When it comes to foreign taxes, there are two options which the taxpayer may avail of either as tax

x deduction or tax credit. Who are

these taxpayers? Again, this pertains only to taxpayers who are taxable for income within and without RC, DC, members of GPPs and
beneficiaries of estates and trusts. Consequently, they can also deduct expenses incurred within and without.
Q: When can foreign taxes be claimed as deductions?
A: When it has not been claimed as tax credit and vice versa i.e. it can be claimed as tax credit, if not claimed as tax deduction. IOW, they
are mutually exclusive.
o
o

If its claimed as credit, you are going to deduct it from the Philippine income tax.
If its deduction, you are going to deduct it from gross income to arrive at your taxable income.

d. Limitations on credit
T/N: If NRFCs, no need to apply the limitations since they cannot claim foreign taxes paid abroad as deductions in their gross income
because that they are only taxable for income within. Consequently, they can only deduct expenses incurred from within.
The amount of the credit taken shall be subject to the following limitations:
i.

Per Country Limitation the amount of the credit in respect to the tax paid or incurred to any country shall not exceed
the same proportion of the tax against which such credit is taken, which the taxpayers taxable income from sources within
such country bears to his entire taxable income for the same taxable year.
Formula: Net income per foreign country Total net income x Philippine income tax

ii.

Global Limitation the total amount of the credit shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayers taxable income from sources without (outside) the Philippines taxable under this Title
bears to his entire taxable income for the same taxable year.
Formula: Total net income from abroad Total net income worldwide x Philippine income tax

Rules:
1.
2.
3.

The amount to be claimed as tax credit is the lowest amount among (1) the actual foreign tax paid, (2) per country limitation
and (3) global limitation.
Apply both limitations if there are two or more foreign countries involved.
Apply only limitation 2 (global limitation) if there is only one foreign country involved.

Illustration 1:

One foreign country involved use Limitation 2 (global limitation) only

Philippines
P1million
P500,000
P150,000

Gross Income
Expenses
Taxes paid
Gross income =
Less: Expenses

US
P1million
P500,000
P160,000

Total
P2million
P1million

P2million
=
P1million
P1million

Tax payable =
P300,000 (P1m x 30% tax rate)
Less: Taxes paid in US= P160,000 (???)
Final tax payable
= ???
Q: Can you deduct the whole P160,000 from your income tax due?
A: Take note of the limitations
Philippines
P1million
P500,000
P500,000

Gross Income
Expenses
Net income (GI-Exp)
Taxes paid

Limitation in credit= 1.

US
P1million
P500,000
P500,000
P160,000

Total
P2million
P1million

Total net income from abroad Total net income worldwide x Philippine income tax

=P500,000 P1 million x P300,000

=1/2 x P300,000
= P150,000
Rule: As between the amount of actual taxes paid abroad and limitation 2, the one lower in amount shall be deducted.
Thus
Gross income
Less: Expenses
Tax payable

=
=
=

P2million
=
P1million
P1million
P300,000 (P1m x 30% tax rate)

Less: Taxes paid in US

Final tax payable

=
=

P150,000 (not P160K because of the limitation)

P150,000

Illustration 2: Two foreign countries involved use both limitations and compare with actual foreign tax paid

Gross income (GI)

Less: Expenses
Taxable (net) income
Tax paid

Philippines
P1,000,000
P500,000
P500,000

US
P500,000
P300,000
P200,000
P50,000

China
P500,000
P200,000
P300,000
P100,000

Total income

P1,000,000

Tax payable (in Ph)

P300, 000 (P1m x 30%)

Q: Can you claim the whole foreign taxes of P50, 000 and P100, 000 as tax credit?
A: No, its subject to both limitations since there are two foreign countries involved in this case thus
Applying limitation 1 (per country limitation)

US
=
=
=
=

Net income per foreign country Total net income x Philippine income tax
P200,000 P1,000,000 x P300,000
1/5 x P300,000
P50,000

=
=
=
=

Net income per foreign country Total net income x Philippine income tax
P300,000 P1,000,000 x P300,000
0.3 x P300,000
P90,000

China

Applying Limitation 2 (global limitation)

Net income in US =
Net income in China
Total net income abroad=
=
=
=
=

P200K
=
P500K

P300K

Total net income from abroad Total net income worldwide x Philippine income tax
P500,000 P1,000,000 x P300,000
x P300,000
P150,000

Compare

o
o

Limit 1

Limit 2

US= P60,000
China =
P90,000

P150,000

Actual taxes
paid
US= P50,000
China=
P100,000

For taxes paid in the US, what will be claimed as tax credit is the amount of taxes actually paid since this since this is the lowest
amount.
For taxes paid in China, you are going to use Limit 1 since this is the lowest amount.

Thus
GI
=
Less: Exp
Taxable (net) income =
Tax payable
=
Less: Tax credit
=
=
=
Final tax payable =

P1,000,000
=
P500,000
P500,000
P300,000 (P500K x 30%)
P50,000 US
P90,000 China
P140,000
P160,000 (300K P140K)

Summary:
1.
2.
3.
4.
5.
6.

Identify the classification of the taxpayer WON it can claim foreign income tax as deduction
Claim either as tax deduction or tax credit
If tax credit, apply the limitations If only 1 foreign country, use global limitation but if 2 or more then apply both limitations
Compare the actual amount paid as taxes and the amount pertaining to limit 1 and limit 2
The lowest amount is what you can claim as tax credit
Compute for the final tax payable

e. Proof of credits (Tax Credits)

The credits shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:

i.
ii.
iii.

The total amount of income from sources without the Philippines;

The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit; and
All other information necessary for the verification and computation of such credits.

f. Tax subsequently refunded or credited

Taxes preciously allowed as deductions, when refunded or credited, shall be included as part of gross income in the year of receipt to the
extent of the income tax benefit of said deduction.
T/N: For taxes subsequently refunded or credited, we still follow the Tax Benefit Rule. If declared as deduction in the previous
taxable year and subsequently recovered in the following taxable year, then that is taxable because of the tax benefit derived
therefrom. But if not deducted in the previous taxable year because it is not deductible, e.g. if its VAT or transfer tax, and in the
following year, there is a tax refund, then it is not taxable because there is not benefit there. This is the same principle when it
comes to bad debts expense bad debts recovered is not taxable if there is no benefit in the previous year it is recognized as
expense. But if there is a benefit therefrom in the previous year, then it is taxable to the extent of such benefit so as to make
taxable income zero.

4. Losses
a.) Classification of Losses
i. Ordinary losses losses sustained in the course of trade, business or profession of the taxpayer
What is deductible under the Itemized deductions from gross income are the ordinary losses which are incurred in the normal
day to day operations of the taxpayers business, trade or profession. If that loss is incurred in relation to a capital transaction,
then it is a capital loss.
Q: When can you say that it is a capital transaction?
A: If it involves capital assets. If what youre selling is classified as an ordinary asset then thats an ordinary transaction.
Consequently, you earn an ordinary income therefrom. If your expenses is greater than your income, then there will be ordinary
losses. If what youre selling is a capital asset and the cost thereof is higher than its selling price, then you incur what we call as
capital loss.

Net Operating Loss the excess of allowable deduction over gross income of the business in a taxable year.
Remember
Sales
Less: Cost of Sales
Gross Income
Less: Expenses
Taxable Income
T/N: Gross income is always positive. For example, if you bake a cake and the cost of baking that cake is P200, you
dont sell it at P100 but for a higher amount e.g. P250 or P300. So technically gross income should be positive since the
amount of sales should always be higher than the cost of sales. However, there are instances when your operating
expenses are higher than your gross income. For example, for expenses incurred as wages of your employees. Suppose
your employees do not really work hard that your production turns out low. Naturally, your operating expenses will be
higher than your gross income thus you incur ordinary loss. Is that ordinary loss deductible? Yes.

GR: Deductions must be incurred during the taxable year.

EXC: NOLCO if in this year, you incurred a loss, you can deduct it the following year provided that you earn income in
that year. But if you still incur a loss in the following year then naturally, you dont deduct it because it would be
useless. Is that deduction incurred in the current year? No its incurred in the previous year. Thats why we said that
NOLCO is an exception to the rule that deductions must be incurred during the taxable year.
Net Operating Loss Carry Over (NOLCO) shall be carried over as a deduction from the gross income for the next 3
consecutive taxable years immediately following the year of loss. Such loss shall be allowed as a deduction. It had not been bee
previously offset as deduction from gross income. However, any net loss incurred in a taxable year during which the taxpayer
was exempt from income tax shall not be allowed as a deduction. NOLCO shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise.
Requisites for applicability of NOLCO:
1.
2.

3.
4.

The taxpayer must be earning income during the following taxable year i.e. the taxpayer must not be
incurring losses.
The taxpayer must not be liable to pay the MCIT.
o
NIT (Normal Income Tax) 30% of taxable income
o
MCIT (Minimum Corporate Income Tax ) 2% of the gross income; applies only to corporate
taxpayers
T/N: If you are liable to pay the MCIT, then you really liable to pay something even if your net or taxable
income is zero or negative since it is taken from your gross income which is at all time positive.
The taxpayer has not availed of the 40% Optional Standard Deduction (OSD).
T/N: NOLCO is included in Itemized Deductions
The taxpayer must not be enjoying a tax exemption e.g. tax holiday

There are some corporations which enjoy tax holidays e.g. PEZA-registered corporations. They have what we call as
Pioneer Enterprise and Non-pioneer Enterprise.
1.
2.

Pioneer Enterprise given a tax holiday of 6 years as incentive for introducing a particular product in the
country.
Non-pioneer Enterprise given a tax holiday of 4 years.

For example, you are Non-pioneer Enterprise given a tax holiday of 4 years so you dont pay taxes within such period.
For that 4 years, you incurred losses. Come the 5 th year, you earned income. Can you carry over the losses youve
incurred from the 1st year up to the 4th year in the 5th year when youve already earned income? No because youre
already enjoying a tax exemption during the 4 year period in the form of a tax holiday.
Example:

Gross Income
Less:
Expenses
Income/
(Loss)

2012
P500,000
P600,000

2013
P1,000,000
P1,200,000

2014

(P100,000)

(P200,000)

P150,000
2012 (P100,000)
P50,000
2013 (P50,000)
-02013
P150,000

P800,000
P650,000

2015
P500,000
P700,000

2016
P300,000
P400,000

(P200,000)

(P100,000)

*The 150K pertaining to

losses in 2013 after
deducting it from the
50K income in 2014
cannot be anymore be
carried over in 2017
because the 3-year
period had already
expired.
* Amount bracketed pertains to losses
Rules:
1.
2.
3.

Net operating losses can only be carried over during the 3 consecutive taxable years following the taxable
year they were incurred.
The first net operating loss that you incurred should be the first that you will deduct from the income earned
during the following taxable years.
You will only deduct the loss enough to make the taxable income zero.

