Income Taxation

IN GENERAL
Income Tax Income tax has been defined as a tax on all yearly profits arising from property, profession, trade or business, or as a tax on a persons income, emoluments, profits and the like. It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but upon the right of a person to receive income or profits. Purposes of income taxation 1. 2. 3. To provide large amounts of revenues. To offset regressive sales and consumption taxes.

Together ith estate tax, to mitigate the evils arising from the ine!ualities in the distribution of income and ealth, hich are considered deterrents to social progress, by imposing a progressive scheme of taxation.

Income Income, in its broad sense, means all ealth hich flo s into the taxpayer other than as a mere return on capital. "#ection 3$, %evenue %egulations 2& Income means accession to ealth, gain or flo of ealth.

Conwi v. CTA "213 #'%( )3&* Income may be defined as an amount of money coming to a person or corporation ithin a specified time, hether as payment for services, interest, or profit from investment. Commissioner v. BOAC "1+, #'%( 3,-&* Income means .cash received or its equivalent. It is the amount of money coming to a person ithin a specific time. It is distinct from capital for, hile the latter is a fund, income is a flo . (s used in our la s, income is flo of ealth. The source of an income is the property, activity or service that produces the income. /or the source of income to be considered as coming from the 0hilippines, it is sufficient that income is derived from activity ithin the 0hilippines. I1 23('s case, the sale of tickets in the 0hilippines is the activity that produces the income. Fisher v. Trinidad "+3 0hil ,43&* #tock dividend is not an income. It merely evidences the interest of the stockholder in the increased capital of the corporation. (n income

may be defined as the amount of money coming to a person or corporation ithin a specified time, hether as payment for services, interest, or profit for investment. ( mere advance in the value of property of a person or corporation in no sense constitutes the .income specified in the revenue la . #uch advance constitutes and can be treated merely as an increase of capital. (n income means cash received or its e!uivalent. It does not mean choses in action or unreali5ed increments in the value of the property. Income v. capital 'apital is a fund or property existing at one distinct point of time hile income denotes a flo of ealth during a definite period of time. The essential difference bet een capital and income is that capital is a fund or property existing at one distinct point of time6 income is a flo of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. 'apital is ealth, income is the service of ealth. "Madrigal v. Rafferty, 3) 0hil +1+& 'apital is the tree hile income is the fruit.

Sources of Income
What produces income? The term .source of income is not a place but the property, activity or service that produced the income. In the case of income derived from labor, it is the place here the labor is performed6 in the case of income derived from the use of capital, it is the place here the capital is employed6 and in the case of profits from the sale or exchange of capital assets, it is the place here the sale or transaction occurs. Commissioner v. BOAC* The source of an income is the property, activity or service that produces the income. /or the source of income to be considered as coming from the 0hilippines, it is sufficient that income is derived from activity ithin the 0hilippines. I1 23('s case, the sale of tickets in the 0hilippines is the activity that produces the income. The tickets exchanged hands here and payments for fares ere also made in 0hilippine currency. The site of the source of the income is the 0hilippines and the flo of ealth proceeded from and occurred in 0hilippine territory, en7oying the protection accorded by the 0hilippine government. Thus, said flo of ealth should share the burden of supporting the government. ources of income 1. 2. 3. #ources ithin the 0hilippines #ources ithout the 0hilippines #ources partly ithin and partly ithout the 0hilippines

Taxable Income
Taxa!le income

 The term .taxable income means the pertinent items of gross income specified in the 1I%', less the deductions and8or personal and additional exemptions, if any, authori5ed by such types of income by the 1I%' or other special la s. "e#uisites for income to !e taxa!le 1. 2. 3. There must be a gain or profit. The gain must be reali5ed or received. The gain must not be excluded by la or treaty from taxation.

$ain must !e reali%ed or received This implies that not all economic gains constitute taxable income. Thus, a mere increase in the value of property is not income but merely an unreali5ed increase in capital. When is income considered received? 1. 2. actual receipt constructive receipt

Income constructivel& received Income hich is credited to the account of or set apart for a taxpayer and hich may be dra n upon by him at any time is sub7ect to tax for the year during hich so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case, the income must be credited to the taxpayer ithout any substantial limitation or restriction as to the time or manner of payment or condition upon hich payment is to be made. "#ection -2, %evenue %egulations 2& 9impan Investment 'ompany deemed to have constructively received rental payments in 1,-4 hen they ere deposited in court due to its refusal to receive them. "'impan v. CI", 14 #'%( 4:3& (xamples of constructive receipt 1. 2. Interest coupons hich have matured and are payable, but have not been cashed. ;efaulted coupons are income for the year in hich paid.

3. 0artners distributive share in the profits of a general professional partnership is regarded as received by the partner, although not yet distributed. Are the followin) items income? /ound treasure < =># 0unitive damages < =># ;amages for breach of promise or alienation of affection < =># ?orthless debts subse!uently collected < =>#

Tax refund @ 13 Abut yes if the tax as previously allo ed as a deduction and subse!uently refunded or credited, as benefit accrued to the taxpayer6 see discussion on tax as a deductible itemB 1on<cash benefits < =># Income from illegal sources < =># 0sychological benefits of ork < 13 Cive a ay pri5es @ =># #cholarships8fello ships @ =># #tock dividends < 13

Tests to determine reali%ation of income 1. 2. 3. #everance test #ubstantial alteration of interest test /lo of ealth test

everance test (s capital or investment is not income sub7ect to tax, the gain or profit derived from the exchange or transaction of said capital by the taxpayer for his separate use, benefit and disposal is income sub7ect to tax. u!stantial alteration of interest test Income is earned hen there is a substantial alteration of the interest of a taxpayer, i.e. increase in proportionate share of a stockholder in a corporation. Income to be returnable for taxation must be fully and completely reali5ed. ?here there is no separation of gain or profit, or separation of increase in value from capital, there is no income sub7ect to tax. Thus, stock dividends are not income sub7ect to tax on the part of the shareholder for he had the same proportionate interest in the assets of the corporation as he had before, and the stockholder as no richer and the corporation no poorer after the declaration of the dividend. Do ever, if the pre<existing proportionate interest of the stockholder is substantially altered, the income is considered derived to the extent of the benefit received. Eoreover, if as a result of an exchange of stocks, the person received something of value hich are essentially and fundamentally different from hat he had before the exchange, income is reali5ed ithin the meaning of the revenue la . Flow of wealth test The essential difference bet een capital and income is that capital is a fund hereas income is the flo of ealth coming from such fund6 capital is the tree, income is the fruit. Income is the flo of ealth other than as a mere return of capital.

lasses of Income
*inds of taxa!le income or )ain 1. 2. capital gain ordinary gain

a. b. c. d. Capital )ains

business income compensation income passive income other income from hatever source derived i.e. found treasure

'apital gains are gains or income from the sale or exchange of capital assets. These include* 1. Income from dealings in shares of stock of domestic corporation hether or not through the stock exchange6 2. 3. Ordinar& )ains 3rdinary gains are gains or income from the sale or exchange of property hich are not capital assets. Business income 1. 2. Income from trading, merchandising, manufacturing or mining Income from practice of profession Income from dealings in real property located in the 0hilippines6 and Income from dealings in other capital assets other than AaB and AbB.

Note* The term .trade or business includes the performance of the functions of a public office. "#ection 22A#B, 1I%'& Passive income 1. 2. 3. 0assive income from 0hilippine sources sub7ect to final tax 0assive income from 0hilippine sources not sub7ect to final tax 0assive income from sources outside the 0hilippines

Passive income a)ain 1. 2. 3. +. Interest income %entals89eases %oyalties ;ividends

-. $. 4. ).

(nnuities and proceeds of life insurance8other types of insurance 0ri5es and innings, a ards, and re ards Cifts, be!uests, and devises 3ther types of passive income
#ES IN IN "ME

A!!R"A

RE

"GNITI"N

Approaches in income reco)nition 1. 2. schedular system global system

chedular s&stem The schedular system is one here the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. $lo!al s&stem The global system is one here the tax treatment vie s indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. chedular s&stem v. )lo!al s&stem 1. Fnder the schedular treatment, there are different tax rates, hile under the global treatment, there is a unitary or single tax rate. 2. Fnder the schedular treatment, there are different categories of taxable income, hile under the global treatment, there is no need for classification as all taxpayers are sub7ected to a single rate. 3. The schedular treatment is usually used in the income taxation of individuals hile the global treatment is usually applied to corporations. Approach used in the Philippines 0artly schedular and partly global. The schedular approach is used in the taxation of individuals hile the global approach is used in the taxation of corporations.

lasses of Income Tax$ayers

Basis of classification of taxpa&ers 1. 2. corporations v. individuals nationality

3.

residence

Classes of income taxpa&ers 1. Individuals a. b. c. d. %esident citi5ens 1on<resident citi5ens %esident aliens 1on<resident aliens iB engaged in trade or business in the 0hilippines, or

iiB not engaged in trade or business in the 0hilippines Note* ( non<resident alien individual ho shall come to the 0hilippines and stay therein for an aggregate period of more than one hundred eighty A1):B days during any calendar year shall be deemed a non<resident alien doing business in the 0hilippines. "#ection 2-A(BA1B, 1I%'& 2. 'orporations a. b. c. 3. ;omestic corporations %esident foreign corporations 1on<resident foreign corporations

#pecial a. b. c. d. 0roprietary educational institutions and hospitals that are non<profit Insurance companies Ceneral professional partnerships

>states and trusts

Note* >states and trusts are treated as individual taxpayers. Who is a non+resident citi%en? The term .non-resident citizen means* 1. ( citi5en of the 0hilippines ho established to the satisfaction of the 'ommissioner the fact of his physical presence abroad ith a definite intention to reside therein.

2. ( citi5en of the 0hilippines ho leaves the 0hilippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 3. ( citi5en of the 0hilippines ho orks and derives income from abroad and hose employment thereat re!uires him to be physically present abroad most of the time during the taxable year. +. ( citi5en ho has been previously considered as a non<resident citi5en and ho arrives in the 0hilippines at any time during the taxable year to reside permanently in the 0hilippines. Corporation ( corporation, as used in income taxation, includes partnerships, no matter ho created or organi5ed, 7oint stock companies, 7oint accounts Acuentas en participacionB, and associations or insurance companies. 1. Do ever, it does not include* a general professional partnership6 and

2. a 7oint venture or consortium formed for the purpose of undertaking construction pro7ects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract ith the government. "esident forei)n corporation The term applies to a foreign corporation engaged in trade or business ithin the 0hilippines. ,on+resident forei)n corporation The term applies to a foreign corporation not engaged in trade of business in the 0hilippines.

GENERAL !R"%ESSI"NAL !ARTNERS#I! &. "R'INAR( )*SINESS !ARTNERS#I!

$eneral professional partnerships Ceneral professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of hich is derived from engaging in any trade or business. "#ection 22A2B, 1I%'& 0ersons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. "#ection 2$, 1I%'& /or purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. "#ection 2$, 1I%'&

 >ach partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. "#ection 2$, 1I%'& Income of a general professional partnership are deemed constructively received by the partners. "#ection 43A;B, 1I%'& Ordinar& !usiness partnership (n ordinary business partnership is considered as a corporation and is thus sub7ect to tax as such. 0artners are considered stockholders and, therefore, profits distributed to them by the partnership are considered as dividends. O-a v. Commissioner. /0 C"A 1/ 2341567 8nre)istered partnership (lthough the '/I already approved the pro7ect of partition of the estate of Gulia 2uHales among her surviving spouse, 9oren5o 3na, and her five children, no attempt as made to divide the properties left by the decedent. Instead, the properties remained under the management of 9oren5o 3na ho used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real property and securities. The said incomes are recorded in the books of account kept by 9oren5o 3na here the corresponding shares of the heirs in the net income for the year are kno n. 2ased on these facts, the 'ommissioner ruled that the heirs formed an unregistered partnership hich is thus sub7ect to corporate income tax. The 'ourt of Tax (ppeals and the #upreme 'ourt affirmed. /or tax purposes, the co<o nership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and8or the incomes derived therefrom are used as a common fund ith intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a pro7ect partition either duly executed in an extra7udicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason is simple. /rom the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his o n ithout the intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection there ith. If after such partition, he allo s his share to be held in common ith his co<heirs under a single management to be used ith the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument ere executed, for the purpose, for tax purposes, at least, an unregistered partnership is formed. /or purposes of the tax on corporations, the 1I%', includes partnerships @ except general professional partnerships @ ithin the purvie of the term .corporation. Note* The income derived from inherited properties may be considered as individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective kno n shares are used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares be considered as part of the taxable income of an unregistered partnership.

$atchalian v. Collector. 395 Phil 3/9 0laintiffs contributed money to buy a s eepstakes ticket hich subse!uently on. The #upreme 'ourt held that they formed an unregistered partnership. 0laintiffs formed a partnership of a civil nature since each of them contributed money to a common fund for the sole purpose of dividing e!ually the pri5e hich they in. Pascual v. Commissioner 0etitioners bought t o parcels of land in 1,$-, ho ever, they did not sell the same nor make any improvements thereon. In 1,$$, they bought another three parcels of land. It as only in 1,$) that they sold the t o parcels of land after hich they did not make any additional or ne purchase. The remaining three parcels of land ere sold in 1,4:. 'ommissioner assessed them corporate income taxes on the ground that petitioners established an unregistered partnership engaged in real estate transactions. The #upreme 'ourt ruled that no unregistered partnership as formed. The sharing of returns does not itself establish a partnership hether or not the persons therein have a 7oint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of hich has the 7uridical personality different from the individual partners and the freedom of each party to transfer or assign the hole property. In this case, there as no sho ing of intent to form a partnership. The transactions ere isolated6 therefore, the character of habituality peculiar to business transactions engaged for the purpose of gain as not present. The essential elements of a partnership are* A1B an agreement to contribute money, property, or industry to a common fund6 and A2B an intent to divide the profits among the contracting parties. 8nre)istered partnership v. co+ownership for tax purposes If the activities of co<o ners are limited to the preservation of the property and the collection of the income therefrom, in hich case, each co<o ner is taxed individually on his distributive share in the income of the co<o nership. If the co<o ners invest the income in business for profit, they ould be constituting themselves into a partnership taxable as a corporation. :oint venture. how created ( 7oint venture is created hen t o corporations, hile registered and operating separately, ere placed under one sole management hich operated the business affairs of said companies as though they constituted a single entity thereby obtaining substantial economy and profits in the operation. (s stated, a 7oint venture is not taxed as a corporation, 7ust like a general professional partnership.

