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1.

Exempt Transactions (Section 30, NIRC)


SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) 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;
(C) 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
nonstock 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 nonstock
corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person;
(F) 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;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion
of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) 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
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to them the proceeds of sales,
less the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any
of their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.

2. Ordinary Asset Vs. Capital Asset (Sec. 39, NIRC)


SEC. 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - The term 'capital assets' means property held by the taxpayer (whether or
not connected with his trade or business), but does not include stock in trade of the taxpayer or
other property of a kind which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in the trade or business,
of a character which is subject to the allowance for depreciation provided in Subsection (F) of
Section 34; or real property used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or
exchanges of capital assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or
exchanges of capital assets over the gains from such sales or exchanges.

(B) Percentage Taken into Account - In the case of a taxpayer, other than a corporation, only 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.
(1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12)
months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

(C) Limitation on Capital losses. - Losses from sales or exchange capital assets shall be allowed
only to the extent of the gains from such sales or exchanges. 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, or 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 limitation and shall not be included in determining the applicability of such limitation to
other losses.

(D) Net Capital Loss Carry-Over. - If any taxpayer, other than a corporation, sustains in any taxable
year a net capital loss, such loss (in an amount not in excess of the net income for such 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 twelve (12) months.

(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder upon
the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued
by any corporation (including those issued by a government or political subdivision thereof) with
interest coupons or in registered form, shall be considered as amounts received in exchange
therefor.

(F) Gains or losses from Short Sales, Etc. - For purposes of this Title -
(1) Gains or losses from short sales of property shall be considered as gains or losses from sales
or exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property
shall be considered as capital gains or losses.

CAPITAL ASSET VS. ORDINARY ASSET

ORDINARY ASSET CAPITAL ASSET


(1) Stock in trade of the taxpayer or other Property held by the taxpayer, whether or not
property of a kind which would properly connected with his trade or business which is
be included in the inventory of the not an ordinary asset. Generally, they include:
taxpayer if on hand at the close of the (1) stocks and securities held by taxpayers
taxable year. other than dealers in securities
(2) Property held by the taxpayer primarily for (2) real property not used in trade or business,
sale to customers in the ordinary course of such as residential house and lot, idle or
his trade or business. vacant land or building
(3) Property used in the trade or business of (3)investment property, such as interest in a
a character which is subject to the partnership, stock investment
allowance for depreciation (4)Personal or non- business properties, such
(4) Real property used in the trade or as family car, home appliances, jewelry.
business of the taxpayer, including
property held for rent.

3. Capital Gains Tax on Dealings in Real Property Located in the Philippines


Sec. 24 (D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%)
based on the gross selling price or current fair market value as determined in accordance
with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed
to have been realized from the sale, exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any,
on gains from sales or other dispositions of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations shall be determined
either under Section 24 (A) or under this Subsection, at the option of the taxpayer;

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding,
capital gains presumed to have been realized from the sale or disposition of their principal residence
by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the date of sale or disposition, shall be
exempt from the capital gains tax imposed under this Subsection: Provided, That 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: Provided, further, That the Commissioner shall have been duly notified
by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That
the said tax exemption can only be availed of once every ten (10) years: Provided, finally, That 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 capital gains tax. For this
purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall
be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to
determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall
be imposed thereon.

NOTES:
Income from dealings in real property located in the Philippines;
- Capital Asset; not used in trade or business; not primarily held for sale
- CGT of 6% FMV or selling price, whichever is higher
- Cost is not deducted from the FMV or selling price when multiplied by the rate of 6% to get the
CGT of the capital asset; cost is only deducted if it is classified as ordinary asset.

What if the real property is located abroad?


- Determine the owner of the real property. If owned by a resident citizen or domestic corporation,
it is taxable (worldwide). CGT or ordinary income tax? They will form part of the ordinary income.
Because they are located outside the Philippines, even if they are NOT used in trade or business
or is treated as capital assets if they be situated in the Philippines, they are treated as normal
income on the part of the domestic corporation or the resident citizen.
- Reason of the law: administration and implementation of the law. How will the FMV be determined
if it is located outside the Philippines? And when we talk of CGT, it necessitates that you have to
file a separate Tax Return. This case is difficult that the property may not be declared to be part
of the income.

4. Capital Gains Tax on Dealings in Shares of Stock of Philippine Corporations


Before TRAIN Law:
Sec. 24 (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed
of through the stock exchange.

