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e. Has mixed income.

3. Non- resident citizen

A citizen of the Philippines who establishes to the


satisfaction of the CIR the fact of his physical
presence abroad with a definite intention to reside
therein;

A citizen of the Philippines who leaves the


Philippines during the taxable year
to reside
abroad, whether as an immigrant or for
employment on a permanent basis

A citizen of the Philippines who works and derives


income from abroad and whose employment
thereat requires him to be physically present
abroad at leat 183 days during the tax able year.

A citizen who has been previously considered as


nonresident citizen and who arrives in the
Philippines at any time during the taxable year to
reside permanently in the Philippines
A. 3 TYPES OF Non- resident citizen
1.
Immigrant
2. Employees of a foreign entity on a permanent
basis
3. OCW/ seamen
Taxed only on his income earned in the
Philippines. His income ab road is exempt
from Philippine income tax
A Filipino seaman is considered as OCW if he receives
compensation income for services rendered abroad as a
member of the complement of a vessel engaged exclusively
in international trade

Pilots, flight attendants and other airline


crew plying international
routes, who are holders of immigrant visas
and have left the Philippines, are NRC.

A NRC shall be entitled to personal


exemption and additional exemptions on
his income from within the PHIL

PART VII
1.

INDIVIDUAL TAXPAYERS UNDER RA 8424

Resident citizens

Non- resident citizens

Overseas contract workers and seamen

Resident alien

Non- resident aliens engaged in trade or business

Non- resident aliens NOT engaged in trade or


business

Special aliens

Estates under judicial statement

Irrevocable trust

Co- ownership

Sometimes taxed as individual and at times it is taxed as a


corporate taxpayer.

2. Resident citizens

Citizen of the Philippines are taxed on their


worldwide income.

At times, citizen can have dual tax status during a


calendar year for income tax purpose.

Citizen s of the Philippines who marry aliens shall


retain their citizenship, UNLESS they renounced
the same. They shall still be taxed on their
worldwide income

Resident citizen can be an individual who is


a. engaged in trade or business
b. In the exercise of his profession
c. Employed earning purely compensation
income
d. Not engaged in trade or business or in the
exercise of his profession nor employed but
has some income

Employees of the company assigned


abroad through second assignment with
its overseas client are NRC or OCW, if they
spend at least 183 days during any given
taxable year or if his contract passes
through the POEA

2. Non- resident aliens NOT engaged in trade or


business - an alien whose aggregate period of stay in the
Phil is DOES NOT EXCEED 180 DAYS during the calendar
year., regardless of whether he actually engages himself in
trade or business in the Phil

4. Resident alien

An individual whose residence is within the Philippines


and who is not a citizen
thereof.

Residence- presence as an inhabitant in a given place,


not as a mere transient but either indefinite as to time
or purpose that is such a nature that an extend stay
may be necessary for its accomplishment.

Taxes only on income realized within the Phil

RA earning compensation income is allowed personal


and additional exemptions including premium
allowance for health and hospitalization

RA earning business or professional income is allowed


deduction s

A. factors to determine residency

5. Non- resident aliensA. kinds of Non- resident alien

1. Non- resident aliens engaged in trade or business


- an alien whose aggregate period of stay in the Phil is
MORE THAN 180 DAYS during the calendar year.

Not allowed to use optional standard deduction of


40% in the deduction of his business or
professional expenses

Taxed only on income realized within the Phil at


the graduated rates of 5% to 32%, while his in
income from passive investments shall generally
be subject to 20% final tax
Allowed to deduct his personal exemptions subject
to the Principle of Reciprocity
but is not allowed to claim additional exemption
even if the principle is recognized.

Taxed only on income realized within the Phil


His compensation income, business or professional
income, capital gain, passive investment income,
and other incomes from sources within the Phil
are taxed at the flat rate of 25%
His capital gains from the sale or exchange of
shares of stocks in a domestic corp. and from real
property shall be subject to capital gains tax or
stock transaction tax, as in the case maybe
Since he is taxed at gross, he is not allowed to
deduct personal / additional
exemptions, health and hospitalization insurance
premiums and allowable deduction
Not also allowed to claim tax credit on foreign
taxes paid on his income earned within
Not required to file a Phil income tax return bcoz
the withholding agent will do that for him

6. Special aliens
a. multinational Company- refers to a foreign firm or entity
engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia pacific Region and other foreign
markets.


b. the 180 rule does not apply

estate under juridical statement and irrevocable trust considered single individual

Who are not entitled?


7. RA 9295 DUAL CITIZENSHIP LAW- native born Filipinos
who lost their Philippines citizenship may now engaged in
business or buy real properties in the Philippines. If they do,
they shall be taxed as NRC whenever income from sources
within the Philippines is realized.

11. ADDITIONAL EXEMPTION- a taxpayer is entitled to


additional exemption from his gross income of P25,000 per child
maximum of 4, whether legitimate or illegitimate, who is not more
than 21 yrs of age, unmarried and unemployed wholly dependent
upon him for chief support and living with such person.

8.
9.
10. Personal exemption- these are arbitrary amounts
allowed for personal, living or family expenses of the taxpayer.
They are available only to individual taxpayers and not juridical
persons. They are deducted from gross compensation income
and/or business and/or profession income of taxpayer.

WHO MAY CLAIM ADDITIONAL EXEMPTION FOR


DEPENDENTS?

2 kinds of exemption:

married individual whether his qualified dependents are


legitimate, illegitimate or legally adopted
head of the family
legally separated spouses
single individual with qualified dependent child or children

12. MEANING OF DEPENDENTS UNDER RA 9504 and RA 9994

1. Basic personal exemption- pertains to the taxpayer himself and


is based on hos status.

13. RULES ON CHANGE OF STATUS

if during the taxable year the taxpayer marries or should


have additional dependent(s), he may claim the personal
or additional exemption, as the case may or, in full for
such year.

2. Additional exemptions for his qualified dependent children.


Who are entitled to personal exemption?

NRAEBT- when no reciprocity


NRANEBT

RC
NRC including OCW and seamen
RA
NRA engaged in trade or business subject to the principle
of reciprocity

if the taxpayer dies during the taxable year, his estate may
still claim the personal and additional exemption for
himself and his dependent(s) as if he died at the close of
the year.

if during the taxable year, the spouse dies, or any of the


dependent dies, or marries, or becomes 21 or gainfully
employed- the taxpayer may still claim the same
exemptions as if the change occurred at the close of such
year.

d. Special Corporations- are those that are subject to tax bases


and rates other than the usual rates (30% now) and bases being
applied to ordinary corporations.
1. Special Domestic Corporations, classified
a. Private educational institutions/hospitals maintained and
administered by private individuals or groups- 10%, but if the
gross income from allied services, business or activity exceeds
50% of the total income from all sources, it shall be taxed at 30%.
b. GOCC, Agencies and Instrumentalities including PAGCOR- same
tax rate upon their taxable income in a similar business, industry
or activity. EXCEPT: GSIS, SSS; PHIC and PCSO
c. Depositary banks- on interest income earned from foreign
currency transactions including interest income from foreign loans.
aa. Predominance Test Rule- if the gross income from unrelated
trade, business or other activity exceeds 50% of the total gross
income derived by such schools or hospitals from all sources, the
tax shall be based on the usual tax rates imposed on ordinary
corporations.
bb. Unrelated trade, business or other activities- this refers to any
trade, business or other activites, the conduct of which is not
substantially related to the exercise of performance by such
educational institution or hospital of its primary purpose or
function.
cc. Preferential Tax Rule- the 10% preferential rate is on their
taxable income earned from educational services, except on their
passive income
2. Special Resident Foreign Corporation
aa. Resident International Carriers- at 2.5% on Gross Philippine
Billings.
International Air Carrier- this is foreign airline corporation
doing business in the Philippines having granted landing rights in
any Philippine port to perform international air transportation
services/activities or flight operations anywhere in the world
Offline Carrier- an international air carrier with no landing
rights and flight operations to and from the Philippines
bb. International Shipping Corporations- taxed at 2.5% on Gross
Philippine Billings same as international carriers.
cc. Offshore banking Units (OBUs)- 10% on any interest income
derived from foreign currency loans granted to residents other
than offshore banking units or local commercial banks, including
local branches of foreign banks that may be authorized by the BSP

to transact business with offshore banking units. (But interest


income derived by OBUs authorized by BSP from foreign currency
transactions on loans granted is EXEMPT from income taxation.
Foreign Currency Division Unit (FCDU)- is a local bank allowed
by the BSP to engage in foreign currency transactions
dd. Regional or Area Headquarters of MNC- Branches established
in the Philippines but no income is earned or derived by it from the
Philippines. They act as supervisory, communications and
coordinating center for affiliates, subsidiaries, branches in AsiaPacific Regions and other foreign marketers or for information
dissemination, production promotion and the performance of
quality control of goods for export to its head office or affiliatesNOT SUBJECT TO PHILIPPINE INCOME TAX
ee. Regional Operating Headquarters of Multi-national
Corporations- taxed on their income earned within the Philippines
at 10% realized by its branches established in the
Philippines. Branches of MNC that are engaged in various services
and generating income from sources within the Philippines
3. Special Non-Resident Foreign Corporations
aa. Non-resident lessors of vessels chartered by Philippine
Nationals
-taxed on gross rentals, lease and charter fees from lease
to Filipino citizens/ corporations as provided under the Maritime
Industry Authority at 4.5%
bb. Non-resident lessor of aircraft, machinery, and other
equipment
-taxed on rentals, charter and other fees at 7.5%
cc. Non-resident cinematographic film owners, lessors or
distributors- taxed on gross income
-taxed on gross income from Philippines sources at 25%

9. Tax Exempt Corporations under Sec. 30, NIRC


1. Labor, agricultural or horticultural organization not
organized principally for profit;
2. Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without
capital

stock organized and operated for mutual purposes and without


profit;

10. Corporations subject to Net Income Tax (Sec. 27 and 28 (A),


NIRC

3. A beneficiary society, order or association operating for


the exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid
association or a non-stock corporation organized by employees
providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or
association, or non-stock corporation or their dependents;

Corporations under Sec. 22(B) (30%)


-

4. Cemetery company owned and operated exclusively for


the benefit of its members;
5. Non-stock corporation or association organized and
operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inures to the benefit of
any member, organizer, officer or any specific person;
6. Business league chamber of commerce, or board of
trade, not organized for profit and no part of the net income of
which inures to the benefit of any private stock-holder, or
individual;

The term "corporation" shall include


partnerships, no matter how created or
organized, joint-stock companies, joint
accounts (cuentas en participacion),
association, or insurance companies, but does
not include general professional partnerships
and a joint venture or consortium formed for
the purpose of undertaking construction
projects or engaging in petroleum, coal,
geothermal and other energy operations
pursuant to an operating consortium
agreement under a service contract with the
Government.

Proprietary Educational Institutions and Hospitals

7. Civic league or organization not organized for profit but


operated exclusively for the promotion of social welfare;

Non-profit
- 10% on their taxable income except those covered by
subsection D (passive income)

8. A non-stock and non-profit educational institution;


9. Government educational institution;

-30% for unrelated trade, business or other activity which


exceeds 50% of the total gross income

10. Farmers' or other mutual typhoon or fire insurance


company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a purely
local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole
purpose of meeting its expenses; and

Government owned or Controlled Corporations, Agencies or


Insturmentalities
-

11. Farmers', fruit growers', or like association organized


and operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds of
sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them. (Sec. 30, NIRC)

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

EXCEPT: GSIS, PHIC (Philippine Health Insurance


Corp.), SSS and PCSO

Note: The income of whatever kind 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 the NIRC.

Resident Foreign Corporations (sec. 28(A)

-subject to an income tax equivalent to 30% of the


taxable income derived from all sources within the
Philippines

-30% for unrelated trade, business or other activity which


exceeds 50% of the total gross income
13. Corporate Income Subject to Final tax:
a)

11. Corporation Subjected to GROSS Income Tax (Sec. 28 (B),


NIRC

1.

On Domestic Corporations ( Sec. 27 (D) (1-5)


1.

Interest from Deposits and Yield or any


other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar
Arrangements, and Royalties
-final tax at the rate of 20% by
corporations, and royalties, derived from
sources within the Philippines

2.

Capital Gains from the Sale of Shares of


Stock Not Traded in the Stock Exchange
-A final tax at the rates prescribed below shall
be imposed on net capital gains realized during
the taxable year from the sale, exchange or
other disposition of shares of stock in a
domestic corporation except shares sold or
disposed of through the stock exchange:
Not over
P100,000..... 5%
Amount in excess of
P100,000.. 10%

NONRESIDENT FOREIGN CORPORATION


Foreign corporation not engaged in trade or business in the
Philippines shall pay a tax of 30% of the gross income received
within the Philippines

2.

Nonresident Cinematographic Film Owner, Lessor or Distributor.


- A cinematographic film owner, lessor, or distributor shall pay a
tax of twenty-five percent (25%) of its gross income from all
sources within the Philippines.

3.

Nonresident Owner or Lessor of Vessels Chartered by Philippine


Nationals. - A nonresident owner or lessor of vessels shall be
subject to a tax of four and one-half percent (4 1/2%) of gross
rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Industry
Authority.

4.

Nonresident Owner or Lessor of Aircraft, Machineries and Other


Equipment. - Rentals, charters and other fees derived by a
nonresident lessor of aircraft, machineries and other equipment
shall be subject to a tax of seven and one-half percent (7 1/2%) of
gross rentals or fees.