For losses incurred in 2012, you can only carry it over until 2015. You cant deduct it in year 2013 because you did
not earn income. Instead, you incurred losses. You can deduct it in 2014 since you earned income in the amount of
P150,000.
For losses incurred in 2013, you can only carry it over until 2016. Between the 2012 and 2013 losses, you will
prioritize the 2012 losses since they are incurred first. Thus after deducting the P100K 2012 losses from income of
P150K earned in 2014, you still have P50,000 left. You cant deduct the whole P200K 2013 losses since that would be
useless. You will only deduct P50,000 enough to make your taxable income 0. The P150,000 cannot be deducted in
2105 and 2016 because you did not earn income. Moreover, it cannot anymore be deducted in 2017 because it can
only be carried over until 2016.
Q: Will the Government be prejudiced in the application of NOLCO?
A: Focusing on the year 2014 in the above illustration, you carry over losses in incurred in 2012 and 2013 in 2014 so as
to make your taxable income 0. In effect, there is no tax payable due the Government in 2014. However, the Minimum
Corporate Income Tax was devised to remedy this situation in which 2% is deducted from your gross income even if
your taxable income in that taxable year is zero. What is subject to tax is the gross income so the Government can still
collect taxes.
T/N: MCIT will be discussed later on.
Q: What will happen to the P150,000?
A: It will become useless. You cannot deduct it anymore from income earned in the taxable years following 2016. Thus,
if you have high taxable income, it would mean higher tax payable considering that you cannot anymore deduct such
losses.
5. There must be no substantial change in the shareholdings of the corporation.
There is no substantial change when

a.
b.

Not less than 75% (75% or more) in nominal value of outstanding issued shares, if the business is in the name of a
corporation, is held by or on behalf of the same persons; or
Not less than 75% (75% or more) of the paid up capital of the corporation, if the business sis in the name of a
corporation, is held by or on behalf of the same person

Stated otherwise, there is substantial change if the change in ownership of the same person is more than 25% in both
corporations.
Q: When can you apply this condition on substantial change?
A: When two corporations enter into a merger where there will be change in ownership.

Q: What is the purpose of merger or consolidation?

A: For one corporation to absorb the losses or liabilities of another.

Q: Whats the difference between merger and consolidation?

A: In consolidation, 2 corporations will combine such that their personalities will be extinguished and a new personality or entity
emerges. Thus, A Corp. + B Corp. = Corp. C
In merger, if you have A Corp. merged with B Corp, you will have what we call as the surviving corporation which can either be
A Corp. or B Corp. depending on which one is the dominant corporation. Thus, A Corp. + B Corp. = A/B Corp. This is usually
common in banking institutions.
T/N: NOLCO applies in cases of merger, not in consolidation
Example:
A Corporation continuously incurred operating losses from 2010 to 2015
Shareholders:
M = 80%
C = 5%
D = 5%
E = 5%
F =5%
B Corporation continuously earned profits from 2010 to 2105 thus it has higher taxable income. Consequently, it has a higher
tax payable.
Shareholders:
M = 80%
N = 5%
O = 5%
P = 5%
Q= 5%
In this case, the common shareholder is M. Suppose A Corp and B Corp enters into a merger.

Q: What is the implication of such merger?

A: One way of avoiding tax is by entering into a merger. In this case, B Corp. is the surviving corporation. The advantage of such
merger is that B Corp. will absorb the losses of A Corp. thus if it will report such losses, it will be liable for a lesser tax payable.
Take note, that the losses here pertains to operating losses thus they can be carried over for the next 3 consecutive taxable
years.

Q: Can B Corp. still avail of the benefit of NOLCO?

A: Yes because there is no substantial change in the ownership of the corporation since M still owns the controlling shares of the
surviving corporation equivalent to 80% or not less than 75% of the shareholdings.
Q: What if M owns 10% of A Corp., can B Corp. still avail of NOLCO if it merges with A Corp?
A: Not anymore because there will already be substantial change in the ownership of the corporation.

Q: What if M owns 75% of the shares in A Corp., can B Corp., the surviving corporation still avail of NOLCO?
A: B Corp. can still avail of NOLCO because there is substantial change only if it is less than 75% so if its 75% or more thus there
is still no substantial change in this case.
T/N: If there is no merger, then apply only the first four conditions, no need to apply the 5 th.
ii. Capital Losses governed by rules on loss from the sale or exchange of capital assets. Losses from sales or exchanges of capital
assets shall be allowed only to the extent of the gains from such sales or exchanges.
This pertains to capital transactions involving capital assets.
Net Capital Loss the excess of capital loss over capital gains.
Net Capital Loss Carry Over (NCLCO) not available to corporate taxpayers.
Q: Why do we call it net capital loss?

A: Because you compare your capital loss with your capital gains. If capital loss is greater than net capital gain, then there is a
net capital loss. If you carry it over, then thats what we call as net capital loss carry-over (NCLC).

o
o
o

Net Capital Loss Carry-Over (NCLC)

Pertains to capital loss
Can only be availed of by individual taxpayers
Losses are carried over only during the following
or succeeding taxable year

Net Operating Loss Carry-Over (NOLCO)

Pertains to operating loss
Can be availed of by both individual and corporate
taxpayer
o
Losses are carried over during the succeeding 3
consecutive taxable years
o
o

RECAP: Capital assets include

1.
2.
3.

Real properties in the Philippines

Shares of stocks not listed and traded or listed but not traded in the local stock exchange
Other capital assets
Example: When you sell your laptop or ipod and you are not engaged in the buying or selling of such gadgets. When
you sell it at a price lower than its acquisition cost, then you incur a capital loss.