GENERAL !RIN

I!LES "% IN "ME

TA+ATI"N IN T#E !#ILI!!INES

$eneral principles of income taxation in the Philippines

1. ( citi5en of the 0hilippines residing therein is taxable on all income derived from sources ithin and ithout the 0hilippines. 2. ( non<resident citi5en is taxable only on income derived from sources ithin the 0hilippines. 3. (n individual citi5en of the 0hilippines ho is orking and deriving income from abroad as an overseas contract orker is taxable only on income from sources ithin the 0hilippines. 0rovided, that a seaman ho is a citi5en of the 0hilippines and ho receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract orker. +. (n alien individual, hether a resident or not of the 0hilippines, is taxable only on income derived from sources ithin the 0hilippines. -. ( domestic corporation is taxable on all income derived from sources ithin and ithout the 0hilippines. $. ( foreign corporation, hether engaged or not in trade or business in the 0hilippines, is taxable only on income derived from sources ithin the 0hilippines.

S"ME R*LES "N TA+ATI"N "% T#E &ARI"*S TA+!A(ERS

Who are taxed on their )lo!al income? 1. 2. %esident citi5ens ;omestic corporations

Who are taxed onl& on their income from sources within the Philippines? 1. 2. 3. +. 1on<resident citi5en 3verseas contract orkers (lien individual, hether a resident or not of the 0hilippines /oreign corporation, hether engaged or not in trade or business in the 0hilippines

Who are taxed !ased onl& on their net income? 1. 2. 3. +. %esident and non<resident citi5ens %esident alien and non<resident alien engaged in trade or business in the 0hilippines ;omestic corporation %esident foreign corporation

Who are taxed !ased on their )ross income? 1. 2. 1on<resident alien not engaged in trade or business in the 0hilippines 1on<resident foreign corporation

Treatment of some s$ecial items

For)iveness of inde!tedness The cancellation and forgiveness of indebtedness may, dependent upon the circumstances, amount to* 1. 2. 3. a payment of income6 a gift6 or a capital transaction.

If, for example, an individual performs services for a creditor ho, in consideration thereof cancels the debt, income to that amount is reali5ed by the debtor as compensation for his service. If, ho ever, a creditor merely desires to benefit a debtor and ithout any consideration thereof cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latters gross income. If a corporation to hich a stockholder is indebted forgives the debt, the transaction has the effect of payment of a dividend. "#ection -:, %evenue %egulations 2& "ecover& of amounts previousl& written off 'onsidered as income
"ME

G*I'E ,*ESTI"NS IN 'ETERMINING TA+A)LE IN

1. 2. Is there a gain or incomeI

Is the gain or income taxableI Is it excluded or exemptI

3. ?hat type of income is it* income includible in the gross income, passive income, capital gains, income derived from other sourceI +. To hat class does the taxpayer belong* individual or corporate, citi5en or not or domestic or foreign, resident or not, engaged in trade or business or notI

Tax on Individuals !reliminary $oints on taxation of individuals

;ow taxed?

 (n individual citi5en, both resident and non<resident, and an individual resident alien are taxed similarly. ( non<resident alien engaged in trade or business shall be sub7ect to the same income tax rates as a citi5en and a resident alien. Thus, only a non<resident alien ho is not engaged in trade or business is taxed differently from the other individual taxpayers. On what income taxed? ( resident citi5en is taxed on all income from sources ithin and outside the 0hilippines. The tax base is net income. ( non<resident citi5en is taxed only on income from sources ithin the 0hilippines. The tax base is net income. (n alien, hether resident or not, is taxed only on income from sources ithin the 0hilippines. Do ever, the tax base for a resident alien and non<resident alien engaged in trade or business is net income hile the tax base for a non<resident alien not engaged in trade or business is gross income. T&pes of income taxed 1. 2. 3. +. Items of income included in the gross income 0assive income 'apital gains from sale of shares of stock not traded in the stock exchange 'apital gains from the sale or exchange of real property

TA+ "N IN'I&I'*AL

ITI-EN

.RESI'ENT AN' N"N/RESI'ENT0 AN' IN'I&I'*AL RESI'ENT ALIEN

Items of income included in the )ross income ( schedular rate of five percent A-JB to 012-,::: K 32J of excess over 0-::,:::.:: by :1 Ganuary 2::: is imposed on items of income of an individual citi5en and individual resident alien hich are properly includible in the gross income. "ates of tax on certain passive income 1. Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements @ 2:J 2. %oyalties, except on books, as ell as other literary orks and musical compositions @ 2:J 3. +. %oyalties on books, literary orks and musical compositions @ 1:J 0ri5es over 01:,:::.:: @ 2:J

Note* 0ri5es less than 01:,:::.:: are included in the income tax of the individual sub7ect to the schedular rate of -J up to 012-,::: K 32J of excess over 0-::,:::.::B -. 3ther innings, except 0'#3 and lotto, derived from sources ithin the 0hilippines @ 2:J $. Interest income derived by a resident individual A1ote* non<resident citi5en not includedB from a depository bank under the expanded foreign currency deposit system @ 4.-J 4. Interest income from long<term deposit or investment evidenced by certificates prescribed by 2#0 a. >xempt if investment is held for more than five years

b. If investment is pre<terminated, interest income on such investment shall be sub7ect to the follo ing rates* 2:J < 12J < -J ). < if pre<terminated in less than 3 years if pre<terminated after 3 years to less than + years if pre<terminated after + years to less than - years

'ash and8or property dividends Ten percent A1:JB final tax by :1 Ganuary 2::: on the follo ing*

a. 'ash and or property dividend actually or constructively received from a domestic corporation or from a 7oint stock company, insurance or mutual fund companies and regional operating head!uarters of multinational companies b. #hare of an individual in the distributable net income after tax of a partnership except a general professional partnership of hich he is a partner c. #hare of an individual in the net income after tax of an association, 7oint account, or a 7oint venture or consortium taxable as a corporation of hich he is a member or a co<venturer Capital )ains from the sale of shares of stoc< not traded in the stoc< exchan)e 1. 2. 1ot over 01::,::: 3ver 01::,::: @ -J @ 1:J

Capital )ains from the sale of real propert& General rule* ( final tax of six percent A$JB is imposed on the gross selling price or current fair market value, hichever is higher, for every sale or exchange of real property. "$tional* If the sale is made to the government or any of its political subdivisions or agencies or to government<o ned or<controlled corporations, the taxpayer has the option to choose from the final tax of six percent A$JB of gross selling price or fair market value, hichever is higher, or the schedular tax rate of -J up to 012-,::: K 32J of excess over 0-::,:::. Exce$tion* The sale or disposition of the principal residence of natural persons is exempt from capital gains tax if certain conditions are met. 'onditions for exemption of gain from sale or exchange of principal residence* 1. 0roceeds are fully utili5ed in ac!uiring or constructing a ne principal residence ithin 1) months from the date of sale or disposition6 2. Distorical cost or ad7usted basis of the real property sold or disposed shall be carried over to the ne principal residence built or ac!uired6 3. 1otice to the 'ommissioner of Internal %evenue shall be given ithin thirty A3:B days from the date of sale or disposition6 and +. This exemption can only be availed of once every ten years.

If the proceeds of the sale ere not fully utili5ed, the portion of the gain presumed to have been reali5ed from the sale or disposition shall be sub7ect to capital gains tax. C#0 or /EL, hichever is higher x Fnutili5ed proceeds8C#0 M Taxable 0ortion

Tax on Non/Resident Alien Individual

"emuneration received !& a non+resident alien as president of a domestic compan& taxa!le in the Philippines 2=s. :uliane Baier+,ic<el. as represented !& =arina >. $u%man v. CI". CTA Case ,o. 003/ dated /?54?446 ( consultant, president of a domestic company or person involved ith .product development is sub7ect to 0hilippine income taxation. (ny remuneration received ould stem from her employment as company president and thus, negates her allegation that she is 7ust a sales agent ho receives commissions. ?hile petitioner tried to sho that she stayed in the country for less than 1): days, her remuneration in the form of commissions is still taxable in the 0hilippines since it is borne by a permanent establishment in the 0hilippines. ,on+resident alien en)a)ed in trade or !usiness ( non<resident alien engaged in trade or business shall be sub7ect to the same income tax rates as a citi5en and a resident alien. Exce$tion* 'ash and8or property dividends received by a non<resident alien individual shall be sub7ect to a final tax of 2:J6 for citi5ens and resident aliens, the rate is 1:J beginning in the year 2:::. ,on+resident alien not en)a)ed in trade or !usiness ( non<resident alien individual not engaged in trade or business shall pay a tax e!uivalent to 2-J on all items of income, except for gain on sale of shares of stock in any domestic corporation and real property hich shall be sub7ect to the same rate applied to other individual taxpayers. 1. Cain on sale of shares of stock*

1ot over 01::,::: @ -J 2. 3ver 1::,::: @ 1:J 'apital gains tax on sale or disposition of property @ $J of C#0 or /EL, hichever is higher.

"t1er Individual Tax$ayers

1. (lien individual employed by regional or area head!uarters and regional operating head!uarters of multinational companies 2. 3. (lien individual employed by offshore banking units (lien individual employed by petroleum service contractor and subcontractor

Note* The salaries, ages, annuities, compensation, remuneration and other emoluments, such as honoraria and allo ances received by these individuals and their /ilipino counterparts occupying the same position as these alien individuals shall be sub7ect to 1-J tax.

(ll other income derived by these individuals shall be sub7ect to the same rate as that of other individual taxpayers. "e)ional or area head#uarters ( regional or area head!uarter is a branch established in the 0hilippines by multinational companies and hich head!uarters do not earn or derive income from the 0hilippines and hich act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the (sia<0acific region and other foreign markets. "e)ional operatin) head#uarters ( regional operating head!uarter shall mean a branch established in the 0hilippines by multinational companies hich are engaged in certain specified services, i.e. general administration and planning, business planning and coordination, sourcing and procurement of ra materials and components, among others.

Taxation of OB8 emplo&ees 2BI" "ulin) ,o. 3/1+4@ dated Octo!er 3A. 344@6 The 1-J preferential tax rate shall apply only in cases here an alien concurrently holds a position similar to that of the /ilipino employee. Thus, this preferential tax treatment shall not apply here the counterpart expatriate is recalled to the head office or reassigned else here, hether temporarily or other ise, and only /ilipinos are the ones so employed by an 32F for the time being or here the post vacated by the expatriate is subse!uently assumed by a /ilipino to replace the expatriate, as a result of hich all top management posts are no being occupied by /ilipinos. Filipino staff of the ABB su!Cect to 30D preferential tax rate 2 ,O. 54+44 dated E?33?446 /ilipino employees occupying managerial or technical positions as those of aliens employed by the (sian ;evelopment 2ank A(;2B, hich is not only a regional or area head!uarters in the 0hilippines but the head!uarters itself, are sub7ect to the preferential tax rate of 1-J on their gross compensation income pursuant to #ection 2- A ' B of the 1I%' of 1,,4. $eneral professional partnerships Ceneral professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of hich is derived from engaging in any trade or business. 0ersons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. >ach partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. The net income of the general professional partnership shall be computed in the same manner as a corporation for purposes of computing the distributive shares of the partners.

Tax on or$orations Rates of Income Tax on 'omestic or$orations

In $eneral 1,,4 @ 3-J 1,,) @ 3+J 1,,, @ 33J 2::: %ate of tax, in general

on ards @ 32J Tax is imposed on taxable or net income.

Optional 30D tax on )ross income The 0resident, upon the recommendation of the #ecretary of /inance, may, effective :1 Ganuary 2:::, allo corporations the option to be taxed at fifteen percent A1-JB of gross income, provided certain conditions are satisfied. This is available to firms hose ratio of cost of sales to gross sales or receipts from all sources does not exceed --J. 3nce elected by the corporation, option shall be irrevocable for the three consecutive years. Conditions to !e satisfied to avail of the 30D optional corporate tax 1. 2. 3. +. ( tax effort ratio of t enty percent A2:JB of Cross 1ational 0roduct AC10B ( ratio of forty percent A+:JB of income tax collection to total tax revenues ( L(T tax effort of four percent A+JB of C10 ( :., percent A:.,JB ratio of the 'onsolidated 0ublic #ector /inancial 0osition to C10

ome definitions for this purpose $ross income derived from business shall be e!uivalent to gross sales less sales returns, discounts and allo ances and cost of goods sold. /or taxpayers engaged in sale of services, )ross income means gross receipts less sales returns, allo ances and discounts. Cost of )oods sold shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

Trading 'oncern 'ost of goods sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place here the goods are actually sold, including insurance hile the goods are in transit.

Eanufacturing 'oncern 'ost of goods manufactured and sold shall include all costs of production of finished goods, such as ra materials used, direct labor and manufacturing overhead, freight cost, insurance and other costs incurred to bring the ra materials to the factory or arehouse.

Tax rate for proprietar& educational institutions and hospitals 1:J on taxable income, except on certain passive incomes

The ordinary rate imposed on corporations shall apply to proprietary educational institutions and hospitals hen their gross income from unrelated trade, business or other activity exceeds -:J of their total gross income derived from all sources. 8nrelated trade. !usiness or other activit& This means any trade, business or other activity, the conduct of hich is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. Proprietar& educational institution ( proprietary educational institution is any private school maintained and administered by private individuals or groups ith an issued permit to operate from the ;>'#, or 'D>;, or T>#;(, as the case may be. $OCCs. a)encies or instrumentalities (ll corporations, agencies, or instrumentalities o ned and controlled by the government shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry, or activity. 1. 2. 3. +. -. Exce$tions* C3''s and instrumentalities not sub7ect to tax are the* Covernment #ervice Insurance #ystem AC#I#B #ocial #ecurity #ystem A###B 0hilippine Dealth Insurance 'orporation A0DI'B 0hilippine 'harity # eepstakes 3ffice A0'#3B 0hilippine (musement and Caming 'orporation A0(C'3%B

"ates on certain passive income su!Cect to final tax

1. Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements @ 2:J 2. %oyalties @ 2:J

3. Interest income derived from a depository bank under the expanded foreign currency deposit system @ 4 N J +. a. b. 'apital gains from sale of shares of stock not traded in the stock exchange 1ot over 01::,::: @ -J 3ver 01::,::: @ 1:J

-. Tax on income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions @ 1:J Note* This is different from the interest income. This pertains to the income derived by a depository bank itself. Note* (ny income of non<residents, hether individuals or corporations, from transactions ith depository banks under the expanded system is exempt from income tax. $. 4. $J Intercorporate dividends @ exempt 'apital gains reali5ed from the sale, exchange or disposition of lands and8or buildings @

ale of corporate real propert& that has ceased to !e used in trade or !usiness su!Cect to AD capital )ains tax 2 ,o. 53+44 dated 5?50?446 ( final tax of $J is imposed on the gains presumed to have been reali5ed in the sale, exchange or disposition of lands and8or buildings hich are not actively used in the business of a corporation and hich are treated as capital assets based on the gross selling price or fair market value, hichever is higher. Do ever, since in the instant case the taxpayer claimed a depreciation deduction hen the building and other improvements ere not used in trade or business, the taxpayer must file and amend its income tax return and pay the deficiency income tax, if any, plus surcharge and interest, based on its ad7usted taxable income resulting from the disallo ance of the depreciation deduction.

Minimum or$orate Income Tax

=inimum corporate income tax ( minimum corporate income tax of t o percent A2JB of the gross income as of the end of the taxable year is hereby imposed on a corporation sub7ect to income tax, beginning on the fourth taxable year immediately follo ing the year in hich such corporation commenced its business operations, hen the minimum income tax is greater than the regular corporate income tax for the taxable year.

Carr& forward of excess minimum tax (ny excess of the minimum corporate income tax over the normal income tax shall be carried for ard and credited against the normal income tax payable for the next three years immediately succeeding the taxable year in hich the minimum corporate income tax as paid. "elief from the minimum corporate income tax under certain conditions The #ecretary of /inance may suspend the imposition of the minimum corporate income tax on any corporation hich suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. =eanin) of )ross income and cost of )oods sold under minimum corporate income tax compared with meanin) of )ross income and cost of )oods sold under ection 512A6 #ection 24A(B #ection 24A>B @ E'IT Cross Income e!uivalent to gross sales less sales returns, discounts and allo ances and cost of goods sold. 'ost of goods sold shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. 'ost of goods sold for a trading shall include the invoice cost of the goods sold, plus import or merchandising concern duties, freight in transporting the goods to the place here the goods are actually sold, including insurance hile the goods are in transit. 'ost of goods manufactured shall include all costs of production of finished goods, such as and sold for a manufacturing ra materials used, direct labor and manufacturing overhead, concern freight cost, insurance and other costs incurred to bring the ra materials to the factory or arehouse. Cross Income for taxpayers gross receipts less sales gross receipts less sales engaged in sale of service returns, allo ances and returns, allo ances and discounts. discounts and cost of services 'ost of services (ll direct costs and expenses necessarily incurred to provide the services re!uired by the customers and clients including A(B salaries and employee benefits of personnel, consultants and specialists directly rendering the service and A2B cost of facilities directly utili5ed in providing the service such as depreciation or rental of e!uipment used and cost of supplies.

/or banks, it includes interest expense. Note* ;efinition of gross income for taxpayers engaged in the sale of service includes .cost of servicesO in E'IT but not in the case of the optional 1-J tax on gross income "#ection 24A(B, 1I%'&.

TA+ "N RESI'ENT %"REIGN

"esident forei)n corporation

"R!"RATI"NS

( resident foreign corporation is one organi5ed, authori5ed, or existing under the la s of any foreign country, engaged in trade or business ithin the 0hilippines. Income tax rate. in )eneral 1,,4 @ 3-J 1,,) @ 3+J 1,,, @ 33J 2::1 %ates of tax, in general

on ards @ 32J Tax is imposed on taxable or net income.

Optional7 30D of $ross Income The option to be taxed at fifteen percent A1-JB on gross income shall also be available to resident foreign corporations, sub7ect to the same conditions. (vailable to firms hose ratio of cost of sales to gross sales or receipts from all sources does not exceed --J. 3nce elected by the corporation, option shall be irrevocable for the three consecutive years. =inimum corporate income tax on resident forei)n corporations (ll conditions of the E'IT on domestic corporations also apply to resident foreign corporations. Tax rates on specific resident forei)n corporations 1. International 'arrier @ 2 N J of Cross 0hilippine 2illings

2. 3ffshore 2anking Fnits @ 1:J of income derived from foreign currency transactions ith local commercial banks, including branches of foreign banks that may be authori5ed by the 2#0 to transact business ith offshore banking units, including any interest income derived from foreign currency loans granted to residents

(ny income of non<residents, hether individuals or corporations, from transactions ith said offshore banking units shall be exempt from income tax. 3. Tax on 2ranch 0rofits %emittances @ 1-J of total profits applied or earmarked for remittance ithout deduction for the tax component thereof +. -. %egional or area head!uarters shall not be sub7ect to income tax %egional operating head!uarters shall be sub7ect to a tax of 1:J of their taxable income

$ross Philippine Billin)s for international air carrier .Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the 0hilippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. Tickets revalidated, exchanged and8or endorsed to another international airline form part of the Cross 0hilippine 2illings if the passenger boards a plane in a port or point in the 0hilippines. /or a flight hich originates from the 0hilippines, but transshipment of passenger takes place at any port outside the 0hilippines on another airline, only the ali!uot portion of the cost of the ticket corresponding to the leg flo n from the 0hilippines to the point of transshipment shall form part of the Cross 0hilippine 2illing. $ross Philippine Billin)s for international shippin) .Gross Philippine Billings means gross revenue hether for passenger, cargo or mail originating from the 0hilippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. Tax on !ranch profits remittances (ny profit remitted by a branch to its head office shall be sub7ect to a tax of fifteen percent A1-JB hich shall be based on the total profits applied or earmarked for remittance ithout any deduction for the tax component thereof Aexcept those activities hich are registered ith the 0hilippine >conomic Pone (uthorityB. The follo ing shall not be treated as branch profits unless the same are effectively connected ith the conduct of its trade or business in the 0hilippines* 1. 2. 3. +. -. interests dividends rents royalties remuneration for technical services

$. 4. ). ,. 1:.

salaries ages premiums annuities emoluments

11. other fixed or determinable annual, periodic or casual gains, profits, income and capital gains In =aru!eni v. Commissioner, Earubeni<Gapan invested directly in (C Q 0 Eanila. #ince Earubeni has a branch in the 0hilippines, (C Q 0 ithheld 1-J as branch profits remittance tax from the cash dividends. #' held that the dividends remitted ere not sub7ect to the 1-J branch profit remittance tax as they ere not income earned by a 0hilippine branch of Earubeni<Gapan. In the 1-J remittance tax, the la specifies its o n tax base to be on the .profit remitted abroad. There is absolutely nothing e!uivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the la calls for nothing further. "Ban< of America ,T v. Court of Appeals, 23+ #'%( 3:2& =aru!eni v. Commissioner. 311 C"A 099 Earubeni 'orporation is a resident foreign corporation.

( resident foreign corporation is one that is incorporated under the la s of a foreign country and is engaged in trade or business in the 0hilippines. Earubeni 'orporation is a foreign corporation duly organi5ed under the la s of Gapan and it is duly licensed to engage in business under 0hilippine la s. Earubeni 'orporation maintains a branch office to carry out its business in the country. The e!uity investments of E' in (CQ0 are investments of the mother corporation and not of its branch office. The investment as in the name of the Earubeni 'orporation and therefore, the stockholder in (CQ0 is the mother corporation, Earubeni 'orporation, and not its branch office in the 0hilippines. Earubeni 'orporation, therefore, and not its branch office, is liable for taxes on dividends earned on its investments. 2ranch profit remittance does not include dividends on investments received from other domestic corporations. 3nly profits remitted abroad by a branch office to its head office hich are effectively connected ith its trade or business in the 0hilippines are sub7ect to the 1-J profit remittance tax.

To be .effectively connected it is not necessary that the income be derived from the actual operation of taxpayer<corporations trade or business6 it is sufficient that the income arises from the business activity in hich the corporation is engaged. The dividends received by Earubeni from (CQ0 are not income arising from the business activity in hich Earubeni is involved. (ccordingly, said dividends if remitted abroad, are not considered branch profits for purposes of the 1-J profit remittance tax. Note* Test of hether remittance of profit by a branch to its head office comes under the purvie of the profit remittance tax, the branch itself should have made the remittance. In this case, it as not Earubenis branch in the 0hilippines, but the investee corporation, (CQ0, hich directly remitted the dividends to Earubeni of Gapan. (lso, only the branch office is the authori5ed ithholding agent for the profit remittance tax. (CQ0, being an investee of Earubeni, erred in ithholding the profit remittance tax from the dividends it remitted to Earubeni. Interest received !& a forei)n corporation from Philippine sources not effectivel& connected with the conduct of its !usiness not considered !ranch profits. 2;on)<on)+ han)hai ;otels. 'td. v. CI". CTA Case ,o. 05/E dated /?54?446 Interest received by a foreign corporation during each taxable year from all sources ithin the 0hilippines is not considered branch profits except hen the same is effectively connected ith the conduct of its business. In the instant case, the interest income from bank placements is not effectively connected ith the business of hotel management, thus, it is excluded form profits sub7ect to the 1-J branch profit remittance tax. "e)ional or area head#uarters of multinational companies %egional or area head!uarters shall not be sub7ect to income tax.

"e)ional operatin) head#uarters of multinational companies %egional operating head!uarters shall pay a tax of ten percent A1:JB on their taxable income. Tax on certain incomes received !& a resident forei)n corporation 1. Interest from deposits and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royalties Interest income from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources ithin the 0hilippines shall be sub7ect to a final income tax at the rate of t enty percent A2:JB of such interest. Do ever, interest income derived by a resident foreign corporation from a depositary bank under the expanded foreign currency deposit system shall be sub7ect to a final income tax at the rate of seven and one<half percent A4182JB of such interest income. 2. Income derived under the expanded foreign currency deposit system

This refers to income derived by a depositary bank under the expanded foreign currency deposit system from foreign currency transactions ith local commercial banks including branches of foreign banks that may be authori5ed by the 2angko #entral ng 0ilipinas to transact business ith foreign currency deposit system units and other depositary banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depositary banks under said expanded foreign currency deposit system to residents. ( final income tax at the rate of ten percent A1:JB is imposed on such income. 3. a. b. +. 'apital gains from sale of shares of stock not traded in the stock exchange 1ot over 01::,::: @ -J 3ver 01::,::: @ 1:J Intercorporate dividends

;ividends received by a resident foreign corporation from a domestic corporation liable to tax under the 1I%' shall not be sub7ect to income tax.

Tax on Non/resident %oreign

or$oration

Taxation of a non+resident forei)n corporation. in )eneral 1,,4 < %ates of tax, in general 3-J

1,,) < 1,,, < 2::: <

3+J 33J 32J Do ever, the tax is imposed on gross income, not on taxable or net income.

#uch gross income may include interests, dividends, rents, royalties, salaries, premiums Aexcept reinsurance premiumsB, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains from the sale of shares of stock not traded in the stock exchange. Taxation of certain non+resident forei)n corporations 1. 1on<resident cinematographic film o ner, lessor or distributor @ 2-J of gross income

2. 1on<resident o ner or lessor of vessels chartered by 0hilippine nationals @ +NJ of gross rentals, lease or charter fees 3. 1on<resident o ner or lessor of aircraft, machineries and other e!uipment @ 4NJ of gross rentals or fees ,on+resident cinemato)raphic film owner. lessor or distri!utor ( cinematographic film o ner, lessor, or distributor shall pay a tax of t enty five percent A2-JB of its gross income from all sources ithin the 0hilippines. ,on+resident owner or lessor of vessels chartered !& Philippine nationals ( non<resident o ner or lessor of vessels shall be sub7ect to a tax of four and one<half percent A+NJ B of gross rentals, lease or charter fees from leases or charters to /ilipino citi5ens or corporations, as approved by the Earitime Industry (uthority.

,on+resident owner or lessor of aircraft. machineries and other e#uipment %entals, charters and other fees derived by a non<resident lessor of aircraft, machineries and other e!uipment shall be sub7ect to a tax of seven and one<half percent A4N JB of gross rentals or fees. Tax on certain incomes received !& a non+resident forei)n corporation 1. Interest on foreign loans ( final ithholding tax at the rate of t enty percent A2:JB is hereby imposed on the amount of interest on foreign loans contracted on or after :1 (ugust 1,)$. 2. Intercorporate dividends ( final ithholding tax at the rate of fifteen percent A1-JB is hereby imposed on the amount of cash and8or property dividends received by a non<resident foreign corporation from a domestic corporation, sub7ect to the condition that the country in hich the non<resident foreign corporation is domiciled shall allo a credit against the tax due from the non<resident foreign corporation taxes deemed to have been paid in the 0hilippines e!uivalent to thirty t o percent A32JB in the year 2:::. This is the so<called tax sparing rule. 3. 'apital gains from sale of shares of stock not traded in the stock exchange a. b. 1ot over 01::,::: @ -J

3ver 01::,::: @ 1:J

Tax sparin) rule Involves intercorporate dividends received by a non+resident forei)n corporation from a domestic corporation 3nly 1-J final ithholding tax on cash and8or property dividends is imposed

0rovided the country in hich the non<resident foreign corporation is domiciled shall allo a credit against the tax due from the non<resident foreign corporation taxes deemed to have been paid in the 0hilippines, hich is 32J by 2::: "#ec. 2), A2B A-B AbB&

Tax on Im$ro$erly Accumulated Earnings

Imposition of the tax

 In addition to the other income taxes, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation an improperly accumulated earnings tax e!ual to ten percent A1:JB of the improperly accumulated taxable income. "#ection 2,, 1I%'& Corporations su!Cect to improperl& accumulated earnin)s tax The improperly accumulated earnings tax shall apply to every corporation formed or availed for the purpose of avoiding the income tax ith respect to shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. (xceptions to improperl& accumulated earnin)s tax 1. 2. 3. The improperly accumulated earnings tax shall not apply to* 0ublicly<held corporations 2anks and other non<bank financial intermediaries Insurance companies

(vidence of purpose to avoid income tax !rima %acie Evidence* The fact that any 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. Evidence 'eterminative of !ur$ose* The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by clear preponderance of evidence, shall prove to the contrary. The term .reasonable needs of the business includes the reasonably anticipated needs of the business.

Computation of improperl& accumulated taxa!le income 1. 2. 3. +. Taxable income ad7usted by* Income exempt from tax6 Income excluded from gross income6 Income sub7ect to final tax6 and (mount of net operating loss carry<over deducted6

(nd reduced by the sum of* 1. 2. Covera)e /or corporations using the calendar basis, the accumulated earnings tax shall not apply on improperly accumulated income as of 31 ;ecember 1,,4. /or corporations adopting the fiscal year accounting period, the improperly accumulated income not sub7ect to this tax shall be reckoned as of the end of the month comprising the 12<month period of fiscal year 1,,4<1,,). ;ividends actually or constructively paid6 and Income tax paid for the taxable year.

Exem$tion of certain organi2ations

(xemption from tax on corporations The follo ing organi5ations shall not be taxed in respect to income received by them as such* 1. 9abor, agricultural or horticultural organi5ation not organi5ed principally for profit6

2. Eutual savings bank not having a capital stock represented by shares, and cooperative bank ithout capital stock organi5ed and operated for mutual purposes and ithout profit6 3. ( beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organi5ation operating under the lodge system, or a mutual aid association or a non<stock corporation organi5ed by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non<stock corporation or their dependents6 +. 'emetery company o ned and operated exclusively for the benefit of its members6

-. 1on<stock corporation or association organi5ed and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organi5ers, officer or any specific person6 $. 2usiness league, chamber of commerce, or board of trade not organi5ed for profit and no part of the net income of hich inures to the benefit of any private stockholder or individual6 4. 'ivic league or organi5ation not organi5ed for profit but operated exclusively for the promotion of social elfare6 ). ,. ( non<stock, non<profit educational institution6 Covernment educational institution6

1:. /armers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organi5ation of a purely local character, the income of hich consists solely of assessments, dues, and fees collected from members for the sole purpose of meetings its expenses6 and 11. /armers, fruit gro ers, or like association organi5ed and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the !uantity of products finished by them. "#ection 3:, 1I%'& Income !& exempted corporations which are not exempted !"ot#ithstanding the provisions in the preceding paragraphs the income of #hatever $ind and character of the foregoing organizations from any of their properties real or personal or from any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this %ode. "2nd pargraph, #ection 3:, 1I%'& Thus, the follo ing income of the exempted organi5ations shall not be exempted* 1. Income of hatever kind and character from any of their properties, real or personal 2. Income from any of their activities conducted for profit #ee Commissioner v. CA re. =E'( case in Ceneral 0rinciples of Taxation

Commissioner v. CA. CTA F Ateneo de =anila 8niversit&. 513 C"A A90 In conducting researches and studies of social organi5ations and cultural values thru its I0', is (teneo performing the ork of an independent contractor and thus taxable for the contractors taxI 13. (n academic institution conducting researches pursuant to its commitments to education and ultimately to public service cannot be considered as an independent contractor hen it accepts

sponsorships for its research activities from international organi5ations, private foundations and government agencies. The research activity of the I0' is done in pursuance of maintaining (teneoRs university status and not in the course of an independent business of selling such research ith profit in mind. It is error to apply the principles of tax exemption ithout first applying the ell<settled doctrine of strict interpretation in the imposition of taxes @ it is obviously both illogical and impractical to determine ho are exempted ithout first determining ho are covered by a provision of the 1I%'. #ornboo3 doctrine in t1e inter$retation of tax la4s5 #tatute ill not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. ( tax cannot be imposed ithout clear and express ords for that purpose. (ccordingly, the general rule of re!uiring adherence to the letter in construing statutes applies ith peculiar strictness to tax la s and the provisions of a taxing act are not to be extended by implication.

GR"SS IN

"ME

$ross income Cross income means all income derived from hatever source, including Abut not limited toB the follo ing items* 1. 'ompensation for services in hatever form paid, including, but not limited to, fees, salaries, ages, commissions, and similar items6 2. Cross income derived from the conduct of trade or business or the exercise of a profession6 3. +. -. $. 4. ). ,. 1:. Cains derived from dealings in property6 Interests6 %ents6 %oyalties6 ;ividends6 (nnuities6 0ri5es and innings6 0ensions6 and

11. 0artners distributive share from the net income of the general professional partnership.
"M!ENSATI"N %"R

SER&I

ES

Compensation for services This means all remuneration for services performed by an employee for his employer under an employer<employee relationship.

Compensation paid in <ind 'ompensation may be paid in money or in some medium other than money.

'ivin) #uarters or meals If a person receives a salary as a remuneration for services rendered and, in addition thereto, living !uarters or meals are provided, the value to such person of the !uarters and meals so furnished shall be added to the remuneration paid for the purpose of determining the amount of compensation sub7ect to ithholding. Do ever, if living !uarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income. "#ection 2.4).1, %evenue %egulations 2<,)& Facilities and privile)es of a relativel& small value /acilities are not considered as compensation sub7ect to ithholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, good ill, contentment, or efficiency of his employees. "#ection 2.4).1, %evenue %egulations 2<,)& Tips and )ratuities Tips or gratuities paid directly to an employee by a customer of the employer hich are not accounted for by the employee to the employer are considered as taxable income but not sub7ect to ithholding. Fixed or varia!le transportation. representation and other allowances In general, fixed or variable transportation, representation and other allo ances hich are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation sub7ect to ithholding. (ny amount paid specifically, either as advancements 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 sub7ect to ithholding, if the follo ing conditions are satisfied* 1. 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 profession6 and 2. The employee is re!uired to account or li!uidate for the foregoing expenses in accordance ith the specific re!uirements of substantiation for each category of expenses. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer.

Gacation and sic< leave allowances (mounts of vacation allo ances or leave credits hich are paid to an employee constitutes compensation. Thus, the salary of an employee on vacation or on sick leave, hich are paid not ithstanding his absence from ork constitutes compensation. Do ever, the moneti5ed value of unutili5ed leave credits of ten A1:B days or less hich ere paid to the employee during the year are not sub7ect to income tax.

Im$osition of %ringe )enefit Tax

Imposition of frin)e !enefit tax ( final tax of 32J effective :1 Ganuary 2::: is imposed on the grossed<up monetary value of fringe benefit furnished or granted to the employee, except rank and file, by the employer, hether an individual or a corporation. The fringe benefit tax is paid by the employer.

Crossed<up monetary value is ac!uired by dividing the actual monetary value of the fringe benefit by $)J effective :1 Ganuary 2:::. Frin)e !enefit /ringe benefit means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee, except rank and file employees, such as, but not limited to, the follo ing* 1. 2. 3. +. Dousing6 >xpense account6 Lehicle of any kind6 Dousehold personnel, such as maid, driver and others6

-. Interest on loan at less than market rate to the extent of the difference bet een the market rate and actual rate granted6 $. Eembership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organi5ations6 4. ). ,. >xpenses for foreign travel6 Doliday and vacation expenses6 >ducational assistance to the employee or his dependents6 and

1:. 9ife or health insurance and other non<life insurance premiums or similar amounts in excess of hat the la allo s.

Frin)e !enefits which are not su!Cect to FBT 1. /ringe benefits hich are authori5ed and exempted from tax under special la s.

2. 'ontributions of the employer for the benefit of the employee to retirement, insurance and hospitali5ation benefit plans. 3. 2enefits given to the rank and file employees, hether granted under a collective bargaining agreement or not. +. &e minimis benefits.

-. /ringe benefit is re!uired by the nature of, or necessary to the trade, business or profession of the employer. $. It is for the convenience or advantage of the employer.

Convenience of the emplo&er rule Fnder this rule, allo ances furnished to the employee for, and as a necessary incident to, the performance of his duties are not taxable. Thus, the value of meals and living !uarters given to a driver ho is available any hour of the day hen needed by his doctor<employer is not considered income of the said driver.

Be minimis !enefits These are 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, good ill, contentment, or efficiency of his employee.

GR"SS IN

"ME %R"M T#E

"N'* T "% TRA'E "R )*SINESS

Performance of the functions of a pu!lic office The term trade or business includes the performance of the functions of a public office. "#ection 22A#B, 1I%'&

Interest Income
ources of interest income 1. 2. 3. +. -. $. 4. interest on bank deposit8deposit substitutes8trust fund and similar arrangement interest from lending8interest income from bonds interest on uncollected salary interest on foreign bonds8government bonds interest on treasury bills interest earned from deposits maintained under the foreign currency deposit system interest income of pa nshop operators

Interest income earned !& non+stoc<. non+profit educational institutions Interest income shall be exempt only hen used directly and exclusively for educational purposes. To substantiate this claim, the institution must submit an annual information return and duly audited financial statement. ( certification of actual utili5ation and the 2oard resolution on the proposed pro7ect to be funded out of the money deposited in banks must also be submitted. ";epartment of /inance 3rder 1+,<,-&

Rentals
Operatin) lease (n operating lease is a contract under hich the asset is not holly amorti5ed during the primary period of the lease, and here the lessor does not rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs and for the rests of his profits from the sale or re<lease of the returned assets at the end of the primary lease period. Finance lease (lso called .full payout lease is a contract involving payment over an obligatory period Aalso called primary or basic periodB of specified rental amounts for the use of a lessors property, sufficient in total to amorti5e the capital outlay of the lessor and to provide for the lessors borro ing costs and profits. 3bligatory period is primary non<cancelable period of the lease hich in no case shall be less than 43: days. 9essee exercises choice over the asset.

'ividend Income
Bividends .&ividends means any distribution made by a corporation to its shareholders out of its earnings on profits and payable to its shareholders, hether in money or in other property. *inds of dividend income 1. 2. 3. +. 'ash dividend #tock dividend8stock rights 0roperty dividend 9i!uidating dividend

toc< dividend ( stock dividend representing the transfer of surplus to capital account shall not be sub7ect to tax. It shall be taxable only if subse!uently cancelled and redeemed by the corporation. It is also taxable if it leads to a substantial alteration in the proportion of tax o nership in a corporation. When redemption of stoc< dividends !& a corporation is Hessentiall& e#uivalent to a distri!ution of taxa!le dividendsI 2CI" v. CA. et. al. . $.". ,o. 39@01A dated 3?59?446 If the source of the redeemed shares is the original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent value of ac!uisition ould not be income but a mere return of capital. 3n the other hand, if the redeemed shares are from stock dividend declarations, the proceeds of the redemption is additional ealth, for it is not merely a return of capital, and thus, deemed as taxable dividends. Bividends paid in propert& ;ividends paid in securities or other property, in hich the earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such property hen receivable by individual stockholders. ( dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed as ac!uired through the transfer by the corporation declaring the dividends of property to the corporation the stock of hich is distributed as a dividend. "#ection 2-1, %evenue %egulations 2& 'i#uidatin) dividend ?here a corporation distributes all its assets in complete li!uidation or dissolution, the gain reali5ed or loss sustained by the stockholder, hether individual or corporation, is a taxable income or deductible loss, as the case may be. Bis)uised dividends These are payments hich are e!uivalent to dividend distribution.

In the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be a distribution of earnings or profits, the excessive payments ill be treated as dividends. "#ection 41, %evenue %egulation 2&

Exclusion

(xclusion >xclusion refers to income received or earned but is not taxable as income because it is exempted by la or by treaty. #uch tax<free income is not to be included in the income tax return unless information regarding it is specifically called for. (xclusions from )ross income 1. 2. 3. +. -. $. 4. ). 0roceeds from life insurance (mount received by insured as return of premium Cifts, be!uests and devises 'ompensation for in7uries or sickness Income exempt under treaty %etirement benefits, pensions, gratuities, etc. Income derived by foreign government Income derived by the 0hilippine Covernment or its political subdivisions

,. 0ri5es and a ards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement 1:. 11. 12. 13. 1+. 0ri5es and a ards in sports competitions sanctioned by the national sports associations 13th month pay and other benefits not exceeding 03:,:::.:: C#I#, ###, Eedicare and other contributions Cains from the sale of bonds, debentures or other certificate of indebtedness Cains from redemption of shares in mutual fund

"etirement !enefits. pensions. )ratuities. etc. 1. #uch exclusions include* %etirement benefits under %( 1o. 4$+1 or a reasonable private benefit plan

2. (mount received by an official or employee or by his heirs from the employer due to separation from the service because of death, sickness or other physical disability or for any cause beyond the control of the official or employee 3. #ocial security benefits, retirement gratuities, pensions and other similar benefits received by resident or non<resident citi5ens or resident aliens from foreign government agencies and other institutions, private or public

+. 0ayment of benefits to a resident person under the Fnited #tates Leterans (dministration -. 2enefits received from or en7oyed under the #ocial #ecurity #ystem

$. 2enefits received from the Covernment #ervice Insurance #ystem, including retirement gratuity received by government officials and employees "e#uisites for exclusion of retirement !enefits 1. It must be received under %( 4$+1 or in accordance ith a reasonable private benefit plan maintained by the employer. 2. %etiring employee or official has been in the service of the same employer for at least ten A1:B years and is not less than fifty A-:B years of age at the time of his retirement. 3. 2enefits granted under the provision shall be availed of by an official or employee only once. "easona!le private !enefit plan It means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and herein 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. eparation pa& and amounts received due to involuntar& separation (ny amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee is excluded from gross income. Cause !e&ond the control of the emplo&ee The phrase .for any cause beyond the control of the said official or employee connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. "#ection 2.4).1, %evenue %egulation 2<,)& The separation as not of his o n making. Terminal leave pa& 'ommutation of leave credits or terminal leave pay are given not only at the same time but also for the same policy considerations governing retirement benefits. Thus, not being part of the gross salary or income but a retirement benefit, terminal pay is not sub7ect to income tax. "'ommissioner v. 'ourt of (ppeals, 2:3 #'%( 42& Terminal leave pay is exempt from income tax. "Pialcita case, 1,: #'%( )-1&

Income derived !& a forei)n )overnment Income derived from investments in the 0hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the 0hilippines by* 1. foreign governments6

2. financing institutions o ned, controlled, or en7oying refinancing from foreign governments6 and 3. international or regional financial institutions established by foreign governments.

Income !& the Philippine )overnment 1. Income derived from any public utility or from the exercise of any essential governmental function 2. (ccruing to the Covernment or to any political subdivision thereof.

Pri%es and awards in reco)nition of reli)ious. charita!le. scientific. educational. artistic. literar& or civic achievement 1. Eade primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement. 2. The recipient as selected ithout any action on his part to enter the contest or proceeding. 3. The recipient is not re!uired to render substantial future services as a condition to receiving the pri5e or a ard. Pri%es and awards in sports competitions 1. 0ri5es and a ards must be granted to athletes in local and international sports competitions and tournaments. 2. #ports competition or tournament held either in the 0hilippines or abroad.

3. #ports competition or tournament must be sanctioned by their natural sports associations.

'E'*

TI"NS

In General
Beductions ;eductions are items or amounts hich the la allo s to be deducted under certain conditions from gross income in order to arrive at taxable income.

Beduction v. exemption ;eduction is an amount allo ed by la to be subtracted from gross income to arrive at taxable income. >xemption from taxation is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax hich others generally ithin the same taxing district are obliged to pay.

Beduction v. exclusion ;eduction is an amount allo ed by la to be subtracted from gross income to arrive at taxable income. >xclusion refers to income received or earned but is not taxable as income because exempted by la or by treaty. #uch tax<free income is not to be included in the income tax return unless information regarding it is specifically called for. "#ection $1, %evenue %egulation 2& Basic principles )overnin) deductions 1. The taxpayer seeking a deduction must point to some specific provisions of the statute authori5ing the deduction6 and 2. De must be able to prove that he is entitled to the deduction authori5ed or allo ed.

*inds of deductions 1. Itemi5ed deduction hich is available to individual and corporate taxpayers

2. 3ptional standard deduction hich is available to individual taxpayers only, except a non<resident alien 3. #pecial deductions hich is available, in addition to the itemi5ed deductions, to certain corporations, i.e. insurance companies and proprietary educational corporations Time within which to claim deduction 1. (s a rule, if a taxpayer does not, ithin any year, deduct certain of his expenses, losses, interests, taxes, or other charges, he cannot deduct them from the income of the next or any succeeding year. 2. If he keeps his books on the cash receipts basis, the expenses are deductible in the year they are paid. 3. If on the accrual basis, then in the year they are incurred, hether paid or not.

Who ma& not avail of deductions from )ross income? 1. 'iti5ens and resident aliens hose income is purely compensation income. They are allo ed personal and additional exemptions and deduction for premium payments on health and hospitali5ation insurance. 2. 3. 1on<resident aliens not engaged in trade or business in the 0hilippines 1on<resident foreign corporations

Beductions from )ross income 1. >xpenses

2. 3. +. -. $. 4. ). ,. 1:. 11.

Interest Taxes 9osses 2ad debts ;epreciation ;epletion of oil and gas ells and mines 'haritable and other contributions %esearch and development 0ension trusts 0remium payments on health and8or hospitali5ation insurance of an individual taxpayer

ome rules on deduction ( corporation may avail only of the deductions from A1B to A1:B6 premium payments on health and8or hospitali5ation insurance is deductible only by an individual taxpayer. ( corporation may avail only of the itemi5ed deductions6 an individual, except a non<resident alien, may elect the itemi5ed deductions or the optional standard deduction. Thus, the optional standard deduction is not available to corporations.

(n individual earning purely compensation income is not allo ed itemi5ed deductions, except premium payments on health and8or hospitali5ation insurance. In addition, he is also granted personal and additional exemptions. (n individual, ho earns income other than purely compensation income, is allo ed personal and additional exemptions in addition to the itemi5ed deductions or the optional standard deduction. Two <inds of deduction availa!le to individuals. except a non+resident alien 1. 2. Itemi5ed deductions 3ptional standard deduction

Note* 3ptional standard deduction is not available to corporations.

"rdinary and Necessary )usiness Ex$enses

Business expense v. capital expenses 2usiness expenses refer to all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or hich are directly attributable to the development, management, operation and8or conduct of the trade, business or the exercise of a profession. 'apital expenses are expenditures for extraordinary repairs hich are capitali5ed and sub7ect to depreciation. These are expenses hich tend to increase the value or prolong the life of the taxpayers property. Ordinar& and necessar& expenses (n expense is ordinary hen it is commonly incurred in the trade or business of the taxpayer as distinguished from capital expenditures. The payments, ho ever, need not be normal or habitual in the sense that the taxpayer ill have to make them often. The payment may be uni!ue or non<recurring to the particular taxpayer affected. (n expense is necessary hen it is appropriate and helpful to the taxpayers business or if it is intended to reali5e a profit or to minimi5e a loss. "e#uisites for deducti!ilit& of !usiness expense 1. 2. 3. +. The expenses must be ordinary and necessary. It must be paid or incurred during the taxable year. It must be paid or incurred in carrying on any trade or business or profession. It must be reasonable in amount.

-. It must be substantiated by sufficient evidence such as official receipts and other official records. $. It must not be against la , morals, public policy or public order.

u!stantiation re#uirement for !usiness expense Taxpayer need to substantiate ith sufficient evidence, such as official receipts or other ade!uate records* 1. the amount of the expense being deducted6 and

2. the direct connection or relation of the expense being deducted to the development, management, operation and8or conduct of the trade, business or profession of the taxpayer. What are included in !usiness expenses? 2usiness expenses include*

1. #alaries, ages and other forms of compensation for personal services actually rendered, including the grossed<up monetary value of fringe benefit granted provided the fringe benefit tax has been paid. 2. Travel expenses, here and abroad, hile a ay from home.

3. %entals and8or other payments of property to hich the taxpayer has not taken or is not taking title or in hich he has no e!uity other than that of a lessee, user or possessor. +. >ntertainment, amusement and recreation expenses.

"e#uisites for deducti!ilit& of compensation pa&ments 1. The payments are reasonable.

2. They are, in fact, payments for personal services actually rendered. "#ection 4:, %evenue %egulation 2&

Treatment of excessive compensation In the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or profits, the excessive payments ill be treated as dividends. "#ection 41, %evenue %egulations 2& If such payments constitute payment for property, they should be treated by the payor as capital expenditure and by the recipient as part of the purchase price. "#ection 41, %evenue %egulations 2& "e#uisites for deducti!ilit& of !onuses to emplo&ees 1. 2. The bonuses are made in good faith. They are given for personal services actually rendered.

3. They do not exceed a reasonable compensation for the services rendered, hen added to the stipulated salaries, measured by the amount and !uality of services performed in relation to the taxpayers business. "#ection 42, %evenue %egulations 2& In *uen%le v. CI" "2) #'%( 3$-& and C.=. ;os<ins v. CI" "3: #'%( +3+&, the #upreme 'ourt disallo ed deductions for bonuses given to the top officers of the involved corporations for being unreasonable. Pensions and compensation for inCuries (mounts paid for pensions to retired employees or to their families or others dependent upon them, or on account of in7uries received by the employee, and lump sum amounts paid or accrued as compensation for in7uries are proper deductions as ordinary and necessary expenses. #uch deductions are limited to the amount not compensated for by insurance or other ise. "ules on repairs >xpenses for repairs are deductible if such repairs are incidental or ordinary, that is, made to keep the property used in the trade or business of the taxpayer in an ordinarily efficient operating condition. %epairs in the nature of replacement to the extent that they arrest deterioration and prolong the life of the property are capital expenditures and should be debited against the corresponding allo ance for depreciation. "#ection $), %evenue %egulations 2& Travel expenses Travel expenses include transportation expenses and meals and lodging of an employee paid for by the employer. "#ection $$, %evenue %egulations 2& "e#uisites for deducti!ilit& of travel expenses

1. 2. 3. Tax home

The expenses must be reasonable and necessary. They must be incurred or paid .#hile a#ay from home. They must be paid or incurred in the conduct of trade or business.

Tax home is the principal place of business, hen referring to .a#ay from home.

"ental expense ( reasonable allo ance for rentals and8or other payments hich are re!uired as a condition for the continued use or possession, for purposes of the trade, business or property to hich the taxpayer has not taken or is not taking title or in hich he has no e!uity other than that of a lessee, user or possessor is deductible from the gross income. ?here a leasehold is ac!uired for business purposes for a specified sum, the purchaser may take as a deduction in his return an ade!uate part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible rent to the tenant and taxable income to the landlord6 the amount of tax being deductible by the latter. The cost borne by the lessee in erecting buildings or making permanent improvements on ground of hich he is a lessee is held to be a capital investment and not deductible as a business expense. "e#uisites for rental expense 1. 2. %e!uired as a condition for continued use or possession /or purposes of the trade, business or profession

3. Taxpayer has not taken or is not taking title to the property or has no e!uity other than that of a lessee, user or possessor (ntertainment. amusement and recreation expense 1. 2. %easonable in amount Incurred during the taxable period

3. ;irectly connected to the development, management, and operation of the trade, business, or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or profession +. 1ot to exceed such ceiling as the #ecretary of /inance may, by rules and regulations, prescribe

-. (ny expense incurred for entertainment, amusement or recreation hich is contrary to la , morals, public policy, or public order shall in no case be allo ed as a deduction Option to private educational institutions In addition to the allo able deductions, a private educational institution may, at its option, elect either* 1. To deduct expenditures other ise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities6 or 2. To deduct allo ance for depreciation thereof.

Treatment of other expenses 1. (dvertising expense 1ot deductible business expense. >fforts to establish reputation are akin to ac!uisition of capital assets and, therefore, expenses related thereto are not business expense but capital expenditures. 2. 0romotional expenses

#ame as advertising expense 3. 9itigation expenses 9itigation expenses that are incurred in the defense or protection of title are capital in nature and not deductible. In $utierre% v. CI" "1+ #'%( 3+&, it as held that litigation expenses defrayed by a taxpayer to collect apartment rentals and to e7ect delin!uent tenants are ordinary and necessary expenses in pursuing his business.

INTEREST E+!ENSE
Interest The amount of interest paid or incurred ithin a taxable year on indebtedness in connection ith the taxpayers profession, trade or business shall be allo ed as deduction from gross income. Bac<+to+!ac< interest The taxpayers allo able deduction for interest expense shall be reduced by an amount e!ual to 3)J by :1 Ganuary 2::: of the interest income earned by him hich has been sub7ected to a final tax. Interest which cannot !e deducted

1. Interest is paid in advance through discount or other ise by an individual taxpayer reporting income on the cash basis. #uch interest shall be allo ed as a deduction in the year the indebtedness is paid. 2. 3. Interest bet een related taxpayers. If the indebtedness is incurred to finance petroleum exploration.

"e#uisites for deducti!ilit& of interest expense 1. There must be an indebtedness incurred by the taxpayer in connection ith the taxpayers trade, business or profession. 2. 3. The interest must have been paid or incurred ithin the taxable year. The interest must have been stipulated in riting.