Not over P 100,000 5%


On any amount in excess of P 100,000 10%
Under TRAIN law:
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange.— The provisions
of Section 39(B) notwithstanding, a final tax at the rate of fifteen percent (15%) is hereby
imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed
of through the stock exchange.

NOTES:
Sale of shares of stocks
a) listed AND traded in the Local Stock Exchange
- exempt from CGT, but subject to Stock Transactions Tax (STT) – 1⁄2 of 1% Fair Market Value
(FMV) of the shares of stocks
- STT is a percentage tax, a business tax
- STT is automatically withheld or remitted by the stock brokers

b) not listed OR not traded in the Local Stock Exchange


- subject to CGT
first P100, 000 – 5%;
excess of P100, 000 – 10%
(based on the FMV [less cost] of the shares or the gain [selling price – cost]
of the shares or the Book Value, whichever is higher)
- covers listed but not traded shares
*FMV is based on the zonal value (as determined by the CIR) or the appraiser’s certificate
*zonal value will be used only when the corporation has real properties

5. Final Tax on Interest Income, Dividend Income, Royalty Income and Prizes/Awards
Sec. 24 (B) Rate of Tax on Certain Passive Income: -
(1) Interests, Royalties, Prizes, and Other Winnings. -
A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest
from any currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements; royalties, except on books, as well as other
literary works and musical compositions, which shall be imposed a final tax of ten percent
(10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be
subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however,
That interest income received by an individual taxpayer (except a nonresident
individual) from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half percent (7
1/2%) of such interest income: Provided, further, That interest income from long-term deposit
or investment in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under
this Subsection: Provided, finally, That should the holder of the certificate pre-terminate 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:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends. - A final tax at the following rates shall be imposed upon
the cash and/or property dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies, or on the 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, or on the 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 co-venturer:

Six percent (6%) beginning January 1, 1998;


Eight percent (8%) beginning January 1, 1999;
Ten percent (10%) beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January
1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if
declared or distributed on or after January 1, 1998, be subject to this tax.

NOTES: 20% FINAL TAX on:


a.) Interest from any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements (except: Interest income received
by an individual taxpayer (except a nonresident individual) from a depository bank under the
expanded foreign currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7 1/2%) of such interest income)
b.) Royalties (except on books, as well as other literary works and musical compositions, which
shall be imposed a final tax of ten percent (10%))
c.) Prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be
subject to tax under Subsection (A) of Section 24)
d.) Other Winnings (except Philippine Charity Sweepstakes and Lotto winnings)

6. Definition of Gross Income


SEC. 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income means all
income derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.

a.) Compensation for services in whatever form paid, including, but not limited to
fees, salaries, wages, commissions, and similar items
- All remuneration for services performed by and EE for his ER under an ER-EE relationship
- Wages and salaries, insofar as taxation is concern, are just the same
- The remuneration referred here DOES NOT INCLUDE (Sec. 78(a) of NIRC):
(1) For agricultural labor paid entirely in products of the farm where the labor is
performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government or an
international organization.
- Includes the cash value of all remuneration paid in any medium other than cash (like for
example the ER pays you with properties or stock options basta not cash, it is still considered
as compensation income and subject to income tax, just determine the cash value)
- Types of taxable compensation income:
 Salaries
 Wages
 Bonus
 Remuneration
 Honorarium
 Benefits and allowances
 For government: Representation and Transportation Allowances (RATA); Personal
Emergency Relief Allowance (PERA)
 Longevity pay
 Subsistence allowance
 Hazard pay
 Annuities, pensions and etc.

b.) Business Income - gross income derived from the conduct of trade or business or the
exercise of a profession
- Manufacturing, merchandising, mining business:
GI = Total Sales - COGS + other income from other investment
- Service enterprises (like accounting firm, law firm, etc.)
GI = Total receipts - Direct costs and expenses

c.) Gains derived from dealings in property (already discussed above)

d.) Interest
1. Interest on bank deposit/deposit substitutes/trust fund and similar arrangements
2. Interest from lending
3. Interest from bonds
4. Interest on foreign bonds/government bonds
5. Interest on treasury bills
6. Interest earned from deposits maintained under the FCDU system
7. Interest income of pawnshop operators

e.) Rents
(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
(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 pre- paid 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 non-
resident taxpayer shall be taxed as follows:

Lease of Real Property

f.) Royalties
(1) Royalty is 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.

NOTE:
 The entity must be involved in granting franchises or royalties.
 If it’s a one-time transaction, it will be recorded as passive income, and not part of the
gross income.

g.) Dividends
(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.