3.

Income under EFC (D) (sec. 27 (1) (3)


(1)

12. Domestic Corporations Subject to Special Tax Rates ( Sec. 27


(B), NIRC
Proprietary Educational Institutions and Hospitals
Non-profit
- 10% on their taxable income except those covered by
subsection D (passive income)

interest income derived by a


domestic corporation from a depository
bank under the expanded foreign
currency deposit system shall be
subject to a final income tax at the
rate of seven and one-half percent (7
1/2%) of such interest income.

(3) Income derived by a depository bank


under the expanded foreign currency
deposit system from foreign currency
transactions with local commercial banks,
including branches of foreign banks that
may be authorized by the Bangko Sentral
ng Pilipinas (BSP) to transact business with
foreign currency depository system units
and other depository banks under the
expanded foreign currency deposit system,
including interest income from foreign
currency loans granted by such depository
banks under said expanded foreign
currency deposit system to residents, shall
be subject to a final income tax at the rate
of ten percent (10%) of such income.

Any profit remitted by a branch to its head office shall


be subject to a tax of fifteen (15%) which shall be based on the
total profits applied or earmarked for remittance without any
deduction for the tax component thereof (except those activities
which are registered with the Philippine Economic Zone Authority).
3. Interest from Depostits and yields or any other
Monetary Benefit from Deposit substitutes, Trust Funds and Similar
Arrangement and Royalties
- Interest 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
within the Philippines shall be subject to a final income tax at the
rate of twenty percent (20%) of such interest
4. Income derived under EFCO (sec. 28 (A) (7) (b)
-Income derived by a depository bank under the expanded
foreign currency deposit system from foreign currency transactions
with local commercial banks including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system units,
including interest income from foreign currency loans granted by
such depository banks under said expanded foreign currency
deposit system to residents, shall be subject to a final income tax
at the rate of ten percent (10%) of such income.

4. Capital Gains Realized from the Sale, Exchange or


Disposition of Lands and/or Buildings. - A final tax of
six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale, exchange
or disposition of lands and/or buildings which are not
actually used in the business of a corporation and are
treated as capital assets, based on the gross selling
price of fair market value as determined in accordance
with Section 6(E) of this Code, whichever is higher, of
such lands and/or buildings.

5. Capital Gains from Sales of shares of Stock not traded in


Stock (Sec. 28 (A) (7) (c)
-A final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable
year from the sale, barter, exchange or other disposition of shares
of stock in a domestic corporation except shares sold or disposed
of through the stock exchange:
Not over P100,000...... 5%
On any amount in excess of P100,000. 10%

B. On Resident Foreign Corporations


1. Income Derived By OBU (Sec. 28 (A) (4);
Offshore Banking Units. - The provisions of any law to
the contrary notwithstanding, income derived by offshore banking
units authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking units, including any
interest income derived from foreign currency loans granted to
residents, shall be subject to a final income tax at the rate of ten
percent (10%) of such income.

C. On Non-Resident Foreign Corporations:

2. Tax on Branch Profis Remittances (Sec. 28 (A)

1. Gross Income (Sec. 28 (B) (1)

-a foreign corporation not engaged in trade or business in the


Philippines shall pay a tax equal to thirty-two percent (32%).of
the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits and income, and capital gains,
except capital gains subject to tax under subparagraphs (C) and
(d)

the taxable year from the sale, barter, exchange or other


disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange:
Not over P100,000............5%
On any amount in excess of P100,000 10%

2. Nonresident Cinematographic Film Owner, Lessor or


Distributor. - A cinematographic film owner, lessor, or distributor
shall pay a tax of twenty-five percent (25%) of its gross income
from all sources within the Philippines
3. Nonresident Owner or Lessor of Vessels Chartered by
Philippine Nationals. - A nonresident owner or lessor of vessels
shall be subject to a tax of four and one-half percent (4 1/2%) of
gross rentals, lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by the Maritime
Industry Authority.
4. Nonresident Owner or Lessor of Aircraft, Machineries
and Other Equipment. - Rentals, charters and other fees derived
by a nonresident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one-half percent
(7 1/2%) of gross rentals or fees.
5. Interest on Foreign Loans - A final withholding tax at
the rate of twenty percent (20%) is hereby imposed on the
amount of interest on foreign loans contracted on or after August
1, 1986;
6. Intercorporate Dividends. - A final withholding tax at
the rate of fifteen percent (15%) is hereby imposed on the amount
of cash and/or property dividends received from a domestic
corporation..
7. Capital Gains from Sale of Shares of Stock not
Traded in the Stock Exchange. - A final tax at the rates prescribed
below is hereby imposed upon the net capital gains realized during

1. Basic Principles
a. Strict Construction Against the Taxpayer

the burden of proving the legality and


correctness of the deduction claimed rest
upon the taxpayer

Deductions are construed strictly against


the taxpayer

Exemption claimed on the ground that


another person similarly situated is not
required to pay the tax is unjustified and
not allowed

the deductions must be paid and or


incurred in connection with the taxpayers
trade, business or profession

Compensation income earners are NOT


allowed deductions from their gross income

The taxpayers qualified to deduct can avail


of any and all deductions authorized by law
to minimize his tax liability. Thus, if there
is an express mention in the law that he is
qualified or if he falls within the express
purview of the exemption by clear
legislative intent, the rule on strict
construction will not apply to him

These are income or receipts


earned or received which are
excluded from gross income.
It pertains to the computations
of gross income
These are things received or
earned by the taxpayer which
do not form part of his gross
income.

They are deductions which the


law allows to be subtracted
from gross income to arrive at
the net income.
Pertains to the computation of
the net income.
These are spent or paid in
earning the gross income.

d. Deductions as distinguished from Personal


Exemptions
ALLOWABLE
PERSONAL
DEDUCTIONS
EXEMPTIONS
These are actual business or
This are arbitrary amounts
professional incurred in the
representing personal daily
pursuit of trade, business or
living expenses allowed as a
profession
deduction by law to qualified
individual taxpayers.
Can be claimed by individual or
Can be claimed by qualified
corporate taxpayers
individual taxpayers only
Deductions must be supported
No need of supporting receipts
with receipts
They are allowed deductions to
They are allowed to cover
enable the taxpayer to recoup
personal, family and living
his cost of doing business
expenses

b. Cohan Rule Principle


Under this principle, taxpayers may use estimates
when they can show that there is some factual foundation
on which to base a reasonable approximation of the
expense, they can prove that they had made a deductible
expenditure but just cannot prove home much that
expenditure was. (cohan vs. Com. 36 F (2d) 540)
It is the use of estimates or approximations of the amount
of cash and other assets where the taxpayer lacks
adequate records.

e. Deductions as distinguished from Tax Credit


ALLOWABLE TEX
TAX CREDIT
DEDUCTIONS
Deductible from gross income
Deductible from Philippine tax
before the tax is computed
due
It reduces the tax payers
It reduces the taxable income
liability dollar for dollar
upon which the tax liability is
calculated
Sources: Deductible taxes, such
Sources; Foreign income tax,
as ; business tax , excise tax,
war-profits and excess profit
percentage tax and other
tax and estate tax.
business connected taxes

c. Deductions as distinguished from Exclusions


EXCLUSION
ALLOWABLE
DEDUCTIONS
Applicable to ALL kinds of
Applicable to persons engage in
taxpayers
business, trade, profession and
corporate taxpayers.

10

g. Proprietary Educational Institutions and Hospital which


are non-profit
h. GOCC, agencies or Instrumentalities which are nonexempt
i. Resident Foreign corporations

2. Deductions, defined
These are amounts or expenses allowed by law to be
subtracted from gross income to arrived at the taxable income.
3. Kinds of Deductions
A) Itemized deductions-Secs. 34(A) to (J) and (M).
(A) Expenses
(B) Interest
(C) Taxes
(D) Losses
(E) Bad debts
(F) Depreciation
(G) Depletion of oil and gas wells and mines
(H) Charitable and other contributions
(I) Research and development
(J) Pension trusts
(M) Premium payments on health and/or hospitalization
insurance of an individual taxpayer
B) Optional Standard Deductions (OSD)- - In lieu of the deductions
allowed under the preceding Subsections, an individual subject to
tax under Section 24, other than a nonresident alien, may elect a
standard deduction in an amount not exceeding ten percent (10%)
of his gross income

5. Itemized Deductions from Gross Income:


a. Expenses
b. Interest
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion of Oil and Gas Wells and Mines
h. Charitable and Other Contributions
i. Research and Development
j. Pension Trust
k. Optional Standard Deductions
l. Premium Payments on Health and/or Hospitalization
Insurance of individual taypayer
6. On Business Expenses
a. Nature and Scope
They are ordinary and necessary expenses directly
incurred or paid during the taxable year in carrying on the
taxpayers trade, business or profession or which are directly
related to the development, management, operation and/or
conduct of the business trade or profession. (commission, labor,
supplies, incidental repairs, operating expenses of transportation,
etc.)

C) Special Deductions These are deductions allowed to be


deducted in addition to the itemized deductions allowable to
corporations which may be availed of by insurance companies,
mutual insurance companies, mutual marine insurance
companies, assessment insurance companies (Sec. 37), estates
and trusts (Secs. 61, 63) and private educational institutions [Sec.
34 (A,2)].

b. Requisites for deductibility


4. Entitled to Avail of Itemized Deductions:
a. Resident Citizen
b. Non-resident Citizen
c. Resident Alien
d. Non-resident Alien Engaged in Trade or Business in the
Philippines
e. Partners in General Professional Partnership
f. Domestic Corporations

1. it must be ordinary and necessary


2. it must be paid or incurred during the taxable year
3. It must be directly connected with taxpayers trade,
business or profession
4. The tax required to be withheld on the expense paid or
payable is shown to have been remitted to the BIR
5. It must be reasonable and substantiated by adequate
proofs

11

6. It must not be against morals, public policy and public

2. In the pursuit of trade or business


3. Must be reasonable and necessary

order
(1) Ordinary Expense, defined
- those payments which are normal (need not be habitual)
in relation to the business of the taxpayer, or one generally
incurred also by taxpayers in the same or similar line of business
or trade

3) Rentals
aa. Requisites:
1. Payment was made as a condition to the continuous use
of or possession of the property
2. Taxpayer has not taken or is not taking title to the
property or has no equity other than that of a lessee, user or
possessor;
3. Property must be used in the trade or business
4. Subject to withholding tax (5%) if business property the
rental must be at least P500 in case of non-business or residential
property the rental is at least p10,000 subject to 5% tax

(2) Necessary Expense, defined


- those that will minimize loss and maximize profit or those
that are appropriate and helpful to the taxpayers business
Expenses that are useful and reasonable such as salaries
and other compensation for personal service actually rendered to
the taxpayer, cost of supplies, transportation expense, reasonable
and legitimate representation and ordinary repair and maintenance
due to wear and tear.

bb. Items deductible under Rental Expense


(3) Paid or Incurred within the year, defined
PAID- if the taxpayer keeps his books on the cash
receipts basis- expenses are deductible in the year they are paid

1. An aliquot of such sum each year based on the number


of years the lease will cover
2. Taxes of the lessor paid by the lessee under contract of
lease is added to the monthly rental and claimed as a rent expense
by the lessee.
3. Obligations of the lessor to third persons assumed or
paid by the lessee constitute additional rent
4. Cost of erecting a building or making permanent
improvements borne by a lessee is a capital investment and NOT
deductible as a business expense.

INCURRED- if the taxpayer keeps his books on the


accrual basis, expenses are deductible in the year they are
incurred, whether paid or not.
c. Kinds of Business Expense
1) Compensation for personal service- (1) actually rendered
(2) reasonable

4)Entertainment, amusement and recreation expenses


aa. Requisites
1) must be directly connected to the development,
management and operation of the trade, business or profession of
the taxpayer, or incurred to promote the business of the taxpayer
2. Must be reasonable
3. Must not be contrary to laws, morals and public policy
or public order
4. Must be substantiated with sufficient evidence such as
or other adequate records

aa. Requisites:
1. Service actually rendered
2. Compensation is for such services rendered
3. Reasonable
2) Traveling Expenses not only for transportation fare but
includes meals and lodging in connection with the trade, business
or profession of the taxpayer, whether local or foreign
aa. Requisites:
1. Incurred while away from home

12

5. Persons or guests entertained are those with whom the


taxpayer has direct business relations, such as but not limited to
current or potential clients or customers.