Optional treatment of interest expense (t the option of the taxpayer, interest incurred to ac!uire property used in trade, business or exercise of a profession may be allo ed as a deduction or treated as a capital expenditure. Belin#uenc& interest on tax pa&ment deducti!le /or interest to be allo ed as deduction from gross income, it must be sho n that there be an indebtedness, that there should be interest upon it, and that hat is claimed as an interest deduction should have been paid or accrued ithin the year. The term .indebtedness has been defined as an unconditional and legally enforceable obligation for the payment of money. ?ithin the meaning of that definition, a tax may be considered as an indebtedness. Dence, interest paid for late payment of the donors tax is deductible from gross income. "Commissioner v. Prieto, 1:, 0hil -,2&

Taxes
What taxes are deducti!le? (s a general rule, all taxes, national or local, paid or incurred ith the taxable year in connection ith the taxpayers trade, business or profession are deductible from gross income. Taxes means taxes proper and, therefore, no deductions are allo ed for amounts representing interest, surcharges and fines or penalties incident to delin!uency. What taxes are not deducti!le from )ross income? 1. 0hilippine income tax

2. Income taxes imposed by the authority of any foreign country but deduction is allo ed only in the case of a taxpayer ho is entitled to tax credit for taxes of foreign countries but does not avail of the same 3. >state and donors taxes

+. #pecial assessments or levies assessed against local benefits of a kind tending to increase the value of the property assessed

Tax su!se#uentl& refunded or credited Taxes previously allo ed as deductions, hen refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. 'imitations on deductions for non+resident alien en)a)ed in trade or !usiness and resident forei)n corporation In the case of a non<resident alien individual engaged in trade or business in the 0hilippines and a resident foreign corporation, deductions for taxes shall be allo ed only if and to the extent that they are connected ith income from sources ithin the 0hilippines. Tax credit Tax credit refers to the taxpayers right to deduct from the income tax due the amount of tax he has paid to a foreign country sub7ect to limitations. Tax deduction v. tax credit In the former, the taxes are deducted from the gross income in computing the net income, hile in the latter, the taxes are deducted from 0hilippine income tax itself. In the former, all taxes as a general rule, are allo ed as deductions ith some exemptions Aenumerated aboveB, hile in the latter, only foreign income taxes may be claimed as credits against 0hilippine income tax. Proof of credits The credits shall be allo ed only if the taxpayer establishes to the satisfaction of the 'ommissioner the follo ing* 1. The total amount of income from sources ithout the 0hilippines6

2. The amount of income derived from each country, the tax paid or incurred to hich is claimed as a credit6 and 3. (ll other information necessary for the verification and computation of such credits.

Credit a)ainst tax for taxes of forei)n countries 'redit may be claimed by a citi5en, domestic corporation, members of general professional partnerships, and beneficiaries of estates and trusts. (n alien individual and a foreign corporation are not allo ed to claim credits against the tax for taxes of foreign countries. 'imitations on credit The amount of the credit taken shall be sub7ect to each of the follo ing limitations*

1. The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against hich such credit is taken, hich the taxpayers taxable income from sources ithin such country bears to his entire taxable income for the same taxable year6 and 2. The total amount of the credit shall not exceed the same proportion of the tax against hich such credit is taken, hich the taxpayers taxable income from sources ithout the 0hilippines taxable under this Title bears to his entire taxable income for the same taxable year.

Losses
'osses The term implies an unintentional parting ith something of value. It is used in the income tax la in a very broad sense to comprehend all losses hich are not general or natural to the ordinary course of business.

"e#uisites for deducti!ilit& of loss 1. 2. 3. +. The loss must be incurred in the trade, business or profession of the taxpayer. It must be actually sustained and charged off ithin the taxable year. It must be evidenced by a closed and completed transaction. It must not be compensated for by insurance or other forms of indemnity.

-. If it is a casualty loss, the taxpayer has filed a s orn declaration of loss ithin +- days after the date of the discovery of the casualty or robbery, theft, or embe55lement. ome reco)ni%ed losses 1. 2. 3rdinary losses8business losses 'asualty losses

3. +. -. $. 4.

'apital losses #ecurities becoming orthless 9osses from ash sales or stock or securities ?agering losses (bandonment losses

Note* 'apital losses and securities becoming orthless are governed by rules on loss from the sale or exchange of capital assets. Casualt& loss 9oss arises from fires, storms, ship reck, or other casualties, or from robbery, theft or embe55lement. 'oss limitation rule for capital losses 9osses from sales or exchanges of capital assets shall be allo ed only to the extent of the gains from such sales or exchanges. ecurities !ecomin) worthless 1. 2. #ecurities become orthless during the taxable year #ecurities are capital assets

3. 9osses are considered as losses from the sale or exchange, on the last day of such taxable year, of capital assets ,et operatin) loss It means the excess of allo able deduction over gross income of the business in a taxable year. ,et operatin) loss carr&+over 2,O'CO6 139'3 shall be carried over as a deduction from the gross income for the next three A3B consecutive taxable years immediately follo ing the year of loss. #uch loss shall be allo ed as a deduction if it had not been previously offset as deduction from gross income. Do ever, any net loss incurred in a taxable year during hich the taxpayer as exempt from income tax shall not be allo ed as a deduction.

 139'3 shall be allo ed only if there has been no substantial change in the o nership of the business or enterprise. There is no substantial change hen* 1. 1ot less than 4-J in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons6 or 2. 1ot less than 4-J of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. 'osses from wash sales of stoc< or securities 1o deduction for loss shall be allo ed for ash sales unless the claim is made by a dealer in stock or securities and ith respect to a transaction made in the ordinary course of the business of such dealer. Wash sale ( ash sale occurs here it appears that ithin a period beginning thirty A3:B days before the date of the sale or disposition of shares of stock or securities and ending thirty A3:B days after such date, the taxpayer has ac!uired Aby purchase or exchangeB or has entered into a contract or option to so ac!uire, substantially identical stock or securities. Wa)erin) losses 9osses from agering shall be allo ed only to the extent of gains from such transactions.

A!andonment losses In the event a contract area here petroleum operations are undertaken is partially or holly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allo ed as a deduction. In case a producing ell is subse!uently abandoned, the unamorti5ed costs thereof, as ell as the undepreciated costs of e!uipment directly used therein, shall be allo ed as a deduction in the year such ell, e!uipment or facilitiy is abandoned by the contractor.

)A' 'E)TS
Bad Be!ts 2ad debts are debts due to the taxpayer hich are actually ascertained to be orthless and charged off ithin the taxable year.

"e#uisites for deducti!ilit& of !ad de!ts 1. There must be a valid and subsisting debt.

2. The debt must be actually ascertained to be orthless and uncollectible during the taxable year. 3. The debt must be charged off during the taxable year.

+. The debt must be connected ith the trade, business or profession of the taxpayer, and not sustained in a transaction entered into bet een related taxpayers. Bili)ent efforts to collect In addition to the four re!uisites, the taxpayer must sho uncollectible even in the future. that the debt is indeed

/urthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, via* aB sending of statement of accounts6 bB sending of collection letters6 cB giving the account to a la yer for collection6 and dB filing a collection case in court. "Philippine "efinin) Co. v. Court of Appeals, 2-$ #'%( $$4&

(#uita!le doctrine of tax !enefit This doctrine holds that a recovery of bad debt previously deducted from gross income constitutes taxable income if in the year the account as ritten off, the deduction resulted in a tax benefit, that is, in the reduction of taxable income of the taxpayer.

'e$reciation
Bepreciation ;epreciation is the gradual diminution in the useful value of tangible property used in trade, business or profession resulting form exhaustion, ear and tear, and obsolescence. The term is also applied to amorti5ation of the value of intangible assets, the use of hich in trade or business is definitely limited in duration. The income tax la does not authori5e the depreciation of an asset beyond its ac!uisition cost. Dence, a deduction over and above the cost cannot be claimed and allo ed. "Basilan v. CI", 21 #'%( 14& Bepreciation is a #uestion of fact ;epreciation is a !uestion of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts. "'impan v. CI", 14 #'%( 4:3& "e#uisites for deducti!ilit& of depreciation 1. 2. 3. +. The allo ance for depreciation must be reasonable. It must be for property used in the trade, business or profession. It must be charged off during the taxable year. ( statement on the allo ance must be attached to the return.

Beduction for o!solescence If the hole or any portion of physical property is clearly sho n by the taxpayer as being affected by economic conditions that ill result in its being abandoned at a future date prior to the end of its natural life, so that depreciation deductions alone ould be insufficient to return the cost at the end of its economic terms of usefulness, a reasonable deduction for obsolescence, in addition to depreciation, may be allo ed. Propert& held for life In the case of property held by one person for life ith remainder to another person, the deduction shall be computed as if the life tenant ere the absolute o ner of the property and shall be allo ed to the life tenant.

In case of propert& held in trust (llo able deductions shall be apportioned bet een the income beneficiaries and the trustees in accordance ith the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allo able to each. Certain methods in computin) depreciation 1. 2. 3. The straight line method ;eclining balance method #um<of<the<year<digit method.

+. (ny other method hich may be prescribed by the #ecretary of /inance upon recommendation of the 'ommissioner. A)reement as to useful life on which depreciation rate is !ased ?here the taxpayer and the 'ommissioner have entered into an agreement in riting specifically dealing ith the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the 1ational Covernment in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest ith the party initiating the modification. ?here the taxpayer has adopted such useful life and depreciation rate for any depreciable asset and claimed the depreciation expenses as deduction from his gross income ithout any ritten ob7ection on the part of the 'ommissioner or his duly authori5ed representative, the aforesaid useful life and depreciation rate so adopted by the taxpayer shall be considered binding. Bepreciation of patent or cop&ri)ht In computing a depreciation allo ance in the case of a patent or copyright, the capital sum to be replaced is the cost or other basis of the patent or copyright. The allo ance should be computed by an apportionment of the cost or other basis of the patent or copyright over the life of the patent or copyright since its grant, or since its ac!uisition by the taxpayer, or since Earch 1, 1,13, as the case may be.

'E!LETI"N "% "IL AN' GAS 6ELLS AN' MINES

Bepletion of Oil and $as Wells and =ines ;epletion is the exhaustion of natural resources like mines and oil and gas ells as a result of production or severance from such mines or ells.

Betermination of amount of depletion cost In determining the amount of depletion cost allo able, the follo ing three factors are essential, namely* 1. 2. the basis of the property6 the estimated total recoverable units in the property6 and

3. the number of units recovered during the taxable year in !uestion. "Consolidated =ines v. CTA, -) #'%( $1)& 2asis means the amount of the taxpayers capital or investment in the property hich he is entitled to recover tax<free during the period he is removing the mineral in the deposit. Intan)i!le cost in petroleum operations This refers to any cost incurred in petroleum operations hich in itself has no salvage value and hich is incidental to and necessary for the drilling of ells and preparation of ells for the production of petroleum. Bepletion v. depreciation 2oth are predicated on the same basic premise of avoiding a tax on capital.

Do ever, depletion is based upon the concept of the exhaustion of a natural resource hereas depreciation is based upon the concept of the exhaustion of the property, not other ise a natural resource, used in a trade or business or held for the production of income. Thus, depletion and depreciation are made applicable to different types of assets.

1aritable and "t1er

ontributions

*inds of Charita!le Contri!utions 1. 3rdinary or those hich are sub7ect to limitations as to the amount deductible from gross income. 2. #pecial or those hich are deductible in full from gross income.

"e#uisite for deducti!ilit& of charita!le contri!utions 1. The contribution must actually be paid or made to the 0hilippine government or any political subdivision thereof or to any of the domestic corporations or associations specified by the 1I%'. 2. 1o part of the net income of the beneficiary must inure to the benefit of any private stockholder or individual. 3. It must be made ithin the taxable year.

+. It must not exceed 1:J in the case of an individual and -J in the case of a corporation of the taxpayers taxable income Aexcept here the donation is deductible in fullB to be determined ithout the benefit of the contribution. -. It must be evidenced by ade!uate records or receipts.

Contri!utions deducti!le in full 1. ;onations to the 0hilippine government or to any of its political subdivisions according to a national priority plan determined by 1>;(. 2. ;onations to foreign institutions or international organi5ations hich are fully deductible in pursuance of or in compliance ith agreements, treaties or commitments entered into by the 0hilippines or in pursuance of special la s. 3. ;onation to accredited non<governmental organi5ation.

,on+)overnment or)ani%ation It means a non<profit domestic corporation* 1. 3rgani5ed and operated exclusively for scientific, research, educational, character<building and youth and sports development, health, social elfare, cultural or charitable purposes, or a combination thereof, no part of the net income of hich inures to the benefit of any private individual. 2. Ftili5es the contribution directly for the active conduct of the activities constituting the purpose or function for hich it is organi5ed and operated not later than the 1-th day of the their month after the close of the accredited 1C3s taxable year in hich the contribution ere received. 3. (dministrative expense shall, in no case, exceed thirty percent A3:JB of the total expenses. +. The assets, in the event of dissolution, ould be distributed to another non<profit domestic corporation organi5ed for similar purpose, or to the #tate for public purpose, or ould be distributed by a court to another organi5ation. 8tili%ation Ftili5ation means*

1. (ny amount in cash or kind Aincluding administrative expensesB paid or utili5ed to accomplish one or more purposes for hich the accredited non<governmental organi5ation as created or organi5ed. 2. (ny amount paid to ac!uire an asset used Aor held for useB directly in carrying out one or more purposes for hich the accredited non<governmental organi5ation as created or organi5ed. Proof of deductions

 'ontributions or gifts shall be allo able as deductions only if verified under the rules and regulations prescribed by the #ecretary of /inance.

RESEAR

# AN'

'E&EL"!MENT

"esearch and development ( taxpayer may treat research or development expenditures hich are paid or incurred by him during the taxable year in connection ith his trade, business or profession as ordinary and necessary expenses hich are not chargeable to capital account. The expenditures so treated shall be allo ed as deduction during the taxable year hen paid or incurred. Amorti%ation of certain research and development expenditures Taxpayer may also elect to treat the follo ing research and development expenditures as deferred expenses* 1. 0aid or incurred by the taxpayer in connection ith his trade, business or profession6 2. 1ot treated as expenses6 and

3. 'hargeable to capital account but not chargeable to property of a character hich is sub7ect to depreciation or depletion. "esearch and development expenses deductions shall not appl& to7 1. (ny expenditure for the ac!uisition or improvement of land, or for the improvement of property to be used in connection ith research and development of a character hich is sub7ect to depreciation or depletion. 2. (ny expenditure paid or incurred for the purpose of ascertaining the existence, location, extent or !uality of any deposit of ore or other mineral, including oil or gas.

!ension Trusts
"e#uisites for deducti!ilit& of pa&ments to pension trusts 1. The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to his employees. 2. 3. The pension plan is reasonable and actuarially sound. It must be funded by the employer.

+. The amount contributed must no longer be sub7ect to the control or disposition of the employer.

-.

The payment has not yet been allo ed as a deduction.

$. The deduction is apportioned in e!ual parts over a period of ten A1:B consecutive years beginning ith the year in hich the transfer or payment is made.

A''ITI"NAL RE,*IREMENT %"R 'E'*

TI)ILIT( "%

ERTAIN !A(MENTS

Additional re#uirement for deducti!ilit& of certain pa&ments (ny amount paid or payable hich is other ise deductible from, or taken into account in computing gross income or for hich depreciation or amorti5ation may be allo ed, shall be allo ed as a deduction only if it is sho n that the tax re!uired to be deducted and ithheld therefrom has been paid to the 2ureau of Internal %evenue. 'imitations or ceilin)s on itemi%ed deductions The #ecretary of /inance may prescribe limitations or ceilings for any of the itemi5ed deductions from A1B to A1:B. This can be done through rules and regulations issued by the #ecretary upon the recommendation of the 'ommissioner and after a public hearing has been held for such purpose. The #ecretary shall, for purposes of determining such ceilings or limitations, consider the follo ing factors* 1. (de!uacy of the prescribed limits on the actual expenditure re!uirements of each particular industry6 and 2. >ffects of inflation on expenditure levels.

"$tional Standard 'eduction

Optional tandard Beduction (n individual sub7ect to tax, other than a non<resident alien, may elect a standard deduction in an amount not exceeding ten percent A1:JB of his gross income S in lieu of itemi5ed deductions. Fnless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the itemi5ed deductions. #uch election hen made in the return shall be irrevocable for the taxable year for hich the return is made.

(n individual ho is entitled to and claimed for the optional standard deduction shall not be re!uired to submit ith his tax return such financial statements other ise re!uired in the 1I%'.

'E'*

TI"NS ALL"6E' "NL( T" IN'I&I'*AL TA+!A(ERS

Beductions allowed onl& to individual taxpa&ers

1. 2. 3.

0ersonal exemption (dditional exception 0remium payments on health and8or hospitali5ation insurance

Personal exemptions 0ersonal exemptions are arbitrary amounts allo ed, in the nature of a deduction from taxable income, for personal, living or family expenses of an individual taxpayer. They are considered to be the e!uivalent of the minimum of subsistence of the taxpayer. Who are allowed personal exceptions? 1. 2. 'iti5ens %esident aliens

3. 1on<resident aliens engaged in trade or business in the 0hilippines under certain conditions +. >states and trusts, hich are treated for purposes of personal exemptions, as a single individual Amount of personal exemptions allowed to citi%ens and resident aliens 02:,::: @ single person or a married person 7udicially decreed as legally separated from his or her spouse ith no !ualified dependents 02-,::: 032,::: < < head of a family married person

Note* 3nly the spouse deriving taxable income can claim the 032,::: personal exemption6 if both have taxable income, each can claim 032,::: exemption. ;ead of the famil& It means an unmarried or legally separated man or oman ith one or both parents, or ith one or more brothers or sisters, or ith one or more legitimate, recogni5ed natural or legally adopted children living ith and dependent upon him or her for their chief support. #uch brothers or sisters or children should be not more than 21 years old, unmarried and not gainfully employed, or here such children, brothers or sisters, regardless of age, are incapable of self<support because of mental or physical defect. ( head of family is an individual ho actually supports and maintains in one household one or more individuals, ho are closely connected ith him by blood relationship,

relationship by marriage, or by adoption, and hose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. Note* 'onsider discrepancy bet een definition of .head of family and .dependent i.e. children. To be a head of a family, one or more le)itimate. reco)ni%ed natural. or le)all& adopted children must live ith and depend on an unmarried or legally separated man or oman. ( dependent, on the other hand, may be a le)itimate. ille)itimate or le)all& adopted child. 2oth, ho ever, define or !ualify different terms. 'ivin) with The term .living #ith the person giving support does not necessarily mean actual and physical d elling together at all times and under all circumstances. Famil& 1. 2. The term .family includes an unmarried or legally separated person ith* one or both parents6 one or more brothers or sisters6 or

3. one or more legitimate, recogni5ed natural, or legally adopted children living ith and dependent upon him or her for their chief support. Additional exemption ( married person or a head of a family may claim an additional exemption of 0),::: for each dependent, not exceeding four A+B. The additional exemption shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, it may be claimed only by the spouse ho has custody of the child or children.

Bependent 1. 2. %efers only to the legitimate, illegitimate or legally adopted child of the taxpayer The child is* living ith the taxpayer6 chiefly dependent upon the taxpayer for support6

3. +.

not more than 21 years of age6 not married6 and

-. not gainfully employed or, even though over 21 years old, incapable of self support because of mental or physical defect. Chan)e of status Taxpayer marries or have additional dependents Taxpayer dies during the taxable year

If the spouse or any of the dependents dies or if any of such dependent marries, becomes 21 years old, or becomes gainfully employed Note* (s a general rule, interpret in favor of taxpayer Personal exemptions to non+resident alien individual 1on<resident alien individual engaged in trade or business >ntitled only to personal exemption

(mount allo ed is limited to exemptions granted to /ilipino citi5ens ho are not residents in the aliens domicile country T but not to exceed the amount allo ed to citi5ens or residents of the 0hilippines in the 1I%'. Premium pa&ment on health and?or hospitali%ation insurance of an individual taxpa&er 0remium payments should not exceed 02,+:: per family or 02:: a month for a taxable year /amily has a gross income of not more than 02-:,::: for the taxable year

In the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

Items Not 'eductible

Items not deducti!le 1. 2. 0ersonal, living or family expenses 'apital expenditures a. (ny amount paid out for ne buildings or for permanent improvements, or betterments made to increase the value of any property or estate

b. (ny amount expended in restoring property or in making good the exhaustion thereof for hich an allo ance is or has been made 3. 0remiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individually or corporate, hen the taxpayer is directly or indirectly a beneficiary under such policy "#ection 3$, 1I%'& +. -. 9osses bet een related taxpayers. 9osses on ash sales

$. Illegal expense i.e. bribes, kickbacks, and other similar payments "#ection 3+A(BA1BAcB, 1I%'& Capital expenditures 1. (ny amount paid out for ne buildings or for permanent improvements, or betterments made to increase the value of any property or estate 2. (ny amount expended in restoring property or in making good the exhaustion thereof for hich an allo ance is or has been made 3. 'ost 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 architects services is part of the cost of the building

-. >xpenses of the administration of an estate such as court costs, attorneys fees, and executors commissions are chargeable against the.corpus of the estate and are not allo able deductions $. In case of a corporation, expenses for organi5ation, such as incorporation fees, attorneys fees and accountants charges are ordinarily capital expenditures, but here such expenditures are limited to purely incidental expenses, a taxpayer may charge such items against income in the year in hich they are incurred. "#ection 12:, %evenue %egulations 2& 'ife or health insurance and other non+life insurance premiums or similar amounts in excess of what the law allows General rule* The cost of life or health insurance and other non<life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit. Exce$tions 1. 'ontribution of the employer for the benefit of the employee pursuant to the provisions of existing la , i.e. ###, C#I#, among others. 2. The cost of premiums borne by the employer for the group insurance of his employees. "%evenue %egulations 3<,)&

"elated taxpa&ers 1. 2et een members of a family A hich shall include only his brothers and sisters, spouse, ancestors and lineal descendantsB 2. 2et een an individual and a corporation more than -:J in value of the outstanding stock of hich is o ned, directly or indirectly, by or for such individual @ except in the case of distributions in li!uidation 3. 2et een t o corporations more than -:J in value of the outstanding stock of each of hich is o ned, directly or indirectly by or for the same individual +. 2et een the grantor and the fiduciary of a trust

-. 2et een the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor ith respect to each trust $. 2et een the fiduciary of a trust and a beneficiary of such trust "#ection 3$A2B, 1I%'&

"elevant points re)ardin) related taxpa&ers 1. 2. 3. 0ayment of interest is not deductible. 2ad debts are not deductible. 9osses from sales or exchanges of property are not deductible.

a$ital Gains and Losses

Ordinar& asset 1. #tock in trade of the taxpayer or other property of a kind hich ould properly be included in the inventory of the taxpayer if on hand at the close of the taxable year. 2. 0roperty held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. 3. 0roperty used in the trade or business, of a character hich is sub7ect to the allo ance for depreciation. +. %eal property used in the trade or business of the taxpayer.

Capital asset 0roperty held by the taxpayer, hether or not connected ith his trade or business, hich is not an ordinary asset.

Ordinar& )ain or income 3rdinary income or gain includes any gain from the sale or exchange of property hich is not a capital asset.

Capital )ain or income ,et capital )ain 1et capital gain means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. ,et capital loss 1et capital loss means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. Three rules on the reco)nition of capital )ains and losses 1. 2. 3. Dolding rule 9oss limitation rule 1et capital loss carry<over rule Note* The holding and net capital loss carry<over rules apply only to individual taxpayers and not to corporate taxpayers. Percenta)e ta<en into account or holdin) rule In the case of an individual taxpayer, only the follo ing percentages of the gain or loss recogni5ed upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income* 1::J < -:J < 'oss limitation rule 9osses from sales or exchanges of capital assets shall be allo ed only to the extent of the gains from such sales or exchanges. ,et capital loss carr&+over If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss Ain an amount not in excess of the net income for such yearB shall be treated in if the capital asset has been held for not more than 12 months if the capital asset has been held for more than 12 months 'apital gain or income is any gain from the sale or exchange of a capital asset.

the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months. $ains and losses from short sales. etc. Cains or losses from short sales of property shall be considered as gains or loses from sales or exchanges of capital assets. Cains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses. $eneral rule on the reco)nition of )ain or loss upon the sale or exchan)e of propert& The general rule is that the entire amount of the gain or loss, as the case may be, shall be recogni5ed, i.e. taxable or deductible. (xceptions 1. Transactions here gains and losses are not recogni5ed a. >xchange of property here the property received is not substantially different from the property disposed of. "#ection 1+:, %eg. 1o. 2& b. >xchange of property solely in kind in pursuance of corporate mergers and consolidations. c. >xchange by a person of his property for stocks in a corporation as a result of hich said person, alone or together ith others not exceeding four persons, gains control of said corporation. 2. Transactions here gain is recogni5ed but not the loss a. b. Transactions bet een related taxpayers Illegal transactions

c. >xchanges of property, not solely in kind, in pursuance of corporate mergers and consolidations =er)er or consolidation Eerger or consolidation shall be understood to mean the AaB ordinary merger or consolidation or AbB the ac!uisition by one corporation of all or substantially all the properties of another corporation solely for stock. #uch merger or consolidation must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation.

Sources of Taxation
ource of income The term .source of income is not a place but the property, activity or service that produces the income. "Commissioner v. BOAC& Bissent of :ustice Feliciano in Commissioner v BOAC The source of income relates not to the physical sourcing of a flo of money or the physical situs of payment but rather to the .property activity or service #hich produced the income. ?here a contract for rendition of services is involved, the applicable source rule may be simply stated as follo s* The income is sourced in the place here the service contracted for is rendered. ources of taxation 1. 2. 3. Income from sources ithin the 0hilippines Income from sources ithout the 0hilippines Income from sources partly ithin and partly ithout the 0hilippines

$ross income from sources within the Philippines The follo ing items of gross income shall be treated as gross income from sources ithin the 0hilippines* 1. Interests derived from sources ithin the 0hilippines, and interests on bonds, notes or other interest<bearing obligations of residents, corporate or other ise. 2. ;ividends received from a domestic corporation and from a foreign corporation, unless less than -:J of the gross income of such foreign corporation for the three<year period ending ith the close of its taxable year preceding the declaration of such dividends as derived from sources ithin the 0hilippines. 3. +. 'ompensation for labor or personal services performed in the 0hilippines. %entals and royalties from property located in the 0hilippines.

-. Cains, profits and income from the sale of real property located in the 0hilippines. $. Cains, profits and income from the sale of personal property if sold ithin the 0hilippines. "#ection +2A(B, 1I%'& Interest income The residence of the obligor ho pays the interest, rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of

the source of interest income. ",ational Bevelopment Corporation v. Commissioner, 1-1 #'%( +42& $ross income from sources without the Philippines Gust the exact opposite of the items of gross income from sources ithin the 0hilippines. "#ection +2A2B, 1I%'& Income from sources partl& within and partl& without the Philippines Cains, profits and income from the sale of personal property produced by the taxpayer ithin and sold ithout the 0hilippines, or produced by the taxpayer ithout and sold ithin the 0hilippines shall be treated as derived partly from sources ithin and partly from sources ithout the 0hilippines. "#ection +2A>B, 1I%'& Purchase or sale of personal propert& Cains, profits and income derived from the purchase of personal property ithin and its sale ithout the 0hilippines, or from the purchase of personal property ithout and its sale ithin the 0hilippines shall be treated as derived entirely from sources ithin the country in hich sold. "#ection +2A>B, 1I%'& $ain from sale of shares of stoc< of a domestic corporation Cain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources ithin the 0hilippines regardless of here the said shares are sold. The transfer by a non<resident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless* 1. The transferor has filed ith the 'ommissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer6 or 2. The 'ommissioner has certified that the taxes, if any, imposed and due on the gain reali5ed from such sale or transfer have been paid. "#ection +2A>B, 1I%'&

"*NTING

!ERI"'S AN' MET#"'S "% A

"*NTING

=ethods of accountin) General Rule* The taxable income shall be computed upon the basis of the taxpayers annual accounting period in accordance ith the method of accounting regularly employed in keeping the books of such taxpayer.

 Exce$tion* 'omputations shall be made in accordance ith such method as in the opinion of the 'ommissioner clearly reflects the income* a. b. If no such method of accounting has been so employed6 or If the method employed does not clearly reflect the income. "#ection +3, 1I%'&

Taxa!le &ear Taxable year means the calendar year, or the fiscal year ending during such calendar year, upon the basis of hich the net income is computed. Accountin) periods 1. 'alendar year < Ganuary 1 to ;ecember 31

2. /iscal year @ an accounting period of t elve A12B months ending on the last day of any month other than ;ecember. When calendar &ear used? 1. 2. 3. 2. If the taxpayer chooses the calendar year If the taxpayer has no annual accounting period If the taxpayer does not keep books If the taxpayer is an individual

When Commissioner is authori%ed to terminate taxa!le period 1. 2. 3. +. ?hen a taxpayer retires from business sub7ect to tax ?hen he intends to leave the 0hilippines ?hen he removes his property from the 0hilippines ?hen he hides or conceals his property

-. ?hen he performs any act tending to obstruct the proceedings for the collection of the tax for the past or current !uarter or year $. ?hen he renders the collection of the tax totally or partly ineffective

=ethods of accountin) 1. 'ash 2asis

Income, profits and gains earned by taxpayer are not included in gross income until received. >xpenses are not deducted until paid ithin the taxable year. 2. (ccrual Eethod

Income, gains and profits are included in the gross income hen earned, hether received or not.

>xpenses are allo ed as deductions hen incurred, although not yet paid. 3. Eixed8Dybrid 'ombination of the cash and accrual method. +. (ny other method hich clearly reflects the income

Cash v. accrual method of accountin) Cains, profits and income are to be included in the gross income for the taxable year in hich they are received by the taxpayer, unless they are included hen they accrue to him in accordance ith the approved method of accounting follo ed by him. Tax accountin) v. financial accountin) ?hile taxable income is based on the method of accounting used by the taxpayer, it ill al ays differ from accounting income. This is so because of a fundamental difference in the ends the t o concepts serve. (ccounting attempts to match cost against revenue. Tax la is aimed at collecting revenue. It is !uick to treat an item as income, slo to recogni5e deductions as losses. Thus, tax la ill not recogni5ed deductions for contingent future losses except in very limited situations. Cood accounting, on the other hand, re!uires their recognition. "Consolidated =ines v. CTA, -) #'%( $1)& 'on)+term contracts The term .long term contracts means building, installation or construction contracts covering a period in excess of one year. "#ection +), 1I%'& Treatment of income from lon)+term contracts 1. 2. 0ercentage of completion basis 'ompleted contract basis Note* #ection +) of the 1I%' provides that .Persons #hose gross income is derive in #hole or in part from such 'long term( contracts shall report such income upon the basis of percentage of completion. The return should be accompanied by a return certificate of architects or engineers sho ing the percentage of completion during the taxable year of the entire ork performed under the contract. ales of dealers in personal propert& ( person ho regularly sells or other ise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, hich the gross profit reali5ed or to be reali5ed hen payment is completed, bears to the total contract price. "#ection +,, 1I%'&

Treatment of sales of realt& and casual sales of personalt& These include* 1. 'asual sale or other casual disposition of personal property Aother than property included in the inventory at the close of the taxable yearB for a price exceeding 01:::6 and 2. #ale or other disposition of real property. Treated either on installment basis or deferred sales basis. Installment basis < if the initial payments do not exceed 2-J of the selling price.

;eferred sales basis < if the initial payments exceed 2-J of the selling price "#ection +,, 1I%' and #ection 14-, %evenue %egulations 2& Initial pa&ments These include the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in hich the sale or other disposition is made. The term .initial payments contemplates at least one other payment in addition to the initial payment. "#ection 14-, %evenue %egulations 2& Termination of leasehold 9essor ho ac!uires building or improvements made by the lessee after the termination of the lease has t o options in reporting said income* 1. 9essor may report as income at the time hen such buildings or improvements are completed the fair market value of such buildings or improvements6 or 2. 9essor 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 of the lease an ade!uate part thereof. "#ection +,, %evenue %egulations 2& Allocation of income and deductions In the case of t o or more organi5ations, trades or businesses A hether or not incorporated and hether or not organi5ed in the 0hilippinesB o ned or controlled, directly or indirectly, by the same interests, the 'ommissioner is authori5ed to distribute, apportion or allocate gross income or deductions bet een or among such organi5ation, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organi5ation, trade or business. "#ection -:, 1I%'&

RET*RNS AN' !A(MENT "% TA+

Individual Income Tax Returns
Who are re#uired to file individual returns? 1. >very /ilipino citi5en residing in the 0hilippines

2. >very /ilipino citi5en residing outside the 0hilippines, on his income from sources ithin the 0hilippines 3. >very alien residing in the 0hilippines, on income derived from sources ithin the 0hilippines +. >very non<resident alien engaged in trade or business or in the exercise of a profession in the 0hilippines Who are not re#uired to file individual returns? 1. (n individual hose gross income does not exceed his total personal and additional exemptions. Do ever, a /ilipino citi5en and any alien individual engaged in business or practice of profession ithin the 0hilippines shall file an income tax return, regardless of the amount of gross income. 2. (n individual ith respect to pure compensation income derived from sources ithin the 0hilippines, the income tax on hich has been correctly ithheld. Do ever, an individual deriving compensation concurrently from t o or more employees at any time during the taxable year shall file an income tax return. /urther, an individual hose pure compensation income derived from sources ithin the 0hilippines exceeds 0$:,::: shall also file an income tax return. 3. (n individual hose sole income has been sub7ected to a final ithholding tax.

+. (n individual ho is exempt from income tax pursuant to the 1I%' and other la s, general or special. Where to file 1. 2. 3. (uthori5ed agent bank %evenue ;istrict 3fficer 'ollection agent

+. ;uly authori5ed Treasurer of the city or municipality in hich such person has his legal residence or principal place of business in the 0hilippines

-. 3ffice of the 'ommissioner if there be no legal residence or place of business in the 0hilippines When to file year 3n or before (pril 1- of each year covering income from the preceding taxable

Thirty A3:B days from each transaction and a final consolidated return on or before (pril 1- covering all stock transactions of the preceding year in case of sale or exchange of shares of stock not traded through a local stock exchange Thirty A3:B days follo ing each sale or other disposition in case of sale or disposition of real property ;us!and and wife Earried individuals, hether citi5ens, resident or non<resident aliens, ho do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses. Do ever, if it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the 2I% for purposes of verification for the taxable year. "eturn of parent to include income of children The income of unmarried minors derived from property received from a living parent shall be included in the return of the parent, except* 1. 2. ?hen the donors tax has been paid on such property6 or ?hen the transfer of such property is exempt from donors tax.

Self/Em$loyed Individuals
Beclaration of income tax for individuals >very individual sub7ect to income tax, ho is receiving self<employment income, hether it constitutes the sole source of his income or in combination ith salaries, ages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before (pril 1- of the same taxable year. 1on<resident /ilipino citi5ens ith respect to income from ithout the 0hilippines and non<resident aliens not engaged in trade or business in the 0hilippines are not re!uired to render a declaration of estimate income tax.

elf+emplo&ment income #elf employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of hich he is a member. "eturn and pa&ment of estimate income tax !& individuals (stimated tax >stimated tax means the amount hich the individual declared as income tax in his final ad7usted and annual income tax return for the preceding taxable year minus the sum of the credits allo ed against the said tax. If, during the current taxable year, the taxpayer reasonably expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates. The amount of estimated income shall be paid in four A+B installments.

or$orate returns
Corporation returns >very corporation sub7ect to income tax, except foreign corporations not engaged in trade or business in the 0hilippines, shall render, in duplicate, a true and accurate* 1. 2. Uuarterly income tax return6 and /inal or ad7ustment return.

The return shall be filed by the president, vice president or other principal officer, and shall be s orn to by such officer and by the treasurer or assistant treasurer. ( corporation may employ either the calendar year or fiscal year as basis for filing its annual income tax return. >very corporation deriving capital gains from the sale or exchange of shares of stock not traded through a local stock exchange shall file a return ithin thirty A3:B days after each transaction and a final consolidated return of all transactions during the taxable year on or before the fifteenth A1-thB day of the fourth month follo ing the close of the taxable year. Beclaration of #uarterl& corporate income tax >very corporation shall file in duplicate a !uarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding !uarter or !uarters upon hich the income tax shall be levied, collected and paid.

 The tax computed shall be decreased by the amount of tax previously paid or assessed during the preceding !uarters and shall be paid not later than sixty A$:B days from the close of each of the first three A3B !uarters of the taxable year, hether calendar or fiscal year. Final adCustment return >very corporation liable for tax shall file a final ad7ustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the !uarterly tax payments made during the said taxable year is not e!ual to the total tax due on the entire taxable income of that year, the corporation shall either* 1. 2. 3. 0ay the balance of tax still due6 or 'arry over the excess credit6 or 2e credited or refunded ith the excess amount paid, as the case may be.

Carr&in)+over or creditin) of excess to succeedin) #uarters In case the corporation is entitled to a tax credit or refund of the excess estimated !uarterly income taxes paid, the excess amount sho n on its final ad7ustment return may be carried over and credited against the estimated !uarterly income tax liabilities for the taxable !uarters of the succeeding taxable years. 2ut this is not automatic. 1eed to apply for crediting of such excess or tax credit to succeeding !uarters.

!ayment and assessment of Income Tax

Pa&ment of tax. in )eneral The total amount of tax shall be paid by the person sub7ect thereto at the time the return is filed. Installment pa&ment ( taxpayer, other than a corporation, may opt to pay the tax in t o e!ual installments hen the tax due is in excess of t o thousand pesos A02,:::B. In such cases, the first installment shall be paid at the time the return is filed and the second installment on or before Guly 1- follo ing the close of the calendar year. Pa&ment of capital )ains tax It shall be paid on the date the return prescribed therefor is filed by the person liable thereto.

 In case the taxpayer elects and is !ualified to report the gain by installments, the tax due from each installment payment shall be paid ithin thirty A3:B days from the receipt of such payments. Assessment and pa&ment of deficienc& tax (fter the return is filed, the 'ommissioner shall examine it and assess the correct amount of tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the 'ommissioner. Beficienc& The term deficiency means* 1. The amount by hich the tax imposed by this Title exceeds the amount sho n as the tax by the taxpayer upon his return. Do ever, the amount so sho n on the return shall be increased by the amount previously assessed Aor collected ithout assessmentB as a deficiency, and decreased by the amount previously abated, credited, returned or other ise repaid in respect of such tax6 or 2. If no amount is sho n as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by hich the tax exceeds the amounts previously assessed Aor collected ithout assessmentB as a deficiency. Do ever, such amounts previously assessed or collected ithout assessment shall first be decreased by the amounts previously abated, credited, returned or other ise repaid in respect of such tax.

6it11olding of Tax at Source

Two <inds of withholdin) 1. ?ithholding of final tax on certain incomes

2.

?ithholding of creditable tax at source

Fund withheld held in trust !& withholdin) a)ent The taxes deducted and ithheld by the ithholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. (ll taxes ithheld pursuant to the 1I%' and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled ith any other funds of the ithholding agent.

ESTATES AN' TR*STS

Taxation of estates and trusts Income tax imposed upon individuals shall also apply to the income of estates or of any kind of property held in trust. The tax shall be computed upon taxable income of the estate or trust and shall be paid by the fiduciary. What are the income of the estates or trusts which are included for taxation? 1. Income accumulated in trust for the benefit of unborn or unascertained person or persons ith contingent interests, and income accumulated or held for future distribution under the terms of the ill or trust. 2. Income hich is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant hich is to be held or distributed as the court may direct. 3. Income received by estates of deceased persons during the period of administration or settlement of the estate. +. Income hich, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. (xception from taxation of estates or trusts >mployees trust hich forms part of a pension, stock bonus or profit<sharing plan of an employer for the benefit of some or all of his employees shall be exempt from income tax* 1. If contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and the principal of the fund accumulated by the trust in accordance ith such plan6 and 2. If under the trust instrument, it is impossible, at any time prior to the satisfaction of all liabilities ith respect to employees under the trust, for any part of the corpus or income to be used for or diverted to purposes other than for the exclusive benefit of the employees. Do ever, any amount actually distributed to any employee or distributee shall be taxable to him in the year in hich so distributed to the extent that it exceeds the amount contributed by such employee or distributee. Taxa!le income of estates or trusts The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual.

 Do ever, there shall be allo ed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year hich is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant hich is to be held or distributed as the court may direct, but the amount so allo ed as a deduction shall be included in computing the taxable income of the beneficiaries, hether distributed or not. In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income hich, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allo ed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, hich is properly paid or credited during such year to any legatee, heir or beneficiary, but the amount so allo ed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary. The deductions allo ed above shall not be allo ed in case of a trust administered in a foreign country. (xemption allowed to estates and trusts There shall be allo ed an exemption of t enty thousand pesos A02:,:::B from the income of the estate or trust. Fiduciar& returns Cuardians, trustees, executors, administrators, receivers, conservators and all persons or corporations acting in any fiduciary capacity shall render a return of the income of the persons, trust or estate for hom or hich they act, and be sub7ect to all the provisions of this Title, hich apply to individuals in case such person, estate or trust has a gross income of t enty thousand pesos A02:,:::B or over during the taxable year. #uch fiduciary or person filing the return for him or it, shall take oath that he has sufficient kno ledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his kno ledge and belief, true and correct, and be sub7ect to all the provisions of this Title hich apply to individuals. Fiduciaries indemnified a)ainst claims for taxes paid Trustees, executors, administrators and other fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes hich they shall be re!uired to make under the provisions of this Title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting hich they make as such trustees or other fiduciaries.

Sponsored by
Object 1