General Principles of Taxation and Income Taxation

General Principles of
Taxation
DEFINITION AND CONCEPT OF TAXATION

TAXATION
(a) is a mode by which governments make

exactions
for revenue in order to support their existence
and
carry out their legitimate objectives.
(b) a mode of raising revenue for public purpose;
the
exercise of sovereign power to raise revenue for
the expense of the government;
(c) the process or means by which the sovereign,
through its law-making body, raises income to
defray the necessary expenses of government; a
method of apportioning the cost of government
among those who in some measure are
privileged
to enjoy its benefits and must, therefore, bear its
burdens, (see 51 Am. Jur. 341; 1 Cooley 72-93.)
(d) as a power, it refers to the inherent power of
the
state to demand enforced contributions for
public
purpose or purposes.
TAXES
(a) are enforced proportional contributions from

persons and property levied by the law-making
body of the State by virtue of its sovereignty for
the support of the government and all public
needs.
(b) The enforced proportional and pecuniary
contributions from persons and property levied
by
the law-making body of the state having
jurisdiction over the subject of the burden for the
support of the government and public needs.
Underlying theory and basis of taxation
The power of taxation proceeds upon the theory
that
the existence of government is a necessity; that
it
cannot continue without means to pay its
expenses;
and that for those means it has the right to
compel
all citizens and property within its limits to
contribute.
The basis of taxation is found in the reciprocal
duties
of protection and support between the State and
its
inhabitants. The State receives taxes that it may
be
enabled to carry its mandates into effect and
perform the functions of government and the
citizen
pays the portion of taxes demanded in order that
he
may, by means thereof, be secured in the
enjoyment
of the benefits of an organized society, (see 51
Am.
Jur. 42-43.) This is the so-called benefits-received
principle.
NATURE OF THE POWER OF TAXATION
(1) Inherent in sovereignty- power to tax is
essential
to the existence of every government. It exists
apart from constitutions and without being
expressly conferred by the people (71 Am.Jur.2d
397-398). Hence, it can be exercised by the
government even if the Constitution is entirely
silent on the subject. Constitutional provisions

relating to the power of taxation do not operate
as grants of the power to the government. They
merely constitute limitations upon a power which
would otherwise be practically without limit. (1
Cooley 150). While the power to tax is not
expressly provided for in our Constitution, its
existence is recognized by the provisions relating
to taxation (infra).
(2) Essentially a legislative function- The power
to tax
is peculiarly and exclusively legislative and
cannot be exercised by the executive or judicial
branch of the government (1 Cooley 160-161).
Hence, only Congress, our national legislative
body, can impose taxes. The levy of a tax,
however, may also be made by a local legislative
body subject to such limitations as may be
provided by law.
(3) Subject to constitutional and inherent
limitations These limitations are those provided in the
fundamental law or implied therefrom, while the
rest spring from the nature of the taxing power
itself although they may or may not be provided
in the Constitution.
SCOPE OF TAXATION
Subject to constitutional and inherent

restrictions,
the power of taxation is regarded as supreme,
unlimited and comprehensive. The principal
check on
its abuse rests only on the responsibility of the
members of the legislature to their constituents.
EXTENT OF THE LEGISLATIVE POWER TO TAX
Subject to constitutional and inherent

restrictions,
the legislature has discretion to determine the
incidence of the power to tax.
(1) The subjects or objects to be taxed refer to
the
coverage and the kind or nature of the tax. They
may be persons, whether natural or juridical;
property, whether real or personal, tangible or
intangible; businesses, transactions, rights, or
privileges. A state is free to select the subject of
taxation and it has been repeatedly held that
that
inequalities which result from a singling out of
one particular class for taxation or exemption
infringe no constitutional limitation so long as
such exemption is reasonable and not arbitrary.
UP COLLEGE OF LAW TAXATION 1 BAR OPERATIONS COMMISSION
PAGE 3
(see Lutz vs. Araneta, 98 Phil. 148; City of

Baguio
vs. De Leon, 25 SCRA 938 [1968]; Sison, Jr. vs.
Ancheta, 130 SCRA 654 [1984])
Thus, the power to tax carries with it the power
to
grant exemption therefrom.
(2) The purpose or object of the tax so long as it
is a
public purposeThe legislative bodys
determination, however, on the question of what
is a public purpose is not conclusive. The courts
can inquire into whether the purpose is really
public or private.
In the final analysis, therefore, the decision on
the
question is not a legislative but a judicial
function. But once it is settled that the purpose is
public, the courts can make no other inquiry into
the objective of the legislature in imposing a tax
(see Pascual vs. Sec. of Public Works, 110 Phil.
331
[1961]), or the wisdom, advisability, or

expediency
of the tax. (Blunt vs. U.S., 255 Fed. 322.)
Judicial action is limited only to a review where it
involves:
(a) The determination of the validity of the tax in
relation to constitutional precepts or
provisions. Thus, a tax may be declared invalid
because it violates the constitutional
requirement of uniformity and equity in
taxation; or
(b) The determination in an appropriate case of
the application of a tax law. (see1 Cooley 165.)
Thus, a court may decide that a tax has been
illegally collected where the taxpayer is
entitled to tax exemption or his liability has
already been extinguished by reason of
prescription.
(3) The amount or rate of the tax.- As a general
rule,
the legislature may levy a tax of any amount or
rate it sees fit. If the taxes are oppressive or
unjust, the only remedy is the ballot box and the
election of new representatives. (see1 Cooley
178181.)
According to Chief Justice John Marshall, "the
power to tax involves the power to destroy."
(McCulloch vs. Maryland, 17 U.S. [4 Wheat.] 316428, 4L. ed. 579.) To say, however, that the
power
to tax is the power to destroy is to describe not
the purposes for which the taxing power may be
used but the extent to which it may be employed
in order to raise revenues. (see1 Cooley 178.)
Thus,
even if a tax should destroy a business, such fact
alone could not invalidate the tax. (84 C.J.S. 46.)
Incidentally, our Constitution mandates that "the
rule of taxation shall be uniform and equitable."
In a case, our Supreme Court said: "The power of
taxation is sometimes called also the power to
destroy. Therefore, it should be exercised with
caution to minimize injury to the proprietary
rights of the taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kills
the 'hen that lays the golden eggs.' And in order
to maintain the general public's trust and
confidence in the government, this power must
be used justly and not treacherously." (Roxas vs.
Court of Tax Appeals, 23 SCRA276, App120,
1968;
Philex Mining Corp. vs. Comm. of Internal
Revenue,
97 SCAD 777,294 SCRA 687, Aug. 28, 1998.)
(4) The manner, means, and agencies of
collection of
the tax. - These refer to the administration of the
tax or the implementation of tax laws. The
legislature possesses the sole power to prescribe
the mode or method by which the tax shall be
collected, and to designate the officers through
whom its will shall be enforced as well as the
remedies which the State or the taxpayer may
avail in connection therewith.
ESSENTIAL CHARACTERISTICS OF TAX
(1) It is an enforced contribution for its
imposition is in
no way dependent upon the will or assent of the
person taxed.
(2) It is generally payable in the form of money,
although the law may provide payment in kind
(e.g. backpay certificates under Sec. 2, R.A. No.
304, as amended);
(3) It is proportionate in character or islaid by

some
rule of apportionment which is usually based on
ability to pay;
(4) It is levied on persons, property, rights, acts,
privileges, or transactions.
(5) It is levied by the State which has jurisdiction
or
control over the subject to be taxed.
(6) It is levied by the law-making body of the
State.
The power to tax is a legislative power but is also
granted to local governments, subject to such
guidelines and limitations as law may provided
(Sec. 5, Art. X, Constitution); and;
(7) It is levied for public purpose. Revenues
derived
from taxes cannot be used for purely private
purposes or for the exclusive benefit of private
persons. (Gaston v. Republic Planters Bank, 158
SCRA 626, March 15, 1988). The public purpose
or purposes of the imposition is implied in the
levy of tax. (seeMendoza v. Municipality, 94 Phil.
1047[1954]), A tax levied for a private purpose
constitutes a taking of property without due
process of law.
PAGE 4
It is also an important characteristic of most

taxes
that they are commonly required to be paid at
regular periods or intervals (see 1 Cooley 64)
every
year.
POWER OF TAXATION COMPARED WITH
OTHER
POWERS
See Annex A.
PURPOSE OF TAXATION
REVENUE-RAISING
Primary purpose of taxation is to provide funds
or
property with which to promote the general
welfare
and protection it its citizens.
Fees may be properly regarded as taxes even
though
they also serve as an instrument of regulation...
If the
purpose is primarily revenue, or if revenue is, at
least,
one of the real and substantial purposes, then
the
exaction is properly called a tax. [PAL v. Edu]
NON-REVENUE/SPECIAL OR REGULATORY
Taxation is often employed as a device for
regulation
by means of which certain effects or conditions
envisioned by governments may be achieved.
Thus,
taxation can:
(1) Strengthen anemic enterprises or provide
incentive
to greater productionthrough grant of tax
exemptions or the creation of conditions
conducive to their growth.
(2) Protect local industriesagainst foreign
competition
or decreased to encourage foreign trade.
(3) On imported goods, as a bargaining tool by
setting tariff rates first at a relatively high level
before trade negotiations are entered into with
another country.
(4) Halt inflationin periods of prosperity to curb
spending power; ward off depression in periods
of
slump to expand business.

(5) Reduce inequalities in wealth and incomes,
as for
instance, the estate, donor's and income taxes,
their payers being the recipients of unearned
wealth or mostly in the higher income brackets.
(6) Taxes may be levied to promote science and
invention (see RA. No. 5448) or to finance
educational activities (see RA. No. 5447) or to
improve the efficiency of local police forces in
the
maintenance of peace and order through grant
of
subsidy (see RA.No. 6141).
(7) As an implement of the police power to
promote
the general welfare. In Lutz v Araneta, 78 Phil
148,
it has been held that the Sugar Adjustment Act is
an act enacted primarily under the police power
and designed to obtain a readjustment of the
benefits derived by people interested in the
sugar
industry as well as to rehabilitate and stabilize
the industry which constitutes one of the great
sources of the country's wealth and, therefore,
affects a great portion of the population of the
country.
Taxes may be levied with a regulatory purpose to
provide means for rehabilitation and stabilization
of a threatened industry which is imbued with
public interest as to be within the police power of
the State. [Caltex v. COA]
As long as a tax is for a public purpose, its
validity is
not affected by collateral purposes or motives of
the
legislature in imposing the levy, or by the fact
that it
has a regulatory effect (51 Am. Jur. 381-382.) or
it
discourages or even definitely deters the
activities
taxed. The principle applies even though the
revenue
obtained from the tax appears very negligible or
the
revenue purpose is only secondary. (seeUnited
States
vs. Sanchez, 340 U.S. 42; Tio vs. Videogram
Regulatory Board, 151 SCRA 208 [1987])
PRINCIPLES OF SOUND TAX SYSTEM
(1) FISCAL ADEQUACY- the sources of tax revenue
should coincide with, and approximate the needs
of, government expenditures. The revenue
should
be elastic or capable of expanding or contracting
annually in response to variations in public
expenditures.
(2) ADMINISTRATIVE FEASIBILITY- Tax laws should
be
capable of convenient, just and effective
administration. Each tax should be capable of
uniform enforcement by government officials,
convenient as to the time, place, and manner of
payment, and not unduly burdensome upon, or
discouraging to business activity.
(3) THEORETICAL JUSTICE OR EQUALITYThe tax
burden
should be in proportion to the taxpayers ability
to
pay. This is the so-called ability to pay principle.
Taxation should be uniform as well as equitable
Note: The non-observance of the above
principles
will not necessarily render the tax imposed

invalid
except to the extent those specific constitutional
limitations are violated. (De Leon)
THEORY AND BASIS OF TAXATION
LIFEBLOOD THEORY
Taxes are the lifeblood of the government and

their
prompt and certain availability is an imperious
need.
[CIR v. Pineda]
PAGE 5
Taxes are the lifeblood of the government and so

should be collected without unnecessary
hindrance.
On the other hand, such collection should be
made
in accordance with law as any arbitrariness will
negate the very reason for government itself... It
is
said that taxes are what we pay for civilized
society.
Without taxes, the government would be
paralyzed
for lack of the motive power to activate and
operate
it.[CIR v. Algue]
NECESSITY THEORY
The power of taxation proceeds upon theory that

the
existence of government is a necessity; that is
cannot
continue without means to pay its expenses; and
that for those means it has the right to compel
all
citizens and property within its limits to
contribute.
BENEFITS-PROTECTION THEORY (SYMBIOTIC
RELATIONSHIP)
This principle serves as the basis of taxation and
is
founded on the reciprocal duties of protection
and
support between the State and its inhabitants.
Every person who is able to must contribute his
share
in the running of the government. The
government
for its part is expected to respond in the form of
tangible and intangible benefits intended to
improve
the lives of the people and enhance their moral
and
material values. This symbiotic relationship is the
rationale of taxation and should dispel the
erroneous
notion that it is an arbitrary method of exaction
by
those in the seat of power. [CIR v Algue]
The obligation to pay taxes rests upon the
necessity of money for the support of the state.
For
this reason, no one is allowed to object to or
resist
the payment of taxes solely because no personal
benefit to him can be pointed out.[Lorenzo v.
Posadas]
JURISDICTION OVER SUBJECT AND OBJECTS
The limited powers of sovereignty are confined

to
objects within the respective spheres of
governmental control. These objects are the
proper
subjects or objects of taxation and none else.
DOCTRINES IN TAXATION
PROSPECTIVITY OF TAX LAWS
General rule: Tax laws are prospective in

operation.
Reason: Nature and amount of the tax could not
be
foreseen and understood by the taxpayer at the
time
the transaction.
Exception:Tax laws may be applied retroactively
provided it is expressly declared or
clearlythelegislative
intent.(e.g increase taxes on income already
earned)
It is a cardinal rule that laws shall have no
retroactive
effect, unless the contrary is provided (citing Art.
4 of
the Civil Code).[Hydro Resources v.CA]The
language
of the statute must clearly demand or press that
it
shall have a retroactive effect.[Lorenzo
v.Posadas]
Exception to the exception:when retroactive
application would be so harsh and oppressive
(Republic v. Fernandez).
Collection of interest in tax cases is not penal in
nature; it is but a just compensation to the State.
The
constitutional prohibition against ex post facto
laws
is not applicable to the collection of interest on
back
taxes. [Central Azucarera v.CTA]
NON-RETROACTIVITY OF RULINGS (SEC. 246)
General rule: Any revocation, modification or
reversal
of rules and regulations promulgated in
accordance
with Sections 244 and 245 of the Tax Code and
rulings or circulars promulgated by the CIR, that
is
prejudicial to the taxpayer, as a general rule,
shall
NOT be given retroactive effect.
Exceptions:
(1) Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by BIR;
(2) Where the facts subsequently gathered by
the
BIR are materially different from the facts on
which the ruling is based; OR
(3) Where the taxpayer acted in bad faith. (Sec.
246,
NIRC)
IMPRESCRIPTIBILITY
Unless otherwise provided by the tax itself, taxes

are
imprescriptible. (CIR v. Ayala Securities
Corporation)
The law on prescription, being a remedial
measure,
should be liberally construed in order to afford
such
protection. As a corollary, the exceptions to the
law
on prescription should perforce be strictly
construed.
[Commissioner v. C.A., G.R.No. 104171 (1999)]
Prescriptions found in statutes
(1) National Internal Revenue Code- statute of
limitations (see Section 203 and 222) in the
assessment and collection of taxes therein
imposed.
(2) Tariff and Customs Code- does not express

any
general statute of limitation; it provides,
however,
that when articles have been entered and
passed free of duty or final adjustments of duties
made, with subsequent delivery, such entry and
passage free of duty or settlements of duties
will,
PAGE 6
after the expiration of one (1) year, from the

date of
the final payment of duties, in the absence of
fraud or protest or compliance audit pursuant to
the provisions of this Code, be final and
conclusive upon all parties, unless the liquidation
of the import entry was merely tentative. (Sec.
1603)
(3) Local Government Code- prescribes
prescriptive
periods for the assessment (5 years) and
collection (5 years) of taxes. (seeSections 194
and
270, Rep. Act No. 7160).
DOUBLE TAXATION
Means taxing twice for the same tax period the

same
thing or activity, when it should be taxed but
once,
for the same purpose and with the same kind of
character of tax.
Strict sense (Direct duplicate Taxation)
(1) the same property must be taxed twice when
it
should be taxed once;
(2) both taxes must be imposed on the same
property
or subject matter;
(3) for the same purpose;
(4) by the same State, Government, or taxing
authority;
(5) within the same territory, jurisdiction or
taxing
district;
(6) during the same taxing period; and
(7) of the same kind or character of tax.
Broad sense
There is double taxation in the broad sense or
there
is indirect duplicate taxationif any of the
elements for
direct duplicate taxation is absent.
It extends to all cases in which there is a burden
of
two or more pecuniary impositions. For example,
a
tax upon the same property imposed by two
different
states.
Double taxation, standing alone and not being
forbidden by our fundamental law, is not a valid
defense against the legality of a tax measure
(Pepsi
Cola v. Mun. of Tanauan). But from it might
emanate
such defenses against taxation as
oppressiveness
and inequality of the tax.
Constitutionality of double taxation
There is no constitutional prohibition against
double
taxation in the Philippines. It is something not
favored, but is permissible, provided some other
constitutional requirement is not thereby
violated.[Villanueva v. City of Iloilo (1968)]
If the tax law follows the constitutional rule on

uniformity, there can be no valid objection to
taxing
the same income, business or property twice.
[China
Banking Corp. v. CA, G.R.No. 146749 (2003)]
Double taxation in its narrow sense is
undoubtedly
unconstitutional but that in the broader sense is
not
necessarily so. (De Leon, citing 26 R.C.L 264265).Where double taxation (in its narrow sense)
occurs, the taxpayer may seek relief under the
uniformity rule or the equal protection
guarantee.
(De Leon, citing 84 C.J.S.138).
Modes of eliminating double taxation
(1) Allowing reciprocal exemption either by law
or by
treaty;
(2) Allowance of tax credit for foreign taxes paid
(3) Allowance of deduction for foreign taxes paid
(4) Reduction of Philippine tax rate.
ESCAPE FROM TAXATION
Shifting of tax burden

SHIFTING - the transfer of the burden of a tax by
the
original payer or the one on whom the tax was
assessed or imposed to someone else. What is
transferred is not the payment of the tax but the
burden of the tax.
All indirect taxes may be shifted; direct taxes
cannot
be shifted.
Ways of shifting the tax burden
(1) Forward shifting - When the burden of the tax
is
transferred from a factor of production through
the factors of distribution until it finally settles on
the ultimate purchaser or consumer. Example:
VAT, percentage tax
(2) Backward shifting - When the burden of the
tax is
transferred from the consumer or purchaser
through the factors of distribution to the factor of
production. Example: Consumer or purchaser
may shift tax imposed on him to retailer by
purchasing only after the price is reduced, and
from the latter to the wholesaler, and finally to
the manufacturer or producer.
(3) Onward shifting - When the tax is shifted two
or
more times either forward or backward.
Meaning of impact and incidence of taxation
Impact of taxation is the point on which a tax is
originally imposed. In so far as the law is
concerned,
the taxpayer, the subject of tax, is the person
who
must pay the tax to the government.
PAGE 7
Incidence of taxation is that point on which the

tax
burden finally rests or settles down. It takes
place
when shifting has been effected from the
statutory
taxpayer to another.
Relationship between Impact, Shifting, and
Incidence of
a Tax
The impact is the initial phenomenon, the
shifting is
the intermediate process, and the incidence is
the
result. Impact is the imposition of the tax;

shifting is
the transfer of the tax; while incidence is the
setting
or coming to rest of the tax. (e.g impact in a
sales tax
is on the seller who shifts the burden to the
customer
who finally bears the incidence of the tax)
Tax avoidance
The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order to
avoid or reduce tax liability. It is politely called
tax
minimization and is not punishable by law.
Example: A person refrains from engaging in
some
activity or enjoying some privilege in order to
avoid
the incidental taxation or to lower his tax bracket
for
a taxable year.
Transformation
TRANSFORMATION method of escape in
taxation
whereby the manufacturer or producer upon
whom
the tax has been imposed pays the tax and
endeavors to recoup himself by improving his
process of production thereby turning out his
units of
products at a lower cost. The taxpayer escapes
by a
transformation of the tax into a gain through the
medium of production.
Tax evasion
TAX EVASION - is the use by the taxpayer of
illegal or
fraudulent means to defeat or lessen the
payment of
a tax. It is also known as tax dodging. It is
punishable by law.
Example: Deliberate failure to report a taxable
income or property; deliberate reduction of
income
that has been received.
Elements of Tax Evasion
(1) The end to be achieved. Example: the
payment of
less than that known by the taxpayer to be
legally
due, or in paying no tax when such is due.
(2) An accompanying state of mind described as
being evil, in bad faith, willful or
deliberate
and not accidental.
(3) A course of action (or failure of action) which
is
unlawful.
Since fraud is a state of mind, it need not be
proved
by direct evidence but may be inferred from the
circumstances of the case. Thus:
(1) The failure of the taxpayer to declare for
taxation
purposes his true and actual income derived
from
his business for two consecutive years has been
held as an indication of his fraudulent intent to
cheat the government of its due taxes. (Republic
v. Gonzales, 13 SCRA 633 [1965]).
(2) The substantial underdeclaration of income in
the
income tax returns of the taxpayer for four (4)
consecutive years coupled with his intentional

overstatement of deductions justifies the finding
of fraud. (Perez v. CTA and Collector, 103 Phil.
1167
[1958]).
EXEMPTION FROM TAXATION
Meaning of exemption from taxation

The grant of immunity to particular persons or
corporations or to person or corporations of a
particular class from a tax which persons and
corporations generally within the same state or
taxing district are obliged to pay. It is an
immunity or
privilege; it is freedom from a financial charge or
burden to which others are subjected.
Strictly construed against the taxpayer.
Taxation is the rule and exemption, the
exception,
and therefore, he who claims exemption must be
able to justify his claim or right thereto, by a
grant
expressed in terms too plain to be mistaken and
too
categorical to be misinterpreted. If not
expressly
mentioned in the law, it must at least be within
its
purview by clear legislative intent.
Nature of tax exemption
(1) Mere personal privilege- cannot be assigned
or
transferred without the consent of the
Legislature. The legislative consent to the
transfer may be given either in the original act
granting the exemption or in a subsequent law
(2) General rule: revocable by the government.
Exception: if founded on a contract which is
protected from impairment. But the contract
must contain the essential elements of other
contracts. An exemption provided for in a
franchise, however, may be repealed or
amended
pursuant to the Constitution (see Sec. 11, Art.
XII).
A legislative franchise is in the nature of a
contract.
(3) Implies a waiver on the part of the
government of
its right to collect taxes due to it, and, in this
sense, is prejudicial thereto. Hence, it exists only
by virtue of an express grant and must be strictly
construed.
PAGE 8
(4) Not necessarily discriminatory, provided it

has
reasonable foundation or rational basis. Where,
however, no valid distinction exists, the
exemption may be challenged as violative of the
equal protection guarantee or the uniformity
rule.
Kinds of tax exemption
(1) Express or Affirmative - either entirely or in
part,
may be made by provisions of the Constitution,
statutes, treaties, ordinances, franchises, or
contracts.
(2) Implied or Exemption by Omission - when a
tax is
levied on certain classes without mentioning the
other classes. Every tax statute, in a very real
sense, makes exemptions since all those not
mentioned are deemed exempted. The omission
may be either accidental or intentional.
Exemptions are not presumed, but when public
property is involved, exemption is the rule, and
taxation, the exception.

(3) Contractual -in the real sense of the term and
where the non-impairment clause of the
Constitution can rightly be invoked, are those
agreed to by the taxing authority in contracts,
such as those contained in government bonds or
debentures, lawfully entered into by them under
enabling laws in which the government, acting in
its private capacity, sheds its cloak of authority
and waives its governmental immunity. These
contractual tax exemptions, however, are not to
be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a
grant which is beyond the purview of the
nonimpairment
clause of the Constitution. (Manila
Electric Company v. Province of Laguna, G.R.No.
131359, May 5, 1999)
RATIONALE/GROUNDS FOR EXEMPTION
Rationale of Tax Exemption
Such exemption will benefit the body of the
people
and not particular individuals or private interest
and
that the public benefit is sufficient to offset the
monetary loss entailed in the grant of the
exemption.
Grounds for tax exemption
(1) It may be based on contract.
(2) It may be based on some ground of public
policy.
(3) It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of international
or
multiple taxation.
But: equity is NOT a ground for tax exemption.
Exemption from tax is allowable only if there is a
clear provision. While equity cannot be used as a
basis or justification for tax exemption, a law
may
validly authorize the condonation of taxes on
equitable considerations.
REVOCATION OF TAX EXEMPTION
General Rule: revocable by the government.

Exception: Contractual tax exemptions may not
be
unilaterally so revoked by the taxing authority
without thereby violating the non-impairment
clause
of the Constitution.
COMPENSATION AND SET-OFF
General rule: Taxes cannot be the subject of setoff or
compensation (Republic v. Mambulao Lumber).
Reasons:
(1) This would adversely affect the government
revenue system (Philex Mining v. CA).
(2) Government and the taxpayer are not
creditors
and debtors of each other. The payment of taxes
is not a contractual obligation but arises out of a
duty to pay. (Republic v. Mambulao)
Exception: If the claims against the government
have
been recognized and an amount has already
been
appropriated for that purpose. Where both
claims
have already become due and demandable as
well as
fully liquidated, compensation takes place by
operation of law under Art. 1200 in relation to
Articles
1279 and 1290 of the NCC, and both debts are
extinguished to the concurrent amount.

[Domingo v.
Garlitos]
Doctrine of Equitable Recoupment- a claim for
refund barred by prescription may be allowed to
offset unsettled tax liabilities. The doctrine FINDS
NO application in this jurisdiction. (Collector v.
UST).
COMPROMISE
(a) A contract whereby the parties, by making

reciprocal concessions avoid litigation or put an
end to one already commenced.(Art. 2028, Civil
Code). It involves a reduction of the taxpayers
liability.
(b) Requisites of a tax compromise:
(1) The taxpayer must have a tax liability.
(2) There must be an offer (by the taxpayer or
Commissioner) of an amount to be paid by the
taxpayer.
(3) There must be acceptance (by the
Commissioner or the taxpayer, as the case
may be) of the offer in settlement of the
original claim.
(c) Generally, compromises are allowed and
enforceable when the subject matter thereof is
not prohibited from being compromised and the
person entering into it is duly authorized to do
so.
PAGE 9
(1) In the National Internal Revenue Code, the

Commissioner of Internal Revenue is expressly
authorized to enter, under certain conditions,
into a compromise of both the civil and
criminal liabilities of the taxpayer (Sec. 204,
NIRC).
(2) The power to compromise in respect of
customs duties is, at best, limited to cases
where potestive authority is specifically
granted such as in the remission of duties by
the Collector of Customs (Sec. 709, Tariff and
Customs Code) and cases involving imposition
of fines, surcharges and forfeitures which may
be compromised by the Commissioner subject
to the approval of the Secretary of Finance
(Sec. 2316, Tariff and Customs Code).
(3) No provisions exist under the Local
Government Code, while the tax (not criminal)
liability is not prohibited from being
compromised (see Arts. 2034 and 2035, Civil
Code); there is no specific authority, however,
given to any public official to execute the
compromise so as to render it effective. (Vitug,
p. 48)
TAX AMNESTY
Definition
A tax amnesty partakes of an absolute
forgiveness or
waiver by the Government of its right to collect
what
otherwise would be due it, and in this sense,
prejudicial thereto, particularly to give tax
evaders,
who wish to relent and are willing to reform a
chance
to do so and become a part of the new society
with a
clean slate.[Republic v. IAC (1991)]
A tax amnesty, much like a tax exemption, is
never
favored nor presumed in law. If granted, the
terms of
the amnesty, like that of a tax exemption, must
be
construed strictly against the taxpayer and
liberally
in favor of the taxing authority. For the right of

taxation is inherent in government. The State
cannot
strip itself of the most essential power of
taxation by
doubtful words. He who claims an exemption (or
an
amnesty) from the common burden must justify
his
claim by the clearest grant of organic or state
law. It
cannot be allowed to exist upon a vague
implication.
If a doubt arises as to the intent of the
legislature,
that doubt must be resolved in favor of the state.
(CIR v. Marubeni Corp.,372 SCRA 576 [2001]).
Distinguished from tax exemption
Tax amnestyis an immunity from all criminal and
civil
obligations arising from non-payment of taxes. It
is a
general pardon given to all taxpayers. It applies
to past
tax periods, hence of retroactive application.
(People v.
Castaeda, 1988).
Tax exemption is an immunity from all civil
liability
only. It is an immunity or privilege, a freedom
from a
charge or burden of which others are subjected.
(Greenfield v. Meer, 77 Phil. 394 [1946]). It is
generally
prospective in application.(Dimaampao, 2005, p.
111)
CONSTRUCTION AND INTERPRETATION OF:
Tax laws
In case of doubt, such are to be construed
strictly
against the government and liberally in favor of
the
taxpayer.(Manila Railroad Co. v. Coll. of Customs,
52
Phil. 950 [1929]).No person or property is subject
to
taxation unless within the terms or plain import
of a
taxing statute. (see72 Am.Jur. 2d 44). Taxes,
being
burdens, they are not to be presumed beyond
what
the statute expressly and clearly declares. (Coll.
v. La
Tondena, 5 SCRA 665 [1962]). Thus, a tax
payable by
individuals does not apply to
corporations.Tax
statutes offering rewards are liberally construed
in
favor of informers. (Penid v. Virata, 121 SCRA
166
[1983]).
Exceptions:
(1) The rule of strict construction as against the
government is not applicable where the
language
of the statute is plain and there is no doubt as to
the legislative intent. (see 51 Am.Jur.368). In
such
case, the words employed are to be given their
ordinary meaning. Ex. Word individual was
changed by the law to person. This clearly
indicates that the tax applies to both natural and
juridical persons, unless otherwise expressly
provided.
(2) The rule does not apply where the taxpayer
claims
exemption from the tax.
Tax statutes are to receive a reasonable
construction
or interpretation with a view to carrying out their
purpose and intent. They should not be
construed as
to permit the taxpayer easily to evade the
payment of
tax. (Carbon Steel Co. v. Lewellyn, 251 U.S. 201).
Thus,
the good faith of the taxpayer is not a sufficient
justification for exemption from the payment of
surcharges imposed by the law for failing to pay
tax
within the period required by law.
Tax exemption and exclusion
Tax exemptions must be shown to exist clearly
and
categorically, and supported by clear legal
provisions.
[NPC v. Albay]
General Rule: In the construction of tax statutes,
exemptions are not favored and are construed
PAGE 10
strictissimi juris against the taxpayer. (Republic

Flour
Mills v. Comm. & CTA, 31 SCRA 520 [1970]).
(a) NPC v. Albay: Tax exemptions must be shown
to
exist clearly and categorically, and supported by
clear legal provisions.
(b) Floro Cement v. Gorospe: Claims for an
exemption
must be able to point out some provision of law
creating the right, and cannot be allowed to
exist
upon a mere vague implication or inference.
(c) CIR v. CA: Refunds are in the nature of
exemption,
and must be construed strictly against the
grantee/taxpayer.
(d) Comm. V. Kiener Co. Ltd. (65 SCRA 142
[1975]):
Taxation is the rule and exemption the exception,
and therefore, he who claims exemption must be
able to justify his claim or right thereto, by a
grant
expressed in terms too plain to be mistaken and
too categorical to be misinterpreted.
Exceptions:
(a) When the law itself expressly provides for a
liberal construction, that is, in case of doubt, it
shall be resolved in favor of exemption; and
(b) When the exemption is in favor of the
government itself or its agencies, or of religious,
charitable, and educational institutions because
the general rule is that they are exempt from
tax.
(c) When the exemption is granted under special
circumstances to special classes of persons.
(d) If there is an express mention or if the
taxpayer
falls within the purview of the exemption by clear
legislative intent, the rule on strict construction
does not apply. (Comm. V. Arnoldus Carpentry
Shop, Inc., 159 SCRA 19 [1988]).
Tax rules and regulations
The Secretary of Finance, upon recommendation
of
the CIR, shall promulgate all needful rules and
regulations for the effective enforcement of the
provisions of the NIRC. (Sec. 244)
Requisites for validity and effectivity of

regulations
(1) Reasonable
(2) Within the authority conferred
(3) Not contrary to law and the Constitution (Art.
7,
Civil Code)
(4) Must be published
There are two kinds of administrative issuances:
the
legislative rules and the interpretative rules. A
legislative rule is in the nature of subordinate
legislation, designed to implement a primary
legislation by providing the details thereof. An
interpretative rule, on the other hand, is
designed to
provide guidelines to the law, which the
administrative agency is in charge of enforcing.
An
administrative rule should be published if it
substantially adds to or increases the burden of
those governed. When an administrative rule is
merely interpretative in nature, its applicability
needs
nothing further than its bare issuance for it gives
no
real consequence more than what the law itself
has
already prescribed. When, upon the other hand,
the
administrative rule goes beyond merely
providing for
the means that can facilitate or render least
cumbersome the implementation of the law but
substantially adds to or increases the burden of
those governed, it behooves the agency to
accord at
least to those directly affected a chance to be
heard,
and thereafter to be duly informed, before that
new
issuance is given the force and effect of law.
(Commissioner v. Court of Appeals, G.R.No.
119761
[1996]).
Rep. of the Philippines v. Pilipinas Shell
Petroleum
Corporation, G.R. No. 173918, April 8, 2008:
Tax regulations (issued by the CIR/DOF
Secretary)
whose purpose is to enforce or implement
existing
law must (a) be published in a newspaper of
general
circulation (see Art. 2 of the Civil Code), AND (b)
filed
with UP Law Center ONAR (per Chapter 2, Book
VII of
the Admin Code of 1987 (EO 292) before they
can
become effective.
Such rules once established and found to be in
consonance with the general purposes and
objects of
the law have the force and effect of law, and so
they
must be applied and enforced. (De Guzman v.
Lontok, 68 Phil. 495 [1939]). They are, therefore,
just
as binding as if the regulations had been written
in
the law itself.
NOTE: Administrative rules and regulations must
always be in harmony with the provisions of the
law.
In case of conflict with the law or the

Constitution,
the administrative rules and regulations are null
and
void.As a matter of policy, however, courts will
declare a regulation or provision thereof invalid
only
when the conflict with the law is clear and
unequivocal.
Administrative interpretations and opinions
The power to interpret the provisions of the Tax
Code
and other tax laws is under the exclusive and
original
jurisdiction of the Commissioner of Internal
Revenue
subject to review by the Secretary of Finance
(Sec. 4,
par.1, NIRC). Revenue regulations are the formal
interpretation of the provisions of the NIRC and
other
laws by the Secretary of Finance upon the
recommendation of the Commissioner of Internal
Revenue.
PAGE 11
The Commissioner has the sole authority to issue

rulings but he also has the power to delegate
said
authority to his subordinates. He cannot,
however,
delegate to any of his subordinate officials the
power
to issue rulings of first impression (i.e., question
involved is new and important) or to reverse,
revoke
or modify any existing ruling of the BIR (Sec.
7[B],
NIRC).
Decisions of the Supreme Court and Court of Tax
Appeals
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on all
subordinate courts and have the force and effect
of
law. As provided for in Article 8 of the Civil Code,
they form part of the law of the land. They
constitute evidence of what the law means.
(People v.
Licera, 65 SCRA 270 [1975]).
The same is also true with respect to decisions of
the
Court of Tax Appeals. However, by the nature of
its
jurisdiction, the decisions of this court are still
appealable to the Supreme Court by a petition
for
review on certiorari.
Penal provisions of tax laws
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the
language of a rule, however beneficent its
intention,
beyond the fair and ordinary meaning of its
language.
A penal statute should be construed strictly
against
the State and in favor of the accused. The reason
for
this principle is the tenderness of the law for the
rights of individuals and the object is to establish
a
certain rule by conformity to which mankind
would
be safe, and the discretion of the court
limited.(People v. Purisima, 86 SCRA 524 [1978]).
Non-retroactivity of tax laws

General rule: Tax laws are prospective in
operation.
The reason is that the nature and amount of the
tax
could not be foreseen and understood by the
taxpayer at the time the transaction which the
law
seeks to tax was completed.
Exception:Tax laws may be applied retroactively
provided it is expressly declared or
clearlythelegislative
intent. (Lorenzo v. Posadas, 64 Phil. 353 [1937]).
Exception to the exception:a tax law should not
be
given retroactive application when it would be so
harsh and oppressive for in such case, the
constitutional limitation of due process would be
violated (Republic v. Fernandez, 99 Phil. 934
[1956]).
SCOPE AND LIMITATION OF TAXATION
INHERENT LIMITATIONS
Public Purpose
The proceeds of the tax must be used (a) for the
support of the State or (b) for some recognized
objects of government or directly to promote the
welfare of the community.
Test: whether the statute is designed to promote
the
public interest, as opposed to the furtherance of
the
advantage of individuals, although each
advantage
to individuals might incidentally serve the public.
[Pascual v. Secretary of Public Works (1960)]
The protection and promotion of the sugar
industry
is a matter of public concern; the legislature may
determine within reasonable bounds what is
necessary for its protection and expedient for its
promotion. [Lutz v Araneta (1955)]
The public purpose of a tax may legally exist
even if
the motive which impelled the legislature to
impose
the tax was to favor one industry over another.
[Tio v.
Videogram (1987)]
Tests in Determining Public Purpose:
(1) Duty Test - Whether the thing to be furthered
by
the appropriation of public revenue is something
which is the duty of the State as a government
to
provide.
(2) Promotion of General WelfareTest - Whether
the
proceeds of the tax will directly promote the
welfare of the community in equal measure.
(3) Character of the Direct Object of the
Expenditure
it is the essential character of the direct object of
the expenditure which must determine its
validity
as justifying a tax and not the magnitude of the
interests to be affected nor the degree to which
the general advantage of the community, and
thus the public welfare, may be ultimately
benefited by their promotion. Incidental
advantage to the public or to the State, which
results from the promotion of private enterprises
or business, does not justify their aid with public
money. [Pascual v. Sec. of Public Works]
Inherently Legislative
Stated in another way, taxation may

exceptionally be
delegated, subject to such well-settled
limitations as
(1) The delegation shall not contravene any

constitutional provision or the inherent
limitations of taxation;
PAGE 12
(2) The delegation is effected either by the

Constitution or by validly enacted legislative
measures or statute; and
(3) The delegated levy power, except when the
delegation is by an express provision of the
Constitution itself, should only be in favor of the
local legislative body of the local or municipal
government concerned. [Vitug and Acosta]
General Rule: Delegata potestas non potest
delegari.
The power to tax is exclusively vested in the
legislative body and it may not be re-delegated.
Legislature has the to determine:
(1) nature (kind),
(2) object (purpose),
(3) extent (rate),
(4) coverage (subjects) and
(5) situs (place) of taxation.
The court cannot freely delve into those matters
which, by constitutional fiat, rightly rest on
legislative
judgment.[Tan v. Del Rosario (1994)]
Exceptions
(1) Delegation to local governments - This
exception
is in line with the general principle that the
power
to create municipal corporations for purposes of
local self-government carries with it, by
necessary
implication, the power to confer the power to tax
on such local governments. (1 Cooley 190). This
is
logical for after all, municipal corporations are
merely instrumentalities of the state for the
better administration of the government in
respect to matters of local concern. (Pepsi-Cola
Bottling Co. of the Phil. Inc. v. Mun. of Tanauan,
69
SCRA 460 [1976]). Under the new Constitution,
however, LGUs are now expressly given the
power
to create its own sources of revenue and to levy
taxes, fees and charges, subject to such
guidelines and limitations as the Congress may
provide which must be consistent with the basic
policy of local autonomy. [Art X, Sec 5, 1987
Constitution]
(2) Delegation to the President
(a) to enter into Executive agreements, and
(b) to ratify treaties which grant tax exemption
subject to Senate concurrence.
The Congress may, by law, authorize the
President to fix within specified limits, and
subject
to such limitations and restrictions as it may
impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or
imposts within the framework of the national
development program of the Government. [Art.
6, Sec. 28 (2), 1987 Consti]
(3) Delegation to administrative agencies Limited to
the administrative implementation that calls for
some degree of discretionary powers under
sufficient standards expressed by law or implied
from the policy and purposes of the Act.

