INCOME TAXATION

GENERAL PRINCIPLES
Imposition of taxes is borne out of necessity. These are the life-blood of the government.
The power to tax is an inherent power of the State.

INHERENT POWERS OF THE STATE:

-Police Power
-Eminent Domain
-Power of Taxation

POWER OF TAXATION
The primary purpose of taxation is to generate funds for the State to finance the needs of the
citizenry and to advance the common wealth. The government chiefly relies on taxation to
obtain the means to carry on its operation.

“The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And in
order to maintain the general public's trust and confidence in the Government, this power must be
used justly and not treacherously. It does not conform with Our sense of justice in the instant case
for the Government to persuade the taxpayer to lend a helping hand and later on to penalize him
for duly answering the urgent call.“ (BIR Ruling 006-07, March 7, 2007, citing Roxas vs. Court of
Appeals, 23 SCRA 276)

SOURCES OF FUNDS FOR GOV’T EXPENDITURES:

1)Revenues from both tax and non-tax sources;
2)Borrowings from both domestic and foreign sources; and,
3)Withdrawals from available cash balances

Revenues refer to all cash inflows of the national government treasury which are collected to
support government expenditures .
Revenues consist of tax and non-tax collections.

Major Classes of Tax Revenues:

a) taxes on income and profits;
b) taxes on property
c)taxes on domestic goods and services
d)taxes on international trade and transactions; and
e) other sources

BASIC CONCEPTS AND DEFINITIONS

Taxation:
In its broadest sense, taxation is defined as the power of the sovereign to impose every kind of
charge or burden upon persons, property, or property rights for the use and support of
government in order to enable it to discharge its appropriate functions. (Des Moines Union
Railways Co. V. Chicago , Great Western Railway Co,. 177N.W. 90,91, 188 Iowa 1091.9 A.L.R.
1557)

Essential Elements of the Taxing Power:

1.Inherent power of the sovereignty
2.Essentially a legislative function
3.Public purposes
4.Territorial in operations
5.Tax exemption of government

•Inherent power of sovereignty

The State can impose and collect taxes from its inhabitants even without a specific provision in
the Constituion conferring the power on it or authorizing it to impose taxes.
The Constitutional provisions on taxation merely constitute limitations on the supremacy of the
taxing power.

•Essentially a legislative finction

The power to enact laws and ordinances, and to impose and collect taxes are given to the
Congress.
The power to make tax laws cannot be delegated to other branches of the government or
exercised by the executive or judicial branch of government since it is peculiarly and exclusively
legislative in nature. (Non-delegation of the taxing powers)

•Congress cannot delegate the following powers:

1. Power to select the coverage, object or property to be taxed.
2. Determining the nature and purposes for which taxes shall be collected
3. Determining the place or situs of tax imposition
4. Fixing the amount to be imposed and tax rates
5. Granting tax exemptions or condonation
6. Setting down the rules of taxation in general

•Taxation powers that can be delegated:

The power to impose tariff rates, import and export quotas, custom duties, subject to the
limitations and guidelines as the congress may impose, consistent with the national development
program of the government. (Article VI, Section 28 of the Constitution)

•Public Purposes:
The primary purpose of taxation is for the support of the government .

•Territorial in Operation:
The taxing power cannot go beyond the Philippine taxing jurisdiction.

•Tax Exemption of the Government

As a rule, agencies performing governmental functions are tax exempt unless expressly taxed. On
the other hand, agencies performing proprietary functions are subject to tax unless expressly
exempted.

TAXES
The term “tax” has been defined as a forced and involuntary burden assessed in accordance with
some reasonable rule of apportionment by the authority of a sovereign government upon persons
or property within its jurisdiction, to provide public revenue for the support of government, the
administration of the law , or payment of public expenses. ( Cooley, The Law on Taxation)

A tax is an enforced contribution levied by the State by virtue of its sovereignty on persons and
property within its jurisdiction for the support of the government and all public needs.

SHORT HISTORY OF OUR INCOME TAX LAWS

The first law imposing income taxes in the Philippines was drafted by Congress of the United
States, and was approved on October 3, 1913. This became known as the Revenue Act of 1913.

The effectivity of the Revenue Act was fixed as of March 1, 2013, the date of the adoption of the
Sixteenth Amendment to the United States Federal Constitution.

The 16th Amendment grants the US Congress the power “to lay and collect taxes on income,
from whatever source derived without apportionment among the several states… “

The Revenue Act was given retroactive effect, since it was made effective on March 1, 1913.

Since the Philippines was under the sovereignty of the US in 1913, the Revenue Act was by
express provision extended to the country.
Section 11 of the Revenue Act provides that the administration of the Act and the collection of
revenues in the Philippines shall be undertaken by internal revenue officers of the Philippine
government and that all revenue taxes collected in the Philippines under the law shall accrue
intact to the Philippine government.

Revenue Act of 1913 was amended by the 1916 Act, which was in turn amended by the “War
Revenue Act of 1917”. Section 5 of the said Act empowered the Philippine Legislature to enact,
amend, alter , modify or repeal, the Federal Income Tax Law then enforced.

The first Philippine Income Tax Law passed by the Philippine legislature was enacted on March 9,
1919, Act no. 2833. This was amended by subsequent acts.

Commonwealth Act No. 466 was known as the National Internal Revenue Code . This was
passed by the National Assembly on June 15, 1939 and took effect on July 1, 1939. It was a
codification of all internal revenue laws.

SOURCES OF LAW ON INCOME TAXATION

•Philippine Constitution
•Statutes
•Regulations
•Administrative rulings
•Court decisions

•CONSTITUTIONAL PROVISIONS ON TAXATION ARTICLE VI

SECTION 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
xxx xxx xxx.

(3)Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,

non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.

(4)No law granting any tax exemption shall be passed without the concurrence of a majority of
all the Members of the Congress.

SECTION 29. (1) No money shall be paid out of the Treasury except in pursuance of an
appropriation made by law.
xxx xxx xxx.
(3)All money collected on any tax levied for a special purpose shall be treated as a special fund
and paid out for such purpose only. If the purpose for which a special fund was created has been
fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the
Government.

ARTICLE VI, Section 28

(2)The Congress may, by law, authorize the President to fix within specified limits, and subject to
such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within the framework of the national development
program of the Government.

CONSTITUTIONAL LIMITATIONS:
•Due process of Law
•Equal protection of law
•Rule of uniformity and equity
•Non-impairment of contracts
•President’s power to veto separate items in revenue or tariff bills
•Exemption from property taxation of religious, charitable or educational entities, nonprofit
cemeteries, churches and convents apartment
•No public money shall be appropriated for religious purposes
•Majority of all the members of the congress required granting tax exemption
•The Congress may not deprive the Supreme Court of its jurisdiction in all cases involving the
legality of any tax, impost or assessment or toll or any penalty imposed in relation to tax.
•No imprisonment for nonpayment of poll tax
•Tax collection shall generally be treated as general funds of the government.

•STATUTES:
A.National Internal Revenue Code ( Tax Code)
B.Special Laws

•REGULATIONS:
A.Revenue Regulations Issued by the BIR
B.Revenue Regulations (RR) are issuances signed by the Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, that specify, prescribe or define rules
and regulations for the effective enforcement of the provisions of the National Internal Revenue
Code (NIRC) and related statutes.

•BIR RULINGS ( Administrative rulings):

BIR Rulings are issued by the Bureau of Internal Revenue (BIR) representing its position on an
issue or on a transaction, and/or its interpretation of the law as it is applied to a particular
transaction.

•REVENUE MEMORANDUM CIRCULARS –not a source of law

Revenue Memorandum Circular (RMCs) are issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR
and other agencies/offices.

•COURT DECISIONS
Major part or jurisprudence on taxation consist of the decisions of the Court of Tax Appeals (CTA)
and the Supreme Court.

SHORT HISTORY OF THE CTA:

The Court of Tax Appeals (CTA) was created on June 16, 1954, through the enactment of
Republic Act No. 1125 (R.A. 1125).

Considering its limited jurisdiction then, it had only three (3) Judges.

Under R.A. 1125, CTA has exclusive appellate jurisdiction to review on appeal, the decisions of
the Commissioner of Internal Revenue (CIR) on disputed assessments, refunds of taxes, fees or
other charges, penalties imposed in relation thereto, and the decisions of the Commissioner of
Customs .

April 23, 2004- Republic Act No. 9282 was passed into law. The CTA became an appellate Court,
equal in rank to the Court of Appeals.

The composition of the Court increased to six (6) Justices with one (1) Presiding Justice and five
(5) Associate Justices. It shall sit En Banc, or in two (2) Divisions with three (3) Justices each. A
decision of a division of the CTA may be appealed to the CTA En Banc.

The decision of the CTA En Banc may further be appealed by verified petition for certiorari to the
Supreme Court.

June 12, 2008- Republic Act No. 9503 was enacted. This law took effect on July 5, 2008. This law
enlarged the organizational structure of the CTA. A Third Division was created providing for three
(3) additional Justice.
The CTA is now composed of one (1) Presiding Justice and eight (8) Associate Justices. The CTA
may sit en banc or in three (3) divisions with each division consisting of three (3) Justices. The
CTA, as one of the Courts comprising the Philippine Judiciary, is under the supervision of the
Supreme Court.

FEATURES OF THE PHILIPPINE INCOME TAX LAW

1.Income Tax is a direct tax- the tax is borne by the income recipient or income earner.
2.It is a progressive tax- based on the “ability to pay” principle
3.Comprehensive system of imposing tax- uses several criteria for taxation-citizenship, residence,
source
4.Semi-schedular or semi-global-

•Schedular tax rates apply to income in general.

•There are types of income subjected to final taxes.
•There are income subjected to preferential tax rates.

5.The Philippine income tax law is a law of American origin. Hence the decisions of the US courts
have force and persuasive effect in the Philippines.

The Tax Code was patterned after the US 1939 and 1954 US Internal Revenue Code.

BASIS OR CRITERIA FOR THE IMPOSITION OF INCOME TAX

1.Citizenship or nationality
2.Residence or domicile
3.Source of income

ADMINISTRATION OF THE INCOME TAX LAW

The administration of tax laws is lodged with the Bureau of Internal Revenue (BIR).

POWERS AND DUTIES OF THE BIR:

Section 2 of the Tax Code provides for the following powers and duties of the BIR:
a. assessment and collection of all national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith;
b. execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the
ordinary courts
c.give effect to and administer the supervisory and police powers conferred to it by the Code or
other laws.

POWERS AND DUTIES OF THE COMMISSIONER OF INTERNAL REVENUE (CIR):

1.To interpret tax laws and to decide tax cases-under the exclusive and original jurisdiction of the
CIR, subject to review by the DOF Secretary (Section 4)

2.To obtain information, and to summon, examine, and take testimony of persons; this shall be
construed as granting the Commissioner the authority to inquire into bank deposits other than as
provided for in Section 6(F) of the Code (Section 5)

3.To make assessments and prescribe additional requirements for tax administration and
enforcement (Section 6)

4. Authority of the Commissioner to delegate power; BUT the following CANNOT be delegated:
a.power to recommend to the DOF secretary , the promulgation of rules and regulations;
b. power to compromise and abate any tax liability ;
c. power to assign or reassign internal revenue officers.

5.Duty to ensure the provision and distribution of forms, receipts, certificates, and appliances, and
the acknowledgment of payment of taxes.

ROLE OF THE SECRETARY OF FINANCE:

THE DOF Secretary has direct control, direction and supervision of the BIR.
RULES OF CONSTRUCTION
“Statutes levying taxes or duties are to be construed strongly against the Government and in favor
of the subject or citizens, because burdens are not to be imposed or presumed to be imposed
beyond
what statutes expressly and clearly declare.”

No person or property is subject to taxation unless they fall within the terms or plain import of a
taxing statute. (Commissioner of Internal Revenue vs. Fireman's Fund Insurance Company, et al.,
148 SCRA 315 (1987) cited in COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
COURT OF APPEALS and ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION, respondents. G.R. No. 86785. November 21, 1991.)

TYPES OF INDIVIDUAL TAXPAYERS

CITIZENS
The following are citizens of the Philippines:
(1)Those who are citizens of the Philippines at the time of the adoption of the 1987
Constitution;
(2)Those whose fathers or mothers are citizens of the Philippines;
(3)Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship
upon reaching the age of majority; and
(4)Those who are naturalized in accordance with law. (Article IV, Section 1, 1987 Philipine
Constitution)

Natural-born citizens are those who are citizens of the Philippines from birth without having to
perform any act to acquire or perfect their Philippine citizenship.

Those who elect Philippine citizenship in accordance with paragraph (3), Section 1 , Article IV of
the 1987 Constituion shall be deemed natural-born citizens. (Article IV, Section2)

NONRESIDENT CITIZENS: (Section 22 (E), Tax Code)

The term ‘nonresident citizen’ means:
(1)A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite intention to reside therein.

(2)A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis.

(3)A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during the
taxable year.

(4)A citizen who has been previously considered as nonresident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently in the Philippines
shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in
the Philippines with respect to his income derived from sources abroad until the date of his
arrival in the Philippines.

(5)The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the case
may be for purposes of this Section 22 of the Tax Code.

Revenue Regulations No. 1-79:

(a) Immigrant - one who leaves the Philippines to reside abroad as an immigrant for which a
foreign visa as such has been secured.
(b) Permanent employee - one who leaves the Philippines to reside abroad for employment on a
more or less permanent basis.
(c) Contract worker - one who leaves the Philippines on account of a contract of employment
which is renewed from time to time within or during the taxable year under such circumstances as
to require him to be physically present abroad most of the time during the taxable year.

To be considered physically present abroad most of the time during the taxable year, a contract
worker must have been outside the Philippines for not less than 183 days during such taxable
year

Overseas Contract Worker (OCW) or Overseas Filipino Worker (OFW)- Rev Regs. No. 1-11
OCW refer to Filipino citizens employed in foreign countries, commonly referred to as OFWs ,
who are physically present in a foreign country as a consequence of their employment thereat.
Their salaries and wages are paid by an employer abroad and is not borne by any entity or person
in the Philippines.

To be considered as an OCW or OFW, they must be duly registered as such with the Philippine
Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate
(OEC).

Seafarers or seamen are Filipino citizens who receive compensation for services rendered
abroad as a member of the complement of a vessel engaged exclusively in international trade.

To be considered as an OCW or OFW they must be duly registered as such with the Philippine
Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate
(OEC) with a valid Seafarers Identification Record Book (SIRB) or Seaman's Book issued by the
Maritime Industry Authority (MARINA).

ALIENS: Section 22, (F) , (G) Tax Code

“(F) The term ‘resident alien’ means an individual whose residence is within the Philippines and
who is not a citizen thereof.”

“(G) The term ‘nonresident alien ’ means an individual whose residence is not within the
Philippines and who is not a citizen thereof.”

Rev. Regs. No. 2-40, Section 5

An alien actually present in the Philippines who is not a mere transient or sojourner is a resident
of the Philippines for purposes of the income tax. Whether he is a transient or not is determined
by his intentions with regard to the length and nature of his stay

A mere floating intention indefinite as to time, to return to another country is not sufficient to
constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay,
he is a resident.

One who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished is a transient.

But if his purpose is of such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his home temporarily in the Philippines, he
becomes a resident, though it may be his intention at all times to return to his domicile abroad
when the purpose for which he came has been consummated or abandoned.

Rev Regs. No. 2- 40, Section 6 Loss of residence by alien:

An alien who has acquired residence in the Philippines retains his status as a resident until he
abandons the same and actually departs from the Philippines.

An intention to change his residence does not change his status as a resident alien to that of a
nonresident alien.

Thus an alien who has acquired a residence in the Philippines is taxable as a resident for the
remainder of his stay in the Philippines.
NONRESIDENT ALIENS (NRA) :
Classes of NRAs:
a.NRAs engaged in trade or business within the Philippines;
b.NRAs not engaged in trade or business in the Philippines.

A NRA is considered as engaged in trade or business within the Philippines if he comes to the
Philippines and stays therein for an aggregate period of more than 180 days during any calendar
year;

A NRA is considered as NOT engaged in trade or business within the Philippines, if his stay in the
Philippines is for less than an aggregate period of 180 days during any calendar year.

a.Resident citizens are taxable on worldwide income.

b.Citizens who qualify as nonresident citizens are taxable only on Philippine –sourced income.
c. Aliens, whether resident or nonresident are taxable only on Philippine-sourced income.

INCOME DEFINED
(a) Income, in the broad sense, meaning all wealth which flows into the tax-payer other than
as a mere return of capital. It includes the forms of income specifically described as gains and
profits, including gains derived from the sale or other disposition of capital assets.”

xxx. (Section 36, Income Tax Regulations)

“ xxxx, income may be defined as an amount of money coming to a person or corporation within a
specified time, whether as payment for services, interest or profit from investment. Unless
otherwise specified, it means cash or its equivalent. Income can also be thought of as flow of the
fruits of one's labor. (Hernando B. Conwi, Jaime E. Dy-Liacco, petitioners, vs. The Honorable
Court Of Tax Appeals and Commissioner Of Internal Revenue, respondents G.R. No. 48532
August 31, 1992 citing Fisher vs. Trinidad, 43 Phil. 973Madrigal vs. Rafferty, 38 Phil. 414. .)

INCOME vs. CAPITAL

Income is a flow of wealth.

Capital maybe defined as :

-A fund or material wealth that can be used for the further production of wealth to satisfy human
wants;
-Tools of production or the resources of a business enterprise

GROSS INCOME -Section 32 (A)

SECTION 32. Gross Income. —
(A)General Definition. — Except when otherwise provided in this Title, gross income means all
income derived from whatever source, including (but not limited to) the following items:

(1)Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
(2)Gross income derived from the conduct of trade or business or the exercise of a
profession;
(3)Gains derived from dealings in property;
(4)Interests;
(5)Rents;
(6)Royalties;
(7)Dividends;
(8)Annuities;
(9)Prizes and winnings;
(10)Pensions; and
(11)Partner's distributive share from the net income of the general professional partnership.

EXCLUSIONS FROM GROSS INCOME Section 32 (B)

The following items shall not be included in gross income and shall be exempt from taxation :
(1)Life Insurance. — The proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held
by the insurer under an agreement to pay interest thereon, the interest payments shall be
included in gross income.

(2)Amount Received by Insured as Return of Premium. — The amount received by the

insured, as a return of premiums paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term mentioned in the contract or upon
surrender of the contract.

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

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

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

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

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

(b) Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer because
of death, sickness or other physical disability or for any cause beyond the control of the said
official or employee.
(c)The provisions of any existing law to the contrary notwithstanding, social security benefits,
retirement gratuities, pensions and other similar benefits received by resident or nonresident
citizens of the Philippines or aliens who come to reside permanently in the Philippines from
foreign government agencies and other institutions, private or public.

d)Payments of benefits due or to become due to any person residing in the Philippines under the
laws of the United States administered by the United States Veterans Administration.

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

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

(7) Miscellaneous Items. —

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

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

(c) Prizes and Awards. — Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
(i)The recipient was selected without any action on his part to enter the contest or proceeding;
and
(ii)The recipient is not required to render substantial future services as a condition to receiving the
prize or award.

(d)Prizes and Awards in Sports Competition. —

All prizes and awards granted to athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national sports
associations.

(e) 13th Month Pay and Other Benefits. — (as amended by Republic Act No. 10653)
Gross benefits received by officials and employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph shall not exceed eighty-two thousand
pesos (P82,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to
Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential Decree No. 851( the
13th month pay law), as amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, That every
three (3) years after the effectivity of this Act, the President of the Philippines shall adjust the
amount herein stated to its present value using the Consumer Price Index (CPI), as published by
the National Statistics Office
(NSO).”

(f)GSIS, SSS, Medicare and Other Contributions. — GSIS, SSS, Medicare and Pag-Ibig
contributions, and union dues of individuals.

(g)Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. — Gains
realized from the sale or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years.

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

DEFINITION OF A CORPORATION FOR TAX PURPOSES

The term “corporation” is all encompassing. Any of the entities considered as a corporation need
not be in any standard form or conform with the usual requirements of law.

DEFINITION: SEC 22 (B) OF THE TAX CODE.

(B) The term "corporation" shall include partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participacion), association, or insurance companies,
but does not include general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating consortium agreement under a service
contract with the Government. "General professional partnerships" are 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.

ENTITIES CONSIDERED TO BE CORPORATIONS FOR INCOME TAX PURPOSES:

A. Corporations (whether registered or not, licensed or not)
B. Partnerships, no matter how created (whether registered or not)
General professional partnerships are partnerships formed by persons for the sole
purpose ofexercising their common profession, no part of the income which is derived
from engaging in any trade or business.

By the contract of partnership, two or more persons bind themselves to contribute

money, property or industry to a common fund with the intention of dividing the profits
among themselves. (Article 1767, Civil Code)

C. Other Associations (joint-stock companies, joint accounts, insurance

companies)

“an association of person or companies jointly undertaking some commercial

enterprise; generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to direct
and govern the policy in connection therewith, and (a) duty, which may be altered
by agreement, to share both in profit and losses.”

PROFIT must have been the object of the association. If yes, then taxed as a
corp, regardless if they retain the profits or not. (Kilosbayan et al vs. Guingona;
Afisco Insurance Corporation, et. al. vs. CA)

D. Joint Ventures or Consortium

A joint venture need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on coporations.

General Rule: joint ventures are taxed like corporations

Exception: those formed for the purpose of undertaking:
1) construction projects or
2) engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract
with the Government

Essential factors to constitute a JV: Taxable: from BIR Rulings:

1. each party to the venture must make a contribution, not necessarily of capital, but by
way of services, skill, knowledge, material or money;
2.profits must be shared;
3. there must be a joint proprietary interest and right of mutual control over the subject
matter of the enterprise;
4. usually, there is single business transaction rather than a general or continuous
transaction

Non-taxable: from RR 10-2012

 1.For an undertaking of a construction project
2.Should involve the pooling of resources by licensed local contractors (i.e, those
licensed by Philippine Contractors Accreditation Board [PCAB] )
3.The contractors MUST be engaged in construction business. The JV itself MUST be
licensed under PCAB

2. TYPES OF CORPORATIONS
a. Entities treated as a “corporation” for income
tax purposes (check above)
b. Domestic corporation - corporation organized under the laws of the Philippines
c. Foreign corporation - corporation formed, organized, exists under laws other
than those of the Philippines Types of Foreign Corporations:

(1) resident foreign corporation - corporations that are considered “doing

business” in the Phils.

“Doing business” doing acts that imply a continuity of commercial dealings or

arrangements (Mentholatum v Mangliman) [note: mere investment is not
considered doing business]

The following acts shall not be deemed "doing business" in the Philippines:
1. Mere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or the exercise of rights as such investor;
2. Having a nominee director or officer to represent its interest in such
corporation;
3. Appointing a representative or distributor domiciled in the Philippines which
transacts business in the representative's or distributor's own name and account;
4. The publication of a general advertisement through any print or broadcast
media;
5. Maintaining a stock of goods in the Philippines solely for the purpose of having
the same processed by another entity in the Philippines;
6. Consignment by a foreign entity of equipment with a local company to be used
in the processing of products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of sale which are
not on a continuing basis, such as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing the same, training
domestic workers to operate it, and similar incidental services.

(2)non-resident foreign corporation - a FC not engaged in or doing business in

the Philippines. (remember the 180 days rule discussed before under
individual tax payer)
 3. TAX BASE
Type of corporation Tax base

Domestic corporation Worldwide income

Resident foreign corporation (RFC) Income from within PH

Non-resident foreign corporation (NRFC) Income from within PH

Type of corporation
4. TAX RATES

Domestic corporation and Resident foreign corporation (RFC)

In general, whichever is higher:
● Regular corporate income tax (RCIT)
30% of taxable income

● Minimum corporate income tax (MCIT)

2% of gross income

Non-resident foreign corporation (NRFC)

Gross Income Tax (GIT)
● Branch Profit Remittance Tax (BPRT)

5.NOT TAXABLE AS A CORPORATION

a. General professional partnerships
GENERAL RULE: The law provides that partnerships and joint ventures are liable
for income tax.
EXCEPTION: General Professional Partnerships. Section 26 of the NIRC provides
that persons engaging in business as partners in a GPP shall be liable for income
tax only in their separate and individual capacities, computed on their respective
distributive shares of the partnership profit. The reason behind this is that GPPs
are formed by persons for the sole purpose of exercising their common profession,
wherein no part of the income of which is derived from engaging in any trade or
business.

b. Joint venture or consortium for engaging in petroleum, coal, geothermal and

other energy operations under a service contract with the PH gov’t
GENERAL RULE: The law provides that partnerships and joint ventures are liable
for income tax.
EXCEPTION: Joint venture (JV) or consortium formed for the purpose of
undertaking construction projects. RR No. 10-2012 provides that the members to a
joint venture not taxable as a corporation shall each be responsible in reporting
and paying appropriate income taxes on their respective share to the joint ventures
profit.

Note in applying the exception: This shall not include those who are mere suppliers
of goods, services, or capital to a construction project.

Note in applying the exception: This may include JVs involving foreign contractors
IF: 1) the foreign contractor has a special license from PCAB; and 2) the
construction project is certified by the appropriate Tendering Agency as a foreign-
 finance project wherein international bidding is allowed.

Supplementary reading: BIR Ruling No. 108-10 (Case including Aurora as owner of
the property, contributing the property to a Joint Development Agreement with
Avida; and Avida contributing project development services to the project; wherein
in return for their respective contributions, each party shall receive respective
saleable units [house and lots] from the project [residential subdivision]) - The court
ruled that the Joint Development Agreement (JDA) is not subject to income tax
since the allocation of the saleable units is in consideration of their respective
contributions in the joint venture. It does not constitute a taxable event since no
income was realized by either Aurora or Avida. Theywill only realize income upon
their respective sales of the units allocated to each of them.

Requirements to be considered as a Joint Venture for construction: (RR No.

10-2012)
1. Formed for the undertaking of a construction project; and
2. should involve joining or pooling of resources by licensed local contractors;
that is, licensed as general contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI);
3. these local contractors are engaged in construction business; and
4. The Joint Venture itself must likewise be duly licensed as such by the
Philippine Contractors Accreditation Board (PCAB) of the Department of Trade
and Industry (DTI).

INCOME; SOURCES OF INCOME

a. The law provides that income may be derived from 6 sources. These are Interest,
Dividends, Services, Rentals and Royalties, Sale of Real Property, and Sale
of Personal Property.
b. Moreover, the principle on what constitutes taxable income anent corporate income
taxation is “where” the income is derived.

Income Principle From Sources Within

Interest Where the capital is employed If derived within PH

Includes interest on
bonds, notes or other
interest bearing
obligations of residents

Dividends Where the capital is employed Received from domestic

corporations

Received from foreign

corporations; if 50% or more
of the gross income of said
corporation for the
immediately preceding 3-
year period was PH-sourced
Services Where the service is If performed with PH
performed
Rentals and royalties Location of property or If property is located in PH
interest
in such property
Sale of Real Property Location of property If property is located in PH

Sale of Personal Property Sale of shares in a domestic

corporation
For property purchased and Personal property purchased
sold - place of sale in or outside the PH but sold
in PH
For property produced and For personal property
sold - apportioned produced in whole or in part
and sold outside; or produced
in whole or in part of and sold
within; gain is considered
derived from partly within and
without the Philippines
DEDUCTIONS
a. Itemized deductions
IN GENERAL: All deductions need to be substantiated
i. Expenses - should be ordinary and necessary trade, business or
professional expenses, paid/incurred during the taxable year, FOR the
development, management, operation and/or conduct of trade such as:
1) Salaries and other remuneration
2) Travel expenses
3) Rentals
4) Entertainment, Amusement, and Recreation (EAR) expenses
directly related to or in furtherance of trade

Requirements for deductibility

5) Ordinary and necessary in carrying on the trade or business or
exercise of a profession
6) Paid or incurred during the taxable year
7) Substantiated with official receipts or adequate records*
(substantiated by showing amount to be deducted AND
connection or relation to the business)
8) Amount must be reasonable (CIR v General Foods)
9) If subject to withholding, proof that amount is actually paid and
properly withheld
10) Not contrary to law, morals, public policy, public order (e.g bribes,
kickbacks)

*RAMO No 1-87 information that substantiates:

● Name and address of vendor
● Amount of expense
● Consideration paid for it
● Date and place of expense
● Description of items purchased or services rendered
● Purpose of expense
● Relation to the business of the expense

FEW NOTES:
➔ Expenses MUST be substantiated, will be disallowed if
otherwise
➔ A deductible expense can only be claimed IN THE YEAR it
was incurred. If you forgot to deduct it for this year, ~s o o r
e e h~ ka na lang, you cannot deduct it the following year
➔ Purchase vouchers/invoice OF the company is sufficient
enough to substantiate the expense PROVIDED that the
voucher contains a) name & address of the farmer/vendor
b) his signature c) name and address of the purchaser
(applies expenses where transaction is done with
marginalized earners)

When is expense considered as ordinary and necessary

Ordinary: payment that is normal in relation to business, and
does not mean that payments are habitual or recurring.

Necessary: when it is useful or helpful to the business OR if

 purpose is to realize profits or minimize losses

FOR ADVERTISING EXPENSES:

CIR v General Foods Phils Inc
Facts:
General Foods Inc (GF) filed its ITR claiming, among others, deduction as business expense
Tang’s media advertising expense worth P9.4m (supposedly to stimulate current sale of Tang,
BUT in their letter protest they said it was “to protect the corporation’s brand franchise, then
under review”), which amounted to almost half of the total media and advertising expense.

The CIR disallowed 50% of the P9.4 and assessed GF for deficiency. Main reason for
assessment: FAILED TO PASS test determining that it is an ORDINARY expense.
Test:
reasonableness of the amount incurred
amount is NOT capital outlay to create good will

The CTA dismissed GF’s appeal saying a) the amount is too big for one expense, and b) the
expense is believed to have been incurred “to create or maintain some form of good will for the
taxpayer’s trade or business” as opposed to “to stimulate current sale”
Cited Welch v Helvering: efforts to establish reputation are akin to ACQUISITION of capital
assets, and therefore not a business expense

On appeal, CA allowed the expense. BASIS: expense is reasonable and it was not sufficiently
established to be excessive

Issue: Was the expense ordinary and necessary, therefore fully deductible? NO, the amount is
unreasonable for BEING INORDINATELY LARGE, meaning it cannot be considered as
ORDINARY

Ruling:
SC agreed with the CIR. It stated that there are two kinds of advertising expense
(!) To stimulate CURRENT sales
(2) To stimulate FUTURE sales

(1) is deductible PROVIDED that it passes the test of reasonableness, pointing to it being
ordinary. (2) is NOT deductible. Why? Because it is considered a capital expenditure (see CTA
ruling), and being such, it has to be spread out over a reasonable period of time.

There are two conditions to be met in determining what kind of advertising expense was
incurred:
a) Assess whether or not it is a capital outlay by looking at the
nature or purpose of the expenditure
b) See whether the expenditure is ordinary or necessary

Court said that the Tang expense falls under (2) = capital expenditure. GF said themselves that
it was to protect the brand’s franchise; and brand = goodwill, so it was to maintain goodwill.

Entertainment, amusement, and representation

(EAR) expenses
Requirements for deductibility:
(1) Paid or incurred during the taxable year
(2) Must be
a) directly connected to development, management, operations or
b) directly related or in furtherance of conduct of trade or business.
(3) Must not be contrary to law, morals, etc. (kickbacks)
(4) Not paid directly to any government employee or official, or any
other persons or GPP IF it constitutes a bribe or kickback
(5) Must be duly substantiated by adequate proof
(6) If subject to withholding, amount should have been withheld and
paid

General principles on EAR: account title should be “entertainment,

amusement, and recreation expense” in the taxpayer’s FS and ITR.
Separate expense items from Ordinary expenses, advertising
expenses etc

INCLUDES both representation expense and/or depreciation or

rental expense of entertainment facilities WITH guests

Representation Expense: Representation facilities:

Expenses incurred IN ITEM of real or personal
CONNECTION with conduct or property used by the taxpayer
trade or business or exercise of PRIMARILY for EAR of guests
profession IN entertaining, providing OR employees.
amusement/recreation at dining
MUST:
places, places of amusements,
(a) For part of the assets of
theaters, concerts, sporting events,
the taxpayer [either
country clubs etc.
owned or leased]
* in the case of country/sports (b) Taxpayer CLAIMS
clubs: they are presumed to be depreciation (for
fringe benefit UNLESS taxpayer owned) or rental (for
can prove it is an expense. leased) expenses
HOW? Through receipts Examples:
showing: Yacht IF not restricted to be
(a) Amount of expense used by a SPECIFIC officer or
(b) Date and place employee (it would be fringe
(c) Purpose benefit if exclusively used)
(d) Professional or business
relation Vacay homes, Condos
(e) Name and
person/company
entertained WITH
CONTACT DETAILS
DOES NOT INCLUDE: fixed
representation allowance
(since it’s subject to WHT)
“Guests” are persons or entities with which the taxpayer has direct
business relationship (i.e., clients/customers) which DOES NOT
INCLUDE people from the same company (employees, officers,
partners, directors, SH, trustees) of the taxpayer.

WHY? Because why would spend to represent your own business

to your own people?? They already know the business. LOL no, it’s
because they can be considered as an ordinary business expense
(samples below)

EXCLUSIONS (not included as EAR)

(1) Expenses treated as compensation or fringe benefit
(2) For charitable/fund raising events
(3) Business meetings of SH, partners, directors (ordinary
expense)
(4) Attending/sponsoring employees to attend professional
organization meetings (ordinary expense)
(5) For events organized for PR and Marketing, including
concerts, workshops, seminars, conventions etc.
(advertising expense is a separate type of business
expense)
(6) Other expenses of similar nature: to promote company good
will

Two conditions for claiming EAR expense:

(1) Amount must be within the ceiling limits
(2) Must be verified and audited by the BIR - if taxpayer is found
to have shifted the EAR expense to any other expense to
avoid being subjected to the ceiling amount, the amount
shifted will be disallowed

CEILING AMOUNT for EAR

For those engaged in the For those engaged in the sale of

sale of services:
goods/properties:
0.50% of net sales 1% of net revenues

Gross Sales Gross Revenue

LESS LESS
Sales Returns Discounts for property
NET
Sales Allowance REVENUE
Sales Discounts
NET
SALES
For those engaged in the sale of both goods and services, the
apportionment formula shall be applied. NOTE: here, the full
amount cannot be claimed because they must ALWAYS fall
WITHIN the ceiling.
Apportionment Formula and
steps
(1) Net Sales / Net x Total EAR * do this for
Revenues each
Total of both expense
(2) Compute separately for the ceiling of each using the formulas
above
(3) Amounts must be within whatever you get from (2), so if
it’s more than that, SOOREEH, hanggang limit amount
lang pwede i claim. BUT if what is computed from (1) is
lower than from (2), (2) shall be the claimable amount
(4) Add the amounts computed from each.
(5) POOF that’s the EAR you can claim

Illustration from ma’am’s slides:

XYZ Corporation is engaged in the sale of goods and services
with net sales/net revenue of PhP 400,000 and PhP 200,000
respectively. The actual EAR expense for the taxable quarter
totaled to PhP 6,000.

(1) APPORTIONMENT FORMULA:

Sale of Goods (PhP 400,000/PhP 600,000) x PhP

6,000 = PhP 4,000 Sale of Services (PhP

200,000/PhP 600,000) x PhP 6,000 = PhP 2,000

(2) Ceiling amounts

Sale of Goods (PhP 400,000 x 0.50%) = PhP 2,000
Sale of Services (PhP 200,000 x 1%) = PhP 2,000
 What you can claim as EAR: P4,000

ii. Interest expense (RR 13-2000)

“Interest” payment for the forbearance or use of money during AND after
the term of a loan with the detention of money note: these do not cover
penalties nor surcharges (in cases of payment default)

1. Requirements for deductibility

(1) An existing indebtedness [there is a valid loan]
(2) Interest has been paid or incurred
(3) Indebtedness MUST be that of the taxpayer [not on
behalf of others]
(4) Proceeds of the indebtedness is used in the conduct,
dev, mgt, or in the course of the taxpayer’s trade or
business (see Metro Inc ruling)
(5) Interest was paid or incurred during the taxable year [rule:
same with ordinary expense, if it was not claimed for year it
was incurred/paid, it’s over]
(6) Interest must be stipulated in writing [Art. 1956; see
Metro Inc v CIR below]
(7) Interest is legally due
(8) Indebtedness is not between related taxpayers under
Sec 34(B)(2)(b) [see below under “relationships covered”,
Sky Internet v CIR and the Samsung BIR Ruling for rules]
if paid to related taxpayers, not allowed as deduction
(9) Interest not incurred to finance petroleum explorations
(why? By express provision of law: refers to service
contracts - part of their undertaking there is to provide for
financing, interest is already part of exploration cost)
(10) If incurred on an indebtedness to acquire property, the
interest was not treated as a capital expenditure (capital
expenditure is spread over time as a depreciation
expense)

Related partied under Sec 34(B)(2)(b)

(a) Between members of family (shall include only his
brothers and sisters [whether whole or half-blood], spouse,
ancestors, and lineal descendants)
(b) Between grantor and fiduciary of any trust

(c) Between the fiduciary of a trust and fiduciary of another

trust if the grantor of each is the same
(d) Between a fiduciary of a trust and a beneficiary of such
trust
(e) Except in cases of distributions in liquidations, between an
individual and a corporation, where more than 50% in
value of the latter’s OCS is owned directly or indirectly by
the former.
(f) Except in cases of distributions in liquidations, between
 two corporations, where more than 50% in value of either
corporations is owned, directly or indirectly, by of for
the same individual, IF either one of such corporations is
a personal holding company or a foreign personal holding
company

Metro Inc v CIR (must be in writing)

Facts:
Metro Inc received an assessment from BIR finding deficiency taxes amounting to more than
P50m. They then protested and requested that the assessment be reconsidered. One of the
things protested was the disallowed Interest and bank charge, claiming that the interest
expense deducted represented interests paid on various loans from different banks.

CIR’s basis for disallowing them:

Metro Inc’s failure to substantiate the claims. It merely submitted bank certifications and credit
advances. The did not present the main loan agreement which is vital
Metro Inc failed to show that the proceeds of the loans were used in connection to its business

Issue: Can the interest expense be claimed? NO, SC found CIR’s basis to be valid.

Ruling:
The foremost requirement for the deduction of an interest expense is that it must be stipulated in
writing? Why? Because law (Art. 1956) provides that “No interest shall be due unless it has
been in writing”. The very existence of the interest is dependent on this requirement.

It can be inferred from this that for interest payment to be deductible, it must be supported by
a written agreement of the indebtedness, the term of which stipulates for the payment of an
interest.

The documents Metro Inc presented were not sufficient to show existence of the loan, they
failed to submit the loan agreement, which is the most vital evidence for an interest claim. The
written agreement of the indebtedness is an indispensable requirement to support a claim for
deductibility of interest payment. Mere certification of the alleged creditors of the debt or the
payment of the interests cannot dispense with the written agreement of the indebtedness
requisite. Otherwise, the law could be easily circumvented.

Although the promissory notes submitted may be considered as valid proof of the indebtedness,
Metro Inc failed to prove that the proceeds were used in connection to its business (also a
requisite for deductibility). Metro Inc’s claim that the proceeds were used to pay for its foreign
currency or working capital requirements were not corroborated by any documentary evidence
whatsoever.

Sky Internet, Inc v CIR (related parties)

Facts:
Sky Internet, Inc (SkyNet), obtained loans from Sky Vision, its major stockholder owning 99.84%
of SkyNet’s OCS, allegedly as its working capital.
The following year, SkyNet claimed the a deduction for the interest expense paid on the interest
of the loan.
CIR then assessed SkyNet for deficiency income tax as a result of the interest expense
deduction. CIR’s basis for the assessment:
Interest expense is NOT deductible because it was paid to and between related parties as
defined under Sec 34(B)(2)(b): SkyNet is a wholly-owned subsidiary of Sky Vision (because of
the 99.84% share ownership)
As for SkyNet’s defense, it claims that they were not related parties as contemplated by law
because no SH owns directly or indirectly more than 50% of the OCS of each corporation.

Issue: Are SkyNet and Sky Vision related parties as contemplated by law? NO, not one
individual is shown to own more than 50% of either companies’ OCS.

Ruling:
In order for interest expense to be deductible, it must be shown that:
(a) There is an indebtedness
(b) That is it incurred by the taxpayer
(c) That there must be a legal liability to pay

The existence of the indebtedness incurred is undisputed. (but it was not mentioned in the case
how) As for the third requisite, the relationship of the parties need to be discussed to determine
whether there was a legal liability to pay because they were not related parties.

2 requisites in determining if two corporations related parties

(1) An individual owns more than 50% in value of the OCS of each corporation
(2) Either 1 or the corporations is a personal holding company

Here, Sky Vision’s SH is comprised mostly of other corporations who are further owned by
different individuals. Because of the diffused ownership in both corporations, it cannot be said
that an individual SH owned more than 50% of the OCS of both SkyNet and SkyVision. The
largest individual SHs are the Lopez siblings, who together - not individually - own 38.65% and
38.54% of each company, well below the 50% threshold.

[individual stock ownership of a company is called the Attribution Rule discussed in the
Samsung BIR Ruling]

Samsung BIR Ruling (related parties)

Facts:
CPRC is a real estate company. It has two major SHs: Retirement Plan, which owns 59.7% of
the stocks and SemCo with 39.8%
Semphil is a manufacturing corporation, whose facilities stand in Calamba Park. It established
the Retirement Plan, which is a duly approved benefit plan for Semphil’s employees, which
was placed under trust to handle the account.
Sometime in the past, CPRC obtained loans from Semphil. It was used to buy the land where
Semphil’s facilities stood. CPRC then leased out the said land and derives rental income as a
result. CPRC continues to pay interests on the loan and have claimed deductions for them.

Issue: Both CPRC and Semphil are now asking an opinion on whether:
(a)If loan transaction is an arrangement between related parties. THEY WERE NOT
(b) All the interests paid on the loan are allowable deductions from GI YES, they fully complied
with the requisites
Fallo: the interest paid on the loans are allowed to be deducted from GI

Ruling:
Before interests can be allowed as a deduction, it must comply with all the requisites for
deductibility. In the this, all except for the related party requisite was clearly shown to have been
complied with.

To determine whether CPRC and Semphil are related parties, the meaning of “individual” under
Sec 36 (B)(3) needs to be determined. “Individual” in the provision refers to natural persons
only, excluding estates, trusts, and corporations. Relevant to this is the provision on personal
holding company under the Tax Code of 1939 as implemented by RR 2,, insofar as
determination based on stock ownership is concerned is this:
--- When a stock is not owned by an individual (if it is own for or by corporations, estates, trusts),
it shall be considered being owned proportionately by the individual SH, partners, or
beneficiaries.

Therefore, in the case of multi-tiered corporation, the attribution rule must be allowed to run
continuously along the chain of ownership, until it finally reaches the individual SH. To
determine if the relationship prohibition applies, the ownership of both corporations must be
traced to the level of the individual SH.

Based on the capital structure of both CPRC and Semphil, it is clear that no stock from both
company is held by the same individual, because there were no natural individual holding them.
It was mentioned that the Retirement Plan owns 59.7% of CPRC, the former’s shareholding
cannot be attributed to either Semphil or Semco, and therefore neither of them derived any
benefit from the fund. Neither did both company exercise control, either individually or together,
Retirement Plan’s funds since it was managed by an independent trustee.

Rules on deductibility:
As a general rule, the entire amount of interest expense paid is deductible.
Limitations are as follows:
(1) The amount of the interest expense is reduced by 33% of interest income earned, which had
been subjected to final withholding tax, depending on the year when the interest income was
earned.

WHAT IT MEANS: so long as, during the taxable year, an interest expense is incurred and an
interest income is earned, the amount of interest expense will be reduced by 33% of the income
earned.

BUT interests paid on unpaid business related taxes SHALL NOT be reduced even if interest
income is earned. why? MORE MOOLAH FOR GOVERNMENT, because it would be paid to
the government. They wouldn’t want to reduce the amount they’re gonna get.

ILLUSTRATION based on ma’am’s slides

Liza Soberano Inc has a deposit with ABS bank. At the same time, it obtained a loan from CBN
finance corp in connection with the operations of its business. For 2017, assume the following:

Liza Soberano Inc’s Net Income before interest expense is PhP 1,000,000
Interest income from ABS bank (subject to final tax) is PhP 180,000, which makes the Final tax
amount on the interest income PhP 36,000
Interest Expense on the loan: PhP 150,000

First of all, 36k is irrelevant, because basis IS amount of interest income NOWHERE is it
mentioned that the amount of final tax is factored in the equation, so do not be confused by it if
ma’am decides to put this with the facts.

The deductible interest expense is

IF the interest expense is paid due to unpaid business related

taxes, the whole PhP 150,000 will be deductible, so the taxable
income would become

For the modified interest timing deductions: An individual taxpayer reporting income on cash
basis incurs an indebtedness within the taxable year which:
(a) an interest paid in advance through discount - interest is
allowed as a deduction in the year when the entire amount
of utang had been fully paid
(b) If payable in periodic amortization - the amount of
corresponding interest expense is deductible in the year it
was paid. (say the interest payable is 10k payable in 5
years. 10k divided by 5 years equals 2k to be paid yearly.
2k paid can be claimed as an interest expense deduction,
every year for 5 years)
Optional Treatment of interest expense on capital expenditure
● Taxpayer may only choose either to deduct the expense IN
FULL in the year it was incurred OR deduct as
depreciation expense and amortized over time.
● Cannot choose both because it would amount to

iii. Taxes
1. Deductible taxes Requisites for deductibility:
(1) paid or incurred within the taxable year,
(2) in connection with the taxpayer’s trade/biz/profession
(3) Must be imposed DIRECTLY upon the taxpayer

Taxes deductible: ALL TAXES EXCEPT THOSE

ENUMERATED IN SEC 34(C), such as:
(1) Documentary stamp taxes
(2) Occupational taxes
(3) Privilege and license taxes
(4) Excise taxes
(5) Import duties
 (6) communitiy

Taxes NOT deductible:

(1) Philippine income tax
(2) Foreign income tax (if taxpayer avails of the foreign tax
credit: 2Bdiscussed below)
(3) Estate and Donor’s tax
(4) Taxes assessed against local benefits of a kind that tends
to increase the value of the property assessed
(5) VAT

Limitations on Deductions:
● NRA & FC - their tax deductions are limited only IF and to
the extent that the income came FROM sources WITHIN
the Philippines
● For RC and DC - they may claim foreign tax credits or
deductions IF they paid for any income tax to foreign
countries.

2. Tax credits - these form part of the Gross Income

IF any of the deducted tax paid is refunded or credited, it SHALL
form part of GROSS INCOME in the year of receipt to the extent
of income tax benefit. [tax benefit rule]

WHY? HOW? You paid a tax under protest. Some time later, you
get back the amount you protested - it was refunded or credited to
you. It would be included in your gross income because you
benefited from the deduction when you paid the tax. The refund
or crediting HAS TO BE REPORTED to the BIR.

3. Foreign tax credits

➢ A taxpayer is given two options on what to do with taxes
paid in foreign countries: either they claim it as a deduction
from Gross Income OR claim it as a foreign tax credit.
➢ Requirements to for claiming foreign taxes paid
(1) Must be either a RC, DC, members of GPPs,
beneficiaries of estates and trusts
Why only them? Because FTC is allowed for taxes
paid for income derived from sources OUTSIDE the
philippines. ^^ are the only ones taxed on sources
including those outside the Phils
(2) Show proof of the total amount of the income from
the foreign source
(3) Proof of the amount of income derived from each
country (if there are multiple countries), and the
foreign tax paid or incurred, which is being claimed
as a credit
(4) Other information necessary for the verification and
computation of the credit

➢ How is the amount to be credited

determined? FORMULA and
PROCESS:
(1) LIMITATION 1: Compute for tax credit limit using
Taxable Income
on a per country basis: * TI = Taxable Income

TI from Foreign Country

x Philippine Income
Total TI FROM ALL tax ACTUALLY
sources paid
 ● Repeat for as many countries there are. List
them all down.
● LOWER amount between the result and the
actual tax amount paid of each will be
summed up
● Hold the summed up amount. let’s label it
Sum1

(2) LIMITATION 2: Compute for tax credit limit using

Taxable Income of the aggregate amount of ALL
foreign countries

TI from all OUTSIDE SOURCES

x Philippine Income
Total TI FROM ALL tax ACTUALLY
sources paid

● Let’s label the result here Sum2

● The amount of tax credit would be
whichever is LOWER between Sum1 and
Sum2

➢ When does this happen and how is the very confusing

formulas applied? Say Coco Martin, a resident citizen,
signs with a modelling agency in the US, and got 2 projects
from it, one in the US and another in the UK . If both the
US and UK IRS makes him pay for income tax on
whatever compensation he received from his modelling
gigs, when he goes back to the Phils he can claim those as
either deductions from his income tax OR tax credits. How
much credit can Coco claim?

Applying and plugging in values to the above formulas,

these figures will come out:

Foreign Computed
Tax Computed using using
paid Limitation 1 limitation 2

US 6,840 5,504

UK 1,000 2,752

TOTAL 6,504 8,256

Coco can then claim tax credits only for 6,504 for his hot
bod gig, because it’s the lower of the two amounts.

BUT if Coco opts to deduct the foreign taxes paid, the

actual amount would form part of all other deductions
under Itemized deduction.
iv. Losses

1. Requirements for deductibility (in general)

(1) If incurred in trade, profession or business;
(2) Of property connected with the trade, business or
profession, if the loss arises from fires, storms,
shipwreck, or other casualties, or from robbery, theft or
embezzlement.

Ordinary losses
- Losses incurred in trade, business or profession (e.g.
losses from destruction or disposal of inventory, machinery
or equipment which have been declared as waste or
obsolete due to spoilage, deterioration, obsolescence,
expiration or other causes, rendering the same unfit for
sale or for use in production.)
- Losses of property connected with trade, business or
profession, due to casualty, robbery, theft, and
embezzlement.

Capital losses
- Losses from (allowable only to the extent of capital gains)
sales or exchanges of capital assets
- Losses resulting from securities becoming worthless
and which are capital assets (considered loss from sale or
exchange) on last day of the taxable year
- Losses from short sales of property
- Losses due to failure to exercise privileges or options
to buy or sell property

Other kind of losses

- Losses from wash sales of stock and securities
- Wagering losses
- Abandonment losses in petroleum operations
- Losses due to voluntary removal of buildings, machinery
- Losses of the useful value of capital assets due to some
change in business conditions

2. Casualty
losses

The term “casualty” is the complete or partial destruction of

property resulting from an identifiable event of a sudden,
 unexpected or unusual nature. It denotes accident, some sudden
invasion by hostile agency, and excludes progressive
deterioration through steadily operating
cause.

Generally, “theft” is the criminal

appropriation of another’s property.

“Embezzlement” is the fraudulent appropriation of another’s

property by a person to whom it is entrusted or into whose hands
it has lawfully come. (Rev. Regs No. 12-77)

Requisites for deductibility (casualty losses)

(1) A taxpayer may be entitled to claim as business
deductions, casualty losses incurred for properties
actually used in the business enterprise that were
damaged and reported as losses in the appropriate
declaration filed
with the
BIR.

The loss of assets not used in the course of business

and/or are personal in nature shall therefore not be
allowed.

(2) Properties that shall be reported as casualty losses must

have been properly reported as part of the taxpayer's
assets in the taxpayer's accounting records and financial
statements in the year immediately preceding the
occurrence of the loss, with the costs of acquisition
clearly established and recorded. Otherwise, the claim
for deduction shall not be allowed.

(3) The amount of loss that shall be compensated by

insurance coverage should not be claimed as a
deductible loss.

(4) If the insurance proceeds exceed the net book value of

the damaged assets, SUCH EXCESS shall be subject
to the regular income tax, but not VAT, since the
indemnification is not an actual sale of goods by the
insured company to the insurance company.

(5) The deduction of assets as capital losses must be

properly recorded in the accounting reports, with the
adjustment of the applicable accounts.

(6) The restoration of the damaged property or the

acquisition of new property to replace it must be properly
 recorded and recognized as either repairs
expense or capitalized
asset.

Revenue Regulations No. 12-77

The amount of casualty loss deductible is limited to the
DIFFERENCE between the value of the property
immediately preceding the casualty and its value
immediately thereafter, but SHALL NOT EXCEED an
amount equal to the cost or other adjusted basis of the
property, or depreciated cost in the case of property used
in business, reduced by any insurance or other
compensation received.

The fair market value of the property immediately before

and immediately after the casualty for purposes of
determining the amount of casualty loss deductible shall
be ascertained by an impartial but competent appraisal.

RMO NO. 031-09 (October 16, 2009)

Prescribes the policies and guidelines that shall govern the
declaration of casualty losses incurred by taxpayers, and
the reporting of such losses filed at the concerned
Revenue District Offices.

In case of casualty loss, a notice of loss must be filed with

the BIR within 45 days from the date of the event that
gave rise to the casualty.

The taxpayer must prove the elements of the loss claimed,

such as the actual nature of the occurrence of the event
and the amount of the loss. (Proof may include, among
others, photographs of the property, documentary
evidence, insurance policy, and police report.)

3. Net operating loss carry over

(NOLCO)

NOLCO shall mean the EXCESS of allowable deductions over

gross income of the business in a taxable year.

The net operating loss (NOL) of the business or enterprise for any
taxable year immediately preceding the current taxable year,
which had not been previously offset as deduction from gross
income shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable years
immediately following the year of such loss. Provided,
however, that any net loss incurred in a taxable year during which
the taxpayer was exempt from income tax shall not be allowed as
a deduction.

Requisites for deductibility (NOLCO)

a. The taxpayer was not exempt from income tax the year the
loss was incurred;

b. There has been NO SUBSTANTIAL CHANGE IN THE

OWNERSHIP of the business or enterprise wherein:

i. AT LEAST 75% of nominal value of outstanding

issued shares is
held by or on behalf of the same persons;
OR

ii. AT LEAST 75% of the paid up capital of the

corporation is held by or on behalf of the same
persons.

Taxpayers ENTITLED to NOLCO

Domestic and resident foreign corporations subject to the normal
income tax (e.g., manufacturers and traders) or preferential tax
rates (e.g., private educational
institutions, hospitals, and regional operating
headquarters)

Taxpayers NOT ENTITLED to NOLCO

● Offshore banking unit (OBU) of a foreign banking
corporation
● Foreign Currency Depository Unit (FCDU) of a domestic or
foreign banking corporation
● Board of Investments (BOI) registered enterprises enjoying
the ITH incentive on their registered activities; NOLCO
sustained during period of ITH may not be deducted.
● Enterprises registered with the PEZA and R.A. No. 7227
[e.g., Subic Bay Metropolitan Authority (SBMA) registered
enterprises] on their registered activities; NOLCO
sustained only during the period of registration shall not be
allowed.
● Foreign corporations engaged in international shipping or
air carriage business in the Philippines.
● Other persons, natural or juridical, enjoying exemption
from income tax; NOLCO sustained during period of
exemption shall not be allowed.

Section 6 of RR No. 14-2001

● Corporations allowed to claim NOLCO deductions
 effectively cannot enjoy the benefit of NOLCO for as long
as it is subject to MCIT in any taxable year.

● In this case, the running of the three-year period for the

expiry of NOLCO is not interrupted by the fact that such
corporation is subject to MCIT in any taxable year during
such three-year period.

Section 7 of RR No. 14-2001

● The NOLCO shall be separately shown in the taxpayer's

ITR (also shown in the Reconciliation Section of the ITR).
● The Unused NOLCO shall be presented in the Notes to the
Financial Statements (FS) showing, in detail:
○ The taxable year in which the NOL was sustained
or incurred, and
○ Any amount thereof claimed as NOLCO deduction
within 3 consecutive years immediately following
the year of such loss.
● Failure to comply with this requirement will disqualify the
taxpayer from claiming the NOLCO.

v. Bad debts
Debts resulting from the worthlessness or uncollectibility, in whole or in part, of the
amounts
due to the taxpayer by others arising from money lent or from uncollectible
amounts of
income from goods sold or services rendered

1. Requirements for deductibility (RR No. 5-99, as amended by

RR No. 25-2002)
a. There must be an existing indebtedness due to the
taxpayer which must be valid and legally demandable;

b. MUST NOT BE sustained in a transaction entered into

between related
parties enumerated under Section 36 (B) of the 1997
Tax Code.

c. Must be connected with the taxpayer’s trade, business

or practice of profession;

d. Must be actually charged off in the books of accounts of

the taxpayer as of the end of the taxable year (see
additional conditions below);

e. Must be actually ascertained to be worthless and

uncollectible as of the end of the taxable year, EXCEPT

FOR BANKS where the BSP shall ascertain the

worthlessness and uncollectibility of the bad debts and

 shall approve the writing-off of said debts (see additional

conditions below)

Charged off in the books of accounts of the taxpayer

(Additional conditions) Before 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. The CIR will consider all pertinent evidence, including:

- The value of the collateral, if any, securing the debt and

the financial condition of the debtor in determining
whether the debt is worthless, or;

- The assigning of the case of collection to an independent

collection lawyer 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 debts.

- Also, in no case may a receivable from an insurance or

surety company be written-off 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 by the Insurance Commissioner
(e.g. flight or
disappearance of
debtor).

Worthless and uncollectible (Additional conditions)

Where the surrounding circumstances indicate that a debt is
worthless and uncollectible and that legal action to enforce
payment would in all probability not result in the satisfaction of
execution on a judgment, a showing of these facts will be
sufficient evidence of the worthlessness of the debt for the
purpose of deduction.

While a mere hope probably will not justify postponement of the

deduction, a reasonable possibility of recovery will permit the
account to be carried along notwithstanding that the probabilities
are that the debt may not be collected at all. The creditor may
offer evidence to show some expectation that the debt would have
been paid in the intervening years, and that subsequently, the
hope was shattered or appeared to have been unfounded. If, for
example, the creditor could show that during the years he
attempted to collect the debt, the debtor had property the title of
which was in dispute but which would enable him to pay his
debts when the title was cleared, the creditor would be entitled
to defer the deduction on the ground that there was no genuine
ascertainment of worthlessness.

In general, a debt is not worthless simply because it is of

doubtful value or difficult to collect. Worthlessness is not
determined by an inflexible formula or slide rule calculation but
upon the exercise of sound business judgment. The
determination of worthlessness in a given case must depend upon
the particular facts and the circumstances of the case. A taxpayer
may not postpone a bad debt deduction on the basis of a mere
hope of ultimate collection or because of a continuance of
attempts to collect 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.

Circumstances affecting worthlessness

The following, in addition to the reasonable efforts to collect, may
justify an ascertainment of the worthlessness of a debt:

- The flight or disappearance of a debtor

- Insufficiency of collateral
- Bankruptcy or insolvency
- Loss of evidence of indebtedness
- Death of debtor leaving no assets
- Absence of visible properties of the debtor
- Fruitless efforts to collect small amounts from debtors
scattered all over the country

Banks (RR No.25-2002)

In the case of banks, the CIR shall determine whether or not bad
debts are worthless and uncollectible in the manner provided in
RR No. 5-99.

Without prejudice to the Commissioner’s determination of the

worthlessness and uncollectibility of debts, the taxpayer shall
submit a BSP/Monetary Board written approval of the writing off
of the indebtedness from the banks’ books of accounts at the
end of the taxable year.

Receivables from insurance/surety companies (RR No.25-

2002)
IN NO CASE may a receivable from an insurance or surety
 company be written off 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 by the
Insurance Commissioner.

Tax benefit rule on recovery of bad debts

A debt which was previously found to be worthless and
written-off in a prior year and subsequently collected DOES NOT
render the deduction unallowable or illegal. (CTA Case No. 367,
January 30, 1961)

The 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. (RR No. 5-99)

vi. Depreciation
1. Definition: refers to the periodic reduction of the value of a
tangible permanent asset due to passage of time, wear and tear
and obsolescence.

2. For intangible assets (e.g. patents, copyrights, franchise), the

annual allowance to reduce their useful value is called
“amortization.”

3. Depreciation expense is allowed as a deduction from gross

income to enable taxpayers to recover the acquisition cost of the
property used in the practice of profession, business or trade.
❖ In the case of property held by one person for life with
remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner of
the property and shall be allowed to the life tenant.
❖ In the case of property held in trust, the allowable
deduction shall be apportioned between the income
beneficiaries and the trustees in accordance with the
pertinent provisions of the instrument creating the trust, or
in the absence of such provisions, on the basis of the trust
income allowable to each. (Sec. 34F, NIRC)

4. Requirements for deductibility

1. It must be reasonable
2. It must be charged off during the year.
3. It must be for property used or employed in the business, or
temporarily not in use.
4. It must be supported by a statement submitted together with
the tax return.

5. Methods of Computing Depreciation

1. Straight-line method
 2. Declining-balance method
3. Sum-of-the-year digit method
4. Any other method which may be prescribed by the Sec. of
Finance upon recommendation of the BIR.

6. The taxpayer and the BIR Commissioner may agree on the

estimated useful life and the rate of depreciation of any property,
which rate shall be binding to the taxpayer and the BIR. However,
if the useful life of the property estimated under previous factual
conditions is no longer reasonable, the law allows the taxpayer to
lengthen or shorten the property’s useful life in light of prevailing
factual conditions. (BIR Ruling 042-2010)

7. The depreciation cost of an asset must be must be premised on

its acquisition cost, and not on its appraised value. The reason is
that deduction from gross income are privileges, not matters of
right. Also, what the taxpayer would recover will be, not only the
acquisition cost, but also profit, which transgresses the underlying
purpose of a depreciation allowance.

No depreciation is allowable on the appraisal increase of fixed

assets. Any foreseeable salvage value is to be deducted from the
cost of the asset in determining the basis of depreciation. (RMC
70-2010)

8. Depreciation of intangibles.
If the use of such intangibles in business is limited in duration, it
may be subject of a depreciation allowance. However, if its use is
not so limited, it will not usually be a proper subject of such an
allowance.

Hence, trademarks which have a remaining lifespan of 10 years

are regarded as intangible assets that are subject to depreciation
(BIR Ruling DA 162-2007).

9. Depreciation of properties used in

petroleum operations
Estimated useful life
1. The useful life of properties used in or related to production of
petroleum shall be 10 years or such shorter life as may be
permitted by the BIR Comm.
2. Properties not used directly in the production of petroleum
shall be depreciated under the straight-line method on the
basis of an estimated life of 5 years. (Sec. 34(F)(4),NIRC)

10. Depreciation of properties in mining operations

An allowance for depreciation in respect to all properties used in
mining operations, other than petroleum operations, shall be
determined as follows:
 1. At the normal rate od depreciation if the expected life of 10
years or less; or
2. Depreciated over any number of years between 5 years and
the expected life if the latter is more than 10 years; and
3. The depreciation thereon allowed as deduction from taxable
income.
The contractor should notify the BIR Comm. at the beginning of
the depreciation period as to which depreciation rate will be used.
(Sec. 34(F) (5), NIRC)

11. In depreciation deductible by nonresident aliens engaged in

trade or business or resident foreign corporations, the
depreciable asset must be located in the PH.

vii. Depletion
1. Depletion is the exhaustion of natural resources as a result of
production or severance.
2. GENERAL RULE: A reasonable allowance shall be allowed as
deduction in the following
cases: 1) for entities engaged in oil and gas wells or mines; and 2)
those under a cost depletion method.
● EXCEPTION: The law provides that if the depletion
allowance has equaled the invested capital, it shall not be
allowed as deduction.
3. Cost depletion

viii. Charitable and other contributions

1. The law provides that the requisites for deductibility of charitable
contributions are as follows:
a. Actually paid or made to the Philippine Government or any
political subdivision thereof, or any of the domestic
corporation or association specified in the Tax Code
b. Made within the taxable year
c. Not exceeding 10% (individuals) or 5% (corporations) of
the taxpayer’s taxable income before charitable
contributions
d. Evidenced by adequate receipts or records (actual receipt
by accredited NGO of the donation; the date of receipt; the
amount if in cash; and the acquisition cost if it is a
property). If the donation is above P50,000, notice to the
RDO is required and certificate of donation must be
attached.

2. The law provides that contributions to the following institutions are

deductible in full:
a. Donations to the Government, its entities, political
subdivisions or fully owned corporations exclusively for
 undertaking priority activities in accordance with the
national priority plan to be determined by NEDA
b. Donations to foreign institutions or international
organizations pursuant to agreements, treaties entered
into by Government or special laws (The Integrated Bar of
the Philippines, Development Academy of the Philippines,
Aquaculture Department of SEA Fisheries and
Development Center, University of the Philippines (UP)
and other State Colleges and Universities, Cultural Center
of the Philippines, National Commission for Culture and
Arts, International Rice Research Institute, Department of
Science and Technology, International Red Cross and Red
Crescent Movement/Philippine National Red Cross.)
c. Donations to accredited Non-Government Organizations
(non-profit domestic corporation) - Conditions are 1) Shall
make utilization directly for the conduct of activities for the
purpose which it is organized not later than march 15,
unless an extended period is granted by law; 2) all
charitable contribution of property other than money shall
be based on acqusition cost; 3) all members of the BOT
did not receive remuneration;
4)their level of administrative expenses do not exceed 30
percent for the taxable year; and 5) their assets would be
distributed to another accredited NGO for similar purposes
in case of dissolution, or distributed
depending on the court’s discretion.
d. Donations of prizes and awards to
athletes.

3. Donations are subject to a limitation, which is 10% of net income

for individual taxpayers and 5% of net income for corporate
taxpayers, when they are made to:
a. The government for public purposes
b. Accredited domestic corporations for religious, charitable,
scientific, etc. purposes
c. Social welfare institutions
d. Non-accredited NGOs

ix. Research and development

1. GENERAL RULE: A taxpayer may treat research or development
expenditures which are paid or incurred by him during the taxable
year in connection with his trade ,business or profession as
ordinary and necessary expenses which are not chargeable to
capital account.The expenditures so treated shall be allowed as
deduction during the taxable year when paidor
incurred

2. The law provides that research and development shall be allowed

 as a deduction if it is incurred in connection with the trade,
business or profession of the taxpayer; and if not charged to
capital account.

x. Pension trust
1. An employer establishing or maintaining trust to provide for the
payment of reasonable pensions to his employees shall be
allowed as a deduction a reasonable amount transferred or paid
into such trust during the taxable year in excess of such
contributions, but only if such amount:
1. Has not theretofore been allowed as deduction, and
 2. Is apportioned in equal parts over a period of 10 consecutive
years beginning with the year in which the transfer or payment
is made. (Sec. 34J, NIRC)

2. Contributions made to a pension trust may be claimed as

deduction in the following manner:
1. Amount contributed for the normal service cost - 100%
deductible; and
2. Amount contributed for the past service cost - 1/10 of the
amount contributed is deductible in year the contribution is
made, the remaining balance will be amortized equally over 9
consecutive years.

3. Requisites for deductibility of payments to pension trusts:

1. There must be a pension or retirement plan established to
provide for the payment of reasonable pensions to employees;
2. The pension plan is reasonable and actuarially sound;
3. It must be funded by the employer
4. The amount contributed must no longer be subject to
employer’s control or disposition; and
5. The payment has not theretofore been allowed before as
deduction

4. Past service cost

5. RA 4917
GR: The retirement benefits received by officials and employees of
private firms, whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer shall
be exempt from all taxes and shall not be liable to attachment,
garnishment, levy or seizure by or under any legal or equitable
process whatsoever
EXCEPT: to pay a debt of the official or employee concerned to the
private benefit plan or that arising from liability imposed in a
criminal action.

Limitations:
1. That the retiring official or employee has been in the service of the
same employer for at least 10 years and is not less than 50 years
of age at the time of his retirement.
2. That such benefits be availed only once
3. That in case of separation of an official or employee from the
service of the employer due to death, sickness or other physical
disability or for any cause beyond the control of the said official or
employee, any amount received by him or by his heirs from the
employer as a consequence of such separation shall likewise be
exempt as hereinabove provided.
 “Reasonable private benefit plan” means a pension, gratuity,
stock bonus or profit sharing plan maintained by an employer for the
benefit of some or all of his officials and employees, wherein contributions
are made by such employer or officials and employees, or both, for the
purpose of distributing to such official and employees the earnings and
principal of the fund thus accumulated, and wherein it is provided in said
plan that at no time shall any party of the corpus or income of the fund be
use for, or be diverted to, any purpose other than for the exclusive benefit
of the said officials and employees.

b. Optional standard deduction (OSD)

Only domestic and Resident Foreign Corporations (RFCs) are entitled to OSD,
NOT Non-Resident Foreign Corporations (NRFCs)

OSD is 40% of a corporation’s gross income. Passive income which have been
subjected to a final tax at source shall not form part of the gross income for
purposes of computing the 40% OSD.

For other taxpayers allowed by law to report their income and deductions under a
different method of accounting (e.g. percentage of completion basis, etc.) other
than cash and accrual method of accounting, the “gross income” shall be
determined in accordance with said acceptable method of accounting.

“Gross Income” shall mean the gross sales LESS returns, discounts and
allowances and Cost of Goods Sold (COGS).

“Gross sales” shall include only sales contributory to income taxable under
Section 27 (A) of the 1997 Tax Code.

“COGS” shall include the purchase price or cost to produce the merchandise and
all expenses directly incurred in bringing them to their present
location and use.

IMPORTANT: COGS is treated differently for TRADING or MERCHANDISING

and MANUFACTURING.
Type of activity/corporation COGS treatment

Means the invoice COGS, PLUS import duties, freight in

Trading or merchandising transporting the
goods to the place where the goods are actually sold,
including
insurance while the goods are in
transit.

All costs incurred in the production of the finished goods such

Manufacturing as raw
materials used, direct labor and manufacturing overhead,
freight cost,
insurance premiums and other costs incurred to bring the raw
materials
warehous
to the factory or e.

The term may be used interchangeably with “cost of

goods manufactured and sold”.

ALSO IMPORTANT: “Gross income” is treated differently for SELLERS OF

GOODS and SELLERS OF SERVICES
 “Gross sales” LESS returns, discounts and allowances and Cost Of Goods Sold
Seller of (COGS).
GOODS

“Gross receipts” LESS sales returns, allowances, discounts and cost of services

NOTES:
“Gross receipts” means amounts actually or constructively received during
the taxable year.

However, for taxpayers engaged as sellers of services but employing the accrual
Seller
of basis of accounting for their income, the term “gross receipts” shall mean amounts
SERVI earned as gross revenue during the taxable year.
CES
“Cost of services” means all direct costs and expenses necessarily incurred to
provide the services required by the customers and clients including (a) salaries
and employee benefits of personnel, consultants and specialists directly rendering
the service, and (b) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however,
that “cost of services” shall not include interest expense except in the case of
banks and other financial institutions.

Examples in determining the basis of the 40% OSD (RR No. 16-08)

Suppose a retailer of goods, whose accounting method is under the accrual

basis, has a gross sales of PhP 1,000,000 with a cost of sales amounting to PhP
800,000. The computation of the OSD for corporations shall be determined as
follows:

Php
Gross sales
1,000,000
LESS: COGS
800,000
Basis of the OSD (Gross income) 200,000
MULTIPLY by OSD Rate 40%
OSD Php 80,000

If the taxpayer opts to use the OSD in lieu of the itemized deduction allowed
under Section 34 of the 1997 Tax Code, as amended, his/ its net taxable income
shall be as follows:

Gross sales
 LESS: COGS Php

1,000,000
800,000

Gross income 200,000

LESS: OSD (maximum) 80,000

Net taxable income 120,000

Making the election (OSD)

 The election to claim EITHER the OSD or the itemized deduction for the taxable year must
be signified by checking the appropriate box on the ITR filed for the first quarter of the taxable
year.

Once the election to avail of the OSD or itemized deduction is signified in the return, it shall be
irrevocable for the taxable year for which the return is made.

8. Minimum corporate income tax (MCIT)

a. Who are liable
i. The law provides that corporate taxpayers, specifically Domestic and Foreign Resident
Corporations are liable to pay MCIT.

b. When the MCIT commences

i. The law provides that a minimum corporate income tax of 2% of gross income shall be
imposed on a domestic corporation and resident foreign corporation beginning on the
fourth taxable year immediately following the year in which such corporation
commenced its business operations when: 1. the MCIT is greater than the RCIT for the
taxable year.
2. such operation has zero or negative taxable income

c. Exemption from MCIT

i. The law provides that the following are exempted from MCIT:
1. Resident foreign corporations engaged in business as international carriers
2. Resident foreign corporations engaged as OBUs
3. Resident foreign corporations engaged in business as ROHQs
4. Firms that are taxed under a special income tax regime.

d. NOTE: Gross income on MCIT

i. For purposes of MCIT, the term "gross income" means gross sales less sales returns,
discounts, and allowances and cost of goods sold, in case of sale of goods, or gross
revenue less sales returns, discounts, allowances and cost of services/direct cost, in
case of sale of services. Note: “Cost of goods sold” shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and
use while “cost of services” shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customs and clients. As noted by the
Supreme Court in COMMISSIONER VS. PAL [JULY 7, 2009], inclusions and
exclusions/deductions from gross income for MCIT purposes are limited to those directly
arising from the conduct of the taxpayer’s business. It is thus more limited than the gross
income used in the computation of basic corporate income tax.

9. Filing of tax return and payment of taxes