Comprehensive

Corporate
Income Taxation
By:
Dr. Ruperto P. Somera, Ph, D., CPA
Tax Consultant, Professor/Lecturer
Former Director, Bureau of Internal Revenue
Former Member, Board of Accountancy
Fellow Tax Management
Fellow Tax Research

Income Tax
Is a tax on all yearly profits arising
from property, professions, trades or
offices, or as a tax on a persons
income, emoluments, profits. Income
tax is a direct.

1.
2.
3.
4.

KINDS OF INCOME TAX

Personal income tax on individuals;
Regular
corporate
income
tax
on
corporations;
Minimum
corporate
income
tax
on
corporations;
Capital gains tax on sale of shares of stocks
of a domestic corporation by a person who is
not a dealer in securities;

5. Tax on passive investment income, such as

interest, dividend, and royalty;
6. Fringe benefits tax;
7. Branch profit remittance tax on Philippine branches
of foreign corporations;
8. Tax on improperly accumulated earnings tax of
corporations; and
9. Final withholding income tax on certain income from
sources within the Philippines payable to resident
(e.g., interest on bank deposits) or non-resident
persons.

Requisites for Income to be Taxable

There must be gain or profit, whether in
cash or its equivalent.
The gain must be realized or received.
- Mere increase in the value of
property is not income (unrealized increase
in capital)

Exclusions from Income

1) Proceeds of life insurance;
2) Amount received by the insured as return of
premium;
3) Gifs, bequests, and devises;
4) Compensation for injuries or sickness;
5) Income exempt under treaty;
6) Retirement benefits, pensions, gratuities, etc.; and
7) Miscellaneous items.

Computation of Taxable Income

TAXPAYERS
TAXPAYERS

INCOME
INCOME

DEDUCTIONS
DEDUCTIONS

PERSONAL
PERSONAL
EXEMPTIONS
EXEMPTIONS

TAX
TAX RATE
RATE

INDIVIDUALS
INDIVIDUALS

CORPORATIONS
CORPORATIONS

Profession/
Profession/
Business
Business

Business
Business
Income
Income

Business
Business
Income
Income

Itemized
Itemized
deductions
deductions or
or
40%
40% OSD
OSD based
based
on
on gross
gross sales
sales or
or
gross
receipts
gross receipts
from
from business
business or
or
profession
profession

Itemized
Itemized
deductions
deductions or
or
40%
40% OSD
OSD
based
based on
on
gross
Income
gross Income

Itemized
Itemized
deductions
deductions or
or
40%
40% OSD
OSD
based
based on
on
gross
Income
gross Income

Basic=P50,000
Basic=P50,000
Additional
Additional =
=
P25,000
each
P25,000 each
child
child (max.
(max. of
of 4)
4)

Tabular
Tabular Tax
Tax on
on
Individuals
Individuals

PARTNERSHIP
PARTNERSHIP

Income
Income from
from
profession
profession

Itemized
Itemized
deductions
deductions

ESTATE/TRUST
ESTATE/TRUST

Business
Business
Income
Income

Itemized
Itemized
deductions
deductions or
or
OSD
OSD like
like
Individuals
Individuals
taxpayer
taxpayer
Distribution
Distribution
to
to
beneficiaries
beneficiaries

P20,000
P20,000

Normal
Normal
Corporate
Corporate
Income
Income Tax
Tax
(30%)
or
(30%) or
MCIT
MCIT (2%)
(2%)

Normal
Normal
Corporate
Corporate
Income
Income Tax
Tax
(30%)
or
(30%) or
MCIT
MCIT (2%)
(2%)

Tax
Tax Exempt
Exempt

Tabular
Tabular on
on
Individuals
Individuals

CORPORATION
Corporations includes partnerships, no matter how
created or organized, joint stock companies, joint
accounts, associations or insurance companies
except:
Joint construction venture;
General professional partnership;
Joint venture for engaging in petroleum, coal,
geothermal and other energy operations pursuant
to a consortium agreement with the government.

Unregistered or registered partnership

taxable provided that the following
requisites occur:
a. Agreement, oral or writing, to
contribute money, property or industry to
a common fund;
b. Intention to divide the profits.
9

i. Two sisters purposely created a common

fund without being registered for the
purpose of engaging in a series of
transactions for profit taxable
unregistered partnership is created
(Evangelista v. Commissioner, 102 Phil.
140).

10

GENERAL PROFESSIONAL
PARTNERSHIP
Are partnership 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

11

PARTNERSHIP
Yes

Type

Income Tax

Is the partnership
income earned from
trading?

No

COMMERCIAL

PROFESSIONAL

NCIT 30% or
MCIT 2%

Exempt from Income

Tax

Distributive Share
Distributive Share

Withholding Tax

Final Withholding
Tax (FWT) of 10%

Creditable Withholding Tax

(CWT)
P720,000 and below = 10%
More than P720,000 = 15%
(RR.30-2003)

12

TAX ON CORPORATION
Domestic Corporation
Domestic Corporation
General Partnership
Proprietary Educational Institutions and
Hospitals

13

TAX ON CORPORATION
Foreign Corporation
a. Resident foreign Corporation
b. International Carriers
International Air Carriers
International Shipping

c. Off-shore Banking Unit

d. Tax on Branch Profit Remittance
e. Regional Area Headquarters and
Regional Operating
14

TAX ON CORPORATION

Foreign Corporation
f. Tax on Certain Incomes Received by
Resident Foreign Companies
g. Non-Resident Corporation:
In General
Cinematographic Film Owners, Lessors or
Distributors
Non-Resident owners of Vessels Chartered by
Philippine Nationals
Non-Resident Lessors of Aircraft, Machine and
other equipment
Intercorporate Dividends

15

Corporate Tax Rate

Classification
1. Domestic
Corporation

Sources
All sources
w/in & w/out
the Phils.

Tax Base
Rate
Net Income 30%

2. Resident
Foreign Corp.

All sources
w/in the Phils.
only

Net Income 30%

3. NonResident
Foreign Corp.

All sources
w/in the Phils.
only

Gross
Income

4. Private
All sources
Educational Ins. w/in & w/out
(stock)
the Phils.

30% TAX
withheld by
payor

Net Income 10% of

Taxable
Income
16

Classification

Sources

Tax Base

Rate

5. International
Carrier

All sources w/in

the Phils.

Gross Phil.
Biling

2 %

6. Non-Resident
Cenematographi
c film Owners,
Lessors,
Distributors

All sources w/in

the Phils.

Film Rentals 25%

and Other
Items of
Gross
Income

7. Non Resident
Owners of
Vessels
Chartered by
Phil. Nationals

All sources w/in

the Phils.