Q: Will you report a capital loss in your ITR when you will be recording your sales or income?
A: No, it should be reported in a different return because transactions involving capital assets are subject to capital gains tax,
which is a final tax, thus should be filed separately.
Q: Of the three capital assets, will a capital loss be incurred in the sale of real property?
A: No. For sale of real property classified as capital asset, capital gains tax thereon is computed at 6% of the Selling Price or the
Fair Market Value, whichever is higher. For taxation purposes, you dont recognize the acquisition cost of that real property.
There is no possibility that you will incur losses in the sale of real property because in the first place, they are expected to
appreciate in value. Thats why the basis of computing the CGT is the selling price or FMV, you dont take into consideration, the
acquisition cost of such property. Thus
You can incur capital losses in two capital transactions only (1) in sales of shares of stocks not listed and traded or listed but not
traded in the local exchange and (2) in the sale of other capital assets.
Remember
In computing the capital gains tax on the sale of such shares of stocks, its 5% or 10% of the net capital gains as the case may
be. The net capital gains is computed as the selling price less the acquisition cost. So if your acquisition cost is greater than your
selling price, you incur a capital loss.
Capital Losses include the following:
1.

2.

3.

4.

Loss arising from failure to exercise the privilege to sell or buy property.
Q: What does this loss pertains to?
A: This pertains to option contracts. The consideration paid or the option money cannot anymore be recovered when
you will not proceed with the transaction. The unrecovered option money is a capital loss because you did not enter
into that transaction, had you proceeded therewith, it would have been classified as an ordinary loss.
Securities becoming worthless.
T/N: These pertains to securities where the fair market value declined because of certain factors; say for example, the
bad image of the corporation.
Q: When will you classify such securities as capital loss?
A: Only when you are engaged as a dealer in securities.
Another manifestation that your securities has become worthless is when the liquidating dividends issued during
dissolution is less than the amount of initial investment of the shareholders in the corporation. Such loss is a capital
loss.
Abandonment losses in the case of natural resources.
Q: What are these abandonment losses?
A: These usually pertains to losses in mining businesses during their exploratory stage. For example, it is thought that
there are mining deposits and other minerals in a certain area such that exploration is undertaken to extract such
deposits but then it was discovered that there were actually no deposits existing so the exploration was abandoned.
The cost of exploring the area is a loss on the part of the proprietor since no operation commenced. Thats what we call
abandonment losses and they are classified as capital losses because the operations did not push through.
Loss from wash sale or stock securities
GR: Its a capital loss.
EXC: If it pertains to sales of shares of stocks by a dealer in securities.
Wash sale occurs where it appears that within a good period beginning 30 days before the date of the sale or disposition of
shares or stocks or securities and ending 30 days after such date, the taxpayer has acquired (by purchase of exchange) or has
entered into a contract or option to so acquire, substantially identical stock or securities. No deduction for loss shall be allowed
for wash sales unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary
course of the business or such dealer.
T/N: If the sale falls beyond the 30 days then it cannot anymore be classified as a wash sale.
Q: Can you deduct losses incurred from such wash sales?
A: No because its considered as a simulated sale. Theres no actual sale that happens. Its treated as a way to
maneuver the price of the shares of stocks to make it appear that these shares of stocks are treated actively in the
market. Of course, if the stocks are traded actively in the market, it will invite more investors. Only dealers in securities
can deduct it as a loss even if it pertains to a wash sale because there is monitoring of the shares of stocks 24/7. You

dont bother taking into consideration whether the transaction occurred 30 days before or 30 days after. In any cases,
losses from the sales of shares of stocks can be deducted.
iii. Wagering or gambling losses the amount that is deductible must not exceed the gains.
As a rule, wagering or gambling losses cannot be deducted but the least that you can do is to offset whatever losses you incur
from your winnings in that particular gambling activity.
o
o

If the winnings is higher than the losses report it as taxable income

If the losses is higher than the winnings not deductible

iv. Casualty losses include losses from fire, storm, shipwreck, other casualty losses, robbery, embezzlement and theft.
Q: Whats the requirement for a casualty loss to be deducted as a loss?
A: You must file a Sworn Statement to the BIR authorities within 45 days from the occurrence of such loss. (See other
requirements for deductibility of losses below)
v. Abandonment losses in the event a contract are where petroleum are undertaken is partially or wholly abandoned, all accumulated
exploration and development expenditures pertaining thereto shall be allowed as a deduction.
vi. Special losses e.g. loss arising from voluntary removal or buildings as an incident to renewal or replacement.
b. ) Common requisites for deductibility of losses
1. The loss must be incurred in the trade, business or profession of the taxpayer;
2. Losses must be actually sustained and charged off within the taxable year, and not mere anticipated losses;
3. Must be evidenced by a closed and complete transaction;
This pertains more to contracts of sale where there is perfection of such contract. It could happen that there will
already be delivery even of the sale has not yet been perfected as in a contract to sell. For example, you bought a car
under a contract to sell and the car was delivered to you. You took it out for a test drive where it met an accident
resulting to a total wreck. Can you as buyer claim it as a loss? No, rather it is the seller who is entitled to claim it as a
loss since there was still no closed and completed transaction. Although there was delivery, there was no perfected
contract.
4. Must not be compensated by insurance or other forms of indemnity;
Q: What if the loss happened in December and suppose that the insurance company was not able to act
upon the insurance claim by the time of the filing of the taxpayers ITR in April 15 of the following year,
can you claim it as a deduction?
A: If the insurance company cannot act on it within that period of time then you can still deduct it. Given, that youve
already filed the required Sworn Statement of Loss with the BIR then you just have to indicate there the amount of
insurance over the subject property. Even if youre not able to report the accurate amount, it is still deductible so long
as it is reasonably accurate or can be reasonably ascertained.
Q: What is the difference between accurate and reasonably accurate?
A: Accurate if the value cannot be changed anymore i.e. it is the final and fixed value; reasonably accurate when the
value is capable of being ascertained with the support of proper substantiation.
5. If it is partly compensated, only the amount not compensated by insurance is deductible.
6. If it is casualty loss, the taxpayer has filed a sworn declaration of loss within 45 days after the date of discovery of the casualty
or robbery, theft, or embezzlement.

