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282, as
amended ) or under the Government Service Insurance System (GSIS) (R.A. No. 8291 ), or similar contributions arising
from the provisions of any other existing law; and (b) the cost of premiums borne by the employer for the group insurance
of his employees.

Fringe Benefits Not Subject to Fringe Benefits Tax — In general, the fringe benefits tax shall not be imposed on the
following fringe benefits:
(1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit
plans;
(3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;
(4) De minimis benefits as defined in these Regulations;
(5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or
profession of the employer; or
(6) If the grant of the fringe benefit is for the convenience of the employer.
The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall not be interpreted to mean
exemption from any other income tax imposed under the Code except if the same is likewise expressly exempt from any
other income tax imposed under the Code or under any other existing law. Thus, if the fringe benefit is exempted from the
fringe benefits tax, the same may, however, still form part of the employee's gross compensation income which is subject
to income tax, hence, likewise subject to a withholding tax on compensation income payment.
The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to
facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are
offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of
his employees such as the following:
(1) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year ;
(2) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per
month ;
(3) Rice subsidy of P350 per month granted by an employer to his employees ;
(4) Uniforms given to employees by the employer ;
(5) Medical benefits given to the employees by the employer ;
(6) Laundry allowance of P150 per month ;
(7) Employee achievement awards, e.g. for length of 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 one-half (1/2) month of the basic salary of the employee receiving the award under an established
written plan which does not discriminate in favor of highly paid employees ; dctai
(8) Christmas and major anniversary celebrations for employees and their guests ;
(9) Company picnics and sports tournaments in the Philippines and are participated exclusively by
employees ; and
(10) Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on
account of illness, marriage, birth of a baby, etc. .

=========

In general, under this illustration, the XYZ Corporation shall not further claim deduction for allowing its Assistant Vice-
President the use of its residential property since the cost for the use thereof has already been recovered as deduction
from its gross income under "Depreciation Expense". However, since the fringe benefit tax in the amount of P10,732.32,
assumed and paid by XYZ corporation has not as yet been recovered by way of deduction from gross income, the same
shall be allowed as a deduction from its gross income. XYZ Corporation shall take up the foregoing in its books of
accounts, as follows:
Debit: Fringe Benefit Tax Expense P10,732.32
Credit: Cash/Fringe Benefit Tax Payable P10,732.32
To record fringe benefit tax expense for the residential property furnished to employees.
However, if the cost of the aforesaid condominium unit subject to depreciation allowance (example: its
acquisition cost is only P7,000,000.00) is lesser than its fair market value as determined by the Commissioner (i.e.
P10,000,000.00), the excess amount (i.e. P3,000,000.00) shall be amortized throughout the remaining estimated useful
life of the residential property used in computing the said employer's depreciation expense and allowed as a deduction
from the said employer's gross income as fringe benefit expense. Thus, if the remaining estimated useful life thereof
during the year 1998 is fifteen (15) years, its monthly amortization shall be computed as follows:
Monthly amortization (P3,000,000.00 divided by
15 years divided by 12 months) P16,666.67
In this case, XYZ Corporation shall take up the foregoing in its books of accounts as follows:
 Debit: Fringe benefit expense P16,666.67
Debit: Fringe benefit tax P10,732.32
Credit: Income constructively realized P16,666.67
Credit: Cash/Fringe benefit tax payable P10,732.32
To record fringe benefit and fringe benefit tax expenses and income constructively realized from the use of company-
owned residential property furnished to employees.

REVENUE REGULATIONS NO. 08-00 (Amending Sections 2.78.1(A)(1), (A)(3), (A)(6), (A)(7), and (B)(11)(b) of Revenue
Regulations No. 2-98, as Amended , and Section 2.33(C) of Revenue Regulations No. 3-98, with Respect to "De Minimis"
Benefits, Additional Compensation Allowance (ACA), Representation and Transportation Allowance (RATA) and Personal
Economic Relief Allowance (PERA))

Amended to further clarify certain benefits/privileges received by the employees which are not considered as items of
income and therefore not subject to income tax and consequently, to the withholding tax.
Likewise amended is the enumeration of the items of de-minimis benefits which are exempt from fringe benefits tax as
appearing under Sec. 2.33(C) of Revenue Regulations No. 3-98.

Amendments. — Sec. 2.78.1(A)(1), (A)(3), (A)(6), (A)(7), (B)(11)(b) and(B)(13) are hereby amended to read as follows:
"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. —
"(A) ...
"(1) Compensation paid in kind. — . . .
''Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure
that the amount of the tax required to be withheld is available for payment to the Commissioner.
"(3) Facilities and privileges of relatively small value. — Ordinarily, facilities and privileges (such as entertainment,
medical services, or so-called "courtesy discounts" on purchases), otherwise known as "de minimis benefits," furnished or
offered by an employer to his employees, are not considered as compensation subject to INCOME TAX AND
CONSEQUENTLY TO withholding tax, if such facilities are offered or furnished by the employer merely as means of
promoting the health, goodwill, contentment, or efficiency of his employees.
"THE FOLLOWING SHALL BE CONSIDERED AS "DE MINIMIS" BENEFITS NOT SUBJECT TO WITHHOLDING TAX
ON COMPENSATION INCOME OF BOTH MANAGERIAL AND RANK AND FILE EMPLOYEES:
(a) MONETIZED UNUSED VACATION LEAVE CREDITS OF EMPLOYEES NOT EXCEEDING TEN (10) DAYS
DURING THE YEAR ;
(b) MEDICAL CASH ALLOWANCE TO DEPENDENTS OF EMPLOYEES NOT EXCEEDING P750.00 PER
EMPLOYEE PER SEMESTER OR P125 PER MONTH;
(c) RICE SUBSIDY OF P1,000.00 OR ONE (1) SACK OF 50-KG. RICE PER MONTH AMOUNTING TO NOT
MORE THAN P1,000.00.
(d) UNIFORMS AND CLOTHING ALLOWANCE NOT EXCEEDING P3,000 PER ANNUM;
(e) ACTUAL YEARLY MEDICAL BENEFITS NOT EXCEEDING P10,000 PER ANNUM;
(f) LAUNDRY ALLOWANCE NOT EXCEEDING P300 PER MONTH;
(g) EMPLOYEES ACHIEVEMENT AWARDS, E.G., FOR LENGTH OF 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 P10,000.00 RECEIVED BY THE
EMPLOYEE UNDER AN ESTABLISHED WRITTEN PLAN WHICH DOES NOT DISCRIMINATE IN FAVOR OF HIGHLY
PAID EMPLOYEES;
(h) GIFTS GIVEN DURING CHRISTMAS AND MAJOR ANNIVERSARY CELEBRATIONS NOT EXCEEDING
P5,000 PER EMPLOYEE PER ANNUM;
(i) FLOWERS, FRUITS, BOOKS, OR SIMILAR ITEMS GIVEN TO EMPLOYEES UNDER SPECIAL
CIRCUMSTANCES, E.G., ON ACCOUNT OF ILLNESS, MARRIAGE, BIRTH OF A BABY, ETC.; AND
(j) DAILY MEAL ALLOWANCE FOR OVERTIME WORK NOT EXCEEDING TWENTY FIVE PERCENT (25%) OF
THE BASIC MINIMUM WAGE."

THE AMOUNT OF "DE MINIMIS' BENEFITS CONFORMING TO THE CEILING HEREIN PRESCRIBED SHALL NOT BE
CONSIDERED IN DETERMINING THE P30,000 CEILING OF "OTHER BENEFITS" PROVIDED UNDER SECTION 32(B)
(7)(e) OF THE CODE. HOWEVER, IF THE EMPLOYER PAYS MORE THAN THE CEILING PRESCRIBED BY THESE
REGULATIONS, THE EXCESS SHALL BE TAXABLE TO THE EMPLOYEE RECEIVING THE BENEFITS ONLY IF
SUCH EXCESS IS BEYOND THE P30,000.00 CEILING. PROVIDED, FURTHER, THAT ANY AMOUNT GIVEN BY THE
EMPLOYER AS BENEFITS TO ITS EMPLOYEES, WHETHER CLASSIFIED AS DE MINIMIS BENEFITS OR FRINGE
BENEFITS, SHALL CONSTITUTE AS DEDUCTIBLE EXPENSE UPON SUCH EMPLOYER.
"(4) ...
(5) ..
"(6) Fixed or variable transportation, representation and other allowances. —
"(a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a
public officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is
compensation subject to withholding. PROVIDED, HOWEVER, THAT REPRESENTATION AND TRANSPORTATION
ALLOWANCE (RATA) GRANTED TO PUBLIC OFFICERS AND EMPLOYEES UNDER THE GENERAL
APPROPRIATIONS ACT AND THE PERSONNEL ECONOMIC RELIEF ALLOWANCE (PERA) WHICH ESSENTIALLY
CONSTITUTE REIMBURSEMENT FOR EXPENSES INCURRED IN THE PERFORMANCE OF GOVERNMENT
PERSONNEL'S OFFICIAL DUTIES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO
WITHHOLDING TAX. PROVIDED FURTHER, THAT PURSUANT TO E.O. 219 WHICH TOOK EFFECT ON JANUARY
1, 2000, ADDITIONAL COMPENSATION ALLOWANCE (ACA) GIVEN TO GOVERNMENT PERSONNEL SHALL NOT
BE SUBJECT TO WITHHOLDING TAX PENDING ITS FORMAL INTEGRATION INTO THE BASIC PAY.
CONSEQUENTLY, AND EFFECTIVE FOR THE TAXABLE YEAR 2000, ACA SHALL BE CLASSIFIED AS PART OF THE
"OTHER BENEFITS" UNDER SECTION 32(B)(7)(e) OF THE CODE WHICH ARE EXCLUDED FROM GROSS
COMPENSATION INCOME PROVIDED THE TOTAL AMOUNT OF SUCH BENEFITS DOES NOT EXCEED P30,000.00.
"(b) Any amount paid specifically, either as advances or reimbursements for traveling, representation and other
bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the
performance of his duties are not compensation subject to withholding, if the following conditions are satisfied:
"(i) It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the
employee in the pursuit of the trade, business or profession; and
"(ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific
requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual
expenses over advances made shall constitute taxable income if such amount is not returned to the employer.
Reasonable amounts of reimbursements/advances for traveling and entertainment expenses which are pre-computed on
a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of
substantiation and to withholding. "
"xxx xxx xxx
"(B) Exemptions from withholding tax on compensation. The following income payments are exempted from the
requirement of withholding tax on compensation:
"xxx xxx xxx
"(11) Thirteenth (13th) month pay and other benefits. —
"(a) ...
"(b) Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind and other
benefits of similar nature actually received by officials and employees of both government and private offices, INCLUDING
THE ADDITIONAL COMPENSATION ALLOWANCE ("ACA") GRANTED AND PAID TO ALL OFFICIALS AND
EMPLOYEES OF THE NATIONAL GOVERNMENT AGENCIES (NGAs) INCLUDING STATE UNIVERSITIES AND
COLLEGES (SUCs), GOVERNMENT-OWNED AND/OR CONTROLLED CORPORATIONS (GOCCs), GOVERNMENT
FINANCIAL INSTITUTIONS (GFIs) AND LOCAL GOVERNMENT UNITS (LGUs)
"The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that total amount
shall not exceed thirty thousand pesos (P30,000.00) which 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."
"(12) ...
"(13) FACILITIES AND PRIVILEGES OF RELATIVELY SMALL VALUE OR 'DE MINIMIS' BENEFITS AS DEFINED
UNDER THESE REGULATIONS."

REVENUE REGULATIONS NO. 10-00

Section 2.78.1(A)(3), (6)(b)(ii) and (7) of Revenue Regulations No. 2-98, as last amended by Revenue Regulations No. 8-
2000, is hereby further amended to read as follows:
"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. —
"(A) ...
"(1) Compensation paid in kind. — . . .
"xxx xxx xxx
"(3) Facilities and privileges of relatively small value. —
"xxx xxx xxx
"The following shall be considered as "de minimis" benefits not subject to INCOME TAX AS WELL AS withholding tax on
compensation income of both managerial and rank and file employees:
(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 P750.00 per employee per semester or
P125 per month;
(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;
(d) Uniform and clothing allowance not exceeding P3,000 per annum;
(e) Actual yearly medical benefits not exceeding P10,000 per annum;
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g., for length of 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) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per
annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of
illness, marriage, birth of a baby, etc., and
(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage."
"xxx xxx xxx
"(6) Fixed or variable transportation, representation and other allowances —
"xxx xxx xxx
"(b) ...
"(i) ...
"(ii) The employee is required to account/liquidate for the expenses in accordance with the specific requirements of
substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of ADVANCES MADE over
ACTUAL EXPENSES shall constitute taxable income if such amount is not returned to the employer. Reasonable
amounts of reimbursements/advances for travelling and entertainment expenses which are pre-computed on a daily basis
and are paid to an employee while he is on an assignment or duty need not be subject to the requirements of
substantiation and to withholding."
"(iii) ...
"(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to
an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which IS paid
notwithstanding his absence from work constitutes compensation. However, the monetized value of unutilized vacation
leave credits of ten (10) days or less which ARE paid to PRIVATE employees during the year AND THE MONETIZED
VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES SHALL NOT BE SUBJECT TO
INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX."
"xxx xxx xxx
SECTION 2. Section 2.33 (C) of Revenue Regulations No. 3-98, as last amended by Revenue Regulations No. 8-
2000, is hereby further amended to read as follows:
"Sec. 2.33. Special Treatment of Fringe Benefits
(A) Imposition of Fringe Benefits Tax —
xxx xxx xxx
(B) Definition of Fringe Benefit —
xxx xxx xxx
(C) Fringe Benefits Not Subject to Fringe Benefits Tax — In general, the fringe benefits tax shall not be imposed on
the following fringe benefits:
(1) ...
(2) ...
(3) ...
(4) De minimis benefits as defined in these Regulations;
(5) ...
(6) ...
xxx xxx xxx
The term "DE MINIMIS" benefits which are exempt from the fringe benefits tax shall, in general, be limited to facilities or
privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or
furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees such as the following:
(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 P750.00 per employee per semester or
P125 per month;
(c) Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;
(d) Uniform and clothing allowance not exceeding P3,000 per annum;
(e) Actual yearly medical benefits not exceeding P10,000 per annum;
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g., for length of 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 in which does not discriminate in favor of highly paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per
annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of
illness, marriage, birth of a baby, etc., and
(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage."
"xxx xxx xxx"

REVENUE REGULATIONS NO. 13-2000 issued December 29, 2000 implements the provisions of Section 34(B) of the
Tax Code of 1997 relative to the requirements for the deductibility of interest expense from the gross income of a
corporation or an individual engaged in trade, business or in the practice of profession.

In general, subject to certain limitations, the following are the requisites for the deductibility of interest expense from gross
income: a) there must be an indebtedness; b) there should be an interest expense paid or incurred upon such
indebtedness; c) the indebtedness must be that of the taxpayer; d) the indebtedness must be connected with the
taxpayer's trade, business or exercise of profession; e) the interest expense must have been paid or incurred during the
taxable year; f) the interest must have been stipulated in writing; g) the interest must be legally due; h) the interest
payment arrangement must not be between related taxpayers; i) the interest must not be incurred to finance petroleum
operations; and j) in case of interest incurred to acquire property used in trade, business or exercise of profession, the
same was not treated as a capital expenditure
REVENUE REGULATIONS NO. 13-00 (Implementing Section 34(B) of the Tax Code of 1997 on the Requirements for
Deductibility of Interest Expense from the Gross Income of a Taxpayer.)

Scope. — Pursuant to the provisions of Section 244 of the Tax Code of 1997, these Regulations are hereby promulgated
to implement the provisions of Section 34(B) of the same Code on the requirements for deductibility of interest expense
from the gross income of a corporation or an individual engaged in trade, business or in the practice of profession.

Definition of Terms. — For purposes of these Regulations, the following words and phrases shall have the following
meanings, viz:
(a) Interest — shall refer to the payment for the use or forbearance or detention of money, regardless of the name it is
called or denominated. It includes the amount paid for the borrower's use of money during the term of the loan, as well as
for his detention of money after the due date for its repayment.
(b) Taxpayer — shall refer to a person, whether natural or juridical, engaged in trade, business or in the exercise of
profession, except one earning compensation income arising from personal services rendered under an employer-
employee relationship.

Requisites for Deductibility of Interest Expense. — In general, subject to certain limitations, the following are the requisites
for the deductibility of interest expense from gross income, viz:
(a) There must be an indebtedness;
(b) There should be an interest expense paid or incurred upon such indebtedness;
(c) The indebtedness must be that of the taxpayer,
(d) The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;
(e) The interest expense must have been paid or incurred during the taxable year;
(f) The interest must have been stipulated in writing;
(g) The interest must be legally due;
(h) The interest payment arrangement must not be between related taxpayers as mandated in Sec. 34(B)(2)(b), in
relation to Sec. 36(B), both of the Tax Code of 1997 ;
(i) The interest must not be incurred to finance petroleum operations; and
(j) In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not
treated as a capital expenditure.

Rules on the Deductibility of Interest Expense. —

(a) General Rule. — In general, the amount of interest expense paid or incurred within a taxable year on indebtedness
in connection with the taxpayer's trade, business or exercise of profession shall be allowed as a deduction from the
taxpayer's gross income.
(b) Limitation. — The amount of interest expense paid or incurred by a taxpayer in connection with his trade, business
or exercise of a profession from an existing indebtedness shall be reduced by an amount equal to the following
percentages of the interest income earned which had been subjected to final withholding tax depending on the year when
the interest income was earned, viz:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%) beginning January 1, 2000 and thereafter.
This limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer or
regardless of the date when the interest bearing loan and the date when the investment was made for as long as, during
the taxable year, there is an interest expense incurred on one side and an interest income earned on the other side, which
interest income had been subjected to final withholding tax. This rule shall be observed irrespective of the currency the
loan was contracted and/or in whatever currency the investments or deposits were made.

Illustration: Supposing on January 15, 1998, Company A, who has a deposit account with BCD Bank, obtained a loan
from XYZ Financing Corporation in connection with the operation of its business. Assume that Company A's net income
for the year 1998 before the deduction of the interest expense amounted to P1,000,000. For the year 1998, the interest
income it derived from the said deposit with BCD Bank amounted to P180,000 on which a final tax of P36,000 had been
withheld. Its interest expense on the loan obtained from XYZ Financing Corporation during the same year amounted to
P150,000.
Under this illustration, the deductible interest expense, the taxable income and the income tax due of Company A shall be
computed as follows:

1998
Net income before interest expense P1,000,000
Less: Interest expense P150,000

Less: 41% of interest income from

deposit (41% x P180,000) 73,800
————
Deductible interest expense 76,200
————
Taxable income P923,800
————
Income tax due for taxable year 1998 (34%) P314,092
========
(c) Interest on Unpaid Taxes. — Provisions of Sec. 4(b) hereof to the contrary notwithstanding, interest incurred or paid
by the taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject
to the limitation on deduction heretofore mentioned. Thus, such interest expense incurred or paid shall not be diminished
by the percentage of interest income earned which had been subjected to final withholding tax. CTSHDI
(d) Other cases where interest expense is not deductible from gross income. — No interest expense shall be allowed
as deduction from gross income in any of the following cases:
(1) If within the taxable year, an individual taxpayer reporting income on the cash basis incurs an indebtedness
on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed as a
deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic
amortization, the amount of interest which corresponds to the amount of the principal amortized or paid during the year
shall be allowed as deduction in such taxable year.

Illustration: Mr. Cruz, a self-employed individual, consistently employs the cash-basis accounting method in keeping his
books of accounts. Assuming that on January 1, 1998, he contracted a loan of P1,000,000 from XYZ Bank for use in his
business operations. Terms: Payable in two (2) years at 15% interest per annum, payable in advance. On January 1,
1998, he received from the bank the proceeds of his loan in the sum of P700,000, net of interest paid in advance in the
amount of P300,000.
In general, the interest expense shall be taken for the taxable year in which "paid or incurred" or "paid or
accrued" depending upon the method of accounting upon the basis of which the net income is computed, unless in order
to clearly reflect the income, the deduction should be taken as of a different period. Thus, a self-employed individual is
allowed to deduct from his gross income the entire amount of interest expense actually paid during the taxable year.
However, if the interest expense is paid in advance and the accounting method used by the self-employed individual is the
cash-basis accounting method, such interest expense paid in advance shall only be allowed as deduction in the year
when he has fully paid his liability. So that if the said debtor has fully paid his loan as of the end of the taxable year 1999,
his interest expense paid in advance on January 1, 1998 in the amount of P300,000 shall only be allowed as deduction
from his gross income in the taxable year 1999.
On the other hand, even if the interest expense is paid in advance but the indebtedness is payable in periodic
amortization, the amount of interest expense which corresponds to the amount of the principal amortized or paid during
the respective years 1998 and 1999 shall be allowed as deduction in such respective taxable years.
(2) If both the taxpayer and the person to whom the payment has been made or is to be made are persons
specified under Sec. 36(B) of the Tax Code of 1997, viz:
(i) Between members of a family. For purposes of this paragraph, the family of an individual shall
include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors and
lineal descendants; or
(ii) Between an individual and a corporation more than fifty percent (50%) in value of the outstanding
stock of which is owned, directly and indirectly, by or for such individual; or
(iii) Between two corporations more than fifty percent (50%) in value of the
outstanding stock of each of which is owned, directly or indirectly, by or for the same
individual; or
(iv) Between the grantor and a fiduciary of any trust; or
(v) Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor
with respect to each trust; or
(vi) Between a fiduciary of a trust and a beneficiary of such trust.
(3) If the indebtedness on which the interest expense is paid is incurred to finance petroleum exploration in the
Philippines. The non-deductible interest expense herein referred to pertains to interest or other consideration paid or
incurred by a Service Contractor engaged in the discovery and production of indigenous petroleum in the Philippines in
respect of the financing of its petroleum operations, pursuant to Section 23 of P.D. No. 8 , as amended by P.D. No. 87 ,
otherwise known as "The Oil Exploration and Development Act of 1972."
(e) Optional treatment of interest expense on capital expenditure. — At the option of the taxpayer, interest expense on
a capital expenditure incurred to acquire property used in trade, business or exercise of a profession may be allowed as a
deduction in full in the year when incurred, the provisions of Sec. 36 (A)(2) and (3) of the Tax Code of 1997 to the
contrary notwithstanding, or may be treated as a capital expenditure for which the taxpayer may claim only as a deduction
the periodic amortization of such expenditure.

REVENUE REGULATIONS NO. 10-02 (Implementing the Provisions of Section 34(A)(1)(a)(iv) of the Tax Code of 1997,
Authorizing the Imposition of a Ceiling on "Entertainment, Amusement and Recreational Expenses")

To provide a ceiling on the amount of entertainment, amusement and recreation expense claimed by individual taxpayers
engaged in business or in the practice of their profession and of domestic or resident foreign corporations, to arrive at the
taxable income subject to income tax under Sections 24(A); 25(A)(1) ; 26 ; 27(A), (B) and (C) ; 28(A)(1); 28(A)(6)(b) and
Section 61.

Coverage. — These regulations shall cover entertainment, amusement and recreation expenses of the following
taxpayers:
a. Individuals engaged in business, including taxable estates and trusts;
b. Individuals engaged in the practice of profession;
c. Domestic corporations;
 d. Resident foreign corporations;
e. General professional partnerships, including its members.

Definition of Terms. — For purposes of these Regulations, the term "Entertainment, Amusement and Recreation
Expenses" includes representation expenses and/or depreciation or rental expense relating to entertainment facilities, as
described below.
The term "Representation Expenses" shall refer to expenses incurred by a taxpayer in connection with the conduct of
his trade, business or exercise of profession, in entertaining, providing amusement and recreation to, or meeting with, a
guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting event, and similar
events or places. For purposes of these Regulations, representation expenses shall not refer to fixed representation
allowances that are subject to withholding tax on wages pursuant to appropriate revenue regulations.
In the case particularly of a country, golf, sports club, or any other similar club where the employee or officer of the
taxpayer is the registered member and the expenses incurred in relation thereto are paid for by the taxpayer, there shall
be a presumption that such expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can prove that
these are actually representation expenses. For purposes of proving that said expense is a representation expense and
not fringe benefits, the taxpayer should maintain receipts and adequate records that indicate the (a) amount of expense
(b) date and place of expense (c) purpose of expense (d) professional or business relationship of expense (e) name of
person and company entertained with contact details.
The term "Entertainment Facilities" shall refer to (1) a yacht, vacation home or condominium; and (2) any similar item of
real or personal property used by the taxpayer primarily for the entertainment, amusement, or recreation of guests or
employees. To be considered an entertainment facility, such yacht, vacation home or condominium, or item of real or
personal property must be owned or form part of the taxpayer's trade, business or profession, or rented by such taxpayer,
for which the taxpayer claims a depreciation or rental expense. A yacht shall be considered an entertainment facility under
these Regulations if its use is in fact not restricted to specified officers or employees or positions in such a manner as to
make the same a fringe benefit for purposes of imposing the fringe benefits tax.
The term "Guests" shall mean persons or entities with which the taxpayer has direct business relations, such as but not
limited to, clients/customers or prospective clients/customers. The term shall not include employees, officers, partners,
directors, stockholders, or trustees of the taxpayer.