Gross
Rentals &
Charter
Fees

4 %

Gross
Rental

7 %

8. Non Resident All sources

Lessors of
w/in the Phils.
Aircraft,
Machineries &
Other Equipment

17

Aircraft,
Gross Income
machinery and
other equipment

7-1/2%

Interest on
Foreign loans

Gross Income

20%

Inter-Corporate
Dividends

Gross Income

15%

18

REVENUE REGULATIONS
NO. 10-2012
Joint Venture or Consortium Formed
for the Purpose of Undertaking
Construction Projects and Mandatory
Enrollment of Local Contractors in the
Electronic Filing Payment System
(EFPS)
19

Joint Ventures Not Taxable As

Corporations
A joint venture or consortium formed for the
purpose of undertaking construction projects
not considered as corporation should be:
1.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)
20

Joint Ventures Not Taxable As

Corporations
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)

21

BRANCH PROFIT REMITTANCES

A final withholding tax of 15% of any profit remitted
by the Philippine branch of a foreign corporation to
its head office based on the total profits applied or
earmarked for remittance without any deduction for
the tax component thereof, except those registered
with the following:
a.Philippine Economic Zone Authority (PEZA)
b.Subic Bay Metropolitan Authority (SBMA)
c.Clark Development Authority (CDA)
d.Other companies within the special economic
zones
22

GOVERNMENT-OWNED OR
CONTROLLED CORPORATION
All government-owned and controlled corporations,
agencies or instrumentalities, shall be subject to
income tax on income from business, industry or
activity similarly taxable in the hands of private
enterprises, except the following:
a.Social Security System (SSS)
b.Government Service Insurance System (GSIS)
c.Philippine Health Insurance Corporation (PHIC)
d.Philippine Charity Sweepstakes Office (PCSO)
e.Local water districts (LWD) (RA 10026)
23

Tax Treaty Relief Application

Court decisions have confirmed that prior
application is mandatory
Section 4 of Revenue Regulations No. 7-82 which
implements the RP-Singapore Tax Treaty requires the filing
of an appropriate BIR Form for Income Tax Convention
with the International Operations Division (now
International Tax Affairs Division (ITAD) of the BIR. (Mirant
Philippines Corporation vs. CIR, CTA EB case 40, June 7, 2005).

(CDL Hotels (Phils.) Corporation vs. CIR, CTA foreign

corporation wishing to avail of the benefits of the

tax treaty should invoke the provisions of the tax
treaty and prove that indeed the provisions of the
tax treaty applies to it, before the benefits may be
extended to such corporation. (CDL Hotels (Phils.) Corporation vs. CIR, CTA
EB No. 399, August 10, 2009)

24

TAX TREATY
Requirement for ITAD ruling in availment of
treaty rates
Under RMO 1-00, availment by the taxpayer of the tax
treaty provisions must be preceded by an application for
tax treaty relief with the ITAD not later than fifteen (15)
days before the transactions covered by tax treaties are
effected.

25

Case: (CBK Power Company Limited v. CIR, CTA

Case Nos. 6699, 6884 and 7166, February 12, 2009,
Deeutsche Bank vs CIR, CTA EB 456, May 29,2009)

Due to petitioner's failure to file an ITAD ruling

with respect to some of its transactions prior to
applying the preferential rates under tax treaties,
the refund claim of taxpayer was reduced.

26

Court of Tax Appeals:

Citing Supreme Court Resolution dated
February 18, 2008 for Mirant (Philippines)
Operations Corporation v. Commissioner of
Internal Revenue in G.R. No. 168531, it was
held that an ITAD ruling must be obtained
prior to availing a preferential tax rate.

27

Educational Institutions
1. Proprietary Educational
Institutions
2. Non-stock, Non-Profit
Educational Institutions

28

Special Domestic Corporations

CLASSIFICATIONS

APPLICABLE TAX

1. Proprietory educational
institutions (Except those
whose gross income from
unrelated source exceeds 50%
of their total gross income)

10% of net taxable income

2. Non Stock Non Profit Hospitals

10% of net taxable income

3. Government owned and

controlled corporations

Normal corporate income tax

4. Exempt government
organizations (GSIS, SSS,
PHIC, PCSO)

Tax exempt

29

Proprietary Educational Institutions

Proprietary Education Institutions
Proprietary educational institutions
shall pay a tax often percent (10%)
on their income. Provided, that if the
gross income from unrelated trade,
business or other activity fifty percent
(50%) of the total gross income
derived by such educational tax
should be 30% on the net income.
30

A Proprietary educational institution is any

private school maintained and administered by
private individuals or groups with an issued
permit to operate from the Department of
Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or
the
Technical
Educational
and
Skills
Development Authority (TESDA)

31

LIMITATIONS:
if the gross income from the
unrelated trade, business or other
activity exceeds fifty (50%) of the total
gross income derived by such
educational
institutions
from
all
sources, the tax to be applied and used
shall be 30% on the entire taxable
income.

32

KINDS OF INCOME TAX

EXEMPTION
Express income tax exemptions,
Intentional income tax exemptions
It could be express or implies immunity, to
particular persons or corporations, or to
persons or corporations of a particular
class.

CONSTITUTIONAL INCOME TAX

EXEMPTIONS
Article XIV of the 1987 Philippine Constitution
to the effect that; All revenues and assets of
non-stock, non-profit educational institutions
used actually, directly, and exclusively for
educational purposes shall be exempt from
taxes and duties.

Organization, Corporation
Exempt from Income Tax
SEC 30 NIRC
A. Labor,
Agricultural
or
horticultural
organization not organized principally for
profit;
B. Mutual savings bank not having a capital
stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit;
35

C. A
beneficiary
society,
order
or
associations, operating for the exclusive
benefit of the members.
D. Cemetery company owned and operated
exclusively for the benefit of its members;
E. Nonstock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes.
36

E. Business league, chamber of commerce,

or board of trade, not organized for profit
and no part of the net income of which
inures to the benefit of any private
stockholder or individual;
F. Civic league or organization not
organized or profit but operated
exclusively for the promotion of social
welfare;
G. A nonstock and nonprofit educational
institution;
H. Government educational Institution;
37

I. Farmers or other mutual typhoon or fire

insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization
for a purely local character, the income of
which consists solely of assessments,
dues, and fees collected from members
for the sole purpose of meeting its
expenses; and
J. Farmers fruit growers, or like association
organized and operated as a sales agent
for the purpose of marketing the products
38
of its members.

Notwithstanding the provisions in the

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

39

REVENUE REGULATION
NO. 2-2011
Filing of Income Tax Return and/or
Annual Information Return by
Individuals, including Estates and
Trusts
40

Revenue Memorandum
Circular No. 4-2013
Requiring Tax-Exempt Hospital
to secure Revalidated Tax
Exemption Rulings/Certificates
41

Revenue Memorandum
Circular No. 35-2012
Clarifying the Taxability of Clubs
Organized and Operated
Exclusively for Pleasure,
Recreation, and Other Non-Profit
Purposes.

Income Tax of Clubs

Clubs which are organized and
operated exclusively for
pleasure, recreation, and other
non-profit purposes are subject
to income tax

Value Added Tax of Clubs

A non-stock, non-profit organization
or government entity is liable to pay
VAT on the sale of goods or
services.

REVENUE MEMORANDUM
ORDER NO. 20-2013
Prescribing the Policies and Guidelines in
the Issuance of Tax Exemption Rulings to
Qualified Non-Stock, Non-Profit
Corporations and Associations Under
Section 30 of the National Internal Revenue
Code of 1997, As Amended
45

Under Section 30 of the National

Internal Revenue Code of 1997 (NIRC), as
amended, certain corporations and
associations are exempt from paying on
income received by them as such. The
Bureau of Internal Revenue (Bureau)
accords tax-exempt status to these
corporations and associations by way of
confirmatory BIR rulings or certificates of tax
exemption which are issued after due
evaluation of documents submitted by said
corporations and associations.
46

Applications for Tax Exemption and

Revalidation.Corporations and associations
enumerated under Section 30 of the NIRC, as
amended, including those which have been
issued tax exemption rulings/certificates prior
to June 30, 2012, shall file their respective
Applications for Tax Exemption/Revalidation
with the Revenue District Office (RDO) where they
are registered. Only corporations or associations
that are duly qualified under Section 30 of the
NIRC, as amended, shall be issued Tax Exemption
Rulings
47

Transitory Provisions. Tax exemption

rulings or certificates issued to corporations
or associations listed under Section 30 of
the NIRC, as amended, prior to June 30,
2012 shall be valid until December 31, 2013.
Tax exemption rulings or certificates issued
after June 30, 2012 shall continue to be
valid for a period of three(3) years form date
of issuance, unless sooner revoked or
cancelled.
48

Revenue Memorandum
Circular No. 9-2013
Clarifying the Taxability of Association
Dues, Membership Fees, and Other
Assessments/Charges Collected by
Homeowners Associations

Income Tax
-the amounts paid in as dues or fees by
homeowner-members of a homeowners association
form part of the gross income of the latter subject to
income tax. This is because a homeowners
association furnishes its members with benefits,
advantages, and privileges in return for such
payments. For tax purpose, the association dues
membership fees and other assessments/charges
collected by a homeowners association constitute
income payments or compensation for beneficial
services it provides to its members and tenants.

Value-Added Tax (VAT) and

Percentage Tax
Association dues, membership fees, and
other assessments/charges collected by a
homeowners association are subject to VAT
since they constitute income payment or
compensation for the beneficial services it
provides to its homeowner-members.

MINIMUM CORPORATE INCOME TAX ON

DOMESTIC CORPORATIONS

1. Imposition of Tax A minimum

corporate income tax of two percent
(2%) of the gross income as of the
end of the taxable year, beginning
on the fourth taxable year
immediately following the year in
which such corporation commenced
its business
52

2. Carry Forward of Excess Minimum

Tax Any excess of the minimum
corporate income tax over the normal
income tax shall be carried forward and
credited against the normal income tax
for the three (3) immediately succeeding
taxable
years.

53

Exceptions the minimum corporate income

tax shall not be imposed upon any of the
following:
A. Domestic corporations operating as
propriety educational institutions;
B. Domestic corporations engaged in
hospital operations which are non profit
subject to tax at ten (10%) on their taxable
income;
54

C. Corporations engaged in business

as depository banks under
expanded foreign currency deposits
system
D. Firms that are taxed under a special
income tax regime such as those in
the PEZA law and the Bases
Convention Development Act
55

REVENUE REGULATION 12-2007

MINIMUM CORPORATE INCOME TAX (MCIT)
ON DOMESTIC CORPORATIONS

A minimum corporate income tax (MCIT) of

two percent (2%) of the gross income as of
the end of the taxable year (whether
calendar or fiscal year, depending on the
accounting period employed) is hereby
imposed upon any domestic corporation
beginning on the fourth (4th) taxable year
immediately following the taxable year in
which such corporation commenced its
business operations.
56

The computation and the payment of MCIT, shall likewise

apply at the time of filing the quarterly corporate income tax.
Thus, in the computation of the tax due for the taxable
quarter, if the computed quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be paid for such
taxable quarter at the time of filing the quarterly corporate
income tax return shall be the MCIT which is two percent
(2%) of the gross income as of the end of the taxable
quarter. Expanded withholding tax, quarterly corporate
income tax payments under the normal income tax, and the
MCIT paid in the previous taxable quarter/s are allowed to
be applied against the quarterly MCIT due.

57

Exception on Minimum Corporate

Income Tax (MCIT) on Resident
Foreign Corporation
a) Resident foreign corporations engaged in
business as international carrier subject to tax
at two and one-half percent (2 %) of their
Gross Philippine Billings;
b) Resident foreign corporation engaged in
business as Offshore Banking Units (OBUs) on
their income from foreign currency transactions
with local commercial banks, including branches
of foreign banks, foreign to final income tax at ten
percent (10%) of such income; and
58

Exception on Minimum Corporate

Income Tax (MCIT) on Resident
Foreign Corporation
c) Residents foreign corporations engaged in
business as regional operating
headquarters subject to tax at ten percent
(10%) of their taxable income.
d) Firms that are taxed under a special income
tax regime such as those in accordance with
RA 7916 and 7227 (the PEZA law and the
Bases Conversion Development Act,
respectively).
59

Imposition of Improperly
Accumulated Earnings Tax
A. In General In addition to other taxes
imposed, there is hereby imposed for
each taxable year on the improperly
accumulate taxable income of each
corporation, an improperly accumulated
earnings tax equal to ten percent (10%)
of the improperly accumulated taxable
income.
60

Corporations not subject to IAET

Banks and other non-bank financial
intermediaries;
Insurance companies;
Publicly-held corporations;
Taxable partnerships;
General professional partnerships;
Enterprises duly registered with the
Philippine Economic Zone Authority (PEZA

61

DEDUCTIONS FROM
GROSS INCOME
a. The itemized deduction
b. The optional standard deduction
c. The special deductions and in special
laws like the BOI law (E.O. 226)
62

Deductions from Gross Income

Deductions are items or amounts which the
law allows to be deducted from the gross
income.

Time for availing deductions

A taxpayer has the right to deduct all
authorize expense for the taxable year. He
can not deduct them from the income of the
next or any succeeding year.
63

Kinds of deductions
1. Deductions from compensation income of
individual taxpayers.
2. Deductions from business and / or
professional
income
of
individual
taxpayers.
3. Deductions from corporate income.
4. Special deductions.

64

REVENUE REGULATIONS
NO. 16-2008
Optional Standard Deduction (OSD)
Allowed to Individuals and Corporations
in Computing their Taxable Income

65

PERSONS COVERED:
1. Individuals:
i. Resident Citizen
ii. Non-resident citizen
iii. Resident Alien
iv. Taxable estates and trusts
2. Corporations:
i. Domestic corporation
ii. Resident foreign corporation
66

DETERMINATION OF THE AMOUNT OF

OPTIONAL STANDARD DEDUCTION FOR
INDIVIDUALS.
The OSD allowed to individual taxpayers
shall be a maximum of forty percent (40%) of
gross sales or gross receipts during the taxable
year. If the individual is on the accrual basis of
accounting for his income and deductions, the
OSD shall be based on the gross sales during
the taxable year. In the other hand, if the
individual employs the cash basis of accounting
for his income and deductions, the OSD shall be
based on his gross receipts during the taxable
year.
67

EXAMPLES IN DETERMINING THE BASIS

OF THE 40% OSD FOR INDIVIDUALS AND
CORPORATIONS.
Suppose a retailer of goods, whose accounting
method is under the accrual basis, has a gross
sales of P1,000,000.00 with a cost of sales
amounting to P800,00.

68

Gross Sales

if Individual

If Corporation

P1,000,000

P1,000,000

Less: Cost of Goods Sold

Basis of the OSD
X OSD Rate (maximum)
OSD Amount

800,000
P1,000,000
.40
P 400,000
==============

200,000
.40

P
80,000
==============

69

Gross Sales

If Individual

If Corporation

P1,000,000

P1,000,000

Less: Cost of Sales

Gross Sales/Gross
Less: OSD (maximum)

800,000
P1,000,000
400,000

Net Income

P 600,000

Less Personal Exemption

Additional Exemption
4x25,000
Taxable Income

(50,000)
(100,000)
______________
450,000
==============
187,000

Income Tax

200,000
80,000

P 120,000
==============
______________
120,000
==============
36,000

70

REVENUE REGULATIONS
NO. 2-2010
Amendment to Sections 6 and 7 of Revenue
Regulations No. 16-2008 with Respect to the
Determination of the Optional Standard
Deduction (OSD) of General Professional
Partnerships (GPPs) and the Partners
Thereof, As Well as the Manner and Period
for Making the Election to Claim OSD in the
Income Tax Returns
71

RMC NO. 3-2012

Share in General Professional Partnership

Not exceeding P720,000 per year 10%

Exceeding P720,000 per year 20%

72

BUSINESS EXPENSES
A. Connected with the taxpayers trade or
business (business related deductions).

1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad Debts

6. Depreciation
7. Depletion
8. Research and
Development
9. Contributions to pension
trusts
73

B. Not connected with the taxpayers trade of

business (non-business deductions).

10. Charitable and other contributions

11. Optional standard deduction
12. Premium payment on health and/or
hospitalization insurance.

74

ITEMIZED DEDUCTION
There shall be allowed as deduction from
gross income all the ordinary and
necessary expenses paid incurred during
the taxable year in carrying on or which
are
directly
attributable
to,
the
development, management, operation
and/or conduct of the trade, business or
exercise of a profession including a
reasonable allowance for salaries, travel,
rental and entertainment expenses.
75

BUSINESS EXPENSES
1. It must be ordinary and necessary;
2. It must be paid or incurred during the taxable
year;
3. It must be paid on incurred in carrying on or
which are directly attributable to the
development, management, operation and/or
conduct of trade, business or exercise of
profession;
4. It must be supported by adequate invoices or
receipts;
5. The tax required to be withheld on the
76
expense paid or payable.

ITEMIZED DEDUCTIONS
Requisites for deductibility
1. The expense must be ordinary and
necessary. There is no hard and fast
rule
on the matter.
It depends upon particular facts such
as, the type of business (custom),
intention of the taxpayer, time, place
and prevailing circumstances.
The
Supreme Court has never attempted to
define with precision the terms ordinary
and necessary.
77

GUIDING PRINCIPLES
Ordinary, when it is normal (common or usual) in
relation to the business of the taxpayer and the
surrounding circumstances.
Necessary, where it is appropriate and helpful in
the development of the taxpayers business. It is
intended to realize a profit or to minimize a loss
(Visayan Cebu Terminal Co. V. Collector, CTA
Case No. 28, 29 June 1957).
Ransom money paid to secure the return of an
individual is not deductible as it has nothing to
do with profit-making
78

 Expenses are considered ordinary and

necessary if they are directly attributable
to development, management, operation,
and or conduct of the trade or business of
the taxpayer, or in the exercise of the
taxpayers profession.

79

The expenses must be incurred

in trade or business carried on by
the taxpayer This means that
the same is not incurred in the
trade or business of another.

80

The expenses must be substantiated by

proof
Receipts are the best proof. Burden of
proof lies upon the taxpayer.
Even if no records/receipts are
available, the oral testimony of a CPA,
if not contradicted by the government
is sufficient (Basilan Estates v. Com.,
G.R. No. L22494, 5 September 1967).

81

Paid or incurred during the taxable year

Cash basis method deducts
expenses in the year in which they are
paid.
Accrual basis method recognizes
expenses in the year they accrue.

82

Cost of goods sold in computing gross

income
Cost of goods sold shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present location
and use.
For a trading or merchandising concern, it includes
the following:
1.Invoice cost of the goods sold.
2.Import duties.
3.Freight in transporting the goods to the place
where the goods are actually sold, and
4.Insurance while the goods are in transit.
83

For a manufacturing concern, cost of goods

manufactured and sold shall include the
following:
1.All costs of production of finished goods
such as:
a. Raw materials used
b. Direct labor
c. Manufacturing overhead
2.Freight cost;
3.Insurance premiums; and
4.Other costs incurred to bring the raw
84
materials to the factory warehouse.

Formula to compute gross income:

In the case of seller of goods:
Gross sales
Less Sales returns
Sales discounts
Cost of goods sold
Gross Income

xx
(x x)
(x x)
(x x)
xx

85

In the case of seller of services:

Gross receipts
Less
Sales discounts
Cost of services
Gross Income

xx
(x x)
(x x)
xx

86

Cost of good sold 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.
For trading or merchandising concern:
Invoice cost of goods sold
Add: Import duties
Freight in transporting the goods to the
place where goods are actually
sold
Insurance while the goods are in transit
Cost of goods sold
xx

xx

xx
xx
87

For manufacturing concern:

Raw materials used
xx
Direct labor
xx
Manufacturing overhead
xx
Freight cost
xx
Insurance premiums
xx
Other costs incurred to bring the raw
materials to the factory or warehouse x x
Cost of goods sold/Cost of goods
manufacture & sold
xx
88

Gross receipts means amounts actually or

constructively received during the taxable
year. However, for taxpayers engaged as
seller of services but employing the accrual
basis of accounting for their income, the term
gross receipts shall mean amounts earned
as gross revenue during the taxable year.

89

Cost of services means all direct costs and

expenses necessarily incurred to provide the
services required by the customers and clients
including:
1)Salaries and employee benefits of personnel,
consultants and specialists directly rendering the
services, and
2)Cost of facilities directly utilized in providing the
service such as depreciation or rental of equipment
used and cost of supplies.

90

Expenses must not be against public

policy, public moral or law
Fines and penalties
Attorneys
fee
incurred
in
defending civil action based on
illegal act deductible provided it
is business connected..

91

REVENUE REGULATIONS NO. 10-2002

Authorizing the Imposition of a Ceiling on Entertainment,
Amusement and Recreational Expense
Coverage:
a.Individuals engaged in business, including taxable
estates and trusts;
b. Individuals engaged in the practice of profession;
c. Domestic corporations
d. Resident foreign corporations;
e. General professional partnerships, including its
members
92

CEILING ON ENTERTAINMENT, AMUSEMENT,

AND RECREATION EXPENSE
Actual
entertainment,
amusement
and
recreation expenses paid or incurred within the
taxable year by the taxpayer, but in no case
shall such deduction exceed of 1% of net
sales
(i.e.,
gross
sales
less
sales
returns/allowances and sales discounts) for
taxpayers engaged in sale of goods or
properties; or 1% of net revenue (I.e., gross
revenue less discounts) for taxpayers engaged
in sale of services, including exercise of
profession and use or lease of properties.
93

NET SALES/NET REVENUE X ACTUAL EXPENSE

TOTAL NET SALES AND NET REVENUE

94

ILLUSTRATION:
ERA Corporation is engaged in the sale of
goods and services with net sales/net
revenue of P200,000 and P100,000,
respectively. The actual entertainment,
amusement and recreation expense for
the taxable quarter totaled to P3,000.

95

*Appointment Formula
Sales of Goods (P200,000 x 0.50%)
Sales of Services (P100,000 x 1%)
**Maximum Percentage Ceiling
Sale of Goods (P200,000 x 0.50%)
Sale of Services (P100,000 x 1%)

96

REQUISITES for DEDUCTABILITY of

INTEREST EXPENSE:
A. These must be an indebtedness;
B. There should be an interest expense paid or
incurred upon such indebtedness;
C. The indebtedness must be that of the
taxpayer;
D. The indebtedness must be connected with
the taxpayers trade, business or exercise of
profession;
E. The interest expense must have been paid
or incurred during the taxable year;
97

F. The interest must have been stipulated

in writing;
G. The interest must be legally due;
H. The interest payment arrangement
must not between related taxpayers;
I. In case of interest incurred to acquire
property used in trade, business or
exercise of profession, the same was
not treated as a capital expenditure.

98

INTEREST
In General
The amount of interest paid or incurred
within the taxable year on indebtedness in
connection with the taxpayer profession,
trade or business shall be allowed as
deduction from gross income: Provided,
however, that the taxpayers otherwise
allowable deduction for interest expense
shall be reduced by an amount equal to
33% of the interest income subjected to
final tax:

99

Example:
Assume that a taxpayer incurred in 2012,
interest expense amounting to P100,000. This is
OTHERWISE ALLOWABLE DEDUCTION FOR
INTEREST EXPENSE but it will be reduced by
an amount equal to the prescribed percentage
of interest income subjected to the final tax.
Thus, if in 2012, the taxpayer received P60,000
interest income on which the final tax was
withheld and remitted to the BIR by the payor of
such income, then the deductible amount of
interest will be computed as follows:
100

Total interest expense

Less: 33% of P60,000
AMOUNT DEDUCTIBLE

P100,000

19,800
P 80,200

Exceptions
No deduction shall be allowed in respect of
interest.

101

TAXES
All taxes are deductible except:
1. Income
2. Estate Tax
3. Energy Tax
4. Special Assessment Tax
5. Value Added Tax
6. Amnesty Tax
7. 10% Penalty Tax on undue
accountabilities of profit
8. Penalty (25% surcharge, 50%
surcharge compensation payment

102

LOSSES
Requisites for the deductibility of a loss.
1. The loss must be incurred in trade, profession, or
business of the taxpayer, or any transaction
entered into for profit;
2. It must be actually sustained within the taxable
year;
3. It must be evidenced by a closed and completed
transaction;
4. It must not be compensated for by insurance or
other form of indemnity; and
5. The taxpayer has filed a sworn declaration of loss
within 45 days after the date of the occurrence of
casualty or robbery, theft, or embezzlement.
103

Requirement for the substantiation of a loss.

The taxpayer bears the burden of proving and
substantiating his claim for deduction for loss
and should com,ply with the following
substantiation requirements:
1. A sworn declaration of loss must be filed
within the period prescribed; and
2. Proof of the elements of the loss claimed,
such as the actual nature and occurrence of the
event and the amount of the loss
104

KINDS OF LOSSES
a. Ordinary losses those incurred in trade or
business.
b. Those incurred in any transaction entered
for profit though not connected with the
trade, or business.
c. Casualty Losses those incurred by property
connected with the trade or business, if the
loss arises from fire, storm, shipwreck, or
other casualties or from robbery, theft or
embezzlement.
105

d. Capital losses deductible only to the extent

of capital gains:
- Losses from sale or exchange of capital
assets;
Losses resulting from securities
becoming worthless which are capital
assets.

106

Loss on Obsolescent
1. Goods for Sale
2. Supplies

107

Requisites for deductibility

(Rev. Reg. No. 12-77)
a. Sworn declaration of loss must be filed with the
BIR
i.
Nature of the event giving rise to loss and
time of its occurrence
ii. Description of the damaged property and its
location.
iii. Items needed to compute the loss such as
cost or other basis of the property, depreciation
allowed if any, value of the property before and
after the event, cost of repair.
iv. Amount of insurance or other compensation
108
received or receivable.

Requisites for deductibility

(Rev. Reg. No. 12-77)
b. Filed through the nearest RDO within 45 days
after the date of the occurrence.
i. Casualty loss documentary proof of costs,
photograph showing extent of damage, condition
or value of the property after it was repaired,
restored or replaced.
ii.
Robbery, theft or embezzlement losses
amount of loss. Police report is necessary
although not conclusive proof of the loss arising
therefrom.
109

Loss which are not allowed by law to be

deducted from Gross Income.
1.Loss on voluntary removal of building on land
with the view to erecting another building;
2.Wagering losses not covered by wagering
gains;
3.Capital losses not covered by capital gains
4.Losses from exchanged of property in
corporate readjustment;
5.Losses from illegal transactions;
6.Losses from exchanges of property where the
property received is not substantially different
from the property disposed of;
7.Losses from sales or exchanges of property
between related taxpayers.
110

NET OPERATING LOSS CARRY OVER

(NOLCO)
A 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 years immediately
following the year of such loss.
111

1.) CONDITIONS
Any net loss incurred in a taxable year
during which the taxpayer was exempt
from tax shall not be allowed
A taxpayer: NOT Entitled to deduct a
NET operating loss incurred in a taxable
year during which He enjoys income tax
exemption under incentive or special
lows
112

Bad Debts The requisites for deductibility of

bad debts are:
1. There must be an existing indebtedness due
to the taxpayer which must be valid and legally
demandable;
2. The same must be connected with the
taxpayers trade, business or practice of
profession;
3. The same
must not be sustained in
transaction entered into between related parties;

113

4. The same must be actually charged off the

books of accounts of the taxpayer as of the end
of the taxable year;
5. The same must be actually charged off the
books of accounts of the taxpayer as of the end
of the taxable year;
* Debt is charged-off within the taxable year.
Partial writing-off is not allowed, it must be
charged-off in full or not at all. (Fernandez
Hermanos. Inc. vs. Comm.2DCRA552)
114

DEPRECIATION
Requisites that must concur the deduction or
Depreciation from Gross Income
The allowance for depreciation must be
reasonable;
It must be for property used in the trade or
business;
It must be charged off during the taxable year;
and
A statement on the allowance must be
attached to the return.
115

Why properties are NOT subject

to Depreciation?
1. Inventories or stock in trade;
2. Land, apart from the improvement or
physical development added to it;
3. Bodies of minerals which through the
process of removal suffer depletion
allowance;
4. Automobiles or other transaction equipment
used solely by the taxpayer for pleasure;
116

5. Building used solely by the taxpayer as his

residence;
6. Furniture or furnishings used in the said building;
7. Personal effects or clothing except properties or
customers used exclusively in a business such
as theatrical business;
8. Intangibles the use of which in business or trade
is not of limited duration; and
9. Incidental repairs which neither materially add to
the value of the property nor appreciably prolong
the life in an ordinary efficient operating
condition.
117

Revenue
Regulations No. 122012
Deductibility of Depreciation
Expenses as it Relates to Purchase
of Vehicles and Other Expenses
Related Thereto, and Input taxes
Allowed

118

The following guidelines shall be observed in

determining whether depreciation expenses can
be claimed or not on account of Vehicles
capitalized by the taxpayer or in claiming other
expenses
and input
account
said
A. No deduction
fromtaxes
grosson
income
for of
depreciation
shall be allowed unless the taxpayer
Vehicle:
substantiates the purchase with sufficient
evidence, such as official receipts or other
adequate records which contain the following,
among others:
I.

Specific Motor Vehicle identification Number,

Chassis Number or other registrable identification
numbers of the Vehicle;
119

II.

The total price of the specific Vehicle subject to

depreciation; and
III. The direct connection or relation of the Vehicle to
the development, management, operations, and/or
conduct of the trade or business or profession of the
taxpayer;
B. Only one Vehicle for land transport is allowed for the
use of an official or employee, the value of which
should not exceed Two Million Four Hundred
Thousand Pesos (Php 2,400,000.00);
C. No depreciation shall be allowed for yachts,
helicopters, airplanes and/or aircrafts, and land
vehicles which exceed the above threshold amount,
unless the taxpayers main line of business is
transport operations or lease of transportation
equipment and the vehicles purchased are used in
said operations;
120

D. All maintenance expenses on account of

non-depreciable Vehicles for taxation
purposes are disallowed in its entirely;
E. The input taxes on the purchase of nondepreciable Vehicles and all input taxes
on maintenance expenses incurred
thereon are likewise disallowed for
taxation purposes.

121

DEPLETION
Depletion is the exhaustion of natural
resources like mines and oil and gas wells as a
result of production or severance from such
mines or wells a result of production or
severance from such mines or wells.
The Formula is :

122

RESEARCH AND DEVELOPMENT

EXPENDITURES
Methods of treating research and development
The Taxpayer has the option to treat research and
development expenditures under one of the
following two methods
1. Currently deductible as ordinary and
necessary expense
Research or Development expenditures paid
or incurred by a taxpayer during the taxable
year in connection with his trade, business or
profession and are not chargeable to capital
123
account may be deducted as expenses

2. Treatment as deferred expenses

Deferred expenses are allowable as
deduction ratably over a period of no less
than 60 consecutive months beginning with
the month in which the taxpayer first realizes
benefits from the expenditures.

124

LIMITATIONS
The option to elect either tax treatment of
research and development expenditure is not
applicable to any expenditure.
For the acquisition or improvement of land, or
for the improvement of property to be used in
connection with research and development of
a character which is subject to depreciation
and depletion.
125

CHARITABLE AND OTHER

CONTRIBUTION
Corporation or association to whom
contributions or gifts may be made or paid
and claimed as deduction, the amount of
which is subject to limitations.
The limitation is 10% for individual and 5%
for corporations, of the taxable income
derived from trade, business or profession.
126

Valuation of deductible contributions

The amount of contributions of property other
than money shall based on the acquisition
cost of the said property.
Contribution Deductible in Full
1.Donation to the Government
2.Donation to Certain Foreign Institutions or
International Organizations
3.Donation to Accredited Nongovernment
organization
127

The term Nongovernment organization

means a nonprofit domestic corporation
a. Organization operation exclusively for
scientific research, educational,
character-building and youth and sports
development. Health, social welfare,
cultural or charitable purposes,
b. The level of administrative expense of
which shall, no case to exceed thirty
percent (30%) of the total expenses
128

ITEMS NOT DEDUCTIBLE (SECTION 30)

1. Personal, living or family expenses;
2. Any amount paid out for new building or for
permanent improvements, or betterment
made to increase the value of any property
or estate;
3. Any amount expanded in restoring property
or in making good the exhaustion thereof
for which an allowance is or has been
made.
129

REVENUE REGULATIONS
NO. 12-2013
Amending Section 2.58.5 of Revenue
Regulation No. 2-98. as amended,
Relatives to the Requirements for
Deductibility of Certain Income Payments
(without Withholding Tax)
130

Requirements for Deductibility any income

payments which is otherwise deductible
under the Code shall be allowed as a
deduction from the payors gross income
only if it is shown that the income tax
required to be withheld has been paid to the
Bureau
2% purchases of goods
2% purchases of services

131

No Deduction will also be allowed not

with standing payment of withholding
tax at the time of the audit investigation
or reinvestigation/reconsideration in
case where no withholding of tax was
made in accordance with Secs. 57 and
58 of the Code.

132

Revenue Regulations
No. 11-2013
Filing/Submission of Hard Copy of the
Certificate of Compensation
Payment/Tax Withheld (BIR Form 2316)
Covering Employees Who are Qualified for
Substituted Filing, thereby Amending
Revenue Regulations (RR) No. 2-98
133

REVENUE REGULATIONS
NO. 1-2014
Specifically on the Submission of
Alphabetical List of
Employees/Payees of Income
Payments
134

REVENUE REGULATIONS NO. 6-2013

Regulations Prescribing the Rules on the Taxation of Sale,
Barter, Exchange or Other Disposition of Shares of Stock
Held as Capital Assets
In the case of shares of stock not listed and traded in the
local stock
exchanges, the value of the shares of stock at the time of
sale shall be the fair market value. In determining the value
of the shares, the Adjusted Net Asset Method shall be used
whereby all assets and liabilities are adjusted to fair market
values. The net of adjusted asset minus the liability values is
the indicated value of the equity. For purposes of this section,
the appraised value of real property at the time of sale shall
be the higher
135

A FINAL TAX (Capital Assets)

Definition of Capital Assets {Sec. 39(H)(I)}

Tax Rate 6%
Valuation GSP/FMV/ZONAL
CGT of 6% [Sec 24(D)(I)]
Time of Payment 30 days
Place of Payment Location of Property

136

Retirement Benefits / Separation Pay

Exemptions from withholding tax. The following
income payments are exempted from the
requirement of withholding tax.
Remunerations received as an incident of
employment as follows:
a)Retirement benefits received under Republic
Act under 764180 and those received by officials
and employees of private firms, whether
individual or corporate, under a reasonable
private benefits plan maintained by the employer
which meet the following requirements:
137

Benefits Plan
i. The plan must be reasonable;
ii. The benefit plan must be approved
by the Bureau;
iii. The retiring official or employee
must have been in the services of
the same employer for at least ten
(10) years and is not less than fifty
(50) years of age at the time of
retirement; and
138

Benefits Plan
iv.

The retiring official or employees should not have

previously availed of the privilege under the
retirement benefit plan of the same or another
employer term reasonable private benefit plan
means a pension, gratuity, stock bonus or profitsharing 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, 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
139

b) Any amount received by an official or

employee or by his heirs from sickness or
other physical disability or for any cause
beyond the control of the said official or
employee, or cessation of business.
The phrase for any cause beyond the control
of the said official or employee connotes
involuntariness on the part of the official or
employee
140

Amounts received by reason of involuntary separation remain

from income tax even if the official or the employee, at the
time of separation, had rendered less than ten (10) years of
service and/or is below fifty (50) years of age. Any payment
made by an employer to an employee on account of
dismissal, constitutes compensation regardless of whether the
employer is legally bound by contract, statute or otherwise to
make such payment.
c) Social Security benefits, retirement gratuities, pensions and
other similar benefits received by residents or non-resident
citizens of the Philippines or aliens who come to reside
permanently in the Philippines from foreign government
agencies and other institutions private or public.

141

d) Payments of benefits due or to become due to

any person residing in the Philippines under the
law of the United States administered by the
United States Veterans Administration;
e) Payments of benefits made under the Social
Security System Act
f) Benefits received from the GSIS Act of 1937, as
amended and the retirement gratuity received
by government officials and employees

142

Private Retirement Benefit Plan

Fees to be paid by the employer:
1. Upon issuance of the certificate of qualification
a) Employers not having more than 50
employees
b) Employers having more than 50 but
not over 100 employees
c) Employers having more than
100 employees

P2,000.00
3,000.00
5,000.00

143

Private Retirement Benefit Plan

2. Upon issuance of an amendatory certificate of
qualification
a) Employers not having more than
50 employees
P2,000.00
b) Employers having more than 50
but not over 100 employees
3,000.00
c) Employers having more than 100
employees
5,000.00
Provided, however that employers not having more than
five (5) employees shall be exempt from the fees
prescribed
144

Fringe Benefits Tax

145

Rank and File Employees means all employees whoa

re holding neither managerial or supervisory position.
Managerial Employees is one who is vested with
powers or prerogatives to lay and/or to hire, transfer,
suspend, lay-off, employees. Supervisory employees
are those who, in the interest of the employer, effectively
recommend such managerial actions if the exercise of
such authority is not merely routinary or clerical in nature
but requires the use of independent judgement.

146

Special Treatment of Fringe Benefit

Imposition of a final tax
of 32% effective Jan.1, 2000 and
thereafter
Basis of Computation
Grossed-up monetary value of fringe
benefit furnished or granted to the
employee by the employer, whether
an individual or a corporation.
147

Computation of Grossed-Up Monetary Value

In Gen. Divide the actual monetary value
of the fringe benefit by
68% effective Jan.1, 2000 and thereafter
FORMULA:
Monthly rental
100,000
Paid to an executive of a Co.
= 100,000 x 32 = 47,058.88
148

Fringe Benefit
Fringe benefit means any good, service or
other benefit granted in cash or in kind by an
employer to an individual employee (except
and file employees) such as, but not limited
to the ff:
1.Housing
2.Expense Account
3.Vehicle of any kind
4.Household personnel
149

Fringe Benefit
6. Membership fees, dues and other
expenses born by the employer for the
employee in social and athletic clubs
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to employee or
his dependent
10.Life or health insurance and other nonlife insurance premiums.
150

Withholding Taxes

151

PERSON REQUIRED TO DEDUCT

& WITHHOLD
a. In general, any juridical person, whether
or not engaged in trade or business;
b. b. an individual, with respect to payments
made in connection with his trade or
business.
c. c. All government offices including
government owned or controlled
corporation, as well as provincial, city,
municipal governments and barangays.
152

Types of Withholding Taxes

Withholding Tax on Gross Compensation
Expanded or Creditable Withholding Tax
Service Expense
Purchases of goods
Final Withholding Tax (Passive Investment Income)
Interest, Dividends, Royalties, Prizes, Winnings and Capital
Gain
Withholding Tax on Government Money Payment
Income Tax
VAT
Percentage Tax
Quarterly Withholding Tax
Individual Engage in Business or Profession
Corporation
153

Duties & Obligations of a

Withholding Agent

To register
To deduct and withhold
To remit the tax withheld
To file withholding tax returns
To issue withholding tax
certificate
154

Time of Withholding
A. Ordinarily, the obligation of the payor to deduct
and withhold arises:
at the time an income payment is paid or payable.
income payment is accrued or recorded as an
expense or asset,
whichever is applicable in the payors books, whichever
is comes first.

155

Gross Compensation Income

Salaries & Wages

Overtime Pay
Emergency Pay
Loyalty Pay
Directors Pay

156

Gross Compensation Income

Allowances
Representation & Transportation
Cost of Living
Clothing
Housing
Medical
Meal
Laundry
Others
157

Gross Compensation Income

Vacation Leave
Bonus/Incentives
Christmas Bonus
Incentive Pay
Productivity Bonus
Anniversary Bonus

Commission
Profit Sharing
Retirement Benefit
158

Tax Due = Tax Withheld

Example:
Tax Payer

Income Tax
(Jan. to Dec.)

30,000

30,000

30,000

Less Tax
Withheld (Jan. to
Nov.)

28,000

33,000

30,000

Withholding Tax
for December
Refund Jan. 20

2,000
None

None
3,000

None
None
159

R.A. 9504
Minimum Wage Tax
Exemption
Revenue Regulations No.
10-2008
July 8, 2008
160

The minimum wage earners as

defines in this Code shall be exempt from
the payment of income tax on their taxable
income: provided, further, that the holiday
pay, overtime pay, night shift differential
pay and hazard pay received by such
minimum wage earners shall likewise be
exempt from income tax.

161

Employee who receives/earns

additional compensation such as
commissions,
honoraria,
fringe
benefits, benefits in excess of the
allowable statutory amount of
P30,000.00, taxable allowances and
other taxable.

162

MWEs receiving other income,

such as income from the conduct of
trade, business, or practice of
profession, except income subject
to final tax, in addition to
compensation income are not
exempted from income tax on their
entire income earned during the
taxable year.
163

Allowance of Personal Exemption for

Individual Taxpayer

A basic personal exemption amounting to

Fifty thousand pesos (P50,000) for each individual
taxpayer.
In the case or married individuals where only
one of the spouses is having gross income, only
such spouse shall be allowed the personal
exemption.
Additional Exemption for Dependent there
shall be allowed an additional exemption of twentyfive thousand pesos (P25,000) for each dependent
not exceeding four (4).
164

A dependent means a legitimate,

illegitimate, or legally adopted child
chiefly dependent upon and living with
the taxpayer if such dependent is not
more than twenty-one (21) years of age,
unmarried, and not gainfully employed
or if such dependent, regardless of age,
is incapable of self-support.

165

166

de minimis benefits not subject to income

tax, hence, not subject to withholding tax on
compensation income of both managerial
and rank and file employees:
a. Monetized unused vacation leave
credits of employees not exceeding ten
(10) days during the year;
b. Medical cash allowance to dependents
of employees not exceeding P750.00
per employee per semester of P125 per
month;
167

c. Rice subsidy of P1,500.00 or one (1)

sack of 50-kg. rice per month amounting
to not more than P1,500.00;
d. Uniforms and clothing allowance not
exceeding P4,000.00 per annum;
e. Actual yearly medical benefits not
exceeding P10,000.00 per annum;
f. Laundry allowance not exceeding
P300.00 per month;

168

g. Employees achievement awards, e.g.,for

length of service or safety achievement,
which must be in the form of a tangible
personal property other than cash or gift
certificate, with an annual monetary
value not exceeding P10,000.00;

169

h. Gifts given during Christmas and major

anniversary celebrations not exceeding
P5,000.00 per employee per annum;
i. Daily meal allowance for overtime work
not exceeding twenty five percent (25%)
of the basic minimum wage.

170

Any amount given by the

employer as benefits to its
employees, whether classified as
de minimis benefits or fringe
benefits,
shall
constitute
as
deductible.

171

Requisites of Substituted Filing

The employee receives purely compensation
income (regardless of amount during the
taxable year)
The employee receives income only from one
employer during the taxable year
The amount of tax due from the employee at
the end of the year equals the amount of tax
withheld by the employer
The employees spouse also complies with all
three conditions stated above
172

Persons Not Qualified for

Substituted Filing
Individuals deriving compensation income
from two or more employers concurrently
or successively at any time during the
taxable year
Employees deriving compensation income
regardless of the amount, whether from a
single or several employees during the
calendar year, the income of which has
not been withheld correctly
173

Persons Not Qualified for

Substituted Filing
Individuals receiving purely compensation
income from a single employer, although the
income tax of which has been correctly withheld,
but whose spouse is not entitled to substituted
filing
Non-resident aliens engaged in trade or
business in the Philippines deriving purely
compensation income or compensation income
and other business or profession related income
174

Final Withholding Tax

Interest
Dividend
Prizes
Winning
Royalty
Capital Gain
175

Interest
Interest on any currency bank deposit
and yield from deposit substitutes,
trust funds and similar arrangements
20%
Income from depository bank under
FCDU system 7-1/2% (nonresidents are exempt)
176

Interest
Interest from long term deposit or
investment EXEMPT from income tax.
But is preterminated before 5th year,
entire interest income will be subject to
final tax based on remaining maturity:
4 years to less than 5 years
3 years to less than 4 years
2 years to less than 3 years

- 5%
- 12%
- 20%
177

Dividends
Cash and/or Property Dividends 10%
A final tax at the following rates shall be
imposed upon the cash and/or property
dividends actually or constructively
received by an individual (except a
general professional partnership)
PRIZES
Exceeding P10,000 10%

178

Intercorporate dividends
Intercorporate dividends received from a
domestic corporation by another domestic
corporation and by a resident foreign
corporation are no longer subject to tax.

179

Applicable withholding Tax Rates on the

Dividend Shares
Set forth below are the applicable rates of withholding taxes due on the
Dividend Shares received by the Receiving Shareholders in
accordance with applicable laws.
Shareholder
I.

Tax Rates

Individuals

Philippine Citizens

10%

Resident Alien

10%

Nonresident alien engaged in

trade or business in the
Philippines

20%

Nonresident alien

25%

III. Corporation
Domestic Corporations

0%

Resident Foreign Corporations

0%

Nonresident Foreign Corporation

30%

180

Expanded Withholding Tax

An income payment is subject to the expanded
withholding tax if the following conditions concur:
a. An expense is paid or payable by the tax payer, which is
income to
the recipient thereof subject to income tax;
b. The income is fixed or determinable at the time of payment;
c. The income is one of the income payments listed in the
regulations that is subject to withholding tax;
d. The income recipient is a resident of the Philippines liable to
income tax;
e. The payor-withholding agent is also a resident of the
Philippines.

181

Persons exempt from creditable

withholding tax
The withholding of creditable withholding tax shall
not apply to income payments made to the following:

1. National government and its instrumentalities,

including provincial, city or municipal governments
and barangays, except government- owned or
controlled corporations;

2. Persons enjoying exemption from payment of income

taxes pursuant to the provisions of any law, general
or special, such as but not limited to the following:
182

a. Sales of real property by a corporation

which is registered with and certified by
HLURB or HUDCC as engaged in
socialized housing project where the
selling price of the house and lot or only
the lot does not exceed P180,000.00 in
Metro Manila and other highly urbanized
areas and P150,000.00 in other areas;
b. Corporations registered with the BOI,
PEZA, and SBMA, enjoying exemption
from income tax under E.O. 226, R.A.
7916, and R.A. 7227,

183

c. Corporations, which are exempt from income tax under

Section 30 of the Tax Code, such as GSIS, SSS, and
PHIC;
d. General professional partnership; and
e. Joint ventures or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under
a service contract with the government.