5. Bad Debts
T/N: These are not the same as doubtful accounts
Definition: These are debts due to the taxpayer which are usually ascertained to be worthless and charged off within the taxable year.
a.) Requisites for deductibility of bad debts
i.
ii.
iii.
iv.
v.

Must
Must
Must
Must
Must

be valid and subsisting indebtedness;

be ascertained to be worthless;
be charged off and uncollectible within the taxable year;
be uncollectible in the near future; and
arise from trade, business or profession of the taxpayer.

b.) Steps to prove the worthlessness

T/N: These steps are usually availed of only when the amount of bad debts is substantial
i.
ii.
iii.

There must be a statement of account sent to the debtor;

A collection letter;
If he failed to pay, refer the case to a lawyer;

iv.

Lawyer may send a demand letter to the debtor; and

T/N: Demand letter is usually a final one
If the debtor still fails to pay the same, file an action in court for collection.

v.

Aging of accounts receivable -- mentioned but not defined

For example, the creditor wanted to collect payment from the debtor but the debtor says that he is already insolvent that he
cannot anymore pay the creditor. Is that already a ground for the creditor to declare it as bad debts expense? No. Although
insolvency is a ground to declare unpaid debts as bad debts expense; however, it must be a judicially declared insolvency. The
debtor cannot just unilaterally declare that he is insolvent. There should be proper insolvency proceedings in court.
Q: When can you say that an individual is insolvent?
A: If his liabilities exceed his assets. If liabilities are still equal with the assets, then he is still solvent. The individual has to file
the appropriate insolvency proceedings in court. Either you file directly insolvency or resort first to rehabilitation. If rehabilitation
is not possible, then thats the time when there will be a declaration of insolvency.
T/N: If the debtor cannot anymore be located, then it could already be a ground to declare it as bad debts expense.
Q: If the debtor dies, is it a ground to declare unpaid debts as bad debts expense?
A: No because monetary obligations survive the death of the debtor. You can still collect it from the estate or if the estate is
already distributed, then you collect from the heirs in which case, they cannot be held liable for more than the amount of what
they received from the distribution. This is actually an SC decided case i.e. death of the debtor is not a ground for you to declare
unpaid debt as bad debt expense.
c.) Bad debts charged off subsequently collected follow the Tax Benefit Rule
o
o

If the recovery of bad debts, resulted in a tax benefit to the taxpayer, that is taxable.
If it did not result in any tax benefit to the taxpayer, that is not taxable.

6. Charitable and Other Contributions

a.) Kinds of charitable contributions
i.
ii.

Ordinary those subject to limitations as to the amount deductible form gross income (5% or 10%)
Special deductible in full from gross income

b.) Requisites for deductibility:

1.
2.
3.
4.
5.
6.

The contribution or gift must be actually paid.

It must be given to the organization specified in the Code.
The net income of the institution must not inure to the benefit of any private stockholder or individual.
It must be made within the taxable year.
It must be evidenced by adequate records or receipts.
Must not exceed 10% in the case of individuals and 5% in the case of a corporation, of the taxpayers taxable income
(EXCEPT WHERE THE DONATION IS DEDUCTIBLE IN FULL) to be determined without the benefit of the contribution).

A.

Deductible in full (Special Charitable

Contributions)
1.) Recipient is the Government of the Philippines;
any of its agencies or political subdivisions; or any
fully-owned government corporation
For priority activity in:
o
Science
o
Education
o
Culture
o
Health
o
Economic development
o
Human settlement
o
Youth and sports development

B.

Deductibility subject to limitation (Ordinary

Charitable Contributions)
1.) Recipient is the Government of the Philippines;
any of its agencies or political subdivisions
For a NON-PRIORITY ACTIVITY in any of the areas
mentioned in A, and exclusively for a public
purpose.
2.) Recipient is an accredited non-government
organization (NGO), organized or operated
a.

o
o
o
o

2. ) Recipient is an accredited non-government

organization (NGO), organized or operate
a.

For any of the following purposes

o
o
o
o
o
o
o

Scientific
Educational
Cultural
Character building/ youth and sports
development
Social welfare
Health
Research

For any of the following purposes

o
o
o
o
o
b.

Scientific
Educational
Cultural
Character building/ youth and sports
development
Charitable
Social welfare
Religious
Rehabilitations of veterans
Social welfare institutions

If the conditions in Table A is NOT COMPLIED WITH

Subject to limitation:

b.

And satisfying the following conditions

a.)

1.

The donation must be utilized not later than the

15th day of the 3rd month following the close of its
taxable year.
The administrative expense must not exceed 30%
of total expenses
Upon dissolution, assets must be distributed to
another non-profit domestic corporation or the
State.

b.)

2.
3.

Individual 10% taxable income from trade

business or profession before contribution
Corporation 5% taxable income from trade
business or profession before contribution

3.) Recipient is a foreign or international

organization with an agreement with the Philippine
Government on deductibility or in accordance with
special law.

Q: When can you say that an NGO is accredited?

A:
1. If it submitted the necessary documents; and
2. If it secured the proper accreditation from the particular department of the Government concerned
Example: If the NGO is engaged in social welfare and development, then it must be accredited from the DSWD. If the main thrust
of the activity of that NGO is education, then it should be accredited with the DepEd, CHED or TESDA.
Q: What is the purpose of accreditation?
A: To counter-check whether these NGOs are really doing their functions and not just used as front for some illegal scheme.
Q: What if the NGO is not accredited, are charitable deductions made to such NGOs deductible?
A: No because accreditation is expressly required by the Tax Code.
T/N: If its just informal contributions or pooling of resources, then it is not deductible.
c.) Deductible in full under special laws
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.

Integrated Bar of the Philippines (PD 81)

Development Academy of the Philippines (PD 205)
Aquaculture Department of the Southeast Asian Fisheries and Development Center [SEAFDEC] (PD 292)
National Social Action Council (PD 924)
National Museum, Library and Archives (PD 373)
University of the Philippines and other state colleges and universities
Philippine Rural Reconstruction Movement
Cultural Center of the Philippines
Trustees of the Press Foundation of Asia
Humanitarian Science Foundation
Artesian Well Fund (RA 1977)
International Rice Research Institute (came out in the BAR)
Department of Science and Technology (DOST) and its agencies to public or recognized non-profit, non-stock
educational institutions (RA 3589)
Donations of prizes and awards to athletes (RA 7549)
T/N: These athletes must be playing in sports competitions which are sanctioned by the National Sports Association
and the Philippine Olympic Committee.
Requisites for a valid donation:
1.
2.

There must be acceptance by the donee.

Take into account what type of property is donated
i.
If real property acceptance must be in writing
ii.
If the amount donated is more than P5000 acceptance should be in writing

7. Research and Development Programs

Research and development expenditures which are paid or incurred by a taxpayer during the taxable year in connection with his trade,
business, or profession may be treated as ordinary and necessary expenses which are not chargeable to capital account. The expenditures
so treated shall be allowed as deduction during the taxable year when paid or incurred.
a.) Amortization of certain research and development expenditures
The taxpayer may also elect to treat the following research and developments expenditures as deferred expenses:
o
Paid or incurred by the taxpayer in connection with his trade, business or profession;
o
Not treated as expense; and
o
Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or
depletion
b.) Non-deductible research and development expenditures

o
o

Amount spent for the acquisition or improvements of land or for the improvement or development of natural resources.
Reason for non-deductibility: These amounts usually form part of the cost of the land which woul will record as an
asset.
Amount paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any natural resources like
deposits of ore or other minerals including oil or gas.
Reason for non-deductibility: Its considered as capital loss specifically abandonment loss.

Q: If its classified as research and development expenditures, is it deductible in full?

A: Yes. There are two options
1. Deduct it in full; or
2. Amortize it meaning you are going to recognize it in staggered. You divide it with the number of years which you think you will
benefit therefrom.

8. Pension trust Contributions

A deduction applicable only to the employer on account of its contribution to a private pension plan for the benefit of its employee. This
deduction is purely business in character.
Q: When is this deductible from gross income?
A: It is considered deductible if it pertains to contributions of the employer to a private pension plan which is separate and
independent from the control of the employer meaning to say, the amount annually shelled out by the employer to such benefit
plan will not anymore go back to the employer. This should be for the benefit of retiring employees. If this pension plan is
controlled by the corporation, then it is not deductible.
a.) Contributions
i.
ii.

Current year the contribution is considered ordinary and necessary expenses fully deductible.
Why deductible? Because it pertains to services rendered by the employees in the current taxable year. As a general
rule, deductions must be incurred during the taxable year.
Past years if it refers to the services rendered for the past 10 years, the contribution is deductible but apportioned
over the next 10 years i.e. 1/10 deductible per year.
T/N: These pertain to contributions which the employer did not remit to the pension plan but were remitted only in the
taxable year when they are claimed as deductions.
Q: Can you deduct the whole amount?
A: No because they pertain to services rendered by the employees in the previous years, not during the taxable year
where they are claimed as deductions.
Rule: You are only allowed to deduct 1/10 of the contributions for the succeeding 10 taxable years.
Q: Why 10?
A: Because under the Tax Code, in order for the employees to avail of the benefits of a private pension plan, they must
have rendered service for at least 10 years. Remember the requirements? The employee must be at least 50 years old
at the time of retirement, must have rendered at least 10 years of service, and the private benefit plan must be
registered with the BIR.

b.) Requisites for deductibility:

i.
ii.
iii.
iv.
v.
vi.
vii.

The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to
his employees;
The pension plan is reasonable and actuarially sound;
Contribution must be made by the employer to that pension fund;
It must be funded by the employer;
The amount contributed must be no longer subject to the control and disposition of the employer;
The payment has not yet been allowed as a deduction; and
The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the
transfer or payment is made.

Example: Corporation A is supposed to contribute P1,000,000 annually to a private pension plan. It contributed P1,000,000 in
2014 but in 2013, it did not make any contribution.
Q: Can you deduct the whole P1,000,000 contributed in 2014?
A: Yes, it is considered as current year deduction thus fully deductible.
Q: Can you deduct the whole P1,000,000 suppose to be contributed in 2013?
A: No, it is considered as past year contribution thus you are only allowed to deduct 1/10 thereof during the taxable year.
Current year (2014)
2013 contribution
Total

Amount of contribution
P1,000,000
P1,000,000

Deduction (in 2014)

100%
1/10 of P1million or P100,000
P1,100,000

Q: What will happen to the remaining 9/10?

A: The remaining 9/10 will be apportioned over the next 9 years until the amount has been fully remitted. So another 1/10 or
P100,000 will be deducted in 2015, in 2016 and so on.

9. Premiums on Health and/or Hospitalization Insurance (applies to individual taxpayer) Refer to previous
outline

10. Depreciation
The gradual diminution of the useful value of the property used in trade, business or profession of the taxpayer, arising from wear and tear
or natural obsolescence. The term is also applied to amortization of the value of intangible assets, the use of which in trade or business is
definitely limited in duration.
Similarity of depreciation, depletion and amortization
They pertain to capital expenses, the benefit of which lasts for a longer period of time. You need to capitalize these
expenses meaning you are going to record them as assets but these capital expenses have what you call as useful
life which pertains to the number of years you can utilize them or when they will benefit you. What are you going to do
to record these expenses per year that you are using these assets? You are going to is them as depreciation,
amortization or depletion.
Difference between depreciation, depletion and amortization
1.

Depreciation pertains to depreciable assets which gradually loses their value due to normal wear and tear or assets
that become obsolete.
Examples: machineries, cars, computers

2.

Depletion pertains to wasting assets or assets or resources that cannot anymore be replaced. As distinguished from
depreciation, the latter pertains to assets that although are depreciable but replaceable. To match the cost of extracting
these assets, you recognize them as depletion expenses.
Example: mining deposits; petroleum

3.

Amortization still pertains to capital expenses recognized yearly but it is more applicable to intangible assets.
Example: goodwill must be externally generated i.e. it pertains to a purchased goodwill in order to be amortized. For
example, you set up a restaurant business and you purchased an already established restaurant in order to derive
benefit from its customers, good name, etc. Included in the purchase is the good will of the business. The transaction
will not benefit you for only one taxable year but for several years. You recognize the cost of purchasing that goodwill
as amortization expense. IOW, you amortize it. You do not depreciate it nor recognize it as depletion expense.
Other examples: royalties, franchise, patents

T/N: Depreciation, depletion and amortization expenses are what we call as non-cash expenses meaning there is no outflow of
cash but if you record them as expenses, there will be a tax shield or benefit. So in this case, there is no need of receipts as
proof of such expenses. What is required is to prove the reasonability of incurring such expenses. The tendency is that these
expenses tend to be overstated or bloated.
a .) Requisites for deductibility of depreciation
i.
ii.
iii.
iv.
v.
vi.

The property must be used in trade, business or profession of the taxpayer;

There must be depreciable properties;
The allowance for depreciation must be reasonable
This must be charged off during the taxable year;
A statement on the allowance must be attached to the return; and
The method in computing the allowance for depreciation must be in accordance with the method prescribed by the
Secretary of Finance upon the recommendation of the BIR Commissioner.
These prescribed methods include

Method of Depreciation
1.

Kind
Straight-line method

2.

Declining balance method

3.

Sum of the years digits (SYD) method

4.

Any other method as may be prescribed by

the Secretary of Finance upon the
recommendation of the BIR Commissioner

Formula
cost salvage value
estimated life
cost depreciation x Rate
estimated life
nth period x (cost salvage)
SYD

Q: Why is it that we have to use different methods?

A: Because the method that you will use depends upon the nature of the asset. There are some assets which have a long useful life but
before the end thereof, they become obsolete as they are replaced by another. So naturally, you will have to record a greater expense
earlier in its useful life and gradually record the remaining towards the end of its useful life. What are some examples of these assets?
Personal computers, laptops and other gadgets. Normally, their useful life spans for 5 years but at the end of the 3 rd year, you already ask
for replacement because of newer and better models coming out of the market.

T/N: If the depreciation method is silent, the default method is the straight-line method.
Example: Straight-line method
Salvage/scrap value the last value that you will receive if you are going to sell it at the end of its useful life.
Cost = P1,000,000
Salvage value = P100,000
Useful life = 10 years
cost salvage value = P1,000,000 P100,000 = P900,000 =P90,000/year
estimated life
10 years 10 years
Q: Whats this P90,000?
A: This would pertain to your depreciation expense per year up to 10 years.
Q: What will happen in the 10th year?
A: Your acquisition cost becomes zero

Acquisition Cost
Less: Accumulated depreciation
Book value

Financial Statement
1st year
P1,000,000
P90,000
P910,000

10th year
P1,000,000
P900,000
P100,000 (equivalent to salvage value)

T/N: For ordinary expenses, you can deduct it in full during the taxable year. But for capital expenses, you do not deduct it in full but
recognize it as an asset and then recognize them yearly as either depreciation, depletion or amortization expense.

b.) Agreement as to useful life on which depreciation rare is based

Where the taxpayer and the CIR have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation
of the property, the rate so agreed upon shall be binding on both the taxpayer and the National Government in the absence of facts and
circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such
facts and circumstances shall rest with the party initiating the modification.
As a rule, when the taxpayer enters into an agreement with the CIR with regards to the useful life and rate of depreciation of the
property, neither of them can unilaterally revoke such agreement. We apply the constitutional principle on the non-impairment of
contracts here.
Q: If what is agreed is the straight-line method, can the taxpayer change it?
A: No, there should be prior approval of the BIR.
c.) Deduction for obsolescence
If the whole or any portion of physical property is clearly shown by the taxpayer as being affected by economic conditions that will result in
its being abandoned at a future date prior to the end of its natural life, so that depreciation deduction alone would be insufficient to return
the cost at the end of its economic terms of usefulness, a reasonable deduction for obsolescence, in addition to depreciation, may be
allowed.
Q: What do you mean by obsolescence?
A: This pertains to property that becomes obsolete or property that you are going to abandon and will no longer use in the
future.

Q: Is this depreciation expense the same as deduction for obsolescence?

A: No. Depreciation expense presupposes that you are still going to use the property the following years until the end of its
useful life but deductions for obsolescence presupposes that you are going to abandon the property altogether.
Q: Can you recognize both depreciation expense and deduction for obsolescence at the same time?
A: Yes if the useful life of the asset is cut-off. For example, the machinery used in your business normally has a useful life of 10
years. There is a calamity such that the useful life of your machinery has been cut-off and good only for the current year. You
sold the machinery. For the current year, you record it as depreciation expense and since you will not use it anymore, you also
recognize for obsolescence so that it will equal the acquisition cost.
Financial Statement
Acquisition cost
Less: Accumulated depreciation
Deduction for obsolescence
Book value

d.) Depreciation of patent or copyright

1st year
P1,000,000
P90,000
P910,000
-0-

In computing a depreciation allowance in the case of a patent or copyright, the capital sum to be replaced is the cost or other basis of the
patent or copyright. The allowance should be computed by an apportionment of the cost acquisition by the taxpayer, or since March 1,
1913, as the case may be.

11. Depletion
Depletion is the exhaustion of natural resources like mines and oil and gas well as a result of production or severance from such mines or
wells. These are non-replaceable assets.
a.) Requisites for deductibility of depletion
Same as that of depreciation, except that the properties involved are natural resources.
Depletion vs. Depreciation
Depletion and depreciation are predicated on the same basic premise of avoiding a tax on capital. Depletion is based upon the
concept of the exhaustion of a natural resource whereas depreciation is based upon the concept of production income. Thus,
depletion and depreciation are made applicable to different types of assets.
b.) Determination of amount of depletion cost
Essential factors:
i.
ii.
iii.

The basis of the property;

The estimated total recoverable units in the property; and
The number of units recovered during the taxable year.

There is no fixed method in determining the amount of depletion cost. Its case to case basis depending on the turn out of your production.
Example: You are engaged in the extraction of petroleum
Estimated total recoverable petroleum = 10,000 liters
Year 1
Cost = P10,000,000
Actual recovered petroleum = 3,000 liters
Depletion cost= 3,000 L x P10,000,000
10,000 L
Year 2
Cost = P10,000,000
Actual recovered petroleum = 5,000 liters
Depletion cost= 5,000 L x P10,000,000
10,000 L
c.)

Intangible cost in petroleum operations

Any cost incurred in petroleum operations which in itself has no salvage value and which incidental to and necessary for the
drilling of wells for the production of petroleum.

TAX RATES
Normal income tax (NIT) = 30% of taxable income
Minimum corporate income tax (MCIT) = 2% of gross income
Q: What are you going to do with this NIT and MCIT?
A: You are going to compare the two and whichever is higher, that will be the amount that THE corporate taxpayer will remit to the BIR.
Q: When is a corporation subject to MCIT?
A: As a rule, a corporation is subject to MCIT on the 4th year from the start of its operation.
Q: If the start of the operation of the corporation is in 2010, when will it be subject to MCIT?

A: On 2014 thus
2010 NIT
2011 NIT
2012 NIT
2013 NIT
2014 onwards NIT vs. MCIT, whichever is higher
Q: What is the purpose of MCIT?
A: To prevent the corporation from continuously reporting a loss. Before MCIT, there were cases where a corporation is already operating
for 10 years but it continuously reports a loss in its tax return because it overstated or bloated its operating and other expenses. What
happens is that the taxable income either becomes zero or negative. How come the corporation survived for 10 years when it continuously
incurs losses? To remedy this situation, the MCIT is devised where the corporation is exempted in its first four years of operation from
being liable to pay the MCIT because understandably, it still starting its operations. The moment it reaches its fourth year, it may now be
subjected to MCIT because it is expected that it will already earn income.
Q: What is considered as start of operation of the business?
A: As a rule, the start of operation of the business is the moment that the corporation registers with the BIR. So the corporation is subject
to MCIT on the 4th year from its registration with the BIR.
Basic steps in registration of a corporation
1.
2.
3.
4.

Incorporate
Register with SEC
Get business permit from LGU
Register with BIR

Remember, the taxpayer can only avail of NOLCO if it is not liable for MCIT
Premise: The corporation started its operations in 1990
Year 2014
GI = P1,000,000
Less: Expenses = P500,000
Taxable income = P500,000
Net income tax (NIT) = P150,000 (500K x 30%)
Minimum corporate income tax (MCIT) = P20,000 (2% of P1million GI)
The rule is that the corporation will be held liable to pay whichever is higher, thus in this case, it is liable to pay P150,000 NIT.
Year 2014
GI = P1,000,000
Less: Expenses = P1,500,000
Taxable income = 0 (P500,000)
Net income tax (NIT) = 0
Minimum corporate income tax (MCIT) = P20,000
In this case, even if the taxable income is zero thus NIT is also zero, the corporation is still liable to pay the MCIT equivalent to P20,000.
Even if the corporation reports zero or negative income, it is still liable to pay the MCIT.