Kinds:
A. Stock Dividends
General Rule: A stock dividend representing a transfer of surplus to capital account shall not
be subject to tax.
Exceptions:
1. If subsequently cancelled and redeemed by the corporation.
 The corporation will buy back the shares.
 Example: X has an existing 1000 shares of stocks in corporation R. The corporation
issued a stock dividend of additional 500 shares to X and the rest of the stockholders.
As a rule, it is not taxable. If R buys back (cancelled or redeemed) the 500 shares from
X, the latter will receive its monetary equivalent. This is now subject to tax.

2. If 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.
 One shareholder has an increased shareholding while another shareholding decreases.
 Dilution: A reduction in the ownership percentage of a share of stock caused by the
issuance of new stock.
 Example:
Stockholders Stock Dividend Total
A P 100 20% P 100 P 200 31.25%
B P 100 20% P 10 P 110 17.18%

C P 100 20% P 10 P 110 17.18%


D P 100 20% P 10 P 110 17.18%
E P 100 20% P 10 P 110 17.18%
P 500 P 140 P 640

B. Property Dividends
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.

C. Liquidating Dividends
Represents distribution of all the property or assets of a corporation in complete liquidation
or dissolution. It is strictly not dividend income, but rather is 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.

h.) 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.

i.) 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 associations shall be EXEMPT from income tax.

j.) 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 work, age, loss or injury. It is
generally taxable unless the law states otherwise.

k.) 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 latter’s 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.
7. Exclusions from Gross Income (Section 32B, NIRC)

(B) Exclusions from Gross Income. - The following items shall not be included in gross income and
shall be exempt from taxation under this Title:

(1) 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, but if such amounts are held by the insurer
under an agreement to pay interest thereon, the interest payments shall be included in gross income.

(2) Amount Received by Insured as Return of Premium. - 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.

(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent:
Provided, however, That income from such property, as well as gift, bequest, devise or descent of
income from any property, in cases of transfers of divided interest, shall be included in gross income.

(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance
or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.

(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.

(6) Retirement Benefits, Pensions, Gratuities, etc.-

(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer: Provided, That the retiring official or employee
has been in the service of the same employer for at least ten (10) years and is not less than fifty
(50) years of age at the time of his retirement: Provided, further, That the benefits granted under
this subparagraph shall be availed of by an official or employee only once. For purposes of this
Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for the officials or employees, or
both, for the purpose of distributing to such officials and employees the earnings and principal
of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any
part of the corpus or income of the fund be used for, or be diverted to, any purpose other than
for the exclusive benefit of the said officials and employees.

(b) Any amount received by an official or 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 or other physical disability or for any cause beyond the control of the said
official or employee.

(c) The provisions of any existing law to the contrary notwithstanding, social security benefits,
retirement gratuities, pensions and other similar benefits received by resident or nonresident
citizens of the Philippines or aliens who come to reside permanently in the Philippines from
foreign government agencies and other institutions, private or public.
(d) 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.

(e) Benefits received from or enjoyed under the Social Security System in accordance with the
provisions of Republic Act No. 8282.

(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity
received by government officials and employees.

(7) Miscellaneous Items. -

(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines
in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the
Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (iii) international or regional financial institutions
established by foreign governments.

(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any
public utility or from the exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision thereof.

(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if:

(i) The recipient was selected without any action on his part to enter the contest or
proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to
receiving the prize or award.

(d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local
and international sports competitions and tournaments whether held in the Philippines or abroad
and sanctioned by their national sports associations.

(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of
public and private entities: Provided, however, That the total exclusion under this subparagraph
shall not exceed eighty-two thousand pesos (P82,000) which shall cover:

(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended
by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No.
851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, That
every three (3) years after the effectivity of this Act, the President of the Philippines shall
adjust the amount herein stated to its present value using the Consumer Price Index (CPI),
as published by the National Statistics Office.

(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-Ibig
contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains
realized from the same or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years.

(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon
redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this
Code.

8. De Minimis Benefit
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.
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)

9. Fringe Benefits Tax (Section 33, NIRC)

SEC. 33. Special Treatment of Fringe Benefit. -

(A) Imposition of Tax. - A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three
percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and
thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to
the employee (except rank and file employees as defined herein) by the employer, whether an individual
or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business
or profession of the employer, or when the fringe benefit is for the convenience or advantage of the
employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner
as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit
shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%)
effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent
(68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to
employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable
rates imposed thereat: Provided, further, That the grossed -up monetary value of the fringe benefit shall
be determined by dividing the actual monetary value of the fringe benefit by the difference between one
hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E)
of Section 25.

(B) Fringe Benefit Defined. - For purposes of this Section, the term 'fringe benefit' means any good, service
or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except
rank and file employees as defined herein) such as, but not limited to, the following:

(1) Housing;

(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference between the market rate
and actual rate granted;

(6) Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of
what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:

(1) Fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining
agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary
of Finance, upon recommendation of the Commissioner.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner,
such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section,
taking into account the peculiar nature and special need of the trade, business or profession of the
employer.

10. Applicable Provisions under Republic Act. No. 10963 (TRAIN LAW)
TO ease the burden of common taxpayers and to provide additional resources for funding social and
economic infrastructure that will benefit the poor, President Rodrigo R. Duterte signed into law on Dec.
19 Republic Act (RA) No. 10963.

Also known as the “Tax Reform for Acceleration and Inclusion (TRAIN),” the Act amends and repeals
certain provisions of the previously amended RA No. 8424, otherwise known as the National Internal
Revenue Code of 1997.

The TRAIN Law is a consolidation of House Bill No. 5636 and Senate Bill No. 1592 that were both passed
by the House of Representatives and the Senate after the bicameral conference committee report was
ratified on Dec. 13. From the proposed bill, the following line items were vetoed by the President with the
corresponding ratiocination of his veto:

1. Continued entitlement of the 15 percent special tax rate of gross income for qualified
employees of RHQs/ROHQs, OBUs, or petroleum service contractors and subcontractors. The provision
violates the equal protection clause and the rule of equity and uniformity. Given the significant reduction
in personal income tax, the employees of the aforementioned firms should follow the regular tax rates as
with other individual taxpayers.

2. Zero-rating of sales of goods and services to separate customs territory and tourism enterprise
zones. This provision goes against the principle of limiting the VAT zero-rating to direct exporters.
Separate customs territories create significant leakages in the previous tax system. On the other hand,
the current law for tourism enterprises explicitly allows only duty- and tax-free importation
of capital equipment, transportation equipment, and other goods.

3. Exemption from percentage tax of gross sales/receipts not exceeding P500,000. The suggested
exemption from percentage tax will result in the unnecessary decrease of revenues and may lead to
abuse and leakages. Since the affected taxpayers are already exempt from VAT, then the lower three
percent percentage tax is considered reasonable.

4. Exemption of various petroleum products from excise tax when used as input, feedstock, or as
raw material in the manufacturing of petrochemical products, or in the refining of petroleum products, or
as replacement fuel for natural gas fired combined cycle power plants. Having the risk of being too
general, this may lead to abuse by taxpayers and a significant decrease in revenue. The previous tax
system already identifies which petroleum products can be exempted and will still be used in the newly
signed Act.

5. Earmarking of incremental tobacco taxes. The proposed provision amends the Sin Tax Law,
which provides for guaranteed funds for universal health care. It will diminish the share of the health
sector in the proposed allocation, thus, vetoed.

RA No. 10963 took effect on Jan. 1.


11. RR No. 8-2018
(Refer to PDF)
REVENUE REGULATIONS NO. 8-2018 issued on February 20, 2018 implements the amended provisions
on Income Tax pursuant to Republic Act No. 10963 (Tax Reform for Acceleration and Inclusion or TRAIN
Law). The Income Tax on the individual’s taxable income shall be computed based on the following
schedules as provided under Sec. 24(A)(2)(a) of the Tax Code, as amended:
SECTION 3. INDIVIDUAL CITIZEN AND INDIVIDUAL RESIDENT ALIEN OF THE PHILIPPINES.
– In general, the income tax on the individual’s taxable income shall be computed based on the following
schedules as provided under Sec. 24(A)(2)(a) of the Tax Code, as amended:

(A) Income Tax Rates

Effective January 1, 2018 until December 31, 2022:

(B) Individuals Earning Purely Compensation Income


Individuals earning purely compensation income shall be taxed based on the income tax rates
prescribed under subsection (A) here.

Taxable income for compensation earners is the gross compensation income less nontaxable
income/benefits such as but not limited to the Thirteenth (13th) month pay and other benefits (subject to
limitations, see Section 6(G)(e) of these Regulations), de minimis benefits, and employee’s share in the
SSS, GSIS, PHIC, Pag-ibig contributions and union dues.

Husband and wife shall compute their individual income tax separately based on their respective
taxable income; if any income cannot be definitely attributed to or identified as income exclusively earned
or realized by either of the spouses, the same shall be divided equally between the spouses for the
purpose of determining their respective taxable income.

Minimum wage earners shall be exempt from the payment of income tax based on their statutory
minimum wage rates. The holiday pay, overtime pay, night shift differential pay and hazard pay received
by such earner are likewise exempt.

(C) Self-Employed Individuals Earning Income Purely from Self-Employment or Practice of Profession
Individuals earning income purely from self-employment and/or practice of profession whose gross
sales/receipts and other non-operating income does not exceed the value-added tax (VAT) threshold as
provided under Section 109 (BB) of the Tax Code, as amended, shall have the option to avail of:

1. The graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended; OR
2. An eight percent (8%) tax on gross sales or receipts and other non-operating income in excess of
two hundred fifty thousand pesos (P250,000.00) in lieu of the graduated income tax rates under
Section 24(A) and the percentage tax under Section 1 16 all under the Tax Code, as amended.

Unless the taxpayer signifies the intention to elect the 8% income tax rate in the 1st Quarter Percentage
and/or Income Tax Return, or on the initial quarter return of the taxable year after the commencement
of a new business/practice of profession, the taxpayer shall be considered as having availed of the
graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended. Such election shall be
irrevocable and no amendment of option shall be made for the said taxable year.

The option to be taxed at 8% income tax rate is not available to a VAT-registered taxpayer, regardless of
the amount of gross sales/receipts, and to a taxpayer who is subject to Other Percentage Taxes under
Title V of the Tax Code, as amended, except those subject under Section 116 of the same Title. Likewise,
partners of a General Professional Partnership (GPP) by virtue of their distributive share from GPP which
is already net of cost and expenses cannot avail of the 8% income tax rate option.

A taxpayer who signifies the intention to avail of the 8% income tax rate option, and is conclusively
qualified for said option at the end of the taxable year [annual gross sales/receipts and other non-
operating income did not exceed the VAT threshold (P3,000,000.00)] shall compute the final annual
income tax due based on the actual annual gross sales/receipts and other non-operating income. The
said income tax due shall be in lieu of the graduated rates of income tax and the percentage tax under
Sec. 116 of the Tax Code, as amended. The Financial Statements (FS) is not required to be attached in
filing the final income tax return. However, existing rules and regulations on bookkeeping and
invoicing/receipting shall still apply.

A taxpayer shall automatically be subject to the graduated rates under Section 24(A)(2)(a) of the Tax
Code, as amended, even if the flat 8% income tax rate option is initially selected, when taxpayer’s gross
sales/receipts and other non operating income exceeded the VAT threshold during the taxable year. In
such case, his income tax shall be computed under the graduated income tax rates and shall be allowed
a tax credit for the previous quarter/s income tax payment/s under the 8% income tax rate option.

In addition, a taxpayer subject to the graduated income tax rates (either selected this as the income tax
regime, or failed to signify chosen intention or failed to qualify to be taxed at the 8% income tax rate) is
also subject to the applicable business tax, if any, subject to the provisions of Section 8 of these
Regulations, an FS shall be required as an attachment to the annual income tax return even if the gross
sales/receipts and other non-operating income is less than the VAT threshold. However, the annual
income tax return of a taxpayer with gross sales/receipts and other non-operating income of more than
the said VAT threshold shall be accompanied by an audited FS.

Taxable income for individuals earning income from self-employment/practice of profession shall be the
net income, if taxpayer opted to be taxed at graduated rates or has failed to signify the chosen option.
However, if the option availed is the 8% income tax rate, the taxable base is the gross sales/receipts and
other non-operating income.

(D) Individuals Earning Income Both from Compensation and from Self-Employment (business or practice of
profession)
For mixed income earners, the income tax rates applicable are:

1. The compensation income shall be subject to the tax rates prescribed under Section 24(A)(2)(a) of the
Tax Code, as amended; AND

2. The income from business or practice of profession shall be subject to the following:

a. lf the gross sales/receipts and other non-operating income do not exceed the VAT threshold, the
individual has the option to be taxed at:

a.1 Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as
amended; OR

a.2 Eight percent (8%) income tax rate based on gross sales/receipts and other non-
operating income in lieu of the graduated income tax rates and percentage tax under Section
116 of the Tax Code, as amended.
b. If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual
shall be subject to the graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code,
as amended.

The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which allows an option of
8% income tax rate on gross sales/receipts and other non-operating income in excess of P250,000.00 is
available only to purely self-employed individuals and/or professionals.

The P250,000.00 mentioned is not applicable to mixed-income earners since it is already


incorporated in the first tier of the graduated income tax rates applicable to compensation income. Under
the said graduated rates, the excess of the P250,000.00 over the actual taxable compensation income is
not deductible against the taxable income from business/practice of profession under the 8% income tax
rate option.

The total tax due shall be the sum of:

(1) tax due from compensation, computed using the graduated income tax rates; and

(2) tax due from self-employment/practice of profession, resulting from the multiplication of the 8%
income tax rate with the total of the gross sales / receipts and other non-operating income.

Mixed income earner who opted to be taxed under the graduated income tax rates for
income from business/practice of profession, shall combine the taxable income from both
compensation and business/practice of profession in computing for the total taxable income
and consequently, the income tax due.

12. RMC 50-2018


(Refer to PDF)

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 50-2018
clarifying certain provisions of Revenue Regulations (RR) Nos. 8-2018 and 11-2018 implementing the
income tax provisions, including its consequent withholding tax, of Republic Act No. 10963 or the Tax
Reform for Acceleration and Inclusion (TRAIN) Act.

HIGHLIGHTS:

Tax treatment of de minimis in excess of prescribed threshold

The benefits given in excess of the maximum amount allowed as de minimis benefits shall be included as
part of “other benefits,” which is subject to the P90,000 ceiling. Any amount in excess of the P90,000
shall be subject to income tax, and consequently, to withholding tax on compensation.

Incentives given to employees


In general, any incentive given to employees shall form part of the compensation subject to income tax,
unless specifically exempted under a special law or unless the incentives are in the nature of the
previously enumerated de minimis benefits.

Premium on health card

 Premium on health card paid by the employer for all employees, whether rank-and-file or
managerial/supervisory, under a group insurance shall be included as part of “other benefits,”
which are subject to P90,000 threshold.
 Individual premiums (not part of group insurance) paid for selected employees holding
managerial or supervisory functions are considered fringe benefits subject to fringe benefits tax.

Receipt of other income of an MWE

The minimum wage employee (MWE) is exempt when it comes to their statutory minimum wage (SWM),
holiday pay, overtime pay, hazard pay, and night shift differential pay. Income other than these will be
taxable, which is computed by deducting the nontaxable/exempt portion and other deductions from gross
compensation income. The resulting taxable income shall be multiplied to the applicable tax rate under
the graduated rates.

Presentation of compensation exempt from tax under the TRAIN Law in BIR Form 1601C

Compensation exempt from tax under the TRAIN Law shall be part of nontaxable compensation in BIR
Form 1601C. There is also no need to segregate the same from the schedule of MWEs since their
compensation is nontaxable.

Failure to signify election of 8% tax

 An individual taxpayer who qualifies for the 8% income tax rate but who fails to signify their
intention to avail of the same will be subject to graduated income tax rates.
 Election of 8% income tax rate for existing taxpayers shall be made by filing BIR Form 1905
(Application for Registration Update), 1st Quarterly Percentage Tax Return, and/or 1st Quarterly
Income Tax Return.
 Election of 8% income tax rate for new taxpayers shall be made by filing BIR Form 1901
(Application for Registration) or initial Quarterly Percentage/Income Tax Return.

Treatment of returnable deposits or deposits held in trust

 Generally, all deposits received are included in the definition of gross receipts under Section 2(g)
of RR 8-2018. However, returnable deposits or deposits held in trust recorded as liabilities are
excluded.

Annex B-2 submitted to payor after deadline of 20 April 2018

 The payee’s excess tax withheld, if any, prior to the approval of RR 11-2018, shall not be
refunded by the income payor. The payee’s executed sworn declaration shall be applied by the
withholding agent on all income payments after receipt of such declaration.
 Annex B-2 of RR 11-2018 pertains to Income Payee’s Sworn Declaration of Gross Receipts/Sales
(For Self-Employed and/or Engaged in the Practice of Profession with Lone Income Payor).
Treatment of remitted withholding taxes using old BIR Forms 1601E and 1601F and BIR
Form 0605 for the first two months of the quarter

The payments shall be deducted from the taxes due to be remitted for the entire quarter.

Filing of withholding tax returns of eFPS taxpayers

eFPS taxpayers shall follow the staggered filing of withholding tax returns based on industry grouping.