184

REVENUE REGULATIONS NO. 6-2009

AMENDING FURTHER PERTINENT PROVISIONS OF
REVENUE REGULATIONS (RR) NO. 2-98, AS
AMENDED, PROVIDING FOR AN ADDITIONAL
CRITERIA IN THE DETERMINATION OF TOP 20,000
PRIVATE CORPORATIONS, INCLUDING THE
THRESHOLD ON THEIR PURCHASES OF
AGRICULTURAL PRODUCTS, AND ADDITIONAL
TRANSACTIONS SUBJECT TO CREDITABLE
WITHHOLDING TAX ON INCOME PAYMENTS MADE
BY THE TOP FIVE THOUSAND (5,000) INDIVIDUAL
TAXPAYERS ENGAGED IN TRADE/BUSINESS OR
PRACTICE OF PROFESSION
185

RATE OF TAX
Nature of Income

Citizen/Resident
Alien

Non-Resident Alien
Engaged in Trade or
Business

Non-Resident Alien Not

Engaged in Trade or
Business

20%

20%

25%

10%

10%

25%

3. Interest on Peso savings

deposit

20%

20%

25%

4. Interest on Peso time

deposit

20%

20%

25%

5. Interest income from

depository bank under
the Foreign Currency
Deposit System

7.5 %

Exempt

Exempt

Exempt
5%
12%
20%

Exempt
5%
12%
20%

Exempt
25%
25%
25%

1. Prizes
2.

Royalties
a. Books, literary works
and musical
compositions

6.

Interest income from

long-term holding
period:
>5 years
4 to < 5 years
3 to < 4 years
>3 years

186

RATE OF TAX
Nature of Income

7.

Citizen/Resident
Alien

Non-Resident Alien
Engaged in Trade or
Business

Non-Resident Alien Not

Engaged in Trade or
Business

Share in the net profits

of a partnership subject
to corporate tax
Beginning Jan. 1, 2000

10%

8.

Sale of shares of stock

listed and traded in the
stock exchange sold

12% of 1% of the
gross selling price of
the shares

12% of 1% of the gross

selling price of the
shares

12% of 1% of the gross

selling price of the
shares

9.

Net capital gain on sale

of shares of stock not
traded in the stock
exchange > P100,000
<P100,000

5%
10%

5%
10%

5%
10%

6%

6%

6%

10. Capital gains tax

(CGT)

187

INCOME PAYMENTS SUBJECT TO CREDITABLE

WITHHOLDING TAX
Income payments made by the top twenty
thousand (20,000) private corporations to their
local/resident
supplier
of
goods
and
local/resident supplier of services other than
those covered by other rates of withholding tax
including non-resident aliens engaged in trade or
business in the Philippines. Provided, however,
that for purchases involving agricultural
products in their original state, the tax required
to be withheld under this sub-section shall only
apply to purchases in excess of the
188

Cumulative
amount
of
Three
Hundred
Thousand Pesos (P300,000) within the same
taxable year. For this purpose, agricultural
products in their original state as used in these
regulations, shall only include corn, coconut,
copra, palay, poultry and live stocks.
Supplier of goods-One percent (1%)
Supplier of services-Two percent (2%)

189

Withholding agent
The following persons are constituted as
withholding agents:
1.
2.

3.

In general, any juridical person, whether or not engaged in trade

or business;
An individual, with respect to payment made in connection with
his trade or business. However, insofar as taxable sale, exchange
or transfer of real property is concerned, individual buyers who
are not engaged in trade or business are also constituted as
withholding agents; and
All government offices, including government-owned or controlled
corporations, as well as provincial, city and municipal government
and barangays.
190

Withholding tax based on gross income

1. Gross payments to contractors

- 2%
2. Gross amounts paid by any credit card company
to any business entity representing sale
of goods or service - of 1%
3. Income payments made by the top 20,000
corporations to their regular local suppliers of
a. goods - 1%
b. services
- 2%
4. Income payments by the government on
their purchases of goods from local suppliers
- 2%
5. Income payments made by the top 5,000
individual

191

Withholding tax based on gross

selling price or fair market value,
whichever is higher.
a.

Upon the following values of real property, where the seller/

transferor is habitually engaged in the real state business as per
proof of registration with HLURB or HUDCC:
With a selling price of five hundred thousand
pesos (P500,000.00) oe less
-1.5%
With a selling price of five hundred thousand
pesos (P500,000.00) but not more than
two million pesos (P2,000,000,00)
- 3.0%
With a selling price of more than two million
pesos (P2,000,000.00)
-5.0%
192

With a selling price of more than two million

pesos (P2,000,000.00)
-5.0%
b. Where the seller/transferor is not
habitually engaged
in the real estate business

-6.0%

c. Where the seller/transferor is exempt

from creditable withholding tax in accordance
with Section 2.57.5 of Rev.
Regs. No. 2-98
-Exempt
193

Withholding tax rates

The withholding tax rates applied on income
payments liable to income tax are as follows :
1. Professionals fees for services rendered by individuals :
If gross income for current year exceeds P720,000.00
or professional does not file Sworn Declaration for first
semester of the year with BIR, regardless of gross income
If gross income for current year does not P720,000,00
2. Professional entertainers and athletes, and directors:
If gross income for current year exceeds P720,000.00
If gross income for current year does not P720,000.00
If recipient of professional fees, talent fees, etc. is a
juridical person

-15%

-10%
-15%
-10%
-10%

194

3. Rental income
Real properties
-5%
Personal properties -5%
4. Income payments to certain brokers and agents
-10%
5. Income payments to partners of general professional
partnerships:
-10%
If gross income for current year exceeds P720,000.00
If gross income for current year does not P720,000.00
7. Professional fees paid to medical practitioners:
If gross income for current year exceeds P720,000.00
If gross income for current year does not P720,000.00
8. Income payments made by pre-need companies to funeral
parlor
-1%
9. Income payments to certain contractors
-2%

-15%
-10%
-15%
-10%

195

REVENUE REGULATIONS
NO. 2-2006
Mandatory Attachments of the Summary
Alphalist of Withholding Agents of Income
Payments Subjected to Tax Withheld at
Source (SAWT) to Tax Returns with
Claimed Tax Credits

196

Mandatory Submission
A. Summary Alphalist of Withholding Agents of
Income Payments Subjected to Withholding
Tax (SAWT) and Monthly Alphalist of Payees
(MAP) defined
Summary Alphalist of Withholding Agents /
Payors of Income Payments subjected to
Creditable Withholding Tax at Source
(SAWT) submitted by the payee-recipient
of income.
Monthly Alphalist of Payees (MAP) Annex
B is a consolidated alphalist of income
earners from whom taxes have been
withheld by the payor of income
197

MAP
(Monthly Alphalist of Payees)
Reporting CWT or FWT WITHHELD ON
INCOME PAYEES
1. Monthly return of creditable income taxes withheld
(Form 1601E)
2. Monthly return of final income taxes withheld
(Form 1601F)
3. Monthly return of VAT and other percentage taxes
withheld (Form 1600)
198

FORMAT
Up to 10
In hard copy
withholding agents
or income payees
Taxpayers with
more than 10
withholding agents
or income payees

In a 3.5 inch diskette or CD inside a

sealed letter envelope, in excel or
own extract programs validated
through the BIR validation module;
or using the BIR data entry module)

EFPS filers

In electronic form attached to

electronic return
199

Thank You
and
May GOD Bless You in ALL
the days of your life

200