(a) There are certain aspects of the taxing
process
that are not legislative and they may,
therefore, be vested in an administrative body.
The powers which are not legislative include:
(1) the power to value property for purposes of
taxation pursuant to fixed rules; (2) the power
to assess and collect the taxes; and (3) the
power to perform any of the innumerable
details of computation, appraisement, and
adjustment, and the delegation of such
details.
(b) The exercise of the above powers is really not
an exception to the rule as no delegation of
the strictly legislative power to tax is involved.
(c) The powers which cannot be delegated
include the determination of the subjects to
be taxed, the purpose of the tax, the amount
or rate of the tax, the manner, means, and
agencies of collection, and the prescribing of
the necessary rules with respect thereto.
Territorial
Rule: A state may not tax property lying outside
its
borders or lay an excise or privilege tax upon the
exercise or enjoyment of a right or privilege
derived
from the laws of another state and therein
exercise
and enjoyed. (51 Am.Jur. 87-88).
Reasons:
(1) Tax laws (and this is true of all laws) do not
operate beyond a countrys territorial limits.
(2) Property which is wholly and exclusively
within
the jurisdiction of another state receives none of
the protection for which a tax is supposed to be
a
compensation.
Note:Where privity of relationship exists. - It
does not
mean, however, that a person outside of state is
no
longer subject to its taxing powers. The
fundamental
basis of the right to tax is the capacity of the
government to provide benefits and protection to
the
object of the tax. A person may be taxed where
there
is between him and the taxing state, a privity of
the
relationship justifying the levy. Thus, the citizens
income may be taxed even if he resides abroad
as
the personal (as distinguished from territorial)
jurisdiction of his government over him remains.
In
this case, the basis of the power to tax is not
dependent on the source of the income nor upon
the
location of the property nor upon the residence
of
the taxpayer but upon his relation as a citizen to
the
state. As such citizen, he is entitled, wherever he
may
PAGE 13
be, inside or outside of his country, to the

protection
of his government.
Within the territorial jurisdiction, the taxing
authority
may determine the situs. Situs of taxation

literally
means the place of taxation. The basic rule is
that
the state where the subject to be taxed has a
situs
may rightfully levy and collect the tax; and the
situs
is necessarily in the state which has jurisdiction
or
which exercises dominion over the subject in
question.
Factors that Determine Situs:
(1) Nature of the tax;
(2) Subject matter of the tax (person, property,
act or
activity);
(3) Possible protection and benefit that may
accrue
both to the government and the taxpayer;
(4) Citizenship of the taxpayer;
(5) Residence of the taxpayer;
(6) Source of income.
Kind of Tax Situs
Property Tax
Real property Where it is located (lexreisitae)
Tangible
Personal
property
Where property is physically
located although the owner
resides in another jurisdiction.
Intangible
personal
property (e.g.,
credits, bills
receivables,
bank deposits,
bonds,
promissory
notes,
mortgage
loans,
judgments and
corporate
stocks)
Gen Rule: Domicile of the owner.
Mobiliasequunturpersonam
(movables follow the person)
Exceptions:
(1) When property has acquired a
business situs in another
jurisdiction; or
(2) When the law provides for the
situs of the subject of tax (e.g.,
Sec 104, NIRC)
Excise Tax
Income Source of the income, nationality
or residence of taxpayer (Sec. 23,
NIRC)
Donors Tax Location of property; nationality
or residence of taxpayer
Estate Location of property; nationality
or residence of taxpayer
VAT Where transaction is made
Others
Poll,
Capitation or
Community
Tax
Residence of taxpayer, regardless
of the source of income or
location of the property of the
taxpayer
International Comity
Comity - respect accorded by nations to each

other
because they are sovereign equals. Thus, the
property or income of a foreign state or
government
may not be the subject of taxation by another
state.
Reasons:
(1) In par in parem non habet imperium. As
between
equals there is no sovereign (Doctrine of
Sovereign Equalityamong states under
international law). One state cannot exercise its
sovereign powers over another.)
(2) In international law, a foreign government
may
not be sued without its consent useless to
impose a tax which could not be collected.
(3) Usage among states that when a foreign
sovereign enters the territorial jurisdiction of
another, there is an implied understanding that
the former does not intend to degrade its dignity
by placing itself under the jurisdiction of the
other.
(4) Rule in international law that a foreign
government may not be sued without its consent
so that it is useless to assess the tax anway
since
it cannot be collected.
Exemption of Government Entities, Agencies,
and
Instrumentalities
If the taxing authority is the National
Government:
General Rule:Agencies and instrumentalities of
the
government are exempt from tax.
Note: Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately and
directly exercises its sovereign powers. With
respect
to government-owned or controlled corporations
performing proprietary (not governmental)
functions,
they are generally subject to tax in the absence
of tax
exemption provisions in their charters or the law
creating them.
Reasons for the exemption: (1) To levy a tax
upon
public property would render necessary new
taxes on
other public property for the payment of the tax
so
laid and thus, the government would be taxing
itself
to raise money to pay over for itself. (2) This
immunity also rests upon fundamental principles
of
government, being necessary in order that the
functions of government shall not be unduly
impeded. (1 Cooley 263). (3) The practical effect
of an
exemption running to the benefit of the
government
is merely to reduce the amount of money that
has to
be handled by the government in the course of
its
operations: It is for these reasons that provisions
granting exemptions to government agencies
may
PAGE 14
be construed liberally in favor of non-tax liability

of
such agencies. (Maceda v. Macaraig, Jr., 197
SCRA 771
[1991]).
Exception: When it chooses to tax itself. Nothing
can
prevent Congress from decreeing that even
instrumentalities or agencies of the government
performing governmental functions may be
subject
to tax. (Mactan Cebu Airport v Marcos, 1996)
There is
no constitutional prohibition against the
government
taxing itself. (Coll. v. Bisaya Land Transportation,
105
Phil. 338 [1959]).
If the taxing authority is the local government
unit:RA
7160 expressly prohibits LGUs from levying tax
on
the National Government, its agencies and
instrumentalities and other LGUs.
CONSTITUTIONAL LIMITATIONS
Provisions Directly Affecting Taxation

Prohibition against imprisonment for nonpayment of
poll tax
Art III, Sec 20, 1987 Constitution- No person shall
be
imprisoned for debt or non-payment of a poll tax.
Uniformity and equality of taxation
Art VI, Sec 28(1), 1987 Constitution- The rule of
taxation shall be uniform and equitable.
Congress
shall evolve a progressive system of taxation.
(1) Uniformity- All taxable articles or properties
of
the same class shall be taxed at the same rate.
(City of Baguio v. de Leon, 25 SCRA 938). (1)
Uniformity of operation throughout tax unit - The
rule requires the uniform application and
operation, without discrimination, of the tax in
every place where the subject of it is found. This
means, for example, that a tax for a national
purpose must be uniform and equal throughout
the country and a tax for a province, city,
municipality, or barangay must be uniform and
equal throughout the province, city, municipality
or barangay. (2) Equality in burden Uniformity
implies equality in burden, not equality in
amount
or equality in its strict and literal meaning. The
reason is simple enough. If legislation imposes a
single tax upon all persons, properties,or
transactions, an inequality would obviously result
considering that not all persons, properties, and
transactions are identical or similarly situated.
Neither does uniformity demand that taxes shall
be proportional to the relative value or amount
of
the subject thereof. Taxes may be progressive.
(2) Equity 1) Uniformity in taxation is effected
through the apportionment of the tax burden
among the taxpayers which under the
Constitution must be equitable. Equitable
means fair, just, reasonable and proportionate
tothe taxpayersability to pay. Taxation may be
uniform but inequitable where the amount of the
tax imposed is excessive or unreasonable. (2)
The
constitutional requirement of equity in taxation
also implies an approach which employees a
reasonable classification of the entities or
individuals who are to be affected by a tax.

Where
the tax differentiation is not based on material
or
substantial differences, the guarantee of equal
protection of the laws and the uniformity rule will
likewise be infringed.
Taxation does not require identity or equality
under all
circumstances, or negate the authority to
classify the
objects of taxation.
Classification to be valid, must, be reasonable
and
this requirement is not deemed satisfied unless:
(1) it is based upon substantial distinctions which
make real differences;
(2) these are germane to the purpose of the
legislation or ordinance;
(3) the classification applies, not only to present
conditions, but, also, to future conditions
substantially identical to those of the present;
and
(4) the classification applies equally to all those
who
belong to the same class.
(Pepsi-Cola v. Butuan City, 24 SCRA 789)
The progressive system of taxation would place
stress
on direct rather than indirect taxes, on
nonessentiality
rather than essentiality to the taxpayer of
the object of taxation, or on the taxpayers
ability to
pay. Example is that individual income tax
system
that imposes rates progressing upwards as the
tax
base (taxpayers taxable income) increases. A
progressive tax, however, must not be confused
with
a progressive system of taxation.
While equal protection refers more to like
treatment
of persons in like circumstances, uniformity and
equity refer to the proper relative treatment for
tax
purposes of persons in unlike circumstances.
Grant by Congress of authority to the President
to
impose tariff rates
Delegation of Tariff powers to the President
under
the flexible tariff clause [Art VI, Sec 28(2), 1987
Constitution], which authorizes the President to
modify import duties. (Sec. 401, Tariff and
Customs
Code)
PAGE 15
Prohibition against taxation of religious,

charitable
entities, and educational entities
Art VI, Sec 28(3), 1987 Constitution:
(e) Charitable institutions, churches and
personages
or convents appurtenant thereto, mosques,
nonprofit
cemeteries, and all lands, buildings, and
improvements,
(f) actually, directly, and exclusively used for
religious, charitable, or educational purposes
shall be exempt from taxation.
(g) The tax exemption under this constitutional
provision covers property taxes only and not
other taxes (Lladoc v. Commissioner, 14 SCRA

292
[1965]).
In general, special assessments are not covered
by
the exemption because by nature they are not
classified as taxes. [Apostolic Prefect v. City
Treasurer
of Baguio]
To be entitled to the exemption, the petitioner
must
prove that:
(1) it is a charitable institution
(2) its real properties are actually, directly and
exclusively used for charitable purposes.
Revenue or income from trade, business or other
activity, the conduct of which is not related to
the
exercise or performance of religious, educational
and
charitable purposes or functions shall be subject
to
internal revenue taxes when the same is not
actually,
directly or exclusively used for the intended
purposes. (BIR Ruling 046-2000)
Test of
Exemption
Use of the property, and not the
ownership
Nature of Use
Actual, direct and exclusive use
for religious, charitable or
educational purposes.
Scope of
Exemption
Real property taxes on facilities
which are
(1) actual,
(2) incidental to, or
(3) reasonably necessary for the
accomplishment of said
purposes such as in the case of
hospitals, a school for training
nurses, a nurses home,
property to provide housing
facilities for interns, resident
doctors and other members of
the hospital staff, and
recreational facilities for
student nurses, interns and
residents, such as athletic
fields. [Abra Valley College v.
Aquino]
TEST whether an enterprise is charitable or not:
whether it exists to carry out a purpose
recognized in
law as charitable or whether it is maintained for
gain,
profit, or private advantage.
A charitable institution does not lose its
character as
such and its exemption from taxes simply
because it
derives income from paying patients, whether
outpatient,
or confined in the hospital, or receives
subsidies from the government, so long as the
money received is devoted or used altogether to
the
charitable object which it is intended to achieve;
and
no money inures to the private benefit of the
persons
managing or operating the institution.
Exclusive" - possessed and enjoyed to the

exclusion
of others; debarred from participation or
enjoyment;
"Exclusively" - "in a manner to exclude; as
enjoying a
privilege exclusively.
If real property is used for one or more
commercial
purposes, it is not exclusively used for the
exempted
purposes but is subject to taxation.The words
"dominant use" or "principal use" cannot be
substituted for the words "used exclusively"
without
doing violence to the Constitutions and the law.
Solely is synonymous with exclusively. [Lung
Center of
the Philippines v. Quezon City (2004)]
Note: Lung Center did not necessarily overturn
the
case of Abra Valley College v. Aquino (1988).
Lung
Center just provided a stricter interpretation. In
Abra
Valley, the court held: The primary use of the
school
lot and building is the basic and controlling
guide,
norm and standard to determine tax exemption,
and
not the mere incidental use thereof. Under the
1935
Constitution, the trial court correctly held that
the
school building as well as the lot where it is built,
should be taxed, not because the second floor of
the
same is being used by the Director and his
family for
residential purposes (incidental to its educational
purpose), but because the first floor thereof is
being
used for commercial purposes. However, since
only a
portion is used for purposes of commerce, it is
only
fair that half of the assessed tax be returned to
the
school involved.
Prohibition against taxation of non-stock, nonprofit
educational institutions
ART XIV, SEC
4, 1987
CONSTITUTION
xxx
(3) All revenues and assets of non-stock, nonprofit
educational institutions used actually, directly,
and exclusively for educational purposes shall be
exempt from taxes and duties.
Proprietary educational institutions, including
those cooperatively owned, may likewise be
PAGE 16
entitled to such exemptions, subject to the

limitations provided by law, including restrictions
on dividends and provisions for reinvestment.
(4) Subject to conditions prescribed by law, all
grants, endowments, donations, or contributions
used actually, directly, and exclusively for
educational purposes shall be exempt from tax.
This provision covers only non-stock, non-profit
educational institutions
The exemption covers income, property, and
donors
taxes, custom duties, and other taxes imposed

by
either or both the national government or
political
subdivisions on all revenues, assets, property or
donations, used actually, directly and exclusively
for
educational purposes. (In the case of religious
and
charitable entities and non-profit cemeteries, the
exemption is limited to property tax.)
The exemption does not cover revenues derived
from, or assets used in, unrelated activities or
enterprise.
Similar tax exemptions may be extended to
proprietary (for profit) educational institutions by
law
subject to such limitations as it may provide,
including restrictions on dividends and provisions
for
reinvestment. The restrictions are designed to
insure
that the tax-exemption benefits are used for
educational purposes.
Lands, buildings, and improvements actually,
directly and exclusively used for educational
purposes are exempt from property tax (Sec.
28[3],
Art. VI, 1987 Constitution), whether the
educational
institution is proprietary or non-profit.
Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3
Charitable institutions,
churches and parsonages
or convents appurtenant
thereto, mosques, nonprofit
cemeteries, and all
lands, buildings, and
improvements, actually,
directly, and exclusively
used for religious,
charitable, or educational
purposes.
Non-stock, non-profit
educational institutions.
Property taxes Income, property, and
donors taxes and
custom duties.
Majority vote of Congress for grant of tax
exemption
ART VI, SEC
28, 1987 CONSTITUTION
xxx
(4) No law granting any tax exemption shall be
passed without the concurrence of a majority of
all the Members of the Congress.
Basis: The inherent power of the state to impose
taxes carries with it the power to grant tax
exemptions.
Exemptions may be created by:
(1) the Constitution or
(2) statute subject to constitutional limitations
Vote required for the grant of exemption:
Absolute
majority of the members of Congress (at least
+1
of ALL the members voting separately)
Vote required for withdrawal of such grant of
exemption: Relative majority is sufficient
(majority of
the quorum).
The provision guaranteeing equal protection of
the
laws and that mandating the rule of taxation
shall be
uniform and equitable likewise limit, although

not
expressly, the legislative power to grant tax
exemption.
Grants in the nature of tax exemptions:
(1) Tax amnesties
(2) Tax condonations
(3) Tax refunds
Note:
(1) The LGU shall have the authority to grant
local
tax exemption privileges. (Sec. 192, LGC)
(2) The President may, when public interest so
requires, condone or reduce real property taxes
and interest. (Sec. 277, LGC)
Prohibition on use of tax levied for special
purpose
All money collected on any tax levied for a
special
purpose shall be treated as a special fund and
paid
out for such purpose only.
If the purpose for which a special fund was
created
has been fulfilled or abandoned, the balance, if
any,
shall be transferred to the general funds of the
Government (see Gaston v. Republic Planters
Bank,
158 SCRA 626).
Presidents veto power on appropriation,
revenue, tariff
bills
ART VI, SEC
27(2), 1987
CONSTITUTION
(2) The President shall have the power to veto

any
particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object.
PAGE 17
Non-impairment of jurisdiction of the Supreme

Court
ART VIII, SEC
2, 1987
CONSTITUTION
The Congress shall have the power to define,

prescribe, and apportion the jurisdiction of the
various courts but may not deprive the Supreme
Court of its jurisdiction over cases enumerated in
Section 5 hereof.
ART VIII, SEC
5(2,B), 1987
CONSTITUTION
The Supreme Court shall have the following

powers:
xxx (2) Review, revise, modify or affirm on
appeal or
certiorari, as the laws or the Rules of Court may
provide, final judgments and orders of lower
courts
in xxx (b) all cases involving the legality of any
tax,
impost, assessment or toll or any penalty
imposed in
relation thereto.
San Miguel Corp v. Avelino: Even the legislative
body
cannot deprive the SC of its appellate jurisdiction
over all cases coming from inferior courts where
the
constitutionality or validity of an ordinance or the
legality of any tax, impost, assessment, or toll is
in
question.
ART VI, SEC
30, 1987
CONSTITUTION
No law shall be passed increasing the appellate

jurisdiction of the Supreme Court without its
advice
and concurrence.
Scope of Judicial Review in taxation: limited only

to
the interpretation and application of tax laws. Its
power does not include inquiry into the policy of
legislation. Neither can it legitimately question or
refuse to sanction the provisions of any law
consistent with the Constitution. (Bisaya Land
Transportation Co v. Collector, May 29, 1959)
Grant of power to the local government units to
create
its own sources of revenue
LGUs have power to create its own sources of
revenue and to levy taxes, fees and charges,
subject
to such guidelines and limitations as the
Congress
may provide which must be consistent with the
basic
policy of local autonomy. [Art X, Sec 5, 1987
Constitution]
Flexible tariff clause
Delegation of Tariff powers to the President
under
the flexible tariff clause [Art VI, Sec 28(2), 1987
Constitution]
Flexible tariff clause: the authority given to the
President, upon the recommendation of NEDA, to
adjust the tariff rates under Sec. 401 of the Code
in
the interest of national economy, general welfare
and/or national security.
Exemption from real property taxes
ART VI, SEC
28(3), 1987
CONSTITUTION
Charitable institutions, churches and personages

or
convents appurtenant thereto, mosques, nonprofit
cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively
used for religious, charitable, or educational
purposes shall be exempt from taxation.
No appropriation or use of public money for
religious
purposes
ART VI, SEC
29, 1987
CONSTITUTION
(1) No money shall be paid out of the Treasury

except in pursuance of an appropriation made by
law.
(2) No public money or property shall be
appropriated, applied, paid, or employed,
directly
or indirectly, for the use, benefit, or support of
any
sect, church, denomination, sectarian institution,
or system of religion, or of any priest, preacher,
minister, other religious teacher, or dignitary as
such, except when such priest, preacher,
minister,
or dignitary is assigned to the armed forces, or
to
any penal institution, or government orphanage
or leprosarium.
(3) All money collected on any tax levied for a
special
purpose shall be treated as a special fund and
paid out for such purpose only. If the purpose for
which a special fund was created has been
fulfilled or abandoned, the balance, if any, shall
be transferred to the general funds of the
Government.
Provisions Indirectly Affecting Taxation
Due process
ART III, SEC
1, 1987
CONSTITUTION
No person shall be deprived of life, liberty, or

property
without due process of law, nor shall any person

be
denied the equal protection of the laws.
(1) Substantive Due Process An act is done
under
the authority of a valid law or the Constitution
itself.
(2) Procedural Due Process An act is done after
compliance with fair and reasonable methods or
procedure prescribed by law.
Due Process in Taxation requirements:
(1) public purpose
(2) imposed within taxing authoritys territorial
jurisdiction
(3) assessment or collection is not arbitrary or
oppressive
PAGE 18
The due process clause may be invoked where a

taxing statute is so arbitrary that it finds no
support
in the Constitution, as where it can be shown to
amount to the confiscation of property. (Sison v.
Ancheta)
Instances of violations of the due process clause:
(1) If the tax amounts to confiscation of property;
(2) If the subject of confiscation is outside the
jurisdiction of the taxing authority;
(3) If the tax is imposed for a purpose other than
a
public purpose;
(4) If the law which is applied retroactively
imposes
just and oppressive taxes.
(5) If the law violates the inherent limitations on
taxation.
Equal protection
ART III, SEC
1, 1987
CONSTITUTION
No person shall be deprived of life, liberty, or

property without due process of law, nor shall
any
person be denied the equal protection of the
laws.
All persons subject to legislation shall be treated
alike under similar circumstances and conditions
both in the privileges conferred and liabilities
imposed. (1 Cooley 824-825; See Sison v.
Ancheta, 130
SCRA 654 [1984]).
The doctrine does not require that persons or
properties different in fact be treated in laws as
though they were the same. Indeed, to treat
them
the same or alike may offend the Constitution.
What
the Constitution prohibits is class legislation
which
discriminates against some and favors others. As
long as there are rational or reasonable grounds
for
so doing, Congress may, therefore, group the
persons or properties to be taxed and it is
sufficient
if all of the same class are subject to the same
rate
and the tax is administered impartially upon
them.
(1 Cooley 608).
The equal protection clause is subject to
reasonable
classification. Classification is valid as long as:
(1) classification rests on substantial distinctions
which make real differences,
(2) classification is germane to achieve the
legislative
purpose,
(3) the law applies, all things being equal, to

both
present and future conditions, and
(4) the classification applies equally well to all
those
belonging to the same class.
Religious freedom
ART III, SEC 5, 1987 CONSTITUTION
No law shall be made respecting an

establishment
of religion, or prohibiting the free exercise
thereof.
(non-establishment clause)
The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed. (free
exercise
clause)
No religious test shall be required for the
exercise of
civil or political rights.
The free exercise clause is the basis of tax
exemptions.
The imposition of license fees on the distribution
and
sale of bibles and other religious literature by a
nonstock,
non-profit missionary organization not for
purposes of profit amounts to a condition or
permit
for the exercise of their right, thus violating the
constitutional guarantee of the free exercise and
enjoyment of religious profession and worship
which
carries with it the right to disseminate religious
beliefs and information. [American Bible Society
v.
City of Manila, L-9637 April 30, 1957]It is actually
in
the nature of a condition or permit for the
exercise of
the right.This is different from a tax in the
income of
one who engages in religious activities or a tax
on
property used or employed in connection with
those
activities. It is one thing to impose a tax on the
income or property of a preacher. It is quite
another
thing to exact a tax for the privilege of delivering
a
sermon. (American Bible Society v. City of
Manila)
The Constitution, however, does not prohibit
imposing a generally applicable tax on the sale
of
religious materials by a religious organization.
(Tolentino v. Secretary of Finance, 235 SCRA 630
[1994])
Non-impairment of obligations of contracts
ART III, SEC
10, 1987
CONSTITUTION
No law impairing the obligation of contracts shall

be
passed.
The Contract Clause has never been thought as
a
limitation on the exercise of the State's power of
taxation save only where a tax exemption has
been
granted for a valid consideration. [Tolentino v.
Secretary of Finance]
STAGES OR PROCESS OF TAXATION
The exercise of taxation involves three stages,
namely:
(1) LEVY OR IMPOSITION This process involves the

passage of tax laws or ordinances through the
legislature. The tax laws to be passed shall
determine those to be taxed (person, property or
PAGE 19
rights), how much is to be collected (the rate and

the base of tax), and how taxes are to be
implemented (the manner of imposing and
collecting tax). It also involves the granting of
tax
exemptions, tax amnesties or tax condonation.
(2) ASSESSMENT AND COLLECTION This process
involves the act of administration and
implementation of tax laws by the executive
through its administrative agencies such as the
Bureau of Internal Revenue or Bureau of
Customs.
(3) PAYMENT this process involves the act of
compliance by the taxpayer in contributing his
share to pay the expenses of the government.
Payment of tax also includes the options,
schemes or remedies as may be legally open or
available to the taxpayer.
REQUISITES OF A VALID TAX
(1) for a public purpose
(2) rule of taxation should be uniform
(3) the person or property taxed is within the
jurisdiction of the taxing authority
(4) assessment and collection is in consonance
with
the due process clause
(5) The tax must not infringe on the inherent and
constitutional limitations of the power of taxation
TAX AS DISTINGUISHED FROM OTHER
FORMS
OF EXACTIONS
TARIFF
Taxes
Tariff
All embracing term to
include various kinds of
enforced contributions
upon persons for the
attainment of public
purposes
A kind of tax imposed on
articles which are traded
internationally
TOLL
Taxes
Toll
Paid for the support of
the government
Paid for the use of
anothers property.
Demand of sovereignty Demand of
proprietorship
Generally, no limit on
the amount collected as
long as it is not
excessive, unreasonable
or confiscatory
Amount paid depends
upon the cost of
construction or
maintenance of the
public improvement
Taxes
Toll
used.
Imposed only by the
government
Imposed by the
government or by
private individuals or
entities.
A toll is a sum of money for the use of
something,
generally applied to the consideration which is
paid
for the use of a road, bridge or the like, of a
public
nature. (1 Cooley 77.)
The view has been expressed, however, that the
taking of tolls is only another method of taxing
the
public for the cost of the construction and repair
of
the improvement for the use of which the toll is
charged. (71 Am. Jur. 2d 351.)
LICENSE FEE
Taxes License and Regulatory

Fee
Imposed under the
taxing power of the
state for purposes of
revenue.
Levied under the police
power of the state.
Forced contributions for
the purpose of
maintaining
government functions.
Exacted primarily to
regulate certain
businesses or
occupations.
Generally, unlimited as
to amount
Should not
unreasonably exceed
the expenses of issuing
the license and of
supervision.
Imposed on persons,
property and to exercise
a privilege.
Imposed only on the
right to exercise a
privilege
Failure to pay does not
necessarily make the act
or business illegal.
Penalty for nonpayment:
surcharges or
imprisonment (except
poll tax).
Failure to pay makes the
act or business illegal.
License or permit fee is a charge imposed under
the
police power for purposes of regulation.
License is in the nature of a special privilege, of
a
permission or authority to do what is within its
terms.
It makes lawful an act which would otherwise be
unlawful. A license granted by the State is
always
revocable. (Gonzalo Sy Trading vs. Central Bank
of the
Phil., 70 SCRA 570 [1976])
PAGE 20
Importance of the distinctions

(1) It is necessary to determine whether a
particular
imposition is a tax or a license fee because some
limitations apply only to one and not to the
other,
and for the reason that exemption from taxes
may not include exemption from license fee.

(2) The power to regulate as an exercise of police
power does not include the power to impose fees
for revenue purposes. The amount of tax bears
no
relation at all to the probable cost of regulating
the activity, occupation, or property being taxed.
(see Progressive Development Corp. vs. Quezon
City, 172 SCRA 629 [1989])
(3) An exaction, however, may be considered
both a
tax and a license fee. This is true in the case of
car
registration fees which may be regarded as taxes
even as they also serve as an instrument of
regulation. If the purpose is primarily revenue, or
if revenue, is, at least, one of the real and
substantial purposes, then the exaction is
properly called a tax. (Phil. Airlines, Inc. vs. Edu,
164 SCRA 320 [1988])
(4) But a tax may have only a regulatory
purpose.
The general rule, however, is that the imposition
is a tax if its primary purpose is to generate
revenue, and regulation is merely incidental; but
if regulation is the primary purpose, the fact that
incidentally revenue is also obtained does not
make the imposition a tax. (see Progressive
Development Corp. vs. Quezon City)
Progressive Development Corp v. QC (1989): To
be
considered a license fee (PRIMARY PURPOSE
TEST):
(1) imposition must relate to an occupation or
activity that so engages the public interest in
health, morals, safety and development as to
require regulation for the protection and
promotion of such public interest;
(2) imposition must bear a reasonable relation to
the
probable expenses of regulation, taking into
account not only the costs of direct regulation
but
also its incidental consequences as well.
Note:Taxes may also be imposed for regulatory
purposes. It is called regulatory tax.
Fees may be properly regarded as taxes even
though
they also served as an instrument of regulation.
If the
purpose is primarily revenue, or if revenue is, at
least,
one of the real and substantial purposes, then
the
exaction is properly called a tax.[PAL v. Edu
(1988)]
SPECIAL ASSESSMENT
Taxes
Special Assessment
Levied not only on land. Levied only on land.
Taxes
Special Assessment
Imposed regardless of
public improvements
Imposed because of an
increase in value of land
benefited by public
improvement.
Contribution of a
taxpayer for the support
of the government.
Contribution of a person
for the construction of a
public improvement
It has general
application both as to
time and place.
Exceptional both as to
time and locality.
A special assessment is not a personal liability of
the
person assessed, i.e., his liability is limited only
to the
land involved. It is based wholly on benefits (not
necessity).
A charge imposed only on property owners
benefited
is a special assessment rather than a tax
notwithstanding that the statute calls it a tax.
The
rule is that an exemption from taxation does not
include exemption from special assessment. But
the
power to tax carries with it the power to levy a
special
assessment.
Note: The term "special levy" is the name used
in the
present Local Government Code (RA. No. 7160).
A
province, city, or municipality, or the National
Government, may impose a special levy on lands
especially benefited by public works or
improvements financed by it (see Sec. 240, RA
7160).
DEBT
Taxes
Debt
Based on laws Generally based on
contract, express or
implied.
Generally cannot be
assigned
Assignable
Generally paid in money May be paid in kind.
Cannot be a subject of
set off or compensation
Can be a subject of set
off or compensation (see
Art. 1279, Civil Code)
A person cannot be
imprisoned for nonpayment
of debt (except
when it arises from a
crime),
Imprisonment is a
sanction for nonpayment
of tax, except
poll tax.
Governed by the special
prescriptive periods
provided for in the NIRC.
Governed by the
ordinary periods of
prescription.
Does not draw interest
except only when
Draws interest when it is
so stipulated or where
PAGE 21
Taxes
Debt
delinquent there is default.
Imposed only by public
authority
Can be imposed by
private individual
A tax is not a debt in the ordinary sense of the
word.
PENALTY
Taxes
Penalty
Violation of tax laws
may give rise to
imposition of penalty.
Any sanction imposed as
a punishment for
violation of law or acts
deemed injurious
Generally intended to
raise revenue
Designed to regulate
conduct
May be imposed only by
the government
May be imposed by the
government or private
individuals or entities
Cannot be a subject of
set off or compensation
Can be a subject of set
off or compensation (see
Art. 1279, Civil Code)
KINDS OF TAXES
AS TO OBJECT
(1) Personal, Poll or Capitation Tax tax of a

fixed
amount imposed on persons residing within a
specified territory, whether citizens or not,
without regard to their property or the
occupation
or business in which they may be engaged. (e.g.
community (formerly residence) tax) Taxes of a
specified amount imposed upon each person
performing a certain act or engaging in a certain
business or profession are not, however, poll
taxes. (71 Am.Jur.2d 357).
(2) Property Tax tax imposed on property, real
or
personal, in proportion to its value or in
accordance with some other reasonable method
of apportionment. (e.g., real estate tax) The
obligation to pay the tax is absolute and
unavoidable and is not based upon the voluntary
action of the person assessed.
(3) Privilege/Excise Tax any tax which does not
fall
within the classification of a pool tax or a
property
tax. Thus, it is said that an excise tax is a charge
imposed upon the performance of an act, the
enjoyment of a privilege, or the engaging in an
occupation, profession, or business. The
obligation to pay the tax is based on the
voluntary
action of the person taxed in performing the act
or engaging in the activity which is subject to the
excise. The term excise tax is synonymous
with
privilege tax and the two are often used
interchangeably. (e.g., income tax, value added
tax, estate tax, donors tax).
AS TO BURDEN OR INCIDENCE
(1) Direct Taxes taxes which are demanded

from
persons also shoulder them; taxes for which the
taxpayer is directly or primarily liable or which
he
cannot shift to another (eg. Income tax, estate
tax, donors tax, community tax)
(2) Indirect Taxes taxes which are demanded
from
one person in the expectation andintention that
he shall indemnify himself at the expense of
another, falling finally upon the ultimate
purchaser or consumer; taxes levied upon

transactions or activities before the articles
subject matter thereof reach the consumers who
ultimately pays for them not as taxes but as part
of the purchase price. Thus, the person who
absorbs or bears the burden of the tax is other
than the one on whom it is imposed and required
by law to pay the tax. Practically all business
taxes are indirect. (e.g., VAT, percentage tax;
excise taxes on specified goods; customs duties).
AS TO TAX RATES
(1) Specific Tax a tax of a fixed amount

imposed by
the head or number or by some other standard
of
weight or measurement. It requires no
assessment (valuation) other than the listing or
classification of the objects to be taxed. (e.g.,
taxes on distilled spirits, wines, and fermented
liquors; cigars and cigarettes)
(2) Ad Valorem Tax a tax of a fixed proportion
of
the value of the property with respect to which
the tax is assessed. It requires the intervention
of
assessors or appraisers to estimate the value of
such property before the amount due from each
taxpayer can be determined. The phrase ad
valorem means literally, according to value.
(e.g. real estate tax, excise tax on automobiles,
non-essential goods such as jewelry and
perfumes, customs duties (except on
cinematographic films)).
(3) Mixed
AS TO PURPOSES
(1) General Tax levied for the general or

ordinary
purposes of the Government, i.e., to raise
revenue
for governmental needs, e.g. income tax, value
added tax, and almost all taxes.
(2) Special or Regulatory Tax levied for special
purposes i.e., to achieve some social or
economic
ends irrespective of whether revenue is actually
raised or not, e.g. protective tariffs or customs
duties on imported goods to enable similar
products manufactured locally to compete with
PAGE 22
such imports in the domestic market. Tariff

duties
intended mainly as a source of revenue are
relatively low so as not to discourage imports.
AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX)
(1) National taxes imposed by the national
government. (e.g. national internal revenue
taxes,
customs duties, and national taxes imposed by
laws)
(2) Municipal or Local taxes imposed by local
governments (e.g. business taxes that may be
imposed under the Local Government Code;
professional tax)
AS TO GRADUATION
(1) Proportional based on a fixed percentage of

the
amount of the property receipts or other basis to
be taxed.
Example: real estate tax, value added tax, and
other percentage taxes.
(2) Progressive the rate of which increases as
the
tax base or bracket increases.
Example: income tax, estate tax, donors tax.
(3) Digressive Tax Rate progressive rate stops

at a
certain point. Progression halts at a particular
stage.
(4) Regressive the rate of which decreases as
the
tax base or bracket increases. There is no such
tax
in the Philippines.
Regressive/progressive system of taxation
(1) A regressive tax, must not be confused with
regressive system of taxation. (a) In a society
where the majority of the people have low
incomes, it exists when there are more indirect
taxes imposed than direct taxes. Since the
lowincome
sector of the population as a whole buys
more consumption goods on which the indirect
taxes are collected, the burden of indirect taxes
rests more on them than on the more affluent
groups. There should be no objection if indirect
taxes are raised on luxury items consumed
mainly
by the higher income groups and reduced on
basic commodities consumed by the lower
income segments of society. (b) Studies reveal
that the progressive elements of the income and
other direct taxes have not sufficiently offset the
regressive effects of the indirect taxes as a
whole.
(2) A progressive tax is, therefore, also different
from
a progressive system of taxation.
National Internal Revenue Code of 1997 as
amended
(NIRC)
Income Taxation
(a) Income Tax is defined as a tax on all yearly

profits
arising from property, professions, trades, or
offices, or as a tax on the persons income,
emoluments, profits and the like (Fisher v.
Trinidad, 43 Phil. 981).
(b) It may be succinctly defined as a tax on
income,
whether gross or net, realized in one taxable
year.
(c) Income tax is generally classified as an
excise tax.
It is not levied upon persons, property, funds or
profits but upon the right of a person to receive
income or profits.
(d) In the Philippines, income tax is imposed on
the
net income of citizens, resident aliens, domestic
corporations, and nonresident aliens and foreign
corporations engaged in trade or business within
the Philippines (Sec. 24 (A), Sec. 25 (A), Sec. 27
(A), Sec. 28 (A), NIRC). It is also imposed on the
gross income of nonresident aliens and foreign
corporations-not doing business in the
Philippines (Sec. 25 (B), (C), (D), Sec. 28 (B),
NIRC).
It is further imposed as a final tax on certain
passive income (interests, royalties, prizes, and
other winnings), cash and property dividends,
capital gains from the sale of domestic shares of
stock and real property classified as capital
assets
located in the Philippines (Sec. 24 (B), Sec. 25
(A)
(2), (3), Sec. 27 (D), Sec. 28 (A), NIRC).
Purpose of Income Tax:
(1) To raise revenue to defray the expenses of

the
government; and
(2) To mitigate the evils arising from the
inequalities
of wealth by a progressive scheme of taxation
which places the burden of on those best able to
pay (Madrigal v. Rafferty & Concepcion, 38 Phil.
414).
INCOME TAX SYSTEMS
GLOBAL TAX SYSTEM
Under a global tax system, it did not matter

whether
the income received by the taxpayer is classified
as
compensation income, business or professional
income, passive investment income, capital gain,
or
other income. All items of gross income,
deductions,
and personal and additional exemptions, if any,
are
reported in one income tax return, and one set of
tax
rates are applied on the tax base.
SCHEDULAR TAX SYSTEM
Different types of incomes are subject to

different
sets of graduated or flat income tax rates. The
applicable tax rate(s) will depend on the
classification of the taxable income and the basis
could be gross income or net income.Separate
income tax returns (or other types of return
PAGE 23
applicable) are filed by the recipient of income

for
the particular types of income received.
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM
All compensation income, business or
professional
income, capital gain and passive income not
subject
to final tax, and other income are added
together to
arrive at the gross income, and after deducting
the
sum of allowable deductions, the taxable income
is
subjected to one set of graduated tax rates or
normal
corporate income tax. With respect to such
income
the computation is global.
For those other income not mentioned above,
they
remain subject to different sets of tax rates and
covered by different returns.
Note: The Philippines, under EO 37 (1986) and
RA
8424 (1998), follows a semi-schedular and
semiglobal
tax system.
FEATURES OF THE PHILIPPINE INCOME TAX
LAW
DIRECT TAX
The tax burden is borne by the income recipient

upon
whom the tax is imposed.
PROGRESSIVE
The tax rate increases as the tax base increases.

It is
founded on the ability to pay principle and is
consistent with Sec. 28, Art. VI, 1987
Constitution.
COMPREHENSIVE
The Philippines has adopted the most
comprehensive system of imposing income tax

by
adopting the citizenship principle, the residence
principle, and the source principle. Any of the
three
principles is enough to justify the imposition of
income tax on the income of a resident citizen
and
domestic corporation that are taxed on a
worldwide
income.
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM
The Philippines follows the semi-schedular or
semiglobal
system of income taxation, although certain
passive investment incomes and capital gains
from
sale of capital assets, namely: (a) shares of stock
of
domestic corporations and (b) real property are
subject to final taxes at preferential tax rates.
NATIONAL TAX
It is imposed and collected by the National

Government throughout the country.
EXCISE TAX
It is imposed on the right or privilege of a person

to
receive or earn income. It is not a personal tax or
a
property tax.
CRITERIA IN IMPOSING PHILIPPINE INCOME
TAX
CITIZENSHIP OR NATIONALITY PRINCIPLE
A citizen of the Philippines is subject to Philippine

income tax
(a) on his worldwide income, if he resides in the
Philippines; or
(b) only on his income from sources within the
Philippines, if he qualifies as a nonresident
citizen.
RESIDENCE PRINCIPLE
A resident alien is liable to pay Philippine income

tax
on his income from sources within the Philippines
but is exempt from tax on his income from
sources
outside the Philippines.
SOURCE OF INCOME PRINCIPLE
An alien is subject to Philippine income tax

because
he derives income from sources within the
Philippines. Thus, a non-resident alien or
nonresident
foreign corporation is liable to pay
Philippine income tax on income from sources
within
the Philippines, such as dividend interest, rent,
or
royalty, despite the fact that he has not set foot
in
the Philippines.
The income tax law adopts the most
comprehensive
tax situs of nationality and residence of resident
citizens and domestic corporations that subject
them
to income tax liability on their income from all
sources within and without the Philippines, while
the
law adopts the source rule with respect to
income
received by taxpayers, other than resident
citizens
and domestic corporations. (Tan v. Del Rosario,
237
SCRA 324)
TYPES OF PHILIPPINE INCOME TAX

(1) Graduated income tax on individuals
(2) Normal corporate income tax on corporations
(3) Minimum corporate income tax on
corporations
(4) Special income tax on certain corporations
(5) Capital gains tax on sale or exchange of
shares
of stock of a domestic corp. classified as capital
assets
(6) Capital gains tax on sale or exchange of real
property classified as capital asset
(7) Final withholding tax on certain passive
investment income paid to residents
(8) Final withholding tax on income payments
made to non-residents
(9) Fringe benefits tax on fringe benefits of
supervisory or managerial employees
(10) Branch profit remittance tax
(11) Tax on improperly accumulated earnings of
corporations
PAGE 24
TAXABLE PERIOD
The accounting periods used in determining the
taxable income of taxpayers are:
(a) Calendar Year - Accounting period of 12
months
ending on the last day of December
(b) Fiscal Year - Accounting period of 12 months
ending on the last day of any month other than
December (Sec. 22(Q), NIRC).
(c) Short Period- Accounting period which starts
after
the first month of the tax year or ends before the
last month of the tax year (less than 12 months).
INSTANCES WHEREBY SHORT ACCOUNTING PERIOD
ARISES
(a) When a corporation is newly organized.

(b) When a corporation is dissolved.
(c) When a corporation changes accounting
period.
(d) When the taxpayer dies.
"Taxable year" means the calendar year, or the
fiscal
year ending during such calendar year, upon the
basis of which the net income is computed under
Title II (Tax on Income).
Taxable year includes, in the case of return made
for
a fractional part of a year under the provisions of
Title II, the period for which such return is made
(Sec. 22 (P), NIRC).
WHEN CALENDAR YEAR SHALL BE USED IN COMPUTING
TAXABLE INCOME:
(a) If the taxpayer's annual accounting period is

other than a fiscal year; or
(b) If the taxpayer has no annual accounting
period;
or
(c) If the taxpayer does not keep books of
accounts;
or
(d) If the taxpayer is an individual (Sec. 43,
NIRC).
KINDS OF TAXPAYERS
DEFINITION OF EACH KIND OF TAXPAYER
Taxpayer- any person subject to tax imposed by

Title
II of the Tax Code (Sec. 22(N), NIRC).
Person- means an individual, a trust, estate or
corporation (Sec. 22(A), NIRC).
For income tax purposes, taxpayers are
classified
generally as follows:
(1) Individuals;
(2) Corporations;
(3) Partnerships; and
(4) Estates and Trusts.
Primary Sub-Classification(s)
Classification
Individuals
Citizens of
the
Philippines
Residents citizens
Non-resident citizens
Aliens
Residents
Nonresident
s
Engaged in
Trade or
Business in
the
Philippines
Not
Engaged in
Trade or
Business in
the
Philippines
Special
Classes of
Individuals
Minimum Wage
Earner
Corporations
Domestic Corporations
Foreign
Corporations
Resident
Corporations
Non-resident
Corporations
Estates and
Trusts
Partnerships
General Business Partnership
General Professional Partnership
Coownerships
Individual Taxpayers
Citizens
(1) Resident Citizens (RC)
(2) Non-resident Citizens (NRC)
(a) Citizen of the Philippines who establishes to
the satisfaction of the Commissioner the fact
of his physical presence abroad with a definite
intention to reside therein.
(b) Citizen who leaves the Philippines during the
taxable year to reside abroad, either as an
immigrant or for employment on a permanent
basis.
(c) Citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the time
during the taxable year.
(d) Citizen previously considered as non-resident
citizen and who arrives in the Philippines at
any time during the taxable year to reside
permanently in the Philippines Treated as
NRC with respect to his income derived from
sources abroad until the date of his arrival in
the Philippines
PAGE 25
Aliens
(1) Resident Alien
An alien actually present in the Philippines who is
not a mere transient or sojourner is a resident for
income tax purposes.
No/Indefinite Intention = RESIDENT: If he lives in

the
Philippines and has no definite intention as to his
stay, he is a resident. A mere floating intention
indefinite as to time, to return to another country
is
not sufficient to constitute him a transient.
Definite Intention = TRANSIENT: One who comes
to
the Philippines for a definite purpose, which in its
nature may be promptly accomplished, is a
transient.
Exception: Definite Intention but such cannot be
promptly accomplished; If his purpose is of such
nature that an extended stay may be necessary
for
its accomplishment, and thus the alien makes his
home temporarily in the Philippines, then he
becomes a resident.
(2) Non-resident Alien
Engaged in trade or business within the
Philippines If the aggregate period of his stay in the
Philippines
is more than 180 days during any calendar year.
Not engaged in trade or business within the
Philippines - If the aggregate period of his stay in
the
Philippines does not exceed 180 days.
Special class of individual employees
Minimum Wage Earner
(a) A worker in the private sector paid the
statutory
minimum wage;
(b) An employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-agricultural
sector where he/she is assigned.
Corporations
Includesall types of corporations, partnerships
(no
matter how created or organized), joint stock
companies, joint accounts, associations, or
insurance
companies, whether or not registered with the
SEC.
Excludes general professional partnerships
(GPP),
joint venture or consortium formed for the
purpose of
undertaking construction projects, joint venture
or
consortium engaging in petroleum, coal,
geothermal
and other energy operations pursuant to an
operating or consortium agreement under a
service
contract with the government.
(1) Domestic corporations A corporation
created
and organized under its laws (the law of
incorporation test).
(2) Foreign corporations A corporation which is
not
domestic.
Resident foreign corporations Foreign
corporation engaged in trade or business within
the Philippines.
Doing business The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works or the exercise of some of the
functions normally incident to, and in
progressive
prosecution of commercial gain or for the

purpose
and object of the business organization. (RA
7042,
Foreign Investments Act)
In order that a foreign corporation may be
regarded
as doing business within a State, there must be
continuity of conduct and intention to establish a
continuous business, such as the appointment of
a
local agent, and not one of a temporary
character
(CIR v. BOAC)
Non-resident foreign corporations Foreign
corporation not engaged in trade or business
within the Philippines
Joint venture and consortium Essential factors
of
a joint venture or consortium:
(a) Each party must make a contribution, not
necessarily of capital but by way of services,
skill, knowledge, material or money;
(b) Profits must be shared among the parties;
(c) There must be a joint proprietary interest and
right of mutual control over the subject matter
of the enterprise;
(d) There is a single business transaction.
(3) Partnership - The Tax Code mandates that
every
other type of business partnership is subject to
income tax in the same manner and at the same
rate as an ordinary corporation.
(4) General Professional Partnerships (GPP) - A
general professional partnership is a partnership
formed by persons for the sole purpose of
exercising their common profession, no part of
the income of which is derived from engaging in
any trade or business.
Not considered as a taxable entity for income tax
purposes. The partners themselves are liable,
not
PAGE 26
the partnership, are liable for the payment of

income tax in their individual capacities.
(5) Estates and Trusts - Taxable estates and
trusts
are taxed in the same manner and on the same
basis as an individual.
(6) Co-ownership - For income tax purposes, the
coowners
in a co-ownership report their share of the
income from the property owned in common by
them in their individual tax returns for the year
and the co-ownership is not considered as a
separate taxable entity or a corporation.
INCOME TAXATION
DEFINITION
Income Tax is defined as a tax on all yearly

profits
arising from property, professions, trades, or
offices,
or as a tax on the persons income, emoluments,
profits and the like (Fisher v. Trinidad).
NATURE
Income tax is generally classified as an excise

tax. It is
not levied upon persons, property, funds or
profits but
upon the right of a person to receive income or
profits.
GENERAL PRINCIPLES
(a) A citizen of the Philippines residing therein is

taxable on all income derived from sources
within
and without the Philippines;

(b) A nonresident citizen is taxable only on
income
derived from sources within the Philippines;
(c) An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on
income derived from sources within the
Philippines:
Provided, That a seaman shall be treated as an
overseas contract worker if he is a:
(1) citizen of the Philippines;and
(2) receives compensation for services rendered
abroad as a member of the complement of a
vessel engaged exclusively in international
trade
(d) An alien individual, whether a resident or not
of
the Philippines, is taxable only on income
derived
from sources within the Philippines;
(e) A domestic corporation is taxable on all
income
derived from sources within and without the
Philippines; and
(f) A foreign corporation, whether engaged or not
in
trade or business in the Philippines, is taxable
only on income derived from sources within the
Philippines. (Sec. 23)
Taxpayer Within Without
Resident Citizen
Non-resident Citizen and OCW X
Resident and Non-resident
Alien
X
Domestic Corporation
Foreign Corporation X
INCOME
DEFINITION
(a) Income means all wealth which flows to the

taxpayer other than a mere return of capital. It
includes gain derived from the sale or other
disposition of capital assets. Income is a gain
derived from labor or capital, or both labor and
capital; and includes the gain derived from the
sale or exchange of capital assets.
(b) Conwi v. CTA: It is an amount of money
coming to
a person within a specified time, whether as
payment for services, interest or profit from
investment. Unless otherwise specified, it means
cash or its equivalent. Income can also be
thought of as a flow of the fruits of one's labor.
NATURE
Income includes earnings, lawfully or unlawfully

acquired, without consensual recognition,
express or
implied, of an obligation to repay and without
restriction as their disposition. (James v. US, 366
US
213)
WHEN INCOME IS TAXABLE
Existence of taxable income

(1) There is INCOME, gain or profit
(2) RECEIVED or REALIZED during the taxable
year
(3) NOT EXEMPT from income tax
(a) Madrigal vs. Rafferty (1918): "The fact is that
property is a tree, income is the fruit; labor is a
tree, income the fruit; capital is a tree, income
the
fruit." A tax on income is not a tax on property.
"Income," as here used, can be defined as
"profits
or gains."
(b) A mere increase in the value of property is
not
income, but merely unrealized increase in
capital.(1
Mertens, Sec. 5.06)The increase in the value of
property is also known as appraisal surplus or
revaluation increment.
When is there INCOME?
When there is a FLOW of wealth other than mere
return of capital during the taxable period.
PAGE 27
Income v. Capital (Madrigal v. Rafferty)

Income
Capital
Denotes a flow of wealth
during a definite period
of time.
Fund or property
existing at one distinct
point in time.
Service of wealth Wealth itself
Subject to tax Return of capital is not
subject to tax
Fruit Tree
When is income RECEIVED or REALIZED?
Actual vis--vis Constructive receipt
(1) Actual receipt Income is actually reduced to
possession. The realization of gain may take the
form of actual receipt of cash.
(2) Constructive receipt An income is
considered
constructively received when it is credited to the
account of, or segregated in favour of a person.
The person may withdraw the said account
credited in his favor anytime without any
substantial limitations or conditions upon which
payment or enjoyment is to be made or
exercised.
Examples of constructive receipt of income are:
(a) Interest credited on savings bank deposit
(b) Matured interest coupons not yet collected by
the taxpayer
(c) Dividends applied by the corporation against
the indebtedness of a stockholder
(d) Share in the profit of a partner in a general
professional partnership, although not yet
distributed, is regarded as constructively
received; or
(e) Intended payment deposited in court
(consignation).
The doctrine of constructive receipt is
designed to prevent the taxpayer using the
cash basis from deferring or postponing the
actual receipt of taxable income. Without the
rule, the taxpayer can conveniently select the
year in which he will report the income.
(Dimaampao)
For a taxpayer using the accrual method, the
determinative question is, when do the facts
present
themselves in such a manner that the taxpayer
must
recognize income or expense? The accrual of
income
and expense is permitted when the all-events
test has
been met. This test requires: (1) fixing of a right
to
income or liability to pay; and (2) the availability
of
the reasonable accurate determination of such
income or liability [CIR v. Isabela Cultural
Corporation].
Methods of accounting in reporting income and
expenses
Cash method vis--vis Accrual methodCash
method
generally reports income upon cash collection
and
reports expenses upon payment. If earned from
rendering of services, income is to be reported in
the
year when collected, whether earned or
unearned.
(Sec. 108, NIRC).
Accrual method generally reports income when
earned and reports expense when incurred. If
earned
from sale of goods, income is to be reported in
the
year of sale, irrespective of collection. (Sec. 106,
NIRC).
Income realized pertains to the accrual basis of
accounting, when recognition of income in the
books
is when it is realized and expenses are
recognized
when incurred. It is the right to receive and not
the
actual receipt that determines the inclusion of
the
amount in gross income
Examples:
(1) interest or rent income earned but not yet
received
(2) rent expense accrued but not yet paid
(3) wages due to workers but remaining unpaid
Generally, trade and manufacturing businesses
use
accrual method while servicing businesses use
cash
method. If the service business opted to report
on
accrual basis, such method can only be applied
when
it comes to reporting of expense. To prevent tax
evasion, individual taxpayers whose business
consists of the sale of inventories cannot use
cash
method. (Valencia)
Installment method vis--vis Deferred method
vis--vis
Percentage of completion method (in long- term
contracts) Installment Methodis a special
method of
accounting whereby income on installment sales
of
property during the year is allowed to be
reported in
installments in proportion to the installment
payments actually received which the gross
profit
bears to the total contract price (Sec. 49, NIRC).
Income may be reported on the installment basis
in
the following cases:
Sales of personal property by a dealer
A dealer who regularly sells or otherwise
disposes of
personal property on the installment plan
Sales of real property (inventory) and casual
sales of
personalty
(1) casual sale or other casual disposition of
personal
property (not of a kind which would be includible
in the inventory of the taxpayer if on hand at the
close of the taxable year) where the selling price
PAGE 28
> P1,000 and the initial payments do not exceed

25% of the selling price, or
(2) sale or other disposition of real property
(inventory), if the initial payments do not exceed
25% of the selling price. Note: This sale is
subject
to creditable withholding tax and normal tax
which is 30% for corporate taxpayer or 5% to
32%
for individual taxpayer.
Sales of real property considered as capital asset
by
individuals
An Individual who sells or disposes of real
property,
considered as capital asset, if initial payments do
not
exceed 25% of the selling price, may pay the
capital
gains tax in installments (Sec. 49(C), NIRC).
Note:
This sale is subject to a capital gains tax of 6%
based
on the selling price or zonal value, whichever is
higher.
Note:Initial payments are the total payments
received
in cash or property (other than evidences of
indebtedness such as promissory notes,
mortgages
given) by the seller upon or before the execution
of
the instrument of sale during the taxable year of
the
disposition of the real property. Considered as
initial
payments are the downpayment and all other
payments received by the seller during the year
of
sale, including excess mortgage assumed by the
buyer over the basis or cost of the property sold.
It
contemplates at least one other payment in
addition
to the initial payment. If the entire purchase
price is
to be paid in a lump sum in a later year, there
being
no payment during the first year, the income
may not
be returned on the installment basis.
Selling price is the total amount or price of the
sale
including the cash or property received and all
notes
of the buyer or mortgages assumed by him.
Contract price is the amount which the
purchaser
contracts to pay the seller in cash. It includes the
excess of the mortgages assumed over the cost
or
other basis of the property sold.
Change from accrual to installment basis
A taxpayer entitled to the benefits of a dealer in
personal property may elect for any taxable year
to
report his taxable income on the installment
basis. In
computing his income for the year of change or
any
subsequent year, amounts actually received
during
any such year on account of sales or other
dispositions of property made in any prior year
shall
not be excluded. [see Sec. 49(D), NIRC].

Deferred Payment
(a) If the initial payments exceed 25% of the
selling
price, the gain realized may be reported on a
deferred payment method.
(b) The taxable gain or income returnable during
the
year of sale is the difference between the selling
or contract price and the cost of the property,
even though the entire purchase price has not
been actually received in the year of sale.
(c) The obligations of the purchaser received by
the
vendor are to be considered as equivalent of
cash.
Personal Property
Real Property
Dealer
Dealer in personal
property who regularly
sells in installment
plan: Installment
method
*held as ordinary
assetregardless of
amount of percentage
of initial payments
Installment method;
Provided, initial
payments do not
exceed 25% of selling
price
If exceeds 25%-Deferred payment
method
*held as inventory
Casual Sale
Installment method;
Provided:
(1) Selling price
exceeds php1,000
(2) Initial payments do
not exceed 25% of
selling price
If either of 2 or both
conditions not met
Deferred payment
method
*personal property not
considered inventory
Sale by Individuals
Installment method;
Provided, initial
payments do not
exceed 25% of selling
price
*held as capital asset
Percentage of completion
Income from long-term construction contracts
refers
to the earnings derived from construction of a
building, installation or other construction
contract
usually covering a period in excess of one year.
When
PAGE 29
income is derived from long-term construction

contracts, it is generally reported on the basis of
percentage of completion made every year that
will
be evidence by the certificates of engineers or
architects. The reportable income is calculated
by
deducting from the contract price the actual cost

of
construction.
In recognizing realized revenue for long-term
construction contracts, accountants usually
follow
two methods:
(a) Completed contract method requires
recognition
of revenue only when the contract is finally
completed; and
(b) Percentage of completion method requires
recognition of income based on the progress of
work.
Long-term contracts are no longer allowed to be
reported based on the completed contract
method basis beginning January 1, 1998
pursuant
to RA 8424; hence, all long-term contracts must
be reported using the percentage of completion
method.
TESTS IN DETERMINING WHETHER INCOME IS EARNED
FOR
TAX PURPOSES
(1) Realization test no taxable income until

there is
a separation from capital of something of
exchangeable value, thereby supplying the
realization or transmutation which would result
in
the receipt of income (Eisner v Macomber). Thus,
stock dividends are not income subject to
income
tax on the part of the stockholder when he
merely
holds more shares representing the same equity
interest in the corporation that declared stock
dividends (Fisher v Trinidad).
Under the doctrine of severance test of income,
in
order that income may exist, is necessary that
there be a separation from capital of something
of exchangeable value. The income required a
realization of gain.
(2)Claim of right doctrine a taxable gain is
conditioned upon the presence of a claim of right
to the alleged gain and the absence of a definite
unconditional obligation to return or repay that
which would otherwise constitute a gain. To
collect a tax would give the government an
unjustified preference as to the part of the
money
that rightfully and completely belongs to the
victim. The embezzlers title is void.
(3)Economic benefit test any economic benefit
to
the employee that increases his net worth,
whatever may have been the mode by which it is
effected, is taxable. Thus, in stock options, the
difference between the fair market value of the
shares at the time the option is exercised and
the
option price constitutes additional compensation
income to the employee at the time of exercise
(not upon the grant or vesting of the right).
(4)Income from whatever source All income not
expressly excluded or exempted from the class
of
taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing
the income, and regardless of the source of
income, is taxable (Gutierrez v. Collector, 101
Phil.
713).
All of the above tests are followed in the
Philippines for purposes of determining whether

income is received by the taxpayer or not during
the year (Mamalateo).
GROSS INCOME
DEFINITION
Gross Income means the pertinent items of

income
referred to in Section 32(A) of the Tax Code. It
includes all income derived from whatever
sourcesource (unless exempt from tax by law),
including but not limited to the following items:
(TRIP CARD GPP)
(1) Gross income derived from the conduct of
Tradeor business or the exercise of a profession
(2) Rents
(3) Interests
(4) Prizes and winnings
(5) Compensationfor servicesin whatever form
paid,
including, but not limited to fees, salaries,
wages, commissions, and similar items
(6) Annuities
(7) Royalties
(8) Dividends
(9) Gains derived from dealings inproperty
(10) Pensions
(11) Partners distributive share from the net
income
of the general professional partnership (GPP)
[Sec 32A, NIRC]
(a) The list here is NOT exclusive
(b) The term gross income whenever used
without
qualification, is comprehensive, as defined
above,
and is different from the limited meaning of
gross
income for purposes of minimum corporate
income tax or the gross income tax of
corporations.Gross income includes gross profit
from ordinary business and other income not
subject to passive income tax or final
withholding
tax.
PAGE 30
(c) Gross income means income, gain, or profit

subject to income tax.
It includes the compensation for personal
services, business income, profits, and income
derived from any source whatever (whether legal
or illegal)
It excludesunless it is exempt from income tax
under the Constitution, tax treaty, or statute or it
is subject to final withholding income tax in
accordance with the semi-global or
semischedular
tax system adopted by the Philippines.
It is the difference between gross sales/revenue
and the cost of goods sold/services. The
definition of gross income is broad and
comprehensive to include proceeds from sales of
transport documents. (Mamalateo)
CONCEPT OF INCOME FROM WHATEVER SOURCE
DERIVED
income derived from whatever sourcemeans

inclusion of all income not expressly exempted
within the class of taxable income under the
laws
irrespective of the voluntary or involuntary
action of
the taxpayer in producing the gains, and
whether
derived from legal or illegal sources (i.e.
gambling,
extortion, smuggling, etc.).
GROSS INCOME VIS--VIS NET INCOME VIS--VIS

TAXABLE
INCOME
(a) Gross income - means income, gain or profit

subject to tax.
(b) Net income means gross income less
statutory
deductions and/or exemptions (Sec. 31, NIRC)
(c) Taxable income means the pertinent items
of
gross income specified in the Tax Code, less the
deductions and/or personal and additional
exemptions, if any, authorized for such types of
income by the Tax Code or other special laws
(Sec. 31, NIRC).
SOURCES OF INCOME
Source is ascribed to the place wherein the

income is
earned. It is governed by the situs of taxation.
This
classification of income is necessary to
determine
whether such income is subject to tax or not.
Income
may be:
(1) Derived entirely from sources within the
Philippines.
Examples: compensation for labor or service
derived from Philippine sources; interest on
bonds, notes, deposits and the like earned in the
Philippines; dividends declared by domestic
corporations; rentals and royalties from property
located within the Philippines; and gains, profits
and income from sale of real property as well as
from personal property in the Philippines. As a
rule, incomes earned with the Philippines are
taxable.
(2) Derived entirely from sources without the
Philippines. Examples: compensation for labor or
service rendered by overseas contract workers;
interest on bonds, notes, deposits and the like
earned abroad; dividends declared by
nonresident foreign corporation; rental and
royalties from property located outside the
Philippines; and gains, profits and income from
sale of real property as well as from personal
property located outside the Philippines. As a
rule, incomes earned with the Philippines are
taxable.
(3) Derived from sources partly within or partly
without
the Philippines.Examples: gains, profits and
income from transportation or other services
rendered partly within and partly outside, and
dividend received by a resident citizen from a
resident foreign corporation. (Sec. 43(E), NIRC).
In
general, when an income is earned partly from
within and partly from without, only income
within is taxable in the Philippines, except if the
taxpayer is a resident citizen or a domestic
corporation. A Filipino citizen or a domestic
corporation whose income is derived from within
and without the Philippines is generally subject
to
tax.
SOURCES OF INCOME SUBJECT TO TAX
Compensation Income
Income arising from an employer-employee (EREE)
relationship. It means all remuneration for
services
performed by an EE for his ER, including the cash
value of all remuneration paid in any medium
other
than cash [Sec. 78(A)],unless specifically

excluded by
the Tax Code.
It includes, but is not limited to, salaries and
wages,
honoraria and emoluments, allowances (e.g.,
transportation, representation, entertainment),
commissions, fees (including directors fees, if
the
director is, at the same time, an employee of the
payor-corporation), tips, taxable bonuses, fringe
benefits except those subject to Fringe Benefit
Tax
(FBT) under Section 33 of the Tax Code, and
taxable
pensions and retirement pay (e.g. retirement
benefits earned without meeting the conditions
for
exemption thereof e.g. retirement of less than
50
years of age.
General Rule: every form of compensation
income is
taxable regardless of how it is earned, by whom
it is
paid, the label by which it is designated, the
basis
upon which it is determined, or the form in which
it is
received. The basis upon which remuneration is
paid
is immaterial. It may be paid on the basis of
piece of
PAGE 31
work, percentage of profits, hourly, weekly,

monthly,
or annually.
Exception: The term wages does NOT include
remuneration paid:
(a) For agricultural labor paid entirely in products
of
the farm where the labor is performed, or
(b) For domestic service in a private home, or
(c) For casual labor not in the course of the
employer's
trade or business, or
(d) For services by a citizen or resident of the
Philippines for a foreign government or an intl
organization. [Sec. 78(A)]
Note: The term agricultural labor does not
include
services performed in connection with forestry,
lumbering or landscaping.
The term remuneration for domestic services
refers
to remuneration paid for services of a household
nature performed by an employee in or about
the
private home of the person whom he is
employed.The services of household personnel
furnished to an employee (except rank and file
employees) by an employer shall be subject to
the
fringe benefits tax pursuant to Sec. 33 of the Tax
Code. A private home is the fixed place of abode
of
an individual or family. If the home is utilized
primarily for the purpose of supplying board or
lodging to the public as a business enterprise, it
ceases to be a private home and remuneration
paid
for services performed therein is not exempted.
Services of the household nature in or about a
private home include services rendered by
cooks,
maids, butlers, valets, laundresses, gardeners,

chauffeurs of automobiles for family use. The
remuneration paid for the services which are
performed in or about rooming or lodging
houses,
boarding houses, clubs, hotels, hospitals or
commercial officer or establishments is
considered
as compensation. Remuneration paid for services
performed as a private secretary, even if they
are
performed in the employers home is considered
as
compensation.
The term casual labor includes labor which is
occasional, incidental or regular. Not in the
course
of the employers trade or business includes
labor
that does not promote or advance the trade or
business of the employer.
The term remuneration paid for services
performed
as an employee of a foreign government or an
international organization includes not only
remuneration paid for services performed by
ambassadors, ministers and other diplomatic
officers
and employees but also remuneration paid for
services performed as consular or other officer or
employee of a foreign government or as a
nondiplomatic
representative of such government.
Compensation income including overtime pay,
holiday pay, night shift differential pay, and
hazard
pay, earned by MINIMUM WAGE EARNERS (MWE)
who has no other returnable income are NOT
taxable
and not subject to withholding tax on wages [RA
9504]Provided, however, that an employee shall
not
enjoy the privilege of being a MWE and,
therefore,
his/her entire earning are not exempt from
income
tax and, consequently, from withholding tax if he
receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits
in
excess of the allowable statutory amount of
P30,000, taxable allowance, and other taxable
income other than the statutory minimum wage
(SMW), holiday pay, overtime pay, hazard pay
and
night shift differential pay.
MWEs receiving other income, such as income
from
the conduct of trade, business, or practice of
profession, except income subject to final tax, in
addition to compensation income are not
exempted
from income tax on their income earned during
the
taxable year.
This rule, notwithstanding, the SMW, Holiday
Pay,
overtime pay, night differential pay and hazard
pay
shall still exempt from withholding tax.
Forms of compensation and how they are
assessed
(a) Cash If compensation is paid in cash, the
full
amount received is the measure of the income
subject to tax.
(b) Medium other than money If services are
paid
for in a medium other than money (e.g. shares of
stock, bonds, and other forms of property), the
fair market value (FMV) of the thing taken in
payment is the amount to be included as
compensation subject to tax. If the services are
rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be
presumed to be the FMV of the remuneration
received.
(c) Living quarters or meals - General Rule: The
value
to the employee of the living quarters and meals
given by the employer shall be added to his
compensation subject to withholding. Exception:
If living quarters/meals are furnished to an
employee for the convenience of the employer
the value needed NOT be included as part of
compensation income.
(d) Facilities and privileges of a relatively small
value Facilities and privileges (such an entertainment,
medical services, or so called courtesy
PAGE 32
discounts on purchases), otherwise known as

de minimis benefits furnished or offered by an
employer to his employees generally, are NOT
considered as compensation subject to income
tax and therefore withholding tax if such
facilities
are offered or furnished by the employer merely
as means of promoting the health, goodwill,
contentment, or efficiency of his employees.
(See RR 5-2011, as amended by RR 8-2012 for
ceilings
of de minimis benefits.) The amount of de
minimis
benefits confirming to the ceiling prescribed shall
not be considered in determining the P30,000
ceiling of other benefits excluded from gross
income under Section 32 (b)(7)(e) of the Tax
Code,
Provided, that the excess of the de minimis
benefits
over their respective ceilings prescribed by these
regulations shall be considered as part of other
benefits and the employee receiving it will be
subject to tax only on the excess over the
P30,000
ceiling, Provided, further, that MWEs receiving,
other
benefits exceeding the P30,000 limit shall be
taxable on the excess benefits, as well as on his
salaries, wages, and allowances, just like an
employee receiving compensation income
beyond
the SMW. Any amount given by the employer as
benefits to its employees, whether classified as
de
minimis benefits of fringe benefits, shall
constitute
as deductible expense upon such employer.
Where
compensation is paid in property other than
money,
the employer shall make necessary
arrangements to
ensure that the amount of the tax required to be
withheld is available for payment to the BIR.
Classification of Gross Compensation Income
Basic salary or wage
(a) Salary earnings received periodically for a
regular work other than manual labor. Example:
monthly salary of an employee

(b) Wages earnings received usually according
to
specified intervals of work, as by the hour, day,
or
week. Example: a carpenters wage.
Honoraria payments given in recognition for
services performed for which the established
practice
discourages charging a fixed fee. Example:
honorarium of a guest lecturer
Fixed or variable allowances i.e. Transportation,
Representation, and other allowances such as
Cost
of Living Allowances (COLA)
General Rule: Fixed or variable transportation,
representation or other allowances that are
received
by a public officer or employee of a private
entity, in
addition to the regular compensation fixed for his
position or office is a COMPENSATION subject to
withholding tax. (Rev. Regs. 2-98)
Exception: Any amount paid specifically, either
as
advances or reimbursements for travelling,
representation and other bona fide ordinary and
necessary expenses incurred or reasonably
expected
to be incurred by the employee in the
performance of
his duties are NOT COMPENSATION subject to
withholding tax, provided the following
conditions
are satisfied:
(a) It is for ordinary and necessary travelling and
representation or entertainment expenses paid
or
incurred by the employee in the pursuit of the
employers trade, business or profession; and
(b) The employee is required to account or
liquidate
for the foregoing expenses.
(c) The excess of actual expenses over advances
made shall constitute taxable income if such
amount is not returned to the employer. The
employee is required to account/liquidate for the
expenses in accordance with the specific
requirements of substantiation for each category
of expenses pursuant to Section 34 of the Tax
Code.
Note: Reasonable amounts of
reimbursements/advances for traveling and
entertainment expenses which are pre-computed
on
a daily basis and are paid to an employee while
he is
on an assignment or duty. NOT subject to
withholding tax on wages and substantiation
requirements.
Commission usually a percentage of total sales
or
on certain quota of sales volume attained as part
of
incentive such as sales commission.
Fees received by an employee for the services
rendered to the employer including a directors
fee of
the company, fees paid to the public officials
such as
clerks of court or sheriffs for services rendered in
the
performance of their official duty over and above
their regular salaries.
Tips and Gratuities those paid directly to the
employee (usually by a customer of the

employer)
which are not accounted for by the employee to
the
employer. (taxable income but not subject to
withholding tax) [RR NO. 2-98, Sec. 2.78.1]
Hazard or Emergency Pay additional payment
received due to the workers exposure to danger
or
harm while working. It is normally added to the
basic
salary together with the overtime pay and night
differential to arrive at gross salary.
PAGE 33
Retirement Pay a lump sum payment received

by
an employee who has served a company for a
considerable period of time and has decided to
withdraw from work into privacy. [RR 6-82, Sec.
2b]
In general, retirement pay is taxable except in
the
following instances:
(1) SSS or GSIS retirement pays.
(2) Retirement pay (R.A. 7641) due to old age
provided the following requirements are met:
(a) The retirement program is approved by the
BIR Commissioner;
(b) It must be a reasonable benefit plan. (Its
implementation must be fair and equitable for
the benefit of all employees)
(c) The retiree should have been employed for
10
years in the said company;
(d) The retiree should have been 50 years old or
above at the time of retirement; and
(e) It should have been availed of for the first
time.
Separation pay taxable if VOLUNTARILY availed
of.
It shall not be taxable if involuntary i.e. death,
sickness, disability, reorganization/merger of
company and company at the brink of
bankruptcy or
for any cause beyond the control of the said
official
or employee.
For any cause beyond the control.
(a) Connotes involuntariness on the part of the
official or employee
(b) The separation from the service of the official
or
employee must not be asked for or initiated by
him.
(c) The separation was not of his own making.
(d) Such fact shall be duly established by the
employer by competent evidence which should
be
attached to the monthly return for the period in
which the amount paid due to the involuntary
separation was made.
(e) Amounts received by reason of involuntary
separation remain EXEMPT from income tax even
if the official or the employee, at the time of
separation, had rendered less than ten (10)
years
of service and/or is below fifty (50) years of age.
(f) Any payment made by an employer to an
employer to an employee on account of
dismissal, constitutes compensation regardless
of
whether theemployer is legally bound by
contract, statute, or otherwise, to make such
payment.
Pension a stated allowance paid regularly to a
person on his retirement or to his dependents on

his
death, in consideration of past services,
meritorious
work, age, loss, or injury. Pension is taxable
unless
the law states otherwise, or unless the BIR
approves
the pension plan of a private company.
Vacation and sick leave- rules in determining
whether
money received for vacation and sick leave is
taxable
or not:
(a) If paid or availed of as salary of an employee
who
is on vacation or on sick leave notwithstanding
his
absence from work, it constitutes TAXABLE
compensation income. [RR 6-82, 2d]
(b) Monetized value of unutilized vacation leave
credits of ten (10) days or less which were paid
to
private employees during the year and the
monetized value of leave credits paid to
government officials and employees are not
subject to income tax and to the withholding tax.
[RR no. 2-98, Sec 2.78.1(A)(7)] Note:
monetization of sick leave credits of private
employees even if not exceeding 10 days is not
exempt from income tax and withholding tax on
wages.
(c) Terminal leave or money value of
accumulated
vacation and sick leave benefits received by heir
upon death of employee is not taxable.
Thirteenth month pay and other benefits - Not
taxable
if the total amount received is P30,000 or less.
Any
amount exceeding P30,000 is taxable. [Sec. 32
(7)e,
NIRC]
Overtime Pay premium payment received for
working beyond regular hours of work which is
included in the computation of gross salary of
employee. It constitutes compensation.
Profit Sharing the proportionate share in the
profits
of the business received by the employee in
addition
to his wages.
Awards for special services awards for past
services
or suggestions to employers resulting in the
prevention of theft or robbery, etc. are also
compensations.
Beneficial Payments such as where employer
pays
the income tax owed by an employee are
additional
Other forms of compensation other forms
received
due to services rendered are compensation paid
in
kind, e.g., insurance premium paid by the
employer
for insurance coverage where the heirs of the
employee are the beneficiaries is the employees
income.
PAGE 34
Note: Any amount which is required by law to be

deducted by the employer from the
compensation of
an employee including the withheld tax is

considered
as part of the employees compensation and is
deemed to be paid to the employee as
compensation
at the time the deduction is made. (This also
applies
to deductions not required by law.)
Withholding Tax on Compensation Income
The income recipient (i.e., EE) is the person
liable to
pay the tax on income, yet to improve the
collection
of compensation income of EEs, the State
requires
the ER to withhold the tax upon payment of the
Fringe Benefits
Special treatment of fringe benefits
Persons liable: The Employer (as a withholding
agent), whether individual, professional
partnership
or a corporation, regardless of whether the
corporation is taxable or not, or the government
and
its instrumentalities, is liable to remit the fringe
benefit tax to the BIR once fringe benefit is given
to a
managerial or supervisory employee.
The fringe benefit tax (FBT) is a final tax on the
employees income to be withheld by the
employer.
The withholding and remittance of FBT shall be
made
on a calendar quarterly basis.
Managerial employee: one who is vested with
the
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
discipline employees.
Supervisory employees: those who, in the
interest of
the employer, effectively recommend such
managerial actions if the exercise of such
authority is
not merely routinary or clerical in nature but
requires
the use of independent judgment.
All employees not falling within any of the above
definitions are considered rank-and-file
employees.
Basic Rule: Convenience of the Employer Rule
(a) If meals, living quarters, and other facilities
and
privileges are furnished to an employee for the
convenience of the employer, and incidental to
the requirement of the employees work or
position, the value of that privilege need not be
included as compensation (Henderson v.
Collector)
(b) Fringe benefit tax is imposed on fringe
benefits
received by supervisory and managerial
employees. The fringe benefits of rank and file
employees are treated as part of compensation
income subject to income tax and withholding
tax
on compensation.
Definition
Fringe benefit means any good, service, or other
benefit furnished or granted by an employer, in
cash
or in kind, in addition to basic salaries, to an
individual employee (except rank and file

employees)
such as, but not limited to the following:
(1) Housing
(2) Expense Account
(3) Vehicle of any kind
(4) Household personnel, such as maid, driver
and
others
(5) Interest on loan at less than market rate to
the
extent of the difference between the market rate
and actual rate granted.
(6) Membership fees, dues and other expenses
borne
by the employer for the employee in social and
athletic clubs and similar organizations
(7) Expenses for foreign travel
(8) Holiday and vacation expenses
(9) Educational assistance to the employee or his
dependents; and
(10) Life or health insurance and other non-life
insurance premiums or similar amounts on
excess of what the law allows.[Sec. 33(B)]
Tax Rate and Tax Base
(a) Tax base is based on the grossed-up
monetary
value (GMV) of fringe benefits.
(b) Rate is generally 32%
(c) GMV represents: (a) the whole amount of
income
realized by the employee which includes the net
amount of money or net monetary value of
property that has been received; and (b) the
amount of fringe benefit tax due from the
employee which has been withheld and paid by
the employer for and in behalf of his employee..
How GMV is determined
GMV is determined by dividing the actual
monetary
value of the fringe benefit by 68% [100% - tax
rate of
32%]. For example, the actual monetary value of
the
fringe benefit is P1,000. The GMV is equal to
P1,470.59 [P1,000 / 0.68]. The fringe benefit tax,
therefore, is P470.59 [P1470.59 x 32%].
Special Cases:
(a) For fringe benefits received by non-resident
alien
not engaged in trade of business in the
Philippines (NRANETB), the tax rate is 25% of the
GMV. The GMV is determined by dividing the
actual monetary value of the fringe benefit by
75% [100% - 25%].
PAGE 35
(b) For fringe benefits received by alien

individuals
and Filipino citizens employed by regional or
area
headquarters, regional operating headquarters,
offshore banking units (OBUs), or foreign service
contractor or by a foreign subcontractor engaged
in petroleum operations in the Philippines, or by
any of their Filipino individual employees who are
employed and occupying the same positions as
those occupied by the alien employees, the tax
rate is 15% of the GMV. The GMV is determined
by dividing the actual monetary value of the
fringe benefit by 85% [100% - 15%].
(c) What is the tax implication if the employer
gives
fringe benefits to rank-and-file employees?
Fringe benefits given to a rank-and-file employee
are treated as part of his compensation income
subject to normal tax rate and withholding tax

on
compensation income, except de minimis
benefits
and benefits provided for the convenience of the
employer.
Payor of Fringe Benefit Tax (FBT): The employer
withholds and pays the FBTbut the law allows
him to
deduct such tax from his gross income.
Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
(1) Fringe benefits not considered as gross
income
(a) if it is required or necessary to the business
of
employer
(b) if it is for the convenience or advantage of
employer
(2) Fringe Benefit that is not taxable under Sec.
32
(B) Exclusions from Gross Income
(3) Fringe benefits not taxable under Sec. 33
Fringe
Benefit Tax:
(a) Fringe Benefits which are authorized and
exempted under special laws, such as the 13th
month Pay and Other Benefits with the ceiling
of P30,000.
(b) Contributions of the employer for the benefit
of the employee to retirement, insurance and
hospitalization benefit plans;
(c) Benefits given to the Rank and File
Employees, whether granted under a
collective bargaining agreement or not; and
(d) The De minimis benefits benefits which are
relatively small in value offered by the
employer as a means of promoting goodwill,
contentment, efficiency of Employees
The exemption of any FB from the FBT shall not
be
interpreted to mean exemption from any other
income tax imposed under the Tax Code except if
the
same is likewise expressly exempt from any
other
income tax imposed under the Tax Code or under
any other existing law. Thus, if the FB is
exempted
from the FBT, the same may, however, still form
of
the employees gross compensation income
which is
subject to income tax; hence, likewise subject to
withholding tax on compensation income
payment.
De minimis benefits (exempt from income tax as
well
as withholding tax on compensation income of
both
managerial and rank and file EEs):
(a) Monetized unused vacation leave credits of
private employees not exceeding ten (10) days
during the year;
(b) Monetized value of vacation and sick leave
credits
paid to government officials and employees;
(c) Medical cash allowance to dependents of
employees, not exceeding P750 per employee
per
semester or P125 per month;
(d) Rice subsidy of P1,500 or one (1) sack of 50
kg.
rice per month amounting to not more than
P1,500;
(e) Uniform and Clothing allowance not

exceeding
P5,000 per annum (RR 8-2012)
(f) Actual medical assistance, e.g. medical
allowance to cover medical and healthcare
needs, annual medical/executive check-up,
maternity assistance, and routine consultations,
not exceeding P10,000.00 per annum;
(g) Laundry allowance not exceeding P300 per
month;
(h) Employees achievement awards, e.g., for
length
of service or safety achievement, which must be
in
the form of a tangible personal property other
than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received
by the employee under an established written
plan which does not discriminate in favor of
highly paid employees;
(i) Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000
per employee per annum;
(j) Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty-five
percent (25%) of the basic minimum wage on a
per region basis;
All other benefits given by employers which are
not
included in the above enumeration shall NOT be
considered as "de minimis" benefits and hence,
shall
be subject to withholding tax on compensation
(rank
and file employees) and FBT
(managerial/supervisory employees)(RR 5-2011)
Housing
Housing Privilege
Fringe Benefit Tax Base
(Monetary Value)
(1) LEASE of residential
property for the
residential use of
MV= 50% of lease
payments
PAGE 36
Housing Privilege
Fringe Benefit Tax Base
(Monetary Value)
employees where MV = monetary
value of the FB
(2) Assignment of
residential property
owned by employer for
use of employees
MV= [5% (FMV or ZV,
whichever is higher) x
50%]
(3) Purchase of residential
property in installment
basis for the use of the
employee
MV= 5% x acquisition
cost x 50%
(4) Purchase of residential
property and
ownership is
transferred in the
name of the employee
MV= FMV or ZV,
whichever is higher
Non-taxable housing fringe benefit:
(1) Housing privilege of the Armed Forces of the
Philippines (AFP) officials i.e, those of the
Philippine Army, Philippine Navy, or Philippine Air
Force
(2) A housing unit, which is situated inside of
adjacent to the premises of a business or factory
maximum of 50 meters from perimeter of the
business premises
(3) Temporary housing for an employee who
stays in
housing unit for three months or less
Motor Vehicle
Motor Vehicle Fringe Benefit Tax
Base
(1) Purchased in the name
of the employee
MV= acquisition cost
(2) Cash given to employee
to purchase in his own
name
MV= cash given
(3) Purchase on installment,
in the name of employee
MV= acquisition
cost/ 5 years
Where acquisition
cost is exclusive of
interest
(4) Employee shoulders part
of the purchase price,
ownership in the name of
employee
MV= amount
shouldered by
employer
(5) Employer owns and
maintains a fleet of
motor vehicles for use of
the business and of
employees
MV= (AC/5) x 50%
(6) Employer leases and
maintains a fleet for the
use of the business and
MV= 50% of rental
payment
of employees
Professional Income
Refers to fees received by a professional from
the
practice of his profession, provided that there is
NO
employer-employee relationship between him
and
his clients.
Income from Business
(a) Any income derived from doing business
(b) Doing business: The term implies a continuity
of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works or the exercise of some of the
functions normally incident to, and in progressive
prosecution of, the purpose and object of its
organization.
Income from Dealings in Property
Dealings in property such as sales or exchanges
may
result in gain or loss. The kind of property
involved
(i.e., whether the property is a capital asset or an
ordinary asset) determines the tax implication
and
income tax treatment, as follows:
Taxable
Net
Income
=
Ordinary
Net Income
+
Net Capital Gains
(other than those
subject to final
CGT)
Ordinary Asset
Capital Asset
Gain from sale, exchange or other disposition
Ordinary Gain (part of
Gross Income)
Capital Gain
Loss from sale, exchange, or other disposition
Ordinary Loss (part of
Allowable Deductions
from Gross Income)
Capital Loss
Excess of Gains over Losses
Part of Gross Income Net Capital Gain
Excess of Losses over Gains
Part of Allowable
Deductions from Gross
Income
Net Capital Loss
Types of Properties
Capital v. Ordinary Asset
Ordinary Assets
Capital Assets
(1)Stock in trade of the
taxpayer or other
property of a kind
which would properly
be included in the
Property held by the
taxpayer, whether or
not connected with his
trade or business which
is not an ordinary asset.
PAGE 37
Ordinary Assets
Capital Assets
inventory of the
taxpayer if on hand at
the close of the
taxable year.
(2) Property held by the
taxpayer primarily for
sale to customers in
the ordinary course of
his trade or business.
(3) Property used in the
trade or business of a
character which is
subject to the
allowance for
depreciation, or
(4) Real property used in
the trade or business
of the taxpayer,
including property
held for rent.
Generally, they include:
(1) stocks and securities
held by taxpayers
other than dealers in
securities
(2) real property not
used in trade or
business, such as
residential house
and lot, idle or
vacant land or
building
(3)investment property,
such as interest in a
partnership, stock
investment
(4)Personal or nonbusiness
properties,
such as family car,
home appliances,
jewelry.
Types of Gains from dealings in property
(1) Ordinary income vis--vis Capital gain.
If the asset involved is classified as ordinary, the
entire amount of the gain from the transaction
shall
be included in the computation of gross income
[Sec
32(A)], and the entire amount of the loss shall be
deductible from gross income. [Sec 34(D)]. (See
XI.
Allowable Deductions from Gross Income Losses)
If the asset involved is a capital asset, the rules
on
capital gains and losses apply in the
determination of
the amount to be included in gross income. (See
Part
V. Capital Gains and Losses). These rules do not
apply to: (a) real property with a capital gains
tax
(final tax), or (2) shares of stock of a domestic
corporation with a capital gains tax (final tax).
Also,
sale of shares of stock of a domestic corporation,
held as capital assets, through the stock
exchange
by either individual or corporate taxpayers, is
subject
to of 1% percentage tax based on gross
selling
price.
The following percentages of the gain or loss
recognized upon the sale or exchange of a
capital
asset shall be taken into account in computing
net
capital gain, net capital loss, and net income:
(a) If the taxpayer is an individual
100% if the capital asset has been held for not
more than 12 months; and
50% of the capital asset has been held for more
than 12 months
(b) If the taxpayer is a corporation
100%, regardless of the holding period of the
capital asset (Sec. 39(B), NIRC)
The tax rules for the gains or losses from sales or
exchanges of capital assets over ordinary assets
are
as follows:
(1) Net capital gain is added to ordinary gain but
net
capital loss is not deductible from ordinary gain.
(2) Net ordinary loss is deductible from ordinary
gain.
(3) Capital losses are deductible only to the
extent of
the capital gain.
(4) There is a net capital loss carry-over on the
net
capital assets loss in a taxable year which may
be deducted as a short-term capital loss from the
net capital gain of the subsequent taxable year;
provided that the following conditions shall be
observed:
(1) The taxpayer is other than a corporation;
(2) The amount of loss does not exceed the
income before exemptions at the year when

the loss was sustained; and
(3) The holding period should not exceed 12
months. (Valencia)
When a capital gain or capital loss is sustained
by a
corporation, the following rules shall be
observed:
(1) There is no holding period; hence, there is no
net
capital loss carry-over.
(2) Capital gains and losses are recognized to the
extent of their full amount.
(3) Capital losses are deductible only to the
extent of
capital gains.
(4) Net capital losses are not deductible from
ordinary gain or income but ordinary losses are
deductible from net capital gains.
Note: For sale, barter, exchange or other forms
of
disposition of shares of stock subject to the
5%/10%
capital gains tax on the net capital gain during
the
taxable year, the capital losses realized from this
type of transaction during the taxable year are
deductible only to the extent of capital gains
from
the same type of transaction during the same
period.
If the transferor of the shares is an individual,
the rule
on holding period and capital loss carry-over will
not
apply, notwithstanding the provisions of Section
39
of the Tax Code as amended. (RR 6-2008, c.4)
(2) Actual gain vis--vis Presumed gain
Presumed Gain:In the sale of real property
located in
the Philippines, classified as capital asset, the
tax
base is the gross selling price or fair market
value,
whichever is higher. The law presumes that the
seller
makes a gain from such sale. Thus, whether or
not
PAGE 38
the seller makes a profit from the sale of real

property, he has to pay 6% capital gains tax. In
fact,
her has to pay the tax, even if he incurs an
actual loss
from the sale thereof. (Note, however, that
where an
individual sells his real property classified as a
capital asset to the government, he has the
option
whether to be taxed at the graduated income tax
rates or at 6% capital gains tax.)
Actual Gain:The tax base in the sale of real
property
classified as an ordinary asset is the actual gain.
If
the seller incurs a loss from the sale, such loss
may
be deducted from his gross income during the
taxable year. The ordinary gain shall be added to
the
operating income and the net taxable income
shall
be subject to the graduated rates from 5% to
32% (if
an individual) or to 30% corporate tax or to 2%

MCIT
(if a corporation).
Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
NET GAIN (LOSS)
Note: Amount realized from sale or other
disposition
of property = sum of money received + fair
market
value of the property (other than money)
received
Note: When a taxpayer sells a real or personal
property, he should deduct its cost from its
selling
price to measure the gain or loss from the sales
transaction (Sec. 40, NIRC).
For income tax purposes the following rules
should
be observed regarding the cost and expenses of
the
capital assets: (1) the costs and expenses of the
acquisition are to be capitalized, and (2) the
expenses of disposition are to be treated as
reduction from the selling price. (Valencia)
(1) Cost or basis of the property sold: In
computing the
gain or loss from the sale or other disposition of
property, the BASIS shall be as follows:
(a) Property acquired by purchase its
acquisition
cost, i.e., the purchase price plus expenses of
acquisition.
(b) Property which should be included in the
inventory
its latest inventory value [RR-2 sec 136]
(c) Property acquired by devise, bequest or
inheritance
its fair market price or value as of the date of
acquisition (inheritance)
(d) Property acquired by gift or donation the
basis is
the same as it would be in the hands of the
donor
or at last preceding owner by whom it was not
acquired by gift, EXCEPT that if such basis is
greater than the FMV of the property at the time
of the gift then, for the purpose of determining
loss, the basis shall be such FMV
(e) Property acquired for less than an adequate
consideration in moneys worth the amount
paid
by the transferee for the property
(2)Cost or basis of the property exchanged in
corporate
reorganizations: Sales or exchanges resulting in
nonrecognition
of gains or losses:
Exchange Solely in Kind (1) If in pursuance of a plan of merger or
consolidation, exchanges:
(a) Between the corporations which are parties
to
the merger or consolidation (property solely
for stocks);
(b) Between a stockholder of a corporation party
to a merger or consolidation and the other
corporation, which is a party to the merger or
consolidation (stock in a corporation solely for
the stock of another corporation);
(c) Between a security holder of a corporation
party to a merger or consolidation and the
other corporation, which is a party to the
merger or consolidation (securities solely for

securities)
(2) Transfer to a controlled corporation a
person
transfers his property to a corporation in
exchange for stocks in such a corporation,
resulting in acquisition of corporate control by
said person, alone or together with others not
exceeding four (4).
Exchange Not Solely in Kind -Gain, but not the
loss,
shall be recognized if, in connection with an
exchange described in the above exceptions:
(a) An individual, a shareholder, a security holder
or
a corporation receives not only stock or
securities
permitted to be received without the recognition
of gain or loss, but also money and/or property.
The gain, if any, but not the loss, shall be
recognized but in an amount not in excess of the
sum of the money and the fair market value of
such other property received.
As to the shareholder, if the money and/or other
property received has the effect of a distribution
of a taxable dividend, there shall be taxed as
dividend to the shareholder an amount of the
gain recognized not in excess of his
proportionate
share of the undistributed earnings and profits of
the corporation.
The remainder, if any, of the gain recognized
shall
be treated as a capital gain (Sec. 40 (C) (3) (a),
NIRC).
PAGE 39
(b) The transferor corporation receives not only

stock
permitted to be received without the recognition
of gain or loss but also money and/or other
property, then (i) if the corporation receiving such money
and/or other property distributes it in
pursuance of the plan of merger or
consolidation, no gain to the corporation shall
be recognized from the exchange, but
(ii) if the corporation receiving such other
property and/or money does not distribute it
in pursuance of the plan of merger or
consolidation, the gain, if any, but not the loss
to the corporation shall be recognized.
The gain shall be recognized in an amount not
in excess of the sum of such money and the
fair market value of such other property so
received, which is not distributed (Sec. 40 (C)
(3) (b), NIRC).
If an individual, stockholder, security holder or
corporation receives on the exchange not only
stock
or securities but also money and/ or property
(boot),
the gain but not the loss shall be recognized, in
an
amount not exceeding the sum of the money
and fair
market value of the property received.
If the money or other property received has the
effect
of a distribution of a taxable dividend, there shall
be
taxed as dividend to the stockholder an amount
of
the gain recognized not in excess of his
proportionate share of the undistributed earnings
and profits of the corporation.
The remainder, if any, of the gain recognized

shall be
treated as a capital gain.
SUBSTITUTED BASIS OF STOCK OR SECURITIES
RECEIVED BY TRANSFEROR UPON THE
EXCHANGE:
Original basis (cost) of the property, stock or
securities exchanged/transferred
LESS: (a) money received, if any; and
(b) FMV of the other property received.
Balance
ADD: (a) the amount treated as dividend of the
shareholder; and
(b) the amount of any gain that was recognized
on
the exchange.
Basis (Cost) of the stock received
Notes:
(a) The property received as boot shall have as
basis its FMV
(b) If as part of the consideration to the
transferor,
the transferee of property assumes a liability of
the transferor or acquires from the latter
property
subject to a liability, such assumption or
acquisition (in the amount of liability), shall be
treated as money received by the transferor on
the exchange
(c) If the transferor receives several kinds of
stocks or
securities, the Commissioner is authorized to
allocate the basis among the several classes of
stocks or securities received.
SUBSTITUTED BASIS OF PROPERTY
TRANSFERRED:
The basis of the property transferred in the
hands of
the transferee shall be the same as it would be
in the
hands of the transferor increased by the amount
of
the gain recognized to the transferor on the
transfer
[Sec. 40 (C)(5), NIRC].
(3)Recognition of gain or loss in exchange of
property:
General rule- Upon the sale or exchange of
property,
the ENTIRE amount of the gain or loss shall be
recognized.
Exceptions- No gain or loss shall be recognized:
(1) If in pursuance of a plan of merger or
consolidation:
(a) A corporation, which is a party to a merger or
consolidation, exchanges property solely for
stock in a corporation, which is a party to the
merger or consolidation;
(b) A shareholder exchanges stock in a
corporation, which is a party to a merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or
(c) A security holder of a corporation, which is a
party to the merger or consolidation,
exchanges his securities in such corporation,
solely for stock or securities in another
corporation, a party to the merger or
consolidation.
(2) If property is transferred to a corporation by a
person in exchange for stock or unit of
participation in such a corporation, of which as a
result of such exchange, said person, alone or
together with others not exceeding 4 persons,
gains control of the corporation.
- Stocks issued for services shall not be

considered as issued in property.
Meaning of merger, consolidation, control,
securities
(a) Merger and consolidation for tax purposes shall mean (1) The ordinary merger or
consolidation; or (2) The acquisition by one
PAGE 40
corporation of all or substantially all the

properties of another corporation solely for stock
(Sec. 40(C )(6)(b), NIRC).
(b) Requirements to establish merger or
consolidation
(1) Must be undertaken for a bona fide business
purpose and not solely for the purpose of
escaping the burden of taxation
(2) In determining whether a bona fide business
purpose exists, each and every step of the
transaction shall be considered and the whole
transaction or series of transaction shall be
treated as a single unit
(3) The property transferred must constitute a
substantial portion of the property of the
transferor (Sec. 40(C)(6)(b), NIRC). Note: In
determining whether the property transferred
constitutes a substantial portion of the
property of the transferor, the term 'property'
shall be taken to include the cash assets of
the transferor (Sec. 40(C)(b), NIRC).
(c) Substantially All: the acquisition by one
corporation of at least 80% of the assets,
including cash, of another corporation, which has
the element of permanence and not merely
momentary holding.
(d) Securities: bonds and debentures but not
"notes"
of whatever class or duration (Sec. 40(C)(6)(a),
NIRC)
(e) Control: ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the
total voting power of all classes of stocks entitled
to vote (Sec. 40(C)(6)(c), NIRC).
Income tax treatment of capital loss
Capital loss limitation rule (applicable to both
corporations and individuals)
General Rule:Losses from sales or exchanges of
capital assets shall be allowed only to the extent
of
the gains from such sales or exchanges (Sec.
39(C),
NIRC).
EXCEPTION for Banks and Trust Companies:If a
bank
or trust company incorporated under the laws of
the
Philippines, a substantial part of whose business
is
the receipt of deposits, sells any bond,
debenture,
note, certificate or other evidence of
indebtedness
issued by any corporation (including one issued
by a
government or political subdivision thereof) with
interest coupons or in registered form, any loss
resulting from such sale shall not be subject to
the
foregoing limitationand shall not be included in
determining the applicability of such limitation to
other losses (Sec. 39(C), NIRC).
Net loss carry-over rule (applicable only to
individuals
If an individual sustains in any taxable year a net
capital loss, such loss (in an amount not in
excess of
the net income for the year) shall be treated in

the
succeeding taxable year as a loss from the sale
or
exchange of a capital asset held for not more
than 12
months (Sec. 39(D), NIRC).
Dealings in real property situated in the
Philippines
Persons Liable and Transactions Affected
(a) Individual taxpayers, estates and trusts
(1) Sale or exchange or other disposition of real
property considered as capital assets.
(2) Includes "pacto de retro sale" and other
conditional sale.
(b) Domestic Corporation
Sale or exchange or disposition of lands and/or
building which are not actually used in business
and are treated as capital asset.
Rate and Basis of Tax
A final withholding tax of 6% is based on the
gross
selling price or fair market value or zonal value
whichever is higher.
Note: Gain or loss is immaterial, there being a
conclusive presumption of gain.
Dealings in shares of stock of Philippine
corporations
Persons Liable to the Tax
(a) Individual taxpayer, whether citizen or alien;
(b) Corporate taxpayer, whether domestic or
foreign;
and
(c) Other taxpayers not falling under (a) and (b)
above, such as estate, trust, trust funds and
pension funds, among others.
Persons not liable
(a) Dealers in securities
(b) Investor in shares of stock in a mutual fund
company
(c) All other persons who are specifically exempt
from national internal revenue taxes under
existing investment incentives and other special
laws.
Shares listed and traded through the stock
exchange
other than sale by a dealer in securities.
(1) of 1% of the gross selling price of the stock
or
gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed
which
shall be assumed and paid by the seller or
transferor through the remittance of the stock
transaction tax by the seller or transferors
broker.
(2) Note: In the nature of percentage tax and not
income tax; exempt from income tax per Section
127 (d):
PAGE 41
Any gain derived from the sale, barter,

exchange
or other disposition of share of stock under this
section shall be exempt from taxes imposed in
Sections 24(C), 27(D)(2), 28(A)(8)(c), and
28(B)(5)(c) of this Code and from the regular
individual or corporate income tax.
(3) Note: Percentage tax under Sec. 127 is NOT
DEDUCTIBLE for income tax purposes.
Shares not listed and traded through the stock
exchange
Net capital gains derived during the taxable year
from sale, exchange, or transfer shall be taxed
as
follows (on a per transaction basis):
Amount of Capital Gain Tax Rate

Not over P 100,000 - 5%
On any amount in excess of P 100,000
- 10%
Sale of principal residence
Principal residence: the family home of the
individual
taxpayer (RR 14-2000)
Disposition of principal residence (capital asset)
is
exempt from Capital Gains Tax, provided:
(a) Sale or disposition of the old principal
residence;
(b) By natural persons - citizens or aliens
provided
that they are residents taxable under Sec. 24 of
the Code (does not include an estate or a trust);
(c) The proceeds of which is fully utilized in (a)
acquiring or (b) constructing a new principal
residence within eighteen (18) months from date
of sale or disposition;
(d) Notify the Commissioner within thirty (30)
days
from the date of sale or disposition through a
prescribed return of his intention to avail the tax
exemption;
(e) Can only be availed of onlyonce every ten
(10)
years;
(f) The historical cost or adjusted basis of his old
principal residence shall be carried over to the
cost basis of his new principal residence
(g) If there is no full utilization, the portion of the
gains presumed to have been realized shall be
subject to capital gains tax.
(h) Portion of presumed gains subject to CGT:
(Unutilized/GSP) x (higher of GSP or FMV)
Passive Income
Under Sec 24(B), a final tax is imposed upon
gross
passive income of citizen and resident aliens. An
income is considered passive if the taxpayer
merely
waits for it to be realized.
(a) Interest Income
(1) An earning derived from depositing or lending
of money, goods or credits. [VALENCIA,
Income Taxation 5th ed. (2009)]
(2) e.g., Interest income from government
securities such as Treasury Bills
(3) Unless exempted by law, interest income
received by the taxpayer, whether or not
usurious, is subject to income tax.
(b) Dividend Income
(1) A form of earnings derived from the
distribution made by a corporation out of its
earnings or profits and payable to its
stockholders, whether in money or in property.
(2) In general, dividends are included in the
gross
income of the stockholder, unless they are
exempt from tax or subject to final ax at
preferential rate under the Tax Code.
Cash dividend
Dividends are included in the gross income of
the
stockholder, unless they are exempt from tax or
subject to tax at preferential rate under the
NIRC.
Cash dividend is the most common form of
dividend, valued at the amount of money
received
by the stockholder. Cash dividend and property
dividend are subject to income tax.
Stock dividend
Stock dividend is generally exempt from income

tax, EXCEPT:
(a) If a corporation cancels or redeems stock
issued as a dividend at such time and in such
manner as to make the distribution and
cancellation or redemption, in whole or in
part, essentially equivalent to the distribution
of a taxable dividend, the amount so
distributed in redemption or cancellation of
the stock shall be considered as taxable
income to the extent that it represents a
distribution of earnings or profits (Sec. 73(B),
NIRC); or
(b) Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends; some
stockholders exercised the option to take cash
of property dividends; and the exercise of
option resulted in a change of the
stockholders proportionate share in the
outstanding share of the corporation.
Property dividend
Dividends are included in the gross income of
the
stockholder, unless they are exempt from tax or
subject to tax at preferential rate under the
NIRC.
Cash dividend and property dividend are subject
to
income tax.
PAGE 42
Liquidating dividend
Represents distribution of all the property or
assets of a corporation in complete liquidation or
dissolution. It is strictly not dividend income, but
ratheris treated in effect, as a sale of shares of
stock resulting in capital gain or loss. The
difference between the cost or other basis of the
stock and the amount received in liquidation of
the stock is a capital gain or a capital loss.
Where
property is distributed in liquidation, the amount
received is the FMV of such property. The income
is subject to ordinary income tax rates and NOT
to the FWT on dividends.
(c) Royalty Income
(1) Royaltyis a valuable property that can be
developed and sold on a regular basis for a
consideration; in which case, any gain derived
therefrom is considered as an active business
income subject to the normal corporate tax.
(2) Where a person pays royalty to another for
the
use of its intellectual property, such royalty is
generally a passive income of the owner
thereof subject to withholding tax.
(d) Rental Income
(1) Refers to earnings derived from leasing real
estate as well as personal property. Aside
from the regular amount of payment for using
the property, it also includes all other
obligations assumed to be paid by the lessee
to the third party in behalf of the lessor (e.g.,
interest, taxes, loans, insurance premiums,
etc.) [RR 19-86]
(2) Rent income may be in the following forms:
(a) Cash, at the stipulated price
(b) Obligations of the lessor to third persons
paid or assumed by the lessee in
consideration of the contract of lease, e.g.,
real estate tax on the property leased
assumed by the lessee
(c) Advance payment
(1) If the advance payment is actually a
loan to the lessor, or an option money
for the property, or a security deposit

for the faithful performance of certain
obligations of the lessee, such advance
payment is not income to the lessor.
(2) However, a security deposit that is
applied to rental is taxable income to
the lessor.
(3) If the advance payment is, in fact, a prepaid
rental, received by the lessor under
a claim of right and without restriction
as to its use, then such payment is
income to the lessor.
(4) Pre-paid rent must be reported in full in
the year of receipt, regardless of the
accounting method used by the lessor.
Lease of personal property
Rental income on the lease of personal property
located in the Philippines and paid to a nonresident
taxpayer shall be taxed as follows:
Non-Resident
Corporation
NonResident
Alien
Vessel 4.5% 25%
Aircraft, machineries
and other Equipment
7.5% 25%
Other assets 30% 25%
Lease of real property
Lessor
Tax Rate
Citizen
Resident Alien
Non-resident alien
engaged in trade or
business in the
Philippines
Net taxable income
shall be subject to the
graduated income tax
rates
Non-resident alien not
engaged in trade or
business in the
Philippines
Rental income from real
property located in the
Philippines shall be
subject to 25% final
withholding tax unless a
lower rate is imposed
PAGE 43
Lessor
Tax Rate
pursuant to an effective
tax treaty
Domestic Corporation
Resident Foreign
Corporation
Net taxable income
shall be subject to 30%
corporate income tax or
its gross income will be
subject to 2% MCIT
Non-resident Foreign
Corporation
Gross rental income
from real property
located in the
Philippines shall be
subject to 30%
corporate income tax,
such tax to be withheld
and remitted by the

lessee in the Philippines
Tax treatment of Leasehold improvements by
lessee:
(a) Leasehold improvements by lessee
Rent Income from leasehold improvements:
(1) Outright method- lessor shall report as
income
FMV of the buildings or improvements subject to
the lease in the year of completion.
(2) Spread-out method- lessor shall spread over
the
remaining term of the lease the estimated
depreciated (book) value of such buildings or
improvements at the termination of the lease,
and reports as income for each remaining term
of the lease an aliquot part thereof. estimated
BV at the end of the lease contract/ remaining
lease term = Income per year
If for any reason than a bona fide purchase from
the
lessee by the lessor, the lease is terminated, so
that
the lessor comes into possession or control of
the
property prior to the time originally fixed, lessor
receives additional income for the year which the
lease is so terminated to the extent of the value
of
such buildings or improvements when he
became
entitled to such possession exceeds the amount
already reported as income on account of the
erection of such building or improvement. No
appreciation in value due to causes other than
the
premature termination of lease shall be included
(Sec. 49, Rev. Reg. No. 2).
If the building or other leasehold improvement is
destroyed before the expiration of the lease, the
lessor is entitled to deduct as a loss for the year
when such destruction takes place, the amount
previously reported as income because of the
erection of the improvement, less any salvage
value,
to the extent that such loss was not
compensated by
insurance (Sec. 49, Rev. Reg. No. 2),
(b) VAT added to rental/paid by the lessee
If the lessee is VAT-registered, treat VAT paid as
input VAT;
If the lessee is not VAT-registered OR not liable to
VAT, treat VAT paid as additional rent expense
deductible from gross income.
Annuities, Proceeds from life insurance or other
types
of insurance
(1) Annuities are installment payments received
for
life insurance sold by insurance companies.
(2) The aleatory contract of life annuity binds the
debtor to pay an annual pension or income
during the life of one or more determinate
persons in consideration of a capital consisting of
money or other property, whose ownership is
transferred to him at once with the burden of the
income. [Art. 2021, New Civil Code]
(3) The annuity payments represent a part that
is
taxable and not taxable. If part of annuity
payment represents interest, then it is a taxable
income. If the annuity is a return of premium, it
is
not taxable.
Prizes and awards
Contest prizes and awards received are generally

taxable. Such payment constitutes gain derived
from
labor.
The EXCEPTIONS are as follows:
(1) Prizes and awards made primarily in
recognition
of religious, charitable, scientific, educational,
artistic, literary or civic achievements are
EXCLUSIONS from gross income if:
(a) The recipient was selected without any action
on his part to enter a contest or proceedings;
and
(b) The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
(2) Prizes and awards granted to athletes in local
and international sports competitions and
tournaments held in the Philippines and abroad
and sanctioned by their national
(3) associations shall be EXEMPT from income
tax.
Pensions, retirement benefit, or separation pay
(1) paid for past employment services rendered.
(2) a stated allowance paid regularly to a person
on
his retirement or to his dependents on his death,
in consideration of past services, meritorious
PAGE 44
work, age, loss or injury. It is generally taxable

unless the law states otherwise. [VALENCIA,
Income Taxation 5th ed. (200/9)]
Other Income
Income from any source whatever
Inclusion of all income not expressly exempted
within the class of taxanle income under the
laws
irrespective of the voluntary or involuntary
action of
the taxpayer in producing the gains, and
whether
derived from legal or illegal sources.
Forgiveness of indebtedness
The cancellation or forgiveness of indebtedness
may
have any of three possible consequences:
(a) It may amount to payment of income. If, for
example, an individual performs services to or
for
a creditor, who, in consideration thereof, cancels
the debt, income in that amount is realized by
the
debtor as compensation for personal services.
(b) It may amount to a gift. If a creditor wishes
merely
to benefit the debtor, and without any
consideration therefore, cancels the debt, the
amount of the debt is a gift to the debtor and
need not be included in the latters report of
income.
(c) It may amount to a capital transaction. If a
corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect
of
a payment of dividend.
Tax Benefit Rule
This isa general principle in taxation which states
that is a taxpayer deducted an item on his
income
tax return and enjoyed a tax benefit (reduced
hisincome tax) thereby, and in a subsequent
year
recovers all or part of that item, he will recognize
gross income in the year the deducted item is
recovered. The rule has both an inclusionary and

an
exclusionary component, i.e., the recovery is
included
in the taxpayers gross income to the extent that
the
taxpayer obtained a tax benefit from the prior
years
deduction, and the recovery is excluded to the
extent
that the prior years deduction did not provide a
tax
benefit.
Example 1: Bad debts claimed as a deduction in
the
preceding year(s) but subsequently recovered
shall
be included as part of the taxpayers gross
income in
the year of such recovery to the extent of the
income
tax benefit of said deduction. There is an income
tax
benefit when the deduction of the bad debt in
the
prior year resulted in lesser income and hence
tax
savings for the company. (Sec. 4, RR 5-99)
Illustration:
Case A Case B Case C
Year 1
Gross Income 500,000 400,000 500,000
Less: Allowable
Deductions
(before write-off
of Uncollectible
Accounts/Debts)
(200,000)
(480,000)
(495,000)
Taxable Income
(Net Loss) before
write-off
300,000
(60,000)
5,000
Deduction for
Accounts
Receivable
written off
(2,000)
(2,000)
(6,000)
Taxable Income
(Net Loss) after
write-off
298,000
(62,000)
(1,000)
Year 2
Recovery of
Amounts Written
Off
2,000
2,000
6,000
Taxable Income
on the Recovery
2,000 - 5,000
Explanation:
(1) In Case A, the entire amount recovered
(P2,000)
is included in the computation of gross income
in Year 2 because the taxpayer benefited by the
same extent. Prior to the write-off, the taxable
income was P300,000; after the write-off, the
taxable income was reduced to P298,000.
(2) In Case B, none of the P2,000 recovered
would
be recognized as gross income in Year 2. Note

that even without the write-off, the taxpayer
would
not have paid any income tax anyway. The
taxable income before the write-off was
actually a net loss.
(3) In Case C, only P5,000 of the P6,000
recovered
would be recognized as gross income in Year 2. It
was only to this extent that the taxpayer
benefited from the write-off. The taxpayer did
not
benefit from the extra P1,000 because at this
point, the P1,000 was already a net loss.
Example 2. Receipt of tax refunds or credit
General rule: a refund of a tax related to the
business
or the practice of profession, is taxable income
(e.g.,
refund of fringe benefit tax) in the year of receipt
to
the extent of the income tax benefit of said
deduction (i.e., the tax benefit rule applies).
PAGE 45
Exceptions: However, the following tax refunds

are
not to be included in the computation of gross
income: (CAPIFFEDVAT)
(1) Philippine income tax, except the fringe
benefit
tax
(2) Income tax imposed by authority of any
foreign
country, if the taxpayer claimed a credit for such
tax in the year it was paid or incurred.
(3) Estate and donors taxes
(4) Taxes assessed against local benefits of a
kind
tending to increase the value of the property
assessed (Special assessments)
(5) Value Added Tax
(6) Fines and penalties due to late payment of
tax
(7) Final taxes
(8) Capital Gains Tax
Note: The enumeration of tax refunds that are
not
taxable (income) is derived from an enumeration
of
tax payments that are not deductible from gross
income.
If a tax is not an allowable deduction from gross
income when paid (no reduction of taxable
income,
hence no tax benefit), the refund is not taxable.
SOURCE RULES IN DETERMINING INCOME FROM
WITHIN
AND WITHOUT
The following items of gross income shall be

treated
as gross income from sources WITHIN the
Philippines:
Interests
Derived from sources within the Philippines, and
interests on bonds, notes or other interestbearing
obligation of residents.
Ultimately, the situs of interest income is the
residence of the debtor.
Dividends
Dividends received:
(1) from a domestic corporation; and
(2) from a foreign corporation, UNLESS less than
50% of its gross income for the previous 3-year
period was derived from sources within the
Philippines [in which case it will be treated as

income partly from within and partly from
without].
The income which is considered as derived from
within the Philippines is obtained by using the
following formula:
Philippine Gross Income* x Dividend = Income
Within
Worldwide Gross Income*
NOTE: * of the corporation giving the dividend
As a rule, the situs of dividend income is the
residence of the corporation declaring the
dividend.
Services
Compensation for labor or personal services
performedin the Philippines:As a rule, the situs of
compensation is the place of performance of the
services.
Rentals And Royalties
From property located in the Philippines or from
any
interest in such property, including rentals or
royalties for (STACKEM)
(1) The use of or the right or privilege to use in
the
Philippines any copyright, patent, design or
model,
plan, secret formula or process, goodwill,
trademark, trade brand or other like property or
right;
(2) The use of, or the right to use in the
Philippines
any industrial, commercial or scientific
equipment;
(3) The supply of scientific, technical, industrial
or
commercialknowledgeor information;
(4) The supply of any assistance that is ancillary
and
subsidiaryto, and is furnished as a means of
enabling the application or enjoyment of, any
such
property or right as is mentioned in (a), any such
equipment as is mentioned in (b) or any such
knowledge or information as is mentioned in (c);
(5) The supply of servicesby a nonresident
person or
his employee in connection with the use of
property or rights belonging to, or the
installation
or operation of any brand, machinery or other
apparatus purchased from such nonresident
person;
(6) Technical advice, assistance or services
rendered in
connection with technical management or
administration of any scientific, industrial or
commercial undertaking, venture, project or
scheme; and
(7) The use of or the right to use:
(8) Motion picture films;
(i) Films or video tapes for use in connection with
television; and
(ii) Tapes for use in connection with radio
broadcasting.
As a rule, the situs of rental income is the place
where the property is located. The situs of
royalty
income is where the rights are exercised.
Sale Of Real Property
As a rule, the situs of the income from sale of
real
property is where the realty is located.
Sale Of Personal Property
General Rule:Gains, profits and income from the

sale
of personal property, subject to the following
rules:
PAGE 46
Place of
PURCHASE
Place of
SALE
Treatment**
Philippines Abroad Income from
Without
Abroad Philippines Income from
Within
** in other words, the situs of the income from
the
sale of personal property is the place of sale.
Exceptions:
(1) Gain from the sale of shares of stock in a
domestic
corporation
Treated as derived entirely from sources within
the Philippines regardless of where the said
shares
are sold.
(2) Gains from the sale of (manufactured)
personal
property:
(a) produced (in whole or in part) by the
taxpayer
withinand sold without the Philippines, or
(b) produced (in whole or in part) by the
taxpayer
withoutand sold within the Philippines
Treated as derived partly from sources within
and partly from sources without the
Philippines.
Place of
PRODUCTION
Place of
SALE
Treatment
Philippines Abroad Partly within,
partly without
Abroad Philippines Partly within,
partly without
Shares of stock of domestic corporation
Treated as derived entirely from sources within
the
Philippines regardless of where the said shares
are
sold.
SITUS OF INCOME TAXATION
Income
Situs
Interest Residence of the debtor
Dividends Residence of the corporation
Services Place of performance
Rentals Location of the property
Royalties Place of exercise
Sale of Real
Property
Location of realty
Sale of
Personal
(a) Tangible
(1) Purchase and sale: Location
of Sale
(2) Manufactured w/in and
sold w/o: Partly w/in and
Income
Situs
partly w/o
(3) Manufactured w/o and sold
w/in: Partly w/in and partly
w/o
(b) Intangible
General rule: Place of Sale
Exception: Shares of stock of
domestic corporations: Place of
incorporation
Shares of
Stock of
Domestic
Corporation
Place of incorporation
EXCLUSIONS FROM GROSS INCOME
Exclusions from gross income refer to income

received or earned but is not taxable as income
because it is exempted by law or by treaty. Such
taxfree
income is not to be included in the income tax
retrun unless information regarding it is
specifically
called for. Receipts which are not in fact income
are,
of course, excluded from gross income. The
exclusion of income should not be confused with
the
reduction of gross income by the application of
allowable deductions. While exclusions are
simply
not taken into account in determining gross
income,
deductions are subtracted from gross income to
arrive at net income. (De Leon)
Items of Exclusions representing return of capital
(a) Amount of capital is generally recovered
through
deduction of the cost or adjusted basis of the
property sold from the gross selling price or
consideration, or through the deduction from
gross income of depreciation relating to the
property used in trade or business before it is
sold.
(b) It may also related to indemnities, such as
proceeds of life insurance paid to the insureds
beneficiaries and return of premiums paid by the
insurance company to the insured under a life
insurance, endowment or annuity contract.
(c) Damages, in certain instances, may also be
exempt because they represent return of capital.
Items of Exclusion because it is subject to
another
internal revenue tax
The value of property acquired by gift, bequest,
devise or descent is exempt from income tax on
the
part of the recipient because the receipt of such
PAGE 47
property is already subject to transfer taxes

(estate
tax or donors tax)
Items of Exclusions because they are expressly
exempt from income tax
(1) Under the Constitution
(2) Under a tax treaty
(3) Under special laws
Rationale for the exclusions
The term exclusions refers to items that are
not
included in the determination of gross income
because:
(a) They represent return of capital or are not
income, gain or profit;
(b) They are subject to another kind of internal
revenue tax;
(c) They are income, gain or profit that are
expressly
exempt from income tax under the Constitution,
tax treaty, Tax Code, or a general or special law.

(Mamalateo)
Taxpayers who may avail of the exclusions
Exclusion
Taxpayer
Return of capital All taxpayers since there
is no income.
Already subject to
internal revenue tax
All taxpayers unless
provided that income is
to be included.
Express exclusion As expressly provided.
Exclusions distinguished from deductions and tax
credit
(a) Exclusions from gross income refer to a flow
of
wealth to the taxpayer which are not treated as
part of gross income for purposes of computing
the taxpayers taxable income, due to the
following reasons: (1) it is exempted by the
Constitution or a statute; or (2) it does not come
within the definition of income.
Deductions, on the other hand, are the amounts
which the law allows to be subtracted from gross
income in order to arrive at net income.
(b) Exclusions pertain to the computation of
gross
income, while deductions pertain to the
computation of net income.
(c) Exclusions are something received or earned
by
the taxpayer which do not form part of gross
income while deductions are something spent or
paid in earning gross income.
Tax Credit refer toamounts subtracted from the
computed tax in order to arrive at taxes payable.
(1) Under the Constitution
(a) Income derived by the government or its
political subdivisions from the exercise of any
essential governmental function
(b) Also, all assets and revenues of a non-stock,
non-profit private educational institution used
directly, actually and exclusively for private
educational purposes shall be exempt from
taxation.
(2) Under the Tax Code (Sec. 32, NIRC)
Proceeds of life insurance policies.
General rule: The proceeds of life insurance
policies
paid to his estate or to any beneficiary (but not a
transferee for a valuable consideration), directly
or in
trust, upon the death of the insured, are
excluded
from the gross income of the beneficiary.
However, if
such amounts are held by the insurer under an
agreement to pay interest thereon, the interest
payments received by the insured shall be
included
in gross income. The interest income shall be
taxed
at the graduated income tax rates.
Return of premium paid.
General rule: The amount received by the
insured as a
return of premiums paid by him under life
insurance,
endowment, or annuity contracts, either during
the
term or at the maturity of the term mentioned in
the
contract or upon surrender of the contract is a
return
of capital and not income.

This refers to the cash surrender value of the
contract.
Exception: If the amounts received by the
insured
(when added to the amounts already received
before
the taxable year under such contract) exceed
the
aggregate premiums or considerations paid
(whether
or not paid during the taxable year), then the
excess
shall be included in gross income.
Amounts received under life insurance,
endowment or
annuity contracts.
Amounts received (other than amounts paid by
reason of the death of the insured and interest
payments on such amounts) under a life
insurance,
endowment or annuity contracts are excluded
from
gross income, but if such amounts (when added
to
amounts already received before the taxable
year
under such contract) exceed the aggregate
premiums of considerations paid (whether or not
paid during the taxable year), then the excess
shall
be included in gross income. However, in the
case of
PAGE 48
a transfer for valuable consideration, by

assignment
or otherwise, of a life insurance, endowment , or
annuity contract, or any interest therein, only the
actual value of such consideration and the
amount of
the premiums and other sums subsequently paid
by
the transferee are exempt from taxation.
Value of property acquired by gift, bequest,
devise or
descent.
Gifts, bequests and devises (which are subject to
estate or gift taxes) are excluded from gross
income,
BUT not the income from such property. If the
amount received is on account of services
rendered,
whether constituting a demandable debt or not,
or
the use or opportunity to use of capital, the
receipt is
income (Pirovano v. Commissioner).
Amount received through accident or health
insurance
(Compensation for damages).
As a rule, amounts received through accident or
health insurance or under workmens
compensation
acts, as compensation for personal injuries or
sickness, plus the amount of any damages
received,
whether by suit or agreement, on account of
such
injuries or sickness are excluded from gross
income.
Examples of nontaxable and taxable damages
recoveries are:
Nontaxable
compensation for
damages on account of
Taxable compensation
for damages on account
of
(1) Personal (physical)
injuries or sickness
(1) Actual damages for
loss of anticipated
profits
(2) Any other damages
recovered on account
of personal injuries or
sickness
(2) .Moral and
exemplary damages
awarded as a result
of break of contract
(3) Exemplary and moral
damages for out-ofcourt
settlement,
including attorneys
fees
(3) Interest for nontaxable
damages
above
(4) Alienation of
affection, or breach of
promise to marry
(4) Any damages as
compensation for
unrealized income
(5) Any amount received
as a return of capital
or reimbursement of
expenses
Income exempt under tax treaty.
Income of any kind, to the extent required by
any
treaty obligation binding upon the Government
of
the Philippines.
Retirement benefits, pensions, gratuities, etc..
These are
(1) Retirement benefits under RA 7641, RA 4917,
and
Section 60(B) of the NIRC
(2) Terminal pay
(3) Retirement Benefits from foreign government
agencies
(4) Veterans benefits
(5) Benefits under the Social Security Act
(6) GSIS benefits
Retirement benefits received under RA 7641(The
Retirement Pay Law) and those received by
officials
and employees of private firms under a
reasonable
private benefit plan (RPBP) maintained by the
employer under RA 4917 (now Section 32(B)(6)
(a) of
NIRC) are excluded from gross income subject to
income tax.
RA 7641
RPBP
Retiring employee must
be in the service of same
employer
CONTINUOUSLY for at
least five (5) years
Retiring official or
employee must have
been in the service of the
same employer forat
least ten (10) years.
Retiring employee must
be at least sixty (60)
years oldbut not more

than 65 years of age at
the time of retirement
Retiring official or
employee must be at
least fifty (50) years old
at the time of retirement
Availed of only once, and
only when there is no
RPBP
Retiring employee shall
not have previously
availed of the privilege
under a retirement
benefit plan of the same
or another employer
Plan must be
reasonable. Its
implementation must be
fair and equitable for the
benefit of all employees
(e.g. from president to
laborer)
Plan must be approved
by BIR
A 'reasonable private benefit plan' means a
pension,
gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of
some or
all of his employees wherein contributions are
made
by such employer, or employees, or both for the
purpose of distributing to such employees the
PAGE 49
earnings and principal of the fund thus

accumulated
by the trust in accordance with such plan (trust
fund)
Further, it should be provided in the plan that at
no
time prior to the satisfaction of all liabilities with
respect to employees under any trust, shall any
part
of the corpus or income of the fund be used for,
or be
diverted to, any purpose other than for the
exclusive
benefit of his employees.
Terminal pay/Separation pay
Any amount received by an employee or by his
heirs
from the employer as a consequence of
separation of
such official or employee from the service of the
employer because of death, sickness, other
physical
disability or for any cause beyond the control of
the
employee. The phrase for any cause beyond
the
control of the said official or employee means
that
the separation of the employee must be
involuntary
and not initiated by him.
The separation must not be of his own making.
Notes:
(a) Sickness must be life-threatening or one
which
renders the employee incapable of working
(b) Retrenchment of the employee due to
unfavorable business conditions or financial
reverses is considered as involuntary. However,
resignation or availment of an optional early
retirement plan is voluntary and bars a claim

under this provision.
BIR Ruling 143-98:
The terminal leave pay (amount paid for the
commutation of leave credits) of retiring
government
employees is considered not part of the gross
salary,
and is exempt from taxes. The government
recognizes that for most public servants,
retirement
pay is always less than generous if not meager
and
scrimpy. Terminal leave payments are given not
only
at the same time but also for the same policy
considerations governing retirement benefits.
(Commissioner v. Castaneda, 203 SCRA 72).
Retirement BENEFITS from foreign government
agencies
The social security benefits, retirement
gratuities,
pensions and other similar benefits received by
resident or non-resident citizens or aliens who
come
to reside permanently in the Philippines from
foreign
government agencies and other institutions,
private
or public;
Payments of VETERANS benefits under U.S.
Veterans
Administration
Payments of benefits due or to become due to
any
person residing in the Philippines under the laws
of
the United States administered by the United
States
Veterans Administration
Social Security Act benefits
Payments of benefits received under the Social
Security Act of 1954 (RA 8282), as amended,
e.g.,
Maternity Benefits
GSIS benefits
Benefits received from GSIS under the GSIS Act
of
1937, as amended, and the retirement gratuity
received by government officials and employees
are
not taxable. [Sec. 32B6., NIRC; Sec. B1, RR 2-98]
Winnings, prizes and award, including those in
sports
competitions.
(a) All prizes and awards granted to athletes:
(1) in local and international sports competitions
and tournaments whether held in the
Philippines or abroad, AND
(2) sanctioned by their national sports
associations.
shall not be included in gross income and shall
be tax exempt. [Sec. 32 B7d, NIRC]
(b) Prizes and awards made primarily in
recognition of
charitable, literary, educational, artistic,
religious,
scientific, or civic achievement (clear sc) are not
taxable, provided:
(1) Recipient was selected without any action on
his part to enter the contest or proceeding;
and
(2) Recipient is not required to render
substantial
future services as a condition to receiving the
prize or award
(3) Under special laws
(a) Personal Equity and Retirement Account
(b) Others:
(1) Under R.A. 6657 (Comprehensive Agrarian
Reform Package Law), gain arising from the
transfer of agricultural property covered by
the law shall be exempt from capital gains
tax.
(2) Under R.A. 6938 (Cooperative Code of the
Philippines), as amended by R.A. 9520,
cooperatives transacting business with
both members and non-members shall
not be subject to tax on their transactions
with members. In relation to this, the
transactions of members with the
cooperative shall not be subject to any
PAGE 50
taxes and fees, including but not limited to

final taxes on members' deposits.
(3) Under R.A. 7916 (PEZA Law), as amended,
PEZA-registered enterprises are given
income tax holidays of six or four years
from the date of commercial operations,
depending on whether their activities are
considered pioneer or non-pioneer.
(4) Under R.A. 9178 (Barangay Micro Business
Enterprises Act of 2002), BMBEs shall be
exempt from income tax for income arising
from the operation of the enterprise.
DEDUCTIONS FROM GROSS INCOME
Deductions are items or amounts which the law

allows to be deducted from the gross of income
of a
taxpayer in order to arrive at taxable income.
In general, deductions or allowable deductions
are
business expenses and losses incurred which the
law
allows to reduce gross business income to arrive
at
net income subject to tax. (Sec. 65, Rev. Reg. No.
2)
Deductions are in the nature of an exemption
from
taxation; they are strictly construed against the
claimant, who must point to a specific provision
allowing them and who has the burden of
proving
that they falls within the purview of such
provision.
Thus, all deductions must be substantiated,
except
when the law dispenses with the records,
documents
or receipts to support the deductions.
If the exemption is not expressly stated in the
law,
the taxpayer must at least be within the purview
of
the exemption by clear legislative intent
(Commissioner of Customs v. Philippine
Acetylene Co.)
However, if there is an express mention in the
law or
if the taxpayer falls within the purview of the
exemption by clear legislative intent, the rule on
strict construction will not apply. (Commissioner
v.
AnoldusCaprentry Shop)
The purpose of deductions from gross income is
to
provide the taxpayer a just and reasonable tax
amount as the basis of income tax. It is because
many taxpayers spend adequate expenditures in
order to obtain a legitimate income.

Types of deductions
There are three (3) types of deductions from
gross
income:
(a) itemized deductions in Section 34(A) to (J)
and (M)
available to all kinds of taxpayers engaged in
trade or business or practice of profession in the
Philippines;
(b) optional standard deduction in Section 34(L)
available only to individual taxpayers deriving
business, professional, capital gains and passive
income not subject to final tax, or other income;
and
(c) thespecial deductions in Sections 37 and 38
of the
NIRC, and in special laws like the BOI law (E.O.
226).
General rules
(a) Deductions must be paid or incurred in
connection with the taxpayers trade, business
or
profession
(b) Deductions must be supported by adequate
receipts or invoices (except standard deduction)
(c) Additional requirement relating to withholding
Return of capital (cost of sales or services)
Income tax is levied by law only on income;
hence,
the amount representing return of capital should
be
deducted from proceeds from sales of assets and
should notbe subject to income tax.
Costs of goods purchased for resale, with proper
adjustment for opening and closing inventories,
are
deducted from gross sales in computing gross
income (Sec. 65, Rev. Regs. 2)
(a) Sale of inventory of goods by manufacturers
and
dealers of properties:
In sales of goods representing inventory, the
amount received by the seller consists of return
of
capital and gain from sale of goods or properties.
That portion of the receipt representing return of
capital is not subject to income tax. Accordingly,
cost of goods manufactured and sold (in the case
of manufacturers) and cost of sales (in the case
of
dealers) is deducted from gross sales and is
reflected above the gross income line in a profit
and loss statement.
(b) Sale of stock in trade by a real estate dealer
and
dealer in securities:
Real estate dealers and dealers in securities are
ordinarily not allowed to compute the amount
representing return of capital through cost of
sales. Rather they are required to deduct the
total
cost specifically identifiable to the real property
or
shares of stock sold or exchanged.
(c) Sale of services:
Their entire gross receipts are treated as part of
gross income.
Itemized deductions
These are enumerated in Section 34 of the NIRC.
Additional deductions are granted to insurance
PAGE 51
companies in Section 37, while losses from wash

sales of stock or securities by a dealer in
securities
are provided for in Section 38 of the NIRC. Other

itemized deductions could be granted under
general
or special laws, e.g. additional training expenses
are
allowed to enterprises registered with PEZA, BOI,
and SBMA.
Timing of Claiming Deductions:
A taxpayer has the right to deduct all authorized
allowances for the taxable year. As a rule, if he
does
not within any year deduct certain of his
expenses,
losses, interest, taxes or other charges, he
cannot
deduct them from the income of the next of any
succeeding year. (Sec. 76, Income Tax
Regulations).
Expenses
Business expenses deductible from gross income
include the ordinary and necessary expenditures
directly connected with or pertaining to the
taxpayers trade or business. The cost of goods
purchased for resale, with proper adjustment for
opening and closing inventories, is deducted
from
gross sales in computing gross income.
Includes:
(a) Salaries, wages, and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of fringe benefits furnished or granted by
the employer to the employee
(b) Travel expenses
(c) Rentals
(d) Entertainment, recreation and amusement
expenses
(e) Other expenses such as repairs or those
incurred
by farmers and other persons in agribusiness
Requisites for deductibility of business expenses.
(a) Ordinary AND necessary;

ORDINARY - normal and usual in relation to the
taxpayer's business and surrounding
circumstances; need not be recurring
NECESSARY - appropriate and helpful in the
development of taxpayer's business or are
proper
for the purpose of realizing a profit or minimizing
a loss
(b) Paid or incurred during the taxable year;
(c) Others: (not in the SC syllabus)
(1) Paid or incurred in carrying on or which are
directly attributable to the development,
management, operation and/or conduct of
the trade, business or exercise of profession;
(2) Substantiated by adequate proof
documented by official receipts or adequate
records, which reflect the amount of expense
deducted and the connection or relation of the
expense to the business/trade of the
taxpayer);
(3) Legitimately paid (not a BRIBE, kickback, or
otherwise contrary to law, morals, public
policy);
(4) If subject to withholding tax, the tax required
to be withheld on the expense paid or payable
is shown to have been properly withheld and
remitted to the BIR on time;
(5) Amount must be reasonable.
Note: The expenses allowable to a non-resident
alien or a foreign corporation consist of only such
expenses as are incurred in carrying on any
business
or trade conducted within the Philippines

exclusively.
(Sec. 77 RR 2)
COHAN Rule: This relief will apply if the taxpayer
has shown that it is usual and necessary in the
trade
to entertain and to incur similar kinds of
expenditures, there being evidence to show the
amounts spent and the persons entertained,
though
not itemized. In such a situation, deduction of a
portion of the expenses incurred might be
allowed
even if there are no receipts or vouchers.
Absence of
invoices, receipts or vouchers, particularly lack
of
proof of the items constituting the expense is
fatal to
the allowance of the deduction (Gancayco v.
Collector,1 SCRA 980).
Substantiation requirement
Sec. 34(A)(1)(b), NIRC: No deduction from gross
income shall be allowed unless the taxpayer
shall
substantiate with sufficient evidence, such as
official
receipts or other adequate records: (1) the
AMOUNT
of the expense being deducted, and (2) the
DIRECT
CONNECTION or relation of the expense being
deducted to the development, management,
operation and/or conduct of the trade, business
or
profession of the taxpayer.
When to ACCRUE expenses: all events test
states
that under the accrual method of accounting,
expenses are deductible in the taxable year in
which:
(1) all events have occurred which determine the
liability; and (2) the amount of liability can be
determined with reasonable accuracy.
Kinds of business expenses.
These are:
(1) Salaries, wages and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe
benefit tax which tax should have been paid
(Compensation for
(2) Travelling expenses
PAGE 52
(3) Cost of materials

(4) Rentals and/or other payments for use or
possession of property
(5) Repairs and maintenance
(6) Expenses under lease agreements
(7) Expenses for professionals
(8) Entertainment expenses
(9) Political campaign expenses
(10) Training expenses
(11) Others
Salaries, wages and other forms of
compensation for
personal services actually rendered, including
the
grossed-up monetary value of the fringe benefit
subjected to fringe benefit tax which tax should
have
been paid (Compensation for personal services
actually rendered)
(1) Given for personal services actually rendered
(2) Amount is reasonable
Bonuses are deductible when:

(a) made in good faith
(b) given as additional compensation for
personal
services actually rendered
(c) such payments, when added to the stipulated
salaries, do not exceed a reasonable
compensation for the services rendered
Travelling expenses
This include transportation expenses and meals
and
lodging (Sections 65 and 66, Rev. Reg. No. 2)
(1) Expenses must be reasonable and necessary.
(2) Must be incurred or paid while away from
home
Tax home is the principal place of business,
when
referring to away from home
(3) Incurred or paid in the conduct of trade or
business.
Note: However, necessary transportation
expenses of
the taxpayer (which are different from the
transportation expenses included in the term
travel
expenses) in its tax home are deductible.
Thus, a
taxpayer operating its business in Manila is
allowed
transportation expenses from its office to its
customers place of business and back. But the
transportation expenses of an employee from his
residence to its office and back are not
deductible as
they are considered personal expenses.
Cost of materials
Deductible only to the amount that they are
actually
consumed and used in operation during the year
for
which the return is made, provided that their
cost has
not been deducted in determining the net
income for
any previous year.
Rentals and/or other payments for use or
possession
of property
(1) Required as a condition for continued use or
possession of property.
(2) For purposes of trade business or profession.
(3) Taxpayer has not taken or is not taking title
to the
property or has no equity other than that of
lessee, user, or possessor.
Repairs and maintenance
(a) Incidental or ordinary repairs are deductible
Repairs which neither materially add to the value
of the property nor appreciably prolong its life,
but keep it in an ordinarily efficient working
condition, may be deducted as expenses,
provided the plant or property account is not
increased by the amount of such expenditure.
The life of the asset referred to is the probable,
normal, useful life for the purpose of the
allowance for the return of the capital
investment
not what the life that would have been if no
repairs had been made after the property was
damaged by a casualty. Since the repairs
prolonged the lives of the said vessels of
petitioners, the disallowance must be sustained.
(Visayan Transportation Co. v. CTA, CTA Case No.
1119, Sept. 30, 1964).
(b) Extraordinary repairs are not deductible

they
are capital expenditures
(1) Repairs which add material value to the
property or appreciably prolong its life
(2) Repairs in the nature of replacement, to the
extent that they arrest deterioration and
appreciably prolong the life of the property,
should be charged against the depreciation
reserves if such account is kept. (Sec. 68, Rev.
Regs. 2).
Expenses under lease agreements
Requisites for deductibility:
(1) Required as a condition for continued use or
possession;
(2) For purposes of the trade, business or
possession;
(3) Taxpayer has not taken or is not taking title
to the
property or has no equity other than that of
lessee, user, or possessor.
Expenses for professionals
Deductible in the year the professional services
are
rendered, not in the year they are billed,
provided
that the all events is present.
PAGE 53
All events testrequires:

(a) Fixing a right to income or liability to pay; and
(b) The availability of reasonably accurate
determination of such income or liability.
The all-events test does not demand that the
amount of income or liability be known
absolutely; it
only requires that a taxpayer has at its disposal
the
information necessary to compute the amount
with
reasonable accuracy, which implies something
less
than an exact or completely accurate amount.
(Commissioner v. Isabela Cultural Corporation,
GR.
172231, Feb. 12, 2007) check citation
A professional may claim as deductions the cost
of
supplies used by him in the practice of his
profession,
expenses paid in the operation and repair of
transportation equipment used in making
professional calls, dues to professional societies
and
subscriptions to professional journals.
(Mamalateo)
Entertainment expenses
Requisites for deductibility:
(1) Reasonable in amount.
(2) Paid or incurred during the taxable period.
(3) Directly connected to the development,
management, and operation of the trade,
business or profession of the taxpayer, or that
are
directly related to or in furtherance of the
conduct
thereof.
(4) Not to exceed such ceiling as the Secretary of
Finance prescribe (under RR 10-02, in no case to
exceed 0.50% of net sales for sellers of goods or
properties or 1% of net revenues for sellers of
services, including taxpayers engaged in the
exercise of profession and use or lease of
properties)
(5) Not incurred for purposes contrary to law,
morals,
public policy or public order.

(6) Must be substantiated with sufficient
evidence
such as receipts and/or adequate records.
Exclusions from Entertainment, Amusement and
Recreation (EAR) expenses:
(1) Expenses which are treated as compensation
or
fringe benefits for services rendered under an
employer-employee relationship
(2) Expenses for charitable or fund raising events
(3) Expenses for bona fide business meeting of
stockholders, partners or directors
(4) Expenses for attending or sponsoring an
employee to a business league or professional
organization meeting
(5) Expenses for events organized for promotion
marketing and advertising, including concerts,
conferences, seminars, workshops, conventions
and other similar events; and
(6) Other expenses of a similar nature.
Political campaign expenses
Amount expended for political campaign
purposes
or payments to campaign funds are not
deductible
either as business expenses or as contribution
(CTA
Case No. 695, April 30, 1969, citing Mertens)
Training expenses
BIR Ruling 102-97 (Sept. 29, 1997):
Under Section 30 of the Tax Code, as
implemented
by Sec. 20 of the Revenue Regulations No. 2,
organization and pre-operating expenses of a
corporation (including training expenses) are
considered as capital expenditures and are
therefore,
not deductible in the year they are paid or
incurred.
But taxpayers who incur these expenses and
subsequently enter the trade or business to
which
the expenditures relate can elect to amortize
these
expenditures over a period not less than sixty
(60)
months.
This rule, however, does not apply to a situation
where an existing corporation incurs these same
expenditures for the purpose of expanding its
business in a new line of trade, venture or
activity.
Others
(a) Expenses Allowable to Private Educational
Institutions:
(b) In addition to the expenses allowable as
deductions under the NIRC, a private proprietary
educational institution may at its OPTION, elect
either:
(1) To deduct expenditures otherwise considered
as capital outlays or depreciable assets
incurred during the taxable year for the
expansion of school facilities, OR
(2) To deduct allowances for depreciation thereof.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for
yearly
depreciation of the school facilities are allowed.
Advertising Expenses
The media advertising expenses which were
found to
be inordinately large and thus, not ordinary, and
which were incurred in order to protect the
taxpayers
brand franchise which is analogous to the

maintenance of goodwill or title to ones
property,
are not ordinary and necessary expenses but are
capital expenditures, which should be spread out
over a reasonable period of time. (CIR v. General
Foods (Phils.)Inc, GR No. 143672, April 24, 2003)
rtens)
Interest
PAGE 54
Requisites for deductibility.

(1) There is an indebtedness.
(2) The indebtedness is that of the taxpayer
(3) The indebtedness is connected with the
taxpayers trade, profession, or business.
(4) The interest must be legally due.
(5) The interest must be stipulated in writing.
(6) The taxpayer is LIABLE to pay interest on the
indebtedness.
(7) The indebtedness must have been paid or
accrued during the taxable year.
(8) The interest payment arrangement must not
be
between related taxpayers
(9) The interest must not be incurred to finance
petroleum operations.
(10) In case of interest incurred to acquire
property
used in trade, business or exercise of profession,
the same was nottreated as a capital
expenditure,
Limitation: The taxpayer's allowable deduction
for
interest expense shall be reduced by an amount
equal to 33% of the interest income subjected to
final
tax (see chapter on taxation of passive income
for
interest income); effective January 1, 2009.
Non-deductible interest expense.
(a) Interest paid in advance by the taxpayer who
reports income on cash basis shall only be
allowed as deduction in the year the
indebtedness
is paid.
(b) If the indebtedness is payable in periodic
amortizations, only the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed
as deduction in such taxable year.
(c) Interest payments made between related
taxpayers.
(d) Interest on indebtedness incurred to finance
petroleum exploration.
Related Taxpayers
(a) Between members of the family, i.e. brothers
and
sisters (whether by the whole or half-blood),
spouse, ancestor, and lineal descendants; or
(b) Except in case of distributions in liquidation,
between an individual and a corporation, where
the individual owns directly or indirectly more
than 50% of the outstanding stock of the
corporation
(c) Except in the case of distributions in
liquidation,
between two corporations where:
(1) Either one is a personal holding company of a
foreign personal holding company with
respect to the taxable year preceding the date
of the sale of exchange; and
(2) More than 50% of the outstanding stock of
each is owned, directly or indirectly, by or for
the same individual; or
(d) Between parties to a trust(1) Grantorand Fiduciary; or

(2) Fiduciary of a trust and fiduciary of another
trust if the same person is a grantor with
respect to each trust; or
(3) Fiduciaryand Beneficiary
Interest subject to special rules.
Interest paid in advance
(a) No deduction shall be allowed if within the
taxable year an individual taxpayer reporting
income on cash basis incurs an indebtedness on
which an interest is paid in advance through
discount or otherwise.
(b) But the deduction shall be allowed in the year
the
indebtedness is paid
Interest periodically amortized
If the indebtedness is payable in periodic
amortizations, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed as
deduction in such taxable year
Interest expense incurred to acquire property for
use in
trade/business/profession
At the option of the taxpayer, interest expense
on a
capital expenditure may be allowed as:
(1) A deduction in full in the year when incurred;
(2) A capital expenditure for which the taxpayer
may
claim only as a deduction the periodic
amortization of such expenditure.
Should the taxpayer elect to deduct the interest
payments against its gross income, the taxpayer
cannot at the same time capitalize the interest
payments. In other words, the taxpayer is not
entitled
to both the deduction from gross income and the
adjusted (increased) basis for determining gain
or
loss and the allowable depreciation charge.(
Paper
Industries Corp. v. Commissioner, 250 SCRA 434)
Reduction of interest expense/interest arbitrage
The taxpayer's allowable deduction for interest
expense shall be reduced by an amount equal to
33%
of the interest income subjected to final tax;
effective
January 1, 2009. (RA 9337)
This limitation is apparently intended to counter
the
tax arbitrage scheme where a taxpayer obtains
an
interest-bearing loan and places the proceeds of
such loan in investments that yield interest
income
PAGE 55
subject to preferential tax rate of 20% final

withholding tax. (Valencia and Roxas)
Taxes
Taxes Proper: Refers to national and local taxes;
Such tax must be:
(a) Paid or incurred within the taxable year;
(b) Paid or incurred in connection with the
taxpayers
trade, profession or business;
(c) Imposed directly on the taxpayer.
(d) Not specifically excluded by law from being
deducted from the taxpayers gross income.
Non-deductible taxes.
General Rule:All taxes, national or local, paid or
incurred during the taxable year in connection

with
the taxpayer's profession, trade or business, are
deductible from gross income
Exceptions:
(1) Philippine income tax, except Fringe Benefit
Taxes;
(2) Income tax imposed by authority of any
foreign
country, if taxpayer avails of the Foreign Tax
Credit (FTC)
(a) Exception to exception: When the taxpayer
does NOT signify his desire to avail of the tax
credit for taxes of foreign countries, the
amount may be allowed as a deductionfrom
gross income of citizens and domestic
corporationssubject to the limitations set forth
by law.
(3) Estate and donors taxes
(4) Percentage tax on stock transaction;
(5) Taxes assessed against local benefits of a
kind
tending to increase the value of the property
assessed (Special Assessments)
(6) Value Added Tax
(7) Fines and penalties
(8) Final taxes
(10) Import duties
(11) Business taxes
(12) Occupation taxes
(13) Privilege and license taxes
(14) Excise taxes
(15) Documentary stamp taxes
(16) Automobile registration fees
(17) Real property taxes
(18) Electric energy consumption tax under BP
36
Treatments of surcharges/interests/fines for
delinquency.
The amount of deductible taxes is limited to the
basic tax and shall not include the amount for
any
surcharge or penalty on delinquent taxes.
However,
interest on delinquent taxes, although not
deductible as tax, can be deducted as interest
expense at its full amount. (CIR v Palanca, 18
SCRA
496).
Although interest payment for delinquent taxes
is
not deductible as tax, the taxpayer is not
precluded
thereby from claiming said interest payment as
deduction as such. (CIR v. Vda. de Prieto, 1960)
Treatment of special assessment.
Special assessments and other taxes assessed
against local benefits of a kind tending to
increase
the value of the property assessed are
nondeductiblefrom
gross income.
Tax credit vis--vis deduction.
Tax credit amount allowed by law to reduce the
Philippine income tax due, subject to limitations,
on
account of taxes paid or accrued to a foreign
country
Tax Credit
Tax Deduction
Taxes are deductible
from the Phil. Income
tax itself
Taxes are deductible
from gross income in

computing the taxable
income
Effect: Reduces
Philippine income tax
liability
Effect: Reduces taxable
income upon which the
tax liability is calculated
Sources: Only foreign
income taxes may be
claimed as credits
against Philippine
income tax.
Sources: Deductible
taxes (e.g. business tax,
excise tax)
An amount subtracted from an individual's or
entity's
tax liability to arrive at the total tax liability. A
tax
credit reduces the taxpayer's liability, compared
to a
deduction which reduces taxable income upon
which
the tax liability is calculated. A credit differs from
deduction to the extent that the former is
subtracted
from the tax while the latter is subtracted from
income before the tax is computed.( CIR v.
Bicolandia
Drug Corp.)
The following may claim tax credits:
(1) Resident citizens
(2) Domestic corporations, which include all
partnerships except general professional
partnerships
(3) Members of general professional partnerships
(4) Beneficiaries of estates or trusts
The following may NOT claim tax credits:
PAGE 56
(1) Non-resident citizens

(2) Aliens, whether resident or non-resident
(3) Foreign corporations, whether resident on
nonresident
Note: Tax credits for foreign taxes are allowed
only
for income derived from sources outside the
Philippines. The above taxpayers are not entitled
to
tax credit; they are taxable only on income
derived
from Philippine sources.
Limitations on Tax Credit.
(1) [Per Country Limit]The amount of tax credit
shall
not exceed the same proportion of the tax
against
which such credit is taken, which the taxpayer's
taxable income from sources within such country
bears to his entire taxable income for the same
taxable year; and
(2) [Worldwide Limit]The total amount of the
credit
shall not exceed the same proportion of the tax
against which such credit is taken, which the
taxpayer's taxable income from sources without
the Philippines taxable bears to his entire
taxable
income for the same taxable year.
Formula:
Limit #1
Taxable
Income Per
Foreign
Country x
Phil. Income
Tax
=
Limit on
amount of
tax credit
(Per
Country
Limit)
World wide
Taxable
Income
Limit #2
Taxable
Income For
all Foreign
Countries x
Phil. Income
Tax
=
Limit on
amount of
tax credit
(World
Wide Limit)
World wide
Taxable
Income
Note: Computation of FTC: Limit #2 applies
where
taxes are paid to two or more foreign countries.
Allowable tax credit is the lower between the tax
credit computed under Limit #1 and that
computed
under Limit#2.
FTC Limitations lowest of the 3:
(1) Actual FTC
(2) For taxes paid to one foreign country
(3) For taxes paid to 2 or more foreign countries
Losses
(1) Loss must be that of the taxpayer (e.g.,
losses of
the parent corp. cannot be deducted by its
subsidiary);
(2) Actually sustained and charged off within the
taxable year;
(3) Incurred in trade, business or profession;
(4) Of property connected with the trade,
business, or
profession, if the loss arises from fires, storms,
shipwreck or other casualties, or from robbery,
theft, or embezzlement;
(5) Sustained in a closed and completed
transaction;
(6) Not compensated for by insurance or other
form
of indemnity;
(7) Not claimed as a deduction for estate tax
purposes;
(8) In case of casualty loss, filing of notice of loss
with
the BIR within 45 days from the date of the
event
that gave rise to the casualty; and
(9) The taxpayer must prove the elements of the
loss
claimed, such as the actual nature and
occurrence of the event and amount of the loss.
No loss is recognized in the following.
(1) Merger, consolidation, or control securities
(where
no gains are recognized either);
(2) Exchanges not solely in kind;
(3) Related taxpayers (see above (c) Interest

expense incurred to acquire property for use in
trade/business/profession)
(4) Wash sales;
(5) Illegal transactions
Other types of losses.
Capital losses
(1) Incurred in the sale or exchange of capital
assets
(allowable only to the extent of capital gains,
except for banks and trust companies under
conditions in Sec. 39 of NIRC where loss from
such sale is not subject to the foregoing
limitation);
(2) Resulting from securities becoming worthless
and which are capital assets (considered loss
from sale or exchange) on last day of the taxable
year ;
(3) Losses from short sales of property;
(4) Losses due to failure to exercise privileges or
options to buy or sell property.
Securities becoming worthless
(a) Loss in shrinkage in value of stockthrough
fluctuation in the market is not deductiblefrom
gross income. (To be deductible, the loss must be
actually suffered when the stock is disposed of.)
(b) Exception: If the stock of the corporation
becomes
worthless, the cost or other basis may be
deducted by its owner in the taxable year in
which
PAGE 57
the stock became worthless, provided a

satisfactory showing of its worthlessness be
made, as in the case of bad debts.
Losses on wash sales of stocks or securities
Wash Sale - a sale or other disposition of stock or
securities where substantially identical securities
(substantially the same as those disposed of) are
acquired or purchased (or there was an option to
acquire, and the acquisition or option should be
by
purchase or exchange upon which gain or loss is
recognized under the income tax law) within a
61-day
period, beginning 30 days before the sale and
ending 30 days after the sale
General rule: Not deductible from gross income
Exception: If by a dealer in securities in the
course of
ordinary business, it is deductible.
Wagering losses
Losses from wagering (gambling) are deductible
only to the extent of gains from such
transactions. A
wager is made when the outcome depends upon
CHANCE.
NOLCO (Net Operating Loss Carry Over)
Net operating loss (NOL)is the excess of
allowable
deductions over gross income for any taxable
year
immediately preceding the current taxable year.
NOLCO: The NOL of the business or enterprise
which
had not been previously offset as deduction from
gross income shall be carried over as a
deduction from
gross incomefor the next three (3) consecutive
taxable
years immediately following the year of such
loss,
provided however, that any net loss incurred in a
taxable year during which the taxpayer was
exempt
from income tax shall not be allowed as a

deduction.
(Sec. 34(3)(D), NIRC)
Exception: Mines other than oil and gas wells,
where a
net operating loss without the benefit of
incentives
provided for under EO No. 226 (Omnibus
Investments
Code) incurred in any of the first ten (10) years
of
operation may be carried over as a deduction
from
taxable income for the next five (5) years
immediately following the year of such loss.
Requisites for NOLCO:
(1) The taxpayer was not exempt from income
tax
the year the loss was incurred;
(2) There has been no substantial change in the
ownership of the business or enterprise wherein:
(a) AT LEAST 75% of nominal value of
outstanding issued shares is held by or on
behalf of the same persons; or
(b) AT LEAST 75% of the paid up capital of the
corporation is held by or on behalf of the same
persons.
Taxpayers Entitled to NOLCO
(1) Individuals engaged in trade or business or in
the
exercise of his profession (including estates and
trusts);
Note:An individual who avails of 40% OSD shall
not simultaneously claim deduction of NOLCO.
However, the three-year reglementary period
shall continue to run during such period
notwithstanding the fact that the aforesaid
taxpayer availed of OSD during the said period.
(2) Domestic and resident foreign corporations
subject to the normal income tax (e.g.,
manufacturers and traders) or preferential tax
rates under the Code (e.g., private educational
institutions, hospitals, and regional operating
headquarters) or under special laws (e.g.,
PEZAregistered
companies)
Note: Domestic and resident foreign corporations
taxed during the taxable year with Minimum
Corporate
Income Tax cannot enjoy the benefit of NOLCO.
However, the three-year period for the expiry of
he NOLCO is not interrupted by the fact that the
corporation is subject to MCIT during such
threeyear
period.
Other Losses:
(1) Abandonment lossesin petroleum operation
and
producing well.
(2) Losses due to voluntary removal of
buildingincident to renewal or replacements are
deductible from gross income.
(3) Loss of useful value of capital assetsdue to
charges
in business conditions is deductible only to the
extent of actual loss sustained (after adjustment
for improvement, depreciation and salvage
value)
(4) Losses from sales or exchanges of property
between related taxpayersare not recognized,
but
the gains are taxable.
Losses of farmersincurred in the operation of
farm
business are deductible.
Bad debts
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts
due
the taxpayer actually ascertained to be
worthlessand
the corresponding receivable should have been
written off or charged off within the taxable year
PAGE 58

(1) Valid and legally demandable debt due to the
taxpayer
(2) Debt is connected with the taxpayer's trade,
business or practice of profession;
(3) Debt was not sustained in a transaction
entered
into between related parties;
(4) Actually ascertained to be worthless and
uncollectible as of the end of the taxable year
(taxpayer had determined with reasonably
degree
of certainty that the claim could not be collected
despite the fact that the creditor took reasonable
steps to collect); and
(5) Actually charged off the books of accounts of
the
taxpayer as of the end of the taxable year
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the
uncollectibility of debt
Exceptions:
(1) Banks as creditors BSP Monetary Board
shall
ascertain the worthlessness and uncollectibility
of
the debt and shall approve the writing off
(2) Receivables from an insurance or surety
company
(as debtor) may be written off as bad debts only
when such company is declared closed due to
insolvency or similar reason
The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove
that
he exerted diligent efforts to collect:
(1) Sending of statement of accounts
(2) Collection letters
(3) Giving the account to a lawyer for collection
(4) Filing the case in court (Phil. Refining Corp. v.
CA,
G.R. No. 118794, May 8, 1996)
In ascertaining the debt to be worthless, it is not
enough that the taxpayer acted in good faith. He
must show that he had reasonably investigated
the
relevant facts from which it became evident, in
the
exercise of sound, objective business judgment,
that
there remained no practical, but only a vague
prospect that the debt would be paid (Collector
v.
Goodrich, 1967)
Rev. Reg. No. 5-1999:
Actually ascertained to be worthless
(1) Determination of worthlessness must depend
upon the particular facts and circumstances of
the case. A taxpayer may not postpone a bad
debt deduction on the basis of a mere hope of
ultimate collection or because of a continuance
of
attempts to collect, where there is no showing
that the surrounding circumstances differ from
those relating to other notes which were charged
off in a prior year
(2) Accounts receivable may be written off as

bad
debts even without conclusive evidence that
they
had definitely become worthless when:
(a) the amount is insignificant; and
(b) collection through court action may be more
costly to the taxpayer
Actually charged off from the taxpayers book of
accounts
Receivable which has actually become worthless
at
the end of the taxable year has been cancelled
and
written off. Mere recording in the books of
account
of estimated uncollectible accounts does not
constitute a write-off.
Effect of recovery of bad debts.
Tax Benefit Rule on Bad Debts
Bad debts claimed as deduction in the preceding
year(s) but subsequently recovered shall be
included
as part of the taxpayers gross income in the
year of
such recovery the extent of the income tax
benefit of
said deduction. Also called the equitable doctrine
of
tax benefit.
(1) Allowance must be reasonable
(2) Charged off during the taxable year from the
taxpayers books of accounts.
(3) Does not exceed the acquisition cost of the
property.
Methods of computing depreciation allowance.
(a) Straight-line costsalvage value
estimated life
(b) Declining balance cost depreciation x
Rate
estimated life
(c) Sum-of-the-year-digit
(SYD)
nth period x costsalvage
SYD
(d) Any other method
which may be
prescribed by the
Secretary of Finance
upon the
recommendation of
the CIR
Charitable and other contributions
(1) Actually PAID or made to the ENTITIES or
institutions specified by law;
(2) Made within the TAXABLE year.
(3) It must be EVIDENCED by adequate receipts
or
records.
(4) For Contributions Other than Money: The
amount
shall be BASED on the acquisition cost of the
PAGE 59
property (i.e., not the fair market value at the

time
of the contribution).
(5) For Contributions subject to the statutory
limitation: It must NOT EXCEED 10% (individual)
or 5% (corporation) of the taxpayers taxable
income before charitable contributions
Amount that may be deducted.
Kinds of Contributions.
(1) Contributions deductible in full;
(2) Contributions subject to the statutory limit.
Contributions Deductible in Full: (FoNG)

(a) Donations to the Government of the
Philippines, or
to any of its agencies, or political subdivisions,
including fully owned government corporations
(1) Exclusively to finance, provide for, or to be
usedin undertaking priority activitiesin
(YEHHES)
(a) Education
(b) Health
(c) Youth and sports development
(d) Human settlements
(e) Science and culture, and
(f) Economic development
(2) in accordance with a National Priority Plan
determined by NEDA (otherwise, subject to
statutory limit)
(b) Donations to Certain Foreign Institutions or
International Organizationswhich are fully
deductible in compliance with agreements,
treaties or commitments entered into by the
Government of the Philippines and the foreign
insgtutions or international organizations or in
pursuance of special laws
(c) Donations to Accredited Non-government
Organizations subject to conditions set forth in
RR No. 13-98 NGO means a non-stock
nonprofit
domestic corporation or organization:
(1) Organized and operated exclusivelyfor:
(a) scientific,
(b) research,
(c) educational,
(d) character-building and youth and sports
development,
(e) health,
(f) social welfare,
(g) cultural or
(h) charitable purposes, or
(i) a combination thereof,
(2) No part of the net income of which inures to
the benefit of any private individual
(3) Directly utilizes contributions for the active
conduct of the activities constituting the
purpose or function for which it is organized,
not later than 15th day of the month
following the close of its taxable year in
which contributions are received, unless an
extended period is granted by the Secretary
of Finance, upon recommendation of the CIR
(4) Administrative expense ,on an annual basis,
must not exceed 30% of total expenses for
the taxable year
(5) Upon dissolution, its assets would be
distributed to another accredited NGO
organized for a similar purpose or purposes,
OR to the State for public purpose, OR would
be distributed by a competent court of justice
to another accredited NGO to be used in
such manner as in the judgment of said court
shall best accomplish the general purpose
for which the dissolved organization was
organized.
Contributions subject to the Statutory Limit
(DNGS)
These contributions are not deductible in full as
specified by the law or such deduction has not
met
the requirements to be deducted in full.
Those made to:
(a) Governmentor any of its agencies or political
subdivisions exclusively for public
purposes(contributions for non-priority activities)
(b) Accredited domestic corporation or
associationsorganized exclusivelyfor
(1) religious
(2) charitable
(3) scientific
(4) youth and sports development
(5) cultural
(6) educational purposes or
(7) rehabilitation of veterans
(c) Social welfare institutions
(d) Non-government organizations: No part of
the net
income of which inures to the benefit of any
private stockholder or individual
Statutory Limit:
(a) 10% in the case of an individual (individual
donor), and
(b) 5% in the case of a corporation (corporate
donor),
of the taxpayer's/donors income derived from
trade, business or profession computed before
the
deduction for contributions and donations
The amount deductible is the actual contribution
or the statutory limit computed, whichever is
lower
Contributions to pension trusts
Contribution to a pension trust may be claimed
as
deduction as follows:
PAGE 60
(1) Amount contributed for the present/normal

service cost 100% deductible
(2) Amount contributed for the past service cost
1/10 of the amount contributed is deductible in

year
the contribution is made, the remaining balance
will be amortized equally over nine consecutive
years
General Rule: An employerestablishing or
maintaining
a pension trust to provide for the payment of
reasonable pensions to his employees shall be
allowed as a deduction, a reasonable amount
transferred or paid into such trust in excess of
the
contributions to such trust made during the
taxable
year.
Requisites for deductibility of payments to
pension
trusts.
(1) There must be a pension or retirement plan
established to provide for the payment of
reasonable pensions to employees;
(2) The pension plan is reasonable and
actuarially
sound;
(3) It must be funded by the employer;
(4) The amount contributed must no longer be
subject to the employers control or disposition;
and
(5) The payment has not theretofore been
allowed
before as a deduction.
Deductions under special laws.
(1) Special deductions for productivity bonus and
manpower training under the Productivity
Incentives Act of 1990
(2) Deductions for training expenses of qualified
jewelry enterprises (Jewelry Industry
Development
Act of 1998)
(3) Deductions under the Adopt-a-School Act of
1998
(4) Deductions under the Expanded Senior

Citizens
Act of 2003. (Domondon)
Optional standard deduction.
(a) Individuals, except non-resident aliens
(1) May be taken by an individual in lieu of
itemized deductions exceptthose earning
purely compensation income.
(2) If an individual opted to use OSD, he is no
longer allowed to deduct cost of sales or cost
of services.
(3) Amount: 40% of gross sales or gross
receipts(under RA 9504, effective July 6, 2008)
Requisites:
(1) Taxpayer is a citizen or resident alien;
(2) Taxpayers income is not entirely from
compensation;
(3) Taxpayer signifies in his return his intention
to
elect this deduction; otherwise he is considered
as having availed of the itemized deductions.
(4) Election is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years.
(b) Corporations, except non-resident foreign
corporations
The option to elect Optional Standard Deduction
granted is now granted to corporations
(domestic
and resident foreign corporations) by virtue of
RA
9504.
(1) The OSD is 40% of its gross income.
(2) The domestic and resident foreign
corporation
shall keep such records pertaining to his gross
income as defined in Section 32 of the NIRC
during the taxable year, as may be required by
the rules and regulations promulgated by the
Secretary of Finance upon recommendation of
the CIR.
(3) Corporations availing of OSD are still required
to submit their financial statements when they
file their annual ITR and to keep such records
pertaining to its gross income. (RR 2-2010).
(c) Partnerships
(1) General Co-Partnership
For purposes of taxation, the Code considers
general co-partnerships as corporations.
Hence, rules on OSD for corporations are
applicable to general co-partnerships.
(2) General Professional Partnerships (GPP)
(a) If the GPP availed of itemized deductions, the
partners are not allowed to claim the OSD
from their share in the net income because the
OSD is a proxy for all the items of deductions
allowed in arriving at taxable income. This
means that the OSD is in lieu of the items of
deductions claimed by the GPP and the items
of deduction claimed by the partners.
(b) If the GPP avails of OSD in computing its net
income, the partners comprising it can no
longer claim further deduction from their
share in the said net income for the following
reasons:
(1) The partners distributive share in the GPP
is treated as his gross income not his gross
sales/receipts and the 40% OSD allowed
to individuals is specifically mandated to
be deducted not from his gross income but
from his gross sales/receipts; and,
(2) The OSD being in lieu of the itemized
deductions allowed in computing taxable
income as defined under Section 32 of the
Tax Code, it will answer for both the items

PAGE 61
of deduction allowed to the GPP and its

partners.
(c) Since one-layer of income tax is imposed on
the income of the GPP and the individual
partners where the law had placed the
statutory incidence of the tax in the hands of
the latter, the type of deduction chosen by the
GPP must be the same type of deduction that
can be availed of by the partners.
Accordingly, if the GPP claims itemized
deductions, all items of deduction allowed
under Sec. 34 can be claimed both at the level
of the GPP and at the level of the partner in
order to determine the taxable income. On
the other hand, should the GPP opt to claim
the OSD, the individual partners are deemed
to have availed also of the OSD because the
OSD is in lieu of the itemized deductions that
can be claimed in computing taxable income.
(d) If the partner also derives other gross income
from trade, business or practice of profession
apart and distinct from his share in the net
income of the GPP, the deduction that he can
claim from his other gross income would
follow the same deduction availed of from his
partnership income as explained in the
foregoing rules. Provided, however, that if the
GPP opts for the OSD, the individual partner
may still claim 40% of its gross income from
trade, business or practice of profession but
not to include his share from the net income
of the GPP. (RR 2-2010)
Personal and additional exemption (R.A. No.
9504,
Minimum Wage Earner Law).
Basic personal exemptions
According to RA 9504 (effective July 6, 2008)
basic
personal exemption is Fifty thousand pesos
(P50,000) for each individual taxpayer,
regardless of
status, i.e., whether single, married or head of
the
family.
But note Sec 35(A) of NIRC - In the case of
married
individuals where only one of the spouses is
deriving
gross income, only such spouse shall be allowed
the
personal exemption.
Additional exemptions for taxpayer with
dependents
(a) An individual, whether single or married, shall
be
allowed an additional exemption of P25,000 for
each qualified dependent child (QDC), provided
that the total number of dependents for which
additional exemptions may be claimed shall not
exceed 4 dependents (depends on the number of
qualified dependent children)
(1) Married Individuals: Additional exemptions for
QDC are claimed by only one spouse.
Generally, the spouse who is the gross
compensation earner is the claimant of the
additional exemptions.
(2) Where the husband and wife are both
compensation income earners: the husband is
the proper claimant of the additional
exemptions EXCEPT if there is an express
waiver by the husband in favor of his wife, as
embodied in the application for registration
(BIR Form No. 1902) or in the Certificate of
Update of Exemption and of Employers and
Employees Information (BIR Form No. 2305),

whichever is applicable.
(3) When the spouses have business and/or
professional income only: either may claim the
additional exemptions at the end of the year.
(4) The employed spouse shall be automatically
entitled to claim the additional exemptions for
children in the following instances:
(a) spouse is unemployed
(b) spouse is a non-resident citizen deriving
income from foreign sources
(5) Legally separated spouses: Additional
exemptions can be claimed by the spouse with
custody of the child or children (but the total
amount for the spouses shall not exceed the
maximum of four). [Sec 35(B), NIRC]
(6) If the taxpayer should have additional
dependents during the taxable year, he may
claim the corresponding additional exemption,
as the case may be, in full for such year.
(b) Who is a dependent for purposes of
additional
exemptions?
(1) A taxpayers child, whether legitimate,
illegitimate or legally adopted child
(2) chiefly dependent for support upon on the
taxpayer
(3) living with the taxpayer
(4) not more than 21 years old, unmarried and
not
gainfully employed or
(5) regardless of age, is incapable of self-support
because of mental or physical defect. (Sec 35
B, NIRC)
Note:
Only children (not parents) may be considered
dependent for purposes of additional
exemptions.
The definition of the term dependent under
Section 35(B) of the NIRC now includes a
Foster Child or a child placed under planned
temporary substitute parental care by a Foster
PAGE 62
Parent or a Foster Family. (RMC No. 41-20i3,

Jan. 23, 2013)
(c) Who may claim personal exemptions?
(1) Citizens (whether resident or non-resident)
and resident aliens
(2) Non-resident aliens engaged in trade or
business are entitled personal exemptions
subject to reciprocity. (See below)
Status-at-the-end-of-the-year rule
Change of Status[Sec 35(C), NIRC]
(1) If taxpayer marries during taxable year,
taxpayer
may claim the corresponding BPE in full for such
year (i.e., no need to pro-rate the exemption).
(2) If taxpayer should have additional
dependent(s)
during taxable year, taxpayer may claim
corresponding AE in full for such year.
(3) If taxpayer dies during taxable year, his
estate
may claim BPE and AE as if he died at the close
of
such year.
(4) If during the taxable year
(a) spouse dies or
(b) any of the dependents dies or marries, turns
21 years old or becomes gainfully employed,
taxpayer may still claim same exemptions as if
the spouse or any of the dependents died, or
married, turned 21 years old or became
gainfully employed at the close of such year.
Note: When it comes to change of status, the

status
beneficial to the taxpayer is used for purposes of
claiming deductions as long as the taxpayer
achieved such status at any time during the
taxable
period.
Exemptions claimed by non-resident aliens
Non-resident aliens engaged in trade or business
are
entitled personal exemptions subject to
reciprocity.
It means that NRAETB shall be allowed a
personal
exemption only if the income tax law in his
country
grants allowance for personal exemptions to the
citizens and residents of the Philippines as
stipulated
in the reciprocity tax treaty with the Philippine
Government.
Limit of PE Allowed to NRAETB: An amount equal
to
the exemptions allowed by the non-resident
aliens
country to Filipino citizens not residing therein
but
deriving income therefrom, but not to exceed the
amount fixed by NIRC.[In other words, whichever
is
lower]
Items not deductible.
General rule: In determining deductions, one of
the
general rules (see above) is that deductions
must be
paid or incurred in connection with the
taxpayers
trade, business or profession. Capital
expenditures
(e.g. acquisition cost of a building) are also not
deductible, because these are not expenses, but
form part of assets.
In computing taxable net income, no deduction
shall
be allowed in respect to:
(1) Personal, living or family expenses (note:
they are
not deductible from compensation and
business/professional income under Section
24(A), NIRC)
(2) Any amount paid out for new buildings or for
permanent improvements, or betterments made
to increase the value of any property or estate
(3) Any amount expended in restoring property
or in
making good the exhaustion thereof for which an
allowance [for depreciation or depletion] is or
has been made
(4) Premiums paid on any life insurance policy
covering the life of any officer, employee, or any
person financially interested in the trade or
business carried on by the taxpayer, individual
or
corporate, when the taxpayer is directly or
indirectly a beneficiaryunder such policy
(5) Interest expense and bad debts between
related
parties (See Sec. 36(B), NIRC).
(6) Losses from sales or exchanges of property
betweenrelated taxpayers.
(7) Non-deductible interest should the taxpayer
elect to deduct interest payments against its
gross income, he cannot at the same time
capitalize such interest and claim depreciation
on the undepreciated cost which includes the

interest. (PICOP v. Commissioner, G.R. No.
106949-50, Dec. 1, 1995)
(8) Non deductible taxes
(9) Non-deductible losses
(10) Losses on Wash Sales (except if by dealer in
securities in ordinary course of
(11) business
EXEMPT CORPORATIONS
These are:
(1) Proprietary Educational Institutions and
hospitals
(2) Government owned and controlled
corporations
(3) Others
Proprietary Educational Institutions and hospitals
By way of exception, proprietary educational
institutions and hospitals are liable for net
income at
a rate of only ten percent (10%).
(See Tax on Domestic Corporations, Tax on
Proprietary Educational Institutions and
Hospitals)
Government owned and controlled corporations
PAGE 63
All corporations, agencies, or instrumentalities

owned or controlled by the Government are
subject
to income tax, except:
(1) GSIS
(2) SSS
(3) PHIC
(4) Local water districts (LWDs)
(5) PCSO
(See Tax on Domestic Corporations, Tax on
Government-Owned or Controlled Corporations,
Agencies or Instrumentalities)
Others (CREB-CLEF-SMB)
The following organizations shall not be taxed in
respect to income received by them as such:
(1) Labor,agricultural or horticultural organization
not organized principally for profit
(2) Mutual savings bank not having a capital
stock
represented by shares, and cooperative bank
without capital stock organized and operated for
mutual purposes and without profit
(3) A Beneficiary society, order or association,
operating for the exclusive benefit of the
members
such as a fraternal organization operating under
the lodge system, or mutual aid association or a
non-stock corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to the
members of such society, order, or association,
or
non-stock corporation or their dependents
(4) CEMETERY company owned and operated
exclusively for the benefit of its members
(5) Non-stock corporation or association
organized
and operated exclusively for Religious,
charitable,
scientific, athletic, orcultural purposes, or for the
rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any
specific person
(6) Business league chamber of commerce, or
board
of trade, not organized for profit and no part of
the net income of which inures to the benefit of
any private stock-holder, or individual
(7) Civic leagueor organization not organized for
profit but operated exclusively for the promotion

of social welfare
(8) A non-stock and nonprofitEducational
institution
(9) GovernmentEducational institution
(10) Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely of
assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses and
(11) Farmers', fruit growers', or like association
organized and operated as a Sales agentfor 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;
Note:
(a) Notwithstanding the exemptions, income of
whatever kind and character of the
enumerated 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.
(b) RA 9178 Act to Promote the Establishment of
Barangay Micro Business Enterprises (BMBEs)
implemented by DO 17-04, April 20, 2004
(1) BMBEs shall be exempt from income tax
for income arising from the operations of
the enterprise.
(2) BMBE is any business entity or enterprise
engaged in the production, processing or
manufacturing of products or
commodities, including agro-processing
trading and services, whose total assets
including those arising from loans but
exclusive of land on which the particular
business entitys office, plant and
equipment are situated, shall not be more
than P3M.
(c) Recreational Clubs - RMC 35-2012 (August 3,
2012) clarifies taxability of clubs organized
exclusively for pleasure, recreation and other
non profit purposes (recreational clubs).
Income from whatever sources including but
not limited to membership fees, assessment
dues, rental income, and service fees are
subject to income tax and VAT.
TAXATION OF RESIDENT CITIZENS,
NONRESIDENT
CITIZENS AND RESIDENT ALIENS
Summary Table for Taxation of Individuals (all
individual taxpayers, including non-resident
aliens)
Classification Taxable
Income
Basic
Personal
Exemption
Additional
Personal
Exemption
Tax
Rates
Resident
Citizen
Income
from
sources
within and
outside
the
Philippines
Allowed Allowed 5%32%

PAGE 64
Classification Taxable
Income
Basic
Personal
Exemption
Additional
Personal
Exemption
Tax
Rates
NonResident
Citizen
Income
from
sources
within the
Philippines
Resident
Alien
Income
from
sources
within the
Philippines
Nonresident
Alien
Engaged in
Trade or
Business
Income
from
sources
within the
Philippines
Lower
amount
between
PE
allowed to
Filipinos in
the foreign
country
where he
resides vs.
PE in the
Philippines
No
specific
provision
5%32%
Nonresident
Alien Not
Engaged in
Trade or
Business
Income
from
sources
within the
Philippines
Not
allowed
Not
allowed
25%
GENERAL RULE THAT RESIDENT CITIZENS ARE TAXABLE
ON INCOME FROM ALL SOURCES WITHIN AND
WITHOUT
THE PHILIPPINES
General rule: A Filipino resident citizen is taxable

on
income from all sources (within and without the
Philippines)
(a) Non-resident citizens: A non-resident citizen

is
taxable only on income derived from sources
within the Philippines.
A non-resident citizen is a Filipino citizen who:
(1) Establishes to the satisfaction of the CIR the
fact of his physical presence abroad with a
definite intention to reside therein
(2) Leaves the Philippines during the taxable
year
to reside abroad (as immigrant or for
employment on a permanent basis)
(3) Works and derives income from abroad and
whose employment requires him to be present
abroad most of the time during the taxable year
(4) Has been previously considered as a
nonresident
and arrives in the Philippines at any
time during the taxable year to reside here
permanently (only with respect to his income
from sources abroad until the date of his
arrival in the country)
(b) Other considerations:
(1) A Filipino citizen working and deriving abroad
as an Overseas Contract Worker is taxable
only on income from sources WITHIN the
Philippines.
(a) OCW refers to Filipino citizens in foreign
countries, who are physically present in a
foreign country as a consequence of their
employment in that country. Their salaries
and wages are paid by an employer abroad
and is not borne by an entity or person in
the Philippines. They must be duly
registered with the Philippine Overseas
Employment Administration (POEA) with
valid Overseas Employment Certificate
(OEC).
(b) An OCWs income arising out of his
overseas employment is exempt from
income tax.
(2) A resident alien or non-resident alien is
taxable only on income from sources
WITHIN the Philippines.
(a) A resident alien is an individual whose
residence is in the Philippines and who
is not a Filipino citizen.
(b) A non-resident alien is an individual
whose residence and citizenship is not
in the Philippines.
(1) An alien actually present in the
Philippine who is not a mere
transient or sojourner is a resident of
the Philippines for purposes of the
income tax.
(2) Whether he is a transient or not is
determined by his intentions with
regard to the length and nature of
his stay. A mere floating intention
indefinite as to time, to return to
another country is not sufficient to
constitute him a transient.
(3) If he lives in the Philippines and has
no definite intention to stay, he is a
resident.
(4) One who comes to the Philippines
for a definite purpose which, in its
nature, may be promptly
accomplished is a transient.
(5) But if his purpose is of such a nature
that an extended stay may be
necessary for its accomplishment,
and to that end the alien makes his
home temporarily in the Philippines,
he becomes a resident, though it
may be his intention at all times to

return to his domicile abroad when
the purpose of which he came has
been consummated or abandoned.
(Sec. 5, RR No.2)
PAGE 65
(c) In general, a non-resident alien individual

who
shall come to the Philippines and stay therein for
an aggregate period of more than 180 days
during any calendar year shall be deemed a
nonresident
alien doing business in the Philippines.
(1) Intended Stay in the Philippines:
Up to 180 days NRANETB
More than 180 days up to 2 years NRAETB
Greater than 2 years Resident alien
TAXATION ON COMPENSATION INCOME
Income arising from an ER-EE relationship. It

means
all remuneration for services performed by an EE
for
his ER, including the cash value of all
remuneration
paid in any medium other than cash. (Sec.
78(A)). It
includes, but is not limited to salaries and wages,
commissions, tips, allowances, bonuses, Fringe
Benefits of rank and file EEs and other forms of
compensation.
Inclusions
(1) Monetary compensation If compensation is
paid
in cash, the full amount received is the measure
of
the income subject to tax.
(a) Regular salary/wage
(1) Salary earnings received periodically for a
regular work other than manual labor,
such as monthly salary of an employee
(2) Wages all remuneration (other than fees
paid to a public official) for services
performed by an employee for his
employer, including the cash value of all
remuneration paid in any medium other
than cash. [Sec. 78A, NIRC]
(b) Separation pay/retirement benefit not
otherwise exempt
(1) Retirement Pay a lump sum payment
received by an employee who has served a
company for a considerable period of time
and has decided to withdraw from work
into privacy. [RR 6-82, Sec. 2b]
General rule: retirement pay is taxable
Exceptions:
(a) SSS or GSIS retirement pays.
(b) Retirement pay (R.A. 7641) due to old age
provided the following requirements are
met:
(i) The retirement program is approved by
the BIR Commissioner;
(ii) It must be a reasonable benefit plan.
(fair and equitable)
(iii) The retiree should have been employed
for 10 years in the said company;
(iv) The retiree should have been 50 years
old or above at the time of retirement;
and
(v) It should have been availed of for the
first time.
(2) Separation pay taxable if voluntarily
availed of. It shall not be taxable if
involuntary i.e. Death, sickness, disability,
reorganization /merger of company and
company at the brink of bankruptcy or for
any cause beyond the control of the said

official or employee
(c) Bonuses, 13th month pay, and other benefits
not exempt
(1) Tips and Gratuities those paid directly to
the employee (usually by a customer of
the employer) which are not accounted
for by the employee to the employer.
(taxable income but not subject to
withholding tax) (RR NO. 2-98, Sec.
2.78.1)
(2) Thirteenth month pay and other benefits Not taxable if the total amount received is
P30,000 or less. Any amount exceeding
P30,000 is taxable. (Sec. 32 (7)e, NIRC)
(3) Overtime Pay premium payment
received for working beyond regular hours
of work which is included in the
computation of gross salary of employee.
It constitutes compensation.
(d) Directors fees
Fees received by an employee for the
services rendered to the employer including a
directors fee of the company, fees paid to the
public officials such as clerks of court or
sheriffs for services rendered in the
performance of their official duty over and
above their regular salaries.
(2) Nonmonetary compensation - If services are
paid
for in a medium other than money, the fair
market value of the thing taken in payment is
the
measure of the income subject to tax.
(a) Fringe benefit not subject to tax
(See Chapter on Gross Income for the
discussion of Taxable and Non-taxable fringe
benefits)
If the recipient of the fringe benefits is a rank
and file employee, and the said fringe benefit
is not tax-exempt, then the value of such
fringe benefit shall be considered as part of
the compensation income of such employee
subject to tax payable by the employee.
(Domondon)
Exclusions
(1) Fringe benefit subject to tax
PAGE 66
(See Chapter on Gross Income for the discussion

of Taxable and Non-taxable fringe benefits)
Where the recipient of the fringe benefit is not a
rank and file employee, and the said benefit is
not
tax-exempt, then the same shall not be included
in the compensation income of such employee
subject to tax. The fringe benefit [tax] is instead
levied upon the employer, who is required to
pay.
(Domondon)
Convenience of the ER Rule
If meals, living quarters, and other facilities and
privileges are furnished to an employee for the
convenience of the employer, and incidental to
the
requirement of the employees work or position,
the
value of that privilege need not be included as
compensation (Henderson v. Collector).
(2) De minimis benefits
(a) Facilities or privileges of relatively small
value
furnished by an employer to his employees
and are as a means of promoting the health,
goodwill, contentment, or efficiency of his
employees.
(b) These are exempt from fringe benefit tax and

compensation income tax.
(3) 13th month pay and other benefits and
payments
specifically excluded from taxable compensation
income
(a) Gross benefits received by employees of
public
and private entities provided that the total
exclusion shall not exceed P30,000 (amounts
in excess are considered compensation
income)
(b) Benefits include:
(1) Benefits received by government
employees under RA 6686
(2) Benefits received by employees pursuant
to PD 851 (13th Month Pay Decree)
(3) Benefits received by employees not
covered by PD 851 as amended by
Memorandum Order No. 28; and,
(4) Other benefits such as productivity
incentives and Christmas bonus
Deductions
(1) Personal exemptions and additional
exemptions
(See the Chapter on Deductions for the full
discussion of Personal and additional
exemptions)
(a) Basic Personal Exemptions
According to RA 9504 (effective July 6, 2008)
basic personal exemption is Fifty thousand
pesos (P50,000) for each individual taxpayer,
regardless whether single, married or head of
the family.
(b) Additional Exemptions (AE)- depends on the
number of qualified dependent children
Amount allowed as a deduction P25,000
per dependent child, but not to exceed four
children (RA 9504)
(2) Health and hospitalization insurance
(a) Premium Paid on Health or Hospitalization
Insurance [Sec.34 (M)]
(b) Amount of premium paid on health and/or
hospitalization by an individual taxpayer (head
of family or married), for himself and members
of his family during the taxable year.
Requisites for Deductibility
(1) Insurance must have actually been taken
(2) The amount of premium deductible does not
exceed P2,400 per family or P200 per month
whichever is lower during the taxable year.
(3) That said family has a gross income of not
more
than P250,000 for the calendar year.
(4) In case of married individual, only the spouse
claiming additional exemption shall be entitled
to this deduction.
Note: The spouse claiming the additional
exemptions for qualified dependent children
shall be
the same spouse to claim the deductions for
premium payments.
The following may avail of the deduction
(1) Individual taxpayers earning purely
compensation
income during the year.
(2) Individual taxpayer earning business income
or in
practice of his profession.
(a) Taxation of compensation income of a
minimum wage earner
(1) Definition of Statutory Minimum Wage
Statutory minimum wage earner shall
refer to rate fixed by the Regional
Tripartite Wage and Productivity Board,
as defined by the Bureau of Labor and

Employment Statistics (BLES) of the
Department of Labor and Employment.
(Sec.22 GG, as amended by RA 9504)
(2) Definition of Minimum Wage Earner
Minimum wage earner shall refer to a
worker in the private sector paid the
statutory minimum wage, or to an
employee in the public sector with
compensation income of not more than
the statutory minimum wage in the
nonagricultural
sector where he/she is
PAGE 67
assigned. (Sec.22 HH, as amended by RA

9504)
The minimum wage shall be exempt from
the payment of income tax on their taxable
income:Provided, further, That the holiday
pay, overtime pay, night shift differential
pay and hazard pay received by such
minimum wage earners shall likewise be
exempt from income tax
(3) Income also subject to tax exemption:
holiday pay, overtime pay, night shift
differential, and hazard pay
Compensation income including overtime
pay, holiday pay and hazard pay, earned
by minimum wage earners who has no
other returnable income are NOT taxable
and not subject to withholding tax on
wages (RA 9504)
TAXATION OF BUSINESS INCOME/INCOME FROM
PRACTICE
OF PROFESSION
All income obtained from doing business and/or

engaging in the practice of a profession shall be
included in the computation of taxable income.
TAXATION OF PASSIVE INCOME
Passive income subject to final tax

Final tax means tax withheld from source, and
the
amount received by the income earner is net of
the
tax already. The tax withheld by the income
payor is
remitted by him to the BIR. The income having
been
tax-paid already, it need not be included in the
income tax return at the end of the year. These
passive income items are as follows:
(1) Interest income
(2) Royalties
(3) Dividends from domestic corporations
(4) Prizes and other winnings
Interest income
(a) on any currency bank deposit, yield or any
other
monetary benefit from deposit substitutes, trust
funds and similar arrangements - 20% final tax
(b) under the expanded foreign currency deposit
system (EFCDS) - 7.5% final tax for residents,
exempt if non-residents
(c) Treatment of income from long-term deposits
On long-term deposit or investment certificates
(LTDIC) in banks (e.g., savings, common or
individual trust funds, deposit substitutes,
investment management accounts and other
investments, which have maturity of 5 years or
more) exempt
Should LTDIC holder pre-terminate LTDIC before
the 5th year, a final tax shall be imposed on the
entire income based on the remaining maturity:
4 years to less than 5 years 5%
3 years to less than 4 years 12%
less than 3 years 20%

Royalties
(See summary table)
Dividends from domestic corporation
(a) cash and/or property dividends actually or
constructively received by an individual from
(1) a domestic corporation
(2) a joint stock company
(3) insurance or mutual fund companies
(4) regional operating headquarters of
multinational companies
(b) share of an individual in the distributable net
income after tax of a partnership (except a
general professional partnership) of which he is a
partner
(c) share of an individual member or co-venturer
in
the net income after tax of an association, a joint
account, or a joint venture or consortium taxable
as a corporation
(d) RATE:
(1) 10%for residents (RC, RA) and non-resident
citizens (NRC);
(2) 20% for NRAETB(non-resident aliens engaged
in trade or business)
(e) A stock dividend representing the transfer of
surplus to capital account shall not be subject to
tax.
(f) However, if a corporation cancels or redeems
stock issued as a dividend at such time and in
such manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a
taxable dividend,the amount so distributed in
redemption or cancellation of the stock shall be
considered as taxable income to the extent that
it
represents a distribution of earnings or profits.
(Sec. 73B, NIRC)
(1) In other words, stock dividends are generally
not subject to tax as long as there are no
options in lieu of the shares of stock.
(2) On the other hand, a stock dividend
constitutes income if it gives the shareholder
an interest different from that which his
former stockholdings represented.
Prizes and other winnings
(1) Winnings, except Philippine Charity
sweepstakes
/ lotto winnings 20%
(2) Prizes exceeding P10,000 20%
PAGE 68
Prize, differentiated from winnings

A prize is the result of an effort made (e.g., prize
in a
beauty contest), while winnings are the result of
a
transaction where the outcome depends upon
chance (e.g., betting).
Summary Table of Rates
(Includes NRAETB and NRANETB)
Section 24(B). Final Tax Rates on Certain Passive
Income from Philippine sources
(1) INTEREST, ROYALTIES, PRIZES AND OTHER
WINNINGS Citizens,
Residents
NRAETB NRANETB
(a) Interest from any currency bank deposit 20%
20% 20%
(b) Yield or any other monetary benefit from
deposit substitute 20% 20% 20%
(c) Yield or any other monetary benefit from trust
funds and similar
arrangements
20% 20% 20%
(d) Royalties, in general (other than royalties

described in letter e) 20% 20% 20%
(e) Royalties on books as well as other literary
works and musical
compositions
10% 10% 25%
(f) Prizes exceeding P10,000 20% 20% 25%
(g) Other winnings (other than Philippine Charity
Sweepstakes and
Lotto winnings)
20% 20% 25%
(h) Interest incomes received from a depositary
bank under expanded
foreign currency deposit system
7 1/2%
Note: NRC
Exempt
(RR 1-2011)
Exempt Exempt
(i) Interest income from long-term deposit or
investment evidenced by
certificates prescribed by BSP. If
preterminatedbefore fifth year, a
final tax shall be imposed based on remaining
maturity:
(a) 4 years to less than 5 years
(b) 3 years to less than 4 years
(c) Less than 3 years
Exempt
5%
12%
20%
Exempt
5%
12%
20%
25%
25%
25%
25%
(2) CASH AND/OR PROPERTY DIVIDENDS Citizens,
Residents
NRAETB NRANETB
(a) Cash and/or property dividends actually or
constructively received
from a domestic corp. or from a joint stock co.,
insurance or mutual
fund companies and regional operating
headquarters of
multinational companies (beginning January 1,
2000)
10%
20%
25%
(b) Share of an individual in the distributable net
income after tax of a
PARTNERSHIP (other than a general professional
partnership)
(beginning January 1, 2000)
10%
20%
25%
(c) Share of an individual in the net income after
tax of an
ASSOCIATION, a JOINT ACCOUNT, or a JOINT
VENTURE or
CONSORTIUM taxable as a corporation, of which
he is a member or
a co-venturer (beginning January 1, 2000)
10%
20%
25%
(a) For interest from foreign currency loans
granted
by FCDUs to residents other than Offshore
Banking Units (OBUs) or other depository banks

under the expanded system tax rate is 10% if
payors are RESIDENTS, whether individuals or
corporations.
(b) For interest from foreign currency loans
granted
by OBUs to residents other than OBUs or local
commercial banks, including branches of foreign
banks that may be authorized by the BSP to
transact business with OBUs - tax rate is 10% if
payors are RESIDENTS, whether individuals or
corporations.
PAGE 69
(c) Gross income from all sources within the

Philippines derived by non-resident
cinematographic film owners, lessors or
distributors tax rate is 25% if payee is: (a)
nonresident
alien individual, or (b) non-resident foreign
corporation. The term cinematographic films
includes motion picture films, films, tapes, discs
and other such similar or related products.
(d) Informers reward given to persons who
voluntarily
provide definite and sworn information that lead
to or was instrumental in the discovery of fraud
or
violation of the provisions of the NIRC or special
laws being administered by the BIR and resulted
in the actual recovery or collection of revenues,
surcharges and fees and/or the conviction of the
guilty party or parties, and/or the imposition of
any fine or penalty or the actual collection of a
compromise amount, in case of amicable
settlement, shall be subject to income tax,
collected as a final withholding tax, at the rate of
10%, pursuant to Sec. 282 of the NIRC (RR 162010).
Passive income not subject to tax
(1) Interest income from long-term deposit or
investment in the form of savings, common or
investments evidenced by certificates in such
form prescribed by the BSP shall be exempt from
tax
But should the holder of the certificate
preterminate
the deposit or investment before the
5th year, a final tax shall be imposed on the
entire
income and shall be deducted and withheld by
the depository bank from the proceeds of the
long-term deposit or investment certificate
based
on the remaining maturity thereof:
(a) Four (4) years to less than five (5) years - 5%;
(b) Three (3) years to less than four (4) years 12%; and
(c) Less than three (3) years - 20%.
(2) Any income of nonresidents, whether
individuals
or corporations, from transactions with
depository
banks under the expanded system shall be
exempt from income tax.
TAXATION OF CAPITAL GAINS
Income from sale of shares of stock of a

Philippine
corporation
(a) Shares traded and listed in the stock
exchange
exempt
The transaction is exempt from income tax
regardless of the nature of business of the seller
or transferor. However, it is subject to the onehalf

of one percent (1/2 of 1%) stock transaction tax
imposed under Sec. 127(A) of the Tax Code
based
on the gross selling price or gross value in
money
of the shares of stock sold or transferred.
(b) Shares not listed and traded in the stock
exchange subject to final tax
On sale, barter, exchange or other disposition of
shares of stockof a domestic corporation not
listed
and traded through a local stock exchange, held
as
a capital asset:
On the net capital gain:
(1) Not over P100,000 = Final Tax of 5%
(2) On any amount in excess of P100,000 = plus
Final Tax of 10% on the excess
Key Definitions
(a) Net capital gain: selling price less cost
(b) Selling price: consideration on the sale OR
fair
market value of the shares of stock at the time of
the sale, whichever is higher
(c) Cost: original purchase price
Income from the sale of real property situated in
the
Philippines
What property covered
Property located in the PH classified as capital
assets
What transactions covered
Sales, exchanges, or other disposition of real
property (classified as capital assets), including
pacto de retro sales and other forms of
conditional
sales of the following: citizens, resident aliens,
NRAETB, NRANETB, domestic corporations.
Tax rate
General rule:6% ofwhichever is higher
(a) Gross selling price, or
(b) Fair market value (determined in accordance
with
Sec. 6(E)).
Except
(1) In case of sales made to the government,
any of its
political subdivisions or agencies, or to GOCCs, it
can be taxed either:
(a) Under Sec. 24(C)(1) 6% CGT, or
(b) Under Sec. 24(A), at the option of the
taxpayer.
(2) In case of the sale of or disposition of their
principal
residence by natural persons
(a) Requirements:
PAGE 70
(1) Sale or disposition by a natural person of

his principal residence,
(2) The proceeds of which is fully utilized in
acquiring/constructing a new principal
residence,
(3) Such acquisition/construction taking
place within 18 calendar months from the
date of sale or disposition,
(4) The taxpayer notifies the Commissioner
within 30 days from the sale/disposition
through a prescribed return of his
intention to avail of the exemption,
(5) The tax exemption can only be availed of
once every 10 years.
(b) Tax treatment: Exempt from capital gains tax
(CGT). If there is no full utilization of the
proceeds of sale or disposition, the portion of

the gain presumed to have been realized
from the sale or disposition shall be subject
to CGT.
(c) How taxable portion and tax determined:
[(
)] [
]
(1) The historical cost or adjusted basis of the
real
property sold or disposed shall be carried over to
the new principal residence built or acquired.
(2) Computation for the basis of new principal
residence:
Historical cost of old principal residence
XXX
Add: Additional cost to acquire new
principal residence*
XXX
Adjusted cost bases of the new principal
residence
XXX
*Additional cost to acquire new principal
residence:
Cost to acquire new principal residence XXX
Less: Gross selling price of old principal
residence
(XXX)
Additional cost to acquire new principal
residence
XXX
Income from the sale, exchange, or other

disposition
of other capital assets
Other properties shall be subject to income tax
(1) At the graduated income tax rates, if the
seller is an
individual;
(a) Long-term capital gains: only 50% is
recognized.
(b) Short-term capital asset transactions: 100%
subject to tax. (Sec. 39(B))
Determination of whether short- or long-term:
If held for <12 mos, then short-term.
Otherwise, long-term.
(2) At 30% corporate income tax, if the seller is a
corporation.
(a) Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties
held by
a taxpayer, whether or not connected with his
trade
or business, and which are not included among
the
real properties considered as ordinary assets
under
Section 39(A)(1) of the NIRC.
Ordinary assets shall refer to all real properties
specifically excluded from the definition of
capital
assets under Section 39(A)(1) of the NIRC,
namely:
(1) Stock in trade of a taxpayer or other real
property
of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close
of the taxable year; or
(2) Real property held by the taxpayer primarily
for
sale to customers in the ordinary course of his
trade or business; or
(3) Real property used in trade or business (i.e.,
buildings and/or improvements) of a character
which is subject to the allowance for depreciation
provided for under Sec. 34(F) of the Code; or
(4) Real property used in trade or business of the
taxpayer.
Summary Tables of Rates

(Tables include NRAETB and NRANETB)
Section 24(C).Capital Gains Tax from Sale of
Shares
of Stock of a domestic corporation NOT TRADED
in
the Stock Exchange
RES/CIT NRAETB NRANETB
Tax base: Net
Capital Gain
Tax rate: Not
over P100,000
Amount in
excess of
P100,000
5%
10%
5%
10%
5%
10%
Section 24(D).Capital Gains Tax from Sale of Real
Property Classified as Capital Asset
RES/CIT NRAETB NRANETB
Tax base: Gross
selling price or
current fair
market value,
whichever is
higher
Tax rate: 6% 6% 6%
PAGE 71
Category of Income
Resident Non-Resident
CITIZEN ALIEN CITIZEN NRAETB NRANETB
All sources
Within the
Philippines
Within the
Philippines
Within the
Philippines
Within the
Philippines
(1) Compensation / Business / Profession
(2) Prizes of P10,000 or less
Based on Taxable (i.e, Net) Income
Schedular Income Tax Rates (Sec. 24, NIRC)
(i.e, 5% to 32%)
GIW 25%
Not
Applicable
(3) Interest from any currency bank
deposit , etc., Royalties (other than
from books, literary works and musical
compositions), Winnings / Prizes
(except prizes P10,000 and below)
Gross Income Within the Philippines (GIW) 20%
Final
Withholding Tax
(4) Royalties from books, literary works,
musical compositions
GIW 10% Final Withholding Tax
(5) Interest from long-term deposit or
investment certificates, which have a
maturity of 5 years or more
EXEMPT; However:
In case of pre-termination, with remaining
maturity of:
4 years to less than 5 years 5% on entire
income
3 years to less than 4 years 12% on entire
income
less than 3 years 20% on entire income
(6) Cash / Property Dividends from a
domestic corporation, etc., OR share

in the distributable net income after
tax of a partnership (except a general
professional partnership), etc.
GIW 10% Final Withholding Tax GIW 20%
(7) Interest (Expanded Foreign Currency
Deposit System)
GIW 7.5% Final
Withholding Tax
EXEMPT
(8) Winnings on Philippine Sweepstakes /
Lotto
EXEMPT
(9) Capital Gains on Sale of Shares of
Domestic Corp. (not traded in a
domestic stock exchange)
Net Capital Gains within:
Not Over P100,000 5% Final Tax
Amount in Excess of P100,000 plus 10% Final
Tax on the excess
(10) Capital Gains on Sale of Real
Property in the Philippines
Gross Selling Price or FMV, whichever is higher
6% Final Withholding Tax
(11) Sale of Shares of Domestic Corp.
(traded in a domestic stock exchange)
of 1% of the Selling Price (Stock Transaction
Tax)
Note: Stock Transaction Tax is not an income tax,
but a business
(percentage) tax
(12) Sale of Real Property located Abroad
Schedular Income Tax Rates (Sec. 24, NIRC)
(i.e, 5% to 32%)
(13) Sale of Shares of Foreign Corp
(14) Passive Income from Abroad
PAGE 72
Computations
Pure Compensation Income
Gross Compensation Income xx
Less:
Personal & Additional Exemptions
and hospitalization/health insurance
premium
xx
Taxable Income xx
x Rate
Income Tax xx
Less: Creditable Withholding Tax on
Compensation Income
xx
Tax Payable xx
Mixed-Income (i.e., compensation income and
business
income/income from the practice of profession)
Gross Compensation Income Xx
Less:
Personal & Additional Exemptions
and hospitalization/health insurance
premium
Xx
Taxable Compensation Income Xx
ADD: Gross Business Income &/or
Income from Practice of Profession
Xx
Less: Allowable Deduction (itemized
or optional deduction)
Xx
Taxable Income Xx
x Rate
Income Tax Xx
Compensation Income/Other
Allowable Tax Credit
Xx
Tax Payable Xx
Pure Business/Professional Income
Gross Business Income &/
or Income from Practice of Profession
Xx
Less:
(a) Allowable Deduction
(itemized or optional deduction)
(b) Personal & Additional
Exemptions
and hospitalization/health
insurance premium
xx
xx
Total Taxable Income Xx
x Rate
Income Tax Xx
Compensation Income/Other
Allowable Tax Credit
Xx
Tax Payable Xx
TAXATION OF NON-RESIDENT ALIENS
ENGAGED IN TRADE OR BUSINESS
(See above summary tables)
GENERAL RULES
(a) Subject to an income tax in the same manner

as
an individual citizen and a resident alien
individual on taxable income from all sources
(b) Nonresident alien doing business in the
Philippines: a non-resident alien individual who
shall come to the Philippines and stay therein for
an aggregate period of more than 180 days
during any calendar year
CASH AND/OR PROPERTY DIVIDENDS
The following shall be subject to an income tax
of
twenty percent (20%) on the total amount
thereof:
(a) Cash and/or property dividends from:
(1) A domestic corporation;
(2) A joint stock company;
(3) An insurance or mutual fund company;
(4) A regional operating headquarter of
multinational company;
(5) The share of a nonresident alien individual in
the distributable net income after tax of a
partnership (except a general professional
partnership) of which he is a partner;
(6) The share of a nonresident alien individual in
the net income after tax of an association, a
joint account, or a joint venture taxable as a
corporation of which he is a member or a
coventurer;
(b) Interests
(c) Royalties (in any form); and
(d) Prizes (except prizes amounting to Ten
thousand
pesos (P10,000) or less which shall be subject to
graduated tax) and other winnings (except
Philippine Charity Sweepstakes and Lotto
winnings);
Except:
(1) The following Royalties shall be subject to a
final
tax of ten percent (10%) on the total amount
thereof:
(a) On books as well as other literary works; and
(b) On musical compositions
(2) Cinematographic films and similar works shall
be
subject to twenty-five percent (25%) of the gross
income
(3) Interest income from long-term deposit or

investment in the form of savings, common or
PAGE 73
investments evidenced by certificates in such

form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the ta
Butshould the holder of the certificate preterminate
the deposit or investment before the fifth (5th)
year, a
final tax shall be imposed on the entire income
and
shall be deducted and withheld by the
depository
bank from the proceeds of the long-term deposit
or
investment certificate based on the remaining
maturity thereof:
(a) Four (4) years to less than five (5) years - 5%;
(b) Three (3) years to less than four (4) years 12%;
and
(c) Less than three (3) years - 20%.
CAPITAL GAINS
Capital gains realized from sale, barter or

exchange
of shares of stock in domestic corporations not
traded through the local stock exchange, and
real
properties shall be subject to the similar tax
prescribed on citizens and resident aliens.
(a) Sale, barter or exchange of Shares of stock in
domestic corporation not traded
(1) Net over P100,000 5% of net capital
gains realized
(2) On any amount in excess of P100,000
10% of net capital gains realized
(b) Sale, barter or exchange of real properties
6%
of gross selling price or current FMV whichever is
higher
NON-RESIDENT ALIENS NOT ENGAGED IN
TRADE OR BUSINESS
(1) Alien individuals employed by:
(a) Regional or Area Headquarters (RAHQ) and
Regional Operating Headquarters (ROHQ)
established in the Philippines by multinational
companies
Multinational company, defined 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) Offshore Banking Units established in the
Philippines
(2) Alien individuals who are permanent
residents of a
foreign country but who are employed and
assigned in the Philippines by a foreign service
contractor or by a foreign service subcontractor
engaged in petroleum operations in the
Philippines
Tax Rate and Base - 15% of gross income
received
as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as
honoraria and allowances
The same tax treatment shall apply to Filipinos
employed and occupying the same positions as
those of aliens employed by these multinational
companies, offshore banking units and
petroleum
service contractors and subcontractors.

Note that the coverage of the special
classification (and the corresponding tax rate) is
limited to income received as wages. Hence, any
income earned from all other sources within the
Philippines by the alien employees shall be
subject to the pertinent income tax (example:
sale
of real property in the Philippines is subject to
6%
capital gain tax, imposed on the gross selling
price or fair market value of the property at the
time of the sale, whichever is higher)
INDIVIDUAL TAXPAYERS EXEMPT FROM
INCOME TAX
Individual Taxpayers exempt from income tax
are:
(1) Senior Citizens
(2) Minimum wage earners
(3) Exemptions granted under international
agreements
SENIOR CITIZENS
Who covered: any resident citizen

(a) At least 60 years old, and
(b) Who are considered minimum wage earners
under RA 9504. (Sec. 4 (b) RA 7432, as amended
by RA 9994) and/or the aggregate amount of
gross income earned by the senior citizen during
the taxable year does not exceed the amount of
his personal exemptions (BPE and APE).
MINIMUM WAGE EARNERS
Rule: they shall be exempt from payment of

income
tax on their taxable income
Limit: however, if he receives other benefits in
excess of the allowable statutory amount of
P30,000, then he shall be taxable on the exceeds
benefits as well as his salaries, wages, and
allowances, just like an employee receiving
compensation income beyond the statutory
minimum wage.
EXEMPTIONS GRANTED UNDER INTERNATIONAL
AGREEMENTS (SEC. 32(B))
See RMC No, 31-2013, April 12, 2013 taxation

of
compensation income of Philippine nationals and
alien individuals employed by foreign
governments/embassies/diplomatic missions and
international organizations situated in the
Philippines
PAGE 74
TAXATION OF DOMESTIC CORPORATIONS

TAX PAYABLE
Taxes payable are:

(1) Regular tax
(2) Minimum Corporate Income Tax
Regular Tax
Normal Corporate Income Tax Rate: 30%of
Taxable
Income (effective January 1, 2009)
Gross Income XXX
Less: Allowable Deductions XXX
Taxable Income XXX
Minimum corporate income tax (MCIT)
(a) applies to domestic corporations and RFCs
whenever such corporations have zero or
negative
taxable income or whenever the MCIT is greater
than the normal income tax due from such
corporations.
(b) Imposed upon any domestic corporation
beginning the fourth taxable year in which such
corporation commenced its business operations.
For purposes of the MCIT, the taxable year in
which business operations commenced shall be
the year when the corporation registers with the

BIR (not in which the corporation started
commercial operations).
(c) Tax rate: 2% of the Gross Income
Imposition of MCIT
Gross Sales XXX
Less: Sales Returns
Sales Discounts & Allowances
Cost of Goods Sold
XXX
XXX
XXX
XXX
MCIT GI XXX
Computation of Gross Income.

The term Gross Income shall be equivalent to
gross
sales less sales returns, discounts and
allowances
and cost of goods sold. Cost of goods sold shall
include all business expenses directly incurred to
produce the merchandise to bring them to their
present location and use.
If apart from deriving income from core business
activities there are other items of gross income
realized or earned by the taxpayer which are
subject
to the normal corporate income tax, they must
be
included as part of gross income for computing
MCIT. (Sec. 27 (E), NIRC; RR 12-2007)
This means that the term gross income will
also
include all items of gross income enumerated
under
Section 32(A) of the NIRC, except: (a) income
exempt
from income tax, and (b) income subjected to
FWT.
The computation by type of business.
Merchandising/Manufacturing
Concerns
Service Concerns
Net Sales P xxx Gross receipts/revenue P xxx
Less: Cost of Sales xxx Less: Direct cost of services xxx
Gross Income P xxx Gross income P xxx
Net Sales is gross sales less sales returns,

discounts and allowances.
Direct cost of services includes salaries of
personnel rendering the services, expenses on
the
facilities directly utilized, cost of supplies, and
the
like. Direct costs and expenses shall only
pertain to
those costs exclusively and directly incurred in
relation to the revenue realized by the sellers of
services. These refer to costs which are
considered
indispensable to the earning of the revenue such
that without such costs, no revenue can be
generated.
Pointers.
MCIT is in the nature of a tax credit, not an
allowable
deduction. Its purpose is to prevent corporations
from escaping being taxed by including frivolous
expenses in their statement of income.
Is the Minimum Corporate Income Tax (MCIT) an
addition to the regular or normal income tax?
No, the MCIT is not an additional tax. The MCIT is
compared with the regular income tax, which is
due
from a corporation. If the regular income is
higher
than the MCIT,then the corporation does not pay
the
MCIT.
Who are covered by MCIT?

The MCIT covers domestic and resident foreign
corporations which are subject to the regular
income
tax. The term regular income tax refers to the
regular income tax rates under the Tax Code.
Thus,
corporations which are subject to a special
corporate
tax system do not fall within the coverage of the
MCIT.
These special corporations are:
(a) Corporations that are subject to ten percent
(10%)
preferential tax rate: Proprietary educational
institutions, nonprofit hospitals, Offshore Banking
Units (OBUs) on their income from foreign
currency transactions which has been subjected
to a final income tax at 10% of such income, and
depository banks under the expanded foreign
currency deposit system on their income from
foreign currency transactions which has
subjected
to final income tax at 10%; RFCs engaged in
business as Regional Operating Headquarters
PAGE 75
(b) Firms under special income tax regime such

as
those under the PEZA law (Rep. Act 7916), the
Bases Conversion Development Act (Rep. Act
7227) and forms enjoying Income Tax Holiday
(ITH) under Exec. Order No. 226;
(c) International carriers subject to tax at 2 %
of
their gross Philippine billings;
Note:For domestic corporations whose
operations or
activities are partly covered by the regular
income
tax and partly covered under a special income
tax
system, the MCIT shall apply on operations
covered
by the regular corporate income tax system.
MCIT gross income differentiated from the
normal
tax gross income
the latter would include other incidental income
items, such as rent income, interest, gain on sale
of
assets, certain tax refunds, etc.
What amount of income tax is paid by the
corporation to the BIR?
Whichever is higher between the normal tax and
the
minimum corporate income tax.
Illustration.
E Co., a domestic trading corporation, in its
fourth
year of operations had a gross profit from sales
of
P300,000 and net taxable income of P100,000.
How much was the income tax paid by the
corporation for the year?
MCIT (P300,000 x 2%) P6,000
Normal income tax
(P100,000 x 30%)
P30,000
Income Tax to be paid for the year
(whichever is higher)
P30,000
Quarterly MCIT Computation.
The computation and the payment of MCIT shall
likewise apply at the time of filing the quarterly
corporate income tax. In the computation of the

tax
due for the taxable quarter, if the quarterly MCIT
is
higher than the quarterly normal income tax, the
tax
due to be paid for such taxable quarter at the
time of
filing the quarterly corporate income tax return
shall
be the MCIT.
Items allowed to be credited against quarterly
MCIT
due: (a) CWT, (b) Quarterly income tax payments
under the normal income tax; and (c) MCIT paid
in
the previous taxable quarter(s).
Excess MCIT from the previous taxable year/s
shall
not be allowed to be credited against the
quarterly
MCIT tax due.
Annual Income Tax Computation.
The final comparison between the normal
income
tax payable and the MCIT shall be made at the
end
of the taxable year. The payable or excess
payment
in the Annual Income Tax Return shall be
computed
taking into consideration corporate income tax
payment made at the time of filing of quarterly
corporate income tax returns whether this be
MCIT
or normal income tax.
In the computation of annual income tax due, if
the
normal income tax due is higher than the
computed
annual MCIT, the following shall be allowed to be
credited against the annual income tax: (a)
quarterly
MCIT payments, (b) quarterly normal income tax
payments, (c) excess MCIT in the prior year/s
(subject
to the prescriptive period allowed for its
creditability),
(d) CWTs in the current year, (d) excess CWTs in
the
prior year.
If in the computation of annual income tax due,
the
computed annual MCIT due is higher than the
annual normal income tax due, the following
may be
credited against the annual income tax: (a)
quarterly
MCIT payments of current taxable quarter, (b)
quarterly normal income tax payments in current
year, (c) CWTs in the current year, (d) excess
CWTs in
the prior year.
Excess MCIT from the previous taxable year/s
shall
not be allowed to be credited against the annual
MCIT due as the same can only be applied
against
normal income tax.
Manner of Filing and Payment.
The MCIT shall be paid in the same manner
prescribed for the payment of the normal
corporate
income tax which is on a quarterly and on a
yearly
basis.
Carry forward of excess minimum tax
Any excess of the minimum corporate income
tax
over the normal income tax shall be carried
forward
on an annual basis. The excess can be credited
against the normal income tax in the nextthree
(3)
succeeding taxable years. [Sec. 27(E)(2)] In the
year
to which carried forward, the normal tax should
be
higher than the MCIT.
Illustration.
A domestic corporation had the following data on
computations of the normal tax (NT) and the
minimum corporate income tax (MCIT) for five
years.
PAGE 76
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K
The excess MCIT over NT carry-forward is shown
below:
Year 4 Year 5 Year 6 Year 7 Year 8
MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000
NT is higher n/a n/a 40,000 n/a 70,000

Less: MCIT carryfwd
(40,000)*
(20,000)
(20,000)
From Year 4
From Year 5
From Year 7
Tax Due 80,000 50,000 - 40,000 30,000
Arrow pointing downward means that the normal
tax is higher so that there can be an excess MCIT
carry-forward against it.
*Cannot carry forward an amount higher than
the NT, hence
the excess of 60K from Year 4 was reduced to
40K. The
unused P20,000 cannot be used in Year 8
because Year 8
was beyond three years from Year 4.
Relief from the MCIT under certain conditions
(Sec. 27
(E ), NIRC)
The Secretary of Finance, upon the
recommendation
of the Commissioner, may suspend the
imposition of
the MCIT upon submission of proof by the
applicantcorporation
that the corporation sustained
substantial losses on account of the following
(LMB):
(1) Prolonged labor dispute (losses from a strike
staged by employees that lasts for more than 6
months and caused the temporary shutdown of
operations), or
(2) Force majeure (acts of God and other
calamity;
includes armed conflicts like war or insurgency),
or
(3) Legitimate business reverses (substantial
losses
due to fire, robbery, theft or other economic
reasons).
Optional Gross Income Tax (OGIT).
Section 27 (A) of the NIRC provides for an
optional
gross income tax of 15% based on gross income.

The
President, upon the recommendation of the
Secretary of Finance, may, effective January 1,
2000,
allow domestic corporations the option to be
taxed at
fifteen percent (15%) of gross income as defined
therein, after the following conditions have been
satisfied:
Tax effort ratio 20% of GNP
Ratio of Income Tax collection to
total tax revenues
40%
VAT tax effort 4% of GNP
Ratio of Consolidated Public
Sector Financial Position (CPSFP)
to GNP
0.90%
Ratio of the Corporations Cost of
Sales to Gross Sales
Does not
exceed 55%
Gross Sales XXX
Less: Sales Returns
SalesDiscounts& Allowances
Cost of Goods Sold
XXX
XXX
XXX
XXX
GI XXX
The election of the gross income tax option by
the
corporation shall be irrevocable for three (3)
consecutive taxable years during which the
corporation is qualified under the scheme.
For purposes of gross income tax, gross income
should be the same as gross income for
purposes of
MCIT in cases of trading, merchandising and
manufacturing concern business. However, for
service enterprises, gross income means gross
>>
>

PAGE 77
receipts less sales returns, discounts, allowances

and
cost of services.
Note: At present, the OGIT has not been
implemented in the Philippines.
Corporations exempt from the MCIT ( BIPTENG)
(1) Banks and other non-bank financial
intermediaries;
(2) Insurance companies;
(3) Publicly-held corporations;
(4) Taxable partnerships;
(5) General professional partnerships;
(6) Non- taxable joint ventures; and
(7) Enterprises that are registered:
(a) with the Philippine Economic Zone Authority
(PEZA) under R.A. 7916;
(b) pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227; and
(c) under special economic zones declared by
law
which enjoy payment of special tax rate on their
registered operations or activities in lieu of other
taxes, national or local.
Note: Words in regular letters are found in Sec.
29(B)(2) of the NIRC. Words in italics are
additions
made by the revenue regulation to consolidate

Sec.
29 with other pertinent laws.
Applicability of the MCIT where a corporation is
governed both under the regular tax system and
a
special income tax system
For corporations whose operations or activities
are
partly covered by the regular income tax and
partly
covered under special income tax system, the
MCIT
shall apply on operations by the regular income
tax
system
ALLOWABLE DEDUCTIONS
Itemized deductions
(1) Bad debts
(2) Expenses
(3) Losses
(4) Taxes
(5) Depreciation
(6) Interest
(7) Depletion of oil and gas wells and mines
(8) Charitable and other contributions
(9) Research and development
(10) Pension trusts
Optional standard deduction
(a) Before RA 9504, effective July 6, 2009, OSD
only
applied to individuals except non-resident aliens.
(b) But by virtue of RA 9504, it now also applies
to
corporations, except non-resident foreign
corporation.
(c) Moreover, the rate was increased from 10%
to
40%.
TAXATION OF PASSIVE INCOME
Passive income subject to tax

Note: (1) and (5) below are more appropriate for
the
next section. The SC Syllabus, however, included
both
in this section
Passive income subject to tax:
(1) Interest from deposits and yield or any other
monetary benefit from deposit substitutes and
from trust funds and similar arrangements and
royalties
(2) Capital gains from the sale of shares of stock
not
traded in the stock exchange
(3) Income derived from depository bank under
the
expanded foreign currency deposit system
(4) Inter-corporate dividends
(5) Capital gains realized from the sale,
exchange, or
disposition of lands and/or buildings
Interest from deposits and yield or any other
monetary
benefit from deposit substitutes and from trust
funds
and similar arrangements and royalties
On any currency bank deposit, yield or any other
funds and similar arrangements - 20%
Capital gains from the sale of shares of stock not
traded in the stock exchange
listed and
traded through a local stock exchange, held as a
capital asset:
(a) First P100,000: Final Tax of 5%
(b) On any amount in excess of P100,000: plus
10%
Final tax on the excess
Income derived from depository bank under the
Under the expanded foreign currency deposit
system
(EFCDS) - 7.5%
Inter-corporate dividends
Dividends received from another domestic
corporation - exempt
Capital gains realized from the sale, exchange,
or
disposition of lands and/or buildings
On the sale, exchange or disposition of lands
and/or
buildings which are not actually used in the
business
PAGE 78
of a corporation and are treated as capital assets

On the gross selling price, or the current fair
market value at the time of the sale, whichever
is
higher, a final tax of 6%
(a) Note: Tax treatment is the same as that of
individuals.
(b) The capital gains tax is applied on the gross
selling price, or the current fair market value at
the time of the sale, whichever is higher. Any
gain
or loss on the sale is immaterial because there is
a conclusive presumption by law that the sale
resulted in a gain.
Passive income not subject to tax
(a) Income derived by a depository bank under
the
expanded foreign currency deposit system from
foreign currency transactions with nonresidents,
offshore banking units in the Philippines, 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 shall be
exemptfromincome tax
Except: net income from transactions specified
by
the Secretary of Finance upon recommendation
by the Monetary Board
BUT: Interest income from foreign currency loans
granted by such depository banks under said
expanded foreign currency deposit system to
residents, other than offshore banking units in
the
Philippines, shall be subject to a final tax at the
rate of 10%.
(b) Any income of nonresidents, whether
individuals
or corporations, from transactions with
depository
banks under the expanded system shall be
exemptfrom income tax.
TAXATION OF CAPITAL GAINS
Income from sale of shares of stock

listed
as a
capital asset:

10%
Income from the sale of real property situated in
the
Philippine & (iii) Income from the sale, exchange,
or
other disposition of other capital assets
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
On the gross selling price, or the current fair
market value at the time of the sale, whichever
is
higher, a final tax of 6%
Note: Tax treatment is the same as that of
individuals.
The capital gains tax is applied on the gross
selling
price, or the current fair market value at the time
of
the sale, whichever is higher. Any gain or loss on
the
sale is immaterial because there is a conclusive
presumption by law that the sale resulted in a
gain.
TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS
AND
NON-PROFIT HOSPITALS
Tax Rate and Base 10% on net income (except

on
income subject to capital gains tax and passive
income subject to final tax) within and without
the
Philippines
Caveat: If gross income from unrelated trade or
business or other activity exceeds 50%of total
gross
income derived from all sources, the tax rate of
30%
shall be imposed on the entire taxable income.
Unrelated trade, business or other activity- any
trade,
business or other activity, the conduct of which
is not
substantially related to the exercise or
performance
by such educational institution or hospital of its
primary purpose or function.
Proprietary educational institution- any private
school
maintained and administered by private
individuals
or groups with an issued permit to operate from
the
DECS, CHED or TESDA. (Sec. 27(B), NIRC)
TAX ON GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS, AGENCIES OR INSTRUMENTALITIES
For GOCCs:
General rule:GOCCs are taxable as any other
corporation engaged in similar business, industry
or
activity, except:
(a) Government Service Insurance System (GSIS)
(b) Social Security System (SSS)
(c) Philippine Health Insurance Corporation
(PHIC)
(d) Local water districts (LWDs)
(e) Philippine Charity Sweepstakes Office (PCSO)
(Sec. 27(C), NIRC)
For instrumentalities and agencies of

government:
General Rule: The government is exempt from
tax.
PAGE 79
Exception: When it chooses to tax itself. Nothing

can
prevent Congress from decreeing that even
instrumentalities or agencies of the government
performing governmental functions may be
subject
to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no
one
can doubt its wisdom. (Mactan Cebu Airport v
Marcos,
1996)
If the taxing authority is the local govt unit
RA 7160 expressly prohibits LGUs from levying
tax
on the Natl Govt, its agencies and
instrumentalities
and other LGUs.
TAXATION OF RESIDENT FOREIGN
CORPORATIONS
GENERAL RULE
A resident foreign corporation is a corporation

organized under the laws of a foreign country,
which
is engaged in trade or business in the
Philippines.
(a) A Philippine branch of a foreign corporation
duly
licensed by the SEC is considered a resident
foreign corporation. Thus, only the income of the
Philippine branch from sources within the
Philippines is subject to Philippine income tax.
(b) Marubeni v. Commissioner: As general rule,
the
head office of a foreign corporation is the same
juridical entity as its branch in the Philippines
following the single entity concept. Thus, the
income from sources within the Phils. of the
foreign head office shall thus be taxable to the
Philippine branch.
But, when the head office of a foreign
corporation
independently and directly invested in a
domestic
corporation without the funds passing through its
Philippine branch, the taxpayer, with respect to
the
tax on dividend income, would be the nonresident
foreign corporation itselfand the dividend income
shall be subject to the tax similarly imposed on
nonresident
foreign corporations.
Definition of doing business under the Foreign
Investment Act of 1991
The phrase "doing business" shall include
soliciting
orders, service contracts, opening offices,
whether
called "liaison" offices or branches; appointing
representatives or distributors domiciled in the
Philippines or who in any calendar year stay in
the
country for a period or periods totaling one
hundred
eighty [180] days or more; participating in the
management, supervision or control of any
domestic
business, firm, entity or corporation in the
Philippines; and any other act or acts that imply

a
continuity of commercial dealings or
arrangements
and contemplate to that extent the performance
of
acts or works, or the exercise of some of the
functions normally incident to, and in progressive
prosecution of commercial gain or of the purpose
and object of the business organization:
Provided,
however, That the phrase "doing business" shall
not
be deemed to include mere investment as a
shareholder by a foreign entity in domestic
corporations duly registered to do business,
and/or
the exercise of rights as such investor; nor
having a
nominee director or officer to represent its
interests
in such corporation; nor appointing a
representative
or distributor domiciled in the Philippines which
transacts business in its own name and for its
own
account; (Sec. 3 (d))
WITH RESPECT TO THEIR INCOME FROM SOURCES
WITHIN
THE PHILIPPINES
Resident foreign corporations are subject to any

or
some of the following:
(2) Final Tax on Passive Income
(3) Normal Tax [OR] Minimum Corporate Income
Tax
(MCIT) [OR] Gross Income Tax (GIT)
(4) Branch Profit Remittance Tax
MINIMUM CORPORATE INCOME TAX
The discussion with respect to this topic (income

subject to normal tax, MCIT, or GIT) under the
subheading of domestic corporations is equally
applicable to resident foreign corporations, both
as
to concepts and computations, except that RFCs
are
taxed only on income from sources within the
Philippines.
(a) Normal Corporate Income Tax Rate30% of
net
taxable income from sources within the
Philippines [RA 9337]
(b) Minimum Corporate Income Tax (MCIT)2%
of
MCIT Gross Income from sources within the
Philippines. The MCIT is imposed on RFCsunder
the same conditions as domestic corporations.
[Sec. 28(A)(2)]
(c) Gross Income Tax (GIT)The President,
upon the
recommendation of the Secretary of Finance,
may
allow resident foreign corporations the option to
be taxed at fifteen percent (15%) of gross
income
within the Philippines, under the same conditions
as domestic corporations. [Sec. 28(A)(1)]
TAX ON CERTAIN INCOME
Interest from deposits and yield or any other

funds
and similar arrangements and royalties
On any currency bank deposit, yield or any other
funds and similar arrangements Final tax of

20%
PAGE 80
Income derived from a depository bank under

the
Under the expanded foreign currency deposit
system
(EFCDS) Final tax of 7.5%
Capital gain from sale of shares of stock not
traded in
the stock exchange
listed
as a
capital asset:
10%
Intercorporate dividends
Dividends received from a domestic corporation
liable
to tax under the NIRC- exempt
Exclude:
(1) International carrier
(2) Offshore banking units
(3) Branch profits remittances
(4) Regional or area headquarters and regional
operating headquarters of multination
companies
(NOTE: Expressly excluded as indicated in the SC
Syllabus. The following discussion is for
information
purposes)
International carrier
Tax Rate and Base 2.5% on Gross Philippine
Billings (GPB)
What is GPB.
In the case of International Air Carriers, GPB
refers to
the amount of:
(a) gross revenue derived from carriage of
persons,
excess baggage, cargo and mail originating from
the Philippines in a continuous and
uninterrupted
flight, irrespective of the place of sale or issue
and
the place of payment of the ticket or passage
document
(b) gross revenue from tickets revalidated,
exchanged and/or indorsed to another
international airline if the passenger boards a
plane in a port or point in the Philippines
(c) for flights which originate from the
Philippines,
but transshipment of passenger takes place at
any port outside the Philippines on another
airline, the gross revenue consisting of only the
aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment[RR 152002]
Air Canada vs. CIR (CTA Case No. 6572):
(a) A foreign airline company selling tickets in
the
Philippines through their local agents shall be
considered as resident foreign corporation
engaged in trade or business in the country.
(b) The absence of flight operations within the
Philippine territory cannot alter the fact that the
income received was derived from activities

within
the Philippines.
(c) The test of taxability is the source, and the
source
is that activity which produced the income.
In the case of International Shipping, GPB
means:
Gross revenue whether for passenger, cargo or
mail
originating from the Philippines up to final
destination, regardless of the place of sale or
payments of the passage or freight documents.
Offshore banking units
Coverage of the Rule.
Only income derived by offshore banking units
from
foreign currency transactions with:
(1) non-residents,
(2) other offshore banking units
(3) local commercial banks including branches of
foreign banks that may be authorized by the
BangkoSentralngPilipinas (BSP) to transact
business with offshore banking units
Tax Rate.
Exempt from all taxes, except net income from
such
transactions as may be specified by the
Secretary of
Finance, upon recommendation by the Monetary
Board to be subject to the regular income tax
payable by banks
Exception: 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, shall be subject only to a
final
tax at the rate of 10%.
Branch profits remittances
Taxable transaction any profit remitted by a
branch
of a multinational corporation to its head office
Tax Rate and Base 15% final tax based on the
total
profits applied or earmarked for remittance
without
any deduction for the tax component. The 15%
final
tax should excluding: (a) profits on activities
which
PAGE 81
are registered with the Philippine Economic Zone

Authority (PEZA) and (b) passive income gains
and
profits received not directly connected with the
conduct of its trade or business in the
Philippines.
Income not treated as branch profits unless
effectively
connected with the conduct of trade or business
in
the Philippines:
(1) Interests, dividends, rents, royalties
remuneration
for technical services
(2) salaries, wages premiums, annuities,
emoluments
(3) other fixed or determinable annual, periodic
or
casual gains, profits, income
(4) capital gains received during each taxable

year
from all sources within the Philippines
Notes:
(a) imposed whether the head office of the
foreign
corporation is located in a tax treaty country, in
a
tax haven or other non-treaty country.
(b) imposed only on the profits remitted by a
Philippine branch to the head office of a foreign
corporation.
Regional or area headquarters and Regional
operating
headquarters of multinational companies
Regional or area headquarters: not subject to
income
tax
Regional or area headquarters: a branch
established
in the Philippines by multinational companies
and
which headquarters do not earn or derive income
from the Philippines and which act as
supervisory,
communications and coordinating center for
their
affiliates, subsidiaries, or branches in the AsiaPacific
Region and other foreign markets.
Regional operating headquarters
(a) 10%of their taxable income
(b) a branch established in the Philippines by
multinational companies which are engaged in
any of the following services: (SMART - BAD
PPL)
(1) general Administration and planning
(2) business Planning and coordination
(3) sourcing and Procurement of raw materials
and components
(4) corporate finance Advisory services
(5) Marketing control and sales promotion
(6) Training and personnel management
(7) Logistic services
(8) Research and development services and
product development
(9) technical Support and maintenance
(10) Data processing and communications, and
(11) Business development.
TAXATION OF NON-RESIDENT FOREIGN
CORPORATIONS
GENERAL RULE
Except as otherwise provided, the tax is 30% of

the
gross income (except certain passive
income)received during each taxable year from
all
sources within the Philippines, such as interests
(except interests on foreign loans, 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
on the sale of shares of stock (not listed and
traded
through a local stock exchange), of a domestic
corporation which are subject to the tax rates
prescribed for individuals and resident foreign
corporations.
TAX ON CERTAIN INCOME
Interest on foreign loans

(a) on foreign loans contracted on or after
August 1,
1986 20%
(b) under the expanded foreign currency deposit
system (EFCDS) - exempt
Intercorporate dividends
(a) (Intercorporate Dividend) 15%, as long as
the
country in which the nonresident foreign
corporation is domiciledallowsa tax credit for
taxes
deemed paid in the Philippines equivalent to at
least15%
(b) 15% represents the difference between the
regular income tax of 30% on corporations and
the 15% tax on dividends (tax sparing credit)
(c) If the country within which the NRFC is
domiciled
does NOT allow a tax credit, a final withholding
tax at the rate of30% is imposed on the
dividends
received from a domestic corporation.
Capital gains from sale of shares of stock not
traded
in the stock exchange
real
property or on shares of stockof a
domesticcorporation
not listed and traded through a local stock
exchange,
held as a capital asset:
(a) First P100,000 Final Tax of 5%
(b) On any amount in excess of P100,000 plus
Final
Tax of 10% on the excess
Exclude:
PAGE 82
(1) Film rentals and other payments to nonresident

cinematographic film owner, lessor or distributor
Final tax of 25% of gross income from all sources
(2) Rental, lease and charter fees payable to
nonresident
owner or lessor of vessels chartered by
Philippine nationals
Final tax of 4.5% of gross rentals, lease or
charter
fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime
Authority
(3) Rentals, charter and other fees payable to
nonresident
owner or lessor of aircraft machineries
and other equipment
Final tax of 7.5% of gross rentals or fees
Summary of Tax Bases and Rates of Special
Corporations
Quick Glance
Type of Corporation Tax Base
Tax
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals
(Nonprofit)
Taxable Income from all sources 10%
Depository Banks (Foreign Currency Deposit
Units)
(1) With respect to income derived under the
expanded
foreign currency deposit system from certain
foreign
currency transactions
(2) With respect to interest income from foreign
currency
loans to residents other than offshore units in the
Philippines or other depository banks under the
expanded system
Exempt (except that net income from
such transactions is subject to the
regular income tax payable by banks)
Amount of interest income 10%
Resident Foreign Corporations
International Carriers Gross Philippine Billings
2.5%
Offshore Banking Units
(1) With respect to income derived by offshore
banking
units from certain foreign currency transactions
(2) With respect to interest income derived from
foreign
currency loans granted to residents other than
offshore
banking units or local commercial banks
Resident Depository Bank (Foreign Currency
Deposit Units)
(1) With respect to income derived under the
expanded
foreign currency deposit system from certain
foreign
currency transactions
(2) With respect to interest income from foreign
currency
loans to residents other than offshore units in the
Philippines or other depository banks under the
expanded system
Regional or Area Headquarters Exempt Regional Operating Headquarters of
Multinational
Companies
Taxable Income from within the
Philippines
10%
Non-resident Foreign Corporations [EXCLUDED]
Non-resident cinematographic film owners,
lessors or
distributors
Gross Income from the Philippines
25%
Non-resident Owner or Lessor of Vessels
Chartered by
Philippine Nationals
Gross Rentals, Lease and Charter
Fees from the Philippines
4.5%
Non-resident Owner or Lessor of Aircraft,
Machineries and
Other Equipment
Gross Rentals, Charges and Fees from
the Philippines
7.5%
IMPROPERLY ACCUMULATED EARNINGS OF
CORPORATIONS
See: Sec. 29, as implemented by RR 2-2001
which
prescribes rules governing the imposition of IAET

PAGE 83
Rule:There is imposed for each taxable year, in

addition to other taxes, a tax equal to 10% of
the
improperly accumulated taxable income of
domestic
and closely-held corporations formed or availed
of for
the purpose of avoiding the income tax with
respect
to its shareholders or the shareholders of any
other
corporation, by permitting the earnings and
profits of
the corporation toaccumulate instead of dividing
them
among or distributing them to the shareholders.
Rationale: It is a tax in the nature of a penaltyto
the
corporationfor the improper accumulation of its
earnings, and a deterrentto the avoidance of tax
upon
shareholders who are supposed to pay dividends
tax
on the earnings distributed to them. The
touchstone
of the liability is the purpose behind the
accumulation of the income and not the
consequences of the accumulation.
Exception: The use of undistributed earnings and
profits for thereasonable needs of the
businesswould
not generally make the accumulated or
undistributed earnings subject to the tax.
What is meant by reasonable needs of the
business
is determined by the immediacy test
Immediacy Test - It states that the reasonable
needs
of the businessare the
(1) immediate needs of the business; and
(2) reasonably anticipated needs.
How to prove the reasonable needs of the
business
The corporation should prove that there is
(1) an immediate need for the accumulation of
the
earnings and profits; or
(2) adirect correlation of anticipated needs to
such
accumulation of profits.
COMPOSITION
The following constitute accumulation of

earnings
for the reasonable needs of the business: (ILL
ABE)
(1) Allowancefor the increase in the
accumulation of
earnings up to 100% of the paid-up capital of the
corporation as of Balance Sheet date,
(2) inclusive of accumulations taken from other
years;
(3) Earnings reserved for definite corporate
Expansion projects or programsrequiring
considerable capital expenditure as approved by
the Board of Directors or equivalent body;
(4) Earnings reserved for Building, Plant or
Equipment Acquisition as approved by the Board
of Directors or equivalent body;
(5) Earnings reserved for compliance with any
Loan
Covenantor pre-existing obligation established
under a legitimate business agreement;
(6) Earnings required by Law or applicable
regulations to be retained by the corporation or

in
respect of which there is legal prohibition against
its distribution;
(7) In the case of subsidiaries of foreign
corporations
in the Philippines, all undistributed earnings
intended or reserved for Investments within the
Philippines as can be proven by corporate
records
and/or relevant documentary evidence.
COVERED CORPORATIONS
Only domestic corporations classified as closelyheld

corporationsare liable for IAET.
Closely-held corporations are those:
(1) at least 50% in value of the outstanding
capital
stock; or
(2) at least 50% of the total combined voting
power
of all classes of stock entitled to vote
is owned directly or indirectly by or for not more
than 20 individuals. Domestic corporations not
falling under the aforesaid definition are,
therefore,
publicly-held corporations.
Todetermine whether the corporation is closely
held
corporation, insofar as such determination is
based on
stock ownership, the following rules shall be
applied:
(1) Stock Not Owned by Individuals. - Stock
owned
directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered
as
being owned proportionately by its shareholders,
partners or beneficiaries.
(2) Family and Partnership Ownership. - An
individual
shall be considered as owning the stock owned,
directly or indirectly, by or for his family, or by or
for his partner.
For purposes of this paragraph, the family of an
individual includes his brothers or sisters
(whether by whole or half-blood), spouse,
ancestors and lineal descendants.
(3) Option to Acquire Stocks. - If any person has
an
option to acquire stock, such stock shall be
considered as owned by such person.
For purposes of this paragraph, an option to
acquire such an option and each one of a series
of
option shall be considered as an option to
acquire
such stock.
(4) Constructive Ownership as Actual Ownership.
Stock constructively owned by reason of the
application of (a) or (c) shall, for purposes of
PAGE 84
applying (1) or (2), be treated as actually owned

by
such person.
But stock constructively owned by the individual
by
reason of the application of (b) shall NOT be
treated as owned by him for purposes of again
applying such paragraph in order to make
another the constructive owner of such stock.
BIR RULING 025-02
The ownership of a domestic corporation for
purposes of determining whether it is a closely

held
corporation or a publicly held corporation is
ultimately traced to the individual shareholders
of the
parent company.
Where at least 50% of the outstanding capital
stock
or at least 50% of the total combined voting
power
of all classes of stock entitled to vote in a
corporation
is owned directly or indirectly by at least 21 or
more
individuals, the corporation is considered as a
publicly-held corporation, thus, exempt from
IAET.
Determination of Reasonable Needs of the
Business:
An accumulation of earnings or profits (including
undistributed earnings or profits of prior years) is
unreasonable if it is not necessary for the
purpose of
the business, considering all the circumstances
of
the case.
To determine the reasonable needs of the
business
in order to justify an accumulation of earnings,
the
Regulations adhere to the so-called Immediacy
Test under American jurisprudence as adopted
in
this jurisdiction. Accordingly, the term
reasonable
needs of the business means the immediate
needs
of the business, including reasonably anticipated
needs. In either case, the corporation should be
able
to prove: (a) an immediate need for the
accumulation of the earnings and profits, or (b)
the
direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such
accumulation would be deemed to be not for the
reasonable needs of the business, and the
penalty
tax would apply.
TAXATION OF PARTNERSHIPS
CLASSIFICATION OF PARTNERSHIPS FOR TAX
PURPOSES
(1) General Professional Partnerships (GPP)

partnerships formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business. A GPP is
exempt from income tax. It is, however, required
to file a tax return for its income for the purpose
of furnishing information as to the share in the
gains or profits that each partner shall include in
his individual tax return.
(2) Other Partnerships (or General Copartnerships)
partnerships wherein all or part of their income is
derived from the conduct of trade or business.
An
ordinary business partnership is considered as a
corporation and is thus subject to corporate tax
of
30%.
OTHER PARTNERSHIPS (OR GENERAL COPARTNERSHIPS)
Rules:
(1) The partnership is subject to the same rules

on
corporations (capital gains tax, final tax on
passive income, normal tax, minimum corporate
income tax [MCIT] and gross income tax [GIT]),
but is not subject to the improperly accumulated
earnings tax [IAET]. The partnership must file
quarterly and year-end income tax returns.
(2) The taxable income of the partnership, less
the
normal corporate income tax (30%) thereon, is
the
distributable net income of the partnership.
The share of a partner in the partnerships
distributable net income of a year shall be
deemed
to have been actually or constructively received
by
the partners in the same taxable year and shall
be
taxed to them in their individual capacity,
whether
actually distributed or not. [Sec. 73(D)] Such
share
will be subjected to a final tax of 10% to be
withheld
by the partnership. [Sec. 24(B)(2)]
CO-OWNERSHIP
There is co-ownership
(1) When two or more heirs inherit and undivided
property from a decedent.
(2) When a donor makes a gift of an undivided
property in favor of two or more donees.
When Co-ownership is not subject to tax
When the co-ownerships activities are limited
merely to the preservation of the co-owned
property
and to the collection of the income from the
property. The income derived by a co-owner from
the
property shall be reported in his individual tax
return
regardless of whether such income is actually or
constructively received.
When Co-ownership is subject to tax
The following circumstances would render a
coownership
subject to a corporate income tax: (a)
When a co-ownership is formed or established
voluntarily, or upon agreement of the parties; (b)
When the individual co-owner reinvested his
share in
the co-ownership to produce another
incomegenerating
activity, and (c) When the inherited
property remained undivided for more than ten
years, and no attempt was ever made to divide
to
PAGE 85
same among the co-heirs, nor was the property

under administration proceedings nor held in
trust,
the property should be considered as owned by
an
unregistered partnership.
Automatically converted into an unregistered
partnership the moment the said common
properties
and/or the incomes derived from them are used
as a
common fund with intent to produce profits for
the
heirs in proportion to their respective shares in
the
inheritance as determined in a project partition
either duly executed in an extrajudicial

settlement or
approved by the court in the corresponding
testate
or intestate proceeding. [Ona v. CIR, May, 25
1972]
JOINT VENTURE AND CONSORTIUM
To constitute a joint venture, certain factors

are
essential. Each party to the venture must make a
contribution, not necessarily of capital, but by
way of
services, skill, knowledge, material or money,;
profits
must be shared among the parties; there must
be a
joint proprietary interest and right of mutual
control
over the subject matter of the enterprise; and
usually, there is single business transaction.
An unincorporated joint venture is taxed likes a
corporation. The share of the joint venture
partners
will no longer be taxable to them because they
partake of dividends if paid to a domestic or
resident
corporation. However, an unincorporated joint
venture formed for the purpose of undertaking a
construction project or engaging in petroleum
operations pursuant to the consortium
agreement
with the Philippine Government is not subject to
the
corporate income tax. Only the joint venture
partners will be taxed on their respective shares
in
the income of the joint ventures.
Two elements necessary to exempt a joint
venture or
consortium from tax
(a) The joint venture must be an unincorporated
entity formed by two or more persons
(b) The joint venture was formed for the purpose
of
undertaking a construction project, or engaging
in
the petroleum and other energy operations with
operating contract with the government.
TAXATION OF GENERAL PROFESSIONAL
PARTNERSHIPS
RULES
(1) A GPP is a partnership formed by persons for

the
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in trade or business. A GPP as
suchshall
not be subject to the income tax. It is not a
taxable
entity for income tax purposes.
(2) The partners shall only be liable for income
tax only
in their separate and individual capacities.
(3) For purposes of computing the distributive
share
of the partners, the net income of the GPP shall
be computedin the same manner as a
corporation.
(4) Each partner shall report as gross income his
distributive share, actually or constructively
received, in the net income of the partnership.
(5) The distributive share of a partner (actual or
constructive) shall be subject to a creditable
withholding income tax of 10% ifthe amount
share
is not more than P720,000 and 15% if the

amount
of the share is more than P720,000. (RR 2- 1998)
(6) If the partnership sustains a net operating
loss,
the partners shall be entitled to deduct their
respective shares in the net operating loss from
their individual gross income.
NOTES
(a) GPP is not a taxable entity

(1) The GPP is deemed to be no more than a
mere mechanism or a flow-through entity in
the generation of income by, and the ultimate
mechanism distribution of such income to the
individual partners. (Tan v. Commissioner [Oct.
3, 1994])
(2) But the partnership itself is required to file
income tax returns for the purpose of
furnishing information as to the share in the
gains or profits which each partner shall
include in his individual return. (RR 2- 1998)
(b) The share of an individual partner in the net
profit
of a general professional partnership is deemed
to have been actually or constructively received
by the partner in the same taxable year in which
such partnership net income was earned, and
shall
be taxed to them in their individual capacities,
whether actually distributed or not, at the
graduated income tax ranging from 5% to 32%.
Thus, the principle of constructive receipt of
income or profit is being applied to
undistributed profits of GPPs. The payment [to
the partners] of such tax-paid profits in another
year should no longer be liable to income tax.
(Mamalateo)
WITHHOLDING TAX
CONCEPT
Withholding tax is a method of collecting income

tax
in advance from the taxable income of the
recipient
of income. It is a systematic way of collecting
taxes at
PAGE 86
source, an indispensable method of collecting

taxes
to ensure adequate revenue for the government.
The withholding of income tax on compensation
income, on certain income payments made to
resident taxpayers, and on income payments
made
to non-resident taxpayers is very important for
all
taxpayers, because the obligation to withhold
and
remit the tax is mandatory and prescribed by
law.
In the operation of the withholding tax system,
the
payee is the taxpayer, the person on whom the
tax is
imposed, while the payor, a separate entity, acts
no
more than an agent of the government for the
collection of the tax in order to ensure its
payment.
The amount thereby used to settle the tax
liability is
deemed sourced from the proceeds constitutive
of
the tax base. In an ad valorem tax, the tax paid
or
withheld is not deducted from the tax base,

except
when the law clearly spells out in defining the
tax
base.
The duty to withhold is different from the duty to
pay
income tax. The revenue officers generally
disallow
the expenses claimed as deduction from gross
income, if no withholding of tax as required by
law or
the regulations was withheld and remitted to the
BIR
within the prescribed dates.
In addition, the withholding tax that should have
been withheld and remitted to the BIR as well as
the
penalties for non-, late or erroneous payment of
the
withholding tax such as surcharges and
deficiency
interest are assessed by the BIR. (Mamalateo)
Withholding Agent
Any person or entity who is required to deduct
and
remit the taxes withheld to the government.
(a) In general, any juridical person, whether or
not
engaged in trade or business;
(b) An individual, with respect to payments made
in
connection with his trade or business. However,
insofar as taxable sale, exchange or transfer of
real property is concerned, individual buyers who
are not engaged in trade or business are also
constituted as withholding agents. In any case,
no Certificate Authorizing Registration (CAR)/Tax
Clearance Certificate (TCL) shall be issued to the
buyer unless the withholding tax due on the sale,
transfer or exchange of real property has been
duly paid; ac. All government offices, including
GOCCs, as well as local government units.
All income payments which are required to be
subjected to withholding tax shall be subject to
the
corresponding withholding tax rate to be
withheld by
the person having control over the payment and
who, at the same time, claims the expenses. (RR
302003)
Duties and Obligations of the Withholding Agent
(a) To Register - withholding agent is required to
register within ten (10) days after acquiring such
status with the Revenue District office having
jurisdiction where the business is located
(b) To Deduct and Withhold - withholding agent is
required to deduct tax from all money payments
subject to withholding tax
(c) To Remit the Tax Withheld - withholding agent
is
required to remit tax withheld at the time
prescribed by law and regulations
(d) To File Annual Return - withholding agent is
required to file the corresponding Annual
Information Return at the time prescribed by law
and regulations
(e) To Issue Withholding Tax Certificates withholding agent shall furnish Withholding Tax
Certificates to recipient of income payments
subject to withholding (Available, BIR Website)
KINDS
Withholding of final tax of certain incomes

Subject to rules and regulations the Secretary of
Finance may promulgate, upon the

recommendation
of the Commissioner, requiring the filing of
income
tax return by certain income payees, the tax
imposed
or prescribed by specific section of the NIRC on
specified items of income shall be withheld by
payorcorporation
and/or person and paid in the same
manner and subject to the same conditions as
provided in Section 58 of the NIRC.
Withholding of creditable tax at source
The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the
withholding of a tax on the items of income
payable
to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than
one
percent (1%) but not more than thirty-two
percent(32%), which shall be credited against
the
income tax liability of the taxpayer for the
taxable
year.
Withholding of Creditable Tax (RR 2-98)
(a) Under the creditable withholding taxsystem,
taxes
withheld on certain income payments are
intended to equal or at least approximatethe tax
due of the payee on said income.
(b) The income recipient is still required to file an
income tax return, to report the income and/or
pay the difference between the tax withheld and
the tax due on the income.
PAGE 87
(c) Taxes withheld on income payments covered

by
the expanded withholding tax and compensation
income are creditable in nature.
WITHHOLDING OF VAT
(1) On gross payments for the purchase of goods

(2) On gross payments for the purchase of
services
(3) Payments made to government public works
contractors
(4) Payments for lease or use of property or
property
rights to non-resident owners
FILING OF RETURN AND PAYMENT OF TAXES WITHHELD
Where to file and pay:

(1) Authorized agent bank;
(2) Collection Agent;
(3) the duly authorized Treasurer of the city or
municipality where the employer has his legal
residence or principal place of business, or in
case
the employer is a corporation, where the
principal
office is located; or
(4) As Commissioner otherwise permits.
Period for filing and payment:
(a) The return shall be filed and the payment
made
within twenty-five (25) days from the close of
each calendar quarter.
(b) The Commissioner may, with the approval of
the
Secretary of Finance, require the employers to
pay or deposit the taxes deducted and withheld
at more frequent intervals, in cases where such
requirement is deemed necessary to protect the
interest of the Government.

Taxes as Special Fund in Trust
The taxes deducted and withheld by employers
shall
be held in a special fund in trust for the
Government
until the same are paid to the said collecting
officers.
Return and payment in case of government
employees
If the employer is the Government of the
Philippines
or any political subdivision, agency or
instrumentality
thereof, the return of the amount deducted and
withheld upon any wage shall be made by the
officer
or employee having control of the payment of
such
wage, or by any officer or employee duly
designated
for the purpose.
Statements and returns
Every employer required to deduct and withhold
a
tax shall:
(1) Furnish to each such employee in respect of
his
employment a written statement confirming the
wages paid by the employer to such employee
during the calendar year, and the amount of tax
deducted and withheld and such other
information as the Commissioner may prescribe
(a) During the calendar year, on or before
January
thirty-first (31st) of the succeeding yea; or
(b) If his employment is terminated before the
close of such calendar year, on the same day
of which the last payment of wages is made
(2) Submit to the Commissioner an annual
information return on or before January thirtyfirst
(31st) of the succeeding year containing:
(a) A list of employees;
(b) The total amount of compensation income of
each employee;
(c) The total amount of taxes withheld therefrom
during the year, accompanied by copies of the
written statements furnished to employees,
and such other information as may be
deemed necessary.
The Commissioner may grant to any employer a
reasonable extension of time to furnish and
submit
the statements and returns required.
FINAL WITHHOLDING TAX AT SOURCE
(a) Under the final withholding tax system, the

amount of income tax withheld by the
withholding agent is constituted as a full and
final payment of the income tax due from payee
on the said income (e.g., interest on deposits,
royalties, etc.). The liability for payment of the
tax
rests primarily on the payor as a withholding
agent. Thus, in case of the withholding agents
failure to withhold the tax or in case of
underwithholding,
the deficiency tax shall be collected
from him. The payee is not required to file an
income tax return for the particular income, nor
is
he liable for the payment of the tax. (Sec. 2.57,
RR
No. 2-98)
(b) The finality of the withholding tax is limited
only
to the payees income tax liability on the

particular income. It does not extend to the
payees other tax liability on said income, such
as
when the said income is further subject to a
percentage tax, such as gross receipts tax in the
case of a bank.
Income payments subject to Final Withholding
Tax:
(1) Income Payments to a Citizen or to a
Resident
Alien Individual
(a) Interest on any peso bank deposit
(b) Royalties
(c) Prizes (except prizes amounting to P10,000
or less which is subject to tax under Sec.
25(A)(1) of the Tax Code
(d) Winnings (except from Philippine Charity
Sweepstake Office and Lotto)
(e) Interest income on foreign currency deposit
(f) Interest income from long term deposit
PAGE 88
(g) Cash and/or property dividends

(h) Capital Gains presumed to have been
realized from the sale, exchange or other
disposition of real property
(2) Income Payments to a Non-Resident Alien
Engaged in Trade or Business in the Philippines
(a) On Certain Passive Income
(1) cash and/or property dividend
(2) Share in the distributable net income of
a partnership
(3) Interest on any bank deposits
(4) Royalties
(5) Prizes (except prizes amounting to
P10,000 or less which is subject to tax
under Sec. 25(A)(1) of the Tax Code.
(6) Winnings (except from Philippine
Charity Sweepstake Office and Lotto)
(b) Interest on Long Term Deposits
(c) Capital Gains presumed to have been
disposition of real property
(3) Income Derived from All Sources Within the
Philippines by a Non-Resident Alien Individual
Not Engaged in Trade or Business
(a) On gross amount of income derived from all
sources within the Philippines
(b) On Capital Gains presumed to have been
realized from the sale, exchange or
disposition of real property located in the
Philippines
(4) Income Derived by Alien Individual Employed
by
a Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies
(5) Income Derived by Alien Individual Employed
by
Offshore Banking Unit
(6) Income of Aliens Employed by Foreign
Petroleum Service Contractors and
Subcontractors
(7) Income Payment to a Domestic Corporation
(a) Interest from any currency bank deposits
and yield or any other monetary benefit
from deposit substitutes and from trust
fund and similar arrangements derived from
sources within the Philippines
(b) Royalties derived from sources within the
Philippines
(c) Interest income derived from a depository
bank under the Expanded Foreign Currency
Deposit (FCDU) System
(d) Income derived by a depository bank under
the FCDU from foreign transactions with

local commercial banks
(e) On capital gains presumed to have been
disposition of real property located in the
Philippines classified as capital assets,
including pacto de retro sales and other
forms of conditional sales based on the
gross selling price or fair market value as
determined in accordance with Sec. 6(E) of
the NIRC, whichever is higher
(8) Income Payments to a Resident Foreign
Corporation
(a) Offshore Banking Units
(b) Tax on branch Profit Remittances
(c) Interest on any currency bank deposits and
yield or any other monetary benefit from
deposit substitute and from trust funds and
similar arrangements and royalties derived
from sources within the Philippines
(d) Interest income on FCDU
(e) Income derived by a depository bank under
the expanded foreign currency deposits
system from foreign currency transactions
with local commercial banks
(9) Income Derived from all Sources Within the
Philippines by a Non-Resident Foreign
Corporation
(a) Gross income from all sources within the
Philippines such as interest, dividends,
rents, royalties, salaries, premiums (except
re-insurance premiums), annuities,
emoluments or other fixed determinable
annual, periodic or casual gains, profits and
income or capital gains
(b) Gross income from all sources within the
Philippines derived by a non-resident
cinematographic film owner, lessor and
distributor
(c) On the gross rentals, lease and charter fees
derived by a non-resident owner or lessor of
vessels from leases or charters to Filipino
citizens or corporations as approved by the
Maritime Industry Authority
(d) On the gross rentals, charter and other fees
derived by a non-resident lessor of aircraft,
machineries and other equipment
(e) Interest on foreign loans contracted on or
after August 1, 1986
(10) Fringe Benefits Granted to the Employee
(except
Rank and File)
Goods, services or other benefits furnished or
granted in cash or in kind by an employer to an
individual employee (except rank and file) such
as but not limited to the following:
(a) Housing
(b) Vehicle of any kind
(c) Interest on loans
(d) Expenses for foreign travel
(e) Holiday and vacation expenses
PAGE 89
(f) Educational assistance to employees or his

dependents
(g) Membership fees, dues and other expense
in social and athletic clubs or other similar
organizations
- Health insurance
(h) Informers Reward
CREDITABLE WITHHOLDING TAX
Taxes withheld on certain income payments are

intended to equal or at least approximate the tax
due of the payee on the income. The income
recipient is still required to file his income tax
return
as prescribed in Section 51 of the NIRC, wither to

report the income and/or pay the difference
between
the tax withheld and the tax due on the income.
Expanded withholding tax
(a) a kind of withholding tax which is prescribed
on
certain income payments and is creditable
against the income tax due of the payee for the
taxable quarter/year in which the particular
income was earned.
(b) An income payment is subject to the
expanded
withholding tax if the following conditions
concur:
(1) An expense is paid or payable by the
taxpayer,
which is income to the recipient thereof subject
to
income tax;
(2) The income is fixed or determinable at the
time of
payment;
(3) The income is one of the income payments
listed
in the regulations that is subject to withholding
tax;
(4) The income recipient is a resident of the
Philippines liable to income tax; and
(5) The payor-withholding agent is also a
resident of
the Philippines.
Income payments subject to Expanded
Withholding
Tax:
(1) Professional fees / talent fees for services
rendered by the following individuals:
(a) Those individually engaged in the practice
of profession or callings
(b) Professional entertainers such as but not
limited to actors and actresses, singers and
emcees
(c) Professional athletes including basketball
players, pelotaris and jockeys
(d) Directors involved in movies, stage, radio,
television and musical directors
(e) Insurance agents and insurance adjusters
(f) Management and technical consultants
(g) Bookkeeping agents and agencies
(h) Other recipient of talent fees
(i) Fees of directors who are not employees of
the company paying such fees whose duties
are confined to attendance art and
participation in the meetings of the Board of
Directors
(2) Professional fees, talent fees, etc for services
of
taxable juridical persons
(3) Rental of real property used in business
(4) Rental of personal properties in excess of P
10,000 annually
(5) Rental of poles, satellites and transmission
facilities
(6) Rental of billboards
(7) Cinematographic film rentals and other
payments
(8) Income payments to certain contractors
(a) General engineering contractors
(b) General building contractors
(c) Specialty contractors
(d) Other contractors like:
(1) Transportation contractors which
include common carriers for the
carriage of goods and merchandise of
whatever kind by land, air or water,
where the gross payments by the payor

to the same payee amounts to at least
two thousand pesos (P2,000) per
month, regardless of the number of
shipments during the month
(2) Filling, demolition and salvage work
contractors and operators of mine
drilling apparatus
(3) Operators of dockyards
(4) Persons engaged in the installation of
water system, and gas or electric light,
hear or power
(5) Operators of stevedoring, warehousing
or forwarding establishments
(6) Printers, bookbinders, lithographers
and publishers, except those principally
engaged in the publication or printing
of any newspaper, magazine, review or
bulletin which appears at regular
intervals, with fixed prices for
subscription and sale
(7) Advertising agencies, exclusive of
payments to media
(8) Independent producers of television,
radio and stage performances or shows
(9) Independent producers of "jingles"
(10) Labor recruiting agencies
(11) Persons engaged in the installation of
elevators, central air conditioning units,
computer machines and other
equipment and machineries and the
maintenance services thereon
(12) Messengerial, janitorial, security,
private detective and other business
agencies
PAGE 90
(13) Persons engaged in landscaping

services
(14) Persons engaged in the collection and
disposal of garbage
(15) TV and radio station operators on sale
of TV and radio airtime, and
(16) TV and radio blocktimers on sale of TV
and radio commercial spots
(17) Persons engaged in the sale of
computer services, computer
programmers, software
developer/designer, etc.
(9) Income distribution to the beneficiaries of
estates and trusts
(10) Gross commission or service fees of
customs,
insurance, stock, real estate, immigration and
commercial brokers and fees of agents of
professional entertainers
(11) Commission, rebates, discounts and other
similar considerations paid/granted to
independent and exclusive distributors,
medical/technical and sales representatives and
marketing agents and sub-agents of multi level
marketing companies
(12) Income payments to partners of general
professional partnerships
(13) Payments made to medical practitioners
through a duly registered professional
partnership
(14) Payments for medical/dental/veterinary
services
thru hospitals/clinics/health maintenance
organizations, including direct payments to
service providers
(15) Gross selling price or total amount of
consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of
real property
(16) Additional income payments to government

personnel from importers, shipping and airline
companies or their agents
(17) Certain income payments made by credit
card
companies
(18) Income payments made by the top 10,000
private corporations to their purchase of goods
and services from their local/resident suppliers
other than those covered by other rates of
withholding
(19) Income payments by government offices on
their
purchase of goods and services, from
local/resident suppliers
(20) Tolling fees paid to refineries
(21) Payments made by pre-need companies to
funeral parlors
(22) Payments made to embalmers by funeral
parlors
(23) Income payments made to suppliers of
agricultural products
(24) Income payments on purchases of mineral,
mineral products and quarry resources
Withholding tax on compensation
The tax withheld from income payments to
individuals arising from an employer-employee
relationship.
Compensationisany remuneration received for
services performed by an employee from his
employer under an employee-employer
relationship.
The different kinds of compensation are:
(1) Regular compensation - includes basic salary,
fixed allowances for representation,
transportation and others paid to an employee
(2) Supplemental compensation - includes
payments to an employee in addition to the
regular compensation such as but not limited to
the following:
(a) Overtime Pay
(b) Fees, including director's fees
(c) Commission
(d) Profit Sharing
(e) Monetized Vacation and Sick Leave
(f) Fringe benefits received by rank & file
employees
(g) Hazard Pay
(h) Taxable 13th month pay and other benefits
(i) Other remunerations received from an
employee-employer relationship
Exemptions from Withholding tax on
compensation:
Remuneration as an incident of employment
(a) Retirement benefits received under RA 7641
(Retirement Pay Law) and those received by
officials and employees of private firms, under a
reasonable private benefit plan.
(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
(g) Remuneration paid for agricultural labor
(h) Remuneration for domestic services
PAGE 91
(i) Remuneration for casual labor not in the

course
of an employer's trade or business
(j) Compensation for services by a citizen or
resident of the Philippines for a foreign
government or an international organization
(k) Payment for damages actual, moral,
exemplary damages received by an employee or
his heirs pursuant to a final judgment or
compromise agreement arising out of or related
to an employer-employee relationship.
(l) Proceeds of Life Insurance the proceeds of
life
insurance policies paid to the heirs or
beneficiaries upon the death of the insured,
whether in a single sum or otherwise; provided
however, that interest payments agreed under
the policy for the amounts which are held by the
insured under such an agreement shall be
INCLUDED in the gross income.
(m) Amount received by the insured as a return
of
premium
(n) Compensation for injuries or sickness
amounts
received through accident or health insurance or
under Workmens Compensation Acts, as
compensation for personal injuries or sickness,
plus the amount of any damages received
whether by suit or agreement on account of such
injuries or sickness.
(o) Income exempt under Treaty
(p) Thirteenth (13th) month pay and other
benefits
(not to exceed P 30,000)
(1) Mandatory 1 month basic salary received
after the twelfth *12th) month pay
(2) Other benefits such as Christmas bonus,
productivity incentives, loyalty award, gift in
cash or in kind and other benefits of similar
nature actually received by officials and
employees of both government and private
offices including the Additional
Compensation Allowance (ACA) granted
and paid to all officials and employees of
the Nations Government (NGAs) including
State Universities and Colleges (SUCs),
Government-Owned-or-Controlled
Corporations (GOCCs), Government
Financial Institutions (GFIs) and Local
Government Units (LGUs)
(a) De minimis benefits, given in excess of
the ceilings prescribed in regulations,
shall be taxable to the recipient
employee only if such excess is beyond
the P30,000 threshold.
(q) GSIS, SSS, Medicare and other contributions
GSIS, SSS, Medicare and Pag-Ibig contributions,
and union dues of individual employees
(r) Compensation income of MWEs who work in
the
private sector and being paid the statutory
minimum wage (SMW), as fixed by Regional
Tripartitie Wage and Productivity Board
(RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place
where he/she is assigned
(s) Compensation income of employees in the
public sector with compensation income of not

more than the SMW in the non-agricultural
sector, as fixed by RTWPB/NWPC, applicable to
the place where he/she is assigned.
TIMING OF WITHHOLDING
The obligation of the payor to deduct and

withhold
the tax arises at the time an income payment is
paid
or payable, or the income payment is accrued or
recorded as an expense or asset, whichever is
applicable, in the payors books, whichever
comes
first. The term payable refers to the date the
obligation becomes due, demandable or legally
enforceable.
Where income is not yet paid or payable but the
same has been recorded as an expense or asset,
whichever is applicable, in the payors books, the
obligation to withhold shall arise in the last
month of
the return period in which the same is claimed as
an
expense or amortized for tax purposes.
(Mamalateo)
PAGE 92
PAGE 93
Estate Tax
Estate tax laws rest in their essence upon the

principle that death is the generating source
from
which the taxing power takes its being, and that
it is
the power to transmit or the transmission from
the
dead to the living on which the tax is more
immediately based. [Lorenzo v. Posadas, 64 Phil
353]
DEFINITION
(a) A graduated tax imposed upon the privilege
of
the decedent to transmit property at death and
is
based on the net estate, considered as a unit,
and
it is determined by subtracting from the gross
estate the allowable deductions.
(b) Tax on the right to transmit property at death
and
on certain transfers which are made by the
statute the equivalent of testamentary
dispositions and is measured by the value of
property at time of death.
NATURE
It is in reality an excise or privilege tax imposed
on
the right to succeed to, receive, or take property
by or
under a will or the intestacy law, or deed, grant,
or
gift to become operative at or after death.
[Lorenzo v.
Posadas, 64 Phil 353]
PURPOSE OR OBJECT
PURPOSE OF ESTATE TAX
(1) The object of estate tax is to tax the shifting

of
economic benefits and enjoyment of property
from the dead to the living.
(2) Death taxes are imposed to give added
income to
the government.
JUSTIFICATION (THEORIES) FOR THE IMPOSITION OF
ESTATE TAX
(1) Benefit received theory The State collects

the tax
because of the services it renders in the
distribution of the estate of the decedent, either
by law or in accordance with his will.
(2) Privilege theory or state partnership theory
Succession to the property of a deceased person
is not a right but a privilege granted by the State
and consequently, the legislature can
constitutionally burden such succession with a
tax.The State collects the tax because of the
protection it provides in the acquisition of large
estates. Hence, the State is a silent or passive
partner in the accumulation of said large
property.
(3) Ability to pay theory Receipt of inheritance,
which is in the nature of unearned wealth or
windfall, place assets into the hands of the heirs
and beneficiaries. This creates an ability to pay
the tax and thus contributes to government
income.
(4) Redistribution of wealth theory Receipt of
inheritance is a contributing factor to the
inequalities in wealth and income. The
imposition of estate tax reduces the property
received by the successor, this helping to
promote
a more equitable distribution of wealth in society.
The tax base is the value of the property and the
progressive scheme of taxation is precisely
motivated by the desire to mitigate the evils of
inheritance in the present form. The taxes paid
by

General Principles of Taxation and Income Taxation

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General Principles of Taxation and Income Taxation

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General Principles of

DEFINITION AND CONCEPT OF TAXATION

(a) is a mode by which governments make

(a) are enforced proportional contributions from

silent on the subject. Constitutional provisions

Subject to constitutional and inherent

Subject to constitutional and inherent

(see Lutz vs. Araneta, 98 Phil. 148; City of

[1961]), or the wisdom, advisability, or

(3) It is proportionate in character or islaid by

It is also an important characteristic of most

slump to expand business.

will not necessarily render the tax imposed

Taxes are the lifeblood of the government and

Taxes are the lifeblood of the government and so

The power of taxation proceeds upon theory that

The limited powers of sovereignty are confined

PROSPECTIVITY OF TAX LAWS

General rule: Tax laws are prospective in

Unless otherwise provided by the tax itself, taxes

(2) Tariff and Customs Code- does not express

after the expiration of one (1) year, from the

Means taxing twice for the same tax period the

If the tax law follows the constitutional rule on

Shifting of tax burden

Incidence of taxation is that point on which the

result. Impact is the imposition of the tax;

consecutive years coupled with his intentional

Meaning of exemption from taxation

(4) Not necessarily discriminatory, provided it

taxation, the exception.

General Rule: revocable by the government.

extinguished to the concurrent amount.

(a) A contract whereby the parties, by making

(1) In the National Internal Revenue Code, the

in favor of the taxing authority. For the right of

strictissimi juris against the taxpayer. (Republic

Requisites for validity and effectivity of

In case of conflict with the law or the

The Commissioner has the sole authority to issue

Non-retroactivity of tax laws

Stated in another way, taxation may

(1) The delegation shall not contravene any

(2) The delegation is effected either by the

from the policy and purposes of the Act.

be, inside or outside of his country, to the

may determine the situs. Situs of taxation

Comity - respect accorded by nations to each

be construed liberally in favor of non-tax liability

Provisions Directly Affecting Taxation

individuals who are to be affected by a tax.

Prohibition against taxation of religious,

other taxes (Lladoc v. Commissioner, 14 SCRA

Exclusive" - possessed and enjoyed to the

entitled to such exemptions, subject to the

taxes, custom duties, and other taxes imposed

28, 1987 CONSTITUTION

uniform and equitable likewise limit, although

(2) The President shall have the power to veto

Non-impairment of jurisdiction of the Supreme

The Congress shall have the power to define,

The Supreme Court shall have the following

No law shall be passed increasing the appellate

Scope of Judicial Review in taxation: limited only