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Expatax
Tax advice for expats in the Netherlands

INCOMETAXATION

INGENERAL

IncomeTax

Incometaxhasbeendefinedasataxonallyearlyprofitsarisingfromproperty,profession,tradeorbusiness,orasataxona
personsincome,emoluments,profitsandthelike.

Itisgenerallyregardedasanexcisetax.Itisnotlevieduponpersons,property,fundsorprofitsbutupontherightofapersonto
receiveincomeorprofits.

Purposesofincometaxation

1.Toprovidelargeamountsofrevenues.

2.Tooffsetregressivesalesandconsumptiontaxes.

3.Togetherwithestatetax,tomitigatetheevilsarisingfromtheinequalitiesinthedistributionofincomeandwealth,whichare
considereddeterrentstosocialprogress,byimposingaprogressiveschemeoftaxation.

Income

Income,initsbroadsense,meansallwealthwhichflowsintothetaxpayerotherthanasamerereturnoncapital.[Section36,
RevenueRegulations2]

Incomemeansaccessiontowealth,gainorflowofwealth.

Conwiv.CTA[213SCRA83]:Incomemaybedefinedasanamountofmoneycomingtoapersonorcorporationwithinaspecified
time,whetheraspaymentforservices,interest,orprofitfrominvestment.

Commissionerv.BOAC[149SCRA395]:Incomemeanscashreceivedoritsequivalent.Itistheamountofmoneycomingtoa
personwithinaspecifictime.Itisdistinctfromcapitalfor,whilethelatterisafund,incomeisaflow.Asusedinourlaws,incomeis
flowofwealth.Thesourceofanincomeistheproperty,activityorservicethatproducestheincome.Forthesourceofincometobe
consideredascomingfromthePhilippines,itissufficientthatincomeisderivedfromactivitywithinthePhilippines.INBOACscase,
thesaleofticketsinthePhilippinesistheactivitythatproducestheincome.

Fisherv.Trinidad[43Phil973]:Stockdividendisnotanincome.Itmerelyevidencestheinterestofthestockholderintheincreased
capitalofthecorporation.Anincomemaybedefinedastheamountofmoneycomingtoapersonorcorporationwithinaspecified
time,whetheraspaymentforservices,interest,orprofitforinvestment.Amereadvanceinthevalueofpropertyofapersonor
corporationinnosenseconstitutestheincomespecifiedintherevenuelaw.Suchadvanceconstitutesandcanbetreatedmerelyas
anincreaseofcapital.Anincomemeanscashreceivedoritsequivalent.Itdoesnotmeanchosesinactionorunrealizedincrements
inthevalueoftheproperty.

Incomev.capital

Capitalisafundorpropertyexistingatonedistinctpointoftimewhileincomedenotesaflowofwealthduringadefiniteperiodof
time.

Theessentialdifferencebetweencapitalandincomeisthatcapitalisafundorpropertyexistingatonedistinctpointoftimeincome
isaflowofservicesrenderedbythatcapitalbythepaymentofmoneyfromitoranyotherbenefitrenderedbyafundofcapitalin
relationtosuchfundthroughaperiodoftime.Capitaliswealth,incomeistheserviceofwealth.[Madrigalv.Rafferty,38Phil414]

Capitalisthetreewhileincomeisthefruit.

SOURCESOFINCOME

Whatproducesincome?

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Thetermsourceofincomeisnotaplacebuttheproperty,activityorservicethatproducedtheincome.Inthecaseofincome
derivedfromlabor,itistheplacewherethelaborisperformedinthecaseofincomederivedfromtheuseofcapital,itistheplace
wherethecapitalisemployedandinthecaseofprofitsfromthesaleorexchangeofcapitalassets,itistheplacewherethesaleor
transactionoccurs.

Commissionerv.BOAC:Thesourceofanincomeistheproperty,activityorservicethatproducestheincome.Forthesourceof
incometobeconsideredascomingfromthePhilippines,itissufficientthatincomeisderivedfromactivitywithinthePhilippines.IN
BOACscase,thesaleofticketsinthePhilippinesistheactivitythatproducestheincome.Theticketsexchangedhandshereand
paymentsforfareswerealsomadeinPhilippinecurrency.ThesiteofthesourceoftheincomeisthePhilippinesandtheflowof
wealthproceededfromandoccurredinPhilippineterritory,enjoyingtheprotectionaccordedbythePhilippinegovernment.Thus,said
flowofwealthshouldsharetheburdenofsupportingthegovernment.

Sourcesofincome

1.SourceswithinthePhilippines

2.SourceswithoutthePhilippines

3.SourcespartlywithinandpartlywithoutthePhilippines

TAXABLEINCOME

Taxableincome

ThetermtaxableincomemeansthepertinentitemsofgrossincomespecifiedintheNIRC,lessthedeductionsand/orpersonaland
additionalexemptions,ifany,authorizedbysuchtypesofincomebytheNIRCorotherspeciallaws.

Requisitesforincometobetaxable

1.Theremustbeagainorprofit.

2.Thegainmustberealizedorreceived.

3.Thegainmustnotbeexcludedbylawortreatyfromtaxation.

Gainmustberealizedorreceived

Thisimpliesthatnotalleconomicgainsconstitutetaxableincome.Thus,amereincreaseinthevalueofpropertyisnotincomebut
merelyanunrealizedincreaseincapital.

Whenisincomeconsideredreceived?

1.actualreceipt

2.constructivereceipt

Incomeconstructivelyreceived

Incomewhichiscreditedtotheaccountoforsetapartforataxpayerandwhichmaybedrawnuponbyhimatanytimeissubjectto
taxfortheyearduringwhichsocreditedorsetapart,althoughnotthenactuallyreducedtopossession.

Toconstitutereceiptinsuchacase,theincomemustbecreditedtothetaxpayerwithoutanysubstantiallimitationor
restrictionastothetimeormannerofpaymentorconditionuponwhichpaymentistobemade.[Section52,RevenueRegulations2]

LimpanInvestmentCompanydeemedtohaveconstructivelyreceivedrentalpaymentsin1957whentheyweredepositedincourtdue
toitsrefusaltoreceivethem.[Limpanv.CIR,17SCRA703]

Examplesofconstructivereceipt

1.Interestcouponswhichhavematuredandarepayable,buthavenotbeencashed.

2.Defaultedcouponsareincomefortheyearinwhichpaid.

3.Partnersdistributiveshareintheprofitsofageneralprofessionalpartnershipisregardedasreceivedbythepartner,althoughnotyet
distributed.

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Arethefollowingitemsincome?

FoundtreasureYES

PunitivedamagesYES

DamagesforbreachofpromiseoralienationofaffectionYES

WorthlessdebtssubsequentlycollectedYES

TaxrefundNO(butyesifthetaxwaspreviouslyallowedasadeductionandsubsequentlyrefundedorcredited,asbenefitaccrued
tothetaxpayerseediscussionontaxasadeductibleitem)

NoncashbenefitsYES

IncomefromillegalsourcesYES

PsychologicalbenefitsofworkNO

GiveawayprizesYES

Scholarships/fellowshipsYES

StockdividendsNO

Teststodeterminerealizationofincome

1.Severancetest

2.Substantialalterationofinteresttest

3.Flowofwealthtest

Severancetest

Ascapitalorinvestmentisnotincomesubjecttotax,thegainorprofitderivedfromtheexchangeortransactionofsaidcapitalby
thetaxpayerforhisseparateuse,benefitanddisposalisincomesubjecttotax.

Substantialalterationofinteresttest

Incomeisearnedwhenthereisasubstantialalterationoftheinterestofataxpayer,i.e.increaseinproportionateshareofa
stockholderinacorporation.

Incometobereturnablefortaxationmustbefullyandcompletelyrealized.Wherethereisnoseparationofgainorprofit,or
separationofincreaseinvaluefromcapital,thereisnoincomesubjecttotax.

Thus,stockdividendsarenotincomesubjecttotaxonthepartoftheshareholderforhehadthesameproportionateinterestinthe
assetsofthecorporationashehadbefore,andthestockholderwasnoricherandthecorporationnopoorerafterthedeclarationof
thedividend.

However,ifthepreexistingproportionateinterestofthestockholderissubstantiallyaltered,theincomeisconsideredderived
totheextentofthebenefitreceived.

Moreover,ifasaresultofanexchangeofstocks,thepersonreceivedsomethingofvaluewhichareessentiallyandfundamentally
differentfromwhathehadbeforetheexchange,incomeisrealizedwithinthemeaningoftherevenuelaw.

Flowofwealthtest

Theessentialdifferencebetweencapitalandincomeisthatcapitalisafundwhereasincomeistheflowofwealthcomingfromsuch
fundcapitalisthetree,incomeisthefruit.Incomeistheflowofwealthotherthanasamerereturnofcapital.

CLASSESOFINCOME

Kindsoftaxableincomeorgain

1.capitalgain
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2.ordinarygain

a.businessincome

b.compensationincome

c.passiveincome

d.otherincomefromwhateversourcederivedi.e.foundtreasure

Capitalgains

Capitalgainsaregainsorincomefromthesaleorexchangeofcapitalassets.Theseinclude:

1.Incomefromdealingsinsharesofstockofdomesticcorporationwhetherornotthroughthestockexchange

2.IncomefromdealingsinrealpropertylocatedinthePhilippinesand

3.Incomefromdealingsinothercapitalassetsotherthan(a)and(b).

Ordinarygains

Ordinarygainsaregainsorincomefromthesaleorexchangeofpropertywhicharenotcapitalassets.

Businessincome

1.Incomefromtrading,merchandising,manufacturingormining

2.Incomefrompracticeofprofession

Note:Thetermtradeorbusinessincludestheperformanceofthefunctionsofapublicoffice.[Section22(S),NIRC]

Passiveincome

1.PassiveincomefromPhilippinesourcessubjecttofinaltax

2.PassiveincomefromPhilippinesourcesnotsubjecttofinaltax

3.PassiveincomefromsourcesoutsidethePhilippines

Passiveincomeagain

1.Interestincome

2.Rentals/Leases

3.Royalties

4.Dividends

5.Annuitiesandproceedsoflifeinsurance/othertypesofinsurance

6.Prizesandwinnings,awards,andrewards

7.Gifts,bequests,anddevises

8.Othertypesofpassiveincome

APPROACHESININCOMERECOGNITION

Approachesinincomerecognition

1.schedularsystem

2.globalsystem

Schedularsystem

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Theschedularsystemisonewheretheincometaxtreatmentvariesandismadetodependonthekindorcategoryoftaxable
incomeofthetaxpayer.

Globalsystem

Theglobalsystemisonewherethetaxtreatmentviewsindifferentlythetaxbaseandgenerallytreatsincommonallcategoriesof
taxableincomeofthetaxpayer.

Schedularsystemv.globalsystem

1.Undertheschedulartreatment,therearedifferenttaxrates,whileundertheglobaltreatment,thereisaunitaryorsingletaxrate.

2.Undertheschedulartreatment,therearedifferentcategoriesoftaxableincome,whileundertheglobaltreatment,thereisnoneed
forclassificationasalltaxpayersaresubjectedtoasinglerate.

3.Theschedulartreatmentisusuallyusedintheincometaxationofindividualswhiletheglobaltreatmentisusuallyappliedto
corporations.

ApproachusedinthePhilippines

Partlyschedularandpartlyglobal.Theschedularapproachisusedinthetaxationofindividualswhiletheglobalapproachisusedin
thetaxationofcorporations.

CLASSESOFINCOMETAXPAYERS

Basisofclassificationoftaxpayers

1.corporationsv.individuals

2.nationality

3.residence

Classesofincometaxpayers

1.Individuals

a.Residentcitizens

b.Nonresidentcitizens

c.Residentaliens

d.Nonresidentaliens

i)engagedintradeorbusinessinthePhilippines,or

ii)notengagedintradeorbusinessinthePhilippines
Note:AnonresidentalienindividualwhoshallcometothePhilippinesandstaythereinforanaggregateperiodofmorethanonehundred
eighty(180)daysduringanycalendaryearshallbedeemedanonresidentaliendoingbusinessinthePhilippines.[Section25(A)(1),
NIRC]

2.Corporations

a.Domesticcorporations

b.Residentforeigncorporations

c.Nonresidentforeigncorporations

3.Special

a.Proprietaryeducationalinstitutionsandhospitalsthatarenonprofit

b.Insurancecompanies

c.Generalprofessionalpartnerships

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d.Estatesandtrusts

Note:Estatesandtrustsaretreatedasindividualtaxpayers.

Whoisanonresidentcitizen?

Thetermnonresidentcitizenmeans:

1.AcitizenofthePhilippineswhoestablishedtothesatisfactionoftheCommissionerthefactofhisphysicalpresenceabroad
withadefiniteintentiontoresidetherein.

2.AcitizenofthePhilippineswholeavesthePhilippinesduringthetaxableyeartoresideabroad,eitherasanimmigrantorfor
employmentonapermanentbasis.

3.AcitizenofthePhilippineswhoworksandderivesincomefromabroadandwhoseemploymentthereatrequireshimtobe
physicallypresentabroadmostofthetimeduringthetaxableyear.

4.AcitizenwhohasbeenpreviouslyconsideredasanonresidentcitizenandwhoarrivesinthePhilippinesatanytimeduring
thetaxableyeartoresidepermanentlyinthePhilippines.

Corporation

Acorporation,asusedinincometaxation,includespartnerships,nomatterhowcreatedororganized,jointstockcompanies,joint
accounts(cuentasenparticipacion),andassociationsorinsurancecompanies.

However,itdoesnotinclude:

1.ageneralprofessionalpartnershipand

2.ajointventureorconsortiumformedforthepurposeofundertakingconstructionprojectsorengaginginpetroleum,coal,
geothermalandotherenergyoperationspursuanttoanoperatingorconsortiumagreementunderaservicecontractwiththe
government.

Residentforeigncorporation

ThetermappliestoaforeigncorporationengagedintradeorbusinesswithinthePhilippines.

Nonresidentforeigncorporation

ThetermappliestoaforeigncorporationnotengagedintradeofbusinessinthePhilippines.

GENERALPROFESSIONALPARTNERSHIPV.ORDINARYBUSINESSPARTNERSHIP

Generalprofessionalpartnerships

Generalprofessionalpartnershipsarepartnershipsformedbypersonsforthesolepurposeofexercisingtheircommonprofession,no
partoftheincomeofwhichisderivedfromengaginginanytradeorbusiness.[Section22(B),NIRC]

Personsengaginginbusinessaspartnersinageneralprofessionalpartnershipshallbeliableforincometaxonlyintheirseparateand
individualcapacities.[Section26,NIRC]

Forpurposesofcomputingthedistributiveshareofthepartners,thenetincomeofthepartnershipshallbecomputedinthesame
mannerasacorporation.[Section26,NIRC]

Eachpartnershallreportasgrossincomehisdistributiveshare,actuallyorconstructivelyreceived,inthenetincomeofthe
partnership.[Section26,NIRC]

Incomeofageneralprofessionalpartnershiparedeemedconstructivelyreceivedbythepartners.[Section73(D),NIRC]

Ordinarybusinesspartnership

Anordinarybusinesspartnershipisconsideredasacorporationandisthussubjecttotaxassuch.

Partnersareconsideredstockholdersand,therefore,profitsdistributedtothembythepartnershipareconsideredasdividends.

Oav.Commissioner,45SCRA74(1972):Unregisteredpartnership

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AlthoughtheCFIalreadyapprovedtheprojectofpartitionoftheestateofJuliaBualesamonghersurvivingspouse,LorenzoOna,
andherfivechildren,noattemptwasmadetodividethepropertiesleftbythedecedent.Instead,thepropertiesremainedunderthe
managementofLorenzoOnawhousedsaidpropertiesinbusinessbyleasingorsellingthemandinvestingtheincomederivedtherefromand
theproceedsfromthesalesthereofinrealpropertyandsecurities.ThesaidincomesarerecordedinthebooksofaccountkeptbyLorenzo
Onawherethecorrespondingsharesoftheheirsinthenetincomefortheyearareknown.

Basedonthesefacts,theCommissionerruledthattheheirsformedanunregisteredpartnershipwhichisthussubjecttocorporate
incometax.TheCourtofTaxAppealsandtheSupremeCourtaffirmed.

Fortaxpurposes,thecoownershipofinheritedpropertiesisautomaticallyconvertedintoanunregisteredpartnershipthemomentthe
saidcommonpropertiesand/ortheincomesderivedtherefromareusedasacommonfundwithintenttoproduceprofitsfortheheirsin
proportiontotheirrespectivesharesintheinheritanceasdeterminedinaprojectpartitioneitherdulyexecutedinanextrajudicialsettlement
orapprovedbythecourtinthecorrespondingtestateorintestateproceeding.

Thereasonissimple.Fromthemomentofsuchpartition,theheirsareentitledalreadytotheirrespectivedefinitesharesofthe
estateandtheincomesthereof,foreachofthemtomanageanddisposeofasexclusivelyhisownwithouttheinterventionoftheother
heirs,and,accordingly,hebecomesliableindividuallyforalltaxesinconnectiontherewith.Ifaftersuchpartition,heallowshissharetobe
heldincommonwithhiscoheirsunderasinglemanagementtobeusedwiththeintentofmakingprofittherebyinproportiontohisshare,
therecanbenodoubtthat,evenifnodocumentorinstrumentwereexecuted,forthepurpose,fortaxpurposes,atleast,anunregistered
partnershipisformed.

Forpurposesofthetaxoncorporations,theNIRC,includespartnershipsexceptgeneralprofessionalpartnershipswithinthe
purviewofthetermcorporation.

Note:Theincomederivedfrominheritedpropertiesmaybeconsideredasindividualincomeoftherespectiveheirsonlysolongasthe
inheritanceorestateisnotdistributedor,atleast,partitioned,butthemomenttheirrespectiveknownsharesareusedaspartofthe
commonassetsoftheheirstobeusedinmakingprofits,itisbutproperthattheincomeofsuchsharesbeconsideredaspartofthe
taxableincomeofanunregisteredpartnership.

Gatchalianv.Collector,102Phil140

Plaintiffscontributedmoneytobuyasweepstakesticketwhichsubsequentlywon.TheSupremeCourtheldthattheyformedan
unregisteredpartnership.Plaintiffsformedapartnershipofacivilnaturesinceeachofthemcontributedmoneytoacommonfundforthe
solepurposeofdividingequallytheprizewhichtheywin.

Pascualv.Commissioner

Petitionersboughttwoparcelsoflandin1965,however,theydidnotsellthesamenormakeanyimprovementsthereon.In1966,
theyboughtanotherthreeparcelsofland.Itwasonlyin1968thattheysoldthetwoparcelsoflandafterwhichtheydidnotmakeany
additionalornewpurchase.Theremainingthreeparcelsoflandweresoldin1970.Commissionerassessedthemcorporateincometaxeson
thegroundthatpetitionersestablishedanunregisteredpartnershipengagedinrealestatetransactions.

TheSupremeCourtruledthatnounregisteredpartnershipwasformed.Thesharingofreturnsdoesnotitselfestablishapartnership
whetherornotthepersonsthereinhaveajointorcommonrightorinterestintheproperty.Theremustbeaclearintenttoforma
partnership,theexistenceofwhichhasthejuridicalpersonalitydifferentfromtheindividualpartnersandthefreedomofeachpartyto
transferorassignthewholeproperty.

Inthiscase,therewasnoshowingofintenttoformapartnership.Thetransactionswereisolatedtherefore,thecharacterof
habitualitypeculiartobusinesstransactionsengagedforthepurposeofgainwasnotpresent.

Theessentialelementsofapartnershipare:(1)anagreementtocontributemoney,property,orindustrytoacommonfundand(2)
anintenttodividetheprofitsamongthecontractingparties.

Unregisteredpartnershipv.coownershipfortaxpurposes

Iftheactivitiesofcoownersarelimitedtothepreservationofthepropertyandthecollectionoftheincometherefrom,inwhichcase,
eachcoowneristaxedindividuallyonhisdistributiveshareintheincomeofthecoownership.

Ifthecoownersinvesttheincomeinbusinessforprofit,theywouldbeconstitutingthemselvesintoapartnershiptaxableasa
corporation.

Jointventure,howcreated

Ajointventureiscreatedwhentwocorporations,whileregisteredandoperatingseparately,wereplacedunderonesolemanagement
whichoperatedthebusinessaffairsofsaidcompaniesasthoughtheyconstitutedasingleentitytherebyobtainingsubstantial
economyandprofitsintheoperation.

Asstated,ajointventureisnottaxedasacorporation,justlikeageneralprofessionalpartnership.
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GENERALPRINCIPLESOFINCOMETAXATIONINTHEPHILIPPINES

GeneralprinciplesofincometaxationinthePhilippines

1.AcitizenofthePhilippinesresidingthereinistaxableonallincomederivedfromsourceswithinandwithoutthePhilippines.

2.AnonresidentcitizenistaxableonlyonincomederivedfromsourceswithinthePhilippines.

3.AnindividualcitizenofthePhilippineswhoisworkingandderivingincomefromabroadasanoverseascontractworkeristaxableonly
onincomefromsourceswithinthePhilippines.Provided,thataseamanwhoisacitizenofthePhilippinesandwhoreceives
compensationforservicesrenderedabroadasamemberofthecomplementofavesselengagedexclusivelyininternationaltrade
shallbetreatedasanoverseascontractworker.

4.Analienindividual,whetheraresidentornotofthePhilippines,istaxableonlyonincomederivedfromsourceswithinthePhilippines.

5.AdomesticcorporationistaxableonallincomederivedfromsourceswithinandwithoutthePhilippines.

6.Aforeigncorporation,whetherengagedornotintradeorbusinessinthePhilippines,istaxableonlyonincomederivedfromsources
withinthePhilippines.

SOMERULESONTAXATIONOFTHEVARIOUSTAXPAYERS

Whoaretaxedontheirglobalincome?

1.Residentcitizens

2.Domesticcorporations

WhoaretaxedonlyontheirincomefromsourceswithinthePhilippines?

1.Nonresidentcitizen

2.Overseascontractworkers

3.Alienindividual,whetheraresidentornotofthePhilippines

4.Foreigncorporation,whetherengagedornotintradeorbusinessinthePhilippines

Whoaretaxedbasedonlyontheirnetincome?

1.Residentandnonresidentcitizens

2.ResidentalienandnonresidentalienengagedintradeorbusinessinthePhilippines

3.Domesticcorporation

4.Residentforeigncorporation

Whoaretaxedbasedontheirgrossincome?

1.NonresidentaliennotengagedintradeorbusinessinthePhilippines

2.Nonresidentforeigncorporation

TREATMENTOFSOMESPECIALITEMS

Forgivenessofindebtedness

Thecancellationandforgivenessofindebtednessmay,dependentuponthecircumstances,amountto:

1.apaymentofincome

2.agiftor

3.acapitaltransaction.

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If,forexample,anindividualperformsservicesforacreditorwho,inconsiderationthereofcancelsthedebt,incometothatamountis
realizedbythedebtorascompensationforhisservice.

If,however,acreditormerelydesirestobenefitadebtorandwithoutanyconsiderationthereofcancelsthedebt,theamountofthe
debtisagiftfromthecreditortothedebtorandneednotbeincludedinthelattersgrossincome.

Ifacorporationtowhichastockholderisindebtedforgivesthedebt,thetransactionhastheeffectofpaymentofadividend.[Section
50,RevenueRegulations2]

Recoveryofamountspreviouslywrittenoff

Consideredasincome

GUIDEQUESTIONSINDETERMININGTAXABLEINCOME

1.Isthereagainorincome?

2.Isthegainorincometaxable?Isitexcludedorexempt?

3.Whattypeofincomeisit:incomeincludibleinthegrossincome,passiveincome,capitalgains,incomederivedfromothersource?

4.Towhatclassdoesthetaxpayerbelong:individualorcorporate,citizenornotordomesticorforeign,residentornot,engagedin
tradeorbusinessornot?

TAXONINDIVIDUALS

PRELIMINARYPOINTSONTAXATIONOFINDIVIDUALS

Howtaxed?

Anindividualcitizen,bothresidentandnonresident,andanindividualresidentalienaretaxedsimilarly.

Anonresidentalienengagedintradeorbusinessshallbesubjecttothesameincometaxratesasacitizenandaresidentalien.

Thus,onlyanonresidentalienwhoisnotengagedintradeorbusinessistaxeddifferentlyfromtheotherindividualtaxpayers.

Onwhatincometaxed?

AresidentcitizenistaxedonallincomefromsourceswithinandoutsidethePhilippines.Thetaxbaseisnetincome.

AnonresidentcitizenistaxedonlyonincomefromsourceswithinthePhilippines.Thetaxbaseisnetincome.

Analien,whetherresidentornot,istaxedonlyonincomefromsourceswithinthePhilippines.However,thetaxbaseforaresident
alienandnonresidentalienengagedintradeorbusinessisnetincomewhilethetaxbaseforanonresidentaliennotengagedin
tradeorbusinessisgrossincome.

Typesofincometaxed

1.Itemsofincomeincludedinthegrossincome

2.Passiveincome

3.Capitalgainsfromsaleofsharesofstocknottradedinthestockexchange

4.Capitalgainsfromthesaleorexchangeofrealproperty

TAXONINDIVIDUALCITIZEN(RESIDENTANDNONRESIDENT)ANDINDIVIDUALRESIDENTALIEN

Itemsofincomeincludedinthegrossincome

Aschedularrateoffivepercent(5%)toP125,000+32%ofexcessoverP500,000.00by01January2000isimposedonitemsof
incomeofanindividualcitizenandindividualresidentalienwhichareproperlyincludibleinthegrossincome.

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Ratesoftaxoncertainpassiveincome

1.Interestfromanycurrencybankdepositandyieldoranyothermonetarybenefitfromdepositsubstitutesandfromtrustfundsand
similararrangements20%

2.Royalties,exceptonbooks,aswellasotherliteraryworksandmusicalcompositions20%

3.Royaltiesonbooks,literaryworksandmusicalcompositions10%

4.PrizesoverP10,000.0020%

Note:PrizeslessthanP10,000.00areincludedintheincometaxoftheindividualsubjecttotheschedularrateof5%uptoP125,000+32%
ofexcessoverP500,000.00)

5.Otherwinnings,exceptPCSOandlotto,derivedfromsourceswithinthePhilippines20%

6.Interestincomederivedbyaresidentindividual(Note:nonresidentcitizennotincluded)fromadepositorybankundertheexpanded
foreigncurrencydepositsystem7.5%

7.InterestincomefromlongtermdepositorinvestmentevidencedbycertificatesprescribedbyBSP

a.Exemptifinvestmentisheldformorethanfiveyears

b.Ifinvestmentispreterminated,interestincomeonsuchinvestmentshallbesubjecttothefollowingrates:

20%ifpreterminatedinlessthan3years

12%ifpreterminatedafter3yearstolessthan4years

5%ifpreterminatedafter4yearstolessthan5years

8.Cashand/orpropertydividends

Tenpercent(10%)finaltaxby01January2000onthefollowing:

a.Cashandorpropertydividendactuallyorconstructivelyreceivedfromadomesticcorporationorfromajointstockcompany,
insuranceormutualfundcompaniesandregionaloperatingheadquartersofmultinationalcompanies

b.Shareofanindividualinthedistributablenetincomeaftertaxofapartnershipexceptageneralprofessionalpartnershipof
whichheisapartner

c.Shareofanindividualinthenetincomeaftertaxofanassociation,jointaccount,orajointventureorconsortiumtaxableasa
corporationofwhichheisamemberoracoventurer

Capitalgainsfromthesaleofsharesofstocknottradedinthestockexchange

1.NotoverP100,0005%

2.OverP100,00010%

Capitalgainsfromthesaleofrealproperty

Generalrule:Afinaltaxofsixpercent(6%)isimposedonthegrosssellingpriceorcurrentfairmarketvalue,whicheverishigher,
foreverysaleorexchangeofrealproperty.

Optional:Ifthesaleismadetothegovernmentoranyofitspoliticalsubdivisionsoragenciesortogovernmentownedorcontrolled
corporations,thetaxpayerhastheoptiontochoosefromthefinaltaxofsixpercent(6%)ofgrosssellingpriceorfairmarketvalue,
whicheverishigher,ortheschedulartaxrateof5%uptoP125,000+32%ofexcessoverP500,000.

Exception:Thesaleordispositionoftheprincipalresidenceofnaturalpersonsisexemptfromcapitalgainstaxifcertainconditions
aremet.

Conditionsforexemptionofgainfromsaleorexchangeofprincipalresidence:

1.Proceedsarefullyutilizedinacquiringorconstructinganewprincipalresidencewithin18monthsfromthedateofsaleor
disposition

2.Historicalcostoradjustedbasisoftherealpropertysoldordisposedshallbecarriedovertothenewprincipalresidencebuilt
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oracquired

3.NoticetotheCommissionerofInternalRevenueshallbegivenwithinthirty(30)daysfromthedateofsaleordispositionand

4.Thisexemptioncanonlybeavailedofonceeverytenyears.

Iftheproceedsofthesalewerenotfullyutilized,theportionofthegainpresumedtohavebeenrealizedfromthesaleor
dispositionshallbesubjecttocapitalgainstax.

GSPorFMV,whicheverishigherxUnutilizedproceeds/GSP=TaxablePortion

TAXONNONRESIDENTALIENINDIVIDUAL

RemunerationreceivedbyanonresidentalienaspresidentofadomesticcompanytaxableinthePhilippines(Ms.Juliane
BaierNickel,asrepresentedbyMarinaQ.Guzmanv.CIR,CTACaseNo.5514dated4/29/99)

Aconsultant,presidentofadomesticcompanyorpersoninvolvedwithproductdevelopmentissubjecttoPhilippineincometaxation.
Anyremunerationreceivedwouldstemfromheremploymentascompanypresidentandthus,negatesherallegationthatsheisjusta
salesagentwhoreceivescommissions.Whilepetitionertriedtoshowthatshestayedinthecountryforlessthan180days,her
remunerationintheformofcommissionsisstilltaxableinthePhilippinessinceitisbornebyapermanentestablishmentinthe
Philippines.

Nonresidentalienengagedintradeorbusiness

Anonresidentalienengagedintradeorbusinessshallbesubjecttothesameincometaxratesasacitizenandaresidentalien.

Exception:Cashand/orpropertydividendsreceivedbyanonresidentalienindividualshallbesubjecttoafinaltaxof20%for
citizensandresidentaliens,therateis10%beginningintheyear2000.

Nonresidentaliennotengagedintradeorbusiness

Anonresidentalienindividualnotengagedintradeorbusinessshallpayataxequivalentto25%onallitemsofincome,exceptfor
gainonsaleofsharesofstockinanydomesticcorporationandrealpropertywhichshallbesubjecttothesamerateappliedtoother
individualtaxpayers.

Gainonsaleofsharesofstock:

1.NotoverP100,0005%

2.Over100,00010%

Capitalgainstaxonsaleordispositionofproperty6%ofGSPorFMV,whicheverishigher.

OTHERINDIVIDUALTAXPAYERS

1.Alienindividualemployedbyregionalorareaheadquartersandregionaloperatingheadquartersofmultinationalcompanies

2.Alienindividualemployedbyoffshorebankingunits

3.Alienindividualemployedbypetroleumservicecontractorandsubcontractor

Note:Thesalaries,wages,annuities,compensation,remunerationandotheremoluments,suchashonorariaandallowancesreceivedby
theseindividualsandtheirFilipinocounterpartsoccupyingthesamepositionasthesealienindividualsshallbesubjectto15%tax.

Allotherincomederivedbytheseindividualsshallbesubjecttothesamerateasthatofotherindividualtaxpayers.

Regionalorareaheadquarters

AregionalorareaheadquarterisabranchestablishedinthePhilippinesbymultinationalcompaniesandwhichheadquartersdonot
earnorderiveincomefromthePhilippinesandwhichactassupervisory,communicationsandcoordinatingcenterfortheiraffiliates,
subsidiaries,orbranchesintheAsiaPacificregionandotherforeignmarkets.

Regionaloperatingheadquarters

AregionaloperatingheadquartershallmeanabranchestablishedinthePhilippinesbymultinationalcompanieswhichareengagedin
certainspecifiedservices,i.e.generaladministrationandplanning,businessplanningandcoordination,sourcingandprocurementof
rawmaterialsandcomponents,amongothers.

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TaxationofOBUemployees(BIRRulingNo.14798datedOctober16,1998)

The15%preferentialtaxrateshallapplyonlyincaseswhereanalienconcurrentlyholdsapositionsimilartothatoftheFilipino
employee. Thus, this preferential tax treatment shall not apply where the counterpart expatriate is recalled to the head office or
reassignedelsewhere,whethertemporarilyorotherwise,andonlyFilipinosaretheonessoemployedbyanOBUforthetimebeingor
wherethepostvacatedbytheexpatriateissubsequentlyassumedbyaFilipinotoreplacetheexpatriate,asaresultofwhichalltop
managementpostsarenowbeingoccupiedbyFilipinos.

FilipinostaffoftheADBsubjectto15%preferentialtaxrate(NO.2999dated3/11/99)

FilipinoemployeesoccupyingmanagerialortechnicalpositionsasthoseofaliensemployedbytheAsianDevelopmentBank(ADB),
whichisnotonlyaregionalorareaheadquartersinthePhilippinesbuttheheadquartersitself,aresubjecttothepreferentialtaxrate
of15%ontheirgrosscompensationincomepursuanttoSection25(C)oftheNIRCof1997.

Generalprofessionalpartnerships

Generalprofessionalpartnershipsarepartnershipsformedbypersonsforthesolepurposeofexercisingtheircommonprofession,no
partoftheincomeofwhichisderivedfromengaginginanytradeorbusiness.

Personsengaginginbusinessaspartnersinageneralprofessionalpartnershipshallbeliableforincometaxonlyintheirseparateand
individualcapacities.

Eachpartnershallreportasgrossincomehisdistributiveshare,actuallyorconstructivelyreceived,inthenetincomeofthe
partnership.

Thenetincomeofthegeneralprofessionalpartnershipshallbecomputedinthesamemannerasacorporationforpurposesof
computingthedistributivesharesofthepartners.

TAXONCORPORATIONS

RATESOFINCOMETAXONDOMESTICCORPORATIONS

InGeneral

Rateoftax,ingeneral

199735%
199834%
199933%
2000onwards32%

Taxisimposedontaxableornetincome.

Optional15%taxongrossincome

ThePresident,upontherecommendationoftheSecretaryofFinance,may,effective01January2000,allowcorporationstheoption
tobetaxedatfifteenpercent(15%)ofgrossincome,providedcertainconditionsaresatisfied.

Thisisavailabletofirmswhoseratioofcostofsalestogrosssalesorreceiptsfromallsourcesdoesnotexceed55%.

Onceelectedbythecorporation,optionshallbeirrevocableforthethreeconsecutiveyears.

Conditionstobesatisfiedtoavailofthe15%optionalcorporatetax

1.Ataxeffortratiooftwentypercent(20%)ofGrossNationalProduct(GNP)

2.Aratiooffortypercent(40%)ofincometaxcollectiontototaltaxrevenues

3.AVATtaxeffortoffourpercent(4%)ofGNP

4.A0.9percent(0.9%)ratiooftheConsolidatedPublicSectorFinancialPositiontoGNP
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Somedefinitionsforthispurpose

Grossincomederivedfrombusinessshallbeequivalenttogrosssaleslesssalesreturns,discountsandallowancesandcostof
goodssold.

Fortaxpayersengagedinsaleofservices,grossincomemeansgrossreceiptslesssalesreturns,allowancesanddiscounts.

Costofgoodssoldshallincludeallbusinessexpensesdirectlyincurredtoproducethemerchandisetobringthemtotheirpresent
locationanduse.

TradingConcern
ManufacturingConcern
Costofgoodssoldshallincludetheinvoicecost
Costofgoodsmanufacturedandsoldshall
ofthegoodssold,plusimportduties,freightin
includeallcostsofproductionoffinishedgoods,
transportingthegoodstotheplacewherethe
suchasrawmaterialsused,directlaborand
goodsareactuallysold,includinginsurancewhile manufacturingoverhead,freightcost,insurance
thegoodsareintransit.
andothercostsincurredtobringtheraw
materialstothefactoryorwarehouse.

Taxrateforproprietaryeducationalinstitutionsandhospitals

10%ontaxableincome,exceptoncertainpassiveincomes

Theordinaryrateimposedoncorporationsshallapplytoproprietaryeducationalinstitutionsandhospitalswhentheirgrossincome
fromunrelatedtrade,businessorotheractivityexceeds50%oftheirtotalgrossincomederivedfromallsources.

Unrelatedtrade,businessorotheractivity

Thismeansanytrade,businessorotheractivity,theconductofwhichisnotsubstantiallyrelatedtotheexerciseorperformanceby
sucheducationalinstitutionorhospitalofitsprimarypurposeorfunction.

Proprietaryeducationalinstitution

Aproprietaryeducationalinstitutionisanyprivateschoolmaintainedandadministeredbyprivateindividualsorgroupswithanissued
permittooperatefromtheDECS,orCHED,orTESDA,asthecasemaybe.

GOCCs,agenciesorinstrumentalities

Allcorporations,agencies,orinstrumentalitiesownedandcontrolledbythegovernmentshallpaysuchrateoftaxupontheirtaxable
incomeasareimposeduponcorporationsorassociationsengagedinasimilarbusiness,industry,oractivity.

Exceptions:GOCCsandinstrumentalitiesnotsubjecttotaxarethe:

1.GovernmentServiceInsuranceSystem(GSIS)

2.SocialSecuritySystem(SSS)

3.PhilippineHealthInsuranceCorporation(PHIC)

4.PhilippineCharitySweepstakesOffice(PCSO)

5.PhilippineAmusementandGamingCorporation(PAGCOR)

Ratesoncertainpassiveincomesubjecttofinaltax

1.Interestfromdepositsandyieldoranyothermonetarybenefitfromdepositsubstitutesandfromtrustfundsandsimilar
arrangements20%

2.Royalties20%

3.Interestincomederivedfromadepositorybankundertheexpandedforeigncurrencydepositsystem7%

4.Capitalgainsfromsaleofsharesofstocknottradedinthestockexchange

a.NotoverP100,0005%

b.OverP100,00010%
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5.Taxonincomederivedbyadepositorybankundertheexpandedforeigncurrencydepositsystemfromforeigncurrencytransactions
10%

Note:Thisisdifferentfromtheinterestincome.Thispertainstotheincomederivedbyadepositorybankitself.

Note:Anyincomeofnonresidents,whetherindividualsorcorporations,fromtransactionswithdepositorybanksundertheexpanded
systemisexemptfromincometax.

6.Intercorporatedividendsexempt

7.Capitalgainsrealizedfromthesale,exchangeordispositionoflandsand/orbuildings6%

Saleofcorporaterealpropertythathasceasedtobeusedintradeorbusinesssubjectto6%capitalgainstax(No.2199
dated2/25/99)

Afinaltaxof6%isimposedonthegainspresumedtohavebeenrealizedinthesale,exchangeordispositionoflandsand/or
buildingswhicharenotactivelyusedinthebusinessofacorporationandwhicharetreatedascapitalassetsbasedonthegross
sellingpriceorfairmarketvalue,whicheverishigher.However,sinceintheinstantcasethetaxpayerclaimedadepreciation
deductionwhenthebuildingandotherimprovementswerenotusedintradeorbusiness,thetaxpayermustfileandamendits
incometaxreturnandpaythedeficiencyincometax,ifany,plussurchargeandinterest,basedonitsadjustedtaxableincome
resultingfromthedisallowanceofthedepreciationdeduction.

MINIMUMCORPORATEINCOMETAX

Minimumcorporateincometax

Aminimumcorporateincometaxoftwopercent(2%)ofthegrossincomeasoftheendofthetaxableyearisherebyimposedona
corporationsubjecttoincometax,beginningonthefourthtaxableyearimmediatelyfollowingtheyearinwhichsuchcorporation
commenceditsbusinessoperations,whentheminimumincometaxisgreaterthantheregularcorporateincometaxforthetaxable
year.

Carryforwardofexcessminimumtax

Anyexcessoftheminimumcorporateincometaxoverthenormalincometaxshallbecarriedforwardandcreditedagainstthenormal
incometaxpayableforthenextthreeyearsimmediatelysucceedingthetaxableyearinwhichtheminimumcorporateincometaxwas
paid.

Relieffromtheminimumcorporateincometaxundercertainconditions

TheSecretaryofFinancemaysuspendtheimpositionoftheminimumcorporateincometaxonanycorporationwhichsufferslosses
onaccountofprolongedlabordispute,orbecauseofforcemajeure,orbecauseoflegitimatebusinessreverses.

Meaningofgrossincomeandcostofgoodssoldunderminimumcorporateincometaxcomparedwithmeaningofgross
incomeandcostofgoodssoldunderSection27(A)

Section27(A)
Section27(E)MCIT
GrossIncome
equivalenttogrosssaleslesssalesreturns,discountsand
allowancesandcostofgoodssold.
Costofgoodssold
shallincludeallbusinessexpensesdirectlyincurredtoproducethe
merchandisetobringthemtotheirpresentlocationanduse.
Costofgoodssoldforatrading
shallincludetheinvoicecostofthegoodssold,plusimportduties,
ormerchandisingconcern
freightintransportingthegoodstotheplacewherethegoodsare
actuallysold,includinginsurancewhilethegoodsareintransit.
Costofgoodsmanufacturedand shallincludeallcostsofproductionoffinishedgoods,suchasraw
soldforamanufacturingconcern materialsused,directlaborandmanufacturingoverhead,freight
cost,insuranceandothercostsincurredtobringtheraw
materialstothefactoryorwarehouse.
GrossIncomefortaxpayers
grossreceiptslesssales
grossreceiptslesssalesreturns,
engagedinsaleofservice
returns,allowancesand
allowancesanddiscountsand
discounts.
costofservices
Costofservices

Alldirectcostsandexpenses
necessarilyincurredtoprovide
theservicesrequiredbythe
customersandclientsincluding
(A)salariesandemployee
benefitsofpersonnel,
consultantsandspecialists
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directlyrenderingtheserviceand
(B)costoffacilitiesdirectly
utilizedinprovidingtheservice
suchasdepreciationorrentalof
equipmentusedandcostof
supplies.

Forbanks,itincludesinterest
expense.

Note:DefinitionofgrossincomefortaxpayersengagedinthesaleofserviceincludescostofservicesinMCITbutnotinthecaseofthe
optional15%taxongrossincome[Section27(A),NIRC].

TAXONRESIDENTFOREIGNCORPORATIONS

Residentforeigncorporation

Aresidentforeigncorporationisoneorganized,authorized,orexistingunderthelawsofanyforeigncountry,engagedintradeor
businesswithinthePhilippines.

Incometaxrate,ingeneral

Ratesoftax,ingeneral

199735%
199834%
199933%
2001onwards32%

Taxisimposedontaxableornetincome.

Optional:15%ofGrossIncome

Theoptiontobetaxedatfifteenpercent(15%)ongrossincomeshallalsobeavailabletoresidentforeigncorporations,subjectto
thesameconditions.

Availabletofirmswhoseratioofcostofsalestogrosssalesorreceiptsfromallsourcesdoesnotexceed55%.

Onceelectedbythecorporation,optionshallbeirrevocableforthethreeconsecutiveyears.

Minimumcorporateincometaxonresidentforeigncorporations

AllconditionsoftheMCITondomesticcorporationsalsoapplytoresidentforeigncorporations.

Taxratesonspecificresidentforeigncorporations

1.InternationalCarrier2%ofGrossPhilippineBillings

2.OffshoreBankingUnits10%ofincomederivedfromforeigncurrencytransactionswithlocalcommercialbanks,includingbranches
offoreignbanksthatmaybeauthorizedbytheBSPtotransactbusinesswithoffshorebankingunits,includinganyinterestincome
derivedfromforeigncurrencyloansgrantedtoresidents

Anyincomeofnonresidents,whetherindividualsorcorporations,fromtransactionswithsaidoffshorebankingunitsshallbe
exemptfromincometax.

3.TaxonBranchProfitsRemittances15%oftotalprofitsappliedorearmarkedforremittancewithoutdeductionforthetax
componentthereof

4.Regionalorareaheadquartersshallnotbesubjecttoincometax

5.Regionaloperatingheadquartersshallbesubjecttoataxof10%oftheirtaxableincome

GrossPhilippineBillingsforinternationalaircarrier

GrossPhilippineBillingsreferstotheamountofgrossrevenuederivedfromcarriageofpersons,excessbaggage,cargoandmail
originatingfromthePhilippinesinacontinuousanduninterruptedflight,irrespectiveoftheplaceofsaleorissueandtheplaceof
paymentoftheticketorpassagedocument.
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Ticketsrevalidated,exchangedand/orendorsedtoanotherinternationalairlineformpartoftheGrossPhilippineBillingsifthe
passengerboardsaplaneinaportorpointinthePhilippines.

ForaflightwhichoriginatesfromthePhilippines,buttransshipmentofpassengertakesplaceatanyportoutsidethePhilippineson
anotherairline,onlythealiquotportionofthecostoftheticketcorrespondingtothelegflownfromthePhilippinestothepointof
transshipmentshallformpartoftheGrossPhilippineBilling.

GrossPhilippineBillingsforinternationalshipping

GrossPhilippineBillingsmeansgrossrevenuewhetherforpassenger,cargoormailoriginatingfromthePhilippinesuptofinal
destination,regardlessoftheplaceofsaleorpaymentsofthepassageorfreightdocuments.

Taxonbranchprofitsremittances

Anyprofitremittedbyabranchtoitsheadofficeshallbesubjecttoataxoffifteenpercent(15%)whichshallbebasedonthetotal
profitsappliedorearmarkedforremittancewithoutanydeductionforthetaxcomponentthereof(exceptthoseactivitieswhichare
registeredwiththePhilippineEconomicZoneAuthority).

Thefollowingshallnotbetreatedasbranchprofitsunlessthesameareeffectivelyconnectedwiththeconductofitstradeor
businessinthePhilippines:

1.interests

2.dividends

3.rents

4.royalties

5.remunerationfortechnicalservices

6.salaries

7.wages

8.premiums

9.annuities

10.emoluments

11.otherfixedordeterminableannual,periodicorcasualgains,profits,incomeandcapitalgains

InMarubeniv.Commissioner,MarubeniJapaninvesteddirectlyinAG&PManila.SinceMarubenihasabranchinthePhilippines,
AG&Pwithheld15%asbranchprofitsremittancetaxfromthecashdividends.SCheldthatthedividendsremittedwerenotsubject
tothe15%branchprofitremittancetaxastheywerenotincomeearnedbyaPhilippinebranchofMarubeniJapan.

Inthe15%remittancetax,thelawspecifiesitsowntaxbasetobeontheprofitremittedabroad.Thereisabsolutelynothing
equivocaloruncertainaboutthelanguageoftheprovision.Thetaxisimposedontheamountsentabroad,andthelawcallsfor
nothingfurther.[BankofAmericaNTv.CourtofAppeals,234SCRA302]

Marubeniv.Commissioner,177SCRA500

MarubeniCorporationisaresidentforeigncorporation.

A resident foreign corporation is one that is incorporated under the laws of a foreign country and is engaged in trade or
business in the Philippines. Marubeni Corporation is a foreign corporation duly organized under the laws of Japan and it is duly
licensedtoengageinbusinessunderPhilippinelaws.MarubeniCorporationmaintainsabranchofficetocarryoutitsbusinessinthe
country.

TheequityinvestmentsofMCinAG&Pareinvestmentsofthemothercorporationandnotofitsbranchoffice.

The investment was in the name of the Marubeni Corporation and therefore, the stockholder in AG&P is the mother
corporation, Marubeni Corporation, and not its branch office in the Philippines. Marubeni Corporation, therefore, and not its branch
office,isliablefortaxesondividendsearnedonitsinvestments.

Branchprofitremittancedoesnotincludedividendsoninvestmentsreceivedfromotherdomesticcorporations.
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Onlyprofitsremittedabroadbyabranchofficetoitsheadofficewhichareeffectivelyconnectedwithitstradeorbusinessin
thePhilippinesaresubjecttothe15%profitremittancetax.

To be effectively connected, it is not necessary that the income be derived from the actual operation of taxpayer
corporationstradeorbusinessitissufficientthattheincomearisesfromthebusinessactivityinwhichthecorporationisengaged.

ThedividendsreceivedbyMarubenifromAG&ParenotincomearisingfromthebusinessactivityinwhichMarubeniisinvolved.
Accordingly,saiddividendsifremittedabroad,arenotconsideredbranchprofitsforpurposesofthe15%profitremittancetax.

Note:Testofwhetherremittanceofprofitbyabranchtoitsheadofficecomesunderthepurviewoftheprofitremittancetax,the
branch itself should have made the remittance. In this case, it was not Marubenis branch in the Philippines, but the investee
corporation,AG&P,whichdirectlyremittedthedividendstoMarubeniofJapan.

Also,onlythebranchofficeistheauthorizedwithholdingagentfortheprofitremittancetax.AG&P,beinganinvesteeof
Marubeni,erredinwithholdingtheprofitremittancetaxfromthedividendsitremittedtoMarubeni.

InterestreceivedbyaforeigncorporationfromPhilippinesourcesnoteffectivelyconnectedwiththeconductofitsbusiness
notconsideredbranchprofits.(HongkongShanghaiHotels,Ltd.v.CIR,CTACaseNo.5243dated4/29/99)

InterestreceivedbyaforeigncorporationduringeachtaxableyearfromallsourceswithinthePhilippinesisnotconsideredbranch
profitsexceptwhenthesameiseffectivelyconnectedwiththeconductofitsbusiness.Intheinstantcase,theinterestincomefrom
bankplacementsisnoteffectivelyconnectedwiththebusinessofhotelmanagement,thus,itisexcludedformprofitssubjecttothe
15%branchprofitremittancetax.

Regionalorareaheadquartersofmultinationalcompanies

Regionalorareaheadquartersshallnotbesubjecttoincometax.

Regionaloperatingheadquartersofmultinationalcompanies

Regionaloperatingheadquartersshallpayataxoftenpercent(10%)ontheirtaxableincome.

Taxoncertainincomesreceivedbyaresidentforeigncorporation

1.Interestfromdepositsandyieldoranyothermonetarybenefitfromdepositsubstitutes,trustfundsandsimilararrangementsand
royalties

Interestincomefromanycurrencybankdepositandyieldoranyothermonetarybenefitfromdepositsubstitutesandfrom
trustfundsandsimilararrangementsandroyaltiesderivedfromsourceswithinthePhilippinesshallbesubjecttoafinalincometaxat
therateoftwentypercent(20%)ofsuchinterest.

However,interestincomederivedbyaresidentforeigncorporationfromadepositarybankundertheexpandedforeign
currencydepositsystemshallbesubjecttoafinalincometaxattherateofsevenandonehalfpercent(71/2%)ofsuchinterest
income.

2.Incomederivedundertheexpandedforeigncurrencydepositsystem

Thisreferstoincomederivedbyadepositarybankundertheexpandedforeigncurrencydepositsystemfromforeigncurrency
transactionswithlocalcommercialbanksincludingbranchesofforeignbanksthatmaybeauthorizedbytheBangkoSentralng
Pilipinastotransactbusinesswithforeigncurrencydepositsystemunitsandotherdepositarybanksundertheexpandedforeign
currencydepositsystem,includinginterestincomefromforeigncurrencyloansgrantedbysuchdepositarybanksundersaidexpanded
foreigncurrencydepositsystemtoresidents.

Afinalincometaxattherateoftenpercent(10%)isimposedonsuchincome.

3.Capitalgainsfromsaleofsharesofstocknottradedinthestockexchange

a.NotoverP100,0005%

b.OverP100,00010%

4.Intercorporatedividends

DividendsreceivedbyaresidentforeigncorporationfromadomesticcorporationliabletotaxundertheNIRCshallnotbe
subjecttoincometax.
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TAXONNONRESIDENTFOREIGNCORPORATION

Taxationofanonresidentforeigncorporation,ingeneral

Ratesoftax,ingeneral

199735%
199834%
199933%
200032%

However,thetaxisimposedongrossincome,notontaxableornetincome.

Suchgrossincomemayincludeinterests,dividends,rents,royalties,salaries,premiums(exceptreinsurancepremiums),annuities,
emolumentsorotherfixedordeterminableannual,periodicorcasualgains,profitsandincome,andcapitalgains,exceptcapitalgains
fromthesaleofsharesofstocknottradedinthestockexchange.

Taxationofcertainnonresidentforeigncorporations

1.Nonresidentcinematographicfilmowner,lessorordistributor25%ofgrossincome

2.NonresidentownerorlessorofvesselscharteredbyPhilippinenationals4%ofgrossrentals,leaseorcharterfees

3.Nonresidentownerorlessorofaircraft,machineriesandotherequipment7%ofgrossrentalsorfees

Nonresidentcinematographicfilmowner,lessorordistributor

Acinematographicfilmowner,lessor,ordistributorshallpayataxoftwentyfivepercent(25%)ofitsgrossincomefromallsources
withinthePhilippines.

NonresidentownerorlessorofvesselscharteredbyPhilippinenationals

Anonresidentownerorlessorofvesselsshallbesubjecttoataxoffourandonehalfpercent(4%)ofgrossrentals,leaseor
charterfeesfromleasesorcharterstoFilipinocitizensorcorporations,asapprovedbytheMaritimeIndustryAuthority.

Nonresidentownerorlessorofaircraft,machineriesandotherequipment

Rentals,chartersandotherfeesderivedbyanonresidentlessorofaircraft,machineriesandotherequipmentshallbesubjecttoa
taxofsevenandonehalfpercent(7%)ofgrossrentalsorfees.

Taxoncertainincomesreceivedbyanonresidentforeigncorporation

1.Interestonforeignloans

Afinalwithholdingtaxattherateoftwentypercent(20%)isherebyimposedontheamountofinterestonforeignloans
contractedonorafter01August1986.

2.Intercorporatedividends

Afinalwithholdingtaxattherateoffifteenpercent(15%)isherebyimposedontheamountofcashand/orproperty
dividendsreceivedbyanonresidentforeigncorporationfromadomesticcorporation,subjecttotheconditionthatthecountryin
whichthenonresidentforeigncorporationisdomiciledshallallowacreditagainstthetaxduefromthenonresidentforeign
corporationtaxesdeemedtohavebeenpaidinthePhilippinesequivalenttothirtytwopercent(32%)intheyear2000.

Thisisthesocalledtaxsparingrule.

3.Capitalgainsfromsaleofsharesofstocknottradedinthestockexchange

a.NotoverP100,0005%

b.OverP100,00010%

Taxsparingrule

Involvesintercorporatedividendsreceivedbyanonresidentforeigncorporationfromadomesticcorporation
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Only15%finalwithholdingtaxoncashand/orpropertydividendsisimposed

Providedthecountryinwhichthenonresidentforeigncorporationisdomiciledshallallowacreditagainstthetaxduefromthenon
residentforeigncorporationtaxesdeemedtohavebeenpaidinthePhilippines,whichis32%by2000[Sec.28,(B)(5)(b)]

TAXONIMPROPERLYACCUMULATEDEARNINGS

Impositionofthetax

Inadditiontotheotherincometaxes,thereisherebyimposedforeachtaxableyearontheimproperlyaccumulatedtaxableincome
ofeachcorporationanimproperlyaccumulatedearningstaxequaltotenpercent(10%)oftheimproperlyaccumulatedtaxable
income.[Section29,NIRC]

Corporationssubjecttoimproperlyaccumulatedearningstax

Theimproperlyaccumulatedearningstaxshallapplytoeverycorporationformedoravailedforthepurposeofavoidingtheincome
taxwithrespecttoshareholdersortheshareholdersofanyothercorporation,bypermittingearningsandprofitstoaccumulate
insteadofbeingdividedordistributed.

Exceptionstoimproperlyaccumulatedearningstax

Theimproperlyaccumulatedearningstaxshallnotapplyto:

1.Publiclyheldcorporations

2.Banksandothernonbankfinancialintermediaries

3.Insurancecompanies

Evidenceofpurposetoavoidincometax

PrimaFacieEvidence:Thefactthatanycorporationisamereholdingcompanyorinvestmentcompanyshallbeprimafacie
evidenceofapurposetoavoidthetaxuponitsshareholdersormembers.

EvidenceDeterminativeofPurpose:Thefactthattheearningsorprofitsofacorporationarepermittedtoaccumulatebeyondthe
reasonableneedsofthebusinessshallbedeterminativeofthepurposetoavoidthetaxuponitsshareholdersormembersunlessthe
corporation,byclearpreponderanceofevidence,shallprovetothecontrary.

Thetermreasonableneedsofthebusinessincludesthereasonablyanticipatedneedsofthebusiness.

Computationofimproperlyaccumulatedtaxableincome

Taxableincomeadjustedby:

1.Incomeexemptfromtax

2.Incomeexcludedfromgrossincome

3.Incomesubjecttofinaltaxand

4.Amountofnetoperatinglosscarryoverdeducted

Andreducedbythesumof:

1.Dividendsactuallyorconstructivelypaidand

2.Incometaxpaidforthetaxableyear.

Coverage

Forcorporationsusingthecalendarbasis,theaccumulatedearningstaxshallnotapplyonimproperlyaccumulatedincomeasof31
December1997.
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Forcorporationsadoptingthefiscalyearaccountingperiod,theimproperlyaccumulatedincomenotsubjecttothistaxshallbe
reckonedasoftheendofthemonthcomprisingthe12monthperiodoffiscalyear19971998.

EXEMPTIONOFCERTAINORGANIZATIONS

Exemptionfromtaxoncorporations

Thefollowingorganizationsshallnotbetaxedinrespecttoincomereceivedbythemassuch:

1.Labor,agriculturalorhorticulturalorganizationnotorganizedprincipallyforprofit

2.Mutualsavingsbanknothavingacapitalstockrepresentedbyshares,andcooperativebankwithoutcapitalstockorganized
andoperatedformutualpurposesandwithoutprofit

3.Abeneficiarysociety,orderorassociation,operatingfortheexclusivebenefitofthememberssuchasafraternalorganization
operatingunderthelodgesystem,oramutualaidassociationoranonstockcorporationorganizedbyemployeesprovidingfor
thepaymentoflife,sickness,accident,orotherbenefitsexclusivelytothemembersofsuchsociety,order,orassociation,or
nonstockcorporationortheirdependents

4.Cemeterycompanyownedandoperatedexclusivelyforthebenefitofitsmembers

5.Nonstockcorporationorassociationorganizedandoperatedexclusivelyforreligious,charitable,scientific,athletic,orcultural
purposes,orfortherehabilitationofveterans,nopartofitsnetincomeorassetshallbelongtoorinuretothebenefitofany
member,organizers,officeroranyspecificperson

6.Businessleague,chamberofcommerce,orboardoftradenotorganizedforprofitandnopartofthenetincomeofwhich
inurestothebenefitofanyprivatestockholderorindividual

7.Civicleagueororganizationnotorganizedforprofitbutoperatedexclusivelyforthepromotionofsocialwelfare

8.Anonstock,nonprofiteducationalinstitution

9.Governmenteducationalinstitution

10.Farmersorothermutualtyphoonorfireinsurancecompany,mutualditchorirrigationcompany,mutualorcooperative
telephonecompany,orlikeorganizationofapurelylocalcharacter,theincomeofwhichconsistssolelyofassessments,dues,
andfeescollectedfrommembersforthesolepurposeofmeetingsitsexpensesand

11.Farmers,fruitgrowers,orlikeassociationorganizedandoperatedasasalesagentforthepurposeofmarketingtheproducts
ofitsmembersandturningbacktothemtheproceedsofsales,lessthenecessarysellingexpensesonthebasisofthe
quantityofproductsfinishedbythem.[Section30,NIRC]

Incomebyexemptedcorporationswhicharenotexempted

Notwithstandingtheprovisionsintheprecedingparagraphs,theincomeofwhateverkindandcharacteroftheforegoing
organizationsfromanyoftheirproperties,realorpersonal,orfromanyoftheiractivitiesconductedforprofitregardlessofthe
dispositionmadeofsuchincome,shallbesubjecttotaximposedunderthisCode.[2ndpargraph,Section30,NIRC]

Thus,thefollowingincomeoftheexemptedorganizationsshallnotbeexempted:

1.Incomeofwhateverkindandcharacterfromanyoftheirproperties,realorpersonal

2.Incomefromanyoftheiractivitiesconductedforprofit

SeeCommissionerv.CAre.YMCAcaseinGeneralPrinciplesofTaxation

Commissionerv.CA,CTA&AteneodeManilaUniversity,271SCRA605

In conducting researches and studies of social organizations and cultural values thru its IPC, is Ateneo performing the work of an
independentcontractorandthustaxableforthecontractorstax?

NO.Anacademicinstitutionconductingresearchespursuanttoitscommitmentstoeducationandultimatelytopublicservicecannot
beconsideredasanindependentcontractorwhenitacceptssponsorshipsforitsresearchactivitiesfrominternationalorganizations,private
foundationsandgovernmentagencies.

The research activity of the IPC is done in pursuance of maintaining Ateneo's university status and not in the course of an
independentbusinessofsellingsuchresearchwithprofitinmind.
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Itiserrortoapplytheprinciplesoftaxexemptionwithoutfirstapplyingthewellsettleddoctrineofstrictinterpretationinthe
impositionoftaxesitisobviouslybothillogicalandimpracticaltodeterminewhoareexemptedwithoutfirstdeterminingwhoarecovered
byaprovisionoftheNIRC.

Hornbookdoctrineintheinterpretationoftaxlaws:

Statutewillnotbeconstruedasimposingataxunlessitdoessoclearly,expressly,andunambiguously.Ataxcannotbeimposed
withoutclearandexpresswordsforthatpurpose.Accordingly,thegeneralruleofrequiringadherencetotheletterinconstruingstatutes
applieswithpeculiarstrictnesstotaxlawsandtheprovisionsofataxingactarenottobeextendedbyimplication.

GROSSINCOME

Grossincome

Grossincomemeansallincomederivedfromwhateversource,including(butnotlimitedto)thefollowingitems:

1.Compensationforservicesinwhateverformpaid,including,butnotlimitedto,fees,salaries,wages,commissions,andsimilar
items

2.Grossincomederivedfromtheconductoftradeorbusinessortheexerciseofaprofession

3.Gainsderivedfromdealingsinproperty

4.Interests

5.Rents

6.Royalties

7.Dividends

8.Annuities

9.Prizesandwinnings

10.Pensionsand

11.Partnersdistributivesharefromthenetincomeofthegeneralprofessionalpartnership.

COMPENSATIONFORSERVICES

Compensationforservices

Thismeansallremunerationforservicesperformedbyanemployeeforhisemployerunderanemployeremployeerelationship.

Compensationpaidinkind

Compensationmaybepaidinmoneyorinsomemediumotherthanmoney.

Livingquartersormeals

Ifapersonreceivesasalaryasaremunerationforservicesrenderedand,inadditionthereto,livingquartersormealsareprovided,
thevaluetosuchpersonofthequartersandmealssofurnishedshallbeaddedtotheremunerationpaidforthepurposeof
determiningtheamountofcompensationsubjecttowithholding.

However,iflivingquartersormealsarefurnishedtoanemployeefortheconvenienceoftheemployer,thevaluethereofneednotbe
includedaspartofcompensationincome.[Section2.78.1,RevenueRegulations298]

Facilitiesandprivilegesofarelativelysmallvalue

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Facilitiesarenotconsideredascompensationsubjecttowithholdingifsuchfacilitiesorprivilegesareofrelativelysmallvalueandare
offeredorfurnishedbytheemployermerelyasameansofpromotingthehealth,goodwill,contentment,orefficiencyofhis
employees.[Section2.78.1,RevenueRegulations298]

Tipsandgratuities

Tipsorgratuitiespaiddirectlytoanemployeebyacustomeroftheemployerwhicharenotaccountedforbytheemployeetothe
employerareconsideredastaxableincomebutnotsubjecttowithholding.

Fixedorvariabletransportation,representationandotherallowances

Ingeneral,fixedorvariabletransportation,representationandotherallowanceswhicharereceivedbyapublicofficeroremployeeor
officeroremployeeofaprivateentity,inadditiontotheregularcompensationfixedforhispositionoroffice,iscompensationsubject
towithholding.

Anyamountpaidspecifically,eitherasadvancementsorreimbursements,fortraveling,representationandotherbonafideordinary
andnecessaryexpensesincurredorreasonablyexpectedtobeincurredbytheemployeeintheperformanceofhisdutiesarenot
compensationsubjecttowithholding,ifthefollowingconditionsaresatisfied:

1.Itisforordinaryandnecessarytravelingandrepresentationorentertainmentexpensespaidorincurredbytheemployeein
thepursuitofthetrade,businessorprofessionand

2.Theemployeeisrequiredtoaccountorliquidatefortheforegoingexpensesinaccordancewiththespecificrequirementsof
substantiationforeachcategoryofexpenses.Theexcessofactualexpensesoveradvancesmadeshallconstitutetaxable
incomeifsuchamountisnotreturnedtotheemployer.

Vacationandsickleaveallowances

Amountsofvacationallowancesorleavecreditswhicharepaidtoanemployeeconstitutescompensation.Thus,thesalaryofan
employeeonvacationoronsickleave,whicharepaidnotwithstandinghisabsencefromworkconstitutescompensation.

However,themonetizedvalueofunutilizedleavecreditsoften(10)daysorlesswhichwerepaidtotheemployeeduringtheyear
arenotsubjecttoincometax.

IMPOSITIONOFFRINGEBENEFITTAX

Impositionoffringebenefittax

Afinaltaxof32%effective01January2000isimposedonthegrossedupmonetaryvalueoffringebenefitfurnishedorgrantedto
theemployee,exceptrankandfile,bytheemployer,whetheranindividualoracorporation.

Thefringebenefittaxispaidbytheemployer.

Grossedupmonetaryvalueisacquiredbydividingtheactualmonetaryvalueofthefringebenefitby68%effective01January2000.

Fringebenefit

Fringebenefitmeansanygood,serviceorotherbenefitfurnishedorgrantedincashorinkindbyanemployertoanindividual
employee,exceptrankandfileemployees,suchas,butnotlimitedto,thefollowing:

1.Housing

2.Expenseaccount

3.Vehicleofanykind

4.Householdpersonnel,suchasmaid,driverandothers

5.Interestonloanatlessthanmarketratetotheextentofthedifferencebetweenthemarketrateandactualrategranted

6.Membershipfees,duesandotherexpensesbornebytheemployerfortheemployeeinsocialandathleticclubsorothersimilar
organizations

7.Expensesforforeigntravel

8.Holidayandvacationexpenses

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9.Educationalassistancetotheemployeeorhisdependentsand

10.Lifeorhealthinsuranceandothernonlifeinsurancepremiumsorsimilaramountsinexcessofwhatthelawallows.

FringebenefitswhicharenotsubjecttoFBT

1.Fringebenefitswhichareauthorizedandexemptedfromtaxunderspeciallaws.

2.Contributionsoftheemployerforthebenefitoftheemployeetoretirement,insuranceandhospitalizationbenefitplans.

3.Benefitsgiventotherankandfileemployees,whethergrantedunderacollectivebargainingagreementornot.

4.Deminimisbenefits.

5.Fringebenefitisrequiredbythenatureof,ornecessarytothetrade,businessorprofessionoftheemployer.

6.Itisfortheconvenienceoradvantageoftheemployer.

Convenienceoftheemployerrule

Underthisrule,allowancesfurnishedtotheemployeefor,andasanecessaryincidentto,theperformanceofhisdutiesarenot
taxable.

Thus,thevalueofmealsandlivingquartersgiventoadriverwhoisavailableanyhourofthedaywhenneededbyhisdoctor
employerisnotconsideredincomeofthesaiddriver.

Deminimisbenefits

Thesearefacilitiesorprivilegesfurnishedorofferedbyanemployertohisemployeesthatareofrelativelysmallvalueandare
offeredorfurnishedbytheemployermerelyasameansofpromotingthehealth,goodwill,contentment,orefficiencyofhisemployee.

GROSSINCOMEFROMTHECONDUCTOFTRADEORBUSINESS

Performanceofthefunctionsofapublicoffice

Thetermtradeorbusinessincludestheperformanceofthefunctionsofapublicoffice.[Section22(S),NIRC]

INTERESTINCOME

Sourcesofinterestincome

1.interestonbankdeposit/depositsubstitutes/trustfundandsimilararrangement

2.interestfromlending/interestincomefrombonds

3.interestonuncollectedsalary

4.interestonforeignbonds/governmentbonds

5.interestontreasurybills

6.interestearnedfromdepositsmaintainedundertheforeigncurrencydepositsystem

7.interestincomeofpawnshopoperators

Interestincomeearnedbynonstock,nonprofiteducationalinstitutions

Interestincomeshallbeexemptonlywhenuseddirectlyandexclusivelyforeducationalpurposes.Tosubstantiatethisclaim,the
institutionmustsubmitanannualinformationreturnanddulyauditedfinancialstatement.Acertificationofactualutilizationandthe
Boardresolutionontheproposedprojecttobefundedoutofthemoneydepositedinbanksmustalsobesubmitted.[Departmentof
FinanceOrder14995]

RENTALS

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Operatinglease

Anoperatingleaseisacontractunderwhichtheassetisnotwhollyamortizedduringtheprimaryperiodofthelease,andwherethe
lessordoesnotrelysolelyontherentalsduringtheprimaryperiodforhisprofits,butlooksfortherecoveryofthebalanceofhis
costsandfortherestsofhisprofitsfromthesaleorreleaseofthereturnedassetsattheendoftheprimaryleaseperiod.

Financelease

Alsocalledfullpayoutleaseisacontractinvolvingpaymentoveranobligatoryperiod(alsocalledprimaryorbasicperiod)of
specifiedrentalamountsfortheuseofalessorsproperty,sufficientintotaltoamortizethecapitaloutlayofthelessorandtoprovide
forthelessorsborrowingcostsandprofits.

Obligatoryperiodisprimarynoncancelableperiodoftheleasewhichinnocaseshallbelessthan730days.

Lesseeexerciseschoiceovertheasset.

DIVIDENDINCOME

Dividends

Dividendsmeansanydistributionmadebyacorporationtoitsshareholdersoutofitsearningsonprofitsandpayabletoits
shareholders,whetherinmoneyorinotherproperty.

Kindsofdividendincome

1.Cashdividend

2.Stockdividend/stockrights

3.Propertydividend

4.Liquidatingdividend

Stockdividend

Astockdividendrepresentingthetransferofsurplustocapitalaccountshallnotbesubjecttotax.

Itshallbetaxableonlyifsubsequentlycancelledandredeemedbythecorporation.

Itisalsotaxableifitleadstoasubstantialalterationintheproportionoftaxownershipinacorporation.

Whenredemptionofstockdividendsbyacorporationisessentiallyequivalenttoadistributionoftaxabledividends(CIRv.
CA,et.al.,G.R.No.108576dated1/20/99)

Ifthesourceoftheredeemedsharesistheoriginalcapitalsubscriptionsuponestablishmentofthecorporationorfrominitialcapital
investmentinanexistingenterprise,itsredemptiontotheconcurrentvalueofacquisitionwouldnotbeincomebutamerereturnof
capital.Ontheotherhand,iftheredeemedsharesarefromstockdividenddeclarations,theproceedsoftheredemptionisadditional
wealth,foritisnotmerelyareturnofcapital,andthus,deemedastaxabledividends.

Dividendspaidinproperty

Dividendspaidinsecuritiesorotherproperty,inwhichtheearningsofacorporationhavebeeninvested,areincometotherecipients
totheamountofthefullmarketvalueofsuchpropertywhenreceivablebyindividualstockholders.

Adividendpaidinstockofanothercorporationisnotastockdividend,eventhoughthestockdistributedwasacquiredthroughthe
transferbythecorporationdeclaringthedividendsofpropertytothecorporationthestockofwhichisdistributedasadividend.
[Section251,RevenueRegulations2]

Liquidatingdividend

Whereacorporationdistributesallitsassetsincompleteliquidationordissolution,thegainrealizedorlosssustainedbythe
stockholder,whetherindividualorcorporation,isataxableincomeordeductibleloss,asthecasemaybe.

Disguiseddividends

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Thesearepaymentswhichareequivalenttodividenddistribution.

Inthecaseofexcessivepaymentsbycorporations,ifsuchpaymentscorrespondorbearacloserelationshiptostockholdings,and
arefoundtobeadistributionofearningsorprofits,theexcessivepaymentswillbetreatedasdividends.[Section71,Revenue
Regulation2]

EXCLUSION

Exclusion

Exclusionreferstoincomereceivedorearnedbutisnottaxableasincomebecauseitisexemptedbylaworbytreaty.Suchtaxfree
incomeisnottobeincludedintheincometaxreturnunlessinformationregardingitisspecificallycalledfor.

Exclusionsfromgrossincome

1.Proceedsfromlifeinsurance

2.Amountreceivedbyinsuredasreturnofpremium

3.Gifts,bequestsanddevises

4.Compensationforinjuriesorsickness

5.Incomeexemptundertreaty

6.Retirementbenefits,pensions,gratuities,etc.

7.Incomederivedbyforeigngovernment

8.IncomederivedbythePhilippineGovernmentoritspoliticalsubdivisions

9.Prizesandawardsmadeprimarilyinrecognitionofreligious,charitable,scientific,educational,artistic,literaryorcivicachievement

10.Prizesandawardsinsportscompetitionssanctionedbythenationalsportsassociations

11.13thmonthpayandotherbenefitsnotexceedingP30,000.00

12.GSIS,SSS,Medicareandothercontributions

13.Gainsfromthesaleofbonds,debenturesorothercertificateofindebtedness

14.Gainsfromredemptionofsharesinmutualfund

Retirementbenefits,pensions,gratuities,etc.

Suchexclusionsinclude:

1.RetirementbenefitsunderRANo.7641orareasonableprivatebenefitplan

2.Amountreceivedbyanofficialoremployeeorbyhisheirsfromtheemployerduetoseparationfromtheservicebecauseof
death,sicknessorotherphysicaldisabilityorforanycausebeyondthecontroloftheofficialoremployee

3.Socialsecuritybenefits,retirementgratuities,pensionsandothersimilarbenefitsreceivedbyresidentornonresidentcitizens
orresidentaliensfromforeigngovernmentagenciesandotherinstitutions,privateorpublic

4.PaymentofbenefitstoaresidentpersonundertheUnitedStatesVeteransAdministration

5.BenefitsreceivedfromorenjoyedundertheSocialSecuritySystem

6.BenefitsreceivedfromtheGovernmentServiceInsuranceSystem,includingretirementgratuityreceivedbygovernment
officialsandemployees

Requisitesforexclusionofretirementbenefits

1.ItmustbereceivedunderRA7641orinaccordancewithareasonableprivatebenefitplanmaintainedbytheemployer.

2.Retiringemployeeorofficialhasbeenintheserviceofthesameemployerforatleastten(10)yearsandisnotlessthanfifty(50)
yearsofageatthetimeofhisretirement.
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3.Benefitsgrantedundertheprovisionshallbeavailedofbyanofficialoremployeeonlyonce.

Reasonableprivatebenefitplan

Itmeansapension,gratuity,stockbonusorprofitsharingplanmaintainedbyanemployerforthebenefitofsomeorallofhis
officialsoremployees,orboth,forthepurposeofdistributingtosuchofficialsandemployeestheearningsandprincipalofthefund
thusaccumulated,andwhereinitisprovidedinsaidplanthatatnotimeshallanypartofthecorpusorincomeofthefundbeused
for,orbedivertedto,anypurposeotherthanfortheexclusivebenefitofthesaidofficialsandemployees.

Separationpayandamountsreceivedduetoinvoluntaryseparation

Anyamountreceivedbyanofficialoremployeeorbyhisheirsfromtheemployerduetodeath,sicknessorotherphysicaldisabilityor
foranycausebeyondthecontrolofthesaidofficialoremployeeisexcludedfromgrossincome.

Causebeyondthecontroloftheemployee

Thephraseforanycausebeyondthecontrolofthesaidofficialoremployeeconnotesinvoluntarinessonthepartoftheofficialor
employee.Theseparationfromtheserviceoftheofficialoremployeemustnotbeaskedfororinitiatedbyhim.[Section2.78.1,
RevenueRegulation298]Theseparationwasnotofhisownmaking.

Terminalleavepay

Commutationofleavecreditsorterminalleavepayaregivennotonlyatthesametimebutalsoforthesamepolicyconsiderations
governingretirementbenefits.Thus,notbeingpartofthegrosssalaryorincomebutaretirementbenefit,terminalpayisnotsubject
toincometax.[Commissionerv.CourtofAppeals,203SCRA72]

Terminalleavepayisexemptfromincometax.[Zialcitacase,190SCRA851]

Incomederivedbyaforeigngovernment

IncomederivedfrominvestmentsinthePhilippinesinloans,stocks,bondsorotherdomesticsecurities,orfrominterestondepositsin
banksinthePhilippinesby:

1.foreigngovernments

2.financinginstitutionsowned,controlled,orenjoyingrefinancingfromforeigngovernmentsand

3.internationalorregionalfinancialinstitutionsestablishedbyforeigngovernments.

IncomebythePhilippinegovernment

1.Incomederivedfromanypublicutilityorfromtheexerciseofanyessentialgovernmentalfunction

2.AccruingtotheGovernmentortoanypoliticalsubdivisionthereof.

Prizesandawardsinrecognitionofreligious,charitable,scientific,educational,artistic,literaryorcivicachievement

1.Madeprimarilyinrecognitionofreligious,charitable,scientific,educational,artistic,literaryorcivicachievement.

2.Therecipientwasselectedwithoutanyactiononhisparttoenterthecontestorproceeding.

3.Therecipientisnotrequiredtorendersubstantialfutureservicesasaconditiontoreceivingtheprizeoraward.

Prizesandawardsinsportscompetitions

1.Prizesandawardsmustbegrantedtoathletesinlocalandinternationalsportscompetitionsandtournaments.

2.SportscompetitionortournamentheldeitherinthePhilippinesorabroad.

3.Sportscompetitionortournamentmustbesanctionedbytheirnaturalsportsassociations.

DEDUCTIONS

INGENERAL

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Deductions

Deductionsareitemsoramountswhichthelawallowstobedeductedundercertainconditionsfromgrossincomeinordertoarrive
attaxableincome.

Deductionv.exemption

Deductionisanamountallowedbylawtobesubtractedfromgrossincometoarriveattaxableincome.Exemptionfromtaxationis
thegrantofimmunitytoparticularpersonsorcorporationsortopersonsorcorporationsofaparticularclassfromataxwhichothers
generallywithinthesametaxingdistrictareobligedtopay.

Deductionv.exclusion

Deductionisanamountallowedbylawtobesubtractedfromgrossincometoarriveattaxableincome.Exclusionreferstoincome
receivedorearnedbutisnottaxableasincomebecauseexemptedbylaworbytreaty.Suchtaxfreeincomeisnottobeincludedin
theincometaxreturnunlessinformationregardingitisspecificallycalledfor.[Section61,RevenueRegulation2]

Basicprinciplesgoverningdeductions

1.Thetaxpayerseekingadeductionmustpointtosomespecificprovisionsofthestatuteauthorizingthedeductionand

2.Hemustbeabletoprovethatheisentitledtothedeductionauthorizedorallowed.

Kindsofdeductions

1.Itemizeddeductionwhichisavailabletoindividualandcorporatetaxpayers

2.Optionalstandarddeductionwhichisavailabletoindividualtaxpayersonly,exceptanonresidentalien

3.Specialdeductionswhichisavailable,inadditiontotheitemizeddeductions,tocertaincorporations,i.e.insurancecompaniesand
proprietaryeducationalcorporations

Timewithinwhichtoclaimdeduction

1.Asarule,ifataxpayerdoesnot,withinanyyear,deductcertainofhisexpenses,losses,interests,taxes,orothercharges,hecannot
deductthemfromtheincomeofthenextoranysucceedingyear.

2.Ifhekeepshisbooksonthecashreceiptsbasis,theexpensesaredeductibleintheyeartheyarepaid.

3.Ifontheaccrualbasis,thenintheyeartheyareincurred,whetherpaidornot.

Whomaynotavailofdeductionsfromgrossincome?

1.Citizensandresidentalienswhoseincomeispurelycompensationincome.

Theyareallowedpersonalandadditionalexemptionsanddeductionforpremiumpaymentsonhealthandhospitalization
insurance.

2.NonresidentaliensnotengagedintradeorbusinessinthePhilippines

3.Nonresidentforeigncorporations

Deductionsfromgrossincome

1.Expenses

2.Interest

3.Taxes

4.Losses

5.Baddebts

6.Depreciation

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7.Depletionofoilandgaswellsandmines

8.Charitableandothercontributions

9.Researchanddevelopment

10.Pensiontrusts

11.Premiumpaymentsonhealthand/orhospitalizationinsuranceofanindividualtaxpayer

Somerulesondeduction

Acorporationmayavailonlyofthedeductionsfrom(1)to(10)premiumpaymentsonhealthand/orhospitalizationinsuranceis
deductibleonlybyanindividualtaxpayer.

Acorporationmayavailonlyoftheitemizeddeductionsanindividual,exceptanonresidentalien,mayelecttheitemizeddeductions
ortheoptionalstandarddeduction.

Thus,theoptionalstandarddeductionisnotavailabletocorporations.

Anindividualearningpurelycompensationincomeisnotalloweditemizeddeductions,exceptpremiumpaymentsonhealthand/or
hospitalizationinsurance.Inaddition,heisalsograntedpersonalandadditionalexemptions.

Anindividual,whoearnsincomeotherthanpurelycompensationincome,isallowedpersonalandadditionalexemptionsinadditionto
theitemizeddeductionsortheoptionalstandarddeduction.

Twokindsofdeductionavailabletoindividuals,exceptanonresidentalien

1.Itemizeddeductions

2.Optionalstandarddeduction

Note:Optionalstandarddeductionisnotavailabletocorporations.

ORDINARYANDNECESSARYBUSINESSEXPENSES

Businessexpensev.capitalexpenses

Businessexpensesrefertoalltheordinaryandnecessaryexpensespaidorincurredduringthetaxableyearincarryingonorwhich
aredirectlyattributabletothedevelopment,management,operationand/orconductofthetrade,businessortheexerciseofa
profession.

Capitalexpensesareexpendituresforextraordinaryrepairswhicharecapitalizedandsubjecttodepreciation.Theseareexpenses
whichtendtoincreasethevalueorprolongthelifeofthetaxpayersproperty.

Ordinaryandnecessaryexpenses

Anexpenseisordinarywhenitiscommonlyincurredinthetradeorbusinessofthetaxpayerasdistinguishedfromcapital
expenditures.Thepayments,however,neednotbenormalorhabitualinthesensethatthetaxpayerwillhavetomakethemoften.
Thepaymentmaybeuniqueornonrecurringtotheparticulartaxpayeraffected.

Anexpenseisnecessarywhenitisappropriateandhelpfultothetaxpayersbusinessorifitisintendedtorealizeaprofitorto
minimizealoss.

Requisitesfordeductibilityofbusinessexpense

1.Theexpensesmustbeordinaryandnecessary.

2.Itmustbepaidorincurredduringthetaxableyear.

3.Itmustbepaidorincurredincarryingonanytradeorbusinessorprofession.

4.Itmustbereasonableinamount.

5.Itmustbesubstantiatedbysufficientevidencesuchasofficialreceiptsandotherofficialrecords.

6.Itmustnotbeagainstlaw,morals,publicpolicyorpublicorder.
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Substantiationrequirementforbusinessexpense

Taxpayerneedtosubstantiatewithsufficientevidence,suchasofficialreceiptsorotheradequaterecords:

1.theamountoftheexpensebeingdeductedand

2.thedirectconnectionorrelationoftheexpensebeingdeductedtothedevelopment,management,operationand/orconduct
ofthetrade,businessorprofessionofthetaxpayer.

Whatareincludedinbusinessexpenses?

Businessexpensesinclude:

1.Salaries,wagesandotherformsofcompensationforpersonalservicesactuallyrendered,includingthegrossedupmonetary
valueoffringebenefitgrantedprovidedthefringebenefittaxhasbeenpaid.

2.Travelexpenses,hereandabroad,whileawayfromhome.

3.Rentalsand/orotherpaymentsofpropertytowhichthetaxpayerhasnottakenorisnottakingtitleorinwhichhehasno
equityotherthanthatofalessee,userorpossessor.

4.Entertainment,amusementandrecreationexpenses.

Requisitesfordeductibilityofcompensationpayments

1.Thepaymentsarereasonable.

2.Theyare,infact,paymentsforpersonalservicesactuallyrendered.[Section70,RevenueRegulation2]

Treatmentofexcessivecompensation

Inthecaseofexcessivepaymentsbycorporations,ifsuchpaymentscorrespondorbearacloserelationshiptostockholdings,and
arefoundtobedistributionofearningsorprofits,theexcessivepaymentswillbetreatedasdividends.[Section71,Revenue
Regulations2]

Ifsuchpaymentsconstitutepaymentforproperty,theyshouldbetreatedbythepayorascapitalexpenditureandbytherecipientas
partofthepurchaseprice.[Section71,RevenueRegulations2]

Requisitesfordeductibilityofbonusestoemployees

1.Thebonusesaremadeingoodfaith.

2.Theyaregivenforpersonalservicesactuallyrendered.

3.Theydonotexceedareasonablecompensationfortheservicesrendered,whenaddedtothestipulatedsalaries,measuredbythe
amountandqualityofservicesperformedinrelationtothetaxpayersbusiness.[Section72,RevenueRegulations2]

InKuenzlev.CIR[28SCRA365]andC.M.Hoskinsv.CIR[30SCRA434],theSupremeCourtdisalloweddeductionsforbonuses
giventothetopofficersoftheinvolvedcorporationsforbeingunreasonable.

Pensionsandcompensationforinjuries

Amountspaidforpensionstoretiredemployeesortotheirfamiliesorothersdependentuponthem,oronaccountofinjuriesreceived
bytheemployee,andlumpsumamountspaidoraccruedascompensationforinjuriesareproperdeductionsasordinaryand
necessaryexpenses.Suchdeductionsarelimitedtotheamountnotcompensatedforbyinsuranceorotherwise.

Rulesonrepairs

Expensesforrepairsaredeductibleifsuchrepairsareincidentalorordinary,thatis,madetokeepthepropertyusedinthetradeor
businessofthetaxpayerinanordinarilyefficientoperatingcondition.

Repairsinthenatureofreplacementtotheextentthattheyarrestdeteriorationandprolongthelifeofthepropertyarecapital
expendituresandshouldbedebitedagainstthecorrespondingallowancefordepreciation.[Section68,RevenueRegulations2]

Travelexpenses
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Travelexpensesincludetransportationexpensesandmealsandlodgingofanemployeepaidforbytheemployer.[Section66,
RevenueRegulations2]

Requisitesfordeductibilityoftravelexpenses

1.Theexpensesmustbereasonableandnecessary.

2.Theymustbeincurredorpaidwhileawayfromhome.

3.Theymustbepaidorincurredintheconductoftradeorbusiness.

Taxhome

Taxhomeistheprincipalplaceofbusiness,whenreferringtoawayfromhome.

Rentalexpense

Areasonableallowanceforrentalsand/orotherpaymentswhicharerequiredasaconditionforthecontinueduseorpossession,for
purposesofthetrade,businessorpropertytowhichthetaxpayerhasnottakenorisnottakingtitleorinwhichhehasnoequity
otherthanthatofalessee,userorpossessorisdeductiblefromthegrossincome.

Wherealeaseholdisacquiredforbusinesspurposesforaspecifiedsum,thepurchasermaytakeasadeductioninhisreturnan
adequatepartofsuchsumeachyear,basedonthenumberofyearstheleasehastorun.

Taxespaidbyatenanttoorforalandlordforbusinesspropertyareadditionalrentandconstituteadeductiblerenttothetenantand
taxableincometothelandlordtheamountoftaxbeingdeductiblebythelatter.

Thecostbornebythelesseeinerectingbuildingsormakingpermanentimprovementsongroundofwhichheisalesseeisheldtobe
acapitalinvestmentandnotdeductibleasabusinessexpense.

Requisitesforrentalexpense

1.Requiredasaconditionforcontinueduseorpossession

2.Forpurposesofthetrade,businessorprofession

3.Taxpayerhasnottakenorisnottakingtitletothepropertyorhasnoequityotherthanthatofalessee,userorpossessor

Entertainment,amusementandrecreationexpense

1.Reasonableinamount

2.Incurredduringthetaxableperiod

3.Directlyconnectedtothedevelopment,management,andoperationofthetrade,business,orprofessionofthetaxpayer,orthatare
directlyrelatedtoorinfurtheranceoftheconductofhisoritstrade,businessorprofession

4.NottoexceedsuchceilingastheSecretaryofFinancemay,byrulesandregulations,prescribe

5.Anyexpenseincurredforentertainment,amusementorrecreationwhichiscontrarytolaw,morals,publicpolicy,orpublicordershall
innocasebeallowedasadeduction

Optiontoprivateeducationalinstitutions

Inadditiontotheallowabledeductions,aprivateeducationalinstitutionmay,atitsoption,electeither:

1.Todeductexpendituresotherwiseconsideredascapitaloutlaysofdepreciableassetsincurredduringthetaxableyearforthe
expansionofschoolfacilitiesor

2.Todeductallowancefordepreciationthereof.

Treatmentofotherexpenses

1.Advertisingexpense

Notdeductiblebusinessexpense.Effortstoestablishreputationareakintoacquisitionofcapitalassetsand,therefore,
expensesrelatedtheretoarenotbusinessexpensebutcapitalexpenditures.
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2.Promotionalexpenses

Sameasadvertisingexpense

3.Litigationexpenses

Litigationexpensesthatareincurredinthedefenseorprotectionoftitlearecapitalinnatureandnotdeductible.

InGutierrezv.CIR[14SCRA34],itwasheldthatlitigationexpensesdefrayedbyataxpayertocollectapartmentrentals
andtoejectdelinquenttenantsareordinaryandnecessaryexpensesinpursuinghisbusiness.

INTERESTEXPENSE

Interest

Theamountofinterestpaidorincurredwithinataxableyearonindebtednessinconnectionwiththetaxpayersprofession,tradeor
businessshallbeallowedasdeductionfromgrossincome.

Backtobackinterest

Thetaxpayersallowabledeductionforinterestexpenseshallbereducedbyanamountequalto38%by01January2000ofthe
interestincomeearnedbyhimwhichhasbeensubjectedtoafinaltax.

Interestwhichcannotbededucted

1.Interestispaidinadvancethroughdiscountorotherwisebyanindividualtaxpayerreportingincomeonthecashbasis.Suchinterest
shallbeallowedasadeductionintheyeartheindebtednessispaid.

2.Interestbetweenrelatedtaxpayers.

3.Iftheindebtednessisincurredtofinancepetroleumexploration.

Requisitesfordeductibilityofinterestexpense

1.Theremustbeanindebtednessincurredbythetaxpayerinconnectionwiththetaxpayerstrade,businessorprofession.

2.Theinterestmusthavebeenpaidorincurredwithinthetaxableyear.

3.Theinterestmusthavebeenstipulatedinwriting.

Optionaltreatmentofinterestexpense

Attheoptionofthetaxpayer,interestincurredtoacquirepropertyusedintrade,businessorexerciseofaprofessionmaybeallowed
asadeductionortreatedasacapitalexpenditure.

Delinquencyinterestontaxpaymentdeductible

Forinteresttobeallowedasdeductionfromgrossincome,itmustbeshownthattherebeanindebtedness,thatthereshouldbe
interestuponit,andthatwhatisclaimedasaninterestdeductionshouldhavebeenpaidoraccruedwithintheyear.Theterm
indebtednesshasbeendefinedasanunconditionalandlegallyenforceableobligationforthepaymentofmoney.Withinthemeaning
ofthatdefinition,ataxmaybeconsideredasanindebtedness.Hence,interestpaidforlatepaymentofthedonorstaxisdeductible
fromgrossincome.[Commissionerv.Prieto,109Phil592]

TAXES

Whattaxesaredeductible?

Asageneralrule,alltaxes,nationalorlocal,paidorincurredwiththetaxableyearinconnectionwiththetaxpayerstrade,business
orprofessionaredeductiblefromgrossincome.

Taxesmeanstaxesproperand,therefore,nodeductionsareallowedforamountsrepresentinginterest,surchargesandfinesor
penaltiesincidenttodelinquency.

Whattaxesarenotdeductiblefromgrossincome?

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1.Philippineincometax

2.Incometaxesimposedbytheauthorityofanyforeigncountrybutdeductionisallowedonlyinthecaseofataxpayerwhoisentitled
totaxcreditfortaxesofforeigncountriesbutdoesnotavailofthesame

3.Estateanddonorstaxes

4.Specialassessmentsorleviesassessedagainstlocalbenefitsofakindtendingtoincreasethevalueofthepropertyassessed

Taxsubsequentlyrefundedorcredited

Taxespreviouslyallowedasdeductions,whenrefundedorcredited,shallbeincludedaspartofgrossincomeintheyearofreceiptto
theextentoftheincometaxbenefitofsaiddeduction.

Limitationsondeductionsfornonresidentalienengagedintradeorbusinessandresidentforeigncorporation

InthecaseofanonresidentalienindividualengagedintradeorbusinessinthePhilippinesandaresidentforeigncorporation,
deductionsfortaxesshallbeallowedonlyifandtotheextentthattheyareconnectedwithincomefromsourceswithinthe
Philippines.

Taxcredit

Taxcreditreferstothetaxpayersrighttodeductfromtheincometaxduetheamountoftaxhehaspaidtoaforeigncountry
subjecttolimitations.

Taxdeductionv.taxcredit

Intheformer,thetaxesaredeductedfromthegrossincomeincomputingthenetincome,whileinthelatter,thetaxesarededucted
fromPhilippineincometaxitself.

Intheformer,alltaxesasageneralrule,areallowedasdeductionswithsomeexemptions(enumeratedabove),whileinthelatter,
onlyforeignincometaxesmaybeclaimedascreditsagainstPhilippineincometax.

Proofofcredits

ThecreditsshallbeallowedonlyifthetaxpayerestablishestothesatisfactionoftheCommissionerthefollowing:

1.ThetotalamountofincomefromsourceswithoutthePhilippines

2.Theamountofincomederivedfromeachcountry,thetaxpaidorincurredtowhichisclaimedasacreditand

3.Allotherinformationnecessaryfortheverificationandcomputationofsuchcredits.

Creditagainsttaxfortaxesofforeigncountries

Creditmaybeclaimedbyacitizen,domesticcorporation,membersofgeneralprofessionalpartnerships,andbeneficiariesofestates
andtrusts.

Analienindividualandaforeigncorporationarenotallowedtoclaimcreditsagainstthetaxfortaxesofforeigncountries.

Limitationsoncredit

Theamountofthecredittakenshallbesubjecttoeachofthefollowinglimitations:

1.Theamountofthecreditinrespecttothetaxpaidorincurredtoanycountryshallnotexceedthesameproportionofthetaxagainst
whichsuchcreditistaken,whichthetaxpayerstaxableincomefromsourceswithinsuchcountrybearstohisentiretaxableincome
forthesametaxableyearand

2.Thetotalamountofthecreditshallnotexceedthesameproportionofthetaxagainstwhichsuchcreditistaken,whichthe
taxpayerstaxableincomefromsourceswithoutthePhilippinestaxableunderthisTitlebearstohisentiretaxableincomeforthe
sametaxableyear.

LOSSES

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Losses

Thetermimpliesanunintentionalpartingwithsomethingofvalue.

Itisusedintheincometaxlawinaverybroadsensetocomprehendalllosseswhicharenotgeneralornaturaltotheordinary
courseofbusiness.

Requisitesfordeductibilityofloss

1.Thelossmustbeincurredinthetrade,businessorprofessionofthetaxpayer.

2.Itmustbeactuallysustainedandchargedoffwithinthetaxableyear.

3.Itmustbeevidencedbyaclosedandcompletedtransaction.

4.Itmustnotbecompensatedforbyinsuranceorotherformsofindemnity.

5.Ifitisacasualtyloss,thetaxpayerhasfiledasworndeclarationoflosswithin45daysafterthedateofthediscoveryofthecasualty
orrobbery,theft,orembezzlement.

Somerecognizedlosses

1.Ordinarylosses/businesslosses

2.Casualtylosses

3.Capitallosses

4.Securitiesbecomingworthless

5.Lossesfromwashsalesorstockorsecurities

6.Wageringlosses

7.Abandonmentlosses

Note:Capitallossesandsecuritiesbecomingworthlessaregovernedbyrulesonlossfromthesaleorexchangeofcapitalassets.

Casualtyloss

Lossarisesfromfires,storms,shipwreck,orothercasualties,orfromrobbery,theftorembezzlement.

Losslimitationruleforcapitallosses

Lossesfromsalesorexchangesofcapitalassetsshallbeallowedonlytotheextentofthegainsfromsuchsalesorexchanges.

Securitiesbecomingworthless

1.Securitiesbecomeworthlessduringthetaxableyear

2.Securitiesarecapitalassets

3.Lossesareconsideredaslossesfromthesaleorexchange,onthelastdayofsuchtaxableyear,ofcapitalassets

Netoperatingloss

Itmeanstheexcessofallowabledeductionovergrossincomeofthebusinessinataxableyear.

Netoperatinglosscarryover(NOLCO)

NOLCOshallbecarriedoverasadeductionfromthegrossincomeforthenextthree(3)consecutivetaxableyearsimmediately
followingtheyearofloss.

Suchlossshallbeallowedasadeductionifithadnotbeenpreviouslyoffsetasdeductionfromgrossincome.

However,anynetlossincurredinataxableyearduringwhichthetaxpayerwasexemptfromincometaxshallnotbeallowedasa
deduction.
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NOLCOshallbeallowedonlyiftherehasbeennosubstantialchangeintheownershipofthebusinessorenterprise.

Thereisnosubstantialchangewhen:

1.Notlessthan75%innominalvalueofoutstandingissuedshares,ifthebusinessisinthenameofacorporation,isheldbyor
onbehalfofthesamepersonsor

2.Notlessthan75%ofthepaidupcapitalofthecorporation,ifthebusinessisinthenameofacorporation,isheldbyoron
behalfofthesamepersons.

Lossesfromwashsalesofstockorsecurities

Nodeductionforlossshallbeallowedforwashsalesunlesstheclaimismadebyadealerinstockorsecuritiesandwithrespecttoa
transactionmadeintheordinarycourseofthebusinessofsuchdealer.

Washsale

Awashsaleoccurswhereitappearsthatwithinaperiodbeginningthirty(30)daysbeforethedateofthesaleordispositionof
sharesofstockorsecuritiesandendingthirty(30)daysaftersuchdate,thetaxpayerhasacquired(bypurchaseorexchange)orhas
enteredintoacontractoroptiontosoacquire,substantiallyidenticalstockorsecurities.

Wageringlosses

Lossesfromwageringshallbeallowedonlytotheextentofgainsfromsuchtransactions.

Abandonmentlosses

Intheeventacontractareawherepetroleumoperationsareundertakenispartiallyorwhollyabandoned,allaccumulatedexploration
anddevelopmentexpenditurespertainingtheretoshallbeallowedasadeduction.

Incaseaproducingwellissubsequentlyabandoned,theunamortizedcoststhereof,aswellastheundepreciatedcostsofequipment
directlyusedtherein,shallbeallowedasadeductionintheyearsuchwell,equipmentorfacilitiyisabandonedbythecontractor.

BADDEBTS

BadDebts

Baddebtsaredebtsduetothetaxpayerwhichareactuallyascertainedtobeworthlessandchargedoffwithinthetaxableyear.

Requisitesfordeductibilityofbaddebts

1.Theremustbeavalidandsubsistingdebt.

2.Thedebtmustbeactuallyascertainedtobeworthlessanduncollectibleduringthetaxableyear.

3.Thedebtmustbechargedoffduringthetaxableyear.

4.Thedebtmustbeconnectedwiththetrade,businessorprofessionofthetaxpayer,andnotsustainedinatransactionenteredinto
betweenrelatedtaxpayers.

Diligenteffortstocollect

Inadditiontothefourrequisites,thetaxpayermustshowthatthedebtisindeeduncollectibleeveninthefuture.

Furthermore,therearestepsoutlinedtobeundertakenbythetaxpayertoprovethatheexerteddiligenteffortstocollectthedebts,
via:a)sendingofstatementofaccountsb)sendingofcollectionlettersc)givingtheaccounttoalawyerforcollectionandd)filing
acollectioncaseincourt.[PhilippineRefiningCo.v.CourtofAppeals,256SCRA667]

Equitabledoctrineoftaxbenefit

Thisdoctrineholdsthatarecoveryofbaddebtpreviouslydeductedfromgrossincomeconstitutestaxableincomeifintheyearthe
accountwaswrittenoff,thedeductionresultedinataxbenefit,thatis,inthereductionoftaxableincomeofthetaxpayer.
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DEPRECIATION

Depreciation

Depreciationisthegradualdiminutionintheusefulvalueoftangiblepropertyusedintrade,businessorprofessionresultingform
exhaustion,wearandtear,andobsolescence.

Thetermisalsoappliedtoamortizationofthevalueofintangibleassets,theuseofwhichintradeorbusinessisdefinitelylimitedin
duration.

Theincometaxlawdoesnotauthorizethedepreciationofanassetbeyonditsacquisitioncost.Hence,adeductionoverandabove
thecostcannotbeclaimedandallowed.[Basilanv.CIR,21SCRA17]

Depreciationisaquestionoffact

Depreciationisaquestionoffactandisnotmeasuredbytheoreticalyardstick,butshouldbedeterminedbyaconsiderationofactual
facts.[Limpanv.CIR,17SCRA703]

Requisitesfordeductibilityofdepreciation

1.Theallowancefordepreciationmustbereasonable.

2.Itmustbeforpropertyusedinthetrade,businessorprofession.

3.Itmustbechargedoffduringthetaxableyear.

4.Astatementontheallowancemustbeattachedtothereturn.

Deductionforobsolescence

Ifthewholeoranyportionofphysicalpropertyisclearlyshownbythetaxpayerasbeingaffectedbyeconomicconditionsthatwill
resultinitsbeingabandonedatafuturedatepriortotheendofitsnaturallife,sothatdepreciationdeductionsalonewouldbe
insufficienttoreturnthecostattheendofitseconomictermsofusefulness,areasonabledeductionforobsolescence,inadditionto
depreciation,maybeallowed.

Propertyheldforlife

Inthecaseofpropertyheldbyonepersonforlifewithremaindertoanotherperson,thedeductionshallbecomputedasifthelife
tenantweretheabsoluteownerofthepropertyandshallbeallowedtothelifetenant.

Incaseofpropertyheldintrust

Allowabledeductionsshallbeapportionedbetweentheincomebeneficiariesandthetrusteesinaccordancewiththepertinent
provisionsoftheinstrumentcreatingthetrust,orintheabsenceofsuchprovisions,onthebasisofthetrustincomeallowableto
each.

Certainmethodsincomputingdepreciation

1.Thestraightlinemethod

2.Decliningbalancemethod

3.Sumoftheyeardigitmethod.

4.AnyothermethodwhichmaybeprescribedbytheSecretaryofFinanceuponrecommendationoftheCommissioner.

Agreementastousefullifeonwhichdepreciationrateisbased

WherethetaxpayerandtheCommissionerhaveenteredintoanagreementinwritingspecificallydealingwiththeusefullifeandrate
ofdepreciationofanyproperty,theratesoagreeduponshallbebindingonboththetaxpayerandtheNationalGovernmentinthe
absenceoffactsandcircumstancesnottakenintoconsiderationduringtheadoptionofsuchagreement.Theresponsibilityof
establishingtheexistenceofsuchfactsandcircumstancesshallrestwiththepartyinitiatingthemodification.

Wherethetaxpayerhasadoptedsuchusefullifeanddepreciationrateforanydepreciableassetandclaimedthedepreciation
expensesasdeductionfromhisgrossincomewithoutanywrittenobjectiononthepartoftheCommissionerorhisdulyauthorized
representative,theaforesaidusefullifeanddepreciationratesoadoptedbythetaxpayershallbeconsideredbinding.
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Depreciationofpatentorcopyright

Incomputingadepreciationallowanceinthecaseofapatentorcopyright,thecapitalsumtobereplacedisthecostorotherbasis
ofthepatentorcopyright.

Theallowanceshouldbecomputedbyanapportionmentofthecostorotherbasisofthepatentorcopyrightoverthelifeofthe
patentorcopyrightsinceitsgrant,orsinceitsacquisitionbythetaxpayer,orsinceMarch1,1913,asthecasemaybe.

DEPLETIONOFOILANDGASWELLSANDMINES

DepletionofOilandGasWellsandMines

Depletionistheexhaustionofnaturalresourceslikeminesandoilandgaswellsasaresultofproductionorseverancefromsuch
minesorwells.

Determinationofamountofdepletioncost

Indeterminingtheamountofdepletioncostallowable,thefollowingthreefactorsareessential,namely:

1.thebasisoftheproperty

2.theestimatedtotalrecoverableunitsinthepropertyand

3.thenumberofunitsrecoveredduringthetaxableyearinquestion.[ConsolidatedMinesv.CTA,58SCRA618]

Basismeanstheamountofthetaxpayerscapitalorinvestmentinthepropertywhichheisentitledtorecovertaxfreeduringthe
periodheisremovingthemineralinthedeposit.

Intangiblecostinpetroleumoperations

Thisreferstoanycostincurredinpetroleumoperationswhichinitselfhasnosalvagevalueandwhichisincidentaltoandnecessary
forthedrillingofwellsandpreparationofwellsfortheproductionofpetroleum.

Depletionv.depreciation

Botharepredicatedonthesamebasicpremiseofavoidingataxoncapital.

However,depletionisbasedupontheconceptoftheexhaustionofanaturalresourcewhereasdepreciationisbaseduponthe
conceptoftheexhaustionoftheproperty,nototherwiseanaturalresource,usedinatradeorbusinessorheldfortheproductionof
income.Thus,depletionanddepreciationaremadeapplicabletodifferenttypesofassets.

CHARITABLEANDOTHERCONTRIBUTIONS

KindsofCharitableContributions

1.Ordinaryorthosewhicharesubjecttolimitationsastotheamountdeductiblefromgrossincome.

2.Specialorthosewhicharedeductibleinfullfromgrossincome.

Requisitefordeductibilityofcharitablecontributions

1.ThecontributionmustactuallybepaidormadetothePhilippinegovernmentoranypoliticalsubdivisionthereofortoanyofthe
domesticcorporationsorassociationsspecifiedbytheNIRC.

2.Nopartofthenetincomeofthebeneficiarymustinuretothebenefitofanyprivatestockholderorindividual.

3.Itmustbemadewithinthetaxableyear.

4.Itmustnotexceed10%inthecaseofanindividualand5%inthecaseofacorporationofthetaxpayerstaxableincome(except
wherethedonationisdeductibleinfull)tobedeterminedwithoutthebenefitofthecontribution.

5.Itmustbeevidencedbyadequaterecordsorreceipts.

Contributionsdeductibleinfull

1.DonationstothePhilippinegovernmentortoanyofitspoliticalsubdivisionsaccordingtoanationalpriorityplandeterminedbyNEDA.
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2.Donationstoforeigninstitutionsorinternationalorganizationswhicharefullydeductibleinpursuanceoforincompliancewith
agreements,treatiesorcommitmentsenteredintobythePhilippinesorinpursuanceofspeciallaws.

3.Donationtoaccreditednongovernmentalorganization.

Nongovernmentorganization

Itmeansanonprofitdomesticcorporation:

1.Organizedandoperatedexclusivelyforscientific,research,educational,characterbuildingandyouthandsportsdevelopment,
health,socialwelfare,culturalorcharitablepurposes,oracombinationthereof,nopartofthenetincomeofwhichinuresto
thebenefitofanyprivateindividual.

2.Utilizesthecontributiondirectlyfortheactiveconductoftheactivitiesconstitutingthepurposeorfunctionforwhichitis
organizedandoperatednotlaterthanthe15thdayofthetheirmonthafterthecloseoftheaccreditedNGOstaxableyearin
whichthecontributionwerereceived.

3.Administrativeexpenseshall,innocase,exceedthirtypercent(30%)ofthetotalexpenses.

4.Theassets,intheeventofdissolution,wouldbedistributedtoanothernonprofitdomesticcorporationorganizedforsimilar
purpose,ortotheStateforpublicpurpose,orwouldbedistributedbyacourttoanotherorganization.

Utilization

Utilizationmeans:

1.Anyamountincashorkind(includingadministrativeexpenses)paidorutilizedtoaccomplishoneormorepurposesforwhichthe
accreditednongovernmentalorganizationwascreatedororganized.

2.Anyamountpaidtoacquireanassetused(orheldforuse)directlyincarryingoutoneormorepurposesforwhichtheaccredited
nongovernmentalorganizationwascreatedororganized.

Proofofdeductions

ContributionsorgiftsshallbeallowableasdeductionsonlyifverifiedundertherulesandregulationsprescribedbytheSecretaryof
Finance.

RESEARCHANDDEVELOPMENT

Researchanddevelopment

Ataxpayermaytreatresearchordevelopmentexpenditureswhicharepaidorincurredbyhimduringthetaxableyearinconnection
withhistrade,businessorprofessionasordinaryandnecessaryexpenseswhicharenotchargeabletocapitalaccount.The
expendituressotreatedshallbeallowedasdeductionduringthetaxableyearwhenpaidorincurred.

Amortizationofcertainresearchanddevelopmentexpenditures

Taxpayermayalsoelecttotreatthefollowingresearchanddevelopmentexpendituresasdeferredexpenses:

1.Paidorincurredbythetaxpayerinconnectionwithhistrade,businessorprofession

2.Nottreatedasexpensesand

3.Chargeabletocapitalaccountbutnotchargeabletopropertyofacharacterwhichissubjecttodepreciationordepletion.

Researchanddevelopmentexpensesdeductionsshallnotapplyto:

1.Anyexpenditurefortheacquisitionorimprovementofland,orfortheimprovementofpropertytobeusedinconnectionwithresearch
anddevelopmentofacharacterwhichissubjecttodepreciationordepletion.

2.Anyexpenditurepaidorincurredforthepurposeofascertainingtheexistence,location,extentorqualityofanydepositoforeor
othermineral,includingoilorgas.

PENSIONTRUSTS

Requisitesfordeductibilityofpaymentstopensiontrusts

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1.Theemployermusthaveestablishedapensionorretirementplantoprovideforthepaymentofreasonablepensionstohis
employees.

2.Thepensionplanisreasonableandactuariallysound.

3.Itmustbefundedbytheemployer.

4.Theamountcontributedmustnolongerbesubjecttothecontrolordispositionoftheemployer.

5.Thepaymenthasnotyetbeenallowedasadeduction.

6.Thedeductionisapportionedinequalpartsoveraperiodoften(10)consecutiveyearsbeginningwiththeyearinwhichthetransfer
orpaymentismade.

ADDITIONALREQUIREMENTFORDEDUCTIBILITYOFCERTAINPAYMENTS

Additionalrequirementfordeductibilityofcertainpayments

Anyamountpaidorpayablewhichisotherwisedeductiblefrom,ortakenintoaccountincomputinggrossincomeorforwhich
depreciationoramortizationmaybeallowed,shallbeallowedasadeductiononlyifitisshownthatthetaxrequiredtobededucted
andwithheldtherefromhasbeenpaidtotheBureauofInternalRevenue.

Limitationsorceilingsonitemizeddeductions

TheSecretaryofFinancemayprescribelimitationsorceilingsforanyoftheitemizeddeductionsfrom(1)to(10).Thiscanbedone
throughrulesandregulationsissuedbytheSecretaryupontherecommendationoftheCommissionerandafterapublichearinghas
beenheldforsuchpurpose.

TheSecretaryshall,forpurposesofdeterminingsuchceilingsorlimitations,considerthefollowingfactors:

1.Adequacyoftheprescribedlimitsontheactualexpenditurerequirementsofeachparticularindustryand

2.Effectsofinflationonexpenditurelevels.

OPTIONALSTANDARDDEDUCTION

OptionalStandardDeduction

Anindividualsubjecttotax,otherthananonresidentalien,mayelectastandarddeductioninanamountnotexceedingtenpercent
(10%)ofhisgrossincomeinlieuofitemizeddeductions.

Unlessthetaxpayersignifiesinhisreturnhisintentiontoelecttheoptionalstandarddeduction,heshallbeconsideredashaving
availedhimselfoftheitemizeddeductions.

Suchelectionwhenmadeinthereturnshallbeirrevocableforthetaxableyearforwhichthereturnismade.

Anindividualwhoisentitledtoandclaimedfortheoptionalstandarddeductionshallnotberequiredtosubmitwithhistaxreturn
suchfinancialstatementsotherwiserequiredintheNIRC.

DEDUCTIONSALLOWEDONLYTOINDIVIDUALTAXPAYERS

Deductionsallowedonlytoindividualtaxpayers

1.Personalexemption

2.Additionalexception

3.Premiumpaymentsonhealthand/orhospitalizationinsurance

Personalexemptions

Personalexemptionsarearbitraryamountsallowed,inthenatureofadeductionfromtaxableincome,forpersonal,livingorfamily
expensesofanindividualtaxpayer.Theyareconsideredtobetheequivalentoftheminimumofsubsistenceofthetaxpayer.

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Whoareallowedpersonalexceptions?

1.Citizens

2.Residentaliens

3.NonresidentaliensengagedintradeorbusinessinthePhilippinesundercertainconditions

4.Estatesandtrusts,whicharetreatedforpurposesofpersonalexemptions,asasingleindividual

Amountofpersonalexemptionsallowedtocitizensandresidentaliens

P20,000singlepersonoramarriedpersonjudiciallydecreedaslegallyseparatedfromhisorherspousewithno
qualifieddependents

P25,000headofafamily

P32,000marriedperson

Note:OnlythespousederivingtaxableincomecanclaimtheP32,000personalexemptionifbothhavetaxableincome,eachcanclaim
P32,000exemption.

Headofthefamily

Itmeansanunmarriedorlegallyseparatedmanorwomanwithoneorbothparents,orwithoneormorebrothersorsisters,orwith
oneormorelegitimate,recognizednaturalorlegallyadoptedchildrenlivingwithanddependentuponhimorherfortheirchief
support.

Suchbrothersorsistersorchildrenshouldbenotmorethan21yearsold,unmarriedandnotgainfullyemployed,orwheresuch
children,brothersorsisters,regardlessofage,areincapableofselfsupportbecauseofmentalorphysicaldefect.

Aheadoffamilyisanindividualwhoactuallysupportsandmaintainsinonehouseholdoneormoreindividuals,whoareclosely
connectedwithhimbybloodrelationship,relationshipbymarriage,orbyadoption,andwhoserighttoexercisefamilycontroland
provideforthesedependentindividualsisbaseduponsomemoralorlegalobligation.

Note:Considerdiscrepancybetweendefinitionofheadoffamilyanddependenti.e.children.

Tobeaheadofafamily,oneormorelegitimate,recognizednatural,orlegallyadoptedchildrenmustlivewithand
dependonanunmarriedorlegallyseparatedmanorwoman.

Adependent,ontheotherhand,maybealegitimate,illegitimateorlegallyadoptedchild.

Both,however,defineorqualifydifferentterms.

Livingwith

Thetermlivingwiththepersongivingsupportdoesnotnecessarilymeanactualandphysicaldwellingtogetheratalltimesand
underallcircumstances.

Family

Thetermfamilyincludesanunmarriedorlegallyseparatedpersonwith:

1.oneorbothparents

2.oneormorebrothersorsistersor

3.oneormorelegitimate,recognizednatural,orlegallyadoptedchildrenlivingwithanddependentuponhimorherfortheirchief
support.

Additionalexemption

AmarriedpersonoraheadofafamilymayclaimanadditionalexemptionofP8,000foreachdependent,notexceedingfour(4).

Theadditionalexemptionshallbeclaimedbyonlyoneofthespousesinthecaseofmarriedindividuals.

Inthecaseoflegallyseparatedspouses,itmaybeclaimedonlybythespousewhohascustodyofthechildorchildren.
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Dependent

Refersonlytothelegitimate,illegitimateorlegallyadoptedchildofthetaxpayer

Thechildis:

1.livingwiththetaxpayer

2.chieflydependentuponthetaxpayerforsupport

3.notmorethan21yearsofage

4.notmarriedand

5.notgainfullyemployedor,eventhoughover21yearsold,incapableofselfsupportbecauseofmentalorphysicaldefect.

Changeofstatus

Taxpayermarriesorhaveadditionaldependents

Taxpayerdiesduringthetaxableyear

Ifthespouseoranyofthedependentsdiesorifanyofsuchdependentmarries,becomes21yearsold,orbecomesgainfully
employed

Note:Asageneralrule,interpretinfavoroftaxpayer

Personalexemptionstononresidentalienindividual

Nonresidentalienindividualengagedintradeorbusiness

Entitledonlytopersonalexemption

AmountallowedislimitedtoexemptionsgrantedtoFilipinocitizenswhoarenotresidentsinthealiensdomicilecountrybutnotto
exceedtheamountallowedtocitizensorresidentsofthePhilippinesintheNIRC.

Premiumpaymentonhealthand/orhospitalizationinsuranceofanindividualtaxpayer

PremiumpaymentsshouldnotexceedP2,400perfamilyorP200amonthforataxableyear

FamilyhasagrossincomeofnotmorethanP250,000forthetaxableyear

Inthecaseofmarriedtaxpayers,onlythespouseclaimingtheadditionalexemptionfordependentsshallbeentitledtothisdeduction.

ITEMSNOTDEDUCTIBLE

Itemsnotdeductible

1.Personal,livingorfamilyexpenses

2.Capitalexpenditures

a.Anyamountpaidoutfornewbuildingsorforpermanentimprovements,orbettermentsmadetoincreasethevalueofany
propertyorestate

b.Anyamountexpendedinrestoringpropertyorinmakinggoodtheexhaustionthereofforwhichanallowanceisorhasbeen
made

3.Premiumspaidonanylifeinsurancepolicycoveringthelifeofanyofficeroremployee,orofanypersonfinanciallyinterestedinany
tradeorbusinesscarriedonbythetaxpayer,individuallyorcorporate,whenthetaxpayerisdirectlyorindirectlyabeneficiaryunder
suchpolicy[Section36,NIRC]

4.Lossesbetweenrelatedtaxpayers.

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5.Lossesonwashsales

6.Illegalexpensei.e.bribes,kickbacks,andothersimilarpayments[Section34(A)(1)(c),NIRC]

Capitalexpenditures

1.Anyamountpaidoutfornewbuildingsorforpermanentimprovements,orbettermentsmadetoincreasethevalueofanypropertyor
estate

2.Anyamountexpendedinrestoringpropertyorinmakinggoodtheexhaustionthereofforwhichanallowanceisorhasbeenmade

3.Costofdefendingorperfectingtitletopropertyconstitutesapartofthecostofthepropertyandisnotadeductibleexpense

4.Theamountexpendedforarchitectsservicesispartofthecostofthebuilding

5.Expensesoftheadministrationofanestatesuchascourtcosts,attorneysfees,andexecutorscommissionsarechargeableagainst
thecorpusoftheestateandarenotallowabledeductions

6.Incaseofacorporation,expensesfororganization,suchasincorporationfees,attorneysfeesandaccountantschargesare
ordinarilycapitalexpenditures,butwheresuchexpendituresarelimitedtopurelyincidentalexpenses,ataxpayermaychargesuch
itemsagainstincomeintheyearinwhichtheyareincurred.[Section120,RevenueRegulations2]

Lifeorhealthinsuranceandothernonlifeinsurancepremiumsorsimilaramountsinexcessofwhatthelawallows

Generalrule:Thecostoflifeorhealthinsuranceandothernonlifeinsurancepremiumsbornebytheemployerforhisemployee
shallbetreatedastaxablefringebenefit.

Exceptions

1.Contributionoftheemployerforthebenefitoftheemployeepursuanttotheprovisionsofexistinglaw,i.e.SSS,GSIS,among
others.

2.Thecostofpremiumsbornebytheemployerforthegroupinsuranceofhisemployees.[RevenueRegulations398]

Relatedtaxpayers

1.Betweenmembersofafamily(whichshallincludeonlyhisbrothersandsisters,spouse,ancestorsandlinealdescendants)

2.Betweenanindividualandacorporationmorethan50%invalueoftheoutstandingstockofwhichisowned,directlyorindirectly,by
orforsuchindividualexceptinthecaseofdistributionsinliquidation

3.Betweentwocorporationsmorethan50%invalueoftheoutstandingstockofeachofwhichisowned,directlyorindirectlybyorfor
thesameindividual

4.Betweenthegrantorandthefiduciaryofatrust

5.Betweenthefiduciaryofatrustandthefiduciaryofanothertrustifthesamepersonisagrantorwithrespecttoeachtrust

6.Betweenthefiduciaryofatrustandabeneficiaryofsuchtrust[Section36(B),NIRC]

Relevantpointsregardingrelatedtaxpayers

1.Paymentofinterestisnotdeductible.

2.Baddebtsarenotdeductible.

3.Lossesfromsalesorexchangesofpropertyarenotdeductible.

CAPITALGAINSANDLOSSES

Ordinaryasset

1.Stockintradeofthetaxpayerorotherpropertyofakindwhichwouldproperlybeincludedintheinventoryofthetaxpayerifonhand
atthecloseofthetaxableyear.

2.Propertyheldbythetaxpayerprimarilyforsaletocustomersintheordinarycourseofhistradeorbusiness.

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3.Propertyusedinthetradeorbusiness,ofacharacterwhichissubjecttotheallowancefordepreciation.

4.Realpropertyusedinthetradeorbusinessofthetaxpayer.

Capitalasset

Propertyheldbythetaxpayer,whetherornotconnectedwithhistradeorbusiness,whichisnotanordinaryasset.

Ordinarygainorincome

Ordinaryincomeorgainincludesanygainfromthesaleorexchangeofpropertywhichisnotacapitalasset.

Capitalgainorincome

Capitalgainorincomeisanygainfromthesaleorexchangeofacapitalasset.

Netcapitalgain

Netcapitalgainmeanstheexcessofthegainsfromsalesorexchangesofcapitalassetsoverthelossesfromsuchsalesor
exchanges.

Netcapitalloss

Netcapitallossmeanstheexcessofthelossesfromsalesorexchangesofcapitalassetsoverthegainsfromsuchsalesor
exchanges.

Threerulesontherecognitionofcapitalgainsandlosses

1.Holdingrule

2.Losslimitationrule

3.Netcapitallosscarryoverrule

Note:Theholdingandnetcapitallosscarryoverrulesapplyonlytoindividualtaxpayersandnottocorporatetaxpayers.

Percentagetakenintoaccountorholdingrule

Inthecaseofanindividualtaxpayer,onlythefollowingpercentagesofthegainorlossrecognizeduponthesaleorexchangeofa
capitalassetshallbetakenintoaccountincomputingnetcapitalgain,netcapitalloss,andnetincome:

100%ifthecapitalassethasbeenheldfornotmorethan12months

50%ifthecapitalassethasbeenheldformorethan12months

Losslimitationrule

Lossesfromsalesorexchangesofcapitalassetsshallbeallowedonlytotheextentofthegainsfromsuchsalesorexchanges.

Netcapitallosscarryover

Ifanytaxpayer,otherthanacorporation,sustainsinanytaxableyearanetcapitalloss,suchloss(inanamountnotinexcessofthe
netincomeforsuchyear)shallbetreatedinthesucceedingtaxableyearasalossfromthesaleorexchangeofacapitalassetheld
fornotmorethan12months.

Gainsandlossesfromshortsales,etc.

Gainsorlossesfromshortsalesofpropertyshallbeconsideredasgainsorlosesfromsalesorexchangesofcapitalassets.

Gainsorlossesattributabletothefailuretoexerciseprivilegesoroptionstobuyorsellpropertyshallbeconsideredascapitalgains
orlosses.

Generalruleontherecognitionofgainorlossuponthesaleorexchangeofproperty

Thegeneralruleisthattheentireamountofthegainorloss,asthecasemaybe,shallberecognized,i.e.taxableordeductible.

Exceptions
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1.Transactionswheregainsandlossesarenotrecognized

a.Exchangeofpropertywherethepropertyreceivedisnotsubstantiallydifferentfromthepropertydisposedof.[Section140,
Reg.No.2]

b.Exchangeofpropertysolelyinkindinpursuanceofcorporatemergersandconsolidations.

c.Exchangebyapersonofhispropertyforstocksinacorporationasaresultofwhichsaidperson,aloneortogetherwithothers
notexceedingfourpersons,gainscontrolofsaidcorporation.

2.Transactionswheregainisrecognizedbutnottheloss

a.Transactionsbetweenrelatedtaxpayers

b.Illegaltransactions

c.Exchangesofproperty,notsolelyinkind,inpursuanceofcorporatemergersandconsolidations

Mergerorconsolidation

Mergerorconsolidationshallbeunderstoodtomeanthe(a)ordinarymergerorconsolidationor(b)theacquisitionbyonecorporation
ofallorsubstantiallyallthepropertiesofanothercorporationsolelyforstock.

Suchmergerorconsolidationmustbeundertakenforabonafidebusinesspurposeandnotsolelyforthepurposeofescapingthe
burdenoftaxation.

SOURCESOFTAXATION

Sourceofincome

Thetermsourceofincomeisnotaplacebuttheproperty,activityorservicethatproducestheincome.[Commissionerv.BOAC]

DissentofJusticeFelicianoinCommissionervBOAC

Thesourceofincomerelatesnottothephysicalsourcingofaflowofmoneyorthephysicalsitusofpaymentbutrathertothe
property,activityorservicewhichproducedtheincome.Whereacontractforrenditionofservicesisinvolved,theapplicablesource
rulemaybesimplystatedasfollows:Theincomeissourcedintheplacewheretheservicecontractedforisrendered.

Sourcesoftaxation

1.IncomefromsourceswithinthePhilippines

2.IncomefromsourceswithoutthePhilippines

3.IncomefromsourcespartlywithinandpartlywithoutthePhilippines

GrossincomefromsourceswithinthePhilippines

ThefollowingitemsofgrossincomeshallbetreatedasgrossincomefromsourceswithinthePhilippines:

1.InterestsderivedfromsourceswithinthePhilippines,andinterestsonbonds,notesorotherinterestbearingobligationsof
residents,corporateorotherwise.

2.Dividendsreceivedfromadomesticcorporationandfromaforeigncorporation,unlesslessthan50%ofthegrossincomeof
suchforeigncorporationforthethreeyearperiodendingwiththecloseofitstaxableyearprecedingthedeclarationofsuch
dividendswasderivedfromsourceswithinthePhilippines.

3.CompensationforlabororpersonalservicesperformedinthePhilippines.

4.RentalsandroyaltiesfrompropertylocatedinthePhilippines.

5.Gains,profitsandincomefromthesaleofrealpropertylocatedinthePhilippines.

6.Gains,profitsandincomefromthesaleofpersonalpropertyifsoldwithinthePhilippines.[Section42(A),NIRC]

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Interestincome

Theresidenceoftheobligorwhopaystheinterest,ratherthanthephysicallocationofthesecurities,bondsornotesortheplaceof
payment,isthedeterminingfactorofthesourceofinterestincome.[NationalDevelopmentCorporationv.Commissioner,151
SCRA472]

GrossincomefromsourceswithoutthePhilippines

JusttheexactoppositeoftheitemsofgrossincomefromsourceswithinthePhilippines.[Section42(B),NIRC]

IncomefromsourcespartlywithinandpartlywithoutthePhilippines

Gains,profitsandincomefromthesaleofpersonalpropertyproducedbythetaxpayerwithinandsoldwithoutthePhilippines,or
producedbythetaxpayerwithoutandsoldwithinthePhilippinesshallbetreatedasderivedpartlyfromsourceswithinandpartlyfrom
sourceswithoutthePhilippines.[Section42(E),NIRC]

Purchaseorsaleofpersonalproperty

Gains,profitsandincomederivedfromthepurchaseofpersonalpropertywithinanditssalewithoutthePhilippines,orfromthe
purchaseofpersonalpropertywithoutanditssalewithinthePhilippinesshallbetreatedasderivedentirelyfromsourceswithinthe
countryinwhichsold.[Section42(E),NIRC]

Gainfromsaleofsharesofstockofadomesticcorporation

GainfromthesaleofsharesofstockinadomesticcorporationshallbetreatedasderivedentirelyfromsourceswithinthePhilippines
regardlessofwherethesaidsharesaresold.

Thetransferbyanonresidentalienoraforeigncorporationtoanyoneofanyshareofstockissuedbyadomesticcorporationshall
notbeeffectedormadeinitsbookunless:

1.ThetransferorhasfiledwiththeCommissionerabondconditioneduponthefuturepaymentbyhimofanyincometaxthat
maybedueonthegainsderivedfromsuchtransferor

2.TheCommissionerhascertifiedthatthetaxes,ifany,imposedanddueonthegainrealizedfromsuchsaleortransferhave
beenpaid.[Section42(E),NIRC]

ACCOUNTINGPERIODSANDMETHODSOFACCOUNTING

Methodsofaccounting

GeneralRule:Thetaxableincomeshallbecomputeduponthebasisofthetaxpayersannualaccountingperiodinaccordancewith
themethodofaccountingregularlyemployedinkeepingthebooksofsuchtaxpayer.

Exception:ComputationsshallbemadeinaccordancewithsuchmethodasintheopinionoftheCommissionerclearlyreflectsthe
income:

a.Ifnosuchmethodofaccountinghasbeensoemployedor

b.Ifthemethodemployeddoesnotclearlyreflecttheincome.[Section43,NIRC]

Taxableyear

Taxableyearmeansthecalendaryear,orthefiscalyearendingduringsuchcalendaryear,uponthebasisofwhichthenetincomeis
computed.

Accountingperiods

1.CalendaryearJanuary1toDecember31

2.Fiscalyearanaccountingperiodoftwelve(12)monthsendingonthelastdayofanymonthotherthanDecember.

Whencalendaryearused?

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1.Ifthetaxpayerchoosesthecalendaryear

2.Ifthetaxpayerhasnoannualaccountingperiod

3.Ifthetaxpayerdoesnotkeepbooks

2.Ifthetaxpayerisanindividual

WhenCommissionerisauthorizedtoterminatetaxableperiod

1.Whenataxpayerretiresfrombusinesssubjecttotax

2.WhenheintendstoleavethePhilippines

3.WhenheremoveshispropertyfromthePhilippines

4.Whenhehidesorconcealshisproperty

5.Whenheperformsanyacttendingtoobstructtheproceedingsforthecollectionofthetaxforthepastorcurrentquarteroryear

6.Whenherendersthecollectionofthetaxtotallyorpartlyineffective

Methodsofaccounting

1.CashBasis

Income,profitsandgainsearnedbytaxpayerarenotincludedingrossincomeuntilreceived.

Expensesarenotdeducteduntilpaidwithinthetaxableyear.

2.AccrualMethod

Income,gainsandprofitsareincludedinthegrossincomewhenearned,whetherreceivedornot.

Expensesareallowedasdeductionswhenincurred,althoughnotyetpaid.

3.Mixed/Hybrid

Combinationofthecashandaccrualmethod.

4.Anyothermethodwhichclearlyreflectstheincome

Cashv.accrualmethodofaccounting

Gains,profitsandincomearetobeincludedinthegrossincomeforthetaxableyearinwhichtheyarereceivedbythetaxpayer,
unlesstheyareincludedwhentheyaccruetohiminaccordancewiththeapprovedmethodofaccountingfollowedbyhim.

Taxaccountingv.financialaccounting

Whiletaxableincomeisbasedonthemethodofaccountingusedbythetaxpayer,itwillalwaysdifferfromaccountingincome.This
issobecauseofafundamentaldifferenceintheendsthetwoconceptsserve.Accountingattemptstomatchcostagainstrevenue.
Taxlawisaimedatcollectingrevenue.Itisquicktotreatanitemasincome,slowtorecognizedeductionsaslosses.Thus,taxlaw
willnotrecognizeddeductionsforcontingentfuturelossesexceptinverylimitedsituations.Goodaccounting,ontheotherhand,
requirestheirrecognition.[ConsolidatedMinesv.CTA,58SCRA618]

Longtermcontracts

Thetermlongtermcontractsmeansbuilding,installationorconstructioncontractscoveringaperiodinexcessofoneyear.[Section
48,NIRC]

Treatmentofincomefromlongtermