TAX ON INCOME

SEC. 22

INCOME
-is any wealth which flows into the taxpayer other than a mere return of capital.
INCOME TAX
-tax based on income, gross or net.
-tax on the earnings derived by a taxpayer for each taxable year arising from
employment of for services rendered or for engaging in trade or business or for exercising a
profession.

CRITERIA USED IN IMPOSING PHILIPPINE INCOME TAX

1. CITIZENSHIP PRINCIPLE
-imposition of tax is based on the taxpayer’s citizenship
-all citizens of the Philippines, whether residents or non-residents, are subject to income
tax law.
Residents-Within and without the Philippines
Non-residents-within the Philippines

2. RESIDENCE PRINCIPLE
-Basis is the residence of the taxpayer
-All income derived by persons residing in the Philippines, whether citizens or aliens,
whether domestic or foreign corporations, shall be subject to income tax on the income
derived from sources within the Philippines.
-Follows the Territoriality Principle

3. SOURCE PRINCIPLE
-basis is the source of income
-All income derived within the Philippines shall be subject to income tax.
-Follows the Territoriality Principle

GENERAL PRINCIPLES OF INCOME TAXATION I THE PHILIPPINES (Tax Reform Act of 1997)
1. RESIDENT CITIZENS-from sources within and without the Philippines
2. NON-RESIDENT CITIZENS- from sources within the Philippines
-working and deriving income from abroad as an OCW (provided,
citizen is a seaman receiving income from abroad)
3. ALIEN INDIVIDUAL-WON resident- from sources within the Philippines
4. DOMESTIC CORPORATION- from sources within and without the Philippines
5. FOREIGN CORPORATION- from sources within the Philippines

TAX ON INDIVIDUALS
CLASSIFICATION OF CITIZENS OF THE PHILIPPINES FOR PURPOSES OF INCOME TAXATION
1. Resident Citizen-resident in the Philippines residing therein, unless he qualifies as a
non-resident citizen under Section 22(E) of the NIRC

2. Nonresident Citizen- citizen whose physical presence abroad with a definite intention to
reside therein and Commissioner is satisfied of that fact;
-citizen who leaves the Philippines either as immigrant or for
employment on a permanent basis;
- citizen whose employment abroad requires his physical presence
abroad most of the time during the taxable year;
- citizen who has been previously considered as nonresident citizen and
who arrives at the Philippines at any time during the taxable year to
reside permanently in the Philippines

I. TAXATION OF INCOME OF RESIDENT CITIZEN

GENERAL RULE: RESIDENT CITIZEN is taxable on all income derived from all sources WITHIN
and WITHOUT the Philippines subject to the following rates:
1. His Regular Taxable Income for each taxable year – subject to scheduler tax rates of
5%-32%
2. His Passive Incomes- subject to FWT depending on the kind of passive income received

II. TAXATION OF INCOME OF NONRESIDENT CITIZEN

GENERAL RULE: The income of a NON-RESIDENT CITIZEN derived from all sources WITHIN the
Philippines for each taxable year shall be subject to the following rates:
1. His Regular Taxable Income for each taxable year – subject to scheduler tax rates of
5%-32%
2. His Passive Incomes- subject to FWT depending on the kind of passive income received

III. TAXATION OF INCOME OF RESIDENT ALIENS

RESIENT ALIEN- individual whose residence is within the Philippines and who is NOT a citizen
thereof.
GENERAL RULE: The income of a RESIDENT ALIEN derived from all sources WITHIN the
Philippines for each taxable year shall be subject to the following rates:
1. His Regular Taxable Income for each taxable year – subject to scheduler tax rates of
5%-32%
2. His Passive Incomes- subject to FWT depending on the kind of passive income received

IV. TAXATION OF INCOME OF MARRIED INDIVIDUALS

REQUIREMENTS IN THE FILING OF ITR

 1. File a consolidated ITR but they shall compute separately their individual income tax on
their income from employment
2. Income from business, shall be divided equally between the spouses
3. Husband, shall declare his own compensation income plus his share in the business
4. Wife will declare her but they are entitled to basic personal and additional exemption
plus they may choose between itemized deductions incurred for engaging in business or
40% optional standard deduction at the option of the spouses.
5. If physically separated, they are still required to file a consolidated or joint return
6. Should they file separately, the tax due shall be recomputed and the additional
exemption shall be allowed only to the husband.

V. TAXATION OF INCOME OF MINIMUM WAGE EARNERS

Compensation of MWEs shall be exempt from income taxation
A Senior Citizen whose salary is equivalent to the SMW shall be considered as a MWE entitled
to exemption from income tax.

VI. TAXATION OF PASSIVE INCOME OF CITIZENS AND RESIDENT ALIENS

1. Passive income subject to final tax- income which tax due is fully collected through the
withholding tax system in the form of final withholding tax.
-Payor withholds the tax and remits it to the government thru the AABs of the BIR
2. Passive income NOT subject to final tax-included in the determination of the gross
income which shall be subject to the regular income tax rates
Example: Sale to the Government of real property considered as capital asset

RATES OF THE FWT ON THE PASSIVE INCOMES DERIVED BY CITIZENS AND RESIDENT
ALIENS

On interest income from any currency bank 20%

deposit in regular domestic bank
Interest income received from a depositary 7.5%
bank under the expanded foreign currency
deposit system XPN: received by Non-
resident individuals
Interest income from a 5-year long-term Exempt
deposit
In case of pre-termination: 5%
4 years to less than 5 years 12%
3 years to less than 4 years 20%
Less than 3 years
Royalties on books, literary works and 10%
musical compositions
Regular royalties 20%
 Prizes (XPN: PCSO and lotto winnings) 20%
Other winnings 20&
Cash and property dividends from a domestic 10%
corporation
Net capital gains from sale of shares of stocks
in a domestic corporation not listed in stock
exchange
Not over P100,000.00 5%
Any amount in excess of P100,000.00 10%
On presumed capital gains from sale of real 6%
property located in the Philippines XPN:
Principal residence
Gross income derived from contracts by 8% of the GI derived from such contract
subcontractors in petroleum

VII. CAPITAL GAINSFROM AE O SHARES OF STOCK

DEALINGS ON SHARES OF STOCK OF DOMESTIC CORPORATION

A. Net capital gains from sale, barter exchange or other disposition of shares of stocks in a
domestic corporation NOT Listed in stock exchange held as capital asset
Not over P100,000.00 5%
Any amount in excess of P100,000.00 10%

B. Net capital gains from sale, barter exchange or other disposition of shares of stocks in a
domestic corporation traded and Listed in the local stock exchange held as capital asset
½ of 1% stock transaction tax
C. If sale is made by a dealer in securities, gain is an ordinary income
Individual- 5%- 32% Corporation-NCIT 30%

DEALINGS IN THE SHARES OF STOCK OF A FOREIGN CORPORATION

Individual Seller - 5%- 32% Corporation Seller-NCIT 30%

VIII. CAPITAL GAINS FROM SALE OF REAL PROPERTY

TAXATION OF CAPITAL GAINS FROM SALE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSETS
-Subject to capital gains tax of 6% based on the presumed gain which is the higher value
between the current FMV or the GSP.
-including Pacto de Retro Sale and other conditional sales

Gross Selling Price-Is the actual selling price or the gross value in money which is the sum
stipulated as the equivalent of the thing sold and also every incident taken into consideration
for the fixing of the price.
PACTO DE RETRO SALE
-the title and ownership of the property sold are immediately vested in the vendee a retro,
subject to the resolutory condition of repurchase by the vendor a retro within the stipulated
period.
-failure does not impair ownership

TAXATION ON SALE OF REAL PROPERTY CONSDERED AS CAPITAL ASSETS BY CITIZENS OR

RESIDENT ALIEN INDIVIDUALS TO THE GOVERNMENT
-the tax to be imposed shall be determined either under either:
Section 24(A)- capital gains shall be added to the gross income earned during the taxable year
subject to the scheduler rates imposed therein; OR
Section 24(D)(1)- final tax on the presumed capital gains from sale of real property at 6%
NOTE: at the option of the individual taxpayer-seller.

1. If BUYER is an individual NETB

a. If sale is on installment plan, no withholding tax is required to be made on the
periodic installment payments.
b. If sale is on cash basis or deferred payment sale not on the installment plan, the
buyer shall withhold the tax based on the gross selling price or the FMV of the
property, whichever is higher, on the first installment.

2. If BUYER is an individual ETB

a. If the sale is on installment plan, the tax shall be deducted and withheld by the
buyer on every installment which tax shall be based on the ratio of actual collection
of the consideration against the agreed appearing in the Contract to Sell applied to
the GSP or FMV, whichever is higher.
b. If sale is on cash basis or deferred payment sale not on the installment plan, the
buyer shall withhold the tax based on the gross selling price or the FMV of the
property, whichever is higher, on the first installment.

In any case, NO Certificate Authorizing Registration (CAR)/ Tax Clearance

Certificate (TCL) shall be issued to the buyer unless the capital gains tax due on the
sale, transfer or exchange of real property has been fully paid in the AAB of the
RDO where the property being transferred is located.

IX. SALE OF PRINCIPAL RESIDENCE

GENERAL RULE: If the sale of the principal residence is not for the purpose of buying a new
principal residence, the same shall be subject to capital gains tax based on the presumed gain.

Conditions to be considered as EXEMPT from CGT:

1. The property being sold must be the principal residence of a natural person;
2. The proceeds must be utilized in the purchase of another principal residence;
3. The historical cost or adjusted basis of the real property sold or disposed shall be carried
over to the new principal residence built or acquired;
 4. The owner/seller must duly notify the Commissioner within 30 days from date of sale/
disposition;
5. Tax exemption can only be availed of once every 10 years;
6. The unused proceeds shall be subject to CGT;
7. The buyer/transferee shall withhold from the seller and shall deduct from the agreed
price the 6% CGT which shall be deposited in cash in the AAB.
8. The buyer and seller shall jointly file within 30 days from the date of the sale/disposition
the final CGT return covering the property bought and stating that the supposed tax due
is maintained in an escrow account.

WHEN THE SELLER WHO AVAILED OF THE TAX EXEMPTION ON SALE OF PRINCIPAL RESIDENCE
IS CONSIDERED DEFICIENT IN THE PAYMENT OF THE CAPITAL GAINS TAX
-if within 30 days after the lapse of the aforesaid 18-month period, the seller/ transferor fails to
submit documentary evidence showing that he has utilized the proceeds of the sale.

TAX ON NON-RESIDENT ALIEN INDIVIDUALS

Non-Resident Alien individual is an alien individual whose residence is not in the Philippines and
who is not a citizen thereof.
Classified as:
1. NRAETB
2. NRANETB

I. TAXATION OF INCOME OF NONRESIDENT ALIEN INDIVIDUALS ENGAGED IN

TRADE OR BUSINESS IN THE PHILIPPINES
Test to determine:
1. Those who stay in the Philippines for an aggregate period of more than 180 days during
the calendar year
2. Includes the performance of personal services within the Philippines

I. RULES ON TAXATION OF INCOME OF NONRESIDENT ALIEN INDIVIDUALS

ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES
1. In the case of regular income, subject to scheduler rates of 5% to 32%
2. Passive income- subject to FWT depending on the kind of passive income received
Interest income from any currency bank 20%
deposit in regular banking unit located in
the Philippines
Yield or any monetary benefit from 20%
deposit substitutes
Royalties 20%
Royalties on books, literary works, and 10%
musical compositions
Prizes exceeding P10,000 20%
 Winnings 20%
GI from sources within the Philippines 25%
derived by nonresident cinematographic
film owners, lessors or distributors
Interest income from a 5-year long-term Exempt
deposit
In case of pre-termination: 5%
4 years to less than 5 years 12%
3 years to less than 4 years 20%
Less than 3 years
Cash and property dividends from a 20%
domestic corporation
Net capital gains from sale of shares of Exempt
stocks in a domestic corporation not listed
in stock exchange 5%
Not over P100,000.00 10%
Any amount in excess of P100,000.00
On presumed capital gains from sale of 6%
real property considered as capital asset
Gross income derived from contracts by 8% , in lieu of any and all taxes national
subcontractors in petroleum and local

NONRESIDENT ALIEN INDIVIDUAL ETB WITHIN THE PHILIPPINES ENTITLED TO DEDUCT

PERSONAL EXEMPTION FROM HIS GROSS INCOME
-But not to exceed the amount fixed in Section 35 as exemption for citizens or residents
of the Philippines.

II. TAXATION OF INCOME OF NRANETB

RULE:
The ff. income derived from all sources within the Philippines by a NRANETB shall be subject to
the final withholding tax rates as follows:

On the gross amount of interest , cash or 25%

property dividents, rents, salaries etc.
Net capital gains from sale of shares of stocks
in a domestic corporation not listed and
traded in stock exchange held as capital asset
Not over P100,000.00 5%
Any amount in excess of P100,000.00 10%
On presumed capital gains from sale of real 6%
property situated in the Philippines
considered as capital asset
 III. TAXATION OF INCOME OF ALIEN INDIVIDUALS SUBJECT TO THE PREFERENTIAL
TAX RATE
TAXATION OF ALIEN INDIVIDUAL EMPLOYED BY RHQ AND ROHQs OF MULTINATIONAL
COMPANIES
-levied upon GI from RHQ or ROHQs, a final withholding tax equal to 15% of such GI.
Provided, however, the same tax treatment shall apply to Filipinos employed by these
multinational companies

Multinational Company-a foreign firm or entity engaged in international trade with

affiliates or subsidies or branch offices in the Asia-Pacific Region and other foreign
markets.

TEST TO DETERMINE WHETHER A FILIPINO WORKING IN ROHQ OR RHQ IS QUALIFIED TO THE

15% PREFERENTIAL TAX RATE
A. POSITION AND FUNCTION TEST- the employee must occupy a managerial position
or technical position and must actually be exercising such managerial or technical
functions pertaining to said position;
B. COMPENSATION THRESHOLD TEST- The employee must have received or is due to
receive under a contract of employment, a gross annual taxable compensation of at
least P975,000;
C. EXCLUSIVITY TEST-must be exclusively working for the RHQ or ROHQ as a regular
employee and not just a consultant or contractual personnel. Must have one
employer at a time.

DETERMINANT TEST AS TO WHETHER A FILIPINO WORKING IN ROHQ OR RHQ IS QUALIFIED

TO THE 15% PREFERENTIAL TAX RATE AS A MANAGER OR TECHNICAL EMPLOYEE FOR
PURPOSES OF THE FRINGE BENEFIT TAX

Rank and file employee-

Managerial employee
Supervisory employee-

TAXATION OF INCOME OF ALIEN INDIVIDUAL EMPLOYED IN OFFSHORE BANKING UNITS

(OBUs)
-a tax equal to 15% of such gross income

TAXATION OF INCOME OF ALIEN INDIVIDUAL EMPLOYED BY PETROLEUM SERVICE

CONTRACTOR AND SUBCONTRACTOR
-shall be liable to pay a tax of 15% of the salaries, wages, annuities, compensation etc.

TAXATION OF INCOME OF GENERAL PROFESSIONAL PARTNERSHIPS AND THE PARTNERS

THEREOF
GENERAL PROFESSIONAL PARTNERSHIP (GPP)- is a partnership formed by professional for the
sole purpose of exercising their common profession, no part of income of which is derived from
engaging in any trade or business.

GENERAL PROFESSIONAL PARTNERSHIPS NOT SUBJECT TO INCOME TAX

-income payments made to the general professional partnership are not subject to the
expanded withholding tax

BUT DISTRIBUTIVE SHARES OF PARTNERS IN THE NET PROFIT OF A GPP TAXABLE IN THE
HANDS OF THE PARTNERS
DETERMINATION OF OPTIONAL STANDARD DEDUCTIONS (OSD) OF GPPs

CLAIM OF THE PARTNERS OF GPP OF THEIR DEDUCTIONS FROM THEIR SHARE IN THE TAXABLE
INCOME OF THE PARTNERSHIP
1. If the GPP availed of the itemized deduction in computing the net income, the partners
may still claim itemized deductions from said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same expenses already claimed
by GPP.
2. If the GPP avails of the OSD in computing its net income, the partners comprising it can
no longer claim further deduction from their share in the sad net income for the
following reasons:
a.
3. If the partners derived other GI from trade, business, or practice of profession apart and
distinct from his share in the net income of the GPP, the deduction that he can claim
from his gross income would follow the same deduction availed of from his partnership
income as explained in the foregoing rules: Provided, however, that if GPP opts for the
OSD, the individual partner may still claim 40% of its GI but not to include his share from
the net income of the GPP.

TAX IMPLICATIONS AND RECORDING OF DEPOSITS/ADVANCES MADE BY CLIENTS TO GPPs

FOR EXPENSES
-Expenses supported by ORs/Invoices issued by third-party establishments in the name of the
firm, may be claimed as deductions from the GI.
-all payments made by the client to the GPP shall be allowed as deduction from the GI as
professional fee/s

TAXATION OF INCOME OF OTHER KINDS OF PARTNERSHIP

GENERAL RULE: Partnerships are taxable just like a corporation
Partners are considered stockholders, hence, their distributive shares are taxed as dividends
subject to the final withholding tax of 10%.

TAXABLE BUSINESS PARTNERSHIPS

Taxable income-income tax paid (30% of the taxable income) = Distributable income of the
partnership to the partners
Partners’ distributive shares are taxed as dividends subject to the final withholding tax of 10%.

GENERAL CO-PARTNESHIPS- are partnerships, which by law are assimilated to be within the
context of, and so legally contemplated as corporations

CO-OWNERSHIP-occurs when two or more heirs inherit an undivided property from a

decedent, or a donor makes a gift of an undivided property in favor of two or more donees.
Instances when co-ownership becomes partnership:
1. If the co-owners appoint an administrator who manages the affairs of the co-ownership
by making investments therein from which profits are realized.
2. Automatically converted the moment the said income/property derived therefrom are
used as a common fund with intent to make profits for the heirs in proportion t their
respective shares in the inheritances

JOINT VENTURE AND CONSORTIUM

Joint venture-an organization formed for some temporary purpose.
Partnership-contemplates a general business with some degree of continuity

REQUISITES OF A JOIN VENTURE:

1. Each party must make a contribution-skill, knowledge, material or money
2. Intent to make profits
3. Joint proprietary interest and right of mutual control over the subject matter
4. There is a single business transaction

WHEN A JOINT VENTURE OR CONSORTIUM IS NOT TAXABLE AS A CORPORATION

GENERAL RULE: A joint venture is not taxed as a corporation and is taxed just like a GPP
Requirements in order that a JV or Consortium shall not be taxable:
1. For the undertaking of a construction project;
2. Involve joining or pooling of resources as general contractors by licensed local
contractor-PCAB of DTI;
3. These local contractors are engaged in construction business;
4. The JV itself must likewise be duly licensed as such by the PCAB of the DTI.
5. Mere suppliers of goods, services or capital to a construction project.

Note: Joint ventures involving foreign contractors may also be treated as a non-taxable
corporation only if member foreign contractor is covered by a special license as contractor by
the PCAB of the DTI.

EXEMPTIONS:
1. When there is an absence in any of the abovementioned requirements;
2. If JV is engaged in any other line of business with operating agreement under a service
contract with the government;
3. When two corporations enter into a JV under one management, the joint operations
shall be separately taxable as a corporation.
 TAX ON CORPORATIONS
DOMESTIC CORPORATION-are those corporations created or organized in the Philippines under
its laws.

TAXATION OF INCOME OF A DOMESTIC CORPORATION

GENERAL RULE: The law imposes 30% normal corporate income tax rate on the taxable
received from all sources within and without the Philippines.

PROPRIETARY EDUCATIONAL INSTITUTION AND NON-PROFIT HOSPITALS

GENERAL RULE: shall pay tax of 10% on their taxable income
EXEMPTION: SECTION 27 (D) Rates of taxes on certain passive income
Interest from Deposits and yield or any other 20%
monetary benefit from deposit substitutes
and from trust funds and similar
arrangements, and royalties
Net capital gains from sale of shares of stocks Exempt
in a domestic corporation not listed in stock
exchange 5%
Not over P100,000.00 10%
Any amount in excess of P100,000.00
Tax on income derived under the expanded 10%
foreign currency deposit system
Intercorporate dividends exempt
Capital gains realized from the sale, exchange 6%
or disposition of lands and/or buildings
NOTE: if the GI from unrelated trade, business or other activity exceeds 50% of the total GI
derived by such educational institutions or hospitals from all sources, the tax rate of 30% shall
be imposed on the entire taxable income.

Proprietary educational institution- is any private school maintained and administered by

private individuals or groups with an issued permit to operate from the DECS or the CHED, or
the TESDA, as the case may be, in accordance with existing laws and regulations.

Section 27(B) of the NIRC: 10% preferential tax rate on the income of:
1. Proprietary non-profit educational institutions; and
2. Proprietary non-profit educational hospitals

TAXABILITY OF REVENUES DERIVED BY PROPRIETARY NONPROFIT HOSPITALS FROM SERVICES

TO PAYING PATIENTS
RULE: Revenues from paying patients are income received from activities conducted for profit.
-Services to paying patients are activities conducted for profit. They cannot be considered any
other way. There is a “purpose to make profit over and above the cost” of services.
CIR v St. Luke’s Medical Center, G.R. 195909 and 195960, September 26, 2012.
-St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. As a proprietary nonprofit
hospital, is entitled to the referential tax rate of 10% on its net income from its non-profit
activities.

GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCs) EXEMPT FROM PAYING

INCOME TAX
1. GSIS
2. SSS
3. PHIC
4. PCSO
5. LOCAL WATER DISTRICTS

PAGCOR NO LONGER EXEMPT FROM CORPORATE INCOME TAX; IT IS THE LEGISLATIVE INTENT
THAT PAGCOR BE SUBJECTED TO THE PAYMENT OF CORPORATE INCOME TAX

PHIC EXEMPT FROM INCOME TAX BUT ITS PAYMENTS TO MEDICAL PRACTITIONERS AND/OR
HOSPITALS PERTAINING TO PHIC MEMBERS’ BENEFITS ARE SUBJECT TO THE EWT
-rates of 10% and 15%, whichever is appropriate, based on the medical practitioner’s declared
gross income in a year.
-payment of hospitals for medical services provided to PHIC members are subjected to EWT
rate of 2%

PAYMENTS OF PHIC OF THE MEMBERS’ MEDICAL BENEFITS GIVEN DIRECTLY TO THE SERVICE
PROVIDER SUBJECT TO EWT
If the GI of the professional does not exceed P720,000 in a year-10%
If the GI of the professional exceeds P720,000 in a year-15%

APPLICABLE EWT RATES THAT PHIC SHALL WITHOLD FROM THE PAYMENT TO THE HOSPITAL
(constituting of facility fees and professional fees), WHICH IN TURN SHALL PAY THE
PROFESSIONAL FEES OF THE MEDICAL PRACTITIONERS
-payments made to medical practitioner-10% or 15%, whichever is applicable
-facility fees paid to hospitals or clinic-2%

PASSIVE INCOME OF DOMESTIC CORPORATIONS WHICH ARE SUBJECT TO FINAL WITHOLDING

TAX
On interest income from any currency bank 20%
deposit in regular domestic bank
Yield or any monetary benefit from deposit 20%
substitutes
 Interest income and yield from trust funds 20%
and similar arrangements
Royalties derived from sources within the 20%
Philippines
Interest income derived from a depository 7.5%
bank under the FCDU
Interest income from foreign currency loans 10%
granted by depository bank under the
expanded foreign currency deposit system to
residents
Net capital gains from sale of shares of stocks
in a domestic corporation not listed in stock
exchange 5%
Not over P100,000.00 10%
Any amount in excess of P100,000.00
On presumed capital gains from sale of real 6%
property located in the Philippines classified
as capital assets
Gross income derived from contracts by 8% , in lieu of any and all taxes national and
subcontractors in petroleum local

Rule: DIVIDENDS RECEIVED BY A DOMESTIC CORPORATION FROM ANOTHER DOMESTIC

CORPORATION NOT SUBJCET TO FINAL WITHOLDING TAX
Except: Dividends received by a domestic corporation from a foreign corporation shall be
subject to income tax and shall form part of the Gross Income

MINIMUM CORPORATE INCOME TAX (MCIT)

-2% of the GI as of the end of the taxable year is imposed on a domestic corporation beginning
on the 4th taxable year immediately following the year in which such corporation commenced
its business operations
-30% when the MCIT is greater than the tax computed for the taxable year

MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of MCIT is greater than the normal corporate income tax.

CARRY FORWARD OF EXCESS MCIT

-Any excess of the MCIT over the normal income tax as computed under Section 27(A) of the
Tax Code shall be carried forward on an annual basis and credited against the normal income
tax for the three (3) immediately succeeding taxable years.
-The excess MCIT cannot be claimed as a credit against the MCIT itself or against any other
losses.

RELIEF FROM THE MCIT UNDER CERTAIN CONDITIONS

Upon recommendation of the Commissioner, the Secretary of Finance may suspend the
imposition of the MCIT upon submission of proof by the applicant-corporation, duly verified by
the Commissioner’s authorized representative, that the corporation sustained:
1. Substantial losses on account of prolonged labor dispute;
2. Force majeure;
3. Legitimate business reverses

SPECIFIC RULES FOR DETERMINING THE PERIOD WHEN A CORPORATION BECOMES SUBJECT
TO THE MCIT
-the year in which the domestic corporation registered with the BIR

MANNER OF FILING AND PAYMENT OF MCIT

-The MCIT shall be paid in the same manner prescribed for the payment of the NCIT which is on
a quarterly or yearly basis.

ACCOUNTING TREATMENT OF THE EXCESS MCIT PAID

-any amount paid in excess MCIT shall be recorded in the corporation’s books as an asset under
account title- “Deferred charges-MCIT”

DOMESTIC CORPORATIONS WHICH ARE NOT SUBJCET TO MCIT

A. Domestic corporations operating as proprietary educational institutions subject to tax at
10% on their taxable income;
B. Domestic corporations engaged in hospital operations which are non-profit subject to
tax at 10% on their taxable income;
C. Domestic corporations engaged in business as depository bank under the expanded
FCDU;
D. Firms that are taxed under a special income tax regime

RATIONALE OF THE LAW FOR THE IMPOSITION OF MCIT ON DOMESTIC COPRORATIONS

-to forestall the prevailing practice of domestic corporations of over claiming deductions in
order to reduce their income tax payments.
-MCIT is not a tax on capital. It is not an additional tax imposition.
It is imposed in lieu of the normal net income tax and only if the normal income tax is
suspiciously low.

DETERMINATION OF MCIT IN THE CASE OF LIFE AND NON-LIFE INSURANCE COMPANIES

-for purposes of computing the GI on the sale of services which shall be the basis of 2% MCIT, of
life and non-life insurance companies, the gross revenue shall include the premium and
reinsurance assumed; miscellaneous income; investment income not subject to final tax;
released reserve; and all other items treated as gross income under Section 32.

SECTION 28
I. TAXATION OF INCOME OF RESIDENT FOREIGN CORPORATIONS
 RESIDENT FOREIGN CORPORATION-is a corporation organized, authorized, or existing under
the laws of any foreign country, but engaged in trade or business within the Philippines.

NORMAL/ REGULAR CORPORATE INCOME TAX OF RESIDENT FOREIGN CORPORATION

-shall be subject to income tax rate of 30% of the taxable income derived in the preceding
taxable year from all sources within the Philippines.

A FOREIGN CORPORATION TRANSACTING BUSINESS IN THE PHILIPPINES INDEPENDENTLY

FOM ITS BRANCH IS NOT CONSIDERED THE SAME JURIDICAL ENTITY AS ITS BRANCH OFFICE IN
THE PHILIPPINES
-This rule is based on the premise of principal-agent relationship theory.
When the foreign corporation transacts business in the Philippines independently of its branch,
the principal-agent relationship is set aside. -Taxpayer is the FC
If the business transaction is conducted through the branch office-taxpayer is the BO

REASONS WHY INCOME OF A FOREIGN CORPORATION WITHIN THE PHILIPPINES IS TAXABLE

IN THE PHILIPPINES
-It is sufficient that such income is derived from an activity within the Philippines. Place of
activity is controlling.
Thus, international air carriers that do not have flights to and from the Philippines but earn
income from other activities in the country will be taxed at the rate of 32%.

MCIT ON RESIDENT FOREIGN CORPORATION

GENERAL RULE: -2% of the GI as of the end of the taxable year is imposed on a resident foreign
corporation beginning on the 4th taxable year immediately following the year in which such
corporation commenced its business operations, whenever the amount of the MCIT is greater
than the normal income tax due for such year.
-only sources from within the PHILIPPINES
EXCEPTIONS:
1. RFC engaged in business as “international carrier” subject to tax at 2 ½% of their “Gross
Philippine Billings”
2. RFC engaged in business as OBUs on their income from foreign currency transactions
with local commercial banks, including branches of foreign banks, authorized by the BSP
to transact business with the OBUS, including interest income from foreign currency
loan granted to residents of the Philippines, subject to final income tax at 10% of such
income;
3. RFC engaged in business as ROHQs subject to tax at 10% of their taxable income; and
4. Firms that are taxed under special income tax regime

II. TAXATION OF INCOME OF INTERNATIONAL CARRIERS

GROSS PHILIPPINE BILLINGS-amount of gross revenue derived from carriage of persons, excess
baggage, cargo, and mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document; Provided, that tickets revalidated, exchanged and/or indorsed to another
international airline form part of the GPB if the passenger boards a plane in a port or point in
the Philippines: Provided, further, that a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of the GPB.

INTERNATIONAL CARRIERS- refer to those carriers doing business in the Philippines who shall
pay a tax of 2.5% on its GPB, which could either be:
1. INTERNATIONAL AIR CARRIER-refers to a foreign airline corporation doing business in
the Philippines having been granted landing rights in any Philippine port to perform
international air transportation services/activities or flight operations anywhere in the
world, which is subject to the GPB Tax of 2.5%
2. INTERNATIONAL SHIPPING- refers to a foreign shipping corporation doing business in
the Philippines having been granted landing rights in any Philippine port to perform
international air transportation services/activities or shipping operations anywhere in
the world, which is subject to the GPB Tax of 2.5%

ORIGINATING RULE-means that to form part of the GPB, passenger or cargo must originate
from the Philippines. It includes:
1. Where the passengers, their excess baggage, cargo and/or mail originally commence
their flight from any Philippine port to any port or point outside the Philippines;
2. Chartered flights of passengers, their excess baggage, cargo and/or mail originally
commence their flight from any foreign port and whose stay in the Philippines is for
more than 48 hours prior to embarkation save in cases where the flight of the airplane
belonging to the same airline company failed to depart within 48 hours by reason of
force majeure;
3. Chartered flights of passengers, their excess baggage, cargo and/or mail originally
commence their flight from any Philippine port to any foreign port; and
4. Where the passengers, their excess baggage, cargo and/or mail originally commence
their flight from a foreign port alights or is discharged in any Philippine airline company,
the flight from the Philippines to any foreign port shall not be considered originating
from the Philippines, unless the time intervening between arrival and departure of said
passenger, his excess baggage, cargo and/or mail from the Philippines exceeds 48 hours,
except, however, when the failure to depart within 48 hours is due to reasons beyond
his control, such as, when the only next available flight leaves beyond 48 hours or by
force majeure: Provided, however, that if the second aircraft belongs to a different
airline company, the flight from the Philippines to any foreign port shall be considered
originating from the Philippines regardless of the intervening period between the arrival
and departure from the Philippines by said passenger, his excess baggage, cargo and/or
mail.
CONTINUOUS AND UNITERRUPTED FLIGHT-refer to a flight in the carrier of the same airline
company from the moment a passenger, his excess baggage, cargo and/or mail is lifted from
the Philippines up to the point of final destination of the passenger, his excess baggage, cargo
and/or mail.
DIFFERENT KINDS OF INTERNATIONAL AIR CARRIERS
1. OFF-LINE CARRIER-having no flight operations to and from the Philippines
2. ON-LINE CARRIER- having or maintaining flight operations to and from the Philippines
DIFFERENT TERMS REFFERING TO FLIGHTS OF INTERNATIONAL AIR CARRIER
1. OFF-LINE FLIGHTS-having flight operations outside the territorial jurisdiction of the
Philippines
2. ONLINE FLIGHTS- flight operations carried out between ports or point in the territorial
jurisdiction of the Philippines
3. CHARTERED FLIGHT- flight operations between ports and points in the Philippines and
ports and points outside the Philippines, which includes block charter, placed under
trhe custody and control of a charterer by a contract/charter for rent or hire relating
to a particular airplane.

CLASSIFICATIONS OF PASSENGERS OF AN INTERNATIONAL AIR CARRIER

1. TRANSIENT PASSENGER- a passenger who originated from outside the Philippines
towards a final destination also outside of the Philippines but stops in the Philippines for
period of less than 48 hours or even more, if the delay is due to force majeure or
reasons beyond his control, wherein in both cases, the passenger boarded an airplane of
the same airline company bound to the place of final destination.
2. NON-REVENUE PASSENGERS- Resolution No. 788 of the International Air Transport
Association
3. ADULT PASSENGER-passenger who has attained his 12th bday
4. CHILDREN- refers to passenger who have attained their 2nd bday no their 12th bday
5. INFANT-refers to a passenger who has not attained his 2nd birthday

TAXES IMPOSED ON INTERNATIONAL AIR CARRIER WITH FLIGHTS ORIGINATING FROM

PHILIPPINE PORTS
GENERAL RULE: subject to the GPB tax of 2.5% irrespective of the place where passage
documents are sold or issued.
EXEMPTION: Different tax rate under the applicable tax treaty to which the Philippines is a
signatory.

TAXES IMPOSED ON THE OFF-LINE AIR CARRIER HAVING A BRANCH OFFICE OR SALES AGENT
IN THE PHILIPPINES
-is considered not engaged in business in the Philippines and is therefore, not subject to the
GPB tax of 30% nor the 3% common carrier’s tax

COMPUTATION OF GROSS PHILIPPINE BILLINGS

There shall be included the total amount of gross revenue derived from:
1. Passage of persons;
2. Excess baggage;
3. Cargo; and/or
4. Mail
 Originating from the Philippines in a continuous and uninterrupted flight.

GROSS REVENUE DERVIED FROM THE PASSAGE OF PASSENGERS

-depends on whether the tickets are sold in the Philippines or outside.

A. For tickets sold inside- the gross revenue shall be the actual amount derived for
transportation, services, for a first class, business class or economy class passage from
any port within the Philippines to any foreign ports.
B. For tickets sold outside-shall be determined using the locally available net fares
applicable to such flight taking into consideration of the seasonal fare rate established
at the time of the flight, the class of passage, classification of passenger, date of
embarkation and the place of destination.

DETERMINATION OF GROSS REVENUE ON EXCESS BAGGAGE

-shall be computed based on the actual revenue derived as appearing on the OR or any similar
document for the said transaction

DETERMINATION OF GROSS REVENUE FOR FREIGHT OR CARGO OR MAIL

-based on the revenue realized from the carriage thereof
Freight or cargo-based on the amount appearing on the airway bill after deducting therefrom
the amount of discounts granted
Mails- based on the amount as reflected in the cargo manifest of the carrier

WHAT TO EXCLUDE FROM THE COMPUTATION OF TAXABLE BASE OF GPB

1. Non-revenue passengers shall not be given value for purposes of computing the taxable
base subject to tax;
2. Refunded tickets

GPB IN THE CASE OF A FLIGHT THAT ORIGINATES FROM THE PHILIPPINES BUT
TRANSSHIPMENT TAKES PLACE ELSEWHERE IN ANOTHER AIRCRAFT BELONGING TO A
DIFFERENT AIRLINE COMPANY
-the GPB shall be the portion of the revenue corresponding to the leg flown from any point in
the Philippines to the point of transshipment

FOERIGN EXCHANGE CONVERSION RATE TO BE USED IN COMPUTING THE TAXABLE AMOUNT

OF THE GPB
-shall be the average monthly Airline Rate or BAP rate, whichever is higher.
BAP RATE= monthly BAP rate/ number of days during the month

TAXABILITY OF THE OTHER INCOME DERIVED IN THE PHILIPPINES BY INTERNATIONAL AIRLINE

COMPANY
-based on NIRC

TAXES THAT MAY BE IMPOSED TO AN INTERNATIONAL CARRIER

-if flights are to and from the Philippines-2.5% of its GPB
-if do not have flights to and from the Philippines but earn income from other activities in the
country-30%
NOTE: The sale of the ticket is the activity that produce the income that’s why we have
jurisdiction over off-line air carriers with general sales agents in the Philippines who sell airline
tickets in the Philippines.

TAXES IMPOSED ON OFF-LINE INTERNATIONAL CARRIER WITHOUT ANY FLIGHT OPERATIONS

IN THE PHLIPPINES WITH GENERAL SALES AGENTS IN THE PHILIPPINES
GENERAL RULE: RFC -30% sources within the Philippines
EXEMPTION: RFC that are international air carriers-2.5% of their GPB

III. TAXATION OF INCOME OF OBUs

OFFSHORE BANKING UNIT-is a branch, subsidiary or affiliate of a foreign banking corporation

which is duly authorized by the BSP, as a separate accounting unit, to transact offshore banking
business in the Philippines.

Offshore Banking-shall refer to the conduct of banking transactions in foreign currencies

involving the receipt of funds principally from external sources and the utilization of such funds.
FOREIGN CURRENCY DEPOSIT UNIT- refer to an accounting or department in a local bank or in
an existing local branch of foreign banks, which is authorized by the BSP to operate under the
expanded foreign currency deposit system.

DEPOSITS-are funds in foreign currencies which are accepted and held by an OBU in the regular
course of business, with the obligation to return an equivalent amount to the owner thereof,
with or without interest.

GROSS OFFSHORE INCOME- shall mean all income arising from transactions allowed by the BSP
conducted by and between-
a. In the case of an OBU with another OBU or with an expanded FCDU or with a
nonresident;
b. In the case of expanded FCDU with another expanded FCDU or with an OBU or with a
nonresident.

GROSS ONSHORE INCOME-gross interest income arising from foreign currency loans and
advances to and/or investments with residents made by OBUs or FCDUs.

TAXATION OF INCOME OF OFFSHORE BANKING UNITS

1. Income derived by OBUs authorized by the BSP from foreign currency transactions-
exempt from all taxes
2. Income of nonresidents with depository banks-exempt for income tax
3. Net income shall be subject to regular income tax rate of 30% payable by bank
4. Interest income derived from foreign currency loans granted to residents-10% FWT
BANK (INCOME EARNER) CANNOT EVADE LIABLILITY FOR FCDUS OSHORE TAX BY SHIFTING
THE BLAME ON THE PAYOR-BORROWER AS THE WITHOLDING AGENT.
-it is liable to pay deficiency onshore tax

INCOME EARNINGS OF BANKS DERIVED FROM CORPORATIONS OF ITS RBUS DISTINGUISHED

FROM ITS FCDU/EFCDU OR OBU
From RBUs- CIT rate of 30%
Income derived by bank from its FCDUs/EFCDU or OBUs with respect to foreign currency
transactions with nonresidents, OBUs in the Philippines, and local commercial banks, including
branches of foreign banks authorized to transact business with FCDUs/EFCDUs are exempt from
income taxes
Interest income derived by bank from its FCDUs/EFCDU or OBU from foreign currency loans
granted to residents other than OBUS and FCDUs or EFCDUs is subject to final tax rate of 10%.

METHOD OF ALLOCATION OF COST AND EXPENSES BY RBUs VS. FCDU/EFCDU/OBUS

1. By specific allocation-
2. By allocation-common expenses shall be allocated based on percentage share of gross
income earnings of a unit to the total gross income earnings subject to regular income
tax and final tax plus those exempt from tax

IV. BRANCH PROFIT REMITTANCE TAX

RATIONALE FOR IMPOSITION- to equalize the tax burden of foreign corporations maintaining,
on one hand, local branch, offices, and organizations, on the other hand, a subsidiary domestic
corporation.

BASIS:
-the 15% BPR tax shall be based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof (except activities which are registered
with the PEZA, SBMA, AND CDA), provided that interests, dividends, rents, royalties, etc.
received by a foreign corporation during each taxable year from all sources within the
Philippines shall not be treated as branch profits
EXEMPTION: if the same are effectively connected with the conduct of its trade or business in
the Philippines
EFFECTIVELY CONNECTED WITH THE CONDUCT OF ITS TRADE OR BUSINESS IN THE
PHILIPPINES
Marubeni vs. CIR-only profits remitted abroad by a branch office to its head office which are
effectively connected with the conduct of its trade or business in the Philippines are subject to
15% BPR tax.

V. TAXATION OF INCOME OF RHQs and ROHQs of MULTINATIONAL COMPANIES

MULITNATIONAL COMPANY- is a foreign firm or entity engaged in international trade with
affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.

REGIONAL OR AREA HEADQUARTERS (RHQS)-a branch established in the Philippines by

multinational companies and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia Pacific region and other foreign market.

RHQS OF MULTINATIONAL COMPANIES EXEMPT FROM INCOME TAX

REGIONAL OPERATING HEADQUARTERS (ROHQS)- is a foreign business entity which is allowed

to derive income in the Philippines by performing qualifying services to its affiliates,
subsidiaries, or branches in the Asia Pacific region and other foreign market, and may engage in
the following activities:
1. General administrative planning;
2. Business planning and coordination;
3. Sourcing/procurement of raw materials and components;
4. Corporate finance and advisory services;
5. Marketing control and sales promotion;
6. Training and personnel mgt;
7. Logistics services;
8. Research and development services, product development;
9. Technical support and maintenance;
10. Data processing and communication; and
11. Business development

TAXATION OF INCOME OF ROHQs

Regional Operating Headquarters shall a tax of 10% of their taxable income

VI. PASSIVE INCOME OF RESIDENT FOREIGN CORPORATION SUBJECT TO FWT

Interest income from any currency bank 20%

deposit in regular banking unit located in
the Philippines AND Yield or any monetary
benefit from deposit substitutes
Royalties derived within the Philippines 20%
Interest income derived from a depository 7.5%
bank under the expanded FCD system
Interest income derived by a resident 10%
depository bank under the expanded FCD
system from foreign currency loans
granted by such depository banks to
Residents, other than OBUs in the
 Philippines or other depository banks
under the expanded system
Net capital gains from sale of shares of
stocks in a domestic corporation not listed
in stock exchange
Not over P100,000.00 5%
Any amount in excess of P100,000.00 10%
Gross income derived from contracts by 8% , in lieu of any and all taxes national
subcontractors in petroleum and local

INTERCORPORATE DIVIDENDS OF RESIDENT FOREIGN CORPORATION received from Domestic

corporation
-shall not be subject to tax

NONRESIDENT FOREIGN CORPORATION-applies to a foreign corporation not engaged in trade

or business within the Philippines

TAXATION OF INCOME OF NONRESIDENT FOREIGN CORPORATION

GENERAL RULE: Income from all sources within the Philippines shall be subject to the 30% FWT
based on the GI received during each taxable year.
EXEMPTION: capital gains from sale of shares of stock not traded in the local stock exchange

TAXATION OF OTHER INCOME OF NONRESIDENT FOREIGN CORPORATION DERIVED FROM ALL

SOURCES WITHIN THE PHILIPPINES

On gross income of NRF cinematographic film 25%

owner, lessor, or distributor
On gross rental income or charter fees by 4.5%
lessor of vessels to Filipino
citizens/corporation
On the gross rental income of nonresident 7.5%
lessor of aircraft, machineries and other
equipment
On interest income on foreign loans 20%
Intercorporate dividends from a domestic 15%
corporation
Net capital gains from sale of shares of stocks
in a domestic corporation not listed in stock
exchange
Not over P100,000.00 5%
Any amount in excess of P100,000.00 10%
NONRESIDENT FOREIGN CORPORATION WHICH TRANSACTED THRU ITS BRANCH OFFICE IN
THE PHILIPPINES BY INVESTING IN THE SHARES OF STOCK OF A DOMESTIC CORPORATION
SUBJECT TO TAX ON INTERCORPORATE DIVIDENDS

CONDITIONS IN ORDER TO BE ENTITLED TO THE 15% PREFERNTIAL TAX RATE ON THE

INTERCORPORATE DIVIDENDS DERIVED BY NONRESIDENT FOREIGN CORPORATION FROM A
DOMESTIC CORPORATION
1. The corporation must show that the country of origin grants a tax credit to the
NONRESIDENT FOREIGN CORPORATION, taxes deemed to have paid in the Philippines
equivalent to at least 15% against the tax due from the said NONRESIDENT FOREIGN
CORPORATION

CIR VS. PROCTER AND GAMBLE PMC-The court denied Procter and Gamble’s claim for refund
for its parent company in the USA since it failed to meet the conditions necessary for the
availment of the preferential tax rate of 15%.

TAX SPARING RULE- connotes that the 15% represents the difference between the regular
income of 30% on corporation and the 15% tax on dividends. It is the amount of tax forgone by
the Philippines Government in favor of the nonresident foreign corporation the purpose of
which is to encourage foreign investors to conduct business in the country.

CONCEPT OF IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

-is a penalty tax designed to compel corporations to distribute earning.
-it is imposed for each taxable year on the improperly accumulated taxable income by closely-
held domestic corporations.
EXEMPTIONS:
1. BANKS AND OTHER NON-BANK FINANCIAL INTERMEDIARIES;
2. INSURANCE COMPANIES;
3. PUBLICLY-HELD CORPORATIONS;
4. TAXABLE PARTNERSHIPS;
5. GENERAL PROFESSIONAL PARTNERSHIPS;
6. TNON-TAXABLE JOINT VENTURES; AND
7. ENTERPRISES DULY REGISTERED WITH PEZA
-the 10% IAET imposed on the improperly accumulated taxable income shall only apply to
corporations formed or availed for the purpose of avoiding the income tax, by permitting
earnings and profits to accumulate beyond the reasonable needs of the business, instead of
dividing or distributing said profits to its shareholders.

CLOSELY-HELD CORPORATIONS- those corporations at least 50% of the total combined voting
power of all classes of stocks entitled to vote is owned directly or indirectly y or for not more
than 20 individuals.
Rules:
1. Stock Not owned by individuals;
2. Family and partnership ownership;
 3. Option to acquire stocks;
4. Constructive ownership as actual ownership

DETERMINATION OF IMPROPERLY ACCUMULATED TAX INCOME

-by adding to the taxable income the ff.:

1. income exempt from tax;

2. Income excluded form GI;
3. Income subject to final tax;
4. The amount of net operating loss carry-over deducted;

-by deducting the:

1. Income tax paid/payable for the taxable year;

2. Dividends paid or issued;
3. Reserves

REASONABLE NEEDS OF THE BUSINESS- immediate needs of the business, including reasonably
anticipated needs.

Immediacy Test-it is applied to determine the “reasonable needs of business” in order to justify
an accumulation of earnings.

PERIOD FOR PAYMENT OF DIVIDEND/ PAYMENT OF IAET

-not later than 1 year following the close of the taxable year, otherwise, the IAET, if any, should
be paid within 15 days thereafter.

ACCUMULATION OF PROFITS-the controlling intention of the taxpayer is that which is

manifested at the time of the accumulation.

UNREASONABLE ACCUMULATION OF PROFITS-unreasonable if it is not required for the

purpose of the business, considering all the circumstances of the case.

TAX EXEMPTION
-construed strictly against the grantee and liberally in favor of the government.

A CORPORATION IS CALLED NON-STOCK AND NON-PROFIT where no part of its income is

distributable as dividends to its members, trustees, or officers.

HOW TO ESTABLISH THE INCOME TAX EXEMPTION OF NONSTOCK, ON-PROFIT

CORPORATION?
1. file an affidavit with the Commissioner showing the character of the organization.
2. Attach a copy of the charter or the articles of incorporation, by-laws, FS and
disbursements of the organization.
 3. When right to exemption is established, the organization need not make and file a
return of income.
4. However, The organization should file on or before April 15 of each year, an annual
information return under oath, stating the GI and expenses during the preceding year
and that no changes occurred.

REASON WHY TAX EXEMPT CORPORATION SHOULD PRESENT PROOF OF TAX EXEMPTION
-to relieve the taxpayer from filing return and paying the tax.

TAX EXEMPTION OF CORPORATIONS DOES NOT EXTEND TO MEMBERS

“ORGANIZED AND OPERATED EXCLUSIVELY”
-refers to real substance and not merely to form.

NON-STOCK NON-PROFIT CORPORATIONS LIABLE TO INCOME TAX

-exempt corporations are subject to income tax on their income from any of their properties,
real or personal, or any activity for profit.

TAXABILITY OF INCOME OF CLUBS ORGANIZED AND OPERATED EXCLUSIVELY FOR PLEASURE,

RECREATION, AND OTHER NON-PROFIT PURPOSES.
-membership fees, assessment dues, rental income, and service fees are subject to income tax.

EXEMPT AGRICULTURAL AND HORTICULTURAL ORGANIZATIONS

1. have no net income inuring to the benefit of any member;
2. are educational or instructive in character;
3. have as their objects the betterment of the condition of those engaged in such pursuit
EXEMPTION: Therefore, not exempt from tax are:
1. associations which have for their purpose, the holding of periodical race meets, the
profits from which may inure to the benefit of the shareholders.
2. Corporations engaged in growing agricultural or horticultural products or raising
livestock or similar products for profits

EXEMPT FORM MUTUAL SAVINGS BANK

1. Has o capital stock represented by shares;
2. Whose earnings less only the expenses of operation, are distributable wholly among the
depositors
EXEMPTION: Therefore, organization is not exempt from tax if:
-organization that has shareholders who participate in the profits

EXEMPT FRATERNAL BENEFICIARY SOCIETIES

-exempt from tax only if operated under the “lodge system” or for the exclusive benefit of the
members of a society so operating
Operating under the “lodge system”-carrying on its activities under a form of organization that
comprises local branches, chartered by a parent organization and largely self-governing, called
lodges, chapters and the like.
EXEMPT CEMETERY COMPANIES
1. It is owned by and operated exclusively for the benefit of its lot owners; or
2. It is operated for profit

EXEMPT RELIGIOUS, CHARITABLE, SCIENTIFIC, ATHLETIC, AND CULTURAL CORPORATIONS

TWO TESTS:
1. It must be organized and operated for one or more the specified purposes; and
2. No part of its net income must inure to the benefit of private individuals.

CHARITABLE INSTITUTIONS –SECTION 30(E)

It must be an organization that meets the substantive test of charity in Lung Center.
-it provides free goods and services to the public which would otherwise fall on the shoulder of
the government.
RATIONALE: The loss taxes by the government is compensated by its relief from doing public
works which would have been funded by appropriations from the Treasury.
LUNG CENTER OF THE PHILIPPINES VS. CIR
Charity means a gift, to be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in life or by otherwise lessening
the burden of government.

REQUIREMENTS TO QUALIFY AS CHARITABLE OR SOCIAL WELFARE NON-STOCK, BNON-

PROFIT CORPORATIONS UNDER SECTION 30 (E ) AND (G)
1. a nonstock corporation or association;
2. organized exclusively for charitable purposes;
3. operated exclusively for charitable purposes; and
4. no part of its net income or asset shall belong or inure to the benefit of any member,
organizer, officer or any specific purpose.

CORPORATION SOLE-is a special form of corporation usually associated with clergy.

EXEMPT BUSINESS LEAGUE

-Is an association or persons having some common business interest, which limits its activities
to work for such common interest and does not engage in a regular business of a kind ordinarily
carried on for profit.

TREATMENT OF INCOME DERIVED FROM DORMITORIES, CANTEENS AND BOOKSTORES, AND

INTEREST INCOME ON BANK DEPOSITS AND YIELDS FROM DEPOSIT SUBSTITUTES BY NON-
STOCK, NON-PROFIT EDUCATIONAL INSTITUTES.

“ACTUALLY, DIRECTLY AND EXCLUSIVELYUSED FOR EDUCATIONAL PURPOSES

EXEMPT FROM INCOME TAX
1. GOVERNMENT EDUCATIONAL INSTITUTIONS
 2. MUTUAL INSURANCE COMPANIES AND SIMILAR ORGANIZATIONS
3. FARMERS’ COOPERATIVE MARKETING AND PURCHASING ASSOCIATIONS

COMPUTATION OF TAXABLE INCOME

TAXABLE INCOME-gross income subject to tax, less the deductions, whether itemized or
optional standard deductions and/or personal and additional exemptions, if any, authorized for
such type of income.
-tax base
-the net income after deducting the itemized deductions or the optional standard deductions of
40%, at the option of the taxpayer.

1. Income- all wealth which flows into the taxpayer other than as a mere return of capital
2. Gross income- income less income which is by statutory deductions or otherwise is
exempt from tax imposed by law.
3. Taxable income-gross income less statutory deductions

BASIS OF COMPUTATION:
-all items of gross income shall be included in the gross income for the taxable year in which
they are received by the taxpayer and deductions taken accordingly, unless in order to clearly
reflect income, such amounts are to be properly accounted for as of a different period.

METHODS OF DETERMINING THE NET TAXABLE INCOME

1. EXPENDITURE METHOD- the aggregate yearly expenditures are deducted from the
declared yearly income, not the expenditures incurred each month and declared
thereafter, to arrive at the net taxable income.
2. NET WORTH OR INVENTORY METHOD-from any other available facts or evidence, so
that the tax may be assessed and collected. It is based on assets or properties appearing
in the name of the taxpayer or in the name of his dummies or friends, without the
taxpayer being able to give a definite reasonable explanation for their existence.
3. SALES METHOD OR PERCENTAGE OF RECEIPTS METHOD-reconstruct taxable income by
applying an average percentage of taxable income to gross income.

TAXABLE INCOME FROM SOURCES WITHIN THE PHILIPPINES

GENERAL RULE: From the items of gross income, there shall be deducted the expenses, losses
and other deductions property allocated thereto and a ratable part of expenses and other
deductions within the Philippines, which cannot definitely be allocated to some items or class
of gross income.
EXCEPTION: No deductions for interest paid or incurred abroad shall be allowed from unless
indebtedness was actually incurred to provide funds for use in connection with the conduct or
operation of trade or business in the Philippines.

TAXABLE INCOME FROM SOURCES WITHOUT THE PHILIPPINES

- From the items of gross income, there shall be deducted the expenses, losses and other
deductions property allocated thereto and a ratable part of expenses and other deductions,
which cannot definitely be allocated to some items or class of gross income.

SECTION 32
COMPUTATION OF GROSS INCOME
GROSS INCOME-all income from whatever source derived, including, but not limited to the
following items:
1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar fees;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interest;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions;
11. Partner’s distributive share from the net income of the general professional partnership.

I. SOURCES OF INCOME SUBJECT TO INCOME TAX

INCOME CAPITAL
Any wealth which flows into the taxpayer Constitutes investment which is the source of
other than a mere return of capital income
Flow Fund
Service of wealth wealth
Fruit Tree

GROSS INCOME NET INCOME/TAXABLE INCOME

All income derived from whatever source, Gross income less allowable deductions
whether derived from legal or illegal sources and/or personal and additional expenses

1. COMPENSATION FOR SERVICES IN WHATEVER FORM PAID

a. Salaries
b. Wages
c. Emoluments
d. Honoraria
e. Allowances
 f. Commissions
g. Fees
h. Director’s fees
i. Taxable pensions
j. Retirement pay
k. And other income of a similar nature
--If paid in cash, full amount received is the measure of the income subject to tax
--If paid other than cash, the fair market value of the thing taken in payment is the amount to
be included as income. (ex. Value of shares of stock given)
--if paid in promissory note, constitutes income to the amount of their FMV

TAX TREATMENT OF FIXED OR VARIABLE ALLOWANCE

-not compensation subject to withholding tax, if the following conditions are satisfied;
1. it is for ordinary and necessary traveling and representation or entertainment expenses
paid or incurred by the employee in the pursuit of the trade, business, or profession;
and
2. the employee is required to account/liquidate for the expenses in accordance with the
specific requirements of substantiation for each category of expense.

2. GROSS INCOME DERIVED FROM THE CONDUCT OF TRADE OR BUSINESS OR

EXERCISE OF PROFESSION

GROSS INCOME DERIVED FROM THE CONDUCT OF TRADE/BUSINESS

GROSSINCOME=GROSS SALES –SALES RETURNS AND ALLOWANCES AND COGS

COST OF GOODS SOLD