Exclusions. — The following expenses are not considered entertainment, amusement and recreation expenses as defined
under Section 2 hereof.
a. Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee
relationship, pursuant to Revenue Regulations 2-98 , 3-98 and amendments thereto;
b. Expenses for charitable or fund raising events;
c. Expenses for bonafide business meeting of stockholders, partners or directors;
d. Expenses for attending or sponsoring an employee to a business league or professional organization meeting;
e. Expenses for events organized for promotion, marketing and advertising including concerts, conferences, seminars,
workshops, conventions, and other similar events;
f. Other expenses of a similar nature.
Notwithstanding the foregoing, such items of exclusions may, nonetheless, qualify as items of deduction under
Section 34 of the Tax Code of 1997, subject to conditions for deductibility stated therein.

Requisites of Deductibility of "Entertainment, Amusement and Recreation Expense". — The following are the requisites
for deductibility of entertainment, amusement and recreation expense as defined above subject to the ceiling prescribed
under Section 5 of these Regulations:
a. It must be paid or incurred during the taxable year;
b. It must be: (i) directly connected to the development, management and operation of the trade, business or
profession of the taxpayer; or (ii) directly related to or in furtherance of the conduct of his or its trade, business or exercise
of a profession;
c. It must not be contrary to law, morals, good customs, public policy or public order;
d. It must not have been paid, directly or indirectly, to an official or employee of the national government, or any local
government unit, or of any government-owned or controlled corporation (GOCC), or of a foreign government, or to a
private individual, or corporation, or general professional partnership (GPP), or a similar entity, if it constitutes a bribe,
kickback or other similar payment;
e. It must be duly substantiated by adequate proof. The official receipts, or invoices, or bills or statements of accounts
should be in the name of the taxpayer claiming the deduction; and
f. The appropriate amount of withholding tax, if applicable, should have been withheld therefrom and paid to the
Bureau of Internal Revenue.

Ceiling on Entertainment, Amusement, and Recreation Expense. — There shall be allowed a deduction from gross
income for entertainment, amusement and recreation expense, as defined in Section 2 of these Regulations, in an amount
equivalent to the actual entertainment, amusement and recreation expense paid or incurred within the taxable year by the
taxpayer, but in no case shall such deduction exceed 0.50 percent (%) of net sales (i.e., gross sales less sales
returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1.00 percent (%) of net
revenue (i.e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession
and use or lease of properties. However, if the taxpayer is deriving income from both sale of goods/properties and
services, the allowable entertainment, amusement and recreation expense shall in all cases be determined based on an
apportionment formula taking into consideration the percentage of the net sales/net revenue to the total net sales/net
revenue, but which in no case shall exceed the maximum percentage ceiling provided in these Regulations.
Apportionment Formula:
Net sales/net revenue
—–——————–———— x Actual Expense
Total Net sales and net revenue

Illustration: ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and
P100,000 respectively. The actual entertainment, amusement and recreation expense for the second semester of 2002
totaled to P3,000.

*Apportionment Formula
Sale of Goods (P200,000/P300,000) x P3,000
Sale of Services(P100,000/P300,000) x P3,000

**Maximum Percentage Ceiling

Sale of Goods (P200,000 x 0.50%)
Sale of Services (P100,000 x 1%)

In the above illustration, ERA Corporation can only claim a total of P2,000 as entertainment, amusement and recreation
expense.

Notwithstanding the ceiling imposed on such expense, the claimed expense shall be subject to verification and audit for
purposes of determining its deductibility as well as compliance with the substantiation requirements as provided in these
Regulations. However, if after verification a taxpayer is found to have shifted the amount of the entertainment, amusement
and recreation expense to any other expense in order to avoid being subjected to the ceiling herein prescribed, the
amount shifted shall be disallowed in its totality, without prejudice to such penalties as may be imposed by the Tax Code
of 1997.

BIR RULING NO. 006-00

Gentlemen :
This refers to your letter dated November 6, 1998 stating that with reference to Section 34(B) of the Tax Reform Act of
1997 disallowing as a deduction a portion of Bank's interest expense representing 41% of interest income subjected to
final tax, you are of the understanding that the said provision was introduced to mitigate the effects of the so-called tax
arbitrage scheme where taxpayers save approximately 14% on taxes by placing their excess funds in government
securities and pay only a 20% tax on the interest derived therefrom instead of the 34% corporate tax that will be imposed
had such excess been used for other income-generating activities not subject to final tax; that as a result of the Codal
provision, taxpayers will no longer enjoy the tax benefit/savings that otherwise may be derived from the tax arbitrage; that
the 12-year treasury bonds were given by the Government as payment for its liabilities to PNB as embodied in the
Memorandum of Agreement (MOA) dated August 14, 1995 executed between the National Government, as represented
by the Department of Finance, and PNB; and that PNB, therefore, has not engaged in a tax arbitrage scheme.
Based on the foregoing representations and documents submitted, you are now requesting for a ruling that
interest income derived by PNB from the treasury bonds be excluded in the determination of the interest expense not
allowable as deduction from gross income.
In reply, please be informed that pursuant to Section 34(B) of the Tax Code of 1997, although as a general rule,
the amount of interest expense paid or incurred by a taxpayer within a taxable year on indebtedness in connection with
his trade, business or exercise of profession shall be allowed as a deduction from his gross income, the said interest
expense, however, shall be reduced if the taxpayer has derived certain interest income which had been subjected to final
withholding tax. The said reduction shall be equal to the following percentages of the interest income earned depending
on the year when the interest income was earned, viz:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%) beginning January 1, 2000 and thereafter.
This limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer
or regardless of the date of the interest-bearing loan and the date when the investment was made, for as long as, during
the taxable year, there is an interest expense incurred on one side and an interest income earned on the other side, which
interest income had been subjected to final withholding tax.
 Accordingly, your request that your interest income derived from the said treasury bonds be excluded in the
determination of the interest expense not allowable as deduction from gross income is hereby denied pursuant to Section
34(B) of the Tax Code of 1997.

REVENUE REGULATIONS NO. 12-77 (Substantiation requirement for losses arising from casualty, robbery, theft or
embezzlement)

Pursuant to the provisions of Section 326 in relation to Section 4 of the National Internal Revenue Code of 1977, these
regulations are hereby promulgated to govern the manner of reporting losses arising from casualty, robbery, theft, or
embezzlement, for income tax purposes.

Nature of deductible losses. — Any loss arising from fires, storms or other casualty, and from robbery, theft or
embezzlement, is allowable as a deduction under Section 30(d) for the taxable year in which the loss is sustained. The
term "casualty" is the complete or partial destruction of property resulting from an identifiable event of a sudden,
unexpected, or unusual nature. It denotes accident, some sudden invasion by hostile agency, and excludes progressive
deterioration through steadily operating cause. Generally, theft is the criminal appropriation of another's property to the
use of the taker. Embezzlement is the fraudulent appropriation of another's property by a person to whom it has been
entrusted or into whose hands it has lawfully come.

Requirements of substantiation. — The taxpayer bears the burden of proving and substantiating his claim for deduction
for losses allowed under Section 30(d) and should comply with the following substantiation requirements:
(a) A declaration of loss which must be filed with the Commissioner of Internal Revenue or his deputies within a certain
period prescribed in these regulations after the occurrence of the casualty, robbery, theft or embezzlement.
(b) Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and amount of the
loss.

Declaration of loss. — Within forty-five days after the date of the occurrence of casualty or robbery, theft or
embezzlement, a taxpayer who sustained loss therefrom and who intends to claim the loss as a deduction for the taxable
year in which the loss was sustained shall file a sworn declaration of loss with the nearest Revenue District Officer. The
sworn declaration of loss shall contain, among other things, the following information:
(a) The nature of the event giving rise to the loss and the time of its occurrence;
(b) A description of the damaged property and its location;
(c) The items needed to compute the loss such as cost or other basis of the property; depreciation allowed or allowable
if any; value of property before and after the event; cost of repair;
(d) Amount of insurance or other compensation received or receivable.

Evidence to support these items should be furnished, if available. Examples are purchase contracts and deeds, receipted
bills for improvements, and pictures and competent appraisals of the property before and after the casualty.

Proof of loss. — (a) In general. — The declaration of loss, being one of the essential requirements of substantiation of a
claim for a loss deduction, is subject to verification and does not constitute sufficient proof of the loss that will justify its
deductibility for income tax purposes. Therefore, the mere filing of a declaration of loss does not automatically entitle the
taxpayer to deduct the alleged loss from gross income. The failure, however, to submit the said declaration of loss within
the period prescribed in these regulations will result in the disallowance of the casualty loss claimed in the taxpayer's
income tax return. The taxpayer should therefore file a declaration of loss and should be prepared to support and
substantiate the information reported in the said declaration with evidence which he should gather immediately or as soon
as possible after the occurrence of the casualty or event causing the loss.
(b) Casualty loss. — Photographs of the property as it existed before it was damaged will be helpful in showing the
condition and value of the property prior to the casualty. Photographs taken after the casualty which show the extent of
damage will be helpful in establishing the condition and value of the property after it was damaged. Photographs showing
the condition and value of the property after it was repaired, restored or replaced may also be helpful.
Furthermore, since the valuation of the property is of extreme importance in determining the amount of loss
sustained, the taxpayer should be prepared to come forward with documentary proofs, such as cancelled checks,
vouchers, receipts and other evidence of cost.
The foregoing evidence should be kept by the taxpayer as part of his tax records and be made available to a
revenue examiner, upon audit of his income tax return and the declaration of loss.
(c) Robbery, theft or embezzlement losses. — To support the deduction for losses arising from robbery, theft or
embezzlement, the taxpayer must prove by credible evidence all the elements of the loss, the amount of the loss, and the
proper year of the deduction. The taxpayer bears the burden of proof, and no deduction will be allowed unless he shows
the property was stolen, rather than misplaced or lost. A mere disappearance of property is not enough, nor is a mere
error or shortage in accounts.
Failure to report theft or robbery to the police may be a factor against the taxpayer. On the other hand, a mere
report of alleged theft or robbery to the police authorities is not a conclusive proof of the loss arising therefrom.

Determination of amount deductible. — (a) In general. — The amount of casualty loss deductible is limited to the
difference between the value of the property immediately preceding the casualty and its value immediately thereafter, but
shall not exceed an amount equal to the cost or other adjusted basis of the property, or depreciated cost in the case of
property used in business, reduced by any insurance or other compensation received.
 (b) Method of valuation. — (i) The fair market value of the property immediately before and immediately after the
casualty for purposes of determining the amount of casualty loss deductible under this section shall be ascertained by an
impartial but competent appraisal. This appraisal must recognize the effects of any general market decline affecting
undamaged, as well as damaged property, which may occur simultaneously with the casualty in order that any deduction
under this section shall be limited to actual loss resulting from damage to property.
(ii) The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer
shows that (1) the repairs are necessary to restore the property to its condition immediately before the casualty, (2) the
amount spent for such repairs is not excessive, (3) the repairs do not cover more than the damage suffered, and (4) the
value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately
before the casualty.
(c) Examples.
The application of this section may be illustrated by the following examples:

(i) Property not used in business:

Cost or adjusted basis P18,000.00
Value of property before casualty 15,000.00
Value of property after casualty 10,000.00
Insurance recovered 3,000.00

The casualty loss is computed as follows:

Value of property before casualty P15,000.00
Value of property after casualty 10,000.00
–––––––––
Difference P5,000.00
========

Loss to be taken into account for purposes of Section 30(d):

lesser amount of property
actually destroyed (P5,000)
or adjusted basis of property
actually destroyed (P18,000) P5,000.00

Less: Insurance received 3,000.00

––––––––
AMOUNT OF LOSS DEDUCTIBLE P2,000.00
=======

(ii) Property used in business:

(A) Total destruction. — In case of losses arising from total destruction of property used in business (ordinary
asset) the net book value (cost less accumulated depreciation) immediately preceding the casualty should be used as the
basis in claiming losses, also to be reduced by any amount of insurance or compensation received.

To illustrate:
Assume that —
Acquisition cost of property P10,000
Accumulated depreciation 5,000
Insurance recovered 2,500

Amount deductible is computed as follows:

Acquisition cost P10,000
Less: Accumulated depreciation 5,000
–––––––
Amount of loss suffered P5,000
Less: Amount recovered through insurance 2,500
–––––––
AMOUNT DEDUCTIBLE P2,500
======

(B) Partial destruction. — In case of losses arising from partial damages of property used in business, the
replacement cost to restore the property back to its normal operating condition should be used for purposes of computing
deductible losses, but in no case shall the deductible loss be more, than the net book value of the property as a whole
immediately before the casualty. The excess over the net book value immediately before the casualty should be
capitalized subject to depreciation over the remaining useful life of the property.

To illustrate:
Assume:
Acquisition cost P100,000
Accumulated depreciation 90,000
––––––––
Net book value P10,000
 =======
Estimated remaining useful life 5 years
Replacement cost of damaged portion P20,000
––––––––
In the above example, the loss deductible for tax purposes would be limited to P10,000 which is equal to the net book
value of the whole property:
Net book value P10,000
Replacement cost 20,000
–––––––
Excess of replacement cost to be
capitalized P10,000
======

Consequently, the new cost basis subject to depreciation charges over the remaining useful life of the property which is
five (5) years, would be P20,000 as shown hereunder:

Net book value before casualty P10,000

Add: Excess of replacement cost over
book value 10,000
–––––––
New cost basis P20,000
======
Yearly depreciation —
P20,000
–––––––
5 years = P4,000

(iii) Farm losses. — In the case of losses sustained, by farmers, the following rules shall apply:
(a) Loss of livestock. — The loss sustained in the death of livestock shall be allowed as a deduction to the
extent of the acquisition cost only if no inventories are taken into account in determining the income from the business of
farming.
If inventories are taken into account in determining the income from the trade or business of farming, no deduction shall
be allowed for losses sustained during the taxable year upon livestock or other products, whether purchased for resale or
produced on the farm, to the extent such losses are reflected in the inventory on hand at the close of the taxable year.
(b) Other farm losses. — Where ground is prepared and planted or stocked as in case of sugar, coconut and
other agricultural plantations, orchards, fishponds and other farms and its value is completely destroyed by the overflow or
seepage of water from natural causes, the cost of the preparation and planting or stocking up to the time of the disaster
shall be deductible loss in the year in which it is incurred.

Determination of amount deductible — robbery, theft and embezzlement losses. — The amount deductible in respect of
robbery, theft and embezzlement loss shall be determined consistently with the manner prescribed in the preceding
section for determining the amount of casualty loss allowable as a deduction. In applying the provisions of the preceding
section for this purpose, the fair market value of the property immediately after the theft shall be considered to be zero.
This section does not apply to losses reflected in the inventories of the taxpayer.

Example:
In 1969, B purchases for personal use a diamond brooch costing P40,000. On November 30, 1975 at which time it has a
fair market value of P35,000 the brooch was stolen. The brooch was fully insured against theft. A controversy develops
with the insurance company over its liability in respect of the loss. However, in 1976; B has a reasonable prospect of
recovery of the fair market value of the brooch from the insurance company. The controversy is settled in March, 1977, at
which time B receives P20,000 in insurance proceeds to cover the loss from theft. No deduction for loss is allowable for
1975 or 1976; but the amount of the deduction allowable for the taxable year 1977 is P15,000, computed as follows:

Value of property immediately before theft P35,000

Less: Value of property immediately after
theft -0-
–––––––
Loss to be taken into account (P35,000 but
not to exceed adjusted basis of P40,000
at the time of theft) P35,000
Less: Insurance received in 1977 20,000
–––––––
Deduction allowable for 1977 P15,000
======

Year of deduction. — If a casualty occurs which may result in a loss and, in the year of such casualty or event, there exist
a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with
respect to which reimbursement may be received is sustained until it can be ascertained with reasonable certainty
whether or not such reimbursement will be received. Whether a reasonable prospect of recovery exist with respect to a
claim for a reimbursement of a loss is a question of fact to be determined upon an examination of all facts and
circumstances. Whether or not such reimbursement will be received may be ascertained with reasonable certainty, for
example, by a settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim. When a
taxpayer claims that the taxable year in which a loss is sustained is fixed by his abandonment of the claim for
reimbursement, he must be able to produce objective evidence of his having abandoned the claim, such as the execution
of a release.

REVENUE REGULATIONS NO. 14-01 (Implementing Section 34(D)(3) of the National Internal Revenue Code of 1997
Relative to the Allowance of Net Operating Loss Carry-Over (NOLCO) as a Deduction from Gross Income.)

Scope. — Pursuant to the provisions of Section 244 of the National Internal Revenue Code of 1997 (hereinafter referred
to as the Code), these Regulations are hereby promulgated to govern the deduction from gross income of the Net
Operating Loss Carry-Over (NOLCO) pursuant to Section 34 (D) (3) of the Code

General Principles and Policies. —

2.1 For purposes of these Regulations, the allowance for deduction of NOLCO shall be limited only to net operating
losses accumulated beginning January 1, 1998.
2.2 In general, NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who sustained
and accumulated the net operating losses regardless of the change in its ownership. This rule shall also apply in the case
of a merger where the taxpayer is the surviving entity.
2.3 Unless otherwise provided in these Regulations, NOLCO of the taxpayer shall not be transferred or assigned to
another person, whether directly or indirectly, such as, but not limited to, the transfer or assignment thereof through a
merger, consolidation or any form of business combination of such taxpayer with another person.
2.4 NOLCO shall also be allowed if there has been no substantial change in the ownership of the business or
enterprise in that not less than 75% in nominal value of outstanding issued shares or not less than 75% of the paid up
capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons.
The 75% equity, ownership or interest rule prescribed in these Regulations shall only apply to a transfer or
assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation
or business combination with another person. In case the transfer or assignment of the taxpayer's net operating losses
arises from the said taxpayer's merger, consolidation or combination with another person, the transferee or assignee shall
not be entitled to claim the same as deduction from gross income unless, as a result of the said merger, consolidation or
combination, the shareholders of the transferor/assignor, or the transferor (in case of other business combinations) gains
control of at least 75% or more in nominal value of the outstanding issued shares or paid up capital of the
transferee/assignee (in case the transferee/assignee is a corporation) or 75% or more interest in the business of the
transferee/assignee (in case the transferee/assignee is other than a corporation).
2.5 Unless otherwise provided in these Regulations, an individual (including estate or trust) engaged in trade or
business or in the exercise of profession, or a domestic or resident foreign corporation may be allowed to claim deduction
of his/its corresponding NOLCO: Provided, however, that an individual who claims the 10% optional standard deduction
shall not simultaneously claim deduction of the NOLCO: Provided, further, that the three-year reglementary period shall
continue to run notwithstanding the fact that the aforesaid individual availed of the 10% optional standard deduction during
the said period.
2.6 The three-year reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact
that the corporation paid its income tax under the "Minimum Corporate Income Tax" computation.
2.7 NOLCO shall be availed of on a "first-in, first-out" basis.
2.8 The net operating loss incurred by a taxpayer in the year in which a substantial change in ownership in such
taxpayer occurs shall not be affected by such change in ownership, notwithstanding subsections 2.3 and 2.4.

Definition of Terms. — For purposes of these Regulations, the words and phrases herein provided shall mean as follows:
3.1 Gross Income — Except as otherwise provided in these Regulations, the term "Gross Income" means the pertinent
items of income referred to in Section 32(A) of the Tax Code of 1997 which are required to be declared in the taxpayer's
Income Tax Return for purposes of computing his taxable income as defined in Section 31 of the same Code. All exempt
income and other items of income subject to final tax shall not form part of the gross income.
3.2 Allowable Deductions — The term "Allowable Deductions" means the items of deduction enumerated under
Section 34(A) to (J) and Section 34(M) , including the special deductions allowed to insurance companies under Section
37 of the Code, but excluding NOLCO and any item of incentive deduction allowable under any special law that does not
actually involve cash outlay: Provided, that, in the case of an individual entitled to claim the Optional Standard Deduction
(OSD) under Section 34(L) , in lieu of the deductions enumerated under Section 34(A) to (K) , the term "allowable
deductions" shall mean the aforesaid OSD plus deduction of premium payments on health and/or hospitalization
insurance as provided under Section 34(M) of the Code, if applicable.
3.3 Net Operating Loss — The term Net Operating Loss" shall mean the excess of allowable deduction over gross
income of the business in a taxable year.
3.4 Nominal Value of Outstanding Issued Shares — The term "Nominal Value of Outstanding Issued Shares " shall
refer to the par value (in case of par value shares of stock) or stated value (in case of no par value shares of stock) of
shares of stock issued to the stockholders of the corporation.
3.5 Paid Up Capital of the Corporation — The term "Paid Up Capital of the Corporation" shall refer to the total amount
paid by stockholders for their subscriptions in the shares of stock of the corporation, including any amount paid over and
above the par value or stated value of the share of stock (e.g., premium on capital). For this purpose, the taxpayers shall
maintain complete and accurate records of the paid-up capital of the shareholders.
 3.6 Taxable Income — The term "Taxable Income" means the excess amount of the pertinent items of gross income
over the allowable deductions and/or personal and additional exemptions, if any, authorized under the Code or under any
special law.
3.7 Taxable Year — The term "Taxable Year" means the calendar year, or the fiscal year ending during such calendar
year, upon the basis of which the net income is computed under Title II of the Code. Taxable year includes, in the case of
a return made for a fractional part of a year, the period for which such return is made. The term "Fiscal Year" means an
accounting period of twelve (12) months ending on the last day of any month other than December.
3.8 Substantial Change in the Ownership of the Business or Enterprise — The term "Substantial Change in the
Ownership of the Business or Enterprise" shall refer to a change in the ownership of the business or enterprise as a result
of or arising from its merger or consolidation or combination with another person in the manner as provided in subsection
2.4 of these Regulations. Any change in ownership as a result of or arising thereunder shall not be treated as a
substantial change for as long as the stockholders of the party thereto, to whom the net operating loss is attributable,
gains or retains 75% or more interest after such merger or consolidation or combination.
3.9 Merger — For purposes of these Regulations, the term "Merger" shall refer to the absorption of a corporation by
another corporation, the latter retaining its own name and identity and acquiring the assets, liabilities, franchises and
powers of the former, and the absorbed corporation ceasing to exist as a separate juridical person.
3.10 Consolidation — For purposes of these Regulations, the term "Consolidation" shall refer to a situation when two
or more corporations are extinguished, and by the same process a new one is created, taking over the assets and
assuming the liabilities of the said extinguished corporations; or the unification of two or more corporations into a single
new corporation, having the combined capital, franchises and powers of all its constituents.
3.11 Combination — For purposes of these Regulations, the term "Combination" shall refer to a situation when an
owner of a business, organized as a sole proprietorship, admits a partner in his business for the purpose of forming a co-
partnership, or any such business combination which, in effect, is similar or synonymous thereto.
3.12 By or on Behalf of the Same Persons — The term "By or on Behalf of the Same Persons" shall refer to the
maintenance of ownership despite change as when:

1. No actual change in ownership is involved in case the transfer involves change from direct ownership to indirect
ownership, or vice versa.
Illustration:
Facts: P Corporation owns Q Corporation that has NOLCO. P Corporation transfers Q Corporation's shares to
R Corporation in exchange for 100% of R Corporation shares.
Held: Q Corporation's NOLCO is retained because Q Corporation's shares are held "by" R Corporation "on
behalf of" P Corporation, the original owner.

2. No actual change in ownership is involved as in the case of merger of the subsidiary into the parent company.
Illustration:
Facts: X Corporation owns 100% of Y Corporation. Y Corporation owns 100%, of Z Corporation. Z Corporation
has NOLCO. Z Corporation is merged into Y Corporation.
Held: Z Corporation's NOLCO should be retained and transferred to Y Corporation. Prior to the merger, X
Corporation already indirectly owned Z Corporation, i.e., Z Corporation's shares were held "by" Y Corporation "on behalf
of" X Corporation. After the merger, X now directly owns Z Corporation [absorbed corporation] which continues to exist in
Y Corporation.

Any reference in these Regulations to the "75% equity, ownership, or interest rule", "75% or more in nominal
value", "75% or more interest", and other similar terms shall be construed within the context of this definition.
Notwithstanding the above, in determining whether there is actual change in ownership in the above-mentioned
and similar cases, each and every step of the transaction shall be considered and the whole transaction or series of
transactions shall be treated as a single unit.

Taxpayers Entitled to Deduct NOLCO from Gross Income. — Any individual (including estates and trusts) engaged in
trade or business or in the exercise of his profession, and domestic and resident foreign corporations subject to the
normal income tax (e.g., manufacturers and traders) or preferential tax rates under the Code (e.g., private educational
institutions, hospitals, and regional operating headquarters) on their taxable income as defined in Section 3 of these
Regulations shall be entitled to deduct from his/its gross income for the current year his/its accumulated net operating
losses for the immediately preceding three (3) consecutive taxable years: Provided, however, that net operating losses
incurred or sustained prior to January 1, 1998 shall not qualify for purposes of the NOLCO. Provided, further, that any
provision of these Regulations notwithstanding, the following shall not be entitled to claim deduction of NOLCO:
4.1 Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency Deposit Unit (FCDU) of a
domestic or foreign banking corporation, duly authorized as such by the Bangko Sentral ng Pilipinas (BSP);
4.2 An enterprise registered with the Board of Investments (BOI) with respect to its BOI-registered activity enjoying the
Income Tax Holiday incentive. Its accumulated net operating losses incurred or sustained during the period of such
Income Tax Holiday shall not qualify for purposes of the NOLCO;
4.3 An enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to R.A. No. 7916 , as
amended, with respect to its PEZA-registered business activity. Its accumulated net operating losses incurred or
sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO;
4.4 An enterprise registered under R.A. No. 7227 , otherwise known as the Bases Conversion and Development Act of
1992, e.g., SBMA-registered enterprises, with respect to its registered business activity. Its accumulated net operating
losses incurred or sustained during the period of its said registered operation shall not qualify for purposes of the NOLCO;
4.5 Foreign corporations engaged in international shipping or air carriage business in the Philippines; and
 4.6 In general, any person, natural or juridical, enjoying exemption from income tax, pursuant to the provisions of the
Code or any special law, with respect to its operation during the period for which the aforesaid exemption is applicable. Its
accumulated net operating losses incurred or sustained during the said period shall not qualify for purposes of the
NOLCO.

Determination of Substantial Change in the Ownership of the Business.

5.1 Time of Determination of Substantial Change in the Ownership of the Business; Determined as of the End of the
Taxable Year — The substantial change in the ownership of the business or enterprise shall be determined as of the end
of the taxable year when NOLCO is to be claimed as deduction. Whether or not substantial change in ownership occurred
shall be determined on the basis of any change in the ownership of interest in the said business or enterprise arising from
or incident to its merger, or consolidation, or combination with another person (e.g., in the case of merger or consolidation
of two or more corporations, such change shall be determined based on the ownership of the outstanding shares of stock
issued or based on paid-up capital as of the end of the taxable year, and as a result of or arising from the said merger or
consolidation).
5.2 When Change Occurs — A change in the ownership of the business occurs when the person who sustained net
operating losses enters into a merger, or consolidation or combination with another person, thereby resulting to the
transfer or conveyance of the said net operating losses, to another person, in the course of the said merger or
consolidation or combination.
(a) When No Substantial Change Occurs — No substantial change in ownership of the business occurs if, as a
result of the said merger or consolidation or combination, the stockholders of the transferor, or the transferor, in case of
other business combinations, gains control of at least 75% or more in nominal value of the outstanding issued shares or
paid-up capital of the transferee-assignee (in case the transferee-assignee is a corporation) or 75% or more interest in the
business of the transferee-assignee (in case the transferee-assignee is other than a corporation).
(b) When Substantial Change Occurs — A substantial change in ownership of the business occurs if, as a
result of the transaction referred to in subsection 5.2 (a) hereof, the stockholders of the transferor or the transferor, in case
of other business combinations, gains control of the aforesaid transferee-assignee only to the extent of less than 75%.

Entitlement to Net Operating Loss Carry-Over.—

6.1 In General — In general, only net operating losses incurred by a qualified taxpayer for the period beginning
January 1, 1998 may be carried over to the next three (3) immediately succeeding taxable years following the year of
such loss for purposes of the NOLCO deduction. Provided, however, that for mines other than oil and gas wells, a net
operating loss without the benefit of incentives provided for under Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, as amended, incurred in any of the first ten (10) years of operation may be carried
over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. Provided,
further, that the entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss,
and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from
the taxable income of the next remaining (4) four years.
6.2 Transitory Apportionment of NOLCO, in Case of Corporation Using the Fiscal Year Accounting Period — In
general, only net operating losses incurred beginning January 1, 1998 may be claimed as a NOLCO deduction. In the
case of a corporation using a fiscal year accounting period as of the said dates whose result of operations for the fiscal
year 1997-1998 shows a net operating loss, the allowable NOLCO for the succeeding fiscal years shall be determined, as
follows:
NOLCO for the entire fiscal year (1997-1998) xxx
Multiplied by the ratio of: No. of months in 1998
———————————
12 mos. covering FY 97-98 xxx
NOLCO to be carried over to FYs 1998-1999, 1999-2000,
and/or 2000-2001 xxx

6.3 Where Taxpayer is Exempt, or Partly Exempt from Income Tax, or Enjoying Preferential Tax Treatment Under
Special Laws — Net operating loss or losses incurred by any person who is exempt from income tax, or enjoying
preferential tax treatment pursuant to the provisions of special laws, shall not be allowed a NOLCO deduction (e.g., any
BOI-registered enterprise enjoying income tax holiday pursuant to E.O. No. 226, as amended, otherwise known as the
Omnibus Investments Code of 1987; or any PEZA-registered enterprise enjoying preferential tax treatment or income tax
holiday pursuant to R.A. No. 7916, as amended; any person enjoying preferential tax treatment pursuant to R.A. No.
7227, otherwise known as the Bases Conversion and Development Act of 1992. See Section 4 of these Regulations for
further discussion).
In case any of the aforementioned persons is engaged in both registered and unregistered business activities
under any of the aforesaid laws (e.g., a corporation with a BOI-registered activity enjoying income tax holiday; and other
unregistered business activities not enjoying any BOI incentive) the net operating loss or losses sustained or incurred by
the said BOI-enterprise from its registered activities shall not be allowed as NOLCO deduction from its gross income
derived from the unregistered business activities.
6.4 Quarterly and Annual Availment of NOLCO — NOLCO shall be allowed as deduction in computing the taxpayer's
income taxes per quarter and annual final adjustment income tax returns: Provided, however, that if per the taxpayer's
final annual adjustment income tax return, the entire operations for the year resulted to a net operating loss, such net
operating loss may be claimed as NOLCO deduction in the immediately succeeding taxable year: Provided, further, that
NOLCO may be claimed as deduction only within a period of three (3) consecutive taxable years immediately following
the year the net operating loss was sustained or incurred. In order that compliance with this three-year statutory requisite
may be effectively monitored, the taxpayer shall, at all times, show its NOLCO deduction, in its income tax return, as a
separate item of deduction. In no case may NOLCO be claimed, as a part of the taxpayer's other itemized deductions, like
under deduction of "losses," in general.
6.5 NOLCO in Relation to the Minimum Corporate Income Tax (MCIT) — In general, domestic and resident foreign
corporations subject to the normal income tax rate are liable to the 2% MCIT, if applicable, computed based on gross
income, whenever the amount of the MCIT is greater than the normal income tax due (computed with the benefit of
NOLCO, if any), pursuant to Sections 27 or 28 of the Code. Thus, such corporation cannot enjoy the benefit of NOLCO
for as long as it is subject to MCIT in any taxable year. Provided, however, that the running of the three-year period for the
expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT in any taxable year during such
three-year period.

Presentation of NOLCO in Tax Return and Unused NOLCO in the Income Statement. — The NOLCO shall be separately
shown in the taxpayer's income tax return (also shown in the Reconciliation Section of the Tax Return) while the Unused
NOLCO shall be presented in the Notes to the Financial Statements showing, in detail, the taxable year in which the net
operating loss was sustained or incurred, and any amount thereof claimed as NOLCO deduction within three (3)
consecutive years immediately following the year of such loss. Failure to comply with this requirement will disqualify the
taxpayer from claiming the NOLCO.

BIR RULING NO. 206-90

Gentlemen :
This refers to your letter dated June 25, 1990 requesting in behalf of your client, Porcelana Mariwasa, Inc. (PMI), a ruling
confirming your opinion that the foreign exchange loss incurred by PMI is a deductible loss in 1990.
It is represented that PMI is a corporation established and organized under Philippine laws; that it has existing US dollar
loans from Noritake Company, Limited (Noritake) and Toyota Tsusho Corporation (Toyota) in the aggregate amounts of
US $7,636,679.17 and US $3,054,671.27, respectively, that in 1989, the parties agreed to convert the said dollar
denominated loans into pesos at the exchange rate prevailing on June 30, 1989; that in December 1989, both agreements
were approved by the Central Bank subject to the submission of a copy each of the signed agreements incorporating the
conversion; that thereafter, drafts of the amended agreements were submitted to the Central Bank for pre-approval; that
on January 29, 1990, the Central Bank advised your office on their findings and comments on the said drafts which were
considered and incorporated in the final amended agreements; that in June 1990, the parties submitted to the Central
Bank the signed agreements; that you are of the opinion that in the case of your client, the resultant loss on conversion of
US dollar denominated loans to peso is more than a shrinkage in value of money; that the approval by the Central Bank
and the signing by the parties of the agreements covering the said conversion established the loss, after which, the loss
became final and irrevocable, so that recoupment is reasonably impossible; and that having been fixed and determinable,
the loss is no longer susceptible to change, hence, it could fairly be stated that such has been sustained in a closed and
completed transaction.
In reply, please be informed that the annual increase in value of an asset is not taxable income because such increase
has not yet been realized. The increase in value i.e., the gain, could only be taxed when a disposition of the property
occurred which was of such a nature as to constitute a realization of such gain, that is, a severance of the gain from the
original capital invested in the property. The same conclusion obtains as to losses. The annual decline in the value of
property is not normally allowable as a deduction. Hence, to be allowable the loss must be realized. (Surre Warren,
Federal Income Taxation (1950, pp. 422-4)
When foreign currency acquired in connection with a transaction in the regular course of business is disposed ordinary
gain or loss results from the fluctuations. (Pr Hall Federal Taxes, Vol. 1, par. 6261) The loss is deductible only for the year
it is actually sustained. It is sustained during the year in which the loss occurs as evidenced by the completed transaction
and as fixed by identifiable occurring in that year. (par, 6570, 34 Am. Jur. 2d, 1976 closed transaction is a taxable event
which has been consummated (p. 231 Black Law's Dictionary, Fifth Editions) No taxation event has as yet been
consummated prior to the remittance of the scheduled amortization. Accordingly, your request for confirmation of your
aforesaid opinion is hereby denied considering that foreign exchange losses sustained as a result of conversion or
devaluation of the peso vis-a-vis the foreign currency or US dollar and vice versa but which remittance of scheduled
amortization consisting of principal and interests payment on a foreign loan has not actually been made are not deductible
from gross income for income tax purposes.

BIR RULING NO. 144-85

Gentlemen :
This refers to your letter dated July 1, 1985 requesting a ruling as to whether foreign exchange losses which have accrued
by reason of devaluation are deductible for income tax purposes. The losses arose from matured but unremitted principal
repayments on loans affected by the debt restructuring program in the Philippines.
In reply thereto, I have the honor to inform you that annual increase in value of an asset is not taxable income because
such increase has not yet been realized. The increase in value, i.e., the gain, could only be taxed when a disposition of
the property occurred which was of such a nature as to constitute a realization of such gain, that is, a severance of the
gain from the original capital invested in the property. The same conclusion obtains as to losses. The annual decrease in
the value of property is not normally allowable as a loss. Hence, to be allowable the loss must be realized. (Surrey and
Warren, Federal Income Taxation (1950), pp. 422-4)
When foreign currency acquired in connection with a transaction in the regular course of business is disposed of ordinary
gain or loss results from the fluctuations. (Prentice-Hall Federal Taxes, Vol. 1, par. 6261) The loss is deductible only for
the year it is actually sustained. It is sustained during the year in which the loss occurs as evidenced by closed and
completed transaction and as fixed by identifiable events occurring in that year. (par. 6570, 34 Am Jur 2d, 1976) A closed
transaction is a taxable event which has been consummated. (p. 231 Black's Law Dictionary, Fifth Edition) No taxable
event has as yet been consummated prior to the remittance of the scheduled amortization. Accordingly, foreign exchange
losses sustained as a result of devaluation of the peso vis-a-vis the foreign currency e.g., US dollar, but which remittance
of scheduled amortization consisting of principal and interests payments on a foreign loan has not actually been made are
not deductible from gross income for income tax purposes.

REVENUE REGULATIONS NO. 05-99 (Implementing Section 34(E) of the Tax Code of 1997 on the Requirements for
Deductibility of Bad Debts from Gross Income)

Definition of Terms. — For purposes of these regulations, the following words and phrases shall have the following
meaning, viz:
a. "Bad debts" — shall refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of
amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or
services rendered.
b. "Securities" — shall mean shares of stock in a corporation and rights to subscribe for or to receive such shares. The
term includes bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation,
including those issued by a government or political subdivision thereof, with interest coupons or in registered form.
c. "Actually ascertained to be worthless" — In general, a debt is not worthless simply because it is of doubtful value or
difficult to collect. Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise
of sound business judgment. The determination of worthlessness in a given case must depend upon the particular facts
and the circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of
ultimate collection or because of a continuance of attempts to collect notes which have long become overdue, and where
there is no showing that the surrounding circumstances differ from those relating to other notes which were charged off in
a prior year. While a mere hope probably will not justify postponement of the deduction, a reasonable possibility of
recovery will permit the account to be carried along notwithstanding that the probabilities are that the debt may not be
collected at all. The creditor may offer evidence to show some expectation that the debt would have been paid in the
intervening years, and that subsequently, the hope was shattered or appeared to have been unfounded. If, for example,
the creditor could show that during the years he attempted to collect the debt, the debtor had property the title of which
was in dispute but which would enable him to pay his debts when the title was cleared, the creditor would be entitled to
defer the deduction on the ground that there was no genuine ascertainment of worthlessness.
Thus, accounts receivable, the amount whereof is insignificant and the collection of which through court action may be
more costly to the taxpayer, may be written-off as bad debts even without conclusive evidence that the taxpayer's
receivable from a debtor has definitely become worthless.
Good faith does not require that the taxpayer be an "incorrigible optimist" but on the other hand, he may not be
unduly pessimistic. Creditors do not have to wait until some turn of the wheel of fortune may bring their debtors into
affluence. The taxpayer may strike a middle course between pessimism and optimism and determine debts to be
worthless in the exercise of sound business judgment based upon as complete information as is reasonably
ascertainable. The taxpayer need not have perfect discernment.
d. "Actually charged off from the taxpayers books of accounts" — This phrase means that the amount of money lent by
the taxpayer (in the course of his business, trade or profession) to his debtor had been recorded in his books of account
as a receivable has actually become worthless as of the end of the taxable year, that the said receivable has been
cancelled and written-off from the said taxpayer's books of account. A mere recording in the taxpayer's books of account
of estimated uncollectible accounts does not constitute a write-off of the said receivable, hence, shall not be a valid basis
for its deduction as a bad debt expense. In no case may any bad debt deduction be allowed unless the facts pertaining to
the money or property lent and its cancellation or write-off from the taxpayer's accounting records, after having been
determined that the same has actually become worthless, have been complied with by the taxpayer.

Requisites for Valid Deduction of Bad Debts From Gross Income. — General Rule. — In general, the requisites for
deductibility of bad debts are:
(1) There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;
(2) The same must be connected with the taxpayer's 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 Tax Code of 1997 ;
(4) The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and
(5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.

Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate with
reasonable degree of certainty the uncollectibility of the debt. The Commissioner of Internal Revenue will consider all
pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor
in determining whether a debt is worthless, or the assigning of the case for collection to an independent collection lawyer
who is not under the employ of the taxpayer and who shall report on the legal obstacle and the virtual impossibility of
collecting the same from the debtor and who shall issue a statement under oath showing the propriety of the deductions
thereon made for alleged bad debts. Thus, where the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a
judgment, a showing of those facts will be sufficient evidence of the worthlessness of the debt for the purpose of
deduction.
Exception: In the case of banks, however, in lieu of requisite No. 5 above, the Bangko Sentral ng Pilipinas (BSP), thru its
Monetary Board, shall ascertain the worthlessness and uncollectibility of the bad debts and it shall approve the writing off
of the said indebtedness from the banks' books of accounts at the end of the taxable year. The bank though should still
comply with requisites Nos. 1-4 as enumerated above before it can avail of the benefit of deduction.
Also, in no case may a receivable from an insurance or surety company be written-off from the taxpayer's books
and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for any such
similar reason by the Insurance Commissioner.

Tax Benefit Rule. — The recovery of bad debts previously allowed as deduction in the preceding year or years shall be
included as part of the taxpayer's gross income in the year of such recovery to the extent of the income tax benefit of said
deduction.

Example: If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax
due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a
receipt of realized taxable income. Conversely, if the said taxpayer did not benefit from the deduction of the said bad debt
written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of
his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery
thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income.

Securities Becoming Worthless. — If securities, as defined under Sec. 2(b) hereof, held as capital asset, are ascertained
to be worthless and charged off within the taxable year, the loss resulting therefrom shall be considered as a loss from the
sale or exchange of capital asset made on the last day of such taxable year. The taxpayer, however, has to prove through
clear and convincing evidence that the securities are in fact worthless.
This rule, however, is not true in the case of banks or trust companies incorporated under the laws of the
Philippines, a substantial part of whose business is the receipt of deposits.

REVENUE MEMORANDUM ORDER NO. 38-83 (Guidelines for Allowance of Deductions for Certain Income Payments
Under Section 30 (1) of the Tax Code.)

Background
1.1 Section 30 (1) of the National Internal Revenue Code, as amended by Batas Pambansa Blg. 135 , provides:
"(1) Additional requirement for deductibility of certain payments. - Any amount paid or payable which is otherwise
deductible from, or taken into account in computing gross income for which depreciation or amortization may be allowed
under this section and Section 29 , shall be allowed as a deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this section, Sections 54 and
93 of this Code. "
1.2 The abovequoted provisions of the Tax Code is frequently cited by Revenue Examiners in their reports of
investigation to justify disallowances of certain expense and other itemized deductions for which the taxpayer is obliged to
make a withholding under Sections 54 and 93 of the Code and implementing regulations. Since the amounts otherwise
deductible are substantial, some taxpayers have vigorously protested the literal application of the said provision in the
audit and investigation of their income tax liabilities.
1.3 In order to minimize audit controversies and to achieve uniformity in implementing the aforequoted provision of
Section 30(1), this Revenue Memorandum Order is hereby issued to prescribe guidelines that shall be observed by
revenue officers for allowing or disallowing items of deductions referred to in the said Section.

The Rationale of Section 30(1)

2.1 PD 1351 which became effective April 17, 1978 added Section 30(1) to the Code (originally as paragraph (m) of
Section 30) as an additional requirement for deductibility of itemized deductions representing income payments which are
subject to withholding. Batas Pambansa Blg. 125 which was approved September 7, 1979 expanded the scope of the
items of deductions subject to the requirement by including amounts taken into account in computing gross income for
which depreciation or amortization may be allowed. The obvious purpose of this provision is to compel compliance with
the requirements of Sections 54 and 93.
2.2 Considering that the existing ad valorem (surcharges and interests), as well as the specific penalties (fine and
imprisonment), are adequate to compel taxpayers/withholding agents to comply with the requirements of the withholding
tax law and regulations, outright disallowance of deductions representing income payment for mere failure to withhold and
remit will in effect, in case of corporations, be tantamount to the imposition of additional 25% or 35% "surcharge"
(equivalent to the normal corporate tax rates).
2.3 In order to minimize the onerous effect of literal application of Section 30(1), allowance or disallowance of a
deduction falling under the said paragraph of Section 30 shall be determined in accordance with the following guidelines.

Guidelines For Applying Section 30(1).

3.1 An amount claimed as deduction on which a tax is supposed to have been withheld under Sections 54 and 93 shall
be allowed if in the course of his audit and/or investigation, the examiner discovers that:
3.1/1 No withholding of creditable or final tax was made but the payee reported the income and the withholding
agent/taxpayer pays during the original audit and investigation the surcharges, interest and penalties incident to the failure
to withhold the tax.
3.1/2 No withholding of creditable or final tax was made and the recipient-payee failed to report the income on
due date thereof, but the withholding agent pays during the original audit and investigation the amount supposed to have
been withheld, inclusive of surcharges, interest and penalties incident to his failure to withhold.
 3.1/3 The withholding agent erroneously underwithheld the tax but pays during the original audit and
investigation the difference in the amount supposed to have been withheld, inclusive of surcharges, interest and penalties
incident to such error.
3.2 Items of deductions disallowed due to non-compliance with Section 30 (1), the deficiency income tax assessment
for which had been issued before the effectivity of this Revenue Memorandum Order may be allowed upon payment not
later than May 15, 1984 of the withholding tax required and supposed to have been withheld and/or surcharges, interest
and penalties. However, no refund or credit arising from such re-allowance of a previously disallowed deduction shall be
granted.

SECTION 119. Personal, living, and family expenses. — Personal, living, and family expenses are not deductible.
Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible. Premiums
paid for life insurance by the insured are not deductible. In the case of a professional man who rents a property for
residential purposes, but incidentally receives his clients, patients, or callers in connection with his professional work (his
place of business being elsewhere), no part of the rent is deductible as a business expense. If however, he uses part of
the house for his office, such portion of the rent as is properly attributable to such office is deductible. Where the father is
legally entitled to the services of his minor children, any allowances which he gives them, whether said to be in
consideration of services or otherwise, are not allowable deductions in his return of income. Alimony, and an allowance
paid under a separation agreement are not deductible from gross income.

SECTION 120. Capital expenditures. — No deduction from gross income may be made for any amounts paid out for
new buildings or for permanent improvements or betterments made to increase the value of the taxpayer's property, or for
any amount expended in restoring property or in making good the exhaustion thereof for which an allowance for
depreciation or depletion or other allowance is or has been made. Amounts expended for securing a copyright and plates,
which remain the property of the person making the payments, are investments of capital. The cost of defending or
perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. The amount
expended for architect's services is part of the cost of the building. Commissions paid in purchasing securities are a part
of the cost of such securities. Commissions paid in selling securities are an offset against the selling price. Expenses of
the administration of an estate, such as court costs, attorney's fees, and executor's commissions, are chargeable against
the "corpus" of the estate and are not allowable deductions. Amounts to be assessed and paid under an agreement
between bondholders or shareholders of a corporation, to be used in a reorganization of the corporation, are investments
of capital and not deductible for any purpose in return of income.
In the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees and
accountants' charges, are ordinarily capital expenditures; but where such expenditures are limited to purely incidental
expenses, a taxpayer may charge such items against income in the year in which they are incurred. A holding company
which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new
capital for the subsidiary and increasing the value of its stockholdings in the subsidiary may not deduct amounts paid in
carrying out this guaranty in computing its net income, but such payments may be added to the cost of its stock in the
subsidiary.

SECTION 121. Premiums on life insurance of employees. — Any amounts paid for premiums on any life insurance
policy covering the life of an officer or employee or of any person financially interested in the business of the taxpayer
when the taxpayer is directly or indirectly a beneficiary under such policy are not deductible.

SECTION 122. Losses from sales or exchanges of property. — No deduction is allowed in respect of losses from sales
or exchanges of property, directly or indirectly —
(a) Between members of a family. As used in Section 31, the family of an individual shall include only his brothers and
sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants;
(b) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty per centum in
value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
(c) Except in the case of distributions in liquidation, between two corporations more than 50 per cent in value of the
outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such
corporations with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the
law applicable to such taxable year, a personal holding company or a foreign personal holding company;
(d) Between a grantor and a fiduciary of any trust;
(e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each
trust; or
(f) Between a fiduciary of a trust and a beneficiary of such trust. (Section 32 of the Code)

SECTION 132. Definition of "capital assets." — The law provides that the term "capital assets" shall be held to mean
property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of
the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business, or property, used in the trade or business, of a character which is subject to the allowance for
depreciation provided in subsection (f) of Section 30 of the Code. The term "capital asset" includes all classes of property
not specifically excluded by Section 30(a).
The exclusion from the term "capital assets" of property used in the trade or business of a taxpayer of a
character which is subject to the allowance for depreciation provided in Section 30(f) of the Code is limited to property
used by the taxpayer in the trade or business at the time of the sale or exchange. It has no application to gains or losses
arising from the sale of real property used in the trade or business to the extent that such gain or loss is allocable to the
land, as distinguished from depreciable improvements upon the land. To such gain or loss allocable to the land, the
limitations of Section 34(b) and (c) apply (such limitation may be inapplicable to a dealer in real estate, but, if so, it is
because he holds the land primarily for sale to customers in the ordinary course of his trade or business, not because land
is subject to a depreciation allowance). Gains or losses from the sale or exchange of property used in the trade or
business of the taxpayer of a character which is subject to the allowance for depreciation provided in Section 30(f) of the
Code, will not be subject to the percentage provisions of Section 34(b) and losses from such transactions will not be
subject to the limitation of losses provided in Section 30(c). (Real property used in taxpayer's trade or business is no
longer capital asset per Am. R.A. 82.)

SECTION 136. Basis for determining gain or loss from sale of property. — For the purpose of ascertaining the gain or
loss from the sale or exchange of property, the basis is the cost of such property, or in the case of property which should
be included in the inventory, its latest inventory value. But in the case of property acquired before March 1, 1913, when its
fair market value as of that date is in excess of its cost, the gain to be included in gross income is the excess of the
amount realized therefor over such fair market value. (See illustration I, Section 137 of these regulations). Also in the case
of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost the deductible
loss is the excess of such fair market value over the amount realized therefor. (See Illustration II, Id.). No gain or loss is
recognized in the case of property sold or exchanged (a) at more than cost but less than its fair market value as of March
1, 1913 (See Illustration III, Id.), or (b) at less than cost but at more than its fair market value as of March 1, 1913. (See
Illustration IV, Id., Id., Id.) In any case proper adjustment must be made in computing gain or loss from the exchange or
sale of property for any depreciation or depletion sustained and allowable as deduction in computing net income; the
amount of depreciation previously charged off by the taxpayer shall be deemed to be true depreciation sustained unless
shown by clear and convincing evidence to be incorrect. What the fair market value of property was as of March 1, 1913,
is a question of fact to be established by evidence which will reasonably and adequately make it appear. The nature and
extent of the sales and the circumstances under which they were made should be considered. Prices received at forced
sales or for small lots of property may be and often are no real indication of the value of the amount of property in
question. For instance, sales from time to time of a small number of shares of stock is little indication of the value of a
large or controlling interest in the corporation. If the taxpayer can not determine the cost of securities purchased prior to
March 1, 1913, because of the loss, destruction, or failure to keep records, the value of the securities at the date of
approximate date of acquisition may be used in determining the cost basis for purposes of computing the gain or loss from
the sale of the securities. When the date or approximate date of acquisition is unknown, no general rule can be stated for
determining the cost value of such securities. Each case must be considered separately upon its own facts.

SECTION 137. Illustrations of the computation of gain or loss from the sale or exchange of property acquired prior to
March 1, 1913. — To avoid complexity no adjustment has been made in these examples for depreciation or depletion.
In the case of property acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost,
the taxable gain is the excess of the amount realized therefor over such fair market value.

ILLUSTRATION I
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P30,000 P40,000 P10,000

Excess of amount realized over fair

market value as of March 1, 1913.
Gain attributed to the period prior
to March 1, 1913 not taxable.

In the case of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost, the
deductible loss is the excess of such fair market value over the amount realized therefor.

ILLUSTRATION II
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P10,000 P6,000 P4,000

Excess of fair market value over

amount realized. Loss attributable to
the period prior to March 1, 1913, not
deducible.

No gain or loss is recognized in the case of property acquired before March 1, 1913, and sold or disposed of at more than
cost but at less than its fair market value as of that date.

ILLUSTRATION III
 Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P60,000 P40,000 No taxable gain or deductible loss.

Reason: A gain on whole transaction,

which gain is attributed to period prior
to March 1,1913.

No gain or loss is recognized in the case of property acquired before March 1, 1913, and sold or disposed of at less than
cost but at more than its fair market value as of that date.

ILLUSTRATION IV

Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P6,000 P10,000 No taxable gain or deductible loss.

Reason: A loss on whole transaction,

which loss is attributable to period
prior to March 1, 1913.

Where the cost is equal to or greater than the fair market value as of March 1, 1913, and the selling price exceeds the
cost, the gain to be included in gross income is the excess of the selling price over the cost.

ILLUSTRATION V
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P10,000 P40,000 P20,000

Reason: Gain on whole transaction,

all of which is attributable to period
subsequent to March 1, 1913.

Where the fair market value as of March 1, 1913, is equal to or greater than the cost and the selling price is less than the
cost, the deductible loss is the amount by which the cost exceeds the selling price.

ILLUSTRATION VI
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P30,000 P10,000 P10,000
Reason: Loss on whole transaction, all
of which is attributable to period
subsequent to March 1, 1913. Only
actual loss sustained deductible.
SECTION 138. Sale of property acquired by gift. — In computing the gain or loss from the sale or other disposition of
property acquired by gift, the basis shall be the selling price and the fair market value of the property at the time the gift
was made, or its fair market value as of March 1, 1913, if acquired prior thereto, determined in accordance with the next
two preceding sections. In the case of gifts made on or after July 1, 1939, the value taken as a basis for gift tax purposes
shall be considered as the fair market value in computing gain or loss from the sale or other disposition of the property.

SECTION 139. Sale of property acquired by devise, bequests, or inheritance. — In computing the gain or loss from the
sale or other disposition of property acquired by devise, bequest, or inheritance, the basis shall be the fair market price or
value of such property at the time of the death of the decedent. The term "property acquired by bequest, devise, or
inheritance" as used herein includes (a) such property interests as the taxpayer has received as the result of a transfer, or
creation of a trust, in contemplation of or intended to take effect in possession or enjoyment at or after death, and (b) such
property interest as the taxpayer has received as the result of the exercise by a person of a general power of appointment
(1) by will, or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after
death. In the case of property acquired by gift, bequest, devise, or inheritance, prior to March 1, 1913, the taxable gain or
deductible loss from the sale or other disposition thereof shall be computed in accordance with sections 136 and 137 of
these regulations. In the case of property acquired by bequest, devise or inheritance, its value as appraised for the
purpose of the inheritance tax shall be deemed to be its fair market value when acquired. DaIACS

SECTION 140. Exchange of property. — Gain or loss arising from the acquisition and subsequent disposition of property
is realized only when as the result of a transaction between the owner and another person the property is converted into
other property (a) that is essentially different from the property disposed of, and (b) that has a market value. The
requirement that the property received in exchange must be "essentially different from the property disposed of" implies
that there must be a change in substance and not merely a change in form. By way of illustration, if a taxpayer owning ten
shares of stock exchanges his stock certificate for a voting trust certificate, no income is realized. The term "market value"
means the fair value of the property in money as between one who wishes to purchase and one who wishes to sell. It is
not, however, what can be obtained for the property when the owner is under peculiar compulsion to sell or the purchaser
to buy; nor is it a purely speculative value which an owner could not reasonably expect to obtain for the property although
he might possibly be fortunate enough to do so. "Market value" is the price at which a seller willing to sell at a fair price
and a buyer willing to buy at a fair price, both having reasonable knowledge of the facts, will trade. Evidence as to the
assets and liabilities of a corporation and as to its earnings may furnish definite indications of the market value of its stock.

SECTION 141. Determination of gain or loss from the exchange of property. — The amount of income derived or loss
sustained from an exchange of property is the difference between the market value at the time of the exchange of the
property received in exchange and the original cost, or other basis, of the property exchange. If the property exchanged
was acquired prior to March 1, 1913, see Sections 136 and 137 of these regulations.

SECTION 142. Readjustment of interest in a registered copartnership. — When a partner retires from a duly registered
copartnership, or the partnership is dissolved, he realizes a gain or loss measured by the difference between the price
received for his interest and the cost to him of his interest in the partnership including in such cost the amount of his share
in any undistributed partnership net income earned since he became a partner on which the income tax has been paid.
However, if such interest in the partnership was acquired prior to March 1, 1913, both the cost as hereinbefore provided
and the amount of such interest as of date, plus the amount of the shares in any undistributed partnership net income
earned since March 1, 1913, on which the income tax has been paid, shall be ascertained and the taxable gain derived or
the deductible loss sustained shall be computed as provided in Sections 136 and 137 of these regulations. If the
partnership distributes its assets in kind and not in cash, the partner realizes gain or suffers loss according to the market
value of the property received in liquidation. Whenever a new partner is admitted, to a partnership, or any existing
partnership is reorganized, the facts as to such change or reorganization should be fully set forth in the next return of
income, in order that the Commissioner of Internal Revenue may determine whether any gain or loss has been realized by
any partner.

SECTION 143. Basis of stock or securities acquired in "wash sales". — In the sale or other disposition of stocks or
securities the acquisition of which (or the contract or option to acquire which) resulted in the non deductibility of the loss
from the sale or other disposition of substantially identical stock or securities the basis shall be the basis of the
substantially identical stock so sold or disposed of, increased or decreased, as the case may be, by the difference, if any,
between the price at which the stock or securities was acquired and the price at which such substantially identical stock or
securities were sold or otherwise disposed of. The application of this rule may be illustrated by the following examples:

EXAMPLE (1): A purchased a share of common stock of the X Corporation for P100 in 1936, which he sold January 15,
1940, for P80.00. On February 1, 1940, he purchased a share of common stock of the same corporation for P90.00. No
loss from the sale is recognized under Section 33 of the Code. The basis of the new share is P110; that is, the basis of
the old share (P100) increased by P10, excess of the price at which the new share was acquired (P90) over the price at
which the old share was sold (P80).

EXAMPLE (2): A purchased a share of common stock of the X corporation for P100 in 1936, which he sold January 15,
1940, for P80. On January 1, 1940, he purchased a share of common stock of the same corporation for P70. No loss from
the sale is recognized under Section 33 of the Code. The basis of the new share is P90; that is, the basis of the old share
(P100) decreased by P10, the excess of the price at which the old share was sold (P80) over the price at which the new
share was acquired (P70). (See Section 131 of these regulations).

RR 18-01 (See book)

RMR 1-02 (See book)

REVENUE AUDIT MEMORANDUM ORDER NO. 01-95 (Audit Guidelines and Procedures on the Proper Determination of
the Income Tax Liability of Philippine Branches and Liaison Offices of Multi-National Enterprises (MNEs) Engaged in
Soliciting Orders, Purchaser, Service Contracts, Trading, Construction and Other Activities in the Philippines.)

I. Rationale
Whereas Revenue Audit Memorandum Order (RAMO) No. 1-86 dated April 25, 1986 imposes income tax on the gross
income generated from constructive trading and commission income derived from brokering activities of Philippines
branches of MNEs engaged in trading activities.
Whereas RAMO No. 1-86 makes no recognition of such factors as the nature of item traded, the risk involved and
participation of the local branch;
Whereas the implementation of RAMO No. 1-86 makes use of much approximations and estimates;
Therefore, this Order is issued to revise RAMO No. 1-86 and to cover taxation of Philippine branches and liaison offices of
MNEs engaged in soliciting orders, purchases, services contracts, trading, construction and other activities.
With this Order, taxation of Philippine branches and liaison offices of MNEs engaged in soliciting orders, purchases,
service contracts, trading, constructions and other activities becomes more practical, easy and equitable. At the same
time, this Order addresses taxation of construction and other activities by the same Philippine branches and liaison offices
of MNEs as separate undertakings.

II. Objectives
This Order is issued to:
a) Amend and supersede RAMO No. 1-86 dated April 25, 1986 which provides for the procedures for tax audit of
Philippine branches or foreign corporation.
b) Address the issue on the proper determination of the income tax liability of Philippine branches and liaison offices of
MNEs pursuant to Section 43 of the National Internal Revenue Code (NIRC) wherein the Commissioner of Internal
Revenue (CIR) is authorized to distribute, apportion or allocate gross income or deduction among organizations in order
to clearly reflect the income of any such organization.
c) Provide guidelines on implementation of policies on the proper determination of the income tax liability of Philippine
branches and liaison offices of MNEs.
d) Prescribed the minimum procedure required in the audit of the income tax liability of Philippine branches and liaison
offices of MNEs.

III. Coverage
a) This Order shall pay only to Philippine branches and liaison of Japanese trading firms which are members of the
Sogo Shoshas and registered with the Japanese Chamber of Commerce and Industry (JCCI), and also all other foreign
trading companies similarly situated as determined by the Commissioner of Internal Revenue.
b) Furthermore, the content of this Order will apply only to income tax liabilities of Philippine branches and liaison
offices of MNEs and will not affect the withholding, including branch profit remittance, and business tax obligations of the
same Philippine branches and liaison offices of MNEs which shall be subject to the provisions of the National Internal
Revenue Code (NIRC).

IV. Guidelines
1. The Philippine income tax due from soliciting orders, purchaser, service contracts, trading, construction and other
activities of the Philippine branches and liaison offices of MNEs will be ascertained using the following formula.
For solicitation and trading activities
{(Worldwide Operating Sales to the Philippines attribution tax)}
{( Income X Worldwide Sales X rate X rate )}
For construction and other activities
plus {(Net Income from construction and other activities X tax rate )}
2. In implementing the above formula, the following terms shall be construed to mean as follows:
(a) Worldwide (W/W) shall include head office accounts and those of branches located in difference countries but shall
exclude subsidiary accounts.
(b) W/W Operating Income shall include the Gross Income minus Selling General & Administrative expenses.
Operating Income does not include non-operating and extraordinary items like interest expense, exchange profit/loss
capital gains/losses or other income/loss not related not related to operation.
(c) Sales to the Philippines shall be defined as the aggregated amount of exports and offshore transactions to the
Philippines by the Head Office, all branches and liaison offices and shall include the amount of indent transactions from
which commissions are generated. These shall also include imported materials and equipment of construction projects
undertaken in the Philippines, but shall exclude local service income from construction projects or onshore income from
local construction.
(d) W/W Sales shall consist of domestic, export, import and offshore transactions which include nor only principal
transactions but also indent transactions from which commissions are generated.
(e) Attribution rate shall mean a rate of 75% to be applied against formula.
(f) The tax rate to be applied shall be in accordance with Section 25(a) of the NIRC which is 35%.
(g) Net income on construction shall consist of local service income from construction projects income from
construction projects less the costs associated with local construction projects including the cost of locally purchased
materials equipment, if any.
(h) Net income on all other activities shall consist of income such as branches and liaison offices of MNEs are engaged
in, net of costs and expenses associated with such income.
3. In the application of the formula, no offsetting of losses from one line of business to the detriment of the other line of
business shall be allowed. This would mean that the tax due from each line of business shall be computed independently
from the other line of business.