1) expenses on minor or ordinary repairs are deductible


from gross income because it keeps the assets in its ordinary and
efficient working condition. They do not materially add to the value
of the property nor prolong its life.
2) Expenses on major or extraordinary repairs are NOT
deductible because it is capitalized and subject to depreciation
expense. Major Expense tends to prolong life of the asset.

bb. Expenses not treated as entertainment, amusement and


representation expenses
1. expenses for charitable and fund raising events
2. expenses for bonfire business meetings or stockholders,
partners and/or directors
3. expenses for events organized for promotion,
marketing, advertising, conference, seminars, workshops,
conventions and other similar events
4. Other expenses of similar nature

9) Advertising and other Selling Expenses


Advertising expenses incurred to take advantage of the
holidays or special occasions are ordinary expenses deductible in
full. Whereas, those that will stimulate future sales or to create
favorable company image are considered capital expenditures

cc. Illegal expenses- on legitimate business such as those that


are contrary to law, morals, public policy or public order are nondeductible, examples:
1. Expenses that are illegal (bribe and kickback)
2. Any payment made to official or employees of the
national government, local government unit, GOCCs or to
representatives of foreign government, private corporation,
representatives of foreign government, private corporation, GPP or
any similar entity if it constitutes a bribe or kickback
3. Expenses to obtain contracts with private firms or
individuals are deductible if it is not contrary to law, public policy
and morals
4. Payments to secure political influence to obtain
favorable public contracts are non-deductible
5. Police protection

10) Insurance Premiums- against fire, storm, theft, accident or


other similar losses in the case of a business or trade
11) Expenses to farmers- those incurred in the operation of a
farm for profit or commercial basis and not merely for recreation
or pleasure.
1) cost of ordinary tools of short-life or small cost for hand
tools, shovel, rakes and the like
2) Cost of feeding and raising livestock, except farm
produce grown on the farm or through the labor of the farmer
3) Cost of gasoline or fuel, repair and upkeep of
transportation equipment used wholly in farming or only a portion
of such expense if the equipment is used partly for pleasure or
convenience of the farmer.
4) cost of fertilizers, seeds and seedlings
aa. Non-deductible expenses to farmers
1) cost of farm machinery, equipment and farm buildings
2) amounts spent in the development of farms, orchards
and ranches, prior to the time when the productive state is
reached

5) Cost of Materials and Supplies


-deductible only to the amount actually consumed or used
in operation during the year
-cost of good purchased for resale with proper adjustment
for opening and closing inventories, is deductible from gross sales
in computing gross income.
6) Equipment Used in trade business
- Expenses on repairs, maintenance and operation are
deductible
7) Advertising and other Selling Expenses
8) Maintenance and Incidental Repairs

12 Other business expenses


a) Pre-operating expenses- are deferred expenses and
deducted from gross income for not more than 60 months. The
amortization period commences with month in which the business
begins. Such as expenses incurred before and in anticipation of,

13

the start of the business in an activity for profit or the production


of income
b) Organization costs are amortized over the life of the
corporation
c) Cost of defending a civil suit affecting the business is
deductible, irrespective of the outcome of the defense
d) Judgment or other binding adjudication on account of
damages for patent infringement, personal injuries, or other
causes, are deductible when the claim is adjudicated and paid
e) Promotion expenses
f) Overhead expenses incurred by foreign head office
related to the production of Philippines-derived income or to
Philippine operations of the branch are deductible expenses of the
local branch without apportionment

-Method of borrowing without entering into a debtor-creditor


relationship to resolve financing and exchange control problem.
Oftentimes, it is used to circumvent the law and has the effect of
lowering the taxes due the government.
e. Deductible Interest Expense
1) Interest on taxes paid on deficiency or delinquency, provided
the tax is a deductible tax, except on income tax. But fines and
penalties on account of taxes are not deductible. Surcharge for
late payment is also non-deductible from income tax
2) interest on scrip dividends paid by a corporation
3) Interest on deposits paid by banks or trust companies to
depositors; if it is shown that the tax on such interest was withheld
and paid
4) interest paid by a corporate taxpayer who is liable on mortgage
upon real property of which the said corporation is the legal or
equitable owner, even though it is not directly liable for the
indebtedness
f. Non-deductible interest expense
1) an individual taxpayer reporting income on a cash basis incurs
and indebtedness where advance interest was paid. Such interests
may be deducted only when principal was likewise paid.
2) interest paid on indebtedness between related relatives
3) interest on indebtedness incurred or continued to purchase or
carry obligations the interest on which is exempt from tax.
4) Interest on indebtedness incurred to finance petroleum
exploration
5) Interest on unpaid salaries and bonuses
6) Interest paid where no stipulation for such payment was agreed
7) Interest paid on unenforceable obligation
8) Interest paid on preferred shares of stocks.
9) Interest on preferred stocks which in reality is dividend thereon.
Preferred shares are considered capital regardless of the conditions
under which such shares are issued and consequently, dividends or
interest paid thereon shall not allowed as a deduction from gross
income of the corporation
10) Advances given without any expectation of repayment do not
give rise to valid and subsisting debts. Interest incurred thereon is
non-deductible
11) Interest calculated for cost-keeping or other purposes on
account of capital or surplus invested in the business which does
not represent a charge arising under an interest-bearing obligation

7. On Interest Expense
a. Interest, defined -the amount paid by a debtor to his
creditor for the use or forbearance of money, goods or credits.
b. Requisites:
1. There is an indebtedness
2. The indebtedness must be that of the taxpayer
3. In connection with taxpayers profession, trade or business
4. There is liability to pay interest on the debt
5. The interest must have been paid or incurred within the year
6. It must not be expressly disallowed by law to be deducted from
taxpayers gross income
7. it must be within the limit set by law
8. The interest payment must not be made between related parties
c. Interest expense as amended by RA 9337
-The tax Code provides that the tax payers otherwise allowable
deduction as interest expense shall be reduced by 42% (previously
38% under RA 8424) of the interest income subjected to final tax.
Provided that effective January 1, 2009 the percentage shall be
33%.
d. Tax Arbitrage, defined
- The simultaneous payment of taxes and income earnings on the
same loan proceeds in order to profit from such price
discrepancies.

14

12) Interest paid abroad by non-resident parent/holding company


in respect of which no deduction is allowable to its branch in the
Phil. unless the indebtedness was incurred to provide funds for
investment in the said resident branch, the income from which is
taxable and provided the branch submits as authenticated copy of
the investment agreement and such other information required.

However, a corporation paying the tax for the holder of its bonds
or other obligations containing a tax-free covenant clause cannot
claim deduction for such taxes paid by it pursuant to such
covenant.
c. Requisites for Deductibility:

g. Related Parties
1. Between family members- including taxpayers brother and
sister, whether full or half-blood spouse,, ancestors and lineal
descendants

a) Paid or incurred within the taxable year;


b) Must not be specifically excluded by law from being
deducted from taxpayers gross income;
c) Deductible only by the person(s) upon whom the tax is
imposed by law;
d) Connected with taxpayers profession, trade or business.

2. Between an individual and a corporation- where more than 50%


in value of the outstanding stock of which is owned directly or
indirectly by or for such taxpayer. Except, in the case of
distributions in liquidation

d. Taxpayers allowed to claim taxes as deductions:


1. Resident citizen
2. Non-resident citizen, OCW and seamen
3. Resident alien
4. Non-resident alien engaged in trade or business in the
Philippines
5. Members of a general professional partnership
6. Domestic corporation
7. Resident foreign corporation

3. Between two corporations- Except in the case of distribution in


liquidations, between two corporations more than 50% in value of
the outstanding stock of each of which is owned, directly or
indirectly, by or of the same individual, if either one of such
corporations, with respect to the taxable year of the corporation
preceding the date of the loans was under the law applicable to
such taxable year, a personal holding company or a foreign
personal holding company

e. Deductible taxes:
1. Import duties
2. Business, occupation, license, privilege, excise and permits
3. Percentage tax and tax on gross receipts paid or accrue
4. Privilege or occupation taxes
5. Fringe benefit taxes under certain conditions
6. Automobile registration fees (taxes in nature)
7. Documentary stamp taxes
8. Income, war-profits and excess-profits taxes imposed by
the authority of any foreign country only if the taxpayer
does not signify in his return his desire to have any extent
the benefits of the provisions of law allowing credits
against the tax for taxes of foreign countries
9. Any other taxes of every amount and nature paid directly
to the government or any political subdivision

4. Between the fiduciary of a trust and fiduciary of another trust if


the same person is a grantor with respect to each trust
5. between the grantor and a fiduciary of any trust m
8. On Taxes
a. General: All taxes (main), whether national or local,
paid or incurred within the taxable year, in connection with the
taxpayers profession, trade, business excluding surcharge,
penalties and fines incident to delinquency.
b. Exception: Taxes of shareholder upon his interest as
such and paid by the corporation without reimbursement from him
can be claimed as deduction by the corporation.

15

h. Taxes that can be claimed as Tax Credit


1. Income tax
2. War profit taxes income taxes by reason or on occasion
of war in order to raise funds to prosecute the war and
reach income of war millionaires
3. Excess profit taxes income taxes imposed upon
excessive earnings occurring during garrison economic life
in times of undeclared war
4. Taxes paid by authority of a foreign government

f. Non-deductible taxes:
1. Income tax (Philippine or foreign)
2. Value Added Tax
3. Estate and donors taxes
4. Special assessment of levies on properties
5. Energy tax
6. Taxes not related with trade, business or profession of the
taxpayer
7. Taxes which are final in nature
8. Stock transfer tax on shares that are listed or traded in the
exchanges which are final in character
9. Taxes assessed against local benefits
10. War profit tax
11. Foreign income taxes imposed by authority of a foreign
country

Tax credit a taxpayers right to deduct from the income tax due
the amount of the tax he has paid to a foreign country subject to
specified limitations
Purpose: to lessen the effects of international double or multiple
taxations
Taxpayers Entitled to Claim Tax Credits
1. Citizens of the Philippines
2. Members of the general professional partnership
3. Beneficiaries of an estate or trust
4. Resident aliens under the Principle of Reciprocity

g. Limitations on deductions of Resident


Limited to the extent that such taxes are connected with
income realized from sources within the Philippines
Tax on interest of shareholder paid by corporation without
reimbursement is not deductible from gross income, but
also not treated as income of the shareholder
In case of corporate bonds or other obligations containing
a tax-free covenant clause, the corporation paying a tax or
any part of it for someone else pursuant to an agreement
is not entitled to deduct such payment from gross income
on any ground
In the case of a resident alien whose income from sources
within such foreign country is not taxable, then only that
portion of the taxes paid to such foreign country which
corresponds to his net income taxable shall be allowed as
deduction
An alien individual and a foreign corporation shall not be
allowed the credits against the tax for the taxes of foreign
countries allowed in Sec. 34 (C) (3) of the Tax Code

Taxpayers Not Entitled to Claim Tax Credits


1. Non-resident citizens
2. Non-resident aliens
3. Resident aliens deriving income solely from the Philippines
4. Foreign corporations
a. Country Limitation Rule only one foreign tax was paid
b. Formula:
Taxable income from foreign country Taxable income from all
sources x Philippine Income tax
When tax credit is applied

The taxpayer at his option and irrespective of the


accounting method employed in keeping his books should
take such tax credit for taxes in the year in which the

16

taxes for the foreign country accrued. An election thus


made by him must be followed in the tax returns for all
subsequent years. No portion of any such tax credit may
be allowed as a deduction from gross income

d. Amount deductible on losses sustained from property


connected with business trade or profession:
1) In case of total destruction the net book value (cost
less accumulated depreciation) immediately preceding the
casualty to be reduced by any amount of insurance or
compensation received
2) In case of partial destruction the replacement cost to
restore the property to its normal operating condition, but
in no case shall the deductible loss be more than the net
book value of the property as a whole, immediately before
casualty. The excess over the net book value immediately
before the casualty should be capitalized, subject to
depreciation over the remaining useful life of the property

9. On Losses
a. Coverage: Such losses which do not come under the category
of bad debts, inventory losses, depreciation and the like and which
arise in taxpayers profession, trade or business.
b. Requisites for Deductibility:
a) The loss must that be of the taxpayer
b) Actually sustained during the taxable year
c) Connected with the business, trade or profession of the
taxpayer
d) No compensated by insurance or other form of indemnity
e) Evidenced by a closed and completed transaction
f) Not claimed as a deduction for estate tax purposes
g) If it is a casualty loss, must be reported to the concerned
authorities with prescribed time

e. Types of Losses:
1. Ordinary losses
2. Capital losses
3. Special losses
I.

Ordinary losses:
a) by individuals losses actually sustained during
the taxable year, not compensated for by
insurance, incurred in connection with trade,
business or profession, or arising from fire, storm,
shipwreck, or other casualties, or from robbery,
theft or embezzlement
b) by resident aliens and foreign corporations losses
actually sustained business, trade or exercise of
profession conducted within the Philippines, when
such losses are not compensated for by insurance
or other forms of indemnity
c) by domestic corporations all losses actually
sustained and charged off within the taxable years
and not compensated for by insurance

II.

