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(e) Premiums paid on any life insurance policy covering the life of any officer, employee, or
any person financially interested in the trade or business carried on by the taxpayer,
individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such
policy;
(f) Interest expense and bad debts between related parties- Sec. 36(B), NIRC- For purposes
of this paragraph, the family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2)
Except in the case of distributions in liquidation, between an individual and corporation
more than fifty percent (50%) in value of the outstanding stock of which is owned, directly
or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation,
between two corporations more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the corporation preceding the date of the
sale of exchange was under the law applicable to such taxable year, a personal holding
company or a foreign personal holding company; (4) Between the grantor and a fiduciary of
any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with respect to each trust; or (6) Between a
fiduciary of a trust and beneficiary of such trust.
(g) Losses from sales or exchanges of property between related taxpayers. (Sec. 36(B),
NIRC)
(h) Non-deductible interest should the taxpayer elect to deduct interest payments against
its gross income, he cannot at the same time capitalize such interest and claim depreciation
on the undepreciated cost which includes the interest.
(i) Non deductible taxes
(j) Non-deductible losses
(k)Losses on Wash Sales (except if by dealer in securities in ordinary course of

EXEMPT CORPORATIONS
These are:
(11)Proprietary Educational Institutions and hospitals
By way of exception, proprietary educational institutions and hospitals are liable for net
income at a rate of only ten percent (10%).

(12)Government owned and controlled corporations

All corporations, agencies, or instrumentalities owned or controlled by the Government are
subject to income tax, except:
(1) GSIS
(2) SSS
(3) PHIC
(4) Local water districts (LWDs)
(5) PCSO

(13)Others
The following organizations shall not be taxed in respect to income received by them as
such:
(1) Labor,agricultural or horticultural organization not organized principally for profit
(2) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without
profit
(3) A Beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual
aid association or a non-stock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporation or their dependents
(4) CEMETERY company owned and operated exclusively for the benefit of its members
(5) Non-stock corporation or association organized and operated exclusively for Religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans,
 no part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person
(6) Business league chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inures to the benefit of any private stock-holder, or
individual
(7) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare
(8) A non-stock and non profit Educational institution
(9) Government Educational institution
(10)Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely
local character, the income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its expenses and
 0 Farmers', fruit growers', or like association organized and operated as a Sales agent
for the purpose of marketing the products of its members and turning back to them
the proceeds of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them;

TAXATION OF RESIDENT CITIZENS, NON-

RESIDENT CITIZENS AND RESIDENT ALIENS

GENERAL RULE THAT RESIDENT CITIZENS ARE TAXABLE

ON INCOME FROM ALL SOURCES WITHIN AND WITHOUT
THE PHILIPPINES

A) General rule: A Filipino resident citizen is taxable on income from all sources
(within and without the Philippines)

(I) Non-resident citizens: A non-resident citizen is taxable only on income derived

from sources within the Philippines.
A non-resident citizen is a Filipino citizen who:
(1) Establishes to the satisfaction of the CIR the fact of his physical presence
abroad with a definite intention to reside therein
(2) Leaves the Philippines during the taxable year to reside abroad (as immigrant
or for employment on a permanent basis)
(3) Works and derives income from abroad and whose employment requires him
to be present abroad most of the time during the taxable year
(4) Has been previously considered as a non-resident and arrives in the
Philippines at any time during the taxable year to reside here permanently (only
with respect to his income from sources abroad until the date of his arrival in the
country)

B) TAXATION ON COMPENSATION INCOME

Income arising from an ER-EE relationship. It means all remuneration for services performed
by an EE for his ER, including the cash value of all remuneration paid in any medium other
than cash. (Sec. 78(A)). It includes, but is not limited to salaries and wages, commissions,
tips, allowances, bonuses, Fringe Benefits of rank and file EEs and other forms of
compensation.

Inclusions
(1) Monetary compensation If compensation is paid in cash, the full amount received is the
measure of the income subject to tax.
(a) Regular salary/wage
(1)Salary earnings received periodically for a regular work other than manual labor,
such as monthly salary of an employee
(2)Wages all remuneration (other than fees paid to a public official) for services
performed by an employee for his employer, including the cash value of all
remuneration paid in any medium other than cash. [Sec. 78A, NIRC]
(b) Separation pay/retirement benefit not otherwise exempt
(1)Retirement Pay a lump sum payment received by an employee who has served a
company for a considerable period of time and has decided to withdraw from work
into privacy. [RR 6-82, Sec. 2b]
1 Separation pay taxable if voluntarily availed of. It shall not be taxable if involuntary
i.e. Death, sickness, disability, reorganization /merger of company and company at
the brink of bankruptcy or for any cause beyond the control of the said official or
employee
a Bonuses, 13th month pay, and other benefits not exempt
1 Tips and Gratuities those paid directly to the employee (usually by a customer of
the employer) which are not accounted for by the employee to the employer.
(taxable income but not subject to withholding tax) (RR NO. 2-98, Sec. 2.78.1)
2 Thirteenth month pay and other benefits - Not taxable if the total amount received
is
 P30,000 or less. Any amount exceeding
P30,000 is taxable. (Sec. 32 (7)e, NIRC)

3 Overtime Pay premium payment received for working beyond regular hours of
work which is included in the computation of gross salary of employee. It
constitutes compensation.
b Directors fees
Fees received by an employee for the services rendered to the employer including a
directors fee of the company, fees paid to the public officials such as clerks of court
or sheriffs for services rendered in the performance of their official duty over and
above their regular salaries.
0 Non-monetary compensation - If services are paid for in a medium other than money, the
fair market value of the thing taken in payment is the measure of the income subject to
tax.

0 Fringe benefit not subject to tax

If the recipient of the fringe benefits is a rank and file employee, and the said fringe
benefit is not tax-exempt, then the value of such fringe benefit shall be considered as
part of the compensation income of such employee subject to tax payable by the
employee.

Exclusions
(1) Fringe benefit subject to tax

Where the recipient of the fringe benefit is not a rank and file employee, and the said benefit
is not tax-exempt, then the same shall not be included in the compensation income of such
employee subject to tax. The fringe benefit [tax] is instead levied upon the employer, who is
required to pay.

0 De minimis benefits
0.8448 Facilities or privileges of relatively small value furnished by an employer to his
employees and are as a means of promoting the health, goodwill, contentment, or
efficiency of his employees.
0.8449 These are exempt from fringe benefit tax and compensation income tax.

1 13th month pay and other benefits and payments specifically excluded from taxable
compensation income
1.8448 Gross benefits received by employees of public and private entities provided
that the total exclusion shall not exceed P30,000 (amounts in excess are considered
compensation income)
1.8449 Benefits include:
0 Benefits received by government employees under RA 6686
1 Benefits received by employees pursuant to PD 851 (13th Month Pay Decree)
2 Benefits received by employees not covered by PD 851 as amended by
Memorandum Order No. 28; and,
3 Other benefits such as productivity incentives and Christmas bonus.