V. Procedures
1. Request documents containing information on the nature of business transactions of the taxpayer as follows:
a) the structure of the Philippine branch or liaison office, the Home Office, other branches or more than 50% owned or
controlled subsidiaries located outside the Philippines dealing with the local branch;
b) the ownership, relationship, extent of control, directors and officers of the Philippine branch or liaison office and the
Home Office;
c) the business activity of the MNE and how it relates to the activity of the local branch or liaison office and other
branches or more than 50% owned or controlled subsidiaries dealing with the local company
2. Ascertain the mathematical accuracy and completeness of the income tax return, financial statements and supporting
schedules filed by the taxpayer.
3. Require the submission of financial statements exclusive for transactions dealing with construction and all other
activities and have a certified public accountant render an opinion as to its fairness and conformity with accepted
accounting standards.
For solicitation/trading activities
4. Obtain a copy of the Worldwide Financial Statement duly certified by an independent public accountant of the country
which issues the financial statements and authenticated by the Philippine Embassy or Consulate situated within the
country where the Home Office of the MNE is located.
5. Verify correctness of Worldwide Operating Income and the Worldwide Sales figures against the financial statements
obtained in 4 above.
6. Request for a summary of Sales to the Philippines duly certified by an independent public accountant and
authenticated by the Philippine Embassy or Consulate situated within the country where the Home Office of the MNE is
located. The Sales to the Philippine shall include the offshore portion of the local construction projects which includes the
supply of machinery and equipment.
7. Request for presentation of copies of pertinent sales invoices, bills of lading, freight and insurance coverages and
other documents to verify Sales to the Philippines, on a test sampling basis.
For construction activities
8. Review all Contracts and analyze the nature of the Contracts, the parties involved, the terms and conditions, the total
contract price, the payment and other pertinent information.
9. Determine method of accounting, whether completed contract or the percentage of completion, and check the
correctness of take up in the books of accounts.
10. Segregate the income from exempt transactions from that of taxable transactions, if applicable.
11. Determine the total contract price and composition of the project. The total contract price includes:
a. Supply of Machinery and Equipment
(Sometimes referred to as the "offshore portion") xx
b. Supply of Labor/Civil Works
(Sometimes referred to as the "onshore portion") xx
——
Total Contract Price xx
====
12. Verify that only the supply of local/civil works (onshore portion) is included in computation of profit/loss on local
construction project.
13. Determine if costs and expenses corresponded only to the service portion of the project referred to in 11 above.
14. Be aware of charging of income and expenses by mere book entries using the branch/home office account.
For all other activities
15. Verify that all income from other activities are included as part of the gross income
16. Ensure that only expenses related to the activities above are included in the determination of the net income.

REVENUE AUDIT MEMORANDUM ORDER NO. 01-86 (Procedure for Tax Audit of Philippine Branches of Foreign
Corporations)

Background
1.1 Some branches of foreign corporations engage in business in the Philippines by soliciting orders from local
importers. These branches are called "liaison offices or branches." Sales made from such solicitations are not reported by
these branches as their own sales purportedly because the branch office merely relays to its head office abroad purchase
orders from local importers and it is purportedly its head office that actually consummates the sales. At the end of the
taxable period, the branch office simply reports for income tax purposes its purported share of the income generated from
sales but the allocation of this purported share is left entirely at the discretion of its head office. The revenue service is
completely at the mercy of multi-national companies. cda
1.2 Some branches engage in business in the Philippines by soliciting orders from local importers and relays this
information to its head office abroad. The head office in turn solicits prospective exporters for a compensation. At the end
of the taxable period, the head office allocates a certain portion of the compensation to its branch in the Philippines. The
branch in turn reports its purported share for income tax purposes but does not pay the commercial broker's tax thereon
purportedly because the compensation was received from its head office and purportedly because the branch cannot be
legally considered a commercial broker in relation to its head office since the branch and its head office possess only a
single legal personality (PHILIPP BROTHERS OCEANIC, INC. vs. COMMISSIONER OF INTERNAL REVENUE, CTA
Case No. 3140, March 8, 1984).
Again, in this second situation, allocation of the compensation is left at the discretion of the head office — the revenue
service also left at the mercy of these multi-national companies.

Legal Consequences
2.1 The foregoing scope of activities of these branch offices is considered under R.A. 5455 as business acts. "'Doing
business' shall include soliciting orders, purchases, service contracts opening offices, whether called 'liaison' offices or
branches. . . . any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to
that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object of the business organization." (SEC. 1 (1), R.A.
5455).
2.2 These branch offices, like any other businesses, are required by law to account for their business operations in
accordance with generally accepted accounting practices (SEC. 38, NIRC). Thus, a branch office although not possessing
a separate and distinct juridical personality is, however, considered under generally accepted accounting practices as a
distinct character, a separate business unit and should be "supplied by the home office with cash and merchandise and
such other assets as may be needed" (Advance Accounting by Simons and Karrenbrock, 4th ed., p. 202). Generally
accepted accounting practices also dictate that income and expenses of the branch shall be segregated from those of the
home office in order to clearly reflect their respective operating results (ibid). cdasia
2.3 The doctrine on corporate fiction is not absolute — the veil of corporate fiction may be legally pierced should it be
used to subvert just application of laws.
". . . Where the corporate form or organization is adopted or a corporate entity is asserted in an endeavor to evade a
statute or to modify its intent, courts will disregard the corporation or its entity. This has been applied to violations of . . .
tax laws, . . ." (FLETCHER, 170-171, Commentaries and Jurisprudence on the Commercial Laws of the Philippines by
Agbayani, Vol. 3, 1970 ed., p. 21).
". . . Where a corporation is a dummy, is unreal or a sham and serves no business purposes and is intended only as a
blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fiction."
(LIDDEL & CO. v. COLLECTOR OF INTERNAL REVENUE, L-9687, June 30, 1961, citing Gregory v. Helvering, 293 US
465, L. ed. 596-599; Higgins v. Smith, 1940, 308 US 406 L. ed., cited in p. 20, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines by Agbayani, Vol. 3, 1970 ed.).
". . . To allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct
corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is
to sanction a circumvention of our tax laws." (ibid).
Corporate fiction may be inquired upon where there is "inadequacy of capital . . ., confusion of affairs . . . and direct
intervention in management causing inequitable results (Ballantine, 314; Rorhlick, 417-422).

Branch Operation and Consequences

3.1 The Philippine branch solicits purchase orders from local buyers, relays the information to its home office abroad,
and the home office purportedly directly makes the sale.
In this type of operation: (i) Sales purportedly consummated abroad by the home office shall be treated as sales
constructively consummated in the Philippines and made by the branch office, hence, income therefrom shall be
considered income from sources within the Philippines; (ii) the branch shall record and report the gross selling price of
commodities sold thru its home office; and (iii) report for income tax purposes its net income therefrom. (iv) Since under
this situation, the import taxes, duties and charges have already been paid by the local buyers, the same shall not
anymore be chargeable against the branch.
Under this paragraph, these transactions are treated sales constructively consummated by the branch office in
accordance with generally accepted accounting practices required under Section 38 of the Tax Code since the branch
solicitations are actually trading acts. Accordingly, the home office is obligated to supply its branch with merchandise in
pursuing its trading business in the Philippines. Hence, sales purportedly made directly by its home office shall be
considered no more than merely a constructive supplying of the merchandise to its branch which eventually constructively
sells the same to Philippine buyers.
3.2 The branch solicits purchase orders from local buyers, relays the information to its home office, the home office
solicits prospective sellers abroad and eventually receives compensation for services rendered.
In this second type of operation: (i) the branch shall be considered "a commercial broker" or indentor; (ii) its
share from compensation as allocated by its home office shall be subject to commercial broker gross receipts tax; (iii) the
branch shall provide itself with the corresponding fixed tax as a commercial broker; and (iv) pay income tax on its share of
the compensation.
Under this paragraph, the branch office shall be considered a commercial broker since its activities is well within
the ambit of the term "broker". Brokers are ". . . those who are engaged for others in the negotiation of contracts relative to
property with the custody of which they have no concern. They act as negotiators in bringing other persons together to
bargain; generally, they ought not to sell in their own names, have no implied authority to receive payment, are not
entrusted with the physical possession of the principal's goods when engaged to buy or sell, and have no special property
therein or lien thereon." (8 Am. Jur. 889-890, cited in Philipp Brothers Oceanic, Inc. v. The Commissioner of Internal
Revenue, CTA Case No. 3140, March 8, 1984).

Audit Procedure
4.1 For constructive trading by branch office
(a) Determine gross sales generated from branch's constructive trading (from solicitations made by the branch);
(b) Require the Philippine branch to submit duly authenticated (i) income statement; and (ii) statement of cost of sales
re worldwide operation of the entire corporation during the taxable year;
(c) Extract the gross income generated from such constructive sales by applying against the gross constructive sales
the gross profit rate shown in the cost of sale statement referred to in paragraph (b) (ii) above.

Illustration: Assume that the gross profit ratio, based on worldwide statement of cost of sales, is 20% and the gross
constructive sales amounts to P1,000,000. Gross income therefrom shall be computed as follows:

Gross sales P1,000,000

Gross income therefrom
(20% G/P rate) P200,000
(d) Check from the records of the Bureau of Customs all shipments coming from the branch's home office during the
taxable year in determining the branch's constructive sales in the Philippines.
 (e) Require the branch to reconcile computations of its constructive sales in the Philippines.
4.2 For broker activity by branch office
(a) Verify veracity of the amount of compensation allocated to the branch by its home office;
(b) Require submission of sworn declaration from home office on the correctness of the allocated share of the branch
office and cross check this declaration in connection with the branch records re extent of solicitations undertaken in the
Philippines during the tax year;
(c) Require the branch to pay the corresponding fixed tax as a commercial broker;
(d) Require the branch to pay the corresponding commercial broker's gross receipts tax, based on its total share from
compensation derived for services rendered in the Philippines; and
(e) Determine also the branch income tax obligation for the said income which is being considered income from
sources within the Philippines.

REVENUE AUDIT MEMORANDUM ORDER NO. 04-86 (Audit Guidelines in the Allocation of Home Office Overhead
Expenses Under Section 37(b) of the National Internal Revenue Code.)

In order to avoid delay and conflict in the determination of Philippine sources taxable net income of foreign taxpayers for
purposes of Philippine income tax, this Revenue Audit Memorandum is issued.

Background
1.1 In computing net income from sources within the Philippines, Section 37(b) provides that from the gross income from
sources within the Philippines ". . . there shall be deducted the expenses, losses and other deductions properly allocated
thereto and a ratable part of any expenses, interests and losses and other deductions effectively connected with the
business or trade conducted exclusively within the Philippines which cannot be definitely allocated to some items or class
of gross income . . . " casia
1.2 These deductions are difficult to verify because substantial amounts thereof are incurred in the head office or
elsewhere and the corresponding supporting documents and books of accounts are not accessible to local taxing
authorities.
1.3 Heretofore only an audit certificate is presented to substantiate the deductions incurred abroad which are allocated
and pro-rated to Philippine source gross income.
1.4 In implementing the above provision of the National Internal Revenue Code, there is a need for adequate and
satisfactory proof and explanations in order that the claimed deductions of the foreign taxpayer may be allowed for income
tax purposes.

Audit Procedure
2.1 Functional analysis — At the start of investigation there should be a detailed examination of the functions performed
both by the Home Office and the Local Branch. For this purpose, an organization and functional chart of the home office
and local branch should be secured.
2.11 The functions should be determined and then listed. Who does what? What is required to do it? Who needs whom
for what?
2.12 After having listed the functions performed by each entity, the functions themselves must be analyzed. Could
anyone else perform these functions? How difficult are they? What skill, equipment and processes are needed?
2.2 On the basis of the functional analysis, the claimed deduction properly allocable can now be determined by applying
the tests of (a) relevance (necessary) to the local branch and (b) reasonable (ordinary) charges keeping always in mind
the arm's length principle in transactions between related parties.
2.3 As to the deductions which cannot be definitely allocated, the following are required:
2.31 Breakdown or Schedule of Home or Foreign Office expenses being pro-rated, together with an explanation of the
nature of each expense. Take note of deductions which are directly allocable to income earned outside the Philippines.
2.32 Basis of pro-ration — (a) Determine if the basis and method of pro-ration are being applied consistently from year
to year. (b) Is the same amount of Home Office expenses being allocated world-wide?

In all instances, be on the lookout for:

a. Charges applicable to newly opened foreign branches but are being claimed as deductions by the Philippine branch;
b. Functions are being performed for some branches but not for others, and yet no adjustments are made on the
allocation;
c. or any other scheme of over-allocating costs to the Philippine branch.

REVENUE REGULATIONS NO. 2-98 issued May 17, 1998 prescribes the regulations to implement Republic Act (RA)
No. 8424 relative to the Withholding on Income subject to the Expanded Withholding Tax and Final Withholding Tax,
Withholding of Income Tax on Compensation, Withholding of Creditable Value- Added Tax and Other Percentage Taxes.
Said Regulations will take effect on compensation income paid beginning January 1,1998. No penalties for non-
compliance with the new features of the Tax Code will apply until May 15, 1998.