Capital Losses

Marcelo Doctrine if one business is taxable and the other is


exempt, the loss in the exempt business is not deductible from the
profits of the former
c. Allowed deductible losses to Non-Resident Foreign
Corporations
1. Losses sustained in business or trade in the country
2. Casualty losses in such business or trade conducted within
the Philippines arising from fire, storms, shipwreck,
TRECUSO (losses due to theft, robbery, embezzlement,
calamity and unexpected sudden occurrences) and
3. Losses actually sustained in transactions entered into for
profit in the Philippines, although not connected with their
trade or business in the Philippines

17

a) losses from sale or exchange of capital asset shall be allowed only to the extent of the gains
from such sale or exchange
b) losses resulting from securities becoming worthless
and which are capital assets
c) losses from short sales of property shall be
considered as losses from sales or exchanges of
capital assets
d) losses due to failure to exercise privilege or option
to buy or sell property shall be considered as
capital losses

III.

f. Losses on sales which are not deductible:


a) Loss from sale or exchange of property is not allowed
except in case of distribution of liquidating dividends
b) Losses between corporations if more than 50% in value of
the outstanding stock in both is owned, directly or
indirectly, by the same individual and only if either one of
the corporation were a personal holding company for the
taxable year preceding the date of the sale or exchange
c) Also not deductible:
1. Decline in market value of securities
2. Capital losses, to the extent not covered by capital
gains
3. Loss on exchange of property, where the property
received is not essentially different from the property
disposed of
4. Loss on wash sale of stock or securities
5. Loss due to shrinkage in value of stocks; loss allowed
only when actualized
6. Loss in pursuance of a merger or consolidation
7. Loss in pursuance of a transfer to a controlled
corporation
8. Loss upon demolition of building acquired with land,
when the building was never intended to be used in
business
9. Loss from illegal transaction

Special Losses (kinds)


1. Wagering loss deductible only to the extent of
gain or winnings
2. Losses on wash sales of stocks not deductible
because these are considered as artificial loss
3. Abandonment losses in petroleum operation and
producing well
4. Losses due to voluntary removal of building
incident to renewal or replacements deductible
expense from gross income
XPN: when the building was never intended to be
used when the asset was acquired, it is not a
deductible loss

g. Net Operating Loss Carry-Over (NOLCO) refers to the


excess of allowable deduction over gross income. It can be carried
over as a deduction from gross income for the next 3 consecutive
years immediately following the year of such loss

5. Loss of useful value of capital asset due to changes in


business conditions deductible expense only to the extent of
actual loss sustained
6. Losses from sales or exchange of property between
related taxpayers losses of this nature are not deductible but
gains are taxable

(1) Requisites for Deductibility:


a) The net loss had not been previously offset as deduction
from gross income
b) The taxpayer was not exempt from income tax in the year
of such net operating loss

7. Losses of farmers if incurred in the operation of farm


business, it is deductible

18

c)

No substantial change in the ownership of the business or


enterprise

Those entities not covered by EO 226 losses incurred in


the first 10 years of operation maybe carried over as a
deduction for the next 5 years immediately following the
year of loss.
The entire amount of loss shall be carried over to the first
of the five taxable years following the loss.
Any excess portion of loss in the first year can be deducted
in like manner from the income of the next remaining 4
years.

(2) Substantial Change in the Ownership of the Business or


Enterprise refers to a change in the ownership of the business

or enterprise as a result of or arising from its merger or


consolidation or combination with another person in a manner

provided by law
(3) Who may avail of NOLCO?
a) Individual taxpayer (including estate and trust) engaged in
10. On Bad Debts
trade or business
b) Individual taxpayers engaged in the exercise of profession
a. Bad Debts debts resulting from the worthlessness or uncollectibility,
c) Domestic corporation
in whole or in part, of amounts due the taxpayer by others, arising from
d) Resident corporation
money lent or from uncollectible amounts of income from goods sold or
services rendered.
(4) Who may not claim NOLCO?
a) Offshore Banking Unit (OBU) of a foreign banking
b. Requisites for Deductibility:
institution/corporation
b) Foreign Currency Deposit Unit (FCDU) of a domestic or
1. debts due to taxpayer was actually ascertained to be worthless
foreign banking corporation, duly authorized by the BSP
2. debts must be charged off within the taxable year
c) Enterprises registered with the BPOI enjoying tax holiday
3. it must be connected with profession, trade or business
d) Enterprises registered with PEZA enjoying tax holidays
e) Enterprises registered with SBMA enjoying tax holidays
4. debt must be valid, legally demandable and subsisting
f) Foreign corporations engaged in international shipping or
5. must not be sustained in transaction entered into between
air carriage business in the Philippines; and
related parties
g) Any person, entity enjoying tax exemption from income
tax pursuant to the Tax Code and other Special Law
c. Who can Avail?
(5) Relationship of NOLCO to MCIT: Corporations covered by
an MCIT cannot enjoy the benefit of NOLCO for as long as it is
1. Resident Citizens and Domestic Corpos in connection with business
subject to MCIT in any taxable year. The running of the 3-year
connected within and without the Phil.
period for the expiry of the NOLCO is not interrupted by the fact
that such corporation is subject to MCIT in any taxable year during 2. RC, NRC, RA, and NRAETB those arising in the course of trade or
the reglamentary period of the 3 years.
business conducted in the Phil.
(6) Net Operating Loss for Miners Other Than Oil and Gas
d. How Much is Deductible?
Wells

19

Gen. Rule - the entire amount of bad debt


Exceptions:
a.

b.

c.
d.
e.

f.

g.

Where corporate taxpayer computes income on the basis of valuing


notes or accounts receivable on their fair market value when received,
which may be less than their face value, the amount deductible is
limited to such original valuation
Only the difference between the amount received by a creditor of a
decedent in the distribution of assets of the decedents estate and the
amount of the claim is deductible
Only the difference between the amount received in distribution of the
assets of a bankrupt and the amount of the claim is deductible
A debt partially secured by a mortgage is deductible to the extent not
covered by the mortgage
Where compromise agreement was arrived at between debtor and
creditor the amount deductible is the amount absolved if the debtor
is insolvent
A purchaser of accounts receivable which cannot be collected and are
consequently charged off in the books as bad debts is entitled to
deduct them, the amount of deduction to be based on the purchase
price and not on their face value
No amount of bad debt is allowed if mortgage is foreclosed and
creditor buys the mortgaged property and credits the debt with the
purchase price even if such price is less than the indebtedness, the
security taking the place of the debt.

tangible property resulting from wear and tear, exhaustion and normal
obsolescence.
- applies to the amortization of the value of intangible assets, the use of
which in the trade or business is definitely limited in duration.
b. Capital Expenditures Subject to Depreciation Allowance
a. amounts paid out for new buildings; or
b. for permanent improvements, or
c. betterments made to increase the value of the taxpayers
property, or
d. for any amount expended in restoring property or
e. in making good the exhaustion thereof.

c. Requisites for Deductibility


a. the allowance of depreciation must be reasonable (determined
by the tax payer)
b. it must be for property use or employment in trade or business
or out of its not being used temporarily during the year

e. Tax Benefit Rule also known as Recapture Rule

c. the allowance must be charged off within the taxable year

- bad debts written off but subsequently paid are subject to income tax.

d. schedule on allowance must be attached to the return

11. On Depreciation
a. Depreciation Defined

d. Persons entitled to claim depreciation allowance:

- refers to the gradual diminution or deterioration in the economic


Person who owns the property and has a capital investment in the
potential of property used in trade or business including the useful value of property, such as:

20

Resident citizens, resident aliens, non-resident aliens engaged in trade or f. Properties not subject to depreciation allowance
business, domestic corporations, resident foreign corps.
1. Inventories in stock
e. Kinds of Properties subject to depreciation allowance
2. Land, apart from the improvements or physical developments added to
1. Tangible property susceptible to wear and tear, to decay or
it
decline from natural causes, to exhaustion and to obsolescence due to the
normal process of the art due to inadequacy of the property to meet
3. Bodies of minerals which through the process of removal suffer
growing needs of the business.
depletion they are subject to depletion allowance
2. Intangible property, the use of which in trade or business is of
limited duration like patents, copyrights, royalties and franchises.
Estimated life:
Patents 17 years (RA 165)
Copyrights lifetime of creator plus 50years without
renewal (PD 49)
Processes 25 years
Franchises as provided in the grant

This allowance applies to amortizations of intangible assets, the


use of which in trade or business is of limited duration.
3. Amounts paid for an agreement not to compete in a trade or
businesses, where the taxpayer can prove the existence of such an
agreement, are capital expenditure subject to depreciation allowance
ratably spread over the period agreed upon.

4.Motor vehicle and other transportation equipment used solely by


taxpayer for his own pleasure
5. Building used solely for residential purposes by taxpayer
6. Furniture or Furnishing used in taxpayers residence
7. Personal effects or clothing except properties and costumes used
exclusively in business such as theatrical, circus and the like
8. Intangibles, the use of which in business or trade is not of limited
duration such as goodwill, trademarks, trade names and trade brands
because they are not subject to exhaustion
9. Formulas but if after acquisition, it is found to be worthless, its cost may
be deducted in full as a loss, for the year for which the formula is
abandoned as being worthless
10.Incidental repairs that neither materially add to the value of the
property nor appreciably prolong its life but keep it in an ordinary efficient
operating condition.

4. Properties kept in repair.


5. Properties and costumes used exclusively in business in theatrical, stage
g Basis of sum recoverable by depreciation
circuses and the like.
6. Window display of dressing, drawing patterns, models or work of an
experimental nature, with limited period of usefulness determinable from
experience can be subject to depreciation.

The sum to be replaced by depreciation allowance is the cost, or


other basis of the property with respect to which the allowance is made.
The amount of any definite loss or damage sustained by the property
through casualty, as depreciated from the gradual exhaustion of its utility

21

which is the basis of its depreciation allowance may be added to the


depreciation allowance.
No depreciation deduction will be allowed in the case of property
that has been amortized to its scrap value and is no longer in use in trade
or business.
h. When to deduct depreciation allowance
Depreciation begins with the acquisition of the property. The
period for depreciation starts when the asset is placed in service.
a.New building = upon completion and capable of being in use
b. If the property is initially acquired for personal use and
subsequently converted into business or investment use = upon
conversion

The allowance should be computed as if the life tenant was the


absolute owner of the said property and as such the expense shall accrue
to him.

l. Depreciation allowance on property held in trust, How computed.


The allowance shall be apportioned between the income of the
beneficiaries and the trustees in accordance with the pertinent provisions
of the instrument creating the trust, or in the absence of such provision,
on the basis of the trust income allowable to each.

m. Methods of computing depreciation allowance

a. straight-line method this method spreads the total


depreciation
over the useful life of the assets.
i. Depreciation allowance deductible by non-resident alien engaged
in trade or business in the Philippines or Resident foreign
b. declining-balance method this method uses the a rate (usually
corporation
1.5 or 2x the straight-line rate) to the declining book value of the assets.
-a reasonable allowance for the deterioration of Property arising
out of its use or employment or its non-use in the business trade or
profession shall be permitted only when such property is located in the
Philippines. (sec. 34 (f) (6)

c. working-hours method the total working hours of the machine


until its retirement is estimated and a charge per hour is determined.
d. unit of production method the estimated service life is stated
in units of products instead of working hours.

e. sum-of-the-years-digit method this is a method of


depreciation where bigger depreciation expenses are provided during the
early years of the fixed asset which gradually diminished until the total
depreciation is equal the assets period (this is synonymous to declining
Depreciation shall be permitted only when such property is located method of depreciation)
within the Philippines and arising out of its use or employment or non-use
f. any other method which may be prescribed by the Department
in business, trade or profession (Lim, San Beda Memory Aid, 2012)
of Finance upon recommendation of the CIR
j. Depreciation allowance Non-resident alien or resident foreign
corporation

k. Depreciation allowance on property held by one person for life


with the remainder to another person, How computed.

n. Adjustment of allowance

22

in case the useful life of the property turns out to be longer or


shorter than that originally estimated an adjustment should be made
accordingly.

May shift from declining balance method to straight-line method.

For property not directly related to production 5 years under


straight-line method.

Illustration:
A commercial building was constructed with an estimated life
of30years at the cost of 5 million. It had been depreciated for 10 years at q. Depreciation of properties used in mining operations
100,000 per year from 1975 to 1984. But the new estimate shows that
beginning 1985 the building will only be good for another 15 years.
- Depreciation on all properties in mining operations other than
petroleum operations at the normal rate if expected life is less than ten
Cost of building
5 million
years.
Less: accumulated depreciation
1.5 million
- If expected life is more than ten years depreciation shall be any
Book value or unrecovered cost
3.5 million
number of years between five years and the expected life.

Adjusted or Revised annual depreciation:

12. ON DEPLETION
a. Depletion, definition
- deduction arising from the exhaustion of natural resources as in
mines, oil and gas wells. The amortization is computed in
accordance with the cost- depletion method under the prescribed
rules and regulations. When the allowance for depletion shall equal
the capital invested, no further allowance shall be granted

3,500,000
15 years

=233,333.34

o. Depreciation allowance of Farmers

b. Who may claim depletion allowance


- only mining entities owning economic interest in mineral deposits
(Economic Interest)- the interests in minerals in place acquired
by investment therein or secured by operating or contract
agreement for which income is derived and return of capital
expected, from the extraction of mineral. Mere economic or
pecuniary advantage to be derived by production by one who has
no capital investment in the mineral deposit does not amount to
economic interest.

Farm buildings (except dwelling used by farmers), farm machinery


and other physical properties, livestock acquired for work, or for breeding
or for dairy purposes, unless included in an inventory to determine profits
are deductible.

c. How intangible exploration and development drilling cost


is applied?
- intangible exploration and development drilling cost in petroleum
shall be treated either as revenue expenditure or capital
expenditures at the option of the taxpayer
The total amount deductible for exploration and development
expenditures shall not exceed 25% of net income from mining

p. Depreciation of properties used in petroleum operations (Beda


Mem Aid)
For property directly related to production shall use straight-line
method or declining-balance method over ten years or shorter as allowed
by the commissioner.

23

operation. The excess shall be carried forward to the succeeding


year until fully deducted.

bb. Number of units of mineral remaining as of the taxable


year
The remaining at the period to be recovered from the
property, including units recovered but not sold , plus
number of units sold within the taxable year.

d. Exploration expenditures- The amount paid or incurred for


the purpose of ascertaining the existence, location, extent or
quality of any deposit of one or other mineral before the beginning
of the development stage of the mine or other natural deposit.

j. Election to deduct exploration and development expenditures


(sec. 34 (G) (2)

e. Development expenditures- The amount paid or incurred


during the development stage of the mine or other natural deposit
f. Development stage- as used in a mining industry begins at
the time when deposits of ore or other minerals are shown to
exist in sufficient commercial quantity and quality and ends upon
the commencement of actual commercial extraction

k. Depletion of Oil and Gas Wells and Mines Deductibles by a NRAI


or FC
- In the case of a nonresident alien individual engaged in
trade or business in the Philippines or a resident foreign
corporation, allowance for depletion of oil and gas wells or mines
under paragraph (1) of this Subsection shall be authorized only in
respect to oil and gas wells or mines located within the Philippines.

g. Depletion of Oil and Gas Wells and Mines (section 34 (G)


h. Requisites of Deductibility
1. Depletible asset- natural resources- mines, gas and oil wells
2. Charged off within the taxable year
3. Allowance of depletion is computed in accordance with the cost
depletion method.

13. CHARITABLE AND OTHER CONTRIBUTIONS

i. Formula for Computation

a. Requisites for deductibility


1. Contribution or gift must be actually paid during the
taxable year
2. Must be given to the organization specified by Tax
Code or special law
3. The net income of the institution must not inure to the
benefit of any member or individual

1. in general
Adjusted cost basis
Mineral unites remaining X Depletion per mineral unit
As of the taxable year
No. of mineral units sold within the taxable year X
Depletion per mineral unit = Cost depletion for the yea
2. Computation for natural gas and oil
See page 273 (LIM)

b.

Non stock Non profit Corporation or Organizations

c.

Non government Organizations

d. Kinds of Charitable Contributions


Ordinary- subject to limitation
Special- deductible in full

aa. Unit of Mineral for depletion


The principal or customary unit(s) paid for the products
sold, such as tons of ore, barrels of oil or thousand cubic
feet of natural gas

e. Limitations in amount
1. Amount deductible shall not exceed:

24

a. For individuals - 10% of taxable income before


contributions;
b. For corporations - 5% of taxable income before
contributions. (Sec. 34 H [1], NIRC)
2. No part of net income of donee inures to the benefit of any
private stockholders or individual.
f.
-

g.
-

Contributions deductible in full


Donations to government or political subdivision including
fully-owned government corporations to be used
exclusively in undertaking priority activities in:

Education

Health

Youth and sport development

Human settlement

Science and culture

Economic development
Donations to international organizations or foreign
institutions in compliance with agreements or treaties

Exclusively for:
---- scientific
---- research
---- character building
---- youth and sports development
---- health
---- social welfare
---- cultural
---- charitable
---- any combination thereof

Utilized not later than 15th day of the 3rd month


following the close of its taxable year

Administrative expense must not exceed 30% of total


expenses

Upon dissolution, assets must be distributed to another


non-profit domestic corporation or to the state

Donations to domestic corporations organized exclusively


for:

Religious

Charitable

Scientific

Cultural

Educational

Rehabilitation of veteran

Social welfare

h.

Valuation

i. Proof of deduction
14. ON RESEARCH AND DEVELOPMENT EXPENSE
A. Amount deductible- amount ratably distributed over a period
of 60 months beginning the month, taxpayer realized benefits from
such expenditures.
B. KINDS OF TAX EXPENDITURES
(1) as revenue expenditures
Requisites:
1. Paid or incurred during the taxable year
2. Ordinary and necessary expenses in connection with
trade, business or profession
3. Not chargeable to capital account

(2) deferred expenses (pre-operating expenses)


Requisite:

Contributions subject to limitations


Not in accordance with priority plan
Conditions are not complied with
Donations to the government of the PH or political
subdivision exclusive for public purposes

1. Paid or incurred in connection with trade, business, or


profession
2. Not treated as expense

25

3. Chargeable to capital account but not chargeable to


property subject to depreciation or depletion.

5. The payment has not yet been allowed as a deduction for


income tax purposes
6. The deduction is apportioned in equal parts over a period of 10
consecutive years beginning the year of the payment was made by
the employer

C. LIMITATIONS ON DEDUCTION WITH RESPECT TO


RESEARCH AND DEVELOPMENT EXPENSE
A. Any expenditure for the acquisition or improvement of land or
for the improvement of property to be used in connection with
research and development subject to depreciation and depletion
allowances.

16. Premium Payments on Health and/or Hospitalization


Insurance of an Individual Taxpayer
Section 34 (M): the amount of premiums not to exceed Two
thousand four hundred pesos (P2,400) per family or Two hundred
pesos (P200) a month paid during the taxable year for health
and/or hospitalization insurance taken by the taxpayer for himself,
including his family, shall be allowed as a deduction from his gross
income:

B. any expenditure paid or incurred for the purpose of ascertaining


the existence, location, extent or quality of any deposit of one or
other minerals including oil or gas.

a. Requisites for Deductibility

15. PENSION TRUST

1. The insurance shall be taken by the individual taxpayer himself


for his family;

A. Defined- the name that is given to a fund in trust with trustees


for money invested for employees when they retire.

2. The amount being claimed shall not exceed P2,400.00 a year or


P200.00 a month per family;

(black's law dictionary)

3. The family has a gross income of P250,000.00 or less for the


taxable year.
For married taxpayers, only the spouse entitled to claim for
additional exemption is allowed this deduction

B. requisite of deductibility

17. Optional Standard Deduction

1. Employer must have established a pension or retirement plan


for the benefit of his/its employees

What is optional standard deduction (OSD)?


A: The OSD is a scheme whereby a taxpayer is given the option to
deduct from his gross revenue or gross income a lump sum
equivalent to a percentage of such gross revenue or gross income
for purposes of computing the net taxable income on which the
income tax rate will be applied.

2. The pension plan is reasonable and actually sound


3. It must be funded by the employer
4. The employer has no control over the amount contributed

26

Note: This is in lieu of the itemized deduction where the taxpayer


lists down all his expenses and the corresponding amounts
incurred to determine the amount of allowable deductions.

permits, the said individual shall keep such records pertaining


to his gross income during the taxable year, as may be
required by the rules and regulations promulgated by the
Secretary of Finance, upon recommendation of the
Commissioner.

a. Taxpayers Entitle to Claim the OSD:


1. Individuals
a. Resident citizens
b. Non-resident citizens
c. Resident aliens
2. Corporations
a. Domestic
b. Resident foreign corporations
3. Estates
4. Trusts
b. Requisites for Allowance of the OSD:
- must be entitled to claim OSD
-taxpayer must signify in his return his intention to elect the OSD
-taxpayer shall keep such records pertaining to his gross income
during the taxable year
Section 34 (L) Optional Standard Deduction. - In lieu of the
deductions allowed under the preceding Subsections, an
individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an
amount not exceeding ten percent (10%) of his gross income.
Unless the taxpayer signifies in his return his intention to elect
the optional standard deduction, he shall be considered as
having availed himself of the deductions allowed in the
preceding Subsections. Such election when made in the return
shall be irrevocable for the taxable year for which the return is
made: Provided, That an individual who is entitled to and
claimed for the optional standard deduction shall not be
required to submit with his tax return such financial
statements otherwise required under this Code: Provided,
further, That except when the Commissioner otherwise

27

PART X- Estate and trusts

2. Income tax of the estate, if the estate is under


administration or judicial settlement. (Sec. 60, NIRC)

1. Estate, defined
Refers to the mass of all property, rights and
obligations of a person that are not extinguished upon
his death including those that have accrued thereto
since the opening of the succession.

5. Composition of the Gross Income of the Estate


All income received by the estate of a deceased person
during the period of the administration or settlement of
the estate
6. Additional Special Deductions Available to Estates
and Trust

2. Kinds of Estate for Tax Purposes


Estate under judicial settlement
Estate NOT under judicial settlement

a.
3. Burden of Income Taxation On Estates
-

Where estate income is distributed to the heirs during


the taxable year such income is deductible from the
taxable income of the estate and the heirs shall be
taxed individually based on their distributive share

Where no part of the estate income earned during the


year is distributed to the heirs, and such income is
subject to income tax payment of the estate, the
subsequent distribution thereof to the heirs is no
longer taxable on the part of the beneficiaries.

b.

If the estate is under judicial administration, the


income of the estate shall be taxable to the fiduciary
and the trustee shall file the return for the estate and
he is responsible to pay the income tax thereon.

c.

d.

The amount of income of the trust and estates for the


taxable year which is to be distributed currently by the
fiduciary to the beneficiaries
The amount of income collected by a guardian of an infant
which is to be held or distributed as the court may direct
The amount of the income received by estates during the
period of administration or settlement, properly paid or
credited during the taxable year to any legatee or heir, and
The amount of the income of the trusts, which in the
discretion of the fiduciary may be either distributed to the
beneficiary or accumulated, properly paid or credited
during the taxable year to the beneficiary.

7. Formula For Computation of Taxable Income of


Estates
GROSS INCOME
Php XXXXXXX
Less: Deductible expenses
XXXXXXX
Income distributed to beneficiaries XXXXXXX
Net Income
XXXXXXX
Less: Exemption
XXXXXXX
Taxable Income
XXXXXXX

If the estate is not under judicial administration, the


income of the estate shall be taxable to the heirs and
beneficiaries of the estate; each heir and beneficiary
shall include in his return his distributive share of net
income of the estate.

8. Trust. Defined
Refers to an arrangement created by will or an
agreement under which title to property, rights of
property, real or personal, is passed to another for

4. Rules On Taxability of estates


1. Income tax for individuals from Jan. to the time of
death. (Sec. 24 and 25, NIRC)

28

conservation or investment with the income therefrom


and ultimately the corpus (principal) to be distributed
in accordance with the direction of the grantor as
expressed in the governing will or agreement

b) Trustee or Grantee- the person in whom confidence is reposed


as regards the property for the benefit of another
c) Beneficiary- the person for whose benefit the trust has been
created

Fiduciary, defined
Generally, it refers to a team, which applies to all
persons or corporations that occupy positions of
peculiar confidence towards others, such as trustees,
executors or administrators. For income tax purposes,
it refers to any person or corporation that holds in
trust an estate of another person(s). in order that a
fiduciary relationship may exist, it is necessary that a
legal trust be created.

12. Kinds of Trust


1) Ordinary Trust- the income and corpus of the trust do not revert
to the grantor. The trust income is accumulated and held for
distribution to the beneficiaries
2) Revocable Trust- A kind of trust in which the power to revest in
the grantor title to any part of the corpus of the trust is vested in
the grantor himself or in any person not having any substantial
adverse interest in the trust corpus or in its income

Cestsei que trust, defined


The person for whose benefit a trust is created or who
is to enjoy the income or the avails to it.

3) Irrevocable Trust- Irrevocable both as to corpus and as to


income. Taxed exactly like an estate under judicial settlement,

9. Essential Elements of Trust


1. Designated beneficiary and trustee
2. Fund sufficiently identified to enable title to pass to
trustee
3. Actual delivery of fund to trustee with intention of
passing title thereto

4) Employees Trust
a. Examples of Ordinary Trust
1. A trust where the income is accumulated or held for future
distribution under the terms of a will or trust

10. Trust, how created:

2. A trust where the income is to be distributed currently by the


fiduciary to the beneficiaries

1) Expressly- by the intention of the trustor or of the parties

3. A trust where the income collected by a guardian of an infant is


held or distributed as the court may direct

2) Impliedly- by operation of law. (art. 1441, NCC)

4. A trust where the income, in the discretion of the fiduciary, may


be either distributed to the beneficiaries or accumulated been
created

11. Parties to a Trust:


a) Trustor or Grantor- the person who establishes a trust

b. When is a trust revocable

29

1. Where, at any time, the power to revest in the grantor title to


any part of the corpus of the trust is vested in the grantor either
alone or in conjunction with any person not having a substantial
adverse interest in the disposition of such part of the corpus or the
income therefrom

e) The distribution of trust income during the taxable year to the


beneficiaries of the trust is deductible from the taxable income of
the trust
14. Rules on Taxability of Trust
15. Taxable Trust

2. In any person not having a substantial adverse interest in the


disposition of such part of the corpus or the income therefrom

a. When income of the trust is taxable to the Grantor

13. Composition of the Gross Income of Trusts

1. If the trust is revocable, the income of such trust which may be


revested to the granted is taxable to the grantor

- The items of gross income of estates and trusts are the same
items of gross income of individuals as provided under the Tax
Code (sec. 32) which shall include:

2. If the income of the trust, in whole or in part, that is held or


distributed for the benefit of the grantor is taxable to the grantor

a) Income accumulated in trust for the benefit of unborn or


unascertained persons with contingent interests, and income
accumulated or held for future distribution under the terms of the
will or trust agreement

3. A trust, under which the grantor remains in control of the estate


and/or income, is a scheme intended to avoid payment of income
tax. Thus, the income that may be revested in the grantor, or held
or distributed for the benefit of the grantor shall be included in
computing the taxable income of the grantor.

b) Income which is to be distributed currently by the fiduciary to


the beneficiaries, and income collected by a guardian of an infant
which is to be held or distributed as the court may direct (taxable
to the beneficiary, whether distributed or not, and is usually
deductible by the fiduciary)

4. If the income of the trust is applied to the payment of premiums


upon such policies of insurance on the life of the grantor, the said
income is taxable to the grantor.
b. When the income of the trust taxable to the trustee

c) Income received by estates of deceased persons during the


period of administration or settlement of the estate (taxable to the
fiduciary or beneficiary, depending upon the amounts which are
properly paid or credited to the beneficiary)

1. If the income is to be accumulated or held for future


distribution, whether consisting or ordinary income or gain from
sale of assets included in the corpus of the trust, must be returned
by and will be taxed to the trustee

d) Income that, in the discretion of the fiduciary, may be either


distributed to the beneficiaries or accumulated. (taxable to the
fiduciary or beneficiary, depending upon the amounts which are
properly paid or credited to the beneficiary)

2. If the income of the trust whether created by will or deed, for


accumulation of income, whether for an unascertained persons
with contingent interests or otherwise, shall be taxed to the
trustee

30

3. If the income of a trust, where under the terms of a will or


deed, the trustee may in his discretion, distributes the income or
accumulates it, the income is taxed to the trustee, irrespective of
the exercise of his discretion

Gross income of the trust


Less: Deductible expenses
Personal exemption (P 50, 000)
Distribution of current years income to the
beneficiaries
TAXABLE INCOME

4. If the income of a trust administered in a foreign country (which


is not entitled to the deductions mentioned in secs. 61 (A) (B) of
the tax code), undiminished by any amounts distributed, paid or
credited to beneficiaries, will be taxed to the trustees.

18. Formula for the computation of the consolidated


income of several trusts

NOTE: Even if the beneficiary is exempt from tax, the imposition of


income tax is not affected by that fact

19. Exceptions of a taxable trust

c. when is the income of the trust taxable to the


beneficiary

-Employees trust. (income tax is not imposed on it when such


income forms part of a pension, stock, bonus or profit-sharing plan
of an employer for the benefit of some or all of his employees)

all income of a trust for the taxable year which is to be distributed


to the beneficiaries must be returned by and will be taxed to the
respective beneficiaries. Thus, each beneficiary must include in his
return the distributive share of the net income of the trust

An employees trust which forms part of an employers pension,


stock or profit-sharing plan that complies with the requirements of
law is tax exempt from income tax. It is usually created for the
benefit of the employees for the purpose of acquiring share capital
in the employer company so that the employees can share in the
ownership of the business

1) the tax shall be computed upon the taxable income of the trust
and shall be paid by the fiduciary
2. Where two or more trusts are created by the same trustor or
grantor, and in each instance the beneficiary is the same person,
the taxable income of all trusts shall be consolidated and the tax
computed on such consolidated income

a. Requisites of exemption of employees trust from


income tax:
1. The employees trust must form part of a pension, stock bonus
or profit-sharing plan of an employer for the benefit of some or all
of his employees

16. One-layered taxation regime in taxable trust and


estate tax defined

2. Contributions are made to the trust by such employer, or


employees, or both

- Income held by the trustee or the estate should be taxed only


once. Hence, any distribution of the income will not trigger the
imposition of another income tax otherwise there will be a violation
of the one-layered taxation.

3. The contributions are made for the purpose of distributing to


such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan

17. Formula for the Computation of taxable income of


trust

31

4. Under the trust instrument, it is impossible, at any time prior to


the satisfaction of all liabilities with respect to employees under
the trust, for any part of the corpus or income to be (within the
taxable year of thereafter) used for, or diverted to, purposes other
than for the exclusive benefit of the employees.
Note: Any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed by
such employee or distributee.

32

PART XI CAPITAL TRANSACTIONS: CAPITAL GAINS and


CAPITAL LOSSES

1.

Requisites for the recognition of capital gain or loss


a.
b.

2.

The transaction must involve property


classified as capital asst, and
The transaction must be a sale or exchange
or one considered as equivalent to a sale or
exchange

The cost of the property if such was acquired by


purchase or ,
if the property should be included in the inventory of
the taxpayer the latest inventory value

b.

Those that were acquired through inheritance The


FMV as of the date of the death of the decedent

c.

If property was acquired by donation, the basis shall


be the value of the gift at the time of the donation. But
if the bases is greater than the FMV of the property at
the time of donation, for determining the loss, the
basis shall be the FMV, or

d.

If the property was acquired for less than an


adequate consideration in money or moneys worth,
the basis of such property sold or disposed is the
amount paid by the transferee.

Determination of Gain or Loss from Sale of Property


a.

General Rule: Gain or loss from sale, exchange or


other disposition of property is either a taxable gain or
a deductible loss
1.

Formula of Computation with respect to sale of


property

a. adjusted basis on property defined:


- Refers to the original cost to acquire the property plus the
amount spent to improve the same and other capital expenditures
made to increase the value of the property or materially prolong
the life of the property less accumulated depreciation up to the
date of sale or disposition of said property

Selling price of property...Php


xxxxxxx
Less:
basis
of
property.
. xxxxxxx
Gain
or
loss... xxxxxxx
2.

Formula of Computation
exchange of pproperty

with

respect

(1) Formula for the computation of Adjusted Basis


Basis of the property . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .Pxxxxxx
Add: Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . xxxxxx
TOTAL
xxxxxx
Less: Depreciation or depletion . . . . . . . . . . . . .
. . . . . . . . . . xxxxxx
ADJUSTED BASIS. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . xxxxxx

to

FMV
of
property
received................Php xxxxxxx
Less:
basis
of
property
given
in
E/X xxxxxxx
Gain or loss.
xxxxxxx
3.

a.

Cost Basis of property

2. Transactions where use of basis is required

33

....
....

....
....

a) Sale, exchange or other disposition involving ordinary assets:

included in the inventory of the taxpayer if on


hand at the close of the taxable year; or

b) Sale, exchange or other disposition involving capital assets, the


gain from which is not subject to final capital gains tax
c) Sale, exchange or other disposition of shares of stock in a
domestic corporation, which are capital assets, not traded in the
stock exchange
d) Sale, exchange or other dispositions of real property, which is a
capital asset, to the government, or any of its political subdivisions
or agencies, or any GOCC should the seller elect the option to
determine his tax liability on the gain or loss under section 24 (A).
4.

Taxpayers Asset, defined


These are properties of a taxpayer other than
those enumerated below or considered ordinary
assets which shall include:
a.
b.
c.

personal or non-business properties


property held for investment
property not used in trade or business

c.

Property used in the trade or business of a


character which is subject to the allowance for
depreciation provided in Sec. 34 (F) of the Tax
Code; or

d.

Real property used in trade or business of


the taxpayer.

Tax rate is 32% of its net


corporate income tax if seller is a
juridical person (XPN: NRFC)
6. CAPITAL ASSETS, defined
These are properties held by the taxpayer (whether or
not connected with his trade or business which does not include
any of the above enumeration.
- Capital assets of property used in the trade or
business of a taxpayer are subject to depreciation allowance.
NOTE: Remember that a real property classified as CAPITAL
ASSET is one (a) that is not used in business; (b) it does not form
part of the inventory of the business; (c) is not held for speculative
purposes, and (d) is not subject to depreciation allowance.

Ordinary Assets, defined


Those that are used or connected with the
taxpayers trade, business or profession which
shall include:
a.

Property held by the taxpayer primarily for


sale to customers in the ordinary course of his
trade or business, or

Tax rate is 5% - 32% if the seller


is an individual person applied on his
net taxable income (XPN: NRANETB)

examples: accounts receivables


property subdivided and sold to
tenants at the
instance of the govt
sugar quota,
interest in partnership and joint
ventures,
franchise rights,
properties held for investments,
residential houses
5.

b.

-If the capital assets are located outside the Philippines,


the normal tax of 5%-32% shall apply because the CGT of 6%
applies only when the real property is situated within the
Philippines.

Stock in trade of the taxpayer or other


property of a kind which would properly be

34

7. CAPITAL TRANSACTION, defined


This refers to the sale, barter, exchange or other
disposition of capital assets.

the exchanges they shall be covered by the 5%-10% rule


instead of the 1/2 of 1% tax rate.
Note: this 5%-10% rule applies to all kinds of
taxpayers

8. CAPITAL GAIN, defined


-The gain from the sale, exchange or other disposition
of capital asset

9. CAPITAL LOSS, defined


-the loss from the sale, exchange, or other disposition
of capital asset.

a. Tax rate
(1) If property sold is real property
-6% Capital gains tax on selling price or
zonal
value
whichever
is
higher
plus
1.5%
thereof
for
documentary
stamps tax.

10. NET CAPITAL GAIN, defined


- the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or exchanges.

NOTE: Even if the property was sold at a


loss,
the
CGT
is
still
due
because
of
the
presumption of income or gain
whenever capital assets are sold or disposed.

- The excess of the losses from sales or exchanges of capital


assets over the gains from such sales or exchanges.

(2) If shares of domestic corporation are traded


through the exchange
-1/2 of 1% of the gross selling price. (Even
if
there
is
a
loss,
the
seller
is
still
liable
because the rate is based on
a selling price and not on actual gain realized.)

- Net capital loss sustained in a taxable year in an amount not


in excess of the net income (before exemptions) for such year may
be deducted as a short term capital loss(100%) from the net
capital gains of the next or succeeding taxable year but not
beyond such period.

11. Net Capital Loss.defined

12. Net Capital Loss Carry-over Principle (NCLCO). defined

13. Holding period.defined

(3) If property sold are shares of domestic corporations


not listed or traded in the
exchange
or are listed but not sold through the exchange
-5% on the first Php 100,000 net capital
gain and 10% in excess of the Php 100,000

- The length of time thr asset was held by the taxpayer. it


covers the period from the date of acquisition to the date of sale or
exchange.
14. Loss Limitation Rule.defined

In the case of Dizon vs CIR, CTA Case No. 4798,


November 3, 1993 the SC held that the nature of the shares
(whether listed or not) is NOT material for purposes of
applying the Tax Code provision. What is material is the
manner by which these shares are traded. Thus, even if the
shares are listed in the exchanges if they are traded outside

- The capital loss that is deductible from the capital gain


should not be more than the net ordinary income for the same
year.

35

15. Ordinary gain.defined

2)

- The gain realized from the sale, exchange other disposition


of ordinary asset. Tbis shall include gains derived from the
performance of services, whether personal or professional, and
those accruing from business.

Long-term capital assets held for more than 12 months by an


individual taxpayer
18. Importance of knowing whether assets are capital or
ordinary
-gains or losses from capital assets are given preferential
treatment which does not apply to the sale of ordinary assets

16. Ordinary loss defined


- The loss incurred from the sale or exchange or other
disposition of ordinary asset. It may also mean the excess of
deduction over the gross income of the taxpayer during a taxable
period or the net operating loss of the taxpayer

19. Gain or Income not subject to the Graduated or Normal


Income tax
a) Gains from interest, royalties, prizes and other
winnings
b) Gains from sale of shares of stocks not traded in the
exchanges
c) Capital gains from sale of real properties

17. Kinds of asset


a. Ordinary asset- those that are used or connected with the
taxpayers trade, business or profession which shall include:
1. Stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year
2. Property held by the taxpayer primarily for the sale
to customers in the ordinary course of his trade for business
3. Property used in the trade or business of a character
which is subject to the allowance for depreciation provided in Sec.
34 (f) of the tax code
4. Real property used in trade or business of the
taxpayer

20. Distinctions between Sale of Capital Asset and Ordinary


Asset
a. with respect to seller of real property
1) If the individual seller is engaged in real estate business
-Real properties are ordinary assets
2) If the individual seller is not engaged in real estate business but
in other kind of business
- If asset is used in business it is ordinary, otherwise
its Capital
3) If the individual is not engaged in any business but owns real
property
-Capital Asset
4) If the selling corporation is engaged in real estate business
-Real properties are Ordinary Assets
5) If the selling corporation is not engaged in real estate business
-If property is used in business it is ORDINARY but if
not, it is CAPITAL

b. Capital asset- these are properties held by the taxpayer


(whether or not connected with his trade or business, which does
not include any of the above enumeration)
Note: Real Property classified as CAPITAL ASSET is one:
a)
That is not used in business
b)
It does not form part of the inventory of the
business
c)
Is not held for speculative purposes
d)
Is not subject to depreciation allowance
1)
Short-term capital assets held for 12 months or less by an
individual taxpayer

b. With respect to the Nature of the asset sold


1. If the real property sold is forms part of the stock in trade
primarily for sale in the course of business of the seller =
ORDINARY ASSET

36

2. If it does not form part of the stock in the trade or business but
the asset is used in business
=
ORDINARY ASSET

2. If asset is ordinary= April 15, the regular date of filing an


income tax return and payment of tax

3. If it does not form part of the stock in trade or business and is


not used in business = CAPITAL ASSET

h. Place to file return and pay the tax due


1. if asset is capital= Revenue District Office of the BIR having
jurisdiction over the location of the property
2. IF the asset is ordinary= RDO that has jurisdiction over the
principal place of business of the seller

c. With respect to the tax base and tax rate


1. If the property sold is capital asset =6% of the FMV of the
property or selling price whichever is higher
2. If the property sold is ordinary asset= gain if any is subject to
the 32% normal income tax or to MCIT as the case may be. If loss
is sustained, it is an ORDINARY ASSET

21. Classification of Real Properties Held by Real Estate


Lessors
-All real properties of a real estate lessor whether land and/or
improvements which are for lease, is an ordinary asset.

d. With respect to the person liable:


1. The seller of the real property if it is a capital asset
2. The income taxpayer if it is an Ordinary asset

22. Additional Rules Applicable

e. With respect to the person liable for the filing of the tax
return:
1. Sale of capital asset, the seller is responsible. Buyer has no
obligation to deduct creditable withholding tax.
2. Sale of ordinary asset, the buyer is required to deduct the
expanded withholding tax from consideration, file the tax return
and pay the tax within the reglementary period prescribed.

23. Dacion En Pago, defined


-the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. It partakes the
nature of sale, as if: the creditor bought the thing or property of
the debtor, payment of which is charged against the debtors debt.
Hence, it is subject to CGT.

f. With respect to the cost or adjusted basis of the real


sold:
1. If the property sold is capital asset, the cost or adjusted basis is
immaterial. The Tax base is the FMV of the property or the selling
price whichever is higher at tax rate of 6%.
2. If asset sold is ordinary, the cost or adjusted basis of the
property must be supported with documentary evidence in order to
be deducted from gross selling price

24. Capital Gains Tax Imposed on Individual Taxpayer as


distinguished from that imposed on Corporations
-the tax rate of 6% is the same when a corporation sells its capital
assets. However, the tax is only imposed on the gain presumed to
have been realized on the sale; exchange or disposition of land or
buildings, which are not used in the business of the corporation.
ALTERNATIVE TAXATION is not available to a corporate taxpayer

g. With respect to the date of filling return and payment of


tax
1. If asset sold is capital= within 30 days from date of sale and the
DST within 10 days of the following month of sale

25. Rules on tax on real properties located abroad


Even if real property is owned by a resident citizen or a nonresident citizen no real property tax shall be imposed.

37

If the property is a capital asset, when sold shall NOT be subject to


the CGT but to the normal income tax. (individuals and corporate
taxpayers)

30. Kinds of Capital Transactions subject to final tax and not


to the scheduler income tax

26. Taxation in case of exchanges of property:


The Gain or loss arising from the acquisition and
subsequent disposition of property is realized only when as the
result of a transaction between the owner and another person the
property is converted into other property
(a) That is essentially different from the property disposed of and
(b) That said property has a FMV.

a) Tax on sale, barter or exchange of shares of stocks listed and


traded through the local exchanges
Based on gross selling price or gross value in money. . .
. . . . . . . . . . . . . . . . . . . of 1 %
b) tax on shares of stocks sold or exchanged through initial public
offering based on gross selling price or gross value in money in
accordance with the proportion of shares of stock sold, bartered,
exchanged or otherwise disposed to the total outstanding shares of
stocks after the listing in the lock stock exchange
Up to 25%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 4%
Over 25% but not over 33 1/3 % . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .2%
Over 33 1/3 % . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 1%

27. Transaction where both gains and losses are NOT


recognized:
1) Exchange of property where the property received is not
essentially different from the property disposed of
2) Transfer of property by a person in exchange for stock of a
corporation as a result of which said person, alone or together with
others, not exceeding 4 persons, gains control of said corporation
3) Exchanges of property solely in kind if in pursuance of a plan of
merger or consolidation

c) Capital gains from the sale of shares of stocks not traded in the
stock exchange
Net gain not more than P100, 000 . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 5%
On any amount in excess of P100, 000 . . . . . . . . . . . .
. . . . . . . . . . . . . . . 10%

28. Transfer of ordinary asset for insufficient consideration:


As a rule, the transfer of property for less than an adequate and
full consideration in money or moneys worth is deemed a gift
subject to donors tax. This is not absolute. (CIR vs. B.F. Goodrich
Philippines, Inc.- in this case there was no donors tax because the
purpose of the sale at less than the FMV was to minimize loss)

d) Capital gains from the sale or real property


Gross selling price or current FMV whichever is higher .
. . . . . . . . . . . . . . 6%

29. Transaction where only Gain is Recognized but not the


Loss:
1. Transactions between members of a family and related
taxpayers
2. Exchanges of property not solely in kind if in pursuance of a
plan of merger or consolidation
3. Illegal transactions

NOTE: the tax on (a) and (b) are final percentage taxes while (c)
and (d) are final income taxes
31. TRANSACTIONS RESULTING TO CAPITAL GAINS AND
LOSSES ALTHOUGH NO SALE OF A CAPITAL ASSET HAD
TAKEN PLACE:
a)
WORTHLESS SHARES OF STOCK- if shares of stock considered
as capital assets become worthless during the taxable year, the

38

b)

c)

d)

e)

f)

g)
h)

a)

loss shall be considered a loss from sale or exchange on the last


day of such taxable year.
WORTHLESS BONDS- if bonds, debentures, or other evidence of
indebtedness of any corporation including those that were issued
by the government that considered as capital assets which are
ascertained to be worthless and charged off withinthe taxable
year, the loss shall be considered as a loss from the sale or
exchange, on the last day of such taxable year, of capital assets.
RETIREMENT OF BONDS- the amounts received by the holder
upon the retirement of bonds, debentures, notes or certificated or
other evidences of indebtedness issued by any corporation and
those by the government or its political subdivision with interest
coupons or in registered form, shall be considered as amounts
received in exchange thereof
FAILURE TO EXERCISE PRIVILEGE OR OPTION TO BUY OR SELL
PROPERTY- The gains or losses attributable to the failure to
exercise privileges or options to buy or sell property shall be
considered a capital gains or losses.
LIQUIDATING DIVIDEND- upon dissolution of a corporation, all
assets distributed in complete distribution, the gain or loss
sustained by the stockholders, whether individual or juridical, is a
capital gain or loss
LIQUIDATION PARTNERSHIP- when a partner retires or
thepartnership is dissolved, he realizes a gain or loss by
considering the amount he receives for his interest less his (a)
investment and (b) shares in undistributed partnership net income
RE-ADJUSTMENT OF INTEREST IN A GENERAL PROFESSIONAL
CO- PARTNERSHIP
SHORT SALES OF PROPERTY- gains or losses from such sales
shall be considered as (short-term) gains or losses from sales or
exchanges of capital assets
32. RULES ON CAPITAL TRANSACTIONS, REVISITED:
ON INDIVIDUAL TAXPAYERS
100% of the capital gains and capital loss shall
be recognized and taken into account if the capital
asset was held for less than 12 months. ( such
gain or loss is called long-term capital gain or long
term capital loss.)

asset was held for more than 12 months. (such


gain or loss is called short-term capital gain or
short-term capital loss.)
Holding period is applicable only to an
individual taxpayer
Net capital loss carry-over principle applies
only to an individual taxpayer
Alternative taxation applies only to individual
taxpayers.
b)

ON CORPORATE TAXPAYERS
100% of the capital gains and capital loss shall
be recognized or taken into account regardless of
the holding period.
Corporations cannot carry-over a net capital
loss
There is no holding period of a corporation
Losses on the sale of any bonds, debenture,
note, or certificate or other evidence of
indebtedness issued by banks or trust companies
incorporation under Philippine laws shall not be
subject to the deduction of capital losses because
the securities held by such entities are considered
ordinary assets. However, the disposition of other
capital assets of a domestic bank or trust company
shall not be covered by the exceptions. 9 losses
from sales of exchange of capital assets shall be
allowed only to the extent of the gains from such
sales or exchanges)
33. SHORT SALE
a transaction where the seller sells securities that he does not
own and, therefore, cannot himself supply the securities for
delivery, in expectation of the decline in their profit.

50% of the capital gains and capital loss shall


be recognized and taken into account if the capital

39

The seller is a mere speculator hoping to make a profit when


prices decline. His purpose being to postpone delivery until some
later date when he hopes to purchase the securities at a lower
price than that received on his sale. If the price of the securities
increases he sustains a loss
a)

WHEN CONSUMMATED? Only until the delivery


of the property covered by the short sale is done.
Thus, if the short sale is made through a broker
and the broker borrows property to make delivery,
the short sale is not deemed to be consummated
until the obligation of the seller created by the
short sale is finally discharged by the delivery of
property to the broker to replace the property
borrowed by such broker.

34. Imposition of the Capital Gains, Tax, Revisited

40

Part XII- Accounting Periods and Methods of Accounting

C. Essential Requirements in keeping accounting records re:

1. Accounting Methods (Sec. 43, NIRC)

1. Classification of capital and income expenditures

A. General Rule

2. When the cost of the capital assets is being recovered

SEC. 43. General Rule. - The taxable income shall be computed


upon the basis of the taxpayer's annual accounting period (fiscal
year or calendar year, as the case may be) in accordance with the
method of accounting regularly employed in keeping the books of
such taxpayer, but if no such method of accounting has been so
employed, or if the method employed does not clearly reflect the
income, the computation shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the
income. If the taxpayer's annual accounting period is other than a
fiscal year, as defined in Section 22(Q), or if the taxpayer has no
annual accounting period, or does not keep books, or if the
taxpayer is an individual, the taxable income shall be computed on
the basis of the calendar year.

3. Inventories
D. Method of Accounting
1. Principal Method
a. Cash receipt and disbursement method
- cash method is a method of accounting whereby all items of
gross income received during the year shall be accounted for in
such taxable year and that only expenses actually paid shall be
claimed as deductions during the year. Under this method, income
is realized upon actual or constructive receipt of cash or its
equivalent, and expenses are deductible only upon actual payment
thereof, regardless of the taxable year when the service is
performed or the expense is incurred.

General Rule = The taxable income shall be computed upon the


basis of the taxpayers annual accounting period (fiscal year or
calendar year, as the case may be) in accordance with the method
of accounting regularly employed in keeping the books of such
taxpayer

1. Taxpayers who must report income under the cash basis


method

B. Exceptions to the general rule

2. Exceptions to the cash basis method of keeping books

1.
Computation shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the
income if no such method of accounting has been so employed, or
if the method employed does not clearly reflect the income

a. death of a taxpayer
b. in case of partners of a general professional partnership
c. in case of partners of a corporation or individual
members of a joint account or joint venture or consortium taxable
as a corporation (sec. 24 (
B2) NIRC.

2.
Taxable income shall be computed on the basis of the
calendar year if the TPs annual accounting period is other than a
fiscal year, as defined in Section 22 (Q), or if the taxpayer has no
annual accounting period, or does not keep books or if the
taxpayer is an individual

d. where improvements were made by the lessee


e. where income is constructively received

41

income and deductions are to be accounted for. If the taxpayer


does not regularly employ a method of accounting that clearly
reflects his income, the computation shall be made in such manner
as in the opinion of the commissioner of internal revenue clearly
reflects it.

1. Examples of constructive receipt (cases 1-3)


2. Purpose of the doctrine of constructive receipt
b. Accrual Method
-accrual method is a method of accounting for income in the
period it is earned, regardless of whether it has been received or
not. In the same manner, expenses are accounted for in the period
they are incurred and not in the period they are paid.

e. In the case of deferred payment of sale


1. Installment method- is a method considered
appropriate when collections of the proceeds of sales and income
extend over relatively long periods of time and there is strong
possibility that full collection will not be made. As customers make
installment payments, the seller recognizes the gross profit on sale
in proportion to the cash collection during the year.

Under this method, net income is being measured by the excess of


the income earned during the period over the expenses incurred
during the same period. The income that has been earned and the
expenses that have been incurred are to be reported during the
year, although they have not been collected or paid. In the
succeeding year of receipt or payment, no additional income or
expenses shall be reported by the taxpayer.

2. Deferred payment method (sec. 49 (B), NICR)


"(B)
Sales of Realty and Casual Sales of Personality. - In the
case (1) of a casual sale or other casual disposition of personal
property (other than property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of
the taxable year), for a price exceeding One thousand pesos
(P1,000), or (2) of a sale or other disposition of real property, if in
either case the initial payments do not exceed twenty-five percent
(25%) of the selling price, the income may, under rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis
and in the manner above prescribed in this Section. As used in this
Section, the term 'initial payments' means the payments received
in cash or property other than evidences of indebtedness of the
purchaser during the taxable period in which the sale or other
disposition is made.

1. Rules applicable
2. Exceptions to the accrual method of keeping books
c. Hybrid Method
-Those methods that are neither strictly cash nor strictly accrual
but combine elements of both
d. Crop Year Method
- it is method applicable only for farmers engaged in the
production of crops which take more than a year from the time of
planting to the process of gathering and disposal of the harvest.
Expenses paid or incurred are deductible in the year the gross
income from the sale of the crops is realized.
The method of accounting regularly employed by the taxpayer in
keeping in his books, if such method clearly reflects his income is
to be followed with respect to the time as of which items of gross

*INITIAL PAYMENTS payments received in cash


or property (other than

42

evidence of indebtedness
of the purchaser) during
the taxable year in which
the sale is made.

b.

b. Completed Contract method- If


upon completion of a contract, it is
found that the taxable (net)
income arising thereunder has not
been clearly reflected for any year
or years, the Commissioner may
per it or require an amended
return.
g. in the case of leasehold improvements

f. In case of long term contracts


1. Meaning of long term contracts

1. In the income over the term of the lease basis

'long-term contracts' means building, installation or construction


contracts covering a period in excess of one (1) year. Persons
whose gross income is derived in whole or in part from such
contracts shall report such income upon the basis of percentage of
completion.
a.

2. Income in the year of completion basis

II. Inventories
A. definition

a.
Percentage
of
completion
method- persons whose gross
income is derived in whole or in
part from such contracts shall
report such income upon the basis
of percentage of completion.

B. when required ( sec. 41 NIRC)


SEC. 41. Inventories. - whenever in the judgment of the
Commissioner, the use of inventories is necessary in order to
determine clearly the income of any taxpayer, inventories shall be
taken by such taxpayer upon such basis as the Secretary of
Finance, upon recommendation of the Commissioner, may, by
rules and regulations, prescribe as conforming as nearly as may be
to the best accounting practice in the trade or business and as
most clearly reflecting the income.

