Tax 1

Contents:
Basic Concepts in Income Taxation

General Classification of Taxpayers
Tax on Individuals
Tax on Corporations
Taxation of Fringe Benefits
Taxation of Partnerships
Tax on Estates and Trusts
Source of Income
Gross Income
Exclusions from Gross Income
Alloa!le "eductions from Gross Income
#on$deducti!le Expenses
Capital Gains and %osses
Installment Basis
&eturns and Payments of Tax ' (ithholding Taxes
)))
INCOME TAXATION
I. BASIC CONCEPTS IN INCOME TAXATION
Income Tax defined as a tax on all yearly profits arising from property, professions, trades or offices, or
as tax on a persons income, emoluments, profits and the like. Income tax is a tax on the net income or
the entire income realized in one taxable year. It is levied upon corporate or individual incomes in excess
of specified amounts, less certain deductions and/or specified exceptions in cases permitted by law.
Nature of income tax
Income tax is a DIRECT TAX because the tax burden is borne by the income recipient
pon !hom the tax i" impo"e#. It is a tax demanded from the very person who, it is
intended or desired, should pay it, while indirect tax is a tax demanded in the first
instance from one person in the expectation and intention that he can shift the burden
to someone else.
Income tax is a PRO$RESSI%E TAX since the tax ba"e increa"e" a" the tax rate
increa"e". It is founded on the ability to pay principle and is consistent with the
Constitutional provision that Congress shall evolve a progressive tax system.!
Income tax is generally regarded as an EXCISE TAX "privilege tax# and not a tax on
persons, property, funds or profits. It is really a tax on the ri&ht to earn income by
an individual or entity for government needs
Purpose(s) of Income Tax: Fiscal/Non-Fiscal
$he imposition of income tax is intended to%
&. raise revenue to defray the expenses of the government'
(. offset regressive sales and consumption taxes' and together with estate tax
). mitigate the evils arising from the ine*ualities of wealth by a progressive scheme of
taxation which places the burden on those best able to pay.
Income all wealth which flows to the taxpayer other than a mere return of capital. It is a flow of
services rendered by that capital by the payment of money from it or any other benefit rendered by a fund
of capital in relation to such fund through a period of time. It includes gain derived from the sale or other
disposition of capital assets.
It is an amount of money coming to a person/corporation within a specified time, whether as
payment for services, interest or profit from investment. +nless otherwise specified, it means cash
or its e*uivalent. Income can also be thought of as a flow of the fruits of one,s labor. "Conwi v.
Court of $ax -ppeals#
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1
Income includes earnings, lawfully or unlawfully ac*uired, without consensual recognition, express
or implied, of an obligation to repay and without restriction as their disposition.
Differentiated from Capital
$he essential difference between capital and income is that capital is a fund' income is a flow. -
fund of property existing at an instant of time is called capital. - flow of services rendered by
that capital by the payment of money from it or any other benefit rendered by a fund of capital
in relation to such fund through a period of time is called income. Capital is wealth, while income
is the service of wealth. $he 6upreme Court of =eorgia expresses the thought in the following
figurative language% >$he 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.> - tax on income is not a tax on property.
>Income,> as here used, can be defined as >profits or gains.> "*adrigal v+ &afferty#
Increase in Property alue - mere increase in the value of property is 3?$
I3C?4@, but merely unrealized increase in capital. $he increase in the value of property is
also known as appraisal surplus or revaluation increment.
Classification of Income !ccordin" to #ource
&. Income from sources within the 9hilippines
(. Income from sources without the 9hilippines
). Income from sources partly within and partly without the 9hilippines
Taxa$ility of Income% &e'uisites
Income, gain or profit is subAect to income tax, when the following re*uisites are present%
a. there is income, gain or profit
b. the income, gain or profit is received or realized during the taxable year
c. the income gain or profit is not exempt from income tax

Tests to Determine &eali(ation of Income for Tax Purposes
Rea'i*ation Te"t B there is 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.
C'aim o+ ri&ht #octrine B 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.
Corollary 5octrine Princip'e o+ Con"trcti)e Receipt o+ Income
Income which is credited to the account of or set apart for a taxpayer and
which may be drawn upon by him at any time is subAect to tax for the year
during which so credited or set apart, although not then actually reduced to
possession. $o constitute receipt in such case, the income must be credited
to the taxpayer without any substantial limitation or restriction as to the
time or manner of payment or condition upon which payment is to be
made.
Economic bene+it te"t B any economic benefit to the employee that increases his net
worth, whatever may have been the mode by which it is effected, is taxable.
Classifications of Income #u$)ect to P*ilippine Income Tax
&. Compen"ation Income income which is derived from the rendering of services
under an employerCemployee relationship.
(. Pro+e""iona' Income fees derived from engaging in an endeavor re*uiring special
training as professional as a means of livelihood, which includes, but is not limited to,
the fees of C9-s, doctors, lawyers, engineers and the like.
). B"ine"" Income gains or profits derived from rendering services, selling
merchandise, manufacturing products, farming and longCterm construction contracts
D. Pa""i)e Income income in which the taxpayer merely waits for the amount to come
in. It includes, but is not limited to, interest income, royalty income, dividend income,
winnings and prizes.
E. Capita' $ain gain from dealings in capital assets
2
II. $ENERA, C,ASSI-ICATION O- TAXPA.ERS
+*o is a taxpayer,
+nder 6ec (("3#, a taxpayer is any person subAect to .income2 tax. Income taxpayers, with distinction
based on the amount of income subAect to tax, or the applicable tax rates, or both, are classified as
follows%
Primary
C'a""i+ication
Sb/C'a""i+ication0"1
Individuals
Citizens of
the
9hilippines
:esidents of the 9hilippines
3ot :esidents of the 9hilippines
-liens
:esidents of the 9hilippines
3ot
:esidents
of the
9hilippines
@ngaged in $rade or 1usiness in the 9hilippines
3ot @ngaged in $rade or 1usiness in the 9hilippines
6pecial
Classes of
Individuals
Individual @mployed by :egional or -rea ;ead*uarters and :egional
?perating ;ead*uarters of 4ultinational Companies
Individual @mployed by ?ffshore 1anking +nits
Individual @mployed by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the 9hilippines
@states and
$rusts
Corporations
5omestic Corporations
Foreign
Corporations
:esident Corporations
3onCresident Corporations
6pecial Classes
of Corporations
9roprietary educational institutions and nonCprofit hospitals
5omestic 5epositary 1ank "Foreign Currency 5eposit +nits#
:esident international carriers
?ffshore 1anking +nits
:esident 5epositary 1ank "Foreign Currency 5eposit +nits#
:egional or -rea ;ead*uarters and :egional ?perating ;ead*uarters
of 4ultinational Companies
3onCresident cinematographic film owners, lessors or distributors
3onCresident owners or lessors of vessels chartered by 9hilippine
nationals
3onCresident lessors of aircraft, machinery and other e*uipment
III. TAX ON INDI%ID2A,S
A. Classifications of Indi-idual Taxpayers
3. Citi*en"
RESIDENT B a citizen is deemed as a resident of the 9hilippines unless he *ualifies
as a nonCresident under 6ec. ((@ of the 3I:C' taxable for income derived from a''
"orce" ba"e# on taxab'e 0i.e.4 net1 income
NON/RESIDENT C term ,nonresident citi-en, means a citizen of the 9hilippines who%
3
"&# establishes to the satisfaction of the Commissioner the fact of his physical
presence a!road with a definite intention to reside therein.
"(# %eaves the Philippines during the taxa!le year to reside a!road, either as an
immigrant or for employment on a permanent !asis.
")# (or.s and derives income from a!road and whose employment thereat
re/uires him to !e physically present a!road most of the time during the
taxable year.
"D# ;as been previously considered as nonresident citi-en and ho arrives in
the Philippines at any time during the taxa!le year to reside permanently in
the Philippines shall likewise be treated as a nonCresident citizen for the
taxable year in which he arrives in the 9hilippines with respect to his income
derived from sources abroad +3$I/ the date of his arrival in the 9hilippines.
- nonCresident citizen is taxable for income derived !ithin the Phi'ippine"
ba"e# on taxab'e 0i.e.4 net1 income
NOTES%
$he definition of a nonCresident citizen should be crossCreferred with 6ec. () "c#,
which provides that a citizen of the 9hilippines who is working and deriving income
from abroad as an O%ERSEAS CONTRACT 5OR6ER is taxable only on income
from sources .it*in the 9hilippines.
NOTE -2RT7ER% - "eaman who is a Filipino citizen and who receives
compensation for services rendered abroad as member of the complement
of a vessel engaged exclusively in international trade is treated as an
overseas contract worker.
,en&th o+ "tay i" in#icati)e o+ intention. - citizen of the 9hilippines who shall
have stayed outside the 9hilippines for 389 #ay" or more by the end of the year is
a non/re"i#ent citizen. ;is presence abroad, however, need not be continuous.
:. A'ien
RESIDENT C an individual whose residence is within the 9hilippines and who is not a
citizen thereof. -n alien actually present in the 9hilippines who is not a mere transient
or soAourner is a resident of the 9hilippines for income tax purposes. - mere floating
intention indefinite as to time, to return to another country is not sufficient to
constitute him a transient. If he lives in the 9hilippines and has no definite intention
as to his stay, he is a resident. ;e is taxable for income derived !ithin the
Phi'ippine" ba"e# on taxab'e 0i.e.4 net1 income
NON/RESIDENT C an individual whose residence is 3?$ in the 9hilippines and who is
not a citizen thereof.
@ngaged in trade or business in the 9hilippines "3:-@$1# C is taxable for
income derived !ithin the Phi'ippine" ba"e# on taxab'e 0i.e.4 net1
income
3ot engaged in trade or business in the 9hilippines "3:-3@$1# C is taxable
for income derived !ithin the Phi'ippine" ba"e# on "ross income
3
NOTES;
Ghat makes an alien a resident or nonCresident alien is his intention .it* re"ard to
t*e len"t* and nature of *is stay. $hus%
a. ?ne who comes to the 9hilippines for a definite purpose which in its
very nature may be promptly accomplished is not a resident citizen.
b. ?ne who comes to the 9hilippines for a definite purpose which in its
very nature would re*uire an extended stay, and to that end, makes
his home temporarily in the 9hilippines, becomes a resident, though
it may be his intention at all times to return to his domicile abroad
when the purpose for which he came has been consummated or
abandoned. "6ec. E, :: (C
1
Notwithstanding the general classification of aliens into resident and non-resident for income tax purposes, note that there is a
special classification of aliens who are taxed differently. See subsection D page 11!.
"
,en&th o+ "tay i" in#icati)e o+ intention. -n alien who shall have stayed in the
9hilippines +or more than one year by the end of the taxable year is a re"i#ent
a'ien.
NOTE -2RT7ER% -n alien who shall come to the 9hilippines and stay for an
aggregate period of more than one hn#re# ei&hty #ay" during a
calendar year shall be considered a non/re"i#ent a'ien in b"ine"", or in
the practice of profession, in the 9hilippines. .6ec. (E"-#"&#2 $hus, if an
alien stays in the 9hilippines for &HI days or less during the calendar year,
he shall be deemed a nonCresident alien not doing business in the
9hilippines, regardless of whether he actually engages in trade or business
therein. "4amalateo#
B. T*ree /inds of Income
3. Capita' $ain" "b<ect to Capita' $ain" Tax
- sale or exchange in asset gives rise to a gain or a loss on the sale. Ghen the asset sold
was held as a capital asset, the gain or loss is called a capital gain or loss. Ghen the asset
sold was not held as a capital asset "in other words, as an ordinary asset#, the gain or loss
is called an ordinary gain or loss.
+*at are capital assets, $he 3I:C defines a capital asset in a ne"ati-e way.
$he law enumerates four categories of ordinary assets' hence, all assets "even if
used in trade or business# other than ordinary assets are capital assets. $he -O2R
CATE$ORIES O- ORDINAR. ASSETS are as follows .6ec. )J2%
&. 6tock in trade of the taxpayer, or other property of a kind which would
properly be included in an inventory of a taxpayer if on hand at the end of
the taxable year "example% :aw 4aterials Inventory, Gork in 9rocess
Inventory, ?ffice 6upplies Inventory#
(. 9roperty held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business "example% 4erchandise Inventory#
). 9roperty used in the trade or business which is subAect to the allowance for
depreciation "example% ?ffice @*uipment#
D. :eal property used in trade or business of the taxpayer "example% 1uilding
used as a factory#
6uccinctly, a capital asset is an asset not used in business. Ghen an asset held
is described as an investment, it is a capital asset. @xamples of capital assets are%
residential house, personal art collection, family pleasure yacht.
!re all sales / dispositions of capital assets su$)ect to capital "ains tax,
NO= ?nly two kinds of things held as capital assets are subAect to the capital gains
tax, as follows%
&. ?n sale, barter, exchange or other disposition of s*ares of stoc0 of a
domestic corporation not listed and traded t*rou"* a local stoc0
exc*an"e, held as a capital asset%
?n the net capital gain%
3ot over 9&II,III Final $ax of EK
?n any amount in excess of 9&II,III Final $ax of &IK
0ey definitions
3et capital gain selling price less cost
6elling price consideration on the sale ?: fair market
value of the shares of stock at the time of the sale,
whichever is ;I=;@:
Cost original purchase price
#
I//+6$:-$I?3% 4r. L sold directly to a buyer shares of stock of a
domestic corporation held as a capital asset. $he selling price was
9(II,III at the time when the fair market value of the shares sold
was 9(EI,III, and the cost was 9&II,III.
6elling price 9(EI,III
/ess% Cost &II,III
Capita' $ain P3>?4???
?n the First 9&II,III, at EK 9 E,III
@xcess over 9&II,III "9EI,III#, at &IK E,III
Tota' Capita' $ain" Tax P3?4???
2. ?n sale, exchange, or other disposition of real property in t*e P*ilippines,
held as a capital asset ?n the gross selling price, or the current fair market
value at the time of the sale, whichever is higher, a final tax of MK
$he capital gains tax is applied on the gross selling price, or the
current fair market value at the time of the sale, whichever is
higher. -ny gain or loss on the sale is immateria' because there is
a conc'"i)e pre"mption by 'a! that the "a'e re"'te# in a
&ain.
I//+6$:-$I?3% 4r. 3 sold a land and building for 9(,III,III
when the fair market value was 9&,JII,III and which had a cost
to him of 9(,EII,III, for a loss on the sale of 9EII,III. $he
capital gain tax is MK of 9(,III,III, or 9&(I,III. $he loss from
the sale is immaterial.
EXCEPTION 0i.e.4 NO NEED TO PA. CAPITA, $AINS TAX1; 3o
capital gains tax "C=$# if the following re*uirements are met%
a. $here is a sale or disposition of their principal residence by
natural persons.
b. $he proceeds of the sale are fully utilized in ac*uiring or
constructing a new principal residence within &H calendar
months from the date of sale or disposition.
c. $he Commissioner shall have been duly notified by the
taxpayer within )I days from the date of sale or disposition
through a prescribed return of his intention to avail of the
tax exemption.
d. - deposit is made of the MK capital gain tax otherwise due,
in cash or managers check, in an interestCbearing account
with an -uthorized -gent 1ank "--1#, under an @scrow
-greement between the taxpayer and the 1ureau of Internal
:evenue that the same shall be released to the taxpayer
when the proceeds of the sale shall have been utilized as
intended.
e. $he tax exemption can only be availed of once every &I
years
If there is no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to have been
realized from the sale or disposition shall be subAect to capital
gains tax "C=$#. $he =69 or F4< 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.
i+e+1
+nutilized amount x "higher of # =69 or F4< N $axable portion
=69
A,TERNATI%E TAXATION; In case of a sale or other disposition
of real property to the government or any of its political
subdivisions or agencies or to governmentCowned or controlled
corporations, the tax shall be EIT7ER the year-end tax of the
individual "i.e., capital gain to be included in the computation of
income subAect to schedular rates#, OR the capital "ain tax of
124 at the option o+ the taxpayer
+*at is t*e tax implication of sales / dispositions of capital assets N3T
su$)ect to capital "ains tax, $he net capital gain or loss is included in the
computation of net income subAect to schedular rates "EK to )(K#.
:. Pa""i)e Income "b<ect to -ina' Tax
Certain passive income items from sources within the 9hilippines are subAect to final tax.
Final tax! means tax withheld from source, and the amount received by the income earner
is net of the tax already. $he tax withheld by the income payor is remitted by him to the
1ureau of Internal :evenue. $he income having been taxCpaid already, it need not be
included in the income tax return at the end of the year. $hese passive income items are as
follows%
Intere"t Income;
o on any currency bank deposit, yield or any other monetary benefit from
deposit substitutes, trust funds and similar arrangements C (IK final tax
o under the expanded foreign currency deposit system "@FC56# C O.EK final
tax for residents, exempt if nonCresidents
o on longCterm deposit or investment certificates "/$5IC# in banks "e.g.,
savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments, which have maturity of E
years or more# B exempt
6hould /$5IC holder preCterminate /$5IC before the Eth year, a final
tax shall be imposed on the entire income based on the remaining
maturity%
D years to less than E years C EK
) years to less than D years C &(K
less than ) years C (IK
Di)i#en#"
o ca"h an#@or property #i)i#en#"
:
actually or constructively received by an
individual from
a domestic corporation
2
% stock dividend representing the transfer of surplus to capital account shall not be subject to tax. &owe'er, if a
corporation cancels or redeems stoc( issued as a di'idend at such time and in such manner as to ma(e the distribution and
cancellation or redemption, in whole or in part, essentially e)ui'alent to the distribution of a taxable di'idend, the amount so
distributed in redemption or cancellation of the stoc( shall be considered as taxable income to the extent that it represents a
distribution of earnings or profits. Sec. *3+, N,-.! /In other words, stoc( di'idends are generally not sub0ect to tax as long as
there are no options in lieu of the shares of stoc(. 1n the other hand, a stock dividend constitutes income if it gives the
shareholder an interest different from that which his former stockholdings represented.2
*
a Aoint stock company
insurance or mutual fund companies
regional operating head*uarters of multinational companies
o 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
o share of an individual member or coCventurer in the net income after tax of
an association, a Aoint account, or a Aoint venture or consortium taxable as a
corporation
:ate B &IK for residents ":C, :-# and nonCresident citizens "3:C#,
(IK for nonCresident aliens engaged in trade or business "3:-@$1#
Roya'tie"
o From books, literary works, and musical compositions B &IK
o ?ther royalties B (IK
5innin&"4 except Phi'ippine Charity "!eep"taAe" @ 'otto !innin&" B (IK
Pri*e" excee#in& P3?4??? (IK
o Pri-e1 differentiated from innings - 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#.
9. B Other IncomeC "b<ect to Sche#'ar Tax Rate"
9

Income which is neither capital gain with capital gain tax, nor passive income with final tax,
is other income! or residual income. ?n other income, the law prescribes a graduated tax.
?ther income is what is included in the computations, and in the income tax return, at the
end of the year "and at the end of the first three *uarters of the year if the individual had
income from business or practice of profession#. It may be derived from%
&. @mployerCemployee relationship, which is called compensation income
(. 1usiness or profession
). 6ale or exchange of property which is not subAect to the capital gain tax
D. Incidental sources, such as interest or dividend, which is not subAect to final tax
"i.e., dividend from a foreign corporation in case of resident citizens, rent income#.
$he tax rates on NET ordinary or other income "schedular rates#
D
are as follows%
Income o)er Bt 'e"" than Tax P'" o+ Exce""
o)er
&I,III EK
&I,III )I,III EII &IK &I,III
3
Schedular tax rates apply to all classes of indi'iduals, with the exception of non-resident aliens not engaged in trade or
business. Should N-%N34+ earn 5other income,6 such is sub0ect to a 2#7 final tax.
"
8ro-forma computation of income sub0ect to schedular tax rates9
:ross .ompensation ,ncome 8 xxx
;ess9 8ersonal 3xemptions xxx!
&ealth ,nsurance if )ualified! xxx!
Net .ompensation ,ncome 8 xxx
%dd9 Net +usiness ,ncome xxx
Net 8rofessional ,ncome xxx
1ther ,ncome capital gains, rent, etc.! xxx
Net ,ncome sub0ect to schedular tax rates 8 xxx
where Net Business Income and Net Professional Income are computed as follows9
:ross +usiness < 8rofessional ,ncome 8 xxx
;ess9 ,temi=ed Deductions /OR2 1ptional Standard Deduction xxx!
Net +usiness < 8rofessional ,ncome 8 xxx
>
)I,III OI,III (,EII &EK )I,III
OI,III &DI,III H,EII (IK OI,III
&DI,III (EI,III ((,EII (EK &DI,III
(EI,III EII,III EI,III )IK (EI,III
EII,III &(E,III )(K EII,III
R'e +or Marrie# In#i)i#a'" 4arried individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely from compensation, shall file a
return for the taxable year to include the income of both spouses. .6ec E&"5#2 $hey
compute the income tax separately on their respective incomes. $he two taxes will
be added to arrive at a single income tax still due and refundable. Income which is
clearly Aoint, or which cannot be identified as exclusively of one spouse, will be
divided eDa''y. .6ec (D"-#2
o EXCEPTION to the oneCreturn rule% Ghere it is impracticable for the spouses
to file one return, each spouse may file a separate return of income but the
returns so filed shall be consolidated by the 1ureau for purposes of
verification for the taxable year. .6ec E&"5#2
C. Deductions 4from Income #u$)ect to #c*edular Tax &ates5% In 6eneral
$he allowable deductions from the gross income of an individual taxpayer
E
are as follows%
1. B"ine"" Expen"e" an# Expen"e" +rom Practice o+ Pro+e""ion deductible only
from business gross income and professional income, respectively but not from
compensation income.
M
$he expenses to be deducted may either be itemized deductions
?: the optional standard deduction.
O

(. Specia' #e#ction +or acta' premim payment" +or hea'th an#@or ho"pita'i*ation
in"rance taken by an individual taxpayer provided that the following re*uisites are met%
a. $he taxpayers family gross income does not exceed 9(EI,III in a
taxable year.
b. $he amount deductible should only be limited to 9(,DII per family or
9(II per month.
In the case of married taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction.
). Per"ona' Exemption" are arbitrary amounts allowed by law to be deducted from
income to cover personal, living, or family expenses of the taxpayer. $hese deductions
are allowed on the theory that the minimum re*uirements of subsistence of a taxpayer
should be free from tax.
/inds:
&. Ba"ic Per"ona' Exemption" 0BPE1 B varies according to the status of
taxpayer
6in# o+ Taxpayer Ba"ic Per"ona' Exemption
0BPE1
6ingle individuals "includes widow/er# 9(I,III
4arried individual who are
2udicially decreed as legally
separated, and
with no *ualified dependents
9(I,III
#
-emember that non-resident aliens not engaged in trade or business are taxed on gross income. 4hey may not, therefore, a'ail
of these deductions.
$
4hus, the only deductions that may be claimed by indi'iduals with compensation income only are personal exemptions and
premium payments on health and<or hospitali=ation insurance.
*
See %llowable Deductions from :ross ,ncome p. "?! for the detailed discussion on itemi=ed deductions and the optional
standard deduction.
@
;ead of Family 9(E,III
Each married individual E 9)(,III
E 1+$ note 6ec )E"-# C In the case of marrie# in#i)i#a'" !here on'y
one o+ the "po"e" i" #eri)in& &ro"" income, on'y "ch "po"e
shall be allowed the personal exemption.
+*o is a 7ead of t*e Family, .6ec )E"-#, 3I:C2
&. -n unmarried or legally separated man or woman with
dependents who may be
one or both parents
one or more brothers or sisters, or
one or more legitimate, illegitimate or legally adopted
children
(. 6uch dependent must be living with -35 dependent upon him
for chief support
Chief support 3 principal or main support given regularly
such that withdrawal will result in destitute life for
dependent' includes situations where taxpayer is away
from home on business, or dependent is away at school
3?$@% Chief support means more than oneChalf of the
re*uirements for support. ;ence, if two children contribute
e*ual amounts to the support of a parent, neither of them
*ualify as head of the family.
). 6uch brothers or sisters or children are
not more than (& years old
unmarried and
not gainfully employed ?:
regardless of age, are incapable of selfCsupport because
of mental or physical defect.
(. A##itiona' Exemption" 0AE1 B depends on the number of *ualified
dependent children
!mount allo.ed as a deduction 9H,III per dependent child, but
not to exceed four children
+*o may claim additional exemptions,
1. 4arried Individuals -dditional exemptions are claimed by only
one spouse. =enerally, the spouse who is the gross
compensation earner is the claimant of the additional
exemptions. Ghere the husband and wife are both compensation
income earners, the husband is the proper claimant of the
additional exemptions @LC@9$ if there is an express waiver by
the husband in favor of his wife, as embodied in the withholding
exemption certificate. Ghen the spouses have business and/or
professional income only, either may claim the additional
exemptions at the end of the year. $he wife claims the additional
exemptions in the following instances%
i. husband has no income
ii. husband works abroad
2. /egally separated spouses -dditional exemptions can be
claimed by the spouse with custody of the child or children "but
the total amount for the spouses shall not exceed the maximum
of four#. .6ec )E"1#, 3I:C2
+*o is a dependent for purposes of additional exemptions, -
legitimate, illegitimate or legally adopted child chiefly dependent upon
and living with the taxpayer%
1?
&. not more than (& years old, unmarried and not gainfully
employed ?:
(. regardless of age, is incapable of selfCsupport because of mental
or physical defect
3?$@% ?nly children may be considered dependent! for purposes
of additional exemptions. Compare with dependent! for purposes of
basic personal exemption.
+*o may claim personal exemptions, Citi*en" "whether resident or nonC
resident# and re"i#ent a'ien" are allowed to avail of basic personal and additional
exemptions. Non/re"i#ent a'ien" en&a&e# in tra#e or b"ine"" are entitled to
basic personal exemptions only by way of reciprocity, but not to additional
exemptions. .6ec. )E, 3I:C2
,imit o+ BPE A''o!e# to NRAETB; -n amount e*ual to the exemptions
allowed by the nonCresident aliens country to Filipino citizens not residing
therein but deriving income therefrom, but not to exceed the amount fixed by
3I:C..In other words, whichever is ,O5ER 2
I//+6$:-$I?3 ?F :@CI9:?CI$8 9:I3CI9/@%
Personal Exemption for #&AETB
I+ taxpayer i"
Foreign country
allows to nonC
resident Filipinos
9ersonal
exemption in the
3I:C
Per"ona'
exemption
a''o!e# 0,O5ER
amont1
6ingle 9)I,III 9(I,III 9(I,III
;ead of the
Family
9&H,III 9(E,III 9&H,III
4arried 9DI, III 9)(,III 9)(,III
C*an"e of #tatus .6ec )E"C#, 3I:C2
&. If taxpayer marries during taxable year, taxpayer may claim the
corresponding 19@ in full for such year "i.e., no need to proCrate the
exemption#.
(. If taxpayer should have additional dependent"s# during taxable year,
taxpayer may claim corresponding -@ in full for such year.
). If taxpayer dies during taxable year, his estate may still claim 19@ and -@ for
himself and his dependent"s# as if he died at the close of such year.
D. If during the taxable year
a.spouse dies or
b.any of the dependents dies or marries, turns (& years old or becomes
gainfully employed
taxpayer may still claim same exemptions as if the spouse or any of the
dependents died, or married, turned (& years old or became gainfully
employed at the close of such year.
Summary of &ules ith respect to Change in Status4
Chan&e in Stat"
Crrent
.ear
Exemption
Sccee#in&
.ear
Exemption
4arried 9)(,III 9)(,III
5ies 9)(,III C
Gidowed with *ualified dependent
children
9)(,III 9(E,III
Gidowed with *ualified dependent not
his child
9)(,III 9(E,III
Gidowed without dependents 9)(,III 9(I,III
11
Chan&e in Stat"
Crrent
.ear
Exemption
Sccee#in&
.ear
Exemption
/egally separated with *ualified
dependent children
9(E,III 9(E,III
/egally separated with *ualified
dependent not his child
9(E,III 9(E,III
/egally separated without dependents 9(I,III 9(I,III
3ot legally separated "i.e., separation de
facto#
9)(,III 9)(,III
"ependent Child 5maximum of four#
1orn 9H,III 9H,III
:eaches (& years old "normal child# 9H,III C
:eaches (& years old "abnormal and
incapable of supporting himself#
9H,III 9H,III
4arries 9H,III C
=ainfully employed 9H,III C
5ies 9H,III C
I//+6$:-$I?36% "=iven% taxpayer in *uestion is a resident citizen#
Chan&e o+ Stat" Exemption" Rea"on
- taxpayer, married, had
living with and dependent
upon him for support at the
beginning of the year his
spouse, a legitimate child
"minor, single, unemployed#
and a brother, (D years old
but crippled. $he taxpayer
died on 4arch (I of the
year.
9DI,III If a taxpayer died during the
year, his estate may claim
the personal exemptions as if
he died at the end of the
year. $hus%
1asic 9)(,III
-@ for child H,III
$otal 9DI,III
- taxpayer was married,
with a child, O years old at
the beginning of the year.
$he wife and the child died
in an accident on ?ctober (E
of the year.
9DI,III - taxpayer whose spouse
and/or dependent child died
during the year may claim
personal exemptions as if the
death took place at the close
of the year. $hus%
1asic 9)(,III
-@ for child H,III
$otal 9DI,III
- taxpayer was married and
had a child, ) years old at
the beginning of the year.
?n 4ay &O of the year,
another child was born. ;is
wife died giving birth to the
second child. $he second
child lives.
9DH,III - taxpayer whose spouse
died during the year may
claim personal exemptions as
if the death took place at the
close of the year. - taxpayer
who should have an
additional dependent during
the year may claim the
additional exemption in full
for such year. $hus%
1asic 9)(,III
-@ for child &M,III
$otal 9DH,III
- taxpayer was married with
a *ualified dependent child
9DI,III If a dependent became
gainfully employed during the
12
at the beginning of the year.
?n -pril & of the year, the
child became gainfully
employed.
year, the taxpayer may claim
the personal exemption as if
such dependent child became
gainfully employed at the end
of the year. $hus%
1asic 9)(,III
-@ for child H,III
$otal 9DI,III
D. #pecial Classification of Indi-iduals and Correspondin" Tax Treatment .6ec (E"C#, "5#,
"@#2
&. -lien individuals employed by%
a. :egional or -rea ;ead*uarters ":-;P# and :egional ?perating ;ead*uarters ":?;P#
established in the 9hilippines by multinational companies
o *ultinational company1 defined a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the -siaC
9acific :egion and other foreign markets
b. ?ffshore 1anking +nits established in the 9hilippines
(. -lien individuals who are permanent residents of a foreign country but
who are employed and assigned in the Philippines by a foreign service contractor or !y a
foreign service su!contractor engaged in petroleum operations in the 9hilippines
$ax :ate and 1ase C &EK of gross income received as "a'arie" , wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances
o $he same tax treatment shall apply to Filipinos employed and occupying the same
positions as those of aliens employed by these multinational companies, offshore
banking units and petroleum service contractors and subcontractors.
3ote that the coverage of the special classification "and the corresponding tax rate# is
limited to income received as wages. ;ence, any income earned from all other sources
ithin the Philippines by the alien employees shall be su!2ect to the pertinent income tax
"example% sale of real property in the 9hilippines is subAect to MK capital gain tax, imposed
on the gross selling price or fair market value of the property at the time of the sale,
whichever is higher#.
13
E. #ummary of Tax 8ases and Tax &ates
9:IC/ 6;!NC<
CATE$OR. O- INCOME
&<#ID<NT N3N-&<#ID<NT
CITIFEN A,IEN CITIFEN NRAETB NRANETB
-ll sources
Githin the
9hilippines
Githin the
9hilippines
Githin the
9hilippines
Githin the
9hilippines
&. Compensation / 1usiness /
9rofession
(. 9rizes of 9&I,III or less
). 9roprietary, @ducational / ;ospital
D. Cinematographic Film and the like
1ased on $axable "i.e, 3et# Income
6chedular Income $ax :ates "6ec. (D, 3I:C#
"i.e, EK to )(K#
=IG B
(EK
3ot
-pplicable
=IG C
(EK
=IG B
(EK
O. Interest from any currency bank
deposit , etc., :oyalties "other
than from books, literary works
and musical compositions#,
Ginnings / 9rizes "except prizes
9&I,III and below#
=IG B (IK Final Githholding $ax
H. :oyalties from books, literary
works, musical compositions =IG B &IK Final Githholding $ax
J. Interest from longCterm deposit or
investment certificates, which have
a maturity of E years or more
@L@49$' ;owever%
In case of preCtermination, with remaining maturity
of%
D years to less than E years B EK on entire income
) years to less than D years B &(K on entire income
less than ) years B (IK on entire income
&I. Cash / 9roperty 5ividends from a
domestic corporation, etc., ?:
share in the distributable net
income after tax of a partnership
"except a general professional
partnership#, etc.
=IG B &IK Final Githholding $ax
=IG B
(IK
&&. Interest "@xpanded Foreign
Currency 5eposit 6ystem#
=IG B O.EK Final
Githholding $ax
@L@49$
&(. Ginnings on 9hilippine
6weepstakes / /otto @L@49$
&). Capital =ains on 6ale of 6hares
"not traded in a domestic stock
exchange#
3et Capital =ains within%
3ot ?ver 9&II,III B EK Final $ax
-mount in @xcess of 9&II,III B &IK Final $ax
1"
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CATE$OR. O- INCOME
&<#ID<NT N3N-&<#ID<NT
CITIFEN A,IEN CITIFEN NRAETB NRANETB
-ll sources
Githin the
9hilippines
Githin the
9hilippines
Githin the
9hilippines
Githin the
9hilippines
&D. Capital =ains on 6ale of :eal
9roperty in the Philippines =ross 6elling 9rice or F4<, whichever is higher B MK Final $ax
&E. 6ale of 6hares "traded in a
domestic stock exchange#
Q of &K of the 6elling 9rice "6tock $ransaction $ax#
3ote% 6tock $ransaction $ax is not an income tax, but a business
"percentage# tax
%egend4 GI( 3 =ross Income within the 9hilippines F*6 3 Fair 4arket <alue
I%. TAX ON CORPORATIONS
A. Co-era"e of t*e term =Corporation> .6ec (("1#2 $he term corporation! includes
partnerships, no matter how created or organized, AointCstock companies, Aoint accounts "cuentas
en participacion#, associations, or insurance companies
It does NOT include%
&. &enera' pro+e""iona' partner"hip" "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#
2. <oint )entre or consortium formed for the purpose of undertaking con"trction
pro<ect" or en&a&in& in petro'em4 coa'4 &eotherma' an# other ener&y
operation" pursuant to an operating consortium agreement under a service contract
with the =overnment.
H
B. Classification of Corporations
6eneral Types
&. Dome"tic Corporation 0DC1 C one created or organized in the 9hilippines or under
its laws .6ec (("C#2
(. -orei&n Corporation 0-C1 B one that is not domestic .6ec (("5#2
Re"i#ent -orei&n Corporation 0R-C1 C a foreign corporation engaged in
trade or business within the 9hilippines .6ec ((";#2
J
Non/re"i#ent +orei&n coporation 0NR-C1 C a foreign corporation not
engaged in trade or business within the 9hilippines .6ec (("I#2
#pecial Types
&. 9roprietary educational institutions and nonCprofit hospitals
(. 5omestic 5epository 1ank "Foreign Currency 5eposit +nits#
). ?ffshore 1anking +nits
D. :esident 5epository 1ank "Foreign Currency 5eposit +nits#
E. :esident international carrier
M. 3onCresident owner or lessor of vessel
O. 3onCresident cinematographic film owner, lessor or distributor
H. 3onCresident lessor of aircraft, machinery and other e*uipment
>
,n this case, the 0oint 'enture /as an entity2 is not sub0ect to income tax, but each member of the 0oint 'enture shall be taxable on
his<its share in the net income of the corporation. 1n the other hand, a 0oint 'enture constituted for purposes other than 2! abo'e
is treated as a corporation and taxable as such.
@
4he )ualifier 5resident6 in the term 5resident foreign corporation6 should not be e)uated with the nationality of the corporation. ,n
determining nationality, the 5control test6 is often in'o(ed and applied, which considers corporate nationality by the nationality of
its controlling shareholders or members. Aamalateo, citing Binship '. 8hilippine 4rust .o., @? 8hil *""! 4hus, for income tax
purposes, a domestic corporation may be formed or organi=ed by foreigners as long as three of them are residents of the
8hilippines as per the .orporation .ode!,pro'ided that it is organi=ed under the laws of the 8hilippines.
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J. :egional/-rea ;ead*uarters R :egional ?perating ;ead*uarters of 4ultinational
companies
1$
C. #cope of Taxation
9:IC/ 6;!NC<
Type o+ Corporation Sorce" o+ Taxab'e Income A''o!e# B"ine""
De#ction"G
5omestic Corporation "5C# Githin and without the 9hilippines 8es
:esident Foreign Corporation
":FC#
Githin the 9hilippines 8es
3onCresident Foreign Corporation
"3:FC#
Githin the 9hilippines 3oS
S C @rgo, nonCresident foreign corporations are taxed on =:?66 I3C?4@.
NOTE; - good example of a resident foreign corporation is the 9hilippine branch of a foreign
corporation duly licensed by the 6ecurities and @xchange Commission. $he 9hilippine branch is
merely an extension of the foreign head office "i.e., nonCresident foreign corporation#' hence it
does not have nor issue 9hilippine shares of stock. $here is only one single entity to speak of.
7oever1 for income tax purposes1 only the income of the Philippine !ranch from sources ithin
the Philippines is su!2ect to income tax, and the income of the 9hilippine branch as well as that of
the foreign head office from sources outside the 9hilippines are exempt from 9hilippine income
tax.
( NOTE -2RT7ER; 4arubeni Corporation v. Commissioner "&OO 6C:- EII# clarified the
single entity concept. -s a $ENERA, R2,E, the head office of a foreign corporation is
the same Auridical entity as its branch in the 9hilippines following the single entity
concept!. The income +rom "orce" !ithin the Phi'ippine" o+ the +orei&n hea# o++ice
"ha'' th" be taxab'e to the Phi'ippine branch. B2T when the head office of a foreign
corporation in#epen#ent'y an# #irect'y invested in a domestic corporation without the
funds passing through its 9hilippine branch, the taxpayer with respect to the tax on the
dividend income !o'# be the non/re"i#ent +orei&n corporation it"e'+ and the dividend
income shall be subAect to the tax similarly imposed on nonCresident foreign corporations.
D. Tax on Domestic Corporations
5omestic corporations are subAect to any or some of the following%
Capital =ain $ax
Final $ax on 9assive Income
3ormal $ax .OR2 4inimum Corporate Income $ax "4CI$# .OR2 =ross Income $ax
"=I$#
Improperly -ccumulated @arnings $ax "I-@$# .only if a domestic and closelyCheld
corporation2
3. Capita' $ain" "b<ect to Capita' $ain" Tax
a. ?n sale, barter, exchange or other disposition of s*ares of stoc0 of a domestic
corporation not listed and traded t*rou"* a local stoc0 exc*an"e, held as a
capital asset%
.3?$@% $ax treatment is the same as that of individuals.2
b. ?n the sale% exc*an"e or disposition of lands and/or $uildin"s which are not
actually used in the business of a corporation and are treated as capital assets ?n
the gross selling price, or the current fair market value at the time of the sale,
whichever is higher, a final tax of MK
3?$@% $ax treatment is the same as that of individuals.
1*
$he capital gains tax is applied on the gross selling price, or the current fair
market value at the time of the sale, whichever is higher. -ny gain or loss on
the sale is immateria' because there is a conc'"i)e pre"mption by 'a!
that the "a'e re"'te# in a &ain.
:. Pa""i)e Income Sb<ect to -ina' Tax
Intere"t Income;
deposit substitutes, trust funds and similar arrangements C (IK
o under the expanded foreign currency deposit system "@FC56# C O.EK
Di)i#en#" recei)e# +rom another #ome"tic corporation "Intercompany
5ividend# C @L@49$
Roya'tie" 0any Ain#1 (IK
9. Income "b<ect to Norma' Tax HORI Minimm Corporate Income Tax 0MCIT1 HORI
$ro"" Income Tax 0$IT1
NORMA, CORPORATE INCOME TAX RATE )(K
&I
of net taxable income
Tax formula for normal tax4
=ross Income "-// income items @LC@9$ passive income subAect
to final tax and capital gain with capital gain tax# 9xxx
/ess% -llowable deductions for expenses and losses
xxx
$axable Income subAect to normal tax 9xxx
MINIM2M CORPORATE INCOME TAX 0MCIT1 (K of 4CI$ =ross Income
(hat is *CIT gross income8 =ross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods sold includes all business
expenses DIRECT,. incurred to produce the merchandise to bring them to their
present location and use. .6ec. (O"@#"D#2
*CIT gross income differentiated from the normal tax gross income the
latter would include other inci#enta' income items, such as rent income,
interest, gain on sale of assets, certain tax refunds, etc.
1?
Starting Culy 1, 2??#, the normal corporate income tax rate for domestic corporations is 3#7. -% @33*, Aay 2", 2??#!
&owe'er, the 2??$ +ar 3xaminations will (most likely) only co'er laws promulgated up to 31December 2??". Dor purposes of the
+ar, therefore, the 327 normal corporate income tax rate is most likely) still applicable. %nyway, DE, lang
1>
e+g+1
Norma' Tax Comptation MCIT Comptation
6ales revenue 9xxx
/ess% 6ales 5iscounts "xxx#
6ales -llowances "xxx#
3et 6ales 9xxx
/ess% Cost of =oods 6old "xxx#
=ross Income from 6ales 9xxx
-dd Incidental Income%
:ent Income xxx
Interest Income xxx
Normal Tax 6ross Income Pxxx
/ess% -llowable deductions "xxx#
Net Taxab'e Income
Pxxx
6ales :evenue 9xxx
/ess% 6ales 5iscounts "xxx#
6ales -llowances "xxx#
3et 6ales 9xxx
/ess% Cost of =oods 6old "xxx#
?CIT 6ross Income Pxxx
/ess% ?perating @xpenses "xxx#
3et ?perating Income 9xxx
-dd Incidental Income%
:ent Income xxx
Interest Income xxx
=ain on 6ale of 9roperty xxx
3et Income 9xxx
(hen is the *CIT computed8 beginning on the +orth taxab'e year
immediately following the year in which such corporation commenced its business
operations
+*at amount of income tax is paid $y t*e corporation to t*e 8I&,
Ghichever is 7I$7ER between the normal tax and the minimum corporate income
tax.
I//+6$:-$I?3% @ Co., a domestic trading corporation, in its fourth year
of operations had a gross profit from sales of 9)II,III and net taxable
income of 9&II,III. ;ow much was the income tax paid by the
corporation for the yearT
4CI$ "9)II,III x (K#
9M,III
3ormal income tax "9&II,III x )(K#
9)(,III
Income Tax to !e paid for the year 5hichever is higher9
9)(,III
<xcess ?CIT carry-for.ard
-ny excess of the minimum corporate income tax over the normal income tax shall
be carried forward and credited against the NORMA, TAX for the three ")#
immediately succeeding taxable years. .6ec. (O"@#"(#2 In the year to which carried
forward, the normal tax should be higher than the 4CI$.
1@
I))*+T#%TI$, % domestic corporation !ad t!e follo-in.
data on computations of t!e normal tax /$T0 and t!e minimum
corporate income tax /1CIT0 for five 2ears.
:ear ; :ear < :ear = :ear > :ear ?
4CI$ HI,III EI,III )I,III DI,III )E,III
3$ (I,III )I,III DI,III (I,III OI,III
T!e excess 1CIT over $T carr2(for-ard is s!o-n belo-,
:ear ; :ear < :ear = :ear > :ear ?
4CI$ HI,III EI,III )I,III DI,III )E,III
3$ (I,III )I,III DI,III (I,III OI,III

#T is
higher
;@1@@@ >@1@@@
/ess% 4CI$
carryC
forward C
"DI,III# "(I,III#
"(I,III#
From 8ear
D
From
8ear E
From 8ear
O
Tax De 8?4??? >?4??? / J?4??? 9?4???
-rrow pointing downward means that the normal tax is higher so
that there can be an excess 4CI$ carryCforward against it.
Ghile only 9DI,III out of 9MI,III excess 4CI$ in 8ear D was
used in 8ear M, the unused 9(I,III cannot be used in 8ear H
because 8ear H was beyond three years from 8ear D.
&elief from ?CIT $he Secretary o+ -inance is authorized to suspend the
imposition of the minimum corporate income tax on any corporation which suffers
,OSSES%
on account of prolon"ed la$or dispute "losses from a strike staged by
employees that lasts for more than M months and caused the temporary
shutdown of operations#, or
because of force ma)eure "acts of =od and other calamity' includes
armed conflicts like war or insurgency#, or
because of le"itimate $usiness re-erses "substantial losses due to
fire, robbery, theft or other economic reasons#.
2?
3 3
3
$ROSS INCOME TAX 0$IT1 $he 9resident, upon the recommendation of the
6ecretary of Finance, may allow domestic corporations the option to be taxed at
fifteen percent "&EK# of gross income, after the following conditions have been
satisfied%
$ax effort ratio (IK of =39
:atio of I$ collection to total tax revenue DIK
<-$ tax effort DK of =39
:atio of Consolidated 9ublic 6ector Financial 9osition
"C96F9# to =39
I.JK
:atio of the Corporations Cost of 6ales to =ross 6ales 5oes not exceed
EEK
$he election of the gross income tax option by the corporation shall be
irre)ocab'e +or three 091 con"ecti)e taxab'e year" during which the
corporation is *ualified under the scheme.
Computation of GIT Gross Income =ross 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. .6ec. (O"-#2
D. Improper'y Accm'ate# Earnin&" Tax 0IAET1 .6ec. (J, as implemented by :: (C(II&
which prescribes rules governing the imposition of I-@$2
A. R'e $here is imposed for each taxable year, in addition to other taxes, a tax e*ual
to 3?K o+ the improper'y accm'ate# taxab'e income o+ #ome"tic an#
c'o"e'y/he'# corporation" formed or availed of for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders of any other
corporation, !y permitting the earnings and profits of the corporation to accumulate
instead of dividing them among or distri!uting them to the shareholders.
B. Rationa'e If the earnings and profits were distributed, the shareholders would
then be liable to income tax' if the distribution were not made to them, they would
incur no tax in respect to the undistributed earnings and profits of the corporation. It
is a tax in the nature of a PENA,T. to the corporation for the improper
accumulation of its earnings, and a DETERRENT to the a)oi#ance o+ tax pon
"hareho'#er" who are supposed to pay dividends tax on the earnings distributed to
them.
C. Exception $he use of undistributed earnings and profits for the reasona$le
needs of t*e $usiness would not generally make the accumulated or undistributed
earnings subAect to the tax. Ghat is meant by reasona$le needs of t*e $usinessA
is determined by the IMMEDIAC. TEST.
Imme#iacy Te"t C It states that the reasona$le needs of t*e $usinessA are
the
&# immediate nee#" of the business' and
(# reasona$ly anticipated nee#".
7o! to pro)e the reasona$le needs of t*e $usinessA $he corporation
should prove that there is
&# an imme#iate nee# for the accumulation of the earnings and profits' or
(# a #irect corre'ation o+ anticipate# nee#" to such accumulation of profits.
D. Compo"ition; $he following constitute accumulation of earnings for the reasona$le
nee#" of the business% 0I,, ABE1
&# ! ,,O5ANCE for the increase in the accumulation of earnings up to B@@C of
21
the paid$up capital of the corporation as of 1alance 6heet date, inclusive of
accumulations taken from other years'
(# @arnings reserved for definite corporate <XPANSION pro<ect" or pro&ram"
re*uiring considerable capital expenditure as approved by the 1oard of
5irectors or e*uivalent body'
)# @arnings reserved for 82I,DIN$4 P,ANT or EL2IPMENT ACL2ISITION
as approved by the 1oard of 5irectors or e*uivalent body'
D# @arnings reserved for compliance with any ;OAN CO%ENANT or preCexisting
obligation established under a legitimate business agreement'
E# @arnings re*uired by ;A5 or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its
distribution'
M# In the case of subsidiaries of foreign corporations in the 9hilippines, all
undistributed earnings intended or reserved for IN%ESTMENTS 5IT7IN
T7E P7I,IPPINES as can be proven by corporate records and/or relevant
documentary evidence.
E. Co)ere# Corporation" ?nly #ome"tic an# c'o"e'y/he'# corporation" are liable
for I-@$.
3. C'o"e'y/he'# corporation" are those%
a# at least >?K in value of the outstanding capital stock' or
b# at least >?K of the total combined voting power of all classes of
stock entitled to vote
is owned directly or indirectly by or for not more t*an @A
indi-iduals. Dome"tic corporation" not +a''in& n#er the a+ore"ai#
#e+inition are4 there+ore4 pb'ic'y/he'# corporation".
:. To determine .*et*er t*e corporation is closely *eld corporation,
insofar as such determination is based on stock ownership, the following
R2,ES shall be applied%
a. #toc0 Not 3.ned $y Indi-iduals. C 6tock 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.
b. Family and Partners*ip 3.ners*ip. C -n 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 Ufamily of an individual includes his brothers or
sisters "whether by whole or halfCblood#, spouse, ancestors and
lineal descendants.
c. 3ption to !c'uire #toc0s. C If any person has an option to ac*uire
stock, such stoc. shall !e considered as oned !y such person. For
purposes of this paragraph, an option to ac*uire such an option and
each one of a series of option shall be considered as an option to
ac*uire such stock.
d. Constructi-e 3.ners*ip as !ctual 3.ners*ip. C 6tock
constructively owned by reason of the application of paragraph 5B9
or 5D9 hereof shall, for purposes of applying paragraph "&# or "(#, be
treated as actually oned by such person' but stock constructively
owned by the individual by reason of the application of paragraph 5E9
hereof shall #FT !e treated as oned !y him for purposes of again
applying such paragraph in order to make another the constructive
owner of such stock.
BIR R'in& ?:>/?: $he 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. Ghere at least EIK of the
22
outstanding capital stock or at least EIK 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 (& or more individuals, the corporation is
considered as publicly held corporation.
-. Exempt Corporation"; $he I-@$ shall not apply to the following corporations% 0BI$/
PEN/T1
&. B anks and other nonCbank financial intermediaries'
(. I nsurance companies'
). P ubliclyCheld corporations'
;+ T axa!le partnershipsG
<+ 6 eneral professional partnershipsG
=+ N on$ taxa!le 2oint venturesG and
>+ < nterprises that are registered4
a+ ith the Philippine Economic Hone Authority 5PEHA9 under &+A+
>IB=G
!+ pursuant to the Bases Conversion and "evelopment Act of BIIE
under &+A+ >EE>G and
c. under special economic -ones declared !y la hich en2oy payment
of special tax rate on their registered operations or activities in lieu
of other taxes1 national or local+
Gords in regular letters are found in 6ec. (J"1#"(# of the 3I:C. Gords in
italics are additions made by the revenue regulation to consolidate 6ec. (J with
other pertinent laws.
$. Comptation
8ears taxable income% 9 LL
-dd% Income exempt from tax LL
Income excluded from gross income LL
Income subAect to final tax LL
-mount of net operating loss carryCover"3?/C?#deducted LL
$otal 9 LL
/ess% Income tax paid/payable for the taxable year LL
5ividends actually or constructively paid/issued from
the applica!le yearJs taxa!le income LL
Amount reserved for the reasona!le needs of the
!usiness emanating from the covered yearJs
taxa!le income LL
Improperly -ccumulated $axable Income 9 LL
4ultiplied by I-@$ rate x &IK
Improperly -ccumulated @arnings $ax "I-@$# 9 LL
Gords in regular letters are in the statutory formula. Gords in italics are
additions made by the revenue regulation.
H. ,imitation $he profit that has been subAected to I-@$ shall no longer be subAected
to I-@$ in later years even if not declared as dividend. ;owever, profits which have
been subAected to I-@$, when declared as dividends, shall be subAect to tax on
dividends except in those instances where the recipient is not subAect thereto.
I. Dec'aration o+ Di)i#en#" +rom earnin&" For purposes of determining the source
of earnings or profits declared or distributed from accumulated income, the dividends
shall be #eeme# to ha)e been pai# ot o+ the mo"t recent'y accm'ate#
pro+it" or "rp'" and shall constitute a part o+ the anna' income o+ the
#i"tribtee for the year in which received pursuant to 6ection O)"C# of the Code.
1ut, where the dividends or portion of the said dividends declared forms part of the
accumulated earnings as of December 934 3MMN4 or emanate" +rom the
23
accm'ate# income o+ a partic'ar year and is therefore an exemption to the
proceeding statement, such fact must be supported by a duly executed Boar#
Re"o'tion to that effect.
J. Perio# +or Payment o+ Di)i#en#@IAET $he dividends must be declared and paid
or issued not 'ater than one year +o''o!in& the c'o"e o+ the taxab'e year,
otherwise, the I-@$, if any, should be paid !ithin +i+teen 03>1 #ay" therea+ter.
6. Determination o+ Prpo"e to A)oi# Income Tax
&# $he fact that a corporation is a mere *oldin" company or in-estment
company "ha'' be prima facie e)i#ence o+ a prpo"e to a)oi# the tax upon
its shareholders or members
- Oho'#in& or in)e"tment companyO is a corporation having
practically no activities except holding property, and collecting the
income therefrom or investing the same' and
(# where the earnings or profits of a corporation are permitte# to accm'ate
beyon# the rea"onab'e nee#" of the business.
P&I?! F!CI< INSTANCES of accumulation of profits beyond the
reasonable needs of a business "and therefore, indicative of purpose
to avoid income tax upon shareholders# 02BE1
&# Investment of substantial earnings and profits of the
corporation in :NRE,ATED B2SINESS or in stock or
securities of unrelated business'
(# Investment in 8ONDS an# other 'on&/term "ecritie"'
and
)# -ccumulation of earnings IN <XCESS O- 3??K O- PAID/
2P CAPITA,, not otherwise intended for the reasonable
needs of the business.
$he controlling intention of the taxpayer is that which is
manifested at the time o+ accm'ation. - speculative and
indefinite purpose will not suffice. $he mere recognition of a
future problem or the discussion of possible and alternative
solutions is not sufficient. Definiteness of plan/s coupled
.it* action/s ta0en to.ards its consummation is
essential.
F#E %AST #FTE F# T7E APP%ICABI%IT: FF TAK &ATES FF "F*ESTIC CF&PF&ATIF#S% -ll
corporations, agencies, or instrumentalities owned or controlled by the $O%ERNMENT are
taxab'e and shall pay "ch rate o+ tax pon their taxab'e income a" are impo"e# on
#ome"tic corporation" en&a&e# in a "imi'ar b"ine"", industry, or activity.
EXCEPTIONS "i.e, not taxable#;
o =overnment 6ervice Insurance 6ystem "=6I6#,
o 6ocial 6ecurity 6ystem "666#,
o 9hilippine ;ealth Insurance Corporation "9;IC#,
o 9hilippine Charity 6weepstakes ?ffice "9C6?# and
o the 9hilippine -musement and =aming Corporation "9-=C?:#
&&

E. Tax on &esident Forei"n Corporations
:esident foreign corporations are subAect to any or some of the following%
Capital =ain $ax
11
4he tax exemption of 8%:.1- was withdrawn by -% @33* Aay 2", 2??#!. &owe'er, the 2??$ +ar 3xaminations will (most
likely) only co'er laws promulgated up to 31 December 2??". Dor purposes of the +ar, therefore, 8%:.1- is most likely) still
tax exempt.
2"
3ormal $ax .OR2 4inimum Corporate Income $ax "4CI$# .OR2 =ross Income $ax
"=I$#
1ranch 9rofit :emittance $ax
1. Capita' $ain" "b<ect to Capita' $ain" Tax ?n sale, barter, exchange or other
disposition of s*ares of stoc0 of a domestic corporation not listed and traded
t*rou"* a local stoc0 exc*an"e, held as a capital asset%
3?$@%
$ax treatment is the same as that of individuals and domestic corporations.
$here is no corresponding provision for resident foreign corporations regarding
capital gain tax on the sale of real property held as a capital asset. ;ence, the net
taxable income from the sale of real property realized by the resident foreign
corporation shall be subAect to the normal corporate income tax.
Intere"t Income;
deposit substitutes, trust funds and similar arrangements C (IK
o under the expanded foreign currency deposit system "@FC56# C O.EK
Di)i#en#" recei)e# +rom a #ome"tic corporation "Intercompany 5ividend# C
@L@49$
Roya'tie" 0any Ain#1 (IK
4. Income "b<ect to Norma' Tax HORI Minimm Corporate Income Tax 0MCIT1 HORI
$ro"" Income Tax 0$IT1 $he discussion with respect to this topic "income subAect to
normal tax, 4CI$, or =I$# under the subheading of domestic corporations is e*ually
applicable to resident foreign corporations, both as to concepts and computations, except
that :FCs are taxed only on income from sources within the 9hilippines.
NORMA, CORPORATE INCOME TAX RATE )(K
&(
of net taxable income from
sources ithin the Philippines
MINIM2M CORPORATE INCOME TAX 0MCIT1 (K of 4CI$ =ross Income from
sources ithin the Philippines+ $he 4CI$ is imposed on :FCs under the same
conditions as domestic corporations. .6ec. (H"-#"(#2
$ROSS INCOME TAX 0$IT1 $he 9resident, upon the recommendation of the
6ecretary of Finance, may allow resident foreign corporations the option to be taxed
at fifteen percent "&EK# of gross income ithin the Philippines, under the same
conditions as domestic corporations. .6ec. (H"-#"&#2
D. Branch Pro+it Remittance Tax .6ec. (H"-#"E#2
Taxa!le transaction B any profit remitted by a branch to its head office
Tax &ate and Base B &EK based on the total profits applied or earmarked for
remittance without any deduction for the tax component
#on$taxa!le activities Bactivities which are registered with the 9hilippine @conomic
Vone -uthority
12
Starting Culy 1, 2??#, the normal corporate income tax rate for resident foreign corporations is 3#7. -% @33*, Aay 2", 2??#!
%gain, it is unli(ely that the 2??$ +ar would co'er -% @33* which was passed in 2??#.
2#
Income #FT T&EATE" AS B&A#C7 P&FFITS unless effectively connected with the
conduct of trade or business in the 9hilippines%
i. Interests, dividends, rents, royalties, including remuneration for technical
services
ii. salaries, wages premiums, annuities, emoluments
iii. other fixed or determinable annual, periodic or casual gains, profits,
income
iv. capital gains received during each taxable year from all sources within
the 9hilippines
NOTES;
( $he branch profit remittance tax is imposed whether the head office of the foreign
corporation is located in a tax treaty country, in a tax haven or other nonCtreaty
country.
( $he branch profit remittance tax is imposed only on the profits remitted by a
9hilippine branch to the head office of a foreign corporation. 6hould the branch of a
domestic corporation remit profits to its head office, the transaction is not subAect to
the branch profit remittance tax.
F. Tax on Nonresident Forei"n Corporations
3onCresident foreign corporations are subAect to any or some of the following%
Capital =ain $ax
Final $ax on .?ther2 =ross Income from sources within the 9hilippines
1. Capita' $ain" "b<ect to Capita' $ain" Tax ?n sale, barter, exchange or other
disposition of s*ares of stoc0 of a domestic corporation not listed and traded
t*rou"* a local stoc0 exc*an"e, held as a capital asset%
3?$@%
$ax treatment is the same as that of individuals and domestic/resident foreign
corporations.
$here is no corresponding provision for nonCresident foreign corporations regarding
capital gain tax on the sale of real property held as a capital asset. ;ence, the gross
income from the sale of real property realized by the nonCresident foreign
corporation shall be subAect to a )(K final tax imposed on gross income from
sources within the 9hilippines.
Intere"t
o on foreign loans contracted on or after -ugust &, &JHM B (IK
o under the expanded foreign currency deposit system "@FC56# C @L@49$
Di)i#en#" 0ca"h an#@or property1 recei)e# +rom a #ome"tic corporation
"Intercorporate 5ividend# B &EK, AS ,ON$ AS the country in which the
nonresident foreign corporation is domiciled a''o!" a tax cre#it +or taxe"
B#eeme# pai#C in the 9hilippines eDi)a'ent to 3NK
39

( &OK represents the difference between the regular income tax of )(K on
corporations and the &EK tax on dividends
( If the country within which the 3:FC is domiciled does 3?$ allow a tax credit, a
final withholding tax at the rate of 9:K is imposed on the dividends received
13
N1439 Salient amendment made by -% @33*9 4he tax credit must now be e)ui'alent to 2?7, since the new income tax rate
for non-resident corporations is 3#7 such that 3#7 - 2?7 F 1#7!. %gain, for purposes of the +ar, chances are! the applicable
tax credit rate is 1*7.
2$
from a domestic corporation. .In other words, the dividends are subAect to the
third kind of tax% Final $ax on .?ther2 =ross Income from sources within the
9hilippines.2
4. -ina' Tax on HOtherI $ro"" Income +rom "orce" !ithin the Phi'ippine" )(K of
the gross income
&D
received from all sources within the 9hilippines, such as interests,
dividends, rents, royalties, salaries, premiums "except reinsurance premiums#, annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits and
income, and capital gains @LC@9$ capital gains resulting from the sale of shares of stock of
a domestic corporation not listed and traded through a local stock exchange, held as a
capital asset.
G. #pecial Types of Corporations
A. Specia' Type o+ Dome"tic Corporation"
B+ Proprietary Educational Institutions and 7ospitals 5#on$profit9
$ax :ate and 1ase B 3?K on net income "except on income subAect to
capital gains tax and passive income subAect to final tax# within and without
the 9hilippines
C-<@-$ % If gross income from unrelated trade or business or other activity
excee#" >?K o+ tota' gross income derived from all sources, the tax rate
o+ 9:K "ha'' be impo"e# on the entire taxab'e income.
( Lnrelated trade1 !usiness 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 5@C6, C;@5 or $@65-.
(. "epository Ban.s 5Foreign Currency "eposit Lnits9 .6ec. (O"5#")# as amended by :-
J(JD "(IID#2
Coverage of the :ule 3 ?3/8 income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency transactions
with%
( nonresidents,
( offshore banking units in the 9hilippines,
( local commercial banks including branches of foreign banks that may
be authorized by the 1angko 6entral ng 9ilipinas "169# to transact
business with foreign currency deposit system units and
( other depository banks under the expanded foreign currency deposit
system
$ax :ate% Exempt +rom a'' taxe"4 except net income +rom "ch
tran"action" as may be specified by the 6ecretary of Finance, upon
recommendation by the 4onetary 1oard to be "b<ect to the re&'ar
income tax payab'e by banA"
( EXCEPTION; Interest income from foreign currency loans granted
by such depository banks under said expanded system to residents
other than offshore units in the 9hilippines or other depository banks
under the expanded system shall be subAect to a final tax at the rate
of &IK.
B. Specia' Type" o+ Re"i#ent -orei&n Corporation"
B+ International Carriers
$ax :ate and 1ase B (.EK on =ross 9hilippine 1illings "=91#
(hat is GPB8
1"
Now 3#7 of gross income, by 'irtue of -% @33*. Same comment as notes 1?, 11, 12, 13. na(a(apagod na!.
2*
( In the case of International Air Carrier s , =91 refers to the amount
of%
gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the 9hilippines 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
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 9hilippines
for flights which originate from the 9hilippines, but
transshipment of passenger takes place at any port outside
the 9hilippines on another airline, the gross revenue
consisting of only the ali*uot portion of the cost of the ticket
corresponding to the leg flown from the 9hilippines to the
point of transshipment
( In the case of International Shipping, =91 means%
gross revenue whether for passenger, cargo or mail
originating from the 9hilippines up to final destination,
regardless of the place of sale or payments of the passage or
freight documents.
(. Fffshore Ban.ing Lnits authori-ed !y the Bang.o Sentral ng Pilipinas 5BSP9 .6ec.
(H"-#"D# as amended by :- J(JD "(IID#2
Coverage of the :ule 3 ?3/8 income derived by offshore banking units from
foreign currency transactions with%
( nonresidents,
( other offshore banking units
business with offshore banking units
( 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 169 to transact business with offshore
banking units, shall be subAect only to a final tax at the rate of &IK.
). &esident "epository Ban. 5Foreign Currency "eposit Lnits9 .6ec. (H"5#"O#"b# as
amended by :- J(JD "(IID#2
Coverage of the :ule 3 ?3/8 income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency transactions
with%
( nonresidents,
( offshore banking units in the 9hilippines,
business with foreign currency deposit system units and
( other depository banks under the expanded foreign currency deposit
system
2>
( EXCEPTION; Interest income from foreign currency loans granted
by such depository banks under said expanded system to residents
other than offshore units in the 9hilippines or other depository banks
under the expanded system shall be subAect to a final tax at the rate
of &IK.
;+ &egional or Area 7ead/uarters and &egional Fperating 7ead/uarters of *ultinational
Companies
:egional or area head*uarters B not subAect to income tax
( &egional or area head/uarters a branch established in the
9hilippines by multinational companies and which head*uarters do
not earn or derive income from the 9hilippines and which act as
supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the -siaC9acific :egion and
other foreign markets.
:egional operating head*uarters B &IK of their taxable income
( a branch established in the 9hilippines by multinational companies
which are engaged in any of the following services%
&. general administration and planning
(. business planning and coordination
). sourcing and procurement of raw materials and components
D. corporate finance advisory services
E. marketing control and sales promotion
M. training and personnel management
O. logistic services
H. research and development services and product
development
J. technical support and maintenance
&I. data processing and communications, and
&&. business development.
C. Specia' Type" o+ Non/re"i#ent -orei&n Corporation"
&. #on$resident cinematographic film oners1 lessors or distri!utors B (EK of gross
income from all sources within the 9hilippines
(. #onresident Fner or %essor of 6essels Chartered !y Philippine #ationals B D.EK of
gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the 4aritime -uthority
). #onresident Fner or %essor of Aircraft1 *achineries and Fther E/uipment B O.EK of
gross rentals or fees
2@
D. Smmary o+ Tax Ba"e" an# Rate" o+ Specia' Corporation"
9:IC/ 6;!NC<
Type o+ Corporation Tax Ba"e
Tax
Rate
"omestic Corporations
9roprietary @ducational Institutions and ;ospitals "3onCprofit# $axable Income from all sources &IK
5epository 1anks "Foreign Currency 5eposit +nits#
Gith respect to income derived under the expanded foreign
currency deposit system from certain foreign currency
transactions
Gith respect to interest income from foreign currency
loans to residents other than offshore units in the
9hilippines or other depository banks under the expanded
system
@xempt "except that net income
from such transactions is subAect to
the regular income tax payable by
banks#
C
-mount of interest income &IK
&esident Foreign Corporations
International Carriers =ross 9hilippine 1illings (.EK
?ffshore 1anking +nits
Gith respect to income derived by offshore banking units
from certain foreign currency transactions
Gith respect to interest income derived from foreign
currency loans granted to residents other than offshore
banking units or local commercial banks
banks#
C
:esident 5epository 1ank "Foreign Currency 5eposit +nits#
Gith respect to income derived under the expanded foreign
currency deposit system from certain foreign currency
transactions
Gith respect to interest income from foreign currency
loans to residents other than offshore units in the
9hilippines or other depository banks under the expanded
system
banks#
C
:egional or -rea ;ead*uarters @xempt C
:egional ?perating ;ead*uarters of 4ultinational Companies $axable Income from within the
9hilippines
&IK
#on$resident Foreign Corporations
3onCresident cinematographic film owners, lessors or distributors =ross Income from the 9hilippines (EK
3onresident ?wner or /essor of <essels Chartered by 9hilippine
3ationals
=ross :entals, /ease and Charter
Fees from the 9hilippines
D.EK
3onresident ?wner or /essor of -ircraft, 4achineries and ?ther
@*uipment
=ross :entals, Charges and Fees
from the 9hilippines
O.EK
H. <xempt Corporations .6ec. )I2 0CREB/C,E-/SMB1
$he following organizations shall not be taxe# in re"pect to income recei)e# by them as suc*%
&. ; ABOR, agricultural or horticultural organization not organized principally for profit
(. ? 2T2A, "a)in&" banA not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without profit
). - BENE-ICIAR. "ociety, order or association, operating for the exclusive !enefit of the
mem!ers such as a fraternal organization operating under the lodge system, or mutual aid
association or a nonCstock corporation organized by employees providing for the payment of
life1 sic.ness1 accident1 or other !enefits exclusively to the mem!ers of such society, order, or
association, or nonCstock corporation or their dependents
D. C EMETER. company owned and operated exclusively for the benefit of its members
3?
E. 3onCstock corporation or association organized and operated exclusively for &E,I$IO2S4
charitab'e4 "cienti+ic4 ath'etic4 or c'tra' prpo"e"1 or for the reha!ilitation of )eteran",
no part of its net income or asset shall !elong to or inures to the !enefit of any mem!er,
organizer, officer or any specific person
M. 8 2SINESS 'ea&e chamber o+ 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 stockCholder, or
individual
O. C I%IC 'ea&e or organization not organized for profit but operated exclusively for the
promotion of social elfare
H. - nonCstock and nonprofit <D2CATIONA, institution
J. =overnment <D2CATIONA, institution
&I. F ARMERSP or other mutual typhoon or fire insurance company1 mutual ditch or irrigation
company1 mutual or cooperative telephone company1 or li.e organi-ation 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
&&. FarmersM1 fruit groersM1 or li.e association organized and operated as a #A,ES a&ent for the
purpose of marketing the products of its members and turning back to them the proceeds of
sales, less the necessary selling expenses on the basis of the *uantity of produce finished by
them'
3otwithstanding the exemptions above, the income of whatever kind and character of the
foregoing organizations from any of t*eir properties, real or personal, or from any of
t*eir acti-ities conducted for profit regardless of the disposition made of such income,
shall be S2BQECT TO TAX.
31
I. #ummary of Tax 8ases% Tax &ates and !pplica$le Tax &e"imes for Corporations
C!T<63&B 3F INC3?<
DOMESTIC RESIDENT NON/RESIDENT
-ll sources
Githin the
9hilippines
Githin the 9hilippines
&. $axable Income "i.e., income other than Ws
( to J#
)(K 3ormal
$ax
)(K 3ormal
$ax
)(K of =ross Income
(. Interest from any currency bank deposit ,
etc.
=IG C (IK Final $ax
). :oyalties =IG C (IK Final $ax
D. Interest "@xpanded Foreign Currency
5eposit 6ystem# =IG C O.EK Final $ax @L@49$
E. Cash / 9roperty 5ividends from a domestic
corporation @L@49$
&EK or )(K,
whichever is
applicable
M. Capital =ains on 6ale of 6hares "not traded
in a domestic stock exchange#
3et Capital =ains within%
3ot ?ver 9&II,III B EK Final $ax
-mount in @xcess of 9&II,III B &IK Final $ax
O. Capital =ains on 6ale of /and and/or
1uilding
=69 or F4<,
whichever is
higher B
MK Final $ax
)(K 3ormal
$ax
)(K of =ross Income
H. 6ale of 6hares "traded in a domestic stock
exchange#
Q of &K of the 6elling 9rice "6tock $ransaction $ax#
3ote% 6tock $ransaction $ax is not an income tax,
but a business "percentage# tax
T!C &<6I?<# !PP;IC!8;<
3ormal $ax
8@6 8@6
8@6, but based on
=ross Income
4inimum Corporate Income $ax 8@6 8@6 3?
=ross Income $ax 8@6 8@6 3?
Improperly -ccumulated @arnings $ax 8@6, if closelyC
held
corporation
3? 3?
1ranch 9rofit :emittance $ax 3? 8@6 3ot -pplicable
%egend4
GI( $ Gross Income ithin the Philippines
GSP 3 Gross Selling Price
F*6 3 Fair *ar.et 6alue
%. TAXATION O- -RIN$E BENE-ITS .6ec. )) of the 3I:C2
I.
A. Definition of Frin"e 8enefit any good, service or other benefit furnished or granted in cash
or in kind by an employer to an individual employee except ranA an# +i'e emp'oyee" "$he
fringe benefit covered by 6ec )) refers to those enAoyed by managerial and supervisory
employees.#
0ey definitions4
*anagerial employee one who is vested with the powers or prerogatives to lay
down and execute management policies and/or to hire, transfer, suspend, layCoff,
recall, discharge, assign or discipline employees.
32
6upervisory 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 re*uires the use of independent Audgment.
-ll employees not falling within any of the above definitions are considered ran.$and$
file employees.
Examples of fringe !enefits4
&. ;ousing
(. @xpense account
). <ehicle of any kind
D. ;ousehold personnel, such as maid, driver and others
E. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted
M. 4embership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations
O. @xpenses for foreign travel
H. ;oliday and vacation expenses
J. @ducational assistance to the employee or his dependents
&I. /ife or health insurance and other nonClife insurance premiums or similar amounts in
excess of what the law allows
B. Tax &ate and Tax 8ase B .=enerally2 )(K of the grossedCup monetary value "=4<#
=4< represents the whole amount of income realized by the employee.
7o G*6 is determined =4< is determined by dividing the actual monetary value of the
fringe benefit by MHK .&IIK C tax rate of )(K2. For example, the actual monetary value
of the fringe benefit is 9&,III. $he =4< is e*ual to 9&,DOI.EJ .9&,III / I.MH2. $he fringe
benefit tax, therefore, is 9DOI.EJ .9&DOI.EJ x )(K2.
Special Cases4
For fringe benefits received by nonCresident alien not engaged in trade of business
"3:-3@$1#, the tax rate is (EK of the grossedCup monetary value "=4<#. $he =4< is
determined by dividing the actual monetary value of the fringe benefit by OEK .&IIK
C (EK2.
For fringe benefits received by alien individuals and Filipino citizens employed by
regional or area head*uarters, regional operating head*uarters, offshore banking
units "?1+s#, or foreign service contractor, the tax rate is &EK of the grossedCup
monetary value "=4<#. $he =4< is determined by dividing the actual monetary value
of the fringe benefit by HEK .&IIK C &EK2.
Ghat is the tax implication if the employer gives Ufringe benefits to rankCandCfile
employeesT Fringe benefits given to a rankCandCfile employee are treated as part of his
compensation income su!2ect to income tax and ithholding tax on compensation income,
which must be withheld and deducted by his employer from the compensation income of
his employee.
C. Payor of Frin"e 8enefit Tax "F1$# B the employer .but the law allows the employer to deduct
such tax as a business expense, in determining his taxable income2
D. Frin"e 8enefits .*ic* are not taxa$le .6ec. )) of the 3I:C, consolidated with 6ec. (.))"C# of
:: I)CJH2 HRED CNCI
&. Fringe benefits which are authorized and <XEMPTED from tax under special laws
(. C ONTRIB2TIONS of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans
). 1enefits given to the &AN6 AND -I,E employees, whether granted under a collective
bargaining agreement or not
D. D E MINIMIS benefits
E. If the grant of fringe benefits to the employee is re*uired by the nature of, or NECESSAR.
to the tra#e, business, or profession of the employer
33
M. If the grant of fringe benefits is for the CON%ENIENCE o+ the emp'oyer .Convenience of
the @mployer :ule2
NOTES;
De minimis $enefits B those which are of relatively small value are offered by the
employer as a means of promoting health, goodwill, contentment, or efficiency of his
employees, such as the following%
&. 4onetized unused )acation 'ea)e cre#it" of private employees not
exceeding ten 5B@9 days during the year and the monetized )a'e o+ 'ea)e
cre#it" paid to government officials and employees'
(. Me#ica' ca"h a''o!ance to #epen#ent" of employees not exceeding P><@
per semester or PBE< per month'
). Rice "b"i#y of PD<@ per month granted by an employer to his employees'
D. 2ni+orm" given to employees by the employer'
E. Me#ica' bene+it" given to the employees by the employer'
M. ,an#ry a''o!ance of PB<@ per month'
O. Emp'oyee achie)ement a!ar#", e.g. for length of service or safety
achievement, which must be in the form of a tangible personal property other
than cash or gift certificate, with an annual monetary value not exceeding
one$half 5N9 month of the !asic salary of the employee receiving the award
under an esta!lished ritten plan which does not discriminate in favor of
highly paid employees'
H. Chri"tma" an# ma<or anni)er"ary ce'ebration" for employees and their
guests'
J. Company picnic" an# "port" tornament" in the 9hilippines and are
participated exclusively by employees' and
&I. Flowers, fruits, books or similar item" &i)en to emp'oyee" n#er "pecia'
circm"tance", e.g. on account of illness, marriage, birth of a baby, etc. .as
enumerated in :: I)CJH, as amended by :: &ICII2
$ax implication of de minimis benefits% @L@49$@5 from tax. ;owever, should
the amount of the benefits given be in @LC@66 of the ceilings prescribed, the
following rules apply%
( If given to managerial ' supervisory employees $he amount in
excess of the ceiling prescribed is taxable as a fringe benefit "i.e.,
there will be a )(K tax imposed on the grossedCup monetary value
of the residual amount#.
I//+6$:-$I?3% L Company gave one of its supervisors a
laundry allowance of 9(II per month. 9&EI of the 9(II is
considered de minimis and not taxable. ;owever, the residual
9EI per month is considered a fringe benefit and is taxable as
such. $he fringe benefits tax for the year will thus be 9(H(.)E
.X"9EI per month x &( months# / MHKY x )(K2
( If given to ran.$and$file employees $he amount in excess of the
ceiling prescribed is taxable as salary or compensation income.
1I: :uling I&JCI(% $o be considered de minimis! medical allowance, the
following conditions must concur%
&. $he amount given to the @@ shall be for his own medical expense'
(. $he amount actually given and actually spent shall not exceed 9&I, III
in any given calendar year'
). $he @@ must fully substantiate with or in his name the medical allowance
to be granted.
3"
1I: :uling I()CI(% 4eal and food allowance, although not for overtime work,
is considered de minimis if it does not exceed (EK of the basic wage. $he rules
and regulations on de minimis benefits do not allow aggregation of the amounts
set for each type of benefit.
1I: :uling I)DCI( "-ug &M, (II(#% :epresentation and $ransportation
-llowance ":-$-# and 9ersonnel @conomic :elief -llowance "9@:-# are not
subAect to Income $ax and Githholding $ax. -dditional Compensation -llowance
"-C-# is part of other benefits! under 6ec. )("b#"O#"e# of the $ax Code of &JJO
which are excluded from gross compensation income provided the total amount
of such benefits does not exceed 9)I,III. It is also not subAect to withholding tax
pending its formal integration into basic pay.
<xample of 8enefits Necessary to t*e Trade / 8usiness of t*e <mployer; 1I:
:uling I&)CI(% ?utstation -llowance given by the 9hilippine =aming 4anagement
Corporation to its managerial and supervisory employees "who will be away from the
office site for at least H hours to visit the lotto franchise holders for repair and/or
inspection of e*uipment leased by the latter from the 9C6?# intended to cover meals and
trip related expenses in connection with their offCsite visit to franchise holders is clearly
re*uired by the nature of or necessary to the trade or business of the employer and
hence, not subAect to the fringe benefits tax not being part of the compensation income of
the employee. It is also not subAect to income tax and conse*uently to withholding tax.
<xamples of Con-enience of t*e <mployer &ule:
&. $he value of the meals given to the employee is not taxable, if the employer provides
the meals for a substantial nonCcompensatory business purpose "generally, when
employee is re*uired to be on duty during the meal period#.
(. /odging is not taxable if the employee must accept the lodging on the employers
business premises as a condition of his employment.
%I. TAXATION O- PARTNERS7IPS
A. Classification of Partners*ips for Tax Purposes
&. General Professional Partnerships 5GPP9 B partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business
(. Fther Partnerships 5or General Co$partnerships9 B partnerships wherein all or part of their
income is derived from the conduct of trade or business
B. 6eneral Professional Partners*ips .6ec (M2
R'e";
&. - $PP a" "ch "ha'' not be "b<ect to the income tax .
(. $he partner" "ha'' on'y be 'iab'e +or income tax on'y in their "eparate an#
in#i)i#a' capacitie".
). For purposes of computing the distributive share of the partners, the net income of
the =99 shall be computed in the same manner as a corporation.
D. @ach partner shall report as gross income his #i"tribti)e "hare4 actually or
constructi-ely recei-ed, in the net income of the partnership.
E. $he share of a partner shall be subAect to a cre#itab'e !ithho'#in& income tax o+
3>K. ":: (C &JJH#
3#
NOTES;
6PP is not a taxa$le entity $he partnership is deemed to be no more than a
mere mechanism or a flowCthrough entity in the generation of income by, and the
ultimate mechanism distribution of such income to, respectively, each of the
individual partners. "$an v. Commissioner .?ct. ), &JJD2# ;owever, the partnership
itself is re*uired 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. ":: (C &JJH#
$he share of an individual partner in the net profit of a general professional
partnership is #eeme# to ha)e been acta''y or con"trcti)e'y recei)e# by the
partner in the same taxa$le year in .*ic* suc* partners*ip net income .as
earned, and shall be taxe# to them in their in#i)i#a' capacitie"4 !hether
acta''y #i"tribte# or not4 at the &ra#ate# income tax ran&in& +rom >K to
9:K. $hus, the principle of constructive receipt of income or profit is being applied to
undistributed profits of =99s. $he payment .to the partners2 of such taxCpaid profits
in another year should no longer be liable to income tax. "4amalateo#
I//+6$:-$I?36%
- and 1, both lawyers, formed a general professional partnership in 7anuary
(II(. In accordance with their agreement, they would e*ually divide the
profit and loss. 5uring the year, the partnership had a net profit of
9&,III,III and 9HII,III was distributed to the partners. +nder 6ection (M,
each partner must report an income of 9EII,III "not Aust 9DII,III#,
representing his share in the partnership profits, because the entire net
income of the partnership is taxable in the year earned and is deemed
distributed to the partners in the same year.
$he I7 partnership is a general professional partnership, with partners, 4r. I
and 4r. 7, sharing e*ually in partnership net income or loss. $he partnership
had gross income of 9MII,III an expenses of operations of 9(II,III in
(II&. 9artner I, who is single, had personal income of 9HI,III. In the same
year, 4r. 7, who is married and has E children, had personal income of
9JI,III. Gho were the taxpayers and how much income tax did they payT
( I7 9artnership had a net income in (II&, not su!2ect to income
tax1 computed as follows%
=ross Income 9MII,III
/ess% @xpenses of ?perations (II,III
3et Income 9DII,III
( T!e taxable income and income tax due of 1r. I and 1r. 5,
respectivel2, are as follo-s,
Partner
I
Partner
Q
=ross Income
6hare in I7 net income 9(II,III 9(II,III
?wn income HI,III JI,III
$otal =ross Income 9(HI,III 9(JI,III
/ess% 9ersonal @xemption
1asic 9ersonal @xemption "(I,III# ")(,III#
-dditional @xemption "maximum of D
children#
C ")(,III#
$axable Income 9(MI,III 9((M,III
Income tax due "graduated rates# 9E),III 9DD,III
3$
C. 3t*er Partners*ips (or 6eneral Co-partners*ips)
R'e";
&. $he partnership is subAect to the same rules on corporations "capital gains tax, final
tax on passive income, normal tax, minimum corporate income tax .4CI$2 and gross
income tax .=I$2#, but is not subAect to the improperly accumulated earnings tax
.I-@$2. $he partnership must file *uarterly and yearCend income tax returns.
(. $he taxable income of the partnership, less the normal corporate income tax thereon,
is the distributable net income of the partnership.
). $he 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. .6ec. O)"5#2 6uch share will be subAected to a final tax of &IK to
be withheld by the partnership. .6ec. (D"1#"(#2

I//+6$:-$I?3%
- and 1 organized -1 $rading!, a partnership that will distribute motor oils in the
9hilippines. $he partners agreed to distribute profits e*ually. In (II(, the partnership had a
net profit of 9&,III,III, - "married# had personal income of 9(II,III, and 1 "single# had
personal income of 9DII,III. $he partnership did not actually distribute the net profit to -
and 1. Gho were the taxpayers and how much income tax did they payT
( -1 $rading is taxable as a corporation, as follows%
$axable Income 9&,III,III
3ormal $ax "9&,III,III x )(K# 9 )(I,III
3?$@% $he profit deemed distributed to the partners is 9MHI,III
"9&,III,III B 9)(,III#, or 9)DI,III each.
( % and ' are liable as follo-s,
Partner
A
Partner B
-ina' Tax on Share o+ the Di"tribtab'e Net
Income
"9)DI,III x &IK# 9)D,III 9)D,III
Income "b<ect to $ra#ate# Rate";
Income "?wn# 9(II,III 9DII,III
/ess% 9ersonal @xemption ")(,III#
"(I,III#
$axable Income 9&MH,III 9)HI,III
Income $ax 5ue 9(J,EII 9HJ,III
Co/o!ner"hip / $here is coCownership%
3*
&. Ghen two or more heirs inherit and undivided property from a decedent.
(. Ghen a donor makes a gift of an undivided property in favor of two or more donees.
( (hen Co$onership is not su!2ect to tax Ghen the coCownerships activities are
limited merely to the preservation of the coCowned property. In such a case, the coC
ownership, as such, is not subAect to tax. $he coCowners are liable for income tax in
their separate and individual capacities.
( (hen Co$onership is su!2ect to tax 5hen the income o+ the co/o!ner"hip i"
in)e"te# by the co/o!ner" in b"ine"", the coCowners have in e++ect
con"titte# them"e')e" into a partner"hip. In such a case, the coCownership
shall be subAect to tax as a corporation.
For tax purposes, the coCownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom 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 proAect partition either duly executed in an
extraAudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. $he reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly
he becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his coCheirs under a
single management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. .?na v. CI:, =.:. 3o. /C&J)D(, (E 4ay &JO(2
%II. TAX ON ESTATES AND TR2STS
A. !pplication of Income Tax $he tax imposed upon individuals shall apply to the income of
estates or of any kind of property held in trust, including%
&. Income accumulated in trust for the !enefit of un!orn or unascertained person or persons
ith contingent interests, and income accumulated or held for future distri!ution under the
terms of the will or trust'
(. Income which is to be distri!uted currently !y the fiduciary to the !eneficiaries, and income
collected !y a guardian of an infant which is to be held or distributed as the court may
direct'
). Income received by estates of deceased persons during the period of administration or
settlement of the estate' and
D. Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries
or accumulated.
EXCEPTION $he tax shall not apply to emp'oyeeP" tr"t !hich +orm" part o+ a pen"ion4
"tocA bon" or pro+it/"harin& p'an o+ an emp'oyer +or the bene+it o+ "ome or a'' o+ hi"
emp'oyee"
"&# if contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan, and
"(# if under the trust instrument it is impossible, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of the corpus or income
to be "within the taxable year or thereafter# used for, or diverted to, purposes other than
for the exclusive benefit of his employees%
( NOTE 7O5E%ER; -ny amount actually distributed to any employee or distributee
shall be taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.
3>
B. Computation and Payment of t*e Tax $he tax shall be computed upon the taxable income
of the estate or trust and shall be paid by the fiduciary. "$ENERA, R2,E1
EXCEPTIONS;
&. Re)ocab'e Tr"t". C Ghere at any time the po!er to re)e"t in the &rantor tit'e
to any part of the corpus of the trust is vested
&. in the grantor either alone or in conAunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or
the income therefrom, or
(. in any person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom,
the income of such part of the trust shall !e included in computing the taxa!le
income of the grantor.