The return should be accompanied


by a return certificate of architects
or engineers showing the
percentage of completion during
the taxable year of the entire work
performed under the contract.

If a taxpayer, after having complied with the terms and a


conditions prescribed by the Commissioner, uses a particular
method of valuing its inventory for any taxable year, then such
method shall be used in all subsequent taxable years unless:

There should be deducted from


such gross income all expenditures
made during the taxable year on
account of the contract, account
being taken of the material and
supplies on hand at the beginning
and end of taxable period for use in
connection with the work under the
contract but not yet so applied.

(i) with the approval of the Commissioner, a change to a


different method is authorized; or
(ii) the Commissioner finds that the nature o the stock on
hand (e.g., its scarcity, liquidity, marketability and price

43

movements) is such that inventory gains should be


considered realized for tax purposes and, therefore, it is
necessary to modify the valuation method for purposes of
ascertaining the income, profits, or loss in a move realistic
manner: Provided, however, That the Commissioner shall
not exercise his authority to require a change in inventory
method more often than once every three (3 years:
Provided, further, That any change in an inventory
valuation method must be subject to approval by the
Secretary of Finance.

F. Market price as used in the valuation of inventory


-under ordinary circumstances, and for normal goods in an
inventory, market price means the current bid price prevailing at
the date of the inventory for the particular merchandise in the
volume in which usually purchased by the taxpayer and is
applicable in the cases of
a) goods purchased and on hand
b) of basic elements of cost (materials, labor and burden) in goods
in process of manufacture and in finished goods on hand

C. what should be included in inventories


D. Requirements to which inventor must conform

G. Full absorption method in inventory - Under the full


absorption method of inventory costing production costs must be
allocated to goods produced during the taxable year, whether sold
during the taxable year or in inventory at the close of the taxable
year determined in accordance with the taxpayer's method of
identifying goods in inventory.

E. Bases of valuation used in the inventory of goods


1. Cost price
a. Meaning of cost
1. in the case of merchandise- cost means merchandise on
hands at the beginning of the taxpayer year, the inventory price of
such goods.

1. Direct production cost


-Costs classified as direct production costs are generally those
costs which are incident to and necessary for production or
manufacturing operations or processes and are components of the
cost of either direct material or direct labor.

2. In any industry like farming and raising livestock- in any


industry in which the usual rules for computation of costs of
production are inapplicable, costs may be approximated upon such
basis as may be reasonable and in conformity with establish trade
practice in the particular industry. Among such cases are:

a. Direct materials costs- include the cost of those materials


which become an integral part of the specific product and those
materials which are consumed in the ordinary course of
manufacturing and can be identified or associated with particular
units or groups of units of that product

a) farmers and raisers of livestock


b) miners and manufacturers who by a single process or uniform
series of processes derive a product of tow or more kinds, size or
grade, the unit cost of which is substantially alike; and

b. Direct labor costs- include the cost of labor which can be


identified or associated with particular units or groups of units of a
specific product.

c) retail merchants who use what is know as the retail method in


ascertaining approximate cost.

Elements:

44

The elements of direct labor costs include such items as basic


compensation, overtime pay, vacation and holiday pay, sick leave
pay (other than payments pursuant to a wage continuation plan
under section 105(d) ), shift differential, payroll taxes, payments
to a supplemental unemployment benefit plan paid or incurred on
behalf of employees engaged in direct labor. For the treatment of
rework labor, scrap, spoilage costs, and any other costs not
specifically described as direct production costs

D. Taxpayers required to compute taxable income on a calendar


year basis
1. Individuals
2. Estate and Trust
3. General Professional Partnership

2. Indirect production cost

E. Taxpayers required to establish a fiscal year as basis for filling


their returns and computing their net income:

The term indirect production costs includes all costs which are
incident to and necessary for production or manufacturing
operations or processes other than direct production costs. Indirect
production costs may be classified as to kind or type in accordance
with acceptable accounting principles so as to enable convenient
identification with various production or manufacturing activities or
functions and to facilitate reasonable groupings of such costs for
purposes of determining unit product costs.

1. Corporations
F. Cases where return may be filed for less than a month
1. In the case of change of accounting period
2. The final personal income tax return of a decedent
3. The income tax return of the Estate of a decedent
4. Newly organized corporations

A. Elements of indirect production cost

5. Dissolving corporations

H. Moving Average Method of Inventory


PART XIII FILING OF TAX RETURNS AND PAYMENT OF
TAXES

1. Requirements for the use


III. Accounting Periods

A. Taxpayers Required to File Income Tax Returns Not Later


Than April 15 of the following year
a. Individuals
1. Every resident citizen on his income from sources
within and without the Phil.
2. Every non-resident citizen on his income from
sources within the Phil.
3. Every resident alien on his income from sources
within the Phil.
4. Every non - resident alien engaged in trade or
business or in the exercise of profession on his
income from sources within the Phil.

A. Definition
B. Kinds
1. Calendar year-starts January 1and ends on December 31
2. Fiscal year- starts on the first day of any month other than
January and ends twelve months thereafter
C. Rule on the accounting period and method of accounting of a
taxpayer

45

5. An individual; deriving compensation income from


2 or more employers.
6. An individual deriving compensation income of
more than 60k in one tax period.
7. Individuals receiving mixed income during the tax
period from compensation, business or profession.
8. If the income tax withheld from the compensation
income was erroneous.
9. Citizens working abroad receiving income from
sources within the Phil.

6. Employer issues BIR Form 2316 to each employee

PART XIV- WTHHOLDING TAXES


I.

Importance of Witholding Taxes

Q: Is withholding tax a tax?


A: No, it is not a tax. It is merely a means of collecting taxes
in advance payment of tax due.
A. Mandatory Character

B. Corporations No Matter How Created Including General


Professional Partnerships
1. Domestic those receiving income from sources within
or without the Phil.
2. Foreign those receiving income from sources within
the Phil.

Under this system, taxes imposed or prescribed by the NIRC are to


be deducted and withheld by the payor-corporations and/or
persons for the former to pay the same directly to the BIR. Hence,
the taxes are collected practically at the same time the transaction
is made or when the taxable transaction occurs. It is taxation at
source.
Note: Purpose of the withholding tax system is to:
1. Provide the taxpayer a convenient manner to meet his probable
income tax liability.
2. Ensure the collection of the income tax which would otherwise
be lost or substantially reduced through the failure to file the
corresponding returns.
3. Improve the governments cash flow.
4. Minimize tax evasion, thus resulting in a more efficient tax
collection system.

C. Estates and Trust Engaged in Trade or Business(NOT


FOUND)
1. Estates under judicial settlement.
2. Trust irrevocable, both as to corpus (trust property)
and as to income earnings.
D. Substituted Filing of Income Tax Returns For Individuals
(Sec. 4, RR. No. 3-2002)
Requisites: (SBC memory aid)
1. Employee receives purely compensation income
(regardless of amount);
2. The income is only from the employer;
3. Amount of tax due from the employee equals the
amount of tax withheld by the employer;
4. Employees spouse also complies with all three (3)
conditions stated above;
5. Employer files the annual information return (BIR Form
No. 1604-cf); and

II.

Types of Withholding Taxes


A. Final Withholding Tax
Effects to the income, which is subjected to
final income tax:
a. Constituted as a full and final payment of
the income tax due from the payee

46

b.

No longer subject to the net income tax


(hence, the corresponding final tax cannot
be claimed as tax credit)
c. Limited only to the payees income tax
liability and does not extend to other taxes
that may be imposed on said income
d. Liability for the payment of the tax rests
primarily on the payor as withholding
agent
e. Withholding agent files the return (not the
payee)
B. Creditable Withholding Tax
Withholding taxes on ordinary business income
which is still subject to income tax and
therefore, it is deductible as tax credit

2. Payment of compensation or wages for


services rendered; and
3. A payroll period.
Q: What are exempted from Withholding
Tax on Compensation?
A:
1. Remuneration as an incident of
employment:
a. Retirement benefits received under RA
7641
b. Any 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 such as
retrenchment, redundancy or cessation of
business
c. Social security benefits, retirement
gratuities, pensions and other similar benefits
d. Payment of benefits due or to become
due to any person residing in the Philippines
under the law of the US administered US
Veterans Administration
e. Payment of benefits made under the
SSS Act of 1954, as amended
f. Benefits received from the GSIS Act of
1937, as amended, and the retirement gratuity
received by the government employee

1. Types of Creditable withholding taxes:


a. Expanded withholding tax on certain
income payments made by private
persons to resident taxpayers
b. Withholding tax on compensation
income for services done in the
Philippines
Q: Give the rule on withholding tax on
compensation.
A:
GR: Every employer making payment of wages
shall deduct and withhold upon such wages, a
tax determined in accordance with the rules
and regulations to be prescribed by the
Secretary of Finance, upon recommendation of
the CIR.
XPN: In the case of a minimum wage earner.
(Sec. 79 [A], NIRC)
Q: What are the elements of withholding
on compensation?
A: There must be:
1. An employer-employee relationship;

2. Remuneration paid for agricultural labor


3. Remuneration for domestic services
4. Remuneration for casual labor not in the
course of an employer's trade or business
5. Compensation for services by a citizen or
resident of the Philippines for a foreign
government or an international organization
6. Payment for damages
7. Proceeds of Life Insurance
8. Amount received by the insured as a return
of premium
9. Compensation for injuries or sickness

47

10. Income exempt under Treaty


11. 13th month pay and other benefits not to
exceed P 30,000
12. GSIS, SSS, Medicare and other
contributions
13. Compensation Income of Minimum Wage
Earners (MWEs) with respect to their Statutory
Minimum Wage (SMW) as fixed by Regional
Tripartite Wage and Productivity Board
(RTWPB) or National Wage and Productivity
Commission (NWPC), including overtime pay,
holiday pay, night shift differential and hazard
pay, applicable to the place where he/she is
assigned.
14. Compensation Income of employees in the
public sector if the same is equivalent to or not
more than the SMW in the non-agricultural
sector, as fixed by RTWPB or NWPC, including
overtime pay, holiday pay, night shift
differential and hazard pay, applicable to the
place where he/she is assigned.

Q: What are the duties and obligations of the withholding


agent?
A: The following are the duties and obligations of the withholding
agent to:
1. Register To register within 10 days after acquiring such status
with the RDO having jurisdiction over the place where the business
is located.
2. Deduct and Withhold To deduct tax from all money payments
subject to withholding tax.
3. Remit the Tax Withheld To remit tax withheld at the time
prescribed by law and regulations.
4. File Annual Return To file the corresponding Annual
Information Return at the time prescribed by law and regulations.
5. Issue Withholding Tax Certificates To furnish Withholding Tax
Certificates to recipient of income payments subject to
withholding.

2. Conditions that must concur in order to be


subject to the expanded withholding tax
3. Persons
exempt
from
creditable
withholding tax
III.

Persons constituted as Withholding Agent


A withholding agent is a separate entity acting
no more than an agent of the government for
the collection of tax in order to ensure its
payments.
He is merely a tax collector, not a taxpayer. If
a withholding agent was assessed for
deficiency withholding tax under the NIRC, as
such, it is being held liable in its capacity as a
withholding agent and not its personality as a
taxpayer

IV.

Time to withheld the tax


It arises at the time an income payment is
PAID or PAYABLE or ACCRUED or recorded as
an expense of asset whichever is applicable in
the payors booked, whichever comes first.

V.

Bases of withholding Tax


A. General Rule
B. With respect to real property other than
capital asset
C. Withholding tax rules applied on income
payments liable to income tax
D. Venue for filing withholding tax return and
time for payment of the tax
-

48

For monthly return and payment of taxesa. Within 10 days after the end of each
month, except for taxes withheld for the
month of December of each year, which
shall be on or before Jan. 25 of the
following year
b. For those who avail of electronic filing and
payment- 5 days later than above.

On return and payment of tax withheld on


compensation income
a. On or before the 10th day of the following
month in which the withholding was made.
December withholding to be paid not later
than January 25 of the following year
b. For those who avail of electronic filing and
payment- 5 days later than above.

As to the effect of the tax withheld


The tax withheld can be
claimed as a tax credit or may
be deducted from the tax due
or payable

Q: How are withholding taxes withheld and


remitted?
A: Taxes deducted and withheld by withholding agents
shall be covered by a return and paid to, except in
cases where the CIR otherwise permits, an authorized
Treasurer of the municipality or city where the
withholding agent has his legal residence or principal
place of business, or where the withholding agent is a
corporation, where the principal office is located. The
taxes deducted and withheld by the withholding agent
shall be held as a special fund in trust for the
government until paid to the collecting officers. (Sec.
58{A], NIRC
CREDITABLE
WITHHOLDING TAX

The tax withheld cannot


be claimed as tax credit

As to filing of ITR

There is a necessity to file on


the earner

FINAL WITHHOLDING
TAX

As to income subject of the system


1.Compensation Income
2.Professional/talent fees
3.Rentals
1. Passive incomes
4.Cinematographic film rentals
2. Fringe benefits
and other payments
5.Income payments to certain
contractors
As to whether or not income should be reported as
part of the gross income
The employee is required to
include the income in his

the tax withheld


constitutes final and full
settlement of the tax
liability

gross income

The recipient may not


report the said income in
his gross income because

49

If the only source of


income is subject to final
tax, no need to file an ITR
on the part of the earner

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