(. Income +or Bene+it o+ $rantor C Ghere any part of the income of a trust
i. is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor, or
ii. may, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income, be
distributed to the grantor, or
iii. is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be applied to
the payment of premiums upon policies of insurance on the life of the grantor,
such part of the income of the trust shall !e included in computing the taxa!le
income of the grantor.
3?$@% ,In the discretion of the grantor, means in the discretion of the grantor,
either alone or in conAunction with any person not having a substantial adverse
interest in the disposition of the part of the income in *uestion.
Consolidation of Income of To or *ore Trusts C Ghere, in the case of two or more trusts, the
creator o+ the tr"t in each in"tance i" the "ame per"on4 an# the bene+iciary in each
in"tance i" the "ame, the taxable income of all the trusts shall be consolidated and the tax
computed on such consolidated income, and such proportion of said tax shall be assessed and
collected from each trustee which the taxable income of the trust administered by him bears to
the consolidated income of the several trusts.
C. 7o. Taxa$le Income of t*e <state or Trust is Computed .6ec. M&2 $he taxable income of
the estate or trust shall be computed in the "ame manner an# on the "ame ba"i" a" in the
ca"e o+ an in#i)i#a', EXCEPT that%
( "-# $here shall be A,,O5ED AS A DED2CTION in computing the taxable income of
the estate or trust the amount of the income of the estate or trust for the taxa!le
year hich is to !e distri!uted currently by the fiduciary to the beneficiaries, and the
amount of the income collected !y a guardian of an infant hich is to !e held or
distri!uted as the court may direct, B2T the amount so allowed as a deduction shall
be included in computing the taxable income of the beneficiaries, hether distri!uted
to them or not. -ny amount allowed as a deduction under this 6ubsection shall not be
allowed as a deduction under 6ubsection "1# of this 6ection in the same or any
succeeding taxable year.
( "1# In the case of income received by estates of deceased persons during the period
of administration or settlement of the estate, and in the case of income hich1 in the
discretion of the fiduciary1 may !e either distri!uted to the !eneficiary or
accumulated, there shall be allowed as an ADDITIONA, DED2CTION the amount of
the income of the estate or trust for its taxable year, which is properly paid or
credited during such year to any legatee, heir or beneficiary but the amount so
allowed as a deduction shall be included in computing the taxable income of the
legatee, heir or beneficiary.
3@
( "C# In the case of a trust administered in a foreign country, the deductions mentioned
in 6ubsections "-# and "1# of this 6ection shall not be allowed% Provided, $hat the
amount of any income included in the return of said trust shall not be included in
computing the income of the beneficiaries.
D. <xemption !llo.ed to <states and Trusts $here shall be allowed an exemption of 9(I,III
from the income of the estate or trust.
E. Fiduciary &eturns =uardians, trustees, executors, administrators, receivers, conservators and
all persons or corporations, acting in any fiduciary capacity, shall%
( render, in duplicate, a return of the income of the person, trust or estate for whom or which
they act, and
( be su!2ect to all the provisions hich apply to individuals in case such person, estate or trust
has a gross income of 9(I,III or over during the taxable year.
6uch fiduciary or person filing the return for him or it, shall%
( take OAT7 that
o he has sufficient .noledge of the affairs of such person, trust or estate to enable
him to make such return and
o that the same is, to the !est of his .noledge and !elief1 true and correct, and
( be subAect to all the provisions of this $itle which apply to individuals.
- return made by or for one or two or more Aoint fiduciaries filed in the province where such
fiduciaries reside, under such rules and regulations as the 6ecretary of Finance shall prescribe,
shall be "++icient comp'iance.
F. Fiduciaries Indemnified !"ainst Claims for Taxes Paid $rustees, executors, administrators
and other fiduciaries are INDEMNI-IED against the claims or demands of every beneficiary for all
payments of taxes which they shall be re*uired to make, and they shall have CREDIT for the
amount of such payments against the beneficiary or principal in any accounting which they make
as such trustees or other fiduciaries.
%III. SO2RCE O- INCOME .6ec. D(2
A. Classification of Income accordin" to #ource
&. Income derived from sources within the 9hilippines
(. Income derived from sources without the 9hilippines
). Income derived from sources partly ithin and partly ithout the 9hilippines
B. 8asic Principles
&. :esident Citizens ":C# and 5omestic Corporations "5C# are taxable on income derived from
within and without the 9hilippines
(. 3onCresident Citizens "3:C#, 3onCresident -liens "3:-#, :esident Foreign Corporations
":FC# and 3onCresident Foreign Corporations "3:FC# are taxable only on income derived
from within the 9hilippines.
C. 6ross Income From #ources +it*in t*e P*ilippines
$he following items of gross income shall be treate# a" &ro"" income +rom "orce" 5IT7IN
the Phi'ippine"%
&. Intere"t" derived from sources within the 9hilippines, and interests on bonds, notes or
other interestCbearing obligation of residents
(. Di)i#en#" received%
a. from a domestic corporation' and
b. from a foreign corporation, +3/@66 less than EIK of its gross income for the
previous )Cyear period was derived from sources within the 9hilippines .in which case
it will be treated as income partly from within and partly from without2. $he income
"?
which is considered as derived from within the 9hilippines is obtained by using the
following formula%
9hilippine =ross IncomeS x 5ividend N Income Githin
Gorldwide =ross IncomeS
3?$@% E of the corporation giving the dividend
). Compen"ation for labor or personal services per+orme# in the 9hilippines
D. Renta'" an# roya'tie" from property located in the 9hilippines or from any interest in such
property, including rentals or royalties for B
a. $he use of or the right or privilege to use in the 9hilippines any copyright1 patent1
design or model1 plan1 secret formula or process1 goodill1 trademar.1 trade !rand or
other li.e property or right'
b. $he use of, or the right to use in the 9hilippines any industrial1 commercial or
scientific e/uipment'
c. $he supply of scientific1 technical1 industrial or commercial .noledge or information'
d. $he supply of any assistance that is ancillary and su!sidiary to, and is furnished as a
means of ena!ling the application or en2oyment of, any such property or right as is
mentioned in "a#, any such e*uipment as is mentioned in "b# or any such knowledge
or information as is mentioned in "c#'
e. $he supply of services by a nonresident person or his employee in connection with the
use of property or rights !elonging to1 or the installation or operation of any !rand1
machinery or other apparatus purchased from such nonresident person'
f. Technical advice1 assistance or services rendered in connection with technical
management or administration of any scientific1 industrial or commercial underta.ing,
venture, proAect or scheme' and
g. $he use of or the right to use%
"i# *otion picture films'
"ii# Films or video tapes for use in connection with television' and
"iii# $apes for use in connection with radio !roadcasting.
E. $ain", profits and income from the "a'e o+ rea' property located in the 9hilippines
M. $ENERA, R2,E; $ain", profits and income from the "a'e o+ per"ona' property, subAect
to the following rules%
9lace of PL&C7ASE 9lace of SA%E $reatmentSS
9hilippines -broad Income from Githout
-broad 9hilippines Income from Githin
EE in other words, treated as income from the country in which sold
EXCEPTIONS;
1. =ain from the sale of shares of stock in a domestic corporation treated as
derived entirely from sources !ithin the 9hilippines regardless of here the said
shares are sold.
(. =ains from the sale of personal property%
a. pro#ce# "in whole or in part# by the taxpayer .it*in an# "o'# .it*out
the 9hilippines, or
b. pro#ce# "in whole or in part# by the taxpayer .it*out an# "o'# .it*in
the 9hilippines
treated as derived partly from sources within and partly from sources without
the 9hilippines.
!llo.a$le Deductions from 6ross Income From #ources +it*in t*e P*ilippines
&. $ENERA, R2,E; From the items of gross income above, the following are allowed as
deductions%
a. expenses, losses and other deductions properly allocated to items of gross
income
"1
b. ratable part of expenses, interests, losses and other deductions effectively
connected with the business or trade conducted exclusively within the 9hilippines
which cannot definitely be allocated to some items of gross income
Formula for 5!94
9hilippine =ross Income x +nallocated @xpenses N @xpenses to be
Gorldwide =ross Income -llocated to Income
from Githin
(. EXCEPTION; 3o DED2CTIONS -OR INTEREST paid or incurred abroad shall be allowed
from the item of gross income unless in#ebte#ne"" !a" actually incrre# to pro)i#e
funds for use in connection !ith the con#ct or operation of trade or $usiness in
t*e P*ilippines.
D. 6ross Income From #ources +it*out t*e P*ilippines
$he following items of gross income shall be treated as income from sources without the
9hilippines%
&. Intere"t" other than those derived from sources within the 9hilippines
(. Di)i#en#" other than those derived from sources within the 9hilippines
). Compen"ation for labor or personal services performed without the 9hilippines
D. Renta'" or roya'tie" from property located without the 9hilippines or from any interest in
such property
E. $ain"4 pro+it" an# income +rom the "a'e o+ rea' property located without the
9hilippines
!llo.a$le Deductions to 6ross Income From #ources +it*out t*e P*ilippines
&. expenses, losses, and other deductions properly apportioned to items of gross income
(. ratable part of any expense, loss or other deduction which cannot definitely be allocated to
some items or classes of gross income
e+g+4
=ross Income from Githout the 9hilippines. x +nallocated @xpenses N @xpenses to be
Gorldwide =ross Income -llocated to Incom from Githout
"2
E. #ummary
9:IC/ 6;!NC<
Item o+ Income Te"t o+ Sorce o+ Income
Interest :esidence of the debtor
Income from 6ervices 9lace of performance
&E
:ental /ocation of the property
:oyalty 9lace of use of the intangible
=ain on 6ale of :eal 9roperty /ocation of the property sold
=ain on 6ale of 9ersonal 9roperty
"@LC@9$%
( 6hares of a domestic corporation
( 9ersonal property produced "in
whole or in part# by the taxpayer
within and sold without the
9hilippines .or vice versa2#
9lace of sale
=ain on 6ale of 5omestic 6hares -lways income from within
=ain on sale of personal property produced
"in whole or in part# by the taxpayer within
and sold without the 9hilippines .or vice
versa2
9artly from without and partly from within
5ividends
a. From 5omestic Corporation Income from within
b. From Foreign Corporation Income from GI$;I3, I- at least EIK of its gross
income for the previous )Cyear period was derived
from sources within the 9hilippines. .entire income
considered as income from within2
7O5E%ER4 if less than EIK of its gross income for
the previous )Cyear period was derived from sources
within the 9hilippines, considered as partly ithin and
partly ithout+ Income within computed using this
formula%
9hilippine =ross IncomeS x 5ividend N Income
Githin
Gorldwide =ross IncomeS
3?$@% E of the corporation giving the dividend
IX. $ROSS INCOME
A. 8asic Principles
Gross Income means all income derived from whatever source
&M
, including "but not limited to#
the following items% 0TRIP CARD $PP1
&. =ross income derived from the conduct of TRADE or b"ine"" or the exerci"e o+ a
pro+e""ion
:. & ENTS
9. I NTERESTS
D. P RIFES and winnings
1#
-egardless of the residence of the payor, of the place in which the contract for ser'ice was made, or of the place of payment.
1$
,t does not include income which is excluded or exempted by law.
"3
E. C OMPENSATION +or "er)ice" in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items
R. ! NN2ITIES
N. & O.A,TIES
8. D I%IDENDS
J. 6 AINS derived from dealings in property
3?. P ENSIONS
&&. P ARTNERPS distributive share from the net income of the general professional partnership
"=99#
$he term gross income! whenever used without *ualification, 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.
B. #upplementary Discussion on #ome Items Included in 6ross Income
Compensation Income income arising from an employerCemployee relationship. It means
all remuneration for services performed by an employee for his employer, including the cash
value of all remuneration paid in any medium other than cash. .6ec. OH"-#2 It includes%
&. 6alaries and wages
(. Commissions
). $ips
D. -llowances
E. 1onuses
M. Fringe 1enefits of rank and file employees
It does NOT inc'#e remuneration paid%
&. For agricultural la!or paid entirely in products of the farm where the labor is
performed, or
(. For domestic service in a private home, or
). For casual la!or not in the course of the employerMs trade or business, or
D. For services !y a citi-en or resident of the Philippines for a foreign government or an
international organi-ation. .6ec. OH"-#2
(ithholding Tax on Compensation Income $he income recipient "i.e., employee# is
the person liable to pay the tax income, yet to improve the collection of compensation
income of employees, the 6tate re*uires the employer to withhold the tax upon
payment of the compensation income.
Fringe Benefits of &an. and File employees Ba"ic R'e; Con)enience o+ the
Emp'oyer R'e
If meals, living *uarters, and other facilities and privileges are furnished to an
employee for the convenience of the employer, and incidental to the re*uirement of
the employees work or position, the value of that privilege need not be included as
compensation.
6ains Deri-ed From Dealin"s In Property B 5ealings in property such as sales or
exchanges may result in gain or loss. $he .ind of property involved "i.e., whether the
property is a capital asset or an ordinary asset# determines the tax implication and income
tax treatment, as follows%
?:5I3-:8 -66@$
C-9I$-/
-66@$SSS
=ain from sale or exchange ?rdinary =ain Capital =ain
/oss from sale or exchange ?rdinary /oss Capital /oss
@xcess of =ains over the
/osses
.goes into computation
of2
?rdinary 3et Income
3et Capital =ain
SSS "except shares of stock not listed nor traded in a local stock exchange and
real property subAect to capital gains tax#
""
Taxab'e net income S Or#inary net income T net capita' "ains
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 .6ec )("-#2, and the
entire amount of the loss shall be deducti!le from gross income. .6ec )D"5#2. "6ee
LI. -llowable 5eductions from =ross Income C /osses, p. DO#
If the property sold is a capital asset "except shares of stock not listed nor traded in a
local stock exchange and real property subAect to capital gains tax#, the rules on
capital gains and losses apply in the determination of the amount to !e included in
gross income. "6ee LIII Capital =ains and /osses, p. MO#
Comptation o+ $ain or ,o"" .6ec. DI"-#2;
-mount realized from sale or other disposition of property
/ess% basis or adAusted basis
=-I3
if the result is a negative amount, there is a /?66.
Note; -mount realized from sale or other disposition of property N sum of
money received Z fair market value of the property "other than money# received
In computing the gain or loss from the sale or other disposition of property,
the BASIS "ha'' be a" +o''o!"%
1. Property ac/uired !y purchase B its cost, i.e., the purchase price plus
expenses of ac*uisition.
2. Property hich should !e included in the inventory B its latest inventory
value .::C( sec &)M2
4. Property ac/uired !y devise1 !e/uest or inheritance 3 its fair market
price or value as of the date of ac*uisition
6. Property ac/uired !y gift or donation 3 the same as if it would be in the
hands of the donor or at last preceding owner by whom it was not
ac*uired by gift, @LC@9$ that if such basis is greater than the F4< of the
property at the time of the gift then, for the purpose of determining loss,
the basis shall be such F4<
7. Property 5other than capital asset9 ac/uired for less than an ade/uate
consideration in moneyJs orth 3 a# the amount paid by the transferee
for the property' or b# the transferors adAusted basis at the time of the
transfer whichever is greater
8. 9roperty ac*uired in a transaction where gain or loss not recognized B
$he basis shall be that as defined in DI "C# "E#
Interest Income B e.g., Interest income from government securities such as $reasury 1ills
&ental Income B
!ctual rent itself included in gross income "taxable#
Payments $y lessee of o$li"ations of lessor to t*ird persons considered as
additional rent income of the lessor, and therefore included in gross income "taxable#.
$hus, if the lessee paid directly to the City =overnment a real estate tax of 9(,III on
the property of the lessor, the tax paid by the lessee would be considered to have
been cash that changed hands two times, as follows%
/essee /essor =overnmen
t
"9(,III
#
9(,III
"9(,III# 9(,III
"#
/10
/20
!d-ance &entals :eceipt of advance rentals by the lessor may or may not
constitute taxable income to him depending on the true nature of the soCcalled
advance rentals.
o If the advance rentals is in the nature of prepaid rent "for the lessee#,
received by the lessor under a claim of right and without restriction as to
use, the entire amount is taxable income of the lessor in the year
received.
o If the amount received is in the nature of a security deposit for the
faithful compliance by the lessee of the terms of the contract, there is no
income to the lessor unless the conditions hich ma.e the security
deposit the property of the lessor occur "i.e., the lessee violates the
terms of the lease agreement#
Di-idends B -ny dividend which is not exempt from income tax, or which is not subAect to
final tax, is taxable dividend included in the computation of the taxable income "gross
income# in the income tax return at the end of the year.
3?$@% /i*uidating 5ividend B distribution of all the property of a corporation. It is strictly
not dividend income, but rather a sale of shares of stock resulting in capital gain or loss.
!nnuities B income derived from a capital amount paid to an insurance company. -nnuities
are paid on the basis of an individual contract, which can be made by everybody.
Pensions B paid for past employment services rendered.
Cancellation of de$t B $he cancellation or forgiveness of indebtedness may have any of
three possible conse*uences%
&. 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. $he law will
consider the transaction as one where the creditor compensated the debtor for
services rendered, and the debtor paid his indebtedness out of the compensation he
received.
(. It may amount to a gift . If a creditor wishes merely to benefit the debtor, and without
any consideration therefor, 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.
). 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.
Pri(es and !.ards B Contest prizes and awards received are generally taxable. 6uch
payment constitutes gain derived from labor. $he EXCEPTIONS are as follows%
9rizes and awards received in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievements are EKC%LSIF#S from gross
income if%
a. $he recipient was selected without any action on his part to enter a contest or
proceedings' and
b. $he recipient is not re*uired to render substantial future services as a condition
to receiving the prize or award.
9rizes and awards granted to athletes in local and international sports competitions
and tournaments held in the 9hilippines and abroad and sanctioned by their national
associations shall be EKE*PT from income tax.
Dama"e reco-ery B
Compensatory damages, as constituting returns of capital, are not taxable . $hus,
amounts received as moral damages for personal actions "such as alienation of
affection, libel, slander or breach of promise to marry# are not taxable.
"$
:ecovered damages representing recoveries of lost profits are taxable, Aust as profits
are taxable in the regular course of business. $hus, damages recovered in patent
infringement suits are taxable.
8ad De$t &eco-ery B
Tax Bene+it R'e 1ad debts claimed as a deduction in the preceding year"s# but
subse*uently recovered shall be included as part of the taxpayers gross income in the year
of such recovery to the extent of the income tax !enefit of said deduction . $here is an
income tax benefit when the deduction of the bad debt in the prior year resulted in lesser
income and hence tax savings for the company.
I//+6$:-$I?3%
Ca"e A Ca"e B Ca"e C
Bear D
=ross Income 9EII,III 9DII,III 9EII,III
/ess% -llowable 5eductions "before writeC
off of
+ncollectible -ccounts/5ebts# "(II,III#
"DHI,III
# "DJE,III#
$axable Income "3et /oss# before writeC
off
9)II,III "9MI,III# 9 E,III
5eduction for -ccounts :eceivable written
off
"(,III# "(,III# "M,III
#
$axable Income "3et /oss# after writeCoff 9(JH,III "9M(,III# "9&,III#
Bear @
:ecovery of -mounts Gritten ?ff 9 (,III 9 (,III 9 M,III
Taxab'e Income on the Reco)ery P
:4???
/ P >4???
Explanation4
In Case -, the entire amount recovered "9(,III# is included in the
computation of gross income in 8ear ( because the taxpayer benefited
by the same extent. 9rior to the writeCoff, the taxable income was
9)II,III' after the writeCoff, the taxable income was reduced to
9(JH,III.
In Case 1, none of the 9(,III recovered would be recognized as gross
income in 8ear (. 3ote that even without the writeCoff, the taxpayer
would not have paid any income tax anyway. $he taxable income!
before the writeCoff was actually a net loss.
In Case C, only 9E,III of the 9M,III recovered would be recognized as
gross income in 8ear (. It was only to this extent that the taxpayer
benefited from the writeCoff. $he taxpayer did not benefit from the
extra 9&,III because at this point, the 9&,III was already a net loss.
Tax &efund B -s a 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 bene+it r'e app'ie"#.
;owever, the following tax refunds are not to be included in the computation of gross
income% "EXCEPTIONS1
&. 9hilippine income tax, except the fringe benefit tax
(. 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.
). @state and donors taxes
D. $axes assessed against local benefits of a kind tending to increase the value of the
property assessed "6pecial assessments#
E. <alue -dded $ax
"*
M. Fines and penalties due to late payment of tax
O. Final taxes
H. Capital =ains $ax
$he 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.
X. EXC,2SIONS -ROM $ROSS INCOME .6ec. )("1#2
$he following are excluded from gross income% 0$IR, CRM1
3. ; IF< Insurance
( (hat is excluded4 $he proceeds of life insurance policies paid to heirs or beneficiaries
upon the death of the insured.
( &eason4 Insurance is a contract of indemnity' hence, the proceeds should be treated
as indemnity and not as gain or income.
( 7O5E%ER, If such amounts are held by the insurer under an agreement to pay
interest thereon, the intere"t payment" "ha'' be inc'#e# in gross income.
:. !mount &ecei-ed $y Insured as &<T:&N of Premium
( (hat is excluded4 $he 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.
( &eason4 $his is a return of capital and not income.
( 7O5E%ER4 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.
9. 6 IFT#% 8e'uests% and De-ises
( (hat is excluded4 $he value of property ac*uired by gift, be*uest, devise, or descent.
( &eason% $hese transactions are subAect to transfer taxes B estate or donors taxes.
( 7O5E%ER, income +rom "ch property, as well as gift, be*uest, devise or
#e"cent o+ income +rom any property, in cases of transfers of divided interest,
shall be included in gross income.
J. C 3?P<N#!TI3N for In)uries or #ic0ness
( (hat is excluded4 $he amounts received as compensation for personal inAuries or
sickness, plus the amounts of any damages received, whether by suit or agreement,
on account of such inAuries or sickness.
>. I NC3?< <xempt under Treaty
( (hat is excluded4 Income of any kind, to the extent re*uired by any treaty obligation
binding upon the =overnment of the 9hilippines.
R. & <TI&<?<NT 8enefits% Pensions% 6ratuities% etcEC
a. (hat is excluded4 Retirement bene+it" received under :- OMD& and those received
by officials and employees of private firms in accordance with a reasonable private
benefit plan maintained by the employer.
o REL2ISITES +or "ch retirement bene+it" to be exc'#e#%
i. $he retiring employee has been in the service of the same
employer for at least &I years.
ii. $he retiring employee is not less than EI years of age at the time
of his retirement
iii. $he benefits shall be availed of by an employee only once.
iv. $hat there be a reasonable private benefit plan as defined below.
">
o - Prea"onab'e pri)ate bene+it p'anP means
a pension, gratuity, stock bonus or profitCsharing plan
maintained by an employer for the !enefit of some or all of his
employees
wherein contri!utions are made !y such employer for the
employees
for the purpose of distri!uting to such employees the earnings
and principal of the fund thus accumulated and
wherein it is 9:?<I5@5 in the plan that at no time shall any part
of the corpus or income of the fund !e used for, or be diverted
to, any purpose other than for the exclusive !enefit of the said
officials and employees.
b. (hat is excluded4 -ny amount received by an employee or by his heirs from the
employer a" a con"eDence o+ "eparation of such official or employee from the
service of the employer because of
o death
o sickness or
o other physical disability or
o for any ca"e beyon# the contro' of the employee "i.e., the separation of
the employee must be involuntary and not initiated by him#
c. (hat is excluded4 $he "ocia' "ecrity bene+it"4 retirement &ratitie"4 pen"ion"
an# other "imi'ar bene+it" received by resident or nonresident citizens of the
9hilippines or aliens who come to reside permanently in the 9hilippines from foreign
government agencies and other institutions
d. (hat is excluded4 9ayments of benefits due or to become due to any person residing
in the 9hilippines under the laws of the +nited 6tates administered by the 2nite#
State" %eteran" A#mini"tration
e. (hat is excluded4 1enefits received from or enAoyed under the Socia' Secrity
Sy"tem
f. (hat is excluded4 1enefits received from the $SIS, including retirement gratuity
received by government officials and employees
C!#< ;!+:
8I& &ulin" D@F-GH: $he phrase >shall not have availed of the privilege
under a retirement benefit plan of the same or another employer> found in
6ec. )( "1# "M# "a# of the $ax Code means that the retiring official or
employee must not *a-e pre-iously recei-ed retirement $enefits from
t*e same or anot*er employer .*o *as a 'ualified retirement $enefit
plan.
8I& &ulin" DIJ-GH: $he terminal lea-e pay of "o-ernment employees
.*ose employment is coterminous is exempt since it falls within the
meaning of the phrase >for any cause beyond the control of the said official
or employee> found in 6ec. )("1#.
N. ?I#C<;;!N<3:# Items
a. Income Deri)e# by -orei&n $o)ernment
Income derived from "&# investments in the 9hilippines in domestic securities "loans,
stocks, bonds, etc.# or "(# from interest on deposits in banks in the 9hilippines by
i. foreign governments
ii. financing institutions owned, controlled, or enAoying refinancing from foreign
governments, and
"@
iii. international or regional financial institutions established by foreign
governments.
b. Income Deri)e# by the $o)ernment or it" Po'itica' Sb#i)i"ion"
Income derived from any public utility or from the exercise of any essential
governmental function accruing to the =overnment of the 9hilippines or to any
political subdivision thereof.
c. Pri*e" an# A!ar#"
9rizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if%
i. recipient was selected without any action on his part to enter the contest or
proceeding and
ii. recipient is not re*uired to render substantial future services as a condition to
receiving the prize or award
#. Pri*e" an# A!ar#" in Sport" Competition
-ll prizes and awards granted to athletes "&# in local and international sports
competitions "(# sanctioned by their national sports associations.
e. 39th Month Pay an# Other Bene+it"
=ross benefits received by employees of public and private entities provided that the
total exclusion shall not excee# P9?4??? which shall cover%
i. 1enefits received by government employees under :- MMHM
ii. 1enefits received by employees pursuant to 95 HE& "&)
th
4onth 9ay 5ecree#
iii. 1enefits received by employees not covered by 95 HE& and
i'. ?ther benefits such as productivity incentives and Christmas bonus
NOTE; 5hat happen" i+ the bene+it" exceed P9?4???G $he amount in
excess of 9)I,III will be considered as compensation income.
+. $SIS4 SSS4 Me#icare an# Other Contribtion"
=6I6, 666, 4edicare and 9agCibig contributions, and union dues of individuals

&. $ain" +rom the Sa'e o+ Bon#"4 Debentre" or other Certi+icate o+
In#ebte#ne""
=ains realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than E years.
h. $ain" +rom Re#emption o+ Share" in Mta' -n#
=ains realized by the investor upon redemption of shares of stock in a mutual fund
company
XI. A,,O5AB,E DED2CTIONS -ROM $ROSS INCOME
$he term taxable income means the pertinent items of gross income specified in the 3ational
Internal :evenue Code .6ec )(2, less the deductions .6ec )D2 and/or personal and additional
exemptions .6ec )E2, if appropriate, authorized for such types of income by the Code or other
special laws. .6ec )&2
A. 8asic Principles 6o-ernin" Tax Deductions
Construed strictly against the taxpayer claiming it' a clear right must be established
#?
;e who claims it must point to the specific provision of the statute authorizing it, and he
must be able to prove that he is entitled to it.
If the exemption is not expressly stated in the law, the taxpayer must at least !e ithin the
purvie of the exemption by clear legislative intent. ;owever, if there is an express
mention in the law or if the taxpayer falls ithin the purvie of the exemption by clear
legislative intent, the rule on strict construction will not apply.
+nlike gross income, there is no catchCall provision for deductions.
5eductions must comply with the su!stantiation re/uirement.

B. /inds of Deductions
1. Itemi-ed "eductions business "or professional# expenses which are ordinary and
necessary in the conduct of business "or in the exercise of profession#
2. Fptional Standard "eduction 5FS"9 may be taken by an individual, in lieu of itemi-ed
deductions
REL2ISITES;
&. ?65 is available only to citi-ens or resident aliens' thus nonCresident
aliens are not entitled to claim the optional standard deduction
(. $he standard deduction is optionalG i.e., unless the taxpayer signifies in
his return his intention to elect this deduction, he is considered as having
availed of the itemized deductions'
). 6uch election, when made by the *ualified taxpayer, is irrevoca!le for
the year in hich made' however, he can change to itemized deductions
in succeeding years'
3?$@ ;?G@<@:% 6ince an individual in business or in the
practice of profession is re*uired to file *uarterly income tax
returns, can he choose the ?ptional 6tandard 5eduction in his
*uarterly returns and then choose the itemized deductions in his
annual income tax return, or vice versaT 8@6, the ?ptional
6tandard 5eduction or Itemized 5eductions is against the gross
income of the year. Puarterly income tax returns are only
interim computations on the taxable income for the year.
D. $he amount of standard deduction is limited to ten percent 5B@C9 of the
taxpayerJs gross income. .;owever, ?65 is not availa!le against
compensation income arising out of an employerCemployee relationship.2
3?$@% $he =ross Income base of ?65 is B
In the case of an individual in a manufacturing or
merchandising concern% gross income "or profit# from
sales .i.e., sales less cost of sales2, and incidental
income, if any
In the case of an individual whose income is from the
sale of services% gross income "or profit# from sale of
services .i.e., gross receipts less direct cost of services2,
and incidental income, if any
E. 9roof of actual expenses is not re*uired, but the taxpayer should keep
records pertaining to his gross income.
C. +*o can a-ail of deductions, In general, a'' taxpayer" except +or tho"e earnin&
compen"ation income arising from personal services rendered under an employerCemployee
relationship
R'e";
&. Compensation income earners can avail themselves only of the deduction in 6ec
)D"4#, i.e., premium payments on health and/or hospitalization insurance "in addition
to the appropriate personal exemption#.
(. $he following can c'aim ITEMIFED #e#ction"%
a. Corporations, whether domestic or "resident# foreign
b. =eneral 9rofessional 9artnerships
#1
c. Individuals engaged in trade, profession or business "citizen, resident alien,
nonCresident alien doing business in the 9hilippines#
d. @states and trusts engaged in trade or business
e. 9roprietary educational institutions and hospitals "nonCprofit#
f. =overnmentCowned or controlled corporations
). On'y in#i)i#a'"4 EXCEPT non/re"i#ent a'ien" , can elect between itemized
deductions and OPTIONA, STANDARD DED2CTION.
9:IC/ 6;!NC<
$he following are the deductions from gross income%
-or in#i)i#a'" !ith &ro"" compen"ation income only;
( 9remium payments on health and/or hospitalization insurance "if
re*uisites are complied with#
( 9ersonal @xemptions
-or in#i)i#a'" !ith &ro"" income +rom b"ine"" or practice o+
pro+e""ion;
( ?ptional 6tandard 5eduction .OR2 Itemized 5eductions
( 9remium payments on health and/or hospitalization insurance "if
re*uisites are complied with#
( 9ersonal @xemptions
-or corporation"4 &enera' pro+e""iona' partner"hip"4 e"tate" an# tr"t"
en&a&e# in b"ine""4 proprietary e#cationa' in"tittion" an# ho"pita'"
0non/pro+it14 an# &o)ernment/o!ne# or contro''e# corporation"
( Itemized 5eductions
D. /inds of Itemi(ed Deductions 0BE,T DID CPR1
&. < xpenses
(. I nterest
). T axes
D. ; osses
E. 8 ad debts
M. D epreciation
O. D epletion
H. C haritable and ?ther Contributions
J. & esearch and 5evelopment
&I. P ension $rust
E. <xpenses .6ec )D"-#2
Fnly deduction alloa!le Or#inary an# nece""ary tra#e4 b"ine"" or pro+e""iona'
expen"e".
REL2ISITES -OR DED2CTIBI,IT. of 1usiness @xpense% "SPOD R.N1
&. It must be 3RDINAR. and necessary+
Frdinary! C expense which is normal in relation to the taxpayers business
and the surrounding circumstances. $he expense need not be recurring.
O#ecessaryA 3 where the expenditure is appropriate or helpful in the
development of the taxpayers business or that the same is proper for the
purpose of realizing a profit or minimizing a loss.
$he two conditions must both be satisfied, so that an expense which is
ordinary but not necessary, or an expense which is necessary but not ordinary, is
not deductible from gross income. - court may decide on when an expense is, or
#2
is not, ordinary, but as much as possible, it will refuse to substitute its Audgment
for that of the taxpayer on the necessity of an expense.
(. It must be paid or incurred durin" t*e taxa$le BEAR+
). It must be paid or incurred in carrying on or which are DIRECT,. attri$uta$le to%
t*e de-elopment% mana"ement% operation and/or conduct of t*e trade4
$usiness or exercise of a profession.
D. $he amount must be &EASONAB,E+
E. It must be #2BSTANTIATED with sufficient evidence, such as official receipts or
other ade*uate records, showing%
i. the amount of the expense being deducted, and
ii. the direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade, business or
profession of the taxpayer..
M. It is NOT CONTRAR. to la.% pu$lic policy or morals.
O. $he tax re'uired to $e .it**eld on the amount paid or payable must *a-e $een
PAID to the 1I: by the taxpayer, who is constituted as a withholding agent of the
government "for instance, withholding tax on compensation income paid to
employees, fringe benefit tax on fringe benefits given to managerial and supervisory
employees, etc.#. "6ec. (.EH.E, :: (CJH as amended by 6ec. M, :: &DC(II(#
Ghat are EXAMP,ES of ordinary and necessary expensesT
&. 6alaries, wages, and other forms of compensation for personal services actually
rendered, including the grossedCup monetary value "=4<# of fringe benefit furnished
by the employer to the employee.
(. Travel expenses, here and abroad, while away from home in the pursuit of trade,
business or profession
). &entals and/or other payments which are re*uired as a condition for the continued
use or possession, for purposes of the trade, business or profession, of property to
which the taxpayer has not taken or is not taking title or in which he has no e*uity
other than that of a lessee, user or possessor
D. Entertainment1 amusement and recreation expenses that are 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 of his or
its trade, business or exercise of a profession
&epresentation Expenses B refer to expenses incurred by a taxpayer in
connection with the conduct of his trade, business or exercise of profession,
in entertaining, providing amusement and recreation to, or meeting with, a
guest or guests at a dining place, place of amusement, country club,
theater, concert, play, sporting event, and similar events or places.
Ceilin" on entertainment% amusement and recreation expense
.6ec. E, :: &IC(II(2 $he amount of actual entertainment, amusement
and recreation expense paid or incurred within the taxable year by the
taxpayer, but in no ca"e "ha'' "ch #e#ction excee#;
( ?.>K o+ net "a'e" "i.e., gross sales less sales returns/allowances
and sales discounts# for taxpayers engaged in sale of &oo#" or
properties or
( 3.?K o+ net re)ene "i.e., gross revenue less discounts# for
taxpayers engaged in sale of "er)ice", including exercise of
profession and use or lease of properties
8ri$es% /ic0$ac0s and 3t*er #imilar Payments No #e#ction "ha'' be a''o!e# for
any payment made, #irect'y or in#irect'y, to an official or employee of the national
government, or to an official or employee of any local government unit, or to an official or
employee of a governmentCowned or Ccontrolled corporation, or to an official or employee or
representative of a foreign government, or to a private corporation, general professional
partnership, or a similar entity, if the payment constitutes a bribe or kickback.
#3
#pecial Case: EXPENSES A,,O5AB,E TO PRI%ATE ED2CATIONA, INSTIT2TIONS
IN ADDITION to the expenses allowable as deductions, a private educational institution
may at its option elect either%
&. to deduct expenditures otherwise considered as capital outlays of deprecia!le assets
incurred during the taxable year for the expansion of school facilities1 or
(. to deduct allowance for depreciation thereof
F. Interest H6ec )D"1#2
"eduction Alloa!le $he amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer,s profession, trade or business shall be
allowed as deduction from gross income.
REL2ISITES -OR DED2CTIBI,IT. "6ec. )D"1# as implemented by :: &)C(III#;
05ITT. CReP D,1
&. $here is an INDEBTEDNESS.
(. $he indebtedness is t*at of t*e TAXPA.ER.
). $he indebtedness is connected .it* t*e taxpayerKs TRADE% profession% or
$usiness.
D. $he interest must be le"ally D2E.
E. $he interest must be stipulated in +RITIN$.
M. $he taxpayer is ;IAB,E to pay interest on the indebtedness.
O. $he indebtedness must have been paid or accrued durin" t*e taxa$le BEAR.
H. $he interest payment arrangement must not $e $et.een &e,ATED taxpayers as
mandated in 6ec. )D"1#"(#"b#, in relation to 6ec. )M"1#, both of the $ax Code of
&JJO.
J. $he interest must not $e incurred to finance PETRO,E2M operations.
&I. In case of interest incurred to ac*uire property used in trade, business or exercise of
profession, the same was not treated as a CAPITA, expenditure,
;imitation on Deduction $he taxpayer,s allowable deduction for interest expense shall
be re#ce# by an amont eDa' to 98K o+ the interest income su$)ected to final
tax.
&O
I//+6$:-$I?3%
?n 7anuary &E, (II(, Company -, who has a deposit account with 1C5 1ank, obtained a
loan from L8V Financing Corporation in connection with the operation of its business.
-ssume that Company -,s net income for the year &JJH before the deduction of the
interest expense amounted to 9&,III,III. For the year (II(, the interest income it
derived from the said deposit with 1C5 1ank amounted to 9 &HI,III on which a final tax
of 9)M,III had been withheld. Its interest expense on the loan obtained from L8V
Financing Corporation during the same year amounted to 9 &EI,III. Ghat is the
deductible interest expenseT the taxable income and the income tax due of Company -
shall be computed as follows%
-ctual Interest expense 9 &EI,III
/ess% )H K of interest income from
deposit ")HK x 9&HI,III# MH, DII
5eductible interest expense 9 H&,MII
(hen is the limitation not applica!le8 Interest incurred or paid by the
taxpayer on all its b"ine"" re'ate# taxe" shall be +''y #e#ctib'e from
gross income unpaid and shall not be subAect to the limitation on
deduction. $hus, such interest expense incurred or paid shall not be
1*
Salient amendment by -% @33*9 4he taxpayerGs allowable deduction for interest expense shall be reduced by an amount e)ual
to 4! of the interest income sub0ected to final tax. Same comment as notes 1?, 11, 12, 13, 1".
#"
diminished by the percentage of interest income earned which had been
subAected to final withholding tax. "6ec. D"c#, :: &)C(III#
Non-deducti$le Interest "6ec. )D"1#"(#"b# as implemented by 6ec. D"d#, :: &)C(III#
&. Interest paid in advance by the taxpayer who reports income on ca"h ba"i"
&ule4 6uch interest shall be allowed as a deduction in the year the
indebtedness is paid.
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 payments made4 "between Re'ate# Taxpayer" .persons specified under
6ection )M "1#2#
&. 1etween mem!ers of a family.
$he family of an individual shall include only his brothers and sisters
"whether by the whole or halfCblood#, spouse, ancestors, and lineal
descendants.
(. 1etween an individual and corporation more than fifty percent 5<@C9 in value
of the outstanding stoc. of which is oned1 directly or indirectly1 !y or for
such individual' or
). 1etween to corporations more than fifty percent 5<@C9 in value of the
outstanding stoc. of hich is oned1 directly or indirectly1 !y or for the same
individual'
D. 1etween the grantor and a fiduciary of any trust'
E. 1etween the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust'
M. 1etween a fiduciary of a trust and !eneficiary of such trust.
D+ Interest on inde!tedness incurred to finance petroleum exploration
3ptional Treatment of Interest <xpense -t the option of the taxpayer, interest incurred
to acDire property "e# in tra#e4 b"ine"" or exerci"e o+ a pro+e""ion may be
either 031 a''o!e# a" a DED2CTION or 0:1 treate# a" a CAPITA, EXPENDIT2RE.
I//+6$:-$I?3%
4r. - wanted to ac*uire a delivery van worth 9&,III,III for his business. $o finance this,
he borrowed 9&,III,III from -1C 1ank on 7anuary &, (II). $he loan bears interest of
&IK, and both the interest and principal are payable on 5ecember )&, (II). For income
tax purposes, how should 4r. - account for his interest expense in (II)T
ANS5ER; 4r. - has two options. First, he may choose to treat the 9&II,III "&IK of
9&,III,III# interest expense as an outright deduction from his gross income in (II)
"which deduction shall be subAect to the limitation that it be reduced by an amount e*ual
to )HK of the taxpayers interest income subAected to final tax#. -lternatively, he may
choose to capitalize the interest expense by incorporating its amount to the cost of the
vehicle obtained for his business. In this case, the vehicle will be recorded in his books at
a cost of 9&,&II,III "purchase price of 9&,III,III plus the interest expense of
9&II,III#. $he total cost of the vehicle will then be gradually allowed as deduction from
the gross income of the succeeding taxable years as depreciation expense.
G. Taxes .6ec. )D"C#2
$ENERA, R2,E% -ll taxes, national or local, paid or incurred during the taxable year in
connection with the taxpayer,s profession, trade or business, are deductible from gross
income.
EXCEPTIONS;
9hilippine income tax, except the fringe benefit tax
Income tax imposed by authority of any foreign country
EXCEPT when the taxpayer does 3?$ signify his desire to avail of the tax
credit for taxes of foreign countries, in which case the amount may be
allowed as a deduction subAect to the limitations set forth by law. "3ote that
##
a taxpayer *ualified to take tax credits for foreign income taxes paid or
incurred may alternatively claim them as deductions from gross income.#
@state and donors taxes
$axes assessed against local benefits of a kind tending to increase the value of the
property assessed "6pecial -ssessments#
<alue -dded $ax
Fines and penalties due to late payment of tax
Final taxes
Capital =ains $ax
REL2ISITES -OR DED2CTIBI,IT.; 0TED.1
&. It must be paid or incurred .it*in t*e taxa$le BEAR.
(. It must be paid or incurred in connection .it* t*e taxpayerKs TRADE% profession
or $usiness.
). It must be imposed DIRECT,. on t*e taxpayer.
D. It must not $e specifically <XC,2DED $y la. from $ein" deducted from the
taxpayers gross income.
EXAMP,ES of 5eductible $axes%
Import duties
1usiness taxes
?ccupation taxes
9rivilege and license taxes
@xcise taxes
5ocumentary stamp taxes
-utomobile registration fees
:eal property taxes
;imitations on Deductions In the case of a nonresident alien individual engaged in trade
or business "NRAETB# and a resident foreign corporation "R-C#, the deductions for taxes
shall be a''o!e# on'y i+ an# to the extent that they are connecte# !ith income +rom
"orce" !ithin the Phi'ippine".
#pecial Treatment of Forei"n Income Tax - taxpayer /ualified to ta.e tax credits for
foreign income taxes paid or incurred may alternatively claim them as deductions from
gross income.
5hat i" tax cre#itG - credit for foreign income tax paid or incurred reduces the
9hilippine income tax that should be paid. $ax credit is given to a taxpayer in order to
provide relief from too onerous a burden of taxation in case where the same income
is subAect to foreign income tax and the 9hilippine income tax. In determining the tax
credit that may be allowed a taxpayer, the foreign income tax should be understood
to mean tax proper only, and no credit shall be taken for any amount paid or incurred
to the foreign country which represents interest, surcharge or penalty incident to
delin*uency on the payment of the tax. In taking a tax credit%
$ax credit is taken for B $he foreign income tax
$ax credit is taken against B $he 9hilippine income tax
5ho can c'aim a tax cre#it4 an# in !hat amont
38
G
&. Citizens B the amount of income taxes paid or incurred during the taxable
year to any foreign country
(. 5omestic Corporations B the amount of income taxes paid or incurred during
the taxable year to any foreign country
1>
%mounts are sub0ect to the limitations per country and o'erall! set forth by law.
#$
). 4ember of =eneral 9rofessional 9artnership "=99# B his proportionate share
of such taxes of the general professional partnership paid or incurred during
the taxable year to a foreign country, if his distributive share of the income of
such partnership is reported for taxation
D. 1eneficiary of an estate or trust B his proportionate share of such taxes of the
estate or trust paid or incurred during the taxable year to a foreign country, if
his distributive share of the income of such trust is reported for taxation
5ho may NOT c'aim a tax cre#itG
&. -lien individuals
(. Foreign Corporations
5hat are the "b"tantiation reDirement"G $he tax credits shall be allowed
only if the taxpayer establishes to the satisfaction of the Commissioner the following%
&. $he total amount of income derived from sources without the 9hilippines'
(. $he amount of income derived from each country, the tax paid or incurred to
which is claimed as a credit under said paragraph, such amount to be
determined under rules and regulations prescribed by the 6ecretary of
Finance' and
). -ll other information necessary for the verification and computation of such
credits.
5hat amont may be taAen a" a tax cre#itG $he amount of tax credit allowed
is e*uivalent to the tax paid or incurred to a foreign country during the taxable year
but not to excee# the +o''o!in& 'imit"%
&. HPer Contry ,imitI $he 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
(. H5or'#!i#e ,imitI $he 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 9hilippines taxable bears to his
entire taxable income for the same taxable year.
i+e+1
&. $axable Income per Foreign Country x 9hilippine income tax N
limit
Gorldwide $axable Income
(. $axable Income for all Foreign Countries x 9hilippine income tax N
limit
Gorldwide $axable Income
3?$@% $he second limitation applies where the taxpayer derives
income from more than one foreign country.
I//+6$:-$I?3%
5 Co., a domestic corporation, had the following data for a year on taxable income and
income taxes paid%
$axable Income, Country - 9(II,III
$axable Income, Country 1 9&II,III
$axable Income, 9hilippines 9OII,III
Income $ax 9aid B Country - 9 MI,III
Income $ax 9aid B Country 1 9 )E,III
Ghat is the 9hilippine income tax still due, after credit for foreign income taxesT 6hould 5
Co. choose to treat income taxes paid to foreign countries as deductions from gross
income, what is its 9hilippine income taxT
#*
An"!er;
Scenario A4 Tax Credit option is chosen+
Step 3; Compte +or tota' taxab'e income an# Phi'ippine income tax.
$axable Income, Country 1 &II,III
$axable Income, 9hilippines OII,III
$otal $axable Income from sources
within and without the 9hilippines
9&,III,II
I
9hilippine Income $ax "9&,III,III x )(K# 9)(I,III
Step :; Compte +or ,imitation A 0Per Contry Ba"i"1.
$o get tax credit per country under /imitation -, this formula is followed%
$axable income from foreign country x 9hil. income tax N $ax credit
$axable income from all sources
$he result after applying the formula above is compared to the tax actually paid
for each foreign country. $he lower of the two amounts for each foreign country
will be added to get the total tax credit allowed under /imitation -.
Amont A''o!e#
05hiche)er i" ,o!er1
Country A
/imitation - "(II/&III x
)(I,III#
-ctually paid to Country -
9 MD,III
MI,III
9 MI,III
Country B
/imitation 1 "&II/&III x
)(I,III#
-ctually paid to Country 1
9 )(,III
)E,III
)(,III
Tax cre#it a''o!e# n#er
,imitation A
P M:4???
Step 9; Compte +or ,imitation B 0O)era'' Ba"i"1.
$o get tax credit "overall basis# under /imitation 1, this formula is followed%
$axable income from sources outside the 9hils. x 9hil. income tax N
$ax credit
$axable income from all sources
$he result after applying the formula above is compared to the tax actually paid
in total to foreign countries. $he lower of the two amounts will be added to get
the total tax credit allowed under /imitation 1.
Amont A''o!e#
05hiche)er i" ,o!er1
?verall /imit% )II/&III x )(I,III 9 JM,III
$otal foreign income taxes paid JE,III
Tax cre#it a''o!e# n#er
,imitation B
P M>4???
Step J; Compare the respective tax credits allowed under /imitation - and /imitation 1.
$he lower of the two amounts is the final allowable tax credit. In this case, the amount
#>
computed under /imitation - "9J(,III# is lower, thus it becomes the final allowable tax
credit.
Step >; Compute for the income tax still due.
9hilippine Income tax 9)(I,III
/ess% -llowable $ax Credit J(,III
Phi'ippine Income Tax "ti'' #e P::84??
?
Scenario B4 "eduction option is chosen+
$axable Income, Country 1 &II,III
$axable Income, 9hilippines OII,III
$otal $axable Income "before deduction
for foreign income tax#
9&,III,II
I
/ess% 5eductions for Foreign Income $axes
9aid
Country - B 9MI,III
Country 1 B 9)E,III "JE,III#
3et $axable Income 9JIE,III
9hilippine Income $ax "JIE,III x )(K# 9(HJ,MII
H. ;osses .6ec. )D"5#2
"eduction Alloa!le B /osses actually sustained during the taxable year and not compensated
for by insurance or other forms of indemnity shall be allowed as deductions%
If incurred in trade, profession or business'
?f 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.
Extent of %osses Alloa!le4 $he entire amount of the loss, as the case may be, shall be
recognized.
REL2ISITES -OR DED2CTIBI,IT.; 0CATT DID1
&. $he loss must be t*at of t*e TAXPA.ER.
$he loss is personal to the taxpayer and is not transferable or usable by
another. $he loss of a predecessor partnership is not deductible by a
successor corporation. $he loss of the parent company may not be deducted
by its subsidiary.
(. $he loss must be !CT2A,,. sustained and c*ar"ed off .it*in t*e taxa$le year.
-s a general rule, the loss is deductible in the year the loss happens.
;owever, if the loss is compensated by insurance or otherwise, the loss is
postponed to a subse*uent year in which it appears that no compensation at
all can be had, or there is a remaining net loss "or there is no full
compensation#. $he rule is that loss deduction will be denied, if there is a
measurable right to compensation for the loss, with ultimate collection
reasonably clear. 6o where there is reasonable ground for reimbursement,
the taxpayer must seek his redress and may not secure a loss deduction until
he establishes that no recovery may be had. In other words, the taxpayer
must first exhaust his remedies to recover or reduce his loss. "9laridel 6urety
and Insurance Co. v. Collector, (& 6C:- &&HO#
#@
I//+6$:-$I?3% In (II&, ; Company had a shipment with a cost of
9MII,III and insured against marine perils for the same amount. $he
vessel carrying the property sank and the insurance company refused to
admit liability under the policy. -n action was brought in court in (II(,
and the insurance company agreed to pay 9EII,III. $he loss of
9&II,III was a proper deduction in (II(.
). $he loss is evidenced by a C,OSED and completed transaction.
$here should be an identifiable event that fixes the loss. For instance, when a
loss results from a sale, the consummation of the sale is the identifiable
event that fixes the loss, and the deduction should be claimed in the year
that the sale was consummated. - sale is consummated only when there is
delivery.
D. $he loss is not claimed as a DED2CTION for estate tax purposes.
$he purpose is to avoid the item from being deducted twice, to the detriment
of the =overnment.
E. $he loss must not $e compensated $y INS2RANCE or other forms of indemnity.
M. $he loss must be connected .it* t*e taxpayerKs TRADE, business or profession.
O. In the case of casualty loss, declaration of loss "#.orn DEC,ARATION of ;oss#
must be filed within DE days from the occurrence of the casualty loss. ":: &(COO#
Despite concurrence of re'uisites% .*en is loss nonet*eless N3T deducti$le, C In
computing net income, no deductions shall in any case be allowed in respect of losses +rom
"a'e" or exchan&e" o+ property #irect'y or in#irect'y .between Re'ate# Taxpayer"I B
&. 1etween mem!ers of a family.
( $he family of an individual shall include only his brothers and sisters
"whether by the whole or halfCblood#, spouse, ancestors, and lineal
descendants.
(. 1etween an individual and corporation more than fifty percent 5<@C9 in value
of the outstanding stoc. of which is oned1 directly or indirectly1 !y or for
such individual' or
). 1etween to corporations more than fifty percent 5<@C9 in value of the
outstanding stoc. of hich is oned1 directly or indirectly1 !y or for the same
individual'
D. 1etween the grantor and a fiduciary of any trust'
E. 1etween the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust'
M. 1etween a fiduciary of a trust and !eneficiary of such trust.
3$solescence and +ort*lessness
F!solescence of property is deductible as a loss when the property has to be
discarded permanently because its usefulness is suddenly terminated.
(orthlessness may be a ground for deductibility of the value of the property as a loss
when it can be satisfactorily shown that the property had indeed become valueless.
3t*er Types of ;osses &eco"ni(ed $y t*e Tax Code (and Correspondin"
Treatment)
Shrin.age in 6alue of Stoc.s - person possessing stock of a corporation cannot
deduct from gross income any amount claimed as a loss merely on account of
shrinkage in value of such stock through fluctuation of the market or otherwise. $he
loss allowable in such case is that actually suffered hen the stoc. is disposed of. If
stock of a corporation becomes worthless, its cost or other basis determined in
accordance with :evenue :egulation (CJH may be deducted by the owner in the
taxable year in which the stock became worthless, provided a satisfactory shoing of
its orthlessness !e made, as in the case of bad debts.
(agering %osses Gagering losses are deductible only to the extent of agering
gains. $herefore, if there are no wagering gains, wagering loss cannot be deducted.
$?
.Gagering gains and losses gains and losses from transactions where the outcome
depends upon chance.2
%oss from (ash Sales of Stoc.s or Securities .6ec. )H2 - loss from a wash sale of
stock or securities is .generally2 not deducti!le from gross income. - wash sale is a
sale under the following circumstances%
&. $here was a sale of stock or securities at a loss.
(. Githin a period beginning thirty days before, and ending thirty days after, the
date of sale or disposition "known as the sixtyCone day period#, there was an
ac*uisition of shares or securities "or option to ac*uire shares or securities#.
i+e+4

CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC x
CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC
). $he ac*uisition, or option, should be a purchase or exchange upon which gain
or loss is recognized under the income tax law.
D. $he stock or securities ac*uired were su!stantially the same as those
disposed of.
E. $he taxpayer is #FT a dealer in securities.
INCOME TAX R2,E; ?n the shares sold at a loss ith covering ac/uisitions,
3? /?66 shall be recognized. ?n the shares sold at a loss with no covering
ac/uisitions, C-9I$-/ /?66 shall be recognized "6ee LIII. Capital =ains and
/osses, p. MO, for the income tax treatment#. $he loss not recognized shall be
adAusted into "i.e., added to# the basis of the shares ac*uired within the sixtyCone
day period.
I//+6$:-$I?3%
6 Co., not a dealer in securities, on 5ecember (O, (III, sold for 9JI,III, &,III
shares of common stock of VV Company, that it ac*uired on 7anuary (I, (III for
9&&I,III. ?n 7anuary E, (II&, or nine days after the sale, it ac*uired JII shares
of common stock of the same company for 9JI,III. ?n 7une &I, (II&, the latest
ac*uisition was sold for 9&(I,III.
I3C?4@ $-L I49/IC-$I?36%
$here would have been a loss not recognized of 9&H,III on the sale of
5ecember (O, (III.
$here would have been a gain of 9&(,III on the sale of 7une &I, (II&.
SLPPF&TI#G SF%LTIF#4
a. 5etermine if the sale is a wash sale 8@6, there is a wash sale because nine
days after the 5ecember (O, (III sale "or within the sixtyCone day period#,
6. Co. "which is not a dealer in securities# ac*uired shares of stock which
were the same as those disposed of.
b. Computation of loss not recognized and recognized
-c*uisition Cost 9&&I,III
/ess% 6elling 9rice JI,III
$1
49 da2s prior to t!e sale 49 da2s after t!e sale
:ate of sale
%c;uisition occurred
EITHER,
OR
$otal /oss 9(I,III
3umber of shares sold at a loss &,III
/ess% 3umber of shares ac*uired within the M&Cday period JII
3umber of shares ac*uired with no matching ac/uisition &II
/oss on a wash sale, not recognized "JII/&,III S (I,III#9&H,III
Capital /oss recognized "&II/&,III S (I,III# 9(,III
c. Computation of basis of the shares ac*uired on 7anuary E, (II& "i.e.,
adAusted cost#.
-c*uisition Cost 9 JI,III
-dd% /oss not recognized &H,III
1asis of the shares ac*uired on 7anuary E, (II& 9&IH,III
d. Computation of the gain on the sale of 7une &I, (II&
6elling 9rice 9&(I,III
/ess% -dAusted 1asis &IH,III
=ain on the 6ale 9 &(,III
Ghat if the taxpayer is a dealer in securities, and the transaction from which
the loss resulted, was made in the ordinary course of the !usiness of such dealerT
$he loss is deductible in full.
Corporate read2ustment4 *erger or Consolidation
BI
.6ec. DI"C#2
- merger or consolidation has income tax conse*uences to the corporation which is a
party to the merger or consolidation, to its stockholders, and to its security holders.
$o the corporation, or to its stockholders, or to its security holders, loss is not
recognized from the merger or consolidation.
I//+6$:-$I?3%
8 Co. was merged into V Co. 8 Co. transferred its properties with a book value of
9(,III,III to V Co., for which it received shares of stock of V Co. with a fair market
value of 9&,HII,III. 4r. -- was a stockholder of 8 Co., and he was asked to
surrender his shares in 8 Co. "which he ac*uired at a cost of 9(II,III# to the
company "8 Co.#, and received in return for the shares surrendered, shares of stock
of V Co. with a fair market value of 9&HI,III. $he merger had the following tax
conse*uences%
$o 8 Co.%
Fair 4arket <alue of shares of V Co. received 9&,HII,III
/ess% 1ook <alue of properties transferred
(,III,III
/oss not recognized 9 (II,III
$o 4r. --%
Fair 4arket <alue of V Co. shares received
9&HI,III
/ess% Cost of 8 Co. shares surrendered (II,III
1@
No gain or loss shall be recogni=ed if in pursuance of a plan of merger or consolidation -
a! % corporation, which is a party to a merger or consolidation, exchanges property solely for stoc( in a corporation,
which is a party to the merger or consolidationH /property for stoc(2 or
b! % shareholder exchanges stoc( in a corporation, which is a party to the merger or consolidation, solely for the stoc(
of another corporation also a party to the merger or consolidationH /stoc( for stoc( 2 or
c! % security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such
corporation, solely for stoc( or securities in such corporation, a party to the merger or consolidation. /securities for
securities2
$2
/oss not recognized 9 (I,III
6uppose a merger or consolidation resulted in a 6!IN to the corporation, or
stockholder, or security holder, will the gain be recognizedT =ain will be recognized
only if on the exchange under the merger or consolidation, the taxpayer recei)e#
ca"h or property. $he gain to be recognized should not excee# the sum of money
and the fair market value of the property received.
I//+6$:-$I?3%
11 Co. was merged into CC Co. 4r. 55 is a stockholder of 11 Co. 4r. 55 was asked
to surrender his shares of stock of 11 Co. "ac*uired by him for 9&II,III# to that
corporation, and in exchange, he received shares of stock of CC Co. with a fair market
value of 9&&I,III, plus cash of 9(I,III. ?ne month after the merger, 4r. 55 sold
his CC Co. shares for 9&(I,III.
I3C?4@ $-L I49/IC-$I?36%
$here would have been a gain of 9(I,III on the merger, and a gain of
9(I,III on the sale.
a. Computation of the gain of 4r. 55 from the merger
F4< of the CC Co. shares received 9&&I,III
-dd% Cash received (I,III
$otal Consideration received 9&)I,III
/ess% Cost of 11 shares surrendered &II,III
Indicated =ain 9 )I,III
=ain to be recognized 9 (I,III
b. 1asis to 4r. 55 of the shares of CC Co. received
1asis of 11 Co. shares surrendered 9&II,III
/ess% Cash received (I,III
1alance 9 HI,III
-dd% =ain recognized (I,III
1asis to 55 of CC shares received 9&II,III
c. Computation of the gain on the sale of 11 shares
6elling 9rice 9&(I,III
/ess% 1asis &II,III
=ain on the sale 9 (I,III
Corporate read2ustment4 Transfer to Controlled Corporation .6ec. DI"C#2
Ghen a taxpayer transfers property to a corporation, in consideration of stock
received for the transfer, as a result of which transfer, the taxpayer "alone or
together with others not exceeding four .or a total of five2# gains control of the
corporation
(I
, no loss is recognized on the transfer of property.
I//+6$:-$I?3%
4r. @@ transferred property to FF Co., as a result of which transfer 4r. @@ ac*uired
control of FF Co. $he property transferred had a basis to 4r. @@ of 9EII,III, and as
consideration, he received shares of stock of FF Co. with a fair market value of
9DJI,III. $he conse*uence of the transaction was%
F4< of the shares of FF Co. received 9DJI,III
/ess% 1asis of the property transferred EII,III
/oss not recognized 9 &I,III
2?
8re'ious to the transfer there was no control, and it was the transfer that resulted in control.
$3
6uppose the transfer resulted in a 6!IN to the transferor, will the gain be
recognizedT =ain will be recognized only if on the transfer, the taxpayer received cash
or property in addition to the shares received. $he gain to recognize shall not excee#
the sum of money and fair market value of the property received.
I//+6$:-$I?3%
4r. == transferred property to ;; Co., as a result of which transfer, 4r. == ac*uired
control of the company. $he property transferred had a basis to 4r. == of 9EII,III,
and as consideration, he received shares of stock of ;; Co. with a fair market value
of 9EEI,III plus cash of 9DI,III. ?ne month after the transfer, 4r. == sold the ;;
Co. shares for 9EMI,III.
I3C?4@ $-L I49/IC-$I?3%
$here would have been a gain of 9MI,III to 4r. == from the sale.
a. Computation of the gain on the transfer
F4< of the ;; Co. shares received 9EEI,III
-dd% Cash received DI,III
$otal Consideration received 9EJI,III
/ess% 1asis of the property transferred EII,III
Indicated =ain 9 JI,III
=ain to be recognized 9 DI,III
b. 1asis to 4r. == of the shares of ;; Co. received
1asis of the property transferred 9EII,III
/ess% Cash received DI,III
1alance 9DMI,III
-dd% =ain recognized DI,III
1asis to == of ;; Co. shares received 9EII,III
c. Computation of the gain on sale of ;; Co. shares
6elling 9rice 9EMI,III
/ess% 1asis EII,III
=ain on the sale 9 MI,III
I+ be+ore the tran"+er to the corporation4 the tran"+eror a'rea#y ha#
contro' o)er the corporation4 the &ain or 'o"" on the tran"+er !i'' be
reco&ni*e#.
I//+6$:-$I?3%
4r. II transferred property to 77 Co., of which he had control. $he property had a
basis to him of 9EII,III. 77 Co. paid him with shares of stock with a fair market
value of 9DEI,III. Gill there be a loss to recognizeT 8es. $his transfer does not
*ualify as a corporate readAustment.
Capital %osses "6ee LIII. Capital =ains and /osses, p. MO#
A!andonment %osses
( In the event a contract area where petro'em operation" are undertaken is
partially or wholly abandoned, A,, accm'ate# exp'oration an#
#e)e'opment expen#itre" pertaining thereto shall be allowed as a
deduction4
o Provided, $hat accumulated expenditures incurred in that area
prior to 7anuary &, &JOJ shall be allowed as a deduction only from
any income derived from the same contract area.
o In all cases, notices of abandonment shall be filed with the
Commissioner.
$"
( In case a pro#cin& !e'' is subse*uently abandoned, the namorti*e#
co"t" thereof, as well as the n#epreciate# co"t" o+ eDipment #irect'y
"e# therein, shall be allowed as a deduction in the year such well,
e*uipment or facility is abandoned by the contractor%
o Provided1 $hat if such abandoned well is reentered and production
is resumed, or if such e*uipment or facility is restored into service,
the said costs shall be inc'#e# a" part o+ &ro"" income in the
year o+ re"mption or restoration and shall be amortized or
depreciated, as the case may be.
#et Fperating %oss Carry$Fver 5#F%CF9 .6ec. )D"5#2 $he net operating loss
(&
of
the business for any taxable year immediately preceding the current taxable year,
which had not !een previously offset as deduction from gross income shall be carried
over as a deduction from gross income for the next three 091 con"ecti)e taxab'e
year"
::
immediately following the year of such loss.
( REL2ISITES for application of 3?/C?%
&. -ny net loss incurred in a taxable year during hich the taxpayer
as exempt from income tax shall not !e alloed as a deduction
(. - net operating loss carryCover "3?/C?# shall be alloed only if
there has !een no su!stantial change in the onership of the
business or enterprise.
$here is no substantial change when%
&. not less than OEK in nominal value of outstanding
issued shares, if the business is in the name of the
corporation, is held by or on behalf of the same
persons' or
(. not less than OEK of the paid up capital of the
corporation, if the business is in the name of the
corporation, is held by or on behalf of the same
persons.
( !pplica$ility of t*e LF2 interest rule $he N>K eDity4 o!ner"hip or
intere"t r'e shall only apply to a transfer or assignment of the taxpayer,s
net operating losses a" a re"'t o+ or ari"in& +rom the "ai# taxpayerP"
mer"er or consolidation or $usiness com$ination !ith another
per"on. In case the transfer or assignment of the taxpayer,s net operating
losses arises from the said taxpayer,s merger, consolidation or combination
with another person, the tran"+eree or a""i&nee "ha'' NOT be entit'e# to
c'aim the "ame a" #e#ction from gross income 2N,ESS, as a result of
the said merger, consolidation or combination, the "hareho'#er" o+ the
tran"+eror@a""i&nor4 or the tran"+eror "in case of other business
combinations# "ains control of at least LF2 or more in nominal value of
the outstanding issued shares or paid up capital of the transferee/assignee
"in case the transferee/assignee is a corporation# or OEK or more interest in
the business of the transferee/assignee "in case the transferee/assignee is
other than a corporation#. "6ec. (.D, :: &DC(II&#
o BIR R'in& ?33/?:4 March :N4 :??: $he OEK e*uity,
ownership or interest rule shall only apply to a transfer or
assignment of the taxpayers net operating losses as a result of or
arising from said taxpayers merger or consolidation or business
21
Net operating loss is the excess of allowable deductions o'er gross income as defined in Sec. 32%! of the N,-.!.
22
"xception to the #hree$%ear Rule Dor mines other than oil and gas wells, a net operating loss without the benefit of
incenti'es pro'ided for under the 1mnibus ,n'estments .ode of 1@>*, incurred in any of the first ten (10) years of operation may
be carried o'er as a deduction from taxable income for the next five (5) years immediately following the year of such loss. 4he
entire amount of the loss shall be carried o'er to the first of the fi'e #! taxable years following the loss, and any portion of such
loss which exceeds, the taxable income of such first year shall be deducted in li(e manner form the taxable income of the next
remaining four "! years.
$#
combination with another person. .In this case,2 since the transfer
of the shares by the previous stockholders were through straight
purchase and sale and not through merger, consolidation or
business combination, such transfer did not cause a substantial
change in ownership.
( #u$stantial C*an"e in t*e 3.ners*ip of t*e 8usiness or <nterprise
$he term >6ubstantial Change in the ?wnership of the 1usiness or @nterprise>
shall refer to a change in the ownership of the business or enterprise as a
result of or arising from its merger or consolidation or combination with
another person in the manner as provided in :: &DC(II&. Any chan&e in
o!ner"hip a" a re"'t o+ or ari"in& theren#er "ha'' not be treate# a"
a "b"tantia' chan&e +or a" 'on& a" the "tocAho'#er" o+ the party
thereto4 to !hom the net operatin& 'o"" i" attribtab'e4 &ain" or
retain" N>K or more intere"t a+ter "ch mer&er or con"o'i#ation or
combination.
o Time o+ Determination o+ Sb"tantia' Chan&e in the
O!ner"hip o+ the B"ine"" [ $he substantial change in the
ownership of the business or enterprise shall be #etermine# a" o+
the en# o+ the taxab'e year !hen NO,CO i" to be c'aime# a"
#e#ction "e.g., in the case of merger or consolidation of two or
more corporations, such change shall be determined based on the
ownership of the outstanding shares of stock issued or based on
paidCup capital as of the end of the taxable year, and as a result of
or arising from the said merger or consolidation#.
( 8y or on 8e*alf of t*e #ame Persons [ $he term >1y or on 1ehalf of the
6ame 9ersons> shall refer to the maintenance of o.ners*ip despite
c*an"e as .*en%
&. #o actual change in onership is involved in case the transfer
involves change from direct onership to indirect onership1 or
vice versa.
I//+6$:-$I?3%
Facts% 9 Corporation owns P Corporation that has 3?/C?. 9
Corporation transfers P Corporation,s shares to : Corporation in
exchange for &IIK of : Corporation shares.
;eld% P Corporation,s 3?/C? is retained because P
Corporation,s shares arc held >by> : Corporation >on behalf of> 9
Corporation, the original owner.
o #o actual change in onership is involved as in the case of merger
of the su!sidiary into the parent company.
I//+6$:-$I?3%
Facts% L Corporation owns &IIK of 8 Corporation. 8
Corporation owns &IIK, of V Corporation. V Corporation has
3?/C?. V Corporation is merged into 8 Corporation.
;eld% V Corporation,s 3?/C? should be retained and
transferred to 8 Corporation. 9rior to the merger, L Corporation
already indirectly owned V Corporation, i.e., V Corporation,s
shares were held >by> 8 Corporation >on behalf of> L
Corporation. -fter the merger, L now directly owns V
Corporation .absorbed corporation2 which continues to exist in 8
Corporation.
$$
( Taxpayers <ntitled to Deduct N3;C3 from 6ross Income. [ -ny
indi-idual "including estates and trusts# engaged in trade or !usiness or in
the exercise of his profession, and domestic and resident forei"n
corporations su$)ect to t*e normal income tax "e.g., manufacturers and
traders# or preferential tax rates under the Code "e.g., private educational
institutions, hospitals, and regional operating head*uarters#
o #pecial &ule in case taxpayer is an indi-idual -n individual
who claims the &IK optional standard deduction shall not
simultaneously claim deduction of the 3?/C?. Further, the three$
year reglementary period shall continue to run notithstanding the
fact that the aforesaid individual availed of the &IK optional
standard deduction during the said period.
o #pecial &ule in case taxpayer is a corporation Corporations
cannot enAoy the benefit of 3?/C? for as long as it is subAect to
4CI$ in any taxable yearE $he three$year reglementary period on
the carry$over of #F%CF shall continue to run notithstanding the
fact that the corporation paid its income tax under the >4inimum
Corporate Income $ax> computation.
o EXCEPTIONS 05ho are not entit'e# to #e#ct NO,CO1;
1. Fffshore Ban.ing Lnit "?1+# of a foreign banking
corporation, and Foreign Currency "eposit Lnit "FC5+# of
a domestic or foreign banking corporation, duly authorized
as such by the 1angko 6entral ng 9ilipinas "169#'
2. -n enterprise registered ith the Board of Investments
5BFI9 with respect to its 1?ICregistered activity en2oying
the Income Tax 7oliday incentive. Its accumulated net
operating losses incurred or sustained during the period of
such Income $ax ;oliday shall not *ualify for purposes of
the 3?/C?'
3. -n enterprise registered ith the Philippine Economic Hone
Authority 5PEHA#, pursuant to :.-. 3o. OJ&M, as amended,
with respect to its 9@V-Cregistered business activity. Its
accumulated net operating losses incurred or sustained
during the period of its 9@V- registration shall not *ualify
for purposes of the 3?/C?'
". -n enterprise registered under &+A+ #o+ >EE>1 otherise
.non as the Bases Conversion and "evelopment Act of
BIIE, e.g., 614-Cregistered enterprises, with respect to
its registered business activity. Its accumulated net
operating losses incurred or sustained during the period of
its said registered operation shall not *ualify for purposes
of the 3?/C?'
#. Foreign corporations engaged in international shipping or
air carriage !usiness in the 9hilippines' and
$. In general, any person1 natural or 2uridical1 en2oying
exemption from income tax, pursuant to the provisions of
the Code or any special law, with respect to its operation
during the period for which the aforesaid exemption is
applicable. Its accumulated net operating losses incurred
or sustained during the said period shall not *ualify for
purposes of the 3?/C?.
$*
I//+6$:-$I?3 ?F 3?/C?%
5In Pesos9 :??? :??3 :??: :??9 :??J
=ross Income EII,III MII,III OII,III EII,III HII,III
/ess% 5eductions JII,III EII,III OEI,III D(I,III DEI,III
3et /oss .OR2 "DII,III# "EI,III#
3et Income before
3?/C?S
&II,III HI,III )EI,III
/ess% 3?/C?
From (III "&II,III# "HI,III#
From (II( "EI,III#
$axable Income I I I I )II,III
S C whichever is applicable
Explanation4
( $he unused net operating loss of 9((I,III "DII,III B &II,III B HI,III# of
the year (III could not be carried over beyond (II). $he net operating loss
of (II( could be carried over to (IID, since it is within the threeCyear period.
( L; -s of yearend of (IID, what amount of 3?/C? is available to the
company for offsetting against "potential# gross income of succeeding taxable
yearsT
An"!er; 3one. Ghile there was an unused portion of the (III 3?/C?, such
had already expired by yearend of (II). $he (II( 3?/C? "9EI,III# was
completely used up in (IID. $here is, therefore, no 3?/C? available to the
company for year (IIE and thereafter.
I. 8ad De$ts .6ec. )D"@#2
"efined4 debts resulting from the worthlessness or uncollectibility, in whole or in part, of
amounts due the taxpayer by others, arising from money lent or from uncollectible amounts
of income from goods sold or services rendered. "6ec. (, :: ECJJ as amended by :: (EC
(II(#
"eduction Alloed4 5ebts due to the taxpayer actually ascertained to be worthless and
charged off within the taxable year
=!ctually ascertained to $e .ort*less> [ In general, a debt is not worthless simply
because it is of doubtful value or difficult to collect. Gorthlessness is not determined by an
inflexible formula or slide rule calculation but upon the exercise of sound $usiness
)ud"ment. $he determination of worthlessness in a given case must depend upon the
particular facts and the circumstances of the case. - 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 notes which have long become overdue, and where there is no showing
that the surrounding circumstances differ from those relating to other notes which were
charged off in a prior year. Ghile a mere hope probably will not Austify postponement of the
$>
>
>
>
deduction, a rea"onab'e po""ibi'ity o+ reco)ery will permit the account to be carried
along notwithstanding that the probabilities are that the debt may not be collected at all.
6ood fait* is not enou"*E $here are two re*uisites before a taxpayer may
charge off and deduct a debt. ;e must ascertain the debt to be worthless in the
year for which the deduction is sought, and that in doing so, he acted in good
faith. ;owever, good faith on the part of the taxpayer is not enough. 7e m"t
"ho! a'"o that he ha# rea"onab'y in)e"ti&ate# the re'e)ant +act" an#
ha# #ra!n a rea"onab'e in+erence +rom the in+ormation th" obtaine#
by him. Ghere a taxpayer has failed to attach to his tax returns a statement
showing the propriety of the deductions therein made for alleged bad debts, the
account written off will be disallowed. "Collector v. =oodrich International
:ubber Co., (& 6C:- &))M#
( +*at does "ood fait* re'uire, =ood faith does not re*uire that
the taxpayer be an >incorrigible optimist> but on the other hand, he
may not be unduly pessimistic. Creditors do not have to wait until
some turn of the wheel of fortune may bring their debtors into
affluence. $he taxpayer may strike a middle course between
pessimism and optimism and determine debts to be worthless in the
exerci"e o+ "on# b"ine"" <#&ment ba"e# pon a" comp'ete
in+ormation a" i" rea"onab'y a"certainab'e. $he taxpayer need
not have perfect discernment. "6ec. (, :: ECJJ as amended by ::
(ECI(#
M!ctually c*ar"ed off from t*e taxpayers $oo0s of accounts> [ $his phrase means
that the amount of money lent by the taxpayer "in the course of his business, trade or
profession# to his debtor had been recorded in his books of account as a receivable has
actually become worthless as of the end of the taxable year, that the said receivable has
been cance''e# an# !ritten/o++ from the said taxpayer,s books of account . - mere
recording in the taxpayer,s books of account of estimated uncollectible accounts does not
constitute a writeCoff of the said receivable, hence, shall not be a valid basis for its
deduction as a bad debt expense. In no case may any !ad de!t deduction !e alloed unless
the facts pertaining to the money or property lent and its cancellation or rite$off from the
taxpayerMs accounting records1 after having !een determined that the same has actually
!ecome orthless1 have !een complied ith !y the taxpayer. "6ec. (, :: ECJJ as amended
by :: (ECI(#
EXCEPTIONS% $he following are not #e#ctib'e as bad debts%
&. those debts not connected with profession, trade or business
2. those sustained in a transaction entered into between family members or related
taxpayers
()

REL2ISITES -OR DED2CTIBI,IT.% 0PIC21
&. $here must be an existin" INDEBTEDNESS due to the taxpayer, which must be
valid and legally demandable.
(. $he debt must be connected with PRO-ESSION% trade or $usiness.
23
1. +etween members of a family.
- 4he family of an indi'idual shall include only his brothers and sisters whether by the whole or half-blood!, spouse,
ancestors, and lineal descendants.
2. +etween an indi'idual and corporation more than fifty percent #?7! in 'alue of the outstanding stoc( of which is owned,
directly or indirectly, by or for such indi'idualH or
3. +etween two corporations more than fifty percent #?7! in 'alue of the outstanding stoc( of which is owned, directly or
indirectly, by or for the same indi'idualH
". +etween the grantor and a fiduciary of any trustH
#. +etween the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trustH
$. +etween a fiduciary of a trust and beneficiary of such trust.
$@
?nly businessCrelated bad debts are allowed as deductions from the
taxpayers gross income. 9ersonal debts from an insolvent debtor cannot be
deducted from the creditors gross income.
). $he debt must be actually ascertained to $e .ort*less or :NCO,,ECTIB,E.
"e.g., bankrupt debtor#
Factors to consider to ascertain uncollecti$ility 1efore a taxpayer
may charge off and deduct a debt, he must ascertain and be able to
demonstrate with reasonable degree of certainty the uncollectibility of the
debt. $he Commi""ioner o+ Interna' Re)ene !i'' con"i#er A,,
PERTINENT E%IDENCE4 inc'#in& t*e -alue of t*e collateral, if any,
securing the debt and t*e financial condition of t*e de$tor in
determining whether a debt is worthless, or the assi"nin" of t*e case for
collection to an independent collection la.yer who is not under the
employ of the taxpayer and who shall report on the legal obstacle and the
virtual impossibility of collecting the same from the debtor and who shall
issue a statement under oath showing the propriety of the deductions
thereon made for alleged bad debts. $hus, where the surrounding
circumstances indicate that a debt is worthless and uncollectible and that
'e&a' action to en+orce payment !o'# in a'' probabi'ity not re"'t in
the "ati"+action o+ exection on a <#&ment, a showing of those facts
will be sufficient evidence of the worthlessness of the debt for the purpose of
deduction. "6ec. ), :: ECJJ as amended by :: (EC(II(#
3t*er factors t*at may $e ta0en into account $he flight or
disappearance of the debtor, the insolvency of the debtor, or the death of the
debtor with insufficient properties to pay creditors, may indicate
worthlessness of the debt.
Note% - creditor cannot deduct the debt of an insolvent debtor as long as it
is possible to proceed against the guarantor or surety who is insolvent. -ll
efforts must be exhausted to collect from the guarantor or surety.
D. $he debt must be actually C7AR$ED 3FF t*e $oo0s of accounts of the taxpayer
as of the end of the taxable year.
NOTE; $he debts due a taxpayer may arise out of securities held. B2T in a case where
securities are ascertained to be worthless and charged off within the taxable year, and are
capital assets, the loss to the taxpayer "other than a bank or trust company incorporated
under the laws of the 9hilippines a substantial part of whose business is the receipt of
deposits# will not be treate# a" ba# #ebt"4 bt a" capital loss on the 'a"t #ay o+ the
taxab'e year "6ee LIII. Capital =ains and /osses, p. MO, for the income tax treatment#.
$he date that the securities were written off is immaterial. .6ec. )D"@#"(#2
(D
$ENERA, R2,E; $he determination by the Commissioner of Internal :evenue as to the
worthlessness of bad debt is ade*uate.
EXCEPTIONS; $here are two groups of companies that are re*uired to submit
additional documents or to secure approval from their regulatory agencies before they
are allowed to deduct bad debts from gross income. $hus%
&. In the case of $an0s% the Commissioner of Internal :evenue shall determine
whether or not bad debts are worthless and uncollectible. Githout preAudice
to the Commissioners determination of the worthlessness and uncollectibility
of debts, the taxpayer shall su!mit a Bang.o Sentral ng Pilipinas 5BSP9 '
*onetary Board ritten approval of the riting off of the inde!tedness from
the banks, books of accounts at the end of the taxable year.
2"
,;;IS4-%4,1N9 Ar. % purchased bonds of + .o. on Aarch 1?, 2??? for 81??,??? and held them as capital assets. 1n
Debruary 2, 2??1, + .o. was declared by the .ourt as insol'ent, and the bonds were totally worthless. Ar. % wrote off the bonds
from his boo(s of accounts on Debruary ", 2??1. 4here is no bad debt for Ar. %. &e would be considered to ha'e a capital loss of
81??,??? for the year 2??1. 4he holding period of the bonds was from Aarch 1?, 2??? to December 31 2??1, or more than 12
months. 4he capital loss would be considered at #?7, or at 8#?,???. See J,,,. .apital :ains and ;osses, p. $* for the detailed
explanation on income tax treatment of capital asset transactions.!
*?
(. In no case may a receivable from an insurance or surety company be
writtenCoff from the taxpayer,s books and claimed as bad debts deduction
unless such company has been declared closed due to insolvency or for any
such similar reason !y the Insurance Commissioner.
&eco-ery of 8ad De$ts Pre-iously Deducted (Tax 8enefit &ule) $he recovery of
bad debts previously allowed as deduction in the preceding year or years shall be included
as part of the taxpayer,s gross income in the year of such recovery to the extent of the
income tax benefit of said deduction.
Examp'e% If in the year the taxpayer claimed deduction of bad debts writtenCoff, he
realized a reduction of the income tax due from him on account of the said deduction,
his subse*uent recovery thereof from his debtor shall be treated as a receipt of
realized taxable income. Conversely, if the said taxpayer did not benefit from the
deduction of the said bad debt writtenCoff because it did not result to any reduction of
his income tax in the year of such deduction "i.e. where the result of his business
operation was a net loss even without deduction of the bad debts writtenCoff#, then
his subse*uent recovery thereof shall be treated as a mere recovery or a return of
capital, hence, not treated as receipt of realized taxable income. "6ee p. )O for the
illustration#
J. Depreciation .6ec. )D"F#2
"efined4 5epreciation is the gradual diminution of the useful value of tangible property
resulting from wear and tear and normal obsolescence. $he term is also applied to
amortization of the value of intangible assets "i.e., patents#, the use of which in the trade or
business is definitely limited in duration.
"eduction Alloa!le4 $here shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear "including reasonable allowance for
obsolescence# of property used in the trade or business. $he rationale for this is that
property gradually approaches a point where its usefulness is exhausted.
Ghat if the property is used in business and for personal purposesT :ule% $he
depreciation expense must be pro/rate#' only the portion attributable to business
use is deductible.
e+g+1
From the evidence, it appears that the car of the petitioner was used more for
business than for personal purposes. ;e was, and is until now, a law practitioner,
a law professor in two law schools and was, during the year in *uestion, engaged
in business as an importer. ;e had only one car at the time. Conse*uently, \ of
the value of the depreciation of the car may be considered as business related,
while ] thereof represents nonCdeductible personal expense. $he same is true as
regards the salary of petitioners driver. "7amir v. Collector, C$- Case 3o. DD),
3ovember (H, &JEJ#
(ho may ta.e depreciation4 $he person who sustains an economic loss from the decrease in
property value due to depreciation gets the deduction. ?rdinarily, this is the person who
owns and has a capital investment in the property.
(hen to deduct depreciation4 $he period of depreciation starts when the asset is placed in
service. It ends when the asset is disposed of, or its usefulness exhausted.
REL2ISITES -OR DED2CTIBI,IT.; 0TR2CE1
&. $he allowance for depreciation must be for property arising out of its use in t*e
TRADE or $usiness, or out of its not being used temporarily during the year.
5epreciation is allowed not only on depreciable property that is used in the
trade, business or profession of the taxpayer, but also on depreciable
property that is not being used temporarily during the year. "Conwell 1ros.
Co. v. Collector, C$- Case 3o. D&&#
(. $he asset must have a limited :SE-2, life.
*1
). $he allowance for depreciation must be &EASONAB,E.
D. $he allowance must be C7AR$ED off durin" t*e taxa$le year from the taxpayers
books of accounts.
E. $he total allowances must not <XCEED t*e cost of the property.
(hat is the appropriate useful life of the property8 (hat rate of depreciation must !e
applied8
=enerally, the estimated useful life is determined by the taxpayer himself.
;?G@<@:, where the taxpayer and the Commissioner have entered into an
agreement in writing specifically dealing with the useful life and rate of depreciation of
any property, the rate so agreed upon shall be bin#in& on both the taxpayer and the
national =overnment in the a!sence of facts and circumstances not ta.en into
consideration during the adoption of such agreement.
$he responsibility of establishing the existence of such facts and circumstances
shall rest with the party initiating the modification.
$enera' R'e; -ny change in the agreed rate and useful life of the depreciable
property as specified in the agreement shall not !e effective for taxa!le years
prior to the taxa!le year in hich notice in riting !y certified mail or
registered mail is served by the party initiating such change to the other party
to the agreement.
Exception; Ghere the taxpayer has adopted such useful life and depreciation
rate for any depreciable property and claimed the depreciation expenses as
deduction from his gross income, !ithot any !ritten ob<ection on the part
of the Commissioner or his duly authorized representatives, the aforesaid useful
life and depreciation rate so adopted by the taxpayer for the depreciable asset.
Metho#" an# Rate" o+ Depreciation
&. Straight$line method
$he depreciation expense deductible in each of the years of the propertys estimated
useful life is constant.
Formula%
5eduction for 5epreciation N Cost B 6alvage <alue L
@stimated +seful /ife of the 9roperty
3?$@% "Cost B 6alvage <alue# is known as the depreciable cost.
-lternative 4ethod%
5epreciation &ate S & 0
@stimated +seful /ife of the 9roperty
5eduction for 5epreciation N 5epreciation :ate x "Cost B 6alvage <alue#
I//+6$:-$I?3%
; Co. ac*uired a machine at a cost of 9)HI,III. It had no scrap "or salvage#
value, and the useful life was estimated at (E years. $he depreciation expense
per year is 9&E,III, computed as follows%
5epreciation @xpense N .")HI,III B I# / (E2 HORI
N "&/(E# x ")HI,III B I#
E+ "eclining$!alance method1 using a rate not exceeding tice the rate for straight line
method
+nder this method, the depreciation alloance per year varies. 5epreciation is
largest in the first year and continually decreases towards the end of the useful life of
the property. $he depreciation rate under the straightCline method is first computed,
and the result is multiplied with the rate relative to the straightCline method rate. $he
product "the declining balance rate!# is then multiplied to the yearly declining
balance of the property "i.e., book value of the property at the start of the current
year, which is e*ual to its original cost minus its accumulated depreciation# to
*2
determine the deduction for depreciation for the current year. ;owever, in the last
year of the assets estimated life, the depreciation is e*ual to the book value of the
property at the start of that year "i.e., the amount of depreciation must be Aust
enough to reduce the propertys book value to zero#. 3ote that the "a')a&e )a'e i"
i&nore# in the #ec'inin& ba'ance metho#.
I//+6$:-$I?3%
9 Company ac*uired a machine on 7anuary &, (II( at a cost of 9DII,III. It had
a scrap value of 9EI,III, and a useful life of D years. $he company uses the
declining balance method, at a rate of one and a half that of the straight line
method. 5etermine the depreciation chargeable in years (II(, (II), (IID and
(IIE.
Step 3; Compte +or the #epreciation rate n#er the "trai&ht/'ine
metho#.
6traight /ine 5epreciation :ate N &/@stimated +seful /ife
N ], or (EK
Step :; Compte +or the Dec'inin& Ba'ance Rate 0DBR1.
5eclining 1alance :ate N 6traight /ine 5epreciation :ate
x
:ate :elative to the 6traight /ine
5epreciation :ate
N ] x &.E
N )O.EK
Step 9; App'y the Dec'inin& Ba'ance Rate to the booA )a'e o+ the
property at the "tart o+ the crrent year.
:ear E@@E4
1ook value of the property SSS 9DII,III
4ultiplied by% 51: )O.EK
De#ction +or Depreciation P3>?4???
SSS 6ince this is the year of the ac*uisition, the book value of the
property at the start of the year is e*ual to its original cost.
:ear E@@D4
?riginal Cost 9DII,III
/ess% -ccumulated 5epreciation &EI,III
1ook <alue of the 9roperty,
start of current year
9 (EI,III
De#ction +or Depreciation P M94N>?
:ear E@@;4
/ess% -ccumulated 5epreciation
8ear (II( B 9&EI,III
8ear (II) B 9J),OEI (D),OEI
start of current year
9 &EM,(EI
De#ction +or Depreciation P
>84>M9.N>
*3
:ear E@@<4
/ess% -ccumulated 5epreciation
8ear (II( B 9&EI,III
8ear (II) B 9J),OEI
8ear (IID B 9EH,EJ).OE )I(,)D).O
E
start of current year 9
JO,MEM.(E
De#ction +or Depreciation
EEE
P
MN4R>R.:>
SSS $he deduction for depreciation in (IIE is e*ual to the book value
of the property at the start of the year because the machine had a useful
life of D years, which ended in (IIE.
D+ Sum$of$the$years$digit method
+nder this method, the annual depreciation is computed by applying a changing
fraction to the depreciable cost of the property "original cost reduced by the salvage
value#. In the fraction, the numerator is the number of remaining years of the
estimated useful life of the property and the denominator is the sum of the numbers
representing the years of the propertys life.
I//+6$:-$I?3% ?n 7anuary &, (II&, 7 Company ac*uired a machine at a cost of
9&IE,III. It had a salvage value of 9E,III, and an estimated useful life of E
years. $he company uses the sumCofCtheCyears method in determining
depreciation. 5etermine the depreciation chargeable in years (II&, (II(, (II),
(IID and (IIE.
Step 3; Compte +or the "m o+ the nmber" repre"entin& the year" o+
the propertyU" 'i+e.
$he property has an estimated useful life of E years. $he sum, therefore, is &E "E
Z D Z ) Z ( Z &#. $his sum will be used as the denominator in the fraction.
Step :; Compte +or the #epreciab'e co"t o+ the property.
$he depreciable cost is 9&II,III "9&IE,III B 9E,III#.
Step 9; Compte +or the year'y #e#ction +or #epreciation "Column 5#.
! 8
0S A @
3>1
C D
0S B x C1
:ear &emaining Lseful
%ife
":eckoning 9oint%
6tart of the 8ear#
&esultin
g
Fraction
"eprecia!le
Cost
"eduction
for
"epreciation
(II& E E/&E 9&IE,III 9)E,III
(II( D D/&E 9&IE,III 9(H,III
(II) ) )/&E 9&IE,III 9(&,III
(IID ( (/&E 9&IE,III 9&D,III
(IIE & &/&E 9&IE,III 9O,III
;+ Any other method hich may !e prescri!ed !y the Secretary of Finance upon
recommendation of the Commissioner
Specia' R'e";
"epreciation of Properties Lsed in Petroleum Fperations B
*"
-n allowance for depreciation in respect of all properties DIRECT,. related
to production of petroleum shall be allowed under the straightCline or
decliningCbalance method of depreciation at the option of the service
contractor. ;owever, if the service contractor initially elects the decliningC
balance method, it may shift to the straightCline method. $he useful life of
properties used in or related to production of petroleum shall be ten "&I#
years or such shorter life as may be permitted by the Commissioner.
9roperties NOT 2SED DIRECT,. in the production of petroleum shall be
depreciated under the straightCline method on the basis of an estimated
useful life of E years.
"epreciation of Properties Lsed in *ining Fperations B -n allowance for depreciation
in respect of all properties used in mining operations other than petroleum
operations, shall be computed as follows%
-t the normal rate of depreciation if the expected life is ten 5B@9 years or
less' or
5epreciated over any number of years between five "E# years and the
expected life if the latter is more than ten 5B@9 years, and the depreciation
thereon allowed as deduction from taxable income% 9rovided, $hat the
contractor notifies the Commissioner at the beginning of the depreciation
period which depreciation rate allowed will be used.
"epreciation "educti!le !y #onresident Aliens Engaged in Trade or Business
5#&AETB9 or &esident Foreign Corporations 5&FC9 C - reasonable allowance for the
deterioration of property arising out of its use or employment or its nonCuse in the
business, trade or profession shall be permitted only when such property is located in
the Philippines.
K. Depletion of 3il and 6as +ells and ?ines .6ec )D"=#2
"efinition4 5epletion is the exhaustion of natural resources due to production. It is the
reduction of cost or value of natural resources such as oil and gas wells and mines as the
resources are converted into inventories.
"eduction Alloa!le4 - reasonable allowance for depletion computed using the costC
depletion method shall be granted provided that the allowance for depletion shall not
exceed the capital invested.
I//+6$:-$I?3%
/and containing natural resources was purchased for 9&II,JII,III. It was estimated that
the land, after exploitation of its natural resources, will have a value of 9JII,III. It was
estimated that the natural resource supply was E,III,III tons. If withdrawal of resources
from the land in (IIE was EII,III tons, how much was the deduction for the yearT
9urchase 9rice 9&II,JII,III
/ess% :esidual <alue of the /and JII,III
5epletion 1ase 9&II,III,III
5ivided by% @stimated :esource 6upply, in tons E,III,III
5epletion 1ase per ton 9(I
4ultiplied by% Githdrawal of :esources in (IIE, in tons EII,III
5epletion @xpense, (IIE 9 &I,III,III
5epletion of ?il and =as Gells and 4ines 5eductible by a 3onresident -lien individual
@ngaged in $rade or 1usiness or a :esident Foreign Corporation -llowance for depletion
of oil and gas wells or mines shall be authorized only in respect to oil and gas wells or mines
located ithin the Philippines.
L. C*arita$le and 3t*er Contri$utions .6ec )D";#2
REL2ISITES -OR DED2CTIBI,IT.; 0TEE @ BE1
1. $he charitable contribution must actually $e paid or made to t*e <NTITIES
specified $y la. "i.e., 9hilippine government or any political subdivision thereof
*#
exclusively for public purposes, or any of the accredited domestic corporations or
associations specified in the 3I:C#.
2. It must be made .it*in t*e TAXAB,E year.
3. It must be <%IDENCED $y ade'uate receipts or records.
4. Additional &e/uisite for Contri!utions Fther than *oney4 $he amount of charitable
contribution of property other than money shall be 8ASED on t*e ac'uisition cost
of t*e property "i.e., not the fair market value at the time of the contribution#.
5. Additional &e/uisite for Contri!utions su!2ect to the statutory limitation4 It must not
<XCEED DA2 (indi-idual) or F2 (corporation) of the taxpayers taxable income
before charitable contributions.
6in#" o+ Contribtion";
1. Contributions deductible in full
2. Contributions subAect to the statutory limit
Contribtion" De#ctib'e in -'';
&. Donations to t*e 6o-ernment C 5onations to the =overnment of the 9hilippines or
to any of its agencies or political subdivisions, including fullyCowned government
corporations, exclusi-ely to finance, to provide for, or to be used in undertaking
PRIORIT. ACTI%ITIES in%
education,
health,
youth and sports development,
human settlements,
science and culture, and
in economic development
according to a Nationa' Priority P'an determined by the 3ational @conomic and
5evelopment -uthority "3@5-#, in consultation with appropriate government
agencies, including its regional development councils and private philanthropic
persons and institutions.
-ny donation which is made to the =overnment or to any of its agencies or
political subdivisions not in accordance ith the said annual priority plan shall be
considered a contribution subAect to the statutory limit.
(. Donations to Certain Forei"n Institutions or International 3r"ani(ations C
5onations to foreign institutions or international organizations which are fully
deductible in pr"ance o+ or in comp'iance !ith a&reement"4 treatie"4 or
commitment" entered into by the =overnment of the 9hilippines and the foreign
institutions or international organizations or in pursuance of "pecia' 'a!"'
). Donations to !ccredited Non-"o-ernment 3r"ani(ations C $he term >nonC
government organization> means a non-profit domestic corporation%
?rganized and operated exc'"i)e'y for%
o scientific,
o research,
o educational,
o characterCbuilding and youth and sports development,
o health,
o social welfare,
o cultural or
o charitable purposes, or
o a combination thereof,
no part of t*e net income of .*ic* inures to t*e $enefit of any
pri-ate indi-idual'
Ghich, not 'ater than the 3>th #ay o+ the thir# month a+ter the c'o"e of
the accredited nonCgovernment organizations taxab'e year in which
*$
contributions are received, ma0es utili(ation directly for t*e acti-e
conduct of t*e acti-ities constitutin" t*e purpose or function for which
it is organized and operated,
o 2N,ESS an extended period is granted by the 6ecretary of
Finance'
$he level of a#mini"trati)e expen"e shall, on an annual basis, not exceed
t*irty percent (JA2) of t*e total expenses' "6ec. &, :: &)C&JJH# and
$he a""et" of which, in the event of #i""o'tion, would be #i"tribte# to%
o another nonprofit domestic corporation organized for similar
purpose or purposes, or
o to the state for public purpose, or
o would be distributed by a court to another organization to be used
in such manner as in the Audgment of said court shall best
accomplish the general purpose for which the dissolved
organization was organized.
All the mem!ers of the Board of Trustees of the non$stoc.1 non$profit
corporation1 organi-ation or #GF do not receive compensation or
remuneration for their service to the aforementioned organi-ation+ 5added !y
Sec+ D1 && BD$BII?9
:tili(ation means%
i. -ny amount in cash or in kind, including administrative expenses, paid or
utilized by an accredited 3=? to accomplish one or more purposes for which
it was created or organized' or
ii. -ny amount paid to ac*uire an asset used, or held for use, directly in
carrying out one or more purposes for which the accredited 3=? was created
or organized' or
iii. -ny amount set aside for a specific proAect which comes within one or more
purpose or purposes for which the accredited 3=? was created, but only if at
the time such amount is set aside, the accredited 3=? has established to the
satisfaction of the Commissioner of Internal :evenue that the amount will be
utilized for a specific proAect within a period not to exceed five "E# years, and
the proAect is the one which can be better accomplished by setting aside such
amount than by immediate payments of funds
iv. -ny amount in cash or in kind invested in any activity related to the purpose
for which it was created or organized.
v. -ny amount in cash or in kind invested in capital sustaining and generating
activities, such as but not limited to, endowment funds, trust funds, money
market placements, shares of stock and similar instruments
9rovided, $hat, any income derived from those investments shall be
exclusively used in activities directly related to one or more purposes
for which the accredited 3=? was created or organized. "6ec. &, ::
&)C&JJH#
Contri$utions su$)ect to t*e #tatutory ;imit
&. Contributions made to the $o)ernment or any of its agencies or political subdivisions
exc'"i)e'y +or pb'ic prpo"e" "contributions for nonCpriority activities#
(. Contributions made to accre#ite# #ome"tic corporation or a""ociation"
?rganized exclusively for
o religious,
o charitable,
o scientific,
o youth and sports development,
o cultural or
o educational purposes or
o for the rehabilitation of veterans
**
). Contributions to social welfare institutions
D. Contributions to nonCgovernment organizations
no part of the net income of which inures to the benefit of any private stockholder or
individual
#tatutory ;imit: -mount deductible must not be in excess of%
&IK in the case of an individual, and
EK in the case of a corporation,
of the taxpayer,s taxable income derived from trade, business or profession before
the deduction for contributions and donations.
In other words, the amount deductible is the actual contribution or the
statutory limit computed, !hiche)er i" 'o!er.
I//+6$:-$I?3%
3 Co. had a gross income from business of 9&,III,III and allowable deductions "except
deductions for contributions# of 9DII,III. It made during the year a contribution that is
fully deductible of 9&I,III and contributions subAect to limitation of 9EI,III. Compute for
the total deduction for contributions and the taxable income of the company.
-36G@:% $he total deduction for contributions is 9DI,III, and the taxable income is
9EMI,III.
=ross Income 9&,III,II
I
/ess% -llowable 5eductions "except deduction for contributions# DII,II
I
$axable Income before deduction for contributions 9 MII,III
4ultiplied by% 6tatutory /imit "K#
EK
6tatutory /imit "in 9esos# 9 )I,III
-ctual Contributions made "subAect to limitation# 9 EI,III
-llowable 5eduction for Contributions subAect to limitation
"whichever is lower#
9 )I,III
$axable Income before deduction for contributions 9 MII,III
/ess% -llowable 5eduction for Contributions
DI,II
I
5eductible in Full
-llowable 5eduction for Contributions subAect to
limitation
9&I,III
)I,II
I
$axable Income 9 EMI,III
M. &esearc* and De-elopment .6ec. )D"/#2
"efinition4 :R5 costs are for improvements of processes and formulas as well as the
development of improved or new products. -s a general rule, :R5 only extends from the
laboratory or drawing board to prototype status' i.e., so long as an activity still contains an
element of uncertainty/technical risk, it is within the realm of :R5. Puality control, routine
product testing, data collection, efficiency surveys, management studies, market research
and sales promotion are normally not considered :R5 activities.
*>
Tax Treatment; :R5 expenditures which are paid or incurred by a taxpayer during the
taxable year in connection with his trade, business or profession may be treated EIT7ER
as%
&. Or#inary an# nece""ary expen"e" allowed as deduction during the taxable year
when paid or incurred "i.e., as an outright deduction for the full expenditure#, or
(. De+erre# a""et "or deferred expense# which is periodically subAect to amortization
-t the election of the taxpayer, the following :R5 expenditures may be
treated as deferred assets%
&. $hose paid or incurred by the taxpayer in connection with his trade,
business or profession.
(. $hose not treated as expenses.
). $hose chargeable to capital account but not chargeable to
depreciable property.
In computing taxable income, such deferred expenses shall be allowed as
deduction ratably distributed over a period of not less than sixty "MI# months
as may be elected by the taxpayer "beginning with the month in which the
taxpayer first realizes benefits from such expenditures#.
$he taxpayer may elect this alternative not later than the time prescribed by
law for filing the return for such taxable year "-pril &E#. $he method so
elected, and the period selected by the taxpayer, shall be adhered to in
computing taxable income for the taxable year for which the election is made
and for all subse*uent taxable years 2N,ESS with the approval of the
Commissioner, a change to a different method is authorized with respect to a
part or all of such expenditures.
$he election shall not apply to any expenditure paid or incurred during any
taxable year prior to the taxable year for which the taxpayer makes the
election.
,imitation" on De#ction; $he above tax treatment of :R5 expenses does NOT apply
to%
&. -ny expenditure for the ac*uisition or improvement of land or the improvement of
depreciable property, used in connection with research and development.
(. -ny expenditure incurred in ascertaining the existence, location, extent, or *uality of
any deposit of ore or other mineral, including oil or gas.
NOTE; Cost of ac*uisition or improvements of property subAect to depreciation or
depletion used in research and development becomes part o+ the co"t o+ the a""et4
an# #e#ction +rom it i" by !ay o+ #epreciation or #ep'etion4 a" the ca"e may be.
I//+6$:-$I?3%
P Co., a manufacturer of food seasoning, is continuously conducting research and
development on its product lines. In early 7anuary (IID, it completed the extension and
improvement of its research and development building at a cost of 9&,III,III. $he
extension has an estimated useful life of (E years. $he company also incurred an
aggregate of 9&,HII,III for other research and development costs. 5etermine the tax
treatment of the various expenditures.
-36G@:%
$he 9&,III,III cost of expansion of the building cannot be deducted as research
and development costs in (IID. ;owever, depreciation of 9DI,III may be
recognized yearly for (E years "9&,III,III / (E years#.
$he other costs of 9&,HII,III may be either%
a. -n outright deduction from gross income for 9&,HII,III in (IID'
.OR2
b. - deferred expense of 9&,HII,III, from which there shall be a
monthly deduction of 9&,HII,III divided by MI months "cannot be
shorter, but can be longer#, or 9)I,III per month, beginning with
*@
the first month from which benefits were ac*uired from the
expenditure. $he aggregate of monthly deductions for a given
taxable year is then deductible from that years gross income.
N. Pension Trusts .6ec. )D"7#2
"eduction Alloa!le4 -n employer establishing or maintaining a pension trust to provide for
the payment of reasonable pensions to his employees shall be allowed as a deduction "in
addition to the contributions to such trust during the taxable year to cover the pension
liability accruing during the year, allowed as a deduction under 6ec. )D"-#"&# .?rdinary and
3ecessary @xpenses2# a reasonable amount transferred or paid into such trust during the
taxable year in excess of such contributions
REL2ISTES O- DED2CTIBI,IT.; 6uch reasonable amount will only be allowed as a
deduction if it%
&. has not theretofore been allowed as a deduction, and
(. is apportioned in e*ual parts over a period of ten "&I# consecutive years
beginning with the year in which the transfer or payment is made.
Bac.ground Concepts4 $he rules in the law on deduction for pension payments to employees
apply to a pension plan that is funded. -n employer does not provide for pension for his
employees in his initial years of operations. - pension plan is usually set up after some
years of operations have gone by, when the employer is already financially capable of
providing benefits to his employees. 6ince the benefits from any pension plan consider the
length of service of the employee, the plan should consider the services of the employees
ho ere already ith the employer even !efore the plan as set up. 6uch past services
will re*uire a lump sum payment to the pension fund' this is called pa"t/"er)ice co"t.!
For each year after the pension plan was set up, there should be payment to the fund for
pension for the services rendered during the year by the employees. $his is called pre"ent
"er)ice co"t.!
9resent service cost B deductible in full in the year transferred or paid into the trust'
covered by 6ec. )D"-#"&# .?rdinary and 3ecessary @xpenses2
9astCservice cost B amount so transferred is apportioned and deductible in e*ual parts
over a period of ten "&I# consecutive years beginning with the year in which the
transfer or payment is made' covered by 6ec. )D"7# .9ension $rusts2
I//+6$:-$I?3%
F Co. established a pension trust in (II&, transferring thereto a lump sum payment of
9EII,III to cover past services rendered by its employees. -dditionally, the terms of the
trust are such that 9(I,III in pension liability would accrue yearly, covering services
rendered during the year by its employees. 5etermine the total deduction on account of
the pension trust allowed to F Co. from (II& onwards.
.ear .ear'y Amorti*ation
o+
Pa"t Ser)ice Co"t
"N &/&I of 9EII,III#
.covered by 6ec. )D"7#2
Crrent ,iabi'ity @
Pre"ent Ser)ice Co"t
.covered by 6ec. )D"-#"&#2
TOTA,
(II& 9EI,III 9(I,III 9OI,III
(II( 9EI,III 9(I,III 9OI,III
(II) 9EI,III 9(I,III 9OI,III
(IID 9EI,III 9(I,III 9OI,III
(IIE 9EI,III 9(I,III 9OI,III
(IIM 9EI,III 9(I,III 9OI,III
(IIO 9EI,III 9(I,III 9OI,III
(IIH 9EI,III 9(I,III 9OI,III
(IIJ 9EI,III 9(I,III 9OI,III
(I&I 9EI,III 9(I,III 9OI,III
>?
(I&& onwards C 9(I,III 9(I,III
O. #pecial Pro-isions &e"ardin" Income and Deductions of Insurance Companies% +*et*er
Domestic or Forei"n .6ec. )O2
Special "eduction Alloed to Insurance Companies . C In the case of insurance companies,
whether domestic or foreign doing business in the 9hilippines, the net additions, if any,
re*uired by law to be made within the year to reserve funds and the sums other than
dividends paid within the year on policy and annuity contracts may be deducted from their
gross income.
o ;owever, the released reserve should be treated as income for the year of
release.
*utual Insurance Companies . C In the case of mutual fire and mutual employers, liability and
mutual workmen,s compensation and mutual casualty insurance companies re*uiring their
members to make premium deposits to provide for losses and expenses, said companies
shall not return as income any portion of the premium deposits returned to their
policyholders, but shall return as taxable income all income received by them from all other
sources plus such portion of the premium deposits as are retained by the companies for
purposes other than the payment of losses and expenses and reinsurance reserves.
*utual *arine Insurance Companies . C 4utual marine insurance companies shall include in
their return of gross income, gross premiums collected and received by them less amounts
paid to policyholders on account of premiums previously paid by them and interest paid
upon those amounts between the ascertainment and payment thereof.
Assessment Insurance Companies .C -ssessment insurance companies, whether domestic or
foreign, may deduct from their gross income the actual deposit of sums with the officers of
the =overnment of the 9hilippines pursuant to law, as additions to guarantee or reserve
funds.
9. !llocation of Income and Deductions .6ec. EI2 C In the case of two or more organizations,
trades or businesses "whether or not incorporated and whether or not organized in the 9hilippines#
owned and controlled directly or indirectly by the same interests, the Commissioner is authorized
to distribute, apportion or allocate gross income or deductions between or among such
organization, trade or business, if he determines that such distribution, apportionment or
allocation is necessary in order% "a# to prevent evasion of taxes' or "b# to clearly reflect the
income of any such organizations, trades or businesses.
XII. NON/DED2CTIB,E EXPENSES .6ec. )M2
$ENERA, R2,E; In computing net income, no deduction shall be allowed in respect to B
&. Personal1 living or family expenses B
:ationale% not related to conduct of trade or business
(. -ny amount paid out for ne !uildings or for permanent improvements, or
betterments made to increase the value of any property or estate
EXCEPTION% Intangible drilling and development costs incurred in
petroleum operations which are deductible under 6ec. )D"=#"&#
). -ny amount expended in restoring property or in ma.ing good the exhaustion thereof
for which an allowance .for depreciation or depletion2 is or has been made "i.e.,
4aAor :epairs#
3?$@% 3os. "(# and ")# are capital expenditures. @xamples are%
a. $he cost of defending or perfecting title to property constitutes a part
of the cost of the property and is not a deductible expense.
b. $he amount expended for architects services is part of the cost of
the building
c. @xpenditures to promote the sales of additional capital stock or the
cost, commissions and fees for obtaining stock subscriptions are
>1
capital expenses. "-tlas Consolidated 4ining Co. v. Commissioner,
&I( 6C:- (DM#
D. 9remiums paid on any life insurance policy covering the life of any officer1 employee1
or person financially interested in the trade or !usiness carried on !y the taxpayer,
when the taxpayer is directly or indirectly a !eneficiary under such policy.
- person is said to be +inancia''y intere"te#! in the taxpayers business,
if he is a stockholder thereof or he is to receive as his compensation a
share of the profits of the business.
I//+6$:-$I?3%
C-6@ & C-6@ (
Insured
?fficer, employee, or
person financially
interested in the
taxpayers trade or
business
person financially interested
in the taxpayers trade or
business
1eneficiary
of /ife
Insurance
9olicy
Company
person financially interested
in the taxpayers trade or
business
9remium a
deductible
expenseT
3? "covered by 6ec. )M#
8@6 "9remium is likewise a
fringe benefit on the part of
the beneficiary.#
XIII. CAPITA, $AINS AND ,OSSES .6ec. )J2
"efinitions4
3et Capital =ain B the excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges
3et Capital /oss B means the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges
;olding 9eriod B the length of time the asset was held by the taxpayer
Meanin& o+ "a'e or exchan&e reDirement" +or capita' &ain
=ain or loss is recognized in a sale or exchange of property if the following conditions
are satisfied%
&. $he property received in exchange is essentially different from the
property disposed of'
(. $he property received has a market value
( 6ale B a delivery of goods for money
( @xchange B a delivery of goods for goods received.
( ;?G@<@:, there are transactions which the law considers sales or
exchanges though they do not meet the definitions given. $hese are%
a. :etirement of bonds, etc.
b. 6hort sales of properties
(E
c. Failure to exercise a privilege or option to buy or sell
property'
d. 6ecurities becoming worthless.
e. :eceipt of a li*uidating dividend
27
% transaction in -!ic! a speculator sells securities -!ic! !e does not o-n in anticipation of a decline in its price. T!e seller intends to cover
t!e sale b2 purc!asin. t!e securities -!en t!e price declines, in -!ic! case !e -ill ma<e a profit.
>2
Percenta&e taAen into accont 0,on&/term @ Short term1 by taxpayer";
Taxpayer" Other than a Corporation "i.e., individual taxpayers and taxpayers
treated as individuals, such as estates and trusts#
( &IIK if the capital asset was held for not more than &( months
( EIK if the capital asset has been held for more than &( months
3?$@%
o $ENERA, R2,E% For purposes of computing capital loss and capital
gain, the actual ho'#in& perio# is taken into account.
o EXCEPTION; If securities !ecome orthless during the taxable year and
are capital assets, the loss resulting therefrom shall be considered as a
loss from the sale or exchange, on the 'a"t #ay o+ "ch taxab'e year,
of capital assets. .6ec. )D"5#"D#"b#2
Corporate Taxpayer" B &IIK of the capital gain or loss, regardless of the holding
period
,imitation on Capita' ,o""e"
$ENERA, R2,E; /osses from sales or exchanges of capital assets shall be allowed
only to t*e extent of t*e "ains from such sales or exchanges.
SPECIA, R2,E -OR BAN6S AND TR2ST COMPANIES; If a bank or trust company
incorporated under the laws of the 9hilippines, a substantial part of whose business is
the receipt of deposits or the sale of bond, debenture, note, certificate or other
evidence of indebtedness, any 'o"" re"'tin& +rom "ch "a'e "ha'' not be "b<ect
to the +ore&oin& 'imitation and shall not be included in determining the
applicability of such limitation to other losses.
&ationale4 $he reason is that the securities mentioned are ordinary assets of
the bank or trust company.
Formula4 5Sec+ BD;1 &&E9
Taxab'e net income S Or#inary net income T net taxab'e capita' &ain"
Net taxab'e capita' &ain" S $ain" o+ "a'e" o+ capita' a""et"4 or >?K
thereo+ ,o""e" +rom "a'e" o+ capita' a""et"4 or >?K thereo+
Net Capita' ,o"" Carry/o)er; If an indi-idual taxpayer sustains a net capital loss in a
taxable year, such loss "in an amount not in excess of the net income
E=
for such year # shall
be treated in the succeeding taxable year as a loss from the sale or exchange of a capital
asset held for not more than &( months "DAA2 deduction#.
I,,2STRATIONS%
4r. 3, a citizen of the 9hilippines, married, had the following data for (II& and (II(%
:??3 :??:
3et Income, 9rofession 9 JI,III 9 OH,III
Interest Income from notes of clients (,III D,III
Capital =ain on assets%
)I,III
DI,III
9ainting, held for &I months
7ewelry, held for ( years
Capital /oss on bonds, held for ) years OI,III C
2$
Net ,ncome should be understood as taxable income 3xecuti'e 1rder No. 3*!
>3
4r. 3s taxable income for (II& was 9MI,III, and for (II( was 9ME,III, computed as follows%
:??3 :??:
3et Income, 9rofession 9 JI,III 9 OH,III
Interest Income (,III D,III
?rdinary 3et Income 9J(,III 9H(,III
Capital =ain "&IIK# 9)I,III
Capital Gain 5<@C9
PE@1@@
@
Capital /oss "EIK# ")E,III#
3et Capital /oss "9 E,III#
#et Capital %oss Carry$Fver from
E@@B
5<1@@@9
#et Capital Gain PE@1@@@ 3 <1@@@Q &E,III
Total 9JO,III
/ess% 1asic 9ersonal @xemption ")(,III# ")(,III#
$axable Income 9MI,III 9ME,III
%egend4
4r. ?, a citizen of the 9hilippines, single, had the following data for (II& and (II(%
:??3 :??:
3et Income, 1usiness 9 HI,III 9 JI,III
Interest Income from notes of clients D,III (,III
Capital =ain on assets%
EI,III
OI,III
6hares of foreign corporations,
held for ) years
7ewelry, held for &I months
Capital /oss on bonds, held for D months &(I,III C
4r. ?s taxable income for (II& was 9MD,III, and for (II( was 9OH,III, computed as follows%
:??3 :??:
3et Income, 1usiness 9 HI,III 9 JI,III
Interest Income D,III (,III
?rdinary 3et Income 9HD,III 9J(,III
Capital =ain "EIK# 9(E,III
Capital Gain 5B@@C9 P>@1@@@
Capital /oss "&IIK# "&(I,III#
3et Capital /oss "9JE,III#
#et Capital %oss Carry$Fver from
E@@B
5=;1@@@
9
#et Capital Gain P>@1@@@ 3 =;1@@@Q M,III
Total 9JH,III
/ess% 1asic 9ersonal @xemption "(I,III# "(I,III#
$axable Income 9MD,III 9OH,III
>"
3
3
3
3
To determine t!e maximum t!at ma2 be carried over to t!e next 2ear, Taxable Income
$et Capital )oss Carr2(ver from t!e previous 2ear
3
3
%egend4
9 Co., a domestic corporation, had the following results of operations for a taxable year%
?rdinary 3et Income 9E(,III
=ain on sale of capital asset, held for ten months (,III
=ain on sale of capital asset, held for eighteen months (,III
/oss on sale of capital asset, held for six months &,&II
/oss on sale of capital asset, held for twenty months (,III
and in the preceding year it had a net capital loss of 9&,EII and a taxable income of
9MI,III.
$he taxable income of the corporation for the year is computed as followsSSS%
?rdinary net income 9E(,III
=ain on sale of capital asset, held for ten months "&IIK# 9(,III
=ain on sale of capital asset, held for eighteen months
"&IIK#
(,III
Total Capital Gains 9D,III
/oss on sale of capital asset, held for six months "&IIK# 9&,&II
/oss on sale of capital asset, held for twenty months
"&IIK#
(,III
Total Capital %oss ),&II
3et Capital =ain JII
$axable Income 9E(,JII
SSS For corporations, capital gains and losses are always considered at &IIK, and there is
no net capital loss carryCover.
S2MMAR. O- R2,ES
For Corporation";
&. Corporations shall recognize &IIK of the capital gain or loss, regardless of the holding
period.
(. Corporations cannot carryCover net capital loss.
). /osses from sales or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges.
For In#i)i#a'"4 an# Taxpayer" Treate# a" In#i)i#a'";
&. $he holding period is relevant in determining the percentage of capital gains and losses to
be taken into account, as follows%
( &IIK if the capital asset was held for not more than &( months
( EIK if the capital asset was held for more than &( months
(. 3et capital 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 &( months "&IIK deduction#
). /osses from sales or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges.
>#
3
3
$et Capital )oss Carr2(ver from t!e previous 2ear
To determine t!e maximum t!at ma2 be carried over to t!e next 2ear, Taxable Income
XI%. INSTA,,MENT BASIS .6ec. DJ2
A. Sa'e" o+ Dea'er" in Per"ona' Property B - person who regularly sell or otherwise disposes of
personal property on the installment plan may return as income therefrom in any taxable year
that proportion of the installment payments actually received that year1 hich gross profit reali-ed
or to !e reali-ed hen payment is complete of the total contract price+
B. Sa'e" o+ Rea'ty an# Ca"a' Sa'e" o+ Per"ona'ty
&. - casual sale or other casual disposition of personal property 5other than property of a
.ind hich ould properly !e included in the inventory of the taxpayer if on hand at the
close of the taxa!le year9 for a price excee#in& Fne thousand pesos 5PB@@@#' or
(. - sale or other disposition of real property
In either ca"e the initia' payment" m"e NOT excee# :>K o+ the "e''in& price
5efinition% MInitial paymentsM means the payment received in cash or property other
than evidences of indebtedness of the purchaser during the taxable period in which
the sale or other disposition is made.
Income $ax $reatment% Income may be return on the same basis as sales of dealers in personal
property "see section -#
C. Sa'e" o+ Rea' Property Con"i#ere# a" Capita' A""et by In#i)i#a'" B -n individual who sells
or disposes of real property considered as capital asset' and is otherwise *ualified to report the
gain therefrom under 6ubsection "1# may pay the capital gains tax in installments.
X%. RET2RNS AND PA.MENTS O- TAX @ 5IT77O,DIN$ TAXES
A. Retrn" an# Payment o+ Tax
3. In#i)i#a' Retrn 0Sec. >34 NIRC1
a. 5ho are reDire# to +i'e
"a# @very Filipino citizen residing in the 9hilippines'
"b# @very Filipino citizen residing outside the 9hilippines, on his income from
sources within the 9hilippines'
"c# @very alien residing in the 9hilippines, on income derived from sources
within the 9hilippines' and
"d# @very nonresident alien engaged in trade or business or in the exercise
of profession in the 9hilippines.
b. Tho"e not reDire# to +i'e
$he following individuals shall not be re*uired to file an income tax return%
a. -n individual whose gross income does not exceed his total personal and
additional exemptions for dependents under 6ection )E% Provided1 $hat a
citizen of the 9hilippines and any alien individual engaged in business or
practice of profession within the 9hilippine shall file an income tax return,
regardless of the amount of gross income'
b. -n individual with respect to pure compensation income, as defined in
6ection )( "-#"&#, derived from sources within the 9hilippines, the
>$
FORMULA:
Gross Profit Installment pa2ments Income to be
(((((((((((((((((((((( = actuall2 received > reported for t!e
Contract price 2ear
income tax on which has been correctly withheld under the provisions of
6ection OJ of this Code% Provided1 $hat an individual deriving
compensation concurrently from two or more employers at any time
during the taxable year shall file an income tax return% Provided1 further,
$hat an individual whose compensation income derived from sources
within the 9hilippines exceeds 6ixty thousand pesos "9MI,III# shall also
file an income tax return'
c. -n individual whose sole income has been subAected to final withholding
tax pursuant to 6ection EO"-# of this Code' and
d. -n individual who is exempt from income tax pursuant to the provisions
of this Code and other laws, general or special.
-ny individual not re*uired to file an income tax return may nevertheless be
re*uired to file an information return pursuant to rules and regulations prescribed
by the 6ecretary of Finance, upon recommendation of the Commissioner.
SPECIA, R2,ES;
1. 7us$and and +ife 4arried individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely from compensation,
shall file a return for the taxable year to inc'#e the income o+ both
"po"e", but where it is impracticable for the spouses to file one return,
each spouse may file a separate return of income but the returns so filed
shall be consolidated by the 1ureau for purposes of verification for the
taxable year.
2. &eturn of Parent to Include Income of C*ildren $he income of
unmarried minors derived from property received from a living parent shall
be included in the return of the parent, except
o when the donor,s tax has been paid on such property, or
o when the transfer of such property is exempt from donor,s tax.
4. Persons :nder Disa$ility If the taxpayer is unable to make his own
return, the return may be made by hi" #'y athori*e# a&ent or
repre"entati)e or by the &ar#ian or other per"on char&e# !ith the
care o+ hi" per"on or property, the principal and his representative or
guardian assuming the responsibility of making the return and incurring
penalties provided for erroneous, false or fraudulent returns.
6. #i"nature Presumed $he fact that an individual,s name is signed to a
filed return shall be prima facie evidence for all purposes that the return was
actually signed by him.
c. 5here to +i'e
@xcept in cases where the Commissioner otherwise permits, the return shall be
filed%
If person has legal residence or place of business in the 9hilippines with an
athori*e# a&ent banA4 Re)ene Di"trict O++icer4 Co''ection A&ent or #'y
athori*e# Trea"rer o+ the city or mnicipa'ity in which such person has his
legal residence or principal place of business in the 9hilippines
If there be no legal residence or place of business in the 9hilippines with the
?ffice of the Commissioner.
d. 5hen to +i'e / $he return of any individual specified above shall be filed on or
before the fifteenth "&Eth# day of -pril of each year covering income for the
preceding taxable year.
>*
e. 5here to pay 0Sec. >R4 NIRC1
$he total amount of tax imposed by this $itle "ha'' be pai# by the person subAect
thereto at the time the retrn i" +i'e#.
Ghen the tax due is in excess of $wo thousand pesos "9(,III#, the taxpayer
other than a corporation may elect to pay the tax in two "(# e*ual installments in
which case%
&. the first installment shall be paid at the time the return is filed and
(. the second installment, on or before 7uly &E following the close of the
calendar year
). If any installment is not paid on or before the date fixed for its payment, the
whole amount of the tax unpaid becomes due and payable, together with the
delin*uency penalties.
+. Capita' &ain" on "hare" o+ "tocA" an# rea' e"tate
-I,IN$ A RET2RN
Individuals subAect to tax on capital gains'
"a# From the sale or exchange of shares of stock not traded thru a local stock
exchange as prescribed under 6ection (D"c# shall file a return within thirty
")I# days after each transaction and a final consolidated return on or before
-pril &E of each year covering all stock transactions of the preceding taxable
year' and
"b# From the sale or disposition of real property under 6ection (D"5# shall file a
return within thirty ")I# days following each sale or other disposition.
PA.MENT
$he total amount of tax imposed and prescribed shall be paid on the date the
return prescribed is filed by the person liable
o $hat if the seller submits proof of his intention to avail himself of the benefit
of exemption of capital gains under existing special laws, no such payments
shall be re*uired
o $hat in case of failure to *ualify for exemption under such special laws and
implementing rules and regulations, the tax due on the gains realized from
the original transaction shall immediately become due and payable
o $hat if the seller, having paid the tax, submits such proof of intent within six
"M# months from the registration of the document transferring the real
property, he shall be entitled to a refund of such tax upon verification of his
compliance with the re*uirements for such exemption.
o In case the taxpayer elects and is *ualified to report the gain by
installments the tax due from each installment payment shall be paid
within ")I# days from the receipt of such payments.
&. Larter'y #ec'aration o+ income tax 0Sec. NJ4 NIRC1
@very individual subAect to income tax under 6ections (D and (E"-# of this $itle,
who is receiving selfCemployment income, whether it constitutes the sole source
of his income or in combination with salaries, wages and other fixed or
determinable income, shall make and file a declaration of his estimated income
for the current taxable year on or be+ore Apri' 3> o+ the "ame taxab'e year.
In general, "e'+/emp'oyment income con"i"t" o+ the earnin&" #eri)e# by
the in#i)i#a' +rom the practice o+ pro+e""ion or con#ct o+ tra#e or
b"ine"" carrie# on by him a" a "o'e proprietor or by a partner"hip o+
!hich he i" a member.
&. 3onresident Filipino citizens, with respect to income from without the
9hilippines, and nonresident aliens not engaged in trade or business in the
9hilippines, are not re*uired to render a declaration of estimated income tax.
>>
(. $he declaration shall contain such pertinent information as the 6ecretary of
Finance, upon recommendation of the Commissioner, may, by rules and
regulations prescribe. -n individual may make amendments of a declaration
filed during the taxable year under the rules and regulations prescribed by
the 6ecretary of Finance, upon recommendation of the Commissioner.
E"timate# tax means the amount which the individual declared as income tax in
his final adAusted and annual income tax return for the preceding taxable year
minus the sum of the credits allowed under this $itle against the said tax. If,
during the current taxable year, the taxpayer reasonable expects to pay a bigger
income tax, he shall file an amended declaration during any interval of
installment payment dates.
Retrn an# Payment o+ E"timate# Income Tax by In#i)i#a'" $he amount
of estimated income with respect to which a declaration is re*uired shall be paid
in four "D# installments.
o $he first installment shall be paid at the time of the declaration and
o $he second and third shall be paid on -ugust &E and 3ovember &E of the
current year, respectively.
o $he fourth installment shall be paid on or before -pril &E of the following
calendar year when the final adAusted income tax return is due to be filed.
h. Sb"titte# +i'in& +or ITR o+ Sa'arie# In#i)i#a'"
&& DG-@AA@
Certificate of Compensation 9ayment/$ax Githheld "1I: Form 3o. ()&M#. [ In
general, every employer or other person who is re*uired to deduct and withhold
the tax on compensation including fringe benefits given to rank and file
employees, shall furnish every employee from whose compensation taxes have
been withheld the Certificate of Compensation 9ayment/$ax Githheld "1I: Form
3o. ()&M#, on or before 7anuary )& of the succeeding calendar year, or if the
employment is terminated before the close of such calendar year, on the day on
which the last payment of compensation is made. Failure to furnish the same
shall be a ground for the mandatory audit of payors income tax liabilities
"including withholding tax# upon verified complaint of the payee.
$he Certificate of Compensation 9ayment/$ax Githheld "1I: Form 3o. ()&M#
shall contain a certification to the effect that the employers filing of 1I: Form 3o.
&MIDCCF shall be con"i#ere# a" a "b"titte# +i'in& o+ the emp'oyeeU"
income tax retrn to the extent that the amount of compensation and tax
ithheld appearing in BI& Form #o+ B=@;$CF as filed ith BI& is consistent ith
the corresponding amounts indicated in BI& Form #o+ EDB= . It shall be signed by
both the employee and employer attesting to the fact that the information stated
therein has been verified and is true and correct to the best of their knowledge.
;owever, the withholding agents/employers are re*uired to retain copies of the
duly signed 1I: Form 3o. ()&M for a period of three ")# years as re*uired under
the 3ational Internal :evenue Code.
$he employee who is *ualified for substituted filing of income tax return under
these regulations, shall no 'on&er be reDire# to +i'e income tax retrn "1I:
Form 3o. &OII# since 1I: Form 3o. &MIDCCF shall be considered a substituted
return filed by the employer. 1I: Form 3o. ()&M, duly certified by both employee
and employer, shall serve the same purpose as if a 1I: Form 3o. &OII had been
filed, such as proof of financial capacity for purposes of loan, credit card, or other
applications, or for the purpose of availing tax credit in the employees home
country and for other purposes with various government agencies. $his may also
be used for purposes of securing travel tax exemption, when necessary.
>@
;owever, information referring to the certification, appearing at the bottom of
1I: Form 3o. ()&M, shall not be signed by both the employer and the employee if
the latter is not *ualified for substituted filing. In which case, 1I: Form 3o. ()&M
furnished by the employer to the employee shall be attached to the employees
Income $ax :eturn "1I: Form 3o. &OII# to be filed on or before -pril &E of the
following year.
i. Mo#e" o+ Payment o+ Taxe" Thro&h BanA"
&& D1-@AA@
SECTION 9. Mo#e" O+ Payment To Athori*e# A&ent BanA". [ -side from
the electronic payment system currently used by some taxpayers in paying their
1I: taxes, the rest shall pay their tax liabilities through any of the following
modes%
a# OO)ertheconter ca"h payment> refers to payment of tax liabilities to
authorized agent bank in the currencies "paper bills or coins# that are legal
tender in the 9hilippines. $he maximum amount allowed per tax payment
shall not exceed ten thousand pesos "9&I,III.II#
b# OBanA #ebit "y"temO refers to the system whereby a taxpayer, through a
bank debit memo/advice, authorizes withdrawals from his/its existing bank
accounts for payment of tax liabilities.
$he bank debit system mode is allowed only if the taxpayer has a
bank account with the --1 branch where he/it intends to file and pay
his/its tax return/form/declaration, provided said --1 branch is within
the Aurisdiction of the 1I: :evenue 5istrict ?ffice ":5?#//arge $axpayers
5istrict ?ffice "/$5?# where the tax payment is due and payable.
c# OChecA"O refers to a bill of exchange or ?rder Instrument drawn on a bank
payable on demand.
$he following checks are, however, not acceptable as check payments for internal
revenue taxes%
&. -ccommodation checks [ checks issued or drawn by a party other than the
taxpayer making the payment'
(. 6econd endorsed checks [ checks issued to the taxpayer as payee who
indorses the same as payment for taxes'
). 6tale checks [ checks dated more than six "M# months prior to presentation
to the authorized agent bank'
D. 9ostdated checks [ checks dated a day or several days after the date of
presentation to the authorized agent bank'
E. +nsigned checks [ checks with no signature of the drawer'
M. Checks with alterations/erasures.
--1s accepting checks for the payment of 1I: taxes and other charges must see
to it that the check covers one tax type for one return period only. 4oreover,
--1s must strictly comply with the systems and procedures for the reception,
processing, clearing and accounting of the checks to be prescribed under a
separate regulation.
6econd indorsement of checks which are payable to the 1ureau of Internal
:evenue or Commissioner of Internal :evenue is absolutely prohibited.
:. Corporation Re&'ar Retrn"
a. Larter'y Income Tax 0Sec. N>4 NIRC1
@very corporation shall file in duplicate a *uarterly summary declaration of its
gross income and deductions on a cm'ati)e ba"i" for the preceding *uarter
or *uarters upon which the income tax, shall be levied, collected and paid.
$he tax so computed "ha'' be #ecrea"e# by the amont o+ tax pre)io"'y

pai# or a""e""e# during the preceding *uarters and shall be paid not later than
@?
sixty "MI# days from the close of each of the first three ")# *uarters of the
taxable year, whether calendar or fiscal year.
b. -ina' A#<"tment Retrn 0Sec. NR4 NIRC1
@very corporation liable to tax shall file a final adAustment return co)erin& the
tota' taxab'e income +or the prece#in& ca'en#ar or +i"ca' year. If the sum
of the *uarterly tax payments made during the said taxable year is not e*ual to
the total tax due on the entire taxable income of that year, the corporation shall
either%
"-# 9ay the balance of tax still due' or
"1# CarryCover the excess credit' or
"C# 1e credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated *uarterly income taxes paid, the excess amount shown on its final
adAustment return may be carried over and credited against the estimated
*uarterly income tax liabilities for the taxable *uarters of the succeeding taxable
years. ?nce the option to carryCover and apply the excess *uarterly income tax
against income tax due for the taxable *uarters of the succeeding taxable years
has been made, such option "ha'' be con"i#ere# irre)ocab'e +or that taxab'e
perio# and no application for cash refund or issuance of a tax credit certificate
shall be allowed.
c. 5hen to -i'e 0Sec. NN4 NIRC1
Larter'y #ec'aration B shall be filed within sixty "MI# days following the close
of each of the first three ")# *uarters of the taxable year.
The +ina' a#<"tment retrn shall be filed on or before the fifteenth "&E
th
#
day of -pril, or on or before the fifteenth "&E
th
# day of the fourth "D
th
# month
following the close of the fiscal year, as the case may be.
Exten"ion o+ Time to -i'e Retrn" B $he Commissioner may, in meritorious
cases, grant a reasonable extension of time for filing returns of income "or final
and adAustment returns in case of corporations#
#. 5here to -i'e 0Sec. NN4 NIRC1
@xcept as the Commissioner other wise permits, the *uarterly income tax
declaration re*uired in 6ection OE and the final adAustment return re*uired in
6ection OM shall be filed with%
o the authorized agent banks or
o :evenue 5istrict ?fficer or
o Collection -gent or
o duly authorized $reasurer of the city or municipality
having Aurisdiction over the location of the principal office of the corporation filing
the return or place where its main books of accounts and other data from which
the return is prepared are kept.
e. 5hen to Pay 0Sec. NN4 NIRC1
$he income tax due on the corporate *uarterly returns and the final adAustment
income tax shall be paid at the time the declaration or return is filed in a manner
prescribed by the Commissioner.
+. Capita' $ain" on Share" o+ StocA
@very corporation deriving capital gains from the sale or exchange of shares of
stock not traded thru a local stock exchange as prescribed under 6ections (D "c#,
(E "-#")#, (O "@#"(#, (H"-#"H#"c# and (H "1#"E#"c#, shall file a return within thirty
")I# days after each transaction and a final consolidated return of all transactions
@1
during the taxable year on or before the fifteenth "&Eth# day of the fourth "Dth#
month following the close of the taxable year.
&. Retrn o+ Corporation" Contemp'atin& Di""o'tion@Reor&ani*ation
@very corporation shall, within thirty ")I# days after the adoption by the
corporation of a resolution or plan for its dissolution, or for the li*uidation of the
whole or any part of its capital stock, including a corporation which has been
notified of possible involuntary dissolution by the 6ecurities and @xchange
Commission, or for its reorganization, render a correct return to the
Commissioner, verified under oath, setting forth the terms of such resolution or
plan and such other information as the 6ecretary of Finance, upon
recommendation of the commissioner, shall, by rules and regulations, prescribe.
$he dissolving or reorganizing corporation shall, prior to the issuance by the
6ecurities and @xchange Commission of the Certificate of 5issolution or
:eorganization, as may be defined by rules and regulations prescribed by the
6ecretary of Finance, upon recommendation of the Commissioner, secure a
certificate of tax clearance from the 1ureau of Internal :evenue which certificate
shall be submitted to the 6ecurities and @xchange Commission.
#ecE @IIE &&-@
-ll corporations, partnerships, Aoint accounts and associations, contemplating
dissolution or retiring from business without formal dissolution, shall, within )I
days after the approval of such resolution authorizing their dissolution, and within
the same period after their retirement from business, file their I$ returns covering
the profit earned or business done by them from the beginning of the year up to
the date of such dissolution or retirement and pay the corresponding I$ due
thereon upon demand of the Commissioner. In addition to the I$ return, they
shall also submit within the same period the following%
"a# a copy of the resolution authorizing such dissolution'
"b# balance sheet at the date of dissolution or retirement and a profit and loss
statement covering the period from the beginning of the taxable year to the
date of dissolution or retirement'
"c# in the case of a corporation, the names and addresses of the shareholders
and the number and par value of the shares held by each' and in case of a
partnership, Aoint account or association, the name of the partners or
members and the capital contributed by each'
"d# the value and a description of the assets received in li*uidation by each
shareholder'
"e# the name and address of each individual or corporation, other than
shareholders, if any, receiving assets at the time of dissolution together with
a description and the value of the assets received by such individuals or
corporations and the consideration if any, paid by each of them for the assets
received.
&' 5IT77O,DIN$ TAX
3. -ina' 5ithho'#in& Tax at Sorce
#ecE FLE NI&C
6ubAect to rules and regulations the 6ecretary of Finance may promulgate, upon the
recommendation of the Commissioner, re*uiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by 6ections (D"1#"&#, (D"1#"(#, (D"C#,
(D"5#"&#' (E"-#"(#, (E"-#")#, (E"1#, (E"C#, (E"5#, (E"@#, (O"5#"^#, (O"5#"(#, (O"5#")#,
(O"5#"E#, (H "-#"D#, (H"-#"E#, (H"-#"O#"a#, (H"-#"O#"b#, (H"-#"O#"c#, (H"1#"&#, (H"1#"(#,
(H"1#")#, (H"1#"D#, (H"1#"E#"a#, (H"1#"E#"b#, (H"1#"E#"c#' ))' and (H( of the 3I:C on
specified items of income shall be withheld by payorCcorporation and/or person and paid
in the same manner and subAect to the same conditions as provided in 6ection EH of the
3I:C.
@2
5ithho'#in& o+ Cre#itab'e Tax at Sorce. C $he 6ecretary of Finance may, upon the
recommendation of the Commissioner, re*uire the withholding of a tax on the items of
income payable to natural or Auridical persons, residing in the 9hilippines, by payorC
corporation/persons as provided for by law, at the rate of not less than one percent "&K#
but not more than thirtyCtwo percent ")(K# thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year.
Tax/+ree Co)enant Bon#". In any case where bonds, mortgages, deeds of trust or other
similar obligations of domestic or resident foreign corporations, contain a contract or
provisions by which the obligor agrees to pay any portion of the tax imposed in this $itle
upon the obligee or to reimburse the obligee for any portion of the tax or to pay the
interest without deduction for any tax which the obligor may be re*uired or permitted to
pay thereon or to retain therefrom under any law of the 9hilippines, or any state or
country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations,
whether the interest or other payments are payable annually or at shorter or longer
periods, and whether the bonds, securities or obligations had been or will be issued or
marketed, and the interest or other payment thereon paid, within or without the
9hilippines, if the interest or other payment is payable to a nonresident alien or to a
citizen or resident of the 9hilippines.
:. 5ithho'#in& o+ Cre#itab'e Tax
&& @-GH
+nder the creditable withholding tax system, taxes withheld on certain income payments
are intended to e*ual or at least approximate the tax due of the payee on said income.
$he income recipient is still re*uired 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.
$axes withheld on income payments covered by the expanded withholding tax and
compensation income are creditable in nature.
&& D@-@AAD
T*e amounts su$)ect to .it**oldin" tax under t*is para"rap* s*all include not
only fees% $ut also per diems% allo.ances and any ot*er form of income
payments not su$)ect to .it**oldin" tax on compensationE
In the case of pro+e""iona' entertainer"4 pro+e""iona' ath'ete"4 #irector" involved in
movies, stage, radio, television and musical productions and other recipients of talent
fees, the amounts subAect to withholding tax shall also include amounts paid to them in
consideration for the use of their names or pictures in print, broadcast, or other media or
for public appearances, for purposes of advertisements or sales proportion.
Furthermore, in order to determine the applicable tax rate "&IK or (IK# to be
applied/withheld by the withholding agent, every professional entertainer, professional
athlete, director involved in movies, stage radio, television and musical productions and
other recipients of talent fees shall annually disclose his gross incomes for the current
year to the 1ureau of Internal :evenue "1I:#, by submitting a notarized sworn declaration
thereof, copy furnished all the current payors of the declaration duly stamped received by
the 1I: "Githholding $ax 5ivision of the 3ational ?ffice#. $he disclosure should be filed
on 7une )I of each year or within fifteen "&E# days after the end of the month the talent,s
income reaches 9O(I,III, whichever comes earlier. In case his total gross income is less
than 9O(,III as 7une )I, he/she shall submit a second disclosure within fifteen "&E# days
after the end of the month that his/her gross income for the current year to date reaches
@3
9O(I,III. $he initial disclosure after the effectivity or these :egulations shall be filed on
or before 6eptember )I, (II& or within fifteen "&E# days after the effectivity of these
:egulations, whichever comes later. In case of failure to submit the annual
declaration/disclosure to the 1I:, the payor shall withhold the tax at the rate of (IK.
If an individual recipient receives talent fees in addition to salaries from the same payor,
the said talent fees shall be considered as supplemental compensation and, thus, be
subAect to the withholding tax on compensation.>
9. Retrn an# Payment o+ Tax
#ecE FHE
Larter'y Retrn" an# Payment" o+ Taxe" 5ithhe'#E C $axes deducted and withheld
under 6ection EO by withholding agents shall be covered by a return and paid to, except
in cases where the Commissioner otherwise permits, an authorized $reasurer of the city
or municipality where the withholding agent has his legal residence or principal place of
business, or where the withholding agent is a corporation, where the principal office is
located.
$he taxes deducted and withheld by the withholding agent shall be held as a special fund
in trust for the government until paid to the collecting officers.
$he return for final withholding tax shall be filed and the payment made !ithin t!enty/
+i)e 0:>1 #ay" +rom the c'o"e o+ each ca'en#ar Darter, while the return for
creditable withholding taxes shall be filed and the payment ma#e not 'ater than the
'a"t #ay o+ the month +o''o!in& the c'o"e o+ the Darter #rin& !hich
!ithho'#in& !a" ma#e; Provided, $hat the Commissioner, with the approval of the
6ecretary of Finance, may re*uire these withholding agents to pay or deposit the taxes
deducted or withheld at more fre*uent intervals when necessary to protect the interest of
the government.
Statement o+ Income Payment" Ma#e an# Taxe" 5ithhe'#. $ @very withholding
agent re*uired to deduct and withhold taxes under 6ection EO shall furnish each recipient,
in respect to his or its receipts during the calendar *uarter or year, a written statement
showing the income or other payments made by the withholding agent during such
*uarter or year, and the amount of the tax deducted and withheld therefrom,
simultaneously upon payment at the re*uest of the payee, but not 'ater than the
t!entieth 0:?th1 #ay +o''o!in& the c'o"e o+ the Darter in the ca"e o+ corporate
payee, or not 'ater than March 3 o+ the +o''o!in& year in the ca"e o+ in#i)i#a'
payee +or cre#itab'e !ithho'#in& taxe". For final withholding taxes, the "tatement
"ho'# be &i)en to the payee on or be+ore Qanary 93 o+ the "ccee#in& year.
Anna' In+ormation Retrn. C @very withholding agent re*uired to deduct and withhold
taxes under 6ection EO shall submit to the Commissioner an annual information return
containing the list of payees and income payments, amount of taxes withheld from each
payee and such other pertinent information as may be re*uired by the Commissioner. In
the case of final withholding taxes, the retrn "ha'' be +i'e# on or be+ore Qanary 93
o+ the "ccee#in& year4 an# +or cre#itab'e !ithho'#in& taxe"4 not 'ater than
March 3 o+ the year +o''o!in& the year +or !hich the anna' report i" bein&
"bmitte#. $his return, if made and filed in accordance with the rules and regulations
approved by the 6ecretary of Finance, upon recommendation of the Commissioner, shall
be sufficient compliance with the re*uirements of 6ection MH of the 3I:C in respect to the
income payments.
$he Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return re*uired in this 6ubsection.
Income o+ Recipient . C Income upon which any creditable tax is re*uired to be withheld
at source under 6ection EO shall be included in the return of its recipient but the excess of
@"
the amount of tax so withheld over the tax due on his return shall be refunded to him
subAect to the provisions of 6ection (ID' if the income tax collected at source is less than
the tax due on his return, the difference shall be paid in accordance with the provisions of
6ection EM.
-ll taxes withheld pursuant to the provisions of this Code and its implementing rules and
regulations are hereby considered trust funds and shall be maintained in a separate
account and not commingled with any other funds of the withholding agent.

Re&i"tration !ith Re&i"ter o+ Dee#"+ C 3o registration of any document transferring
real property shall be effected by the :egister of 5eeds unless the Commissioner or his
duly authorized representative has certified that such transfer has been reported, and the
capital gains or creditable withholding tax, if any, has been paid% Provided1 hoever, $hat
the information as may be re*uired by rules and regulations to be prescribed by the
6ecretary of Finance, upon recommendation of the Commissioner, shall be annotated by
the :egister of 5eeds in the $ransfer Certificate of $itle or Condominium Certificate of
$itle% Provided1 further1 $hat in cases of transfer of property to a corporation, pursuant to
a merger, consolidation or reorganization, and where the law allows deferred recognition
of income in accordance with 6ection DI, the information as may be re*uired by rules and
regulations to be prescribed by the 6ecretary of Finance, upon recommendation of the
Commissioner, shall be annotated by the :egister of 5eeds at the back of the $ransfer
Certificate of $itle or Condominium Certificate of $itle of the real property involved%
Provided1 finally1 $hat any violation of this provision by the :egister of 5eeds shall be
subAect to the penalties imposed under 6ection (MJ of this Code.

(' 5ithho'#in& on 5a&e"
#ecE LHE Definitions .
5a&e" C $he term ,wages, means 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, except that such term shall not include remuneration paid%
"&# For agricultural labor paid entirely in products of the farm where the labor is performed, or
"(# For domestic service in a private home, or
")# 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 9hilippines for a foreign government or an
international organization.
If the remuneration paid by an employer to an employee for services performed during oneChalf
"&/(# or more of any payroll period of not more than thirtyCone ")&# consecutive days constitutes
wages, all the remuneration paid by such employer to such employee for such period shall be
deemed to be wages' but if the remuneration paid by an employer to an employee for services
performed during more than one Chalf "&/(# of any such payroll period does not constitute wages,
then none of the remuneration paid by such employer to such employee for such period shall be
deemed to be wages.

Payro'' Perio# C a period for which payment of wages is ordinarily made to the employee by his
employer, and the term ,miscellaneous payroll period, means a payroll period other than, a daily,
weekly, biweekly, semiCmonthly, monthly, *uarterly, semiCannual, or annual period.

Emp'oyee C any individual who is the recipient of wages and includes an officer, employee or
elected official of the =overnment of the 9hilippines or any political subdivision, agency or
instrumentality thereof. $he term ,employee, also includes an officer of a corporation.

Emp'oyer C means the person for whom an individual performs or performed any service, of
whatever nature, as the employee of such person, except that%
"&# If the person for whom the individual performs or performed any service does not have
control of the payment of the wages for such services, the term ,employer, "except for the
@#
purpose of 6ubsection "-# means the person having control of the payment of such wages'
and
"(# In the case of a person paying wages on behalf of a nonresident alien individual, foreign
partnership or foreign corporation not engaged in trade or business within the 9hilippines, the
term ,employer, "except for the purpose of 6ubsection "-# means such person.
#ecE LGE Income Tax Collected at #ource
ReDirement o+ 5ithho'#in& $ @very employer making payment of wages shall deduct and
withhold upon such wages a tax determined in accordance with the rules and regulations to be
prescribed by the 6ecretary of Finance, upon recommendation of the Commissioner% Provided,
however, $hat no withholding of a tax shall be re*uired where the total compensation income of
an individual does not exceed the statutory minimum wage, or five thousand pesos "9E,III.II#
per month, whichever is higher.

Tax Pai# by Recipient C If the employer, in violation of the provisions of this Chapter, fails to
deduct and withhold the tax as re*uired under this Chapter, and thereafter the tax against which
such tax may be credited is paid, the tax so re*uired to be deducted and withheld shall not be
collected from the employer' but this 6ubsection shall in no case relieve the employer from
liability for any penalty or addition to the tax otherwise applicable in respect of such failure to
deduct and withhold.

Re+n#" or Cre#it" C
"&# Employer+ C Ghen there has been an overpayment of tax under this 6ection, refund or credit
shall be made to the employer only to the extent that the amount of such overpayment was
not deducted and withheld hereunder by the employer.
"(# Employees+ C$he amount deducted and withheld under this Chapter during any calendar year
shall be allowed as a credit to the recipient of such income against the tax imposed under
6ection (D"-# of this $itle. :efunds and credits in cases of excessive withholding shall be
granted under rules and regulations promulgated by the 6ecretary of Finance, upon
recommendation of the Commissioner.
-ny excess of the taxes withheld over the tax due from the taxpayer shall be returned or
credited within three ")# months from the fifteenth "&E
th
# day of -pril. :efunds or credits
made after such time shall earn interest at the rate of six percent "MK# per annum, starting
after the lapse of the threeCmonth period to the date the refund of credit is made.
:efunds shall be made upon warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of counterCsignature by the Chairman, Commission on
-udit or the latter,s duly authorized representative as an exception to the re*uirement
prescribed by 6ection DJ, Chapter H, 6ubtitle 1, $itle & of 1ook < of @xecutive ?rder 3o. (J(,
otherwise known as the -dministrative Code of &JHO.
Per"ona' Exemption" C
In =eneral. C +nless otherwise provided by this Chapter, the personal and additional exemptions
applicable under this Chapter shall be determined in accordance with the main provisions of this
$itle.
@xemption Certificate. C
"a# (hen to File+ C ?n or before the date of commencement of employment with an employer,
the employee shall furnish the employer with a signed withholding exemption certificate
relating to the personal and additional exemptions to which he is entitled.
"b# Change of Status. C In case of change of status of an employee as a result of which he would
be entitled to a lesser or greater amount of exemption, the employee shall, within ten "&I#
days from such change, file with the employer a new withholding exemption certificate
reflecting the change.
"c# Lse of Certificates. C $he certificates filed hereunder shall be used by the employer in the
determination of the amount of taxes to be withheld.
@$
"d# Failure to Furnish Certificate. C Ghere an employee, in violation of this Chapter, either fails or
refuses to file a withholding exemption certificate, the employer shall withhold the taxes
prescribed under the schedule for zero exemption of the withholding tax table determined
pursuant to 6ubsection "-# hereof.
5ithho'#in& on Ba"i" o+ A)era&e 5a&e" C $he Commissioner may, under rules and
regulations promulgated by the 6ecretary of Finance, authorize employers to%
"&# estimate the wages which will be paid to an employee in any *uarter of the calendar year'
"(# determine the amount to be deducted and withheld upon each payment of wages to such
employee during such *uarter as if the appropriate average of the wages so estimated
constituted the actual wages paid' and
")# deduct and withhold upon any payment of wages to such employee during 'such *uarter such
amount as may be re*uired to be deducted and withheld during such *uarter without regard
to this 6ubsection.
7"ban# an# 5i+e C Ghen a husband and wife each are recipients of wages, whether from the
same or from different employers, taxes to be withheld shall be determined on the following
bases%
"&# $he husband shall be deemed the head of the family and proper claimant of the additional
exemption in respect to any dependent children, unless he explicitly waives his right in favor
of his wife in the withholding exemption certificate.
"(# $axes shall be withheld from the wages of the wife in accordance with the schedule for zero
exemption of the withholding tax table prescribed in 6ubsection "5#"(#"d# hereof.
Nonre"i#ent A'ien" C Gages paid to nonresident alien individuals engaged in trade or business
in the 9hilippines shall be subAect to the provisions of this Chapter.
.ear/En# A#<"tment C ?n or before the end of the calendar year but prior to the payment of
the compensation for the last payroll period, the employer shall determine the tax due from each
employee on taxable compensation income for the entire taxable year in accordance with 6ection
(D"-#. $he difference between the tax due from the employee for the entire year and the sum of
taxes withheld from 7anuary to 3ovember shall either be withheld from his salary in 5ecember of
the current calendar year or refunded to the employee not later than 7anuary (E of the
succeeding year.
#ecE LGE ;ia$ility for Tax
Emp'oyer C $he employer shall be liable for the withholding and remittance of the correct amount
of tax re*uired to be deducted and withheld under this Chapter. If the employer fails to withhold
and remit the correct amount of tax as re*uired to be withheld under the provision of this
Chapter, such tax shall be collected from the employer together with the penalties or additions to
the tax otherwise applicable in respect to such failure to withhold and remit.

Emp'oyee C Ghere an employee fails or refuses to file the withholding exemption certificate or
willfully supplies false or inaccurate information thereunder, the tax otherwise re*uired to be
withheld by the employer shall be collected from him including penalties or additions to the tax
from the due date of remittance until the date of payment. ?n the other hand, excess taxes
withheld made by the employer due to%
"&# failure or refusal to file the withholding exemption certificate' or
"(# false and inaccurate information
shall not be refunded to the employee but shall be forfeited in favor of the =overnment.
#ecE HDE Filin" of &eturn and Payment of Taxes +it**eld
@xcept as the Commissioner otherwise permits, taxes deducted and withheld by the employer on
wages of employees shall be covered by a return and paid to an authorized agent bank' Collection
-gent, or the duly authorized $reasurer 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.
@*
$he return shall be filed and the payment made within twentyCfive "(E# days from the close of
each calendar *uarter% Provided1 hoever1 $hat the Commissioner may, with the approval of the
6ecretary of Finance, re*uire the employers to pay or deposit the taxes deducted and withheld at
more fre*uent intervals, in cases where such re*uirement is deemed necessary to protect the
interest of the =overnment.
$he taxes deducted and withheld by employers shall be held in a special fund in trust for the
=overnment until the same are paid to the said collecting officers.
Cre#it"%
:eyes, Income $ax% /aw and -ccounting
<alencia and :oxas, :eviewer and Puizzer in $axation
+9 /aw 1arops (II) :eviewer in Income $ax
C(IIE $ax& :eviewer
@>

Tax 1

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Contents:

Basic Concepts in Income Taxation

$he tax so computed "ha'' be #ecrea"e# by the amont o+ tax pre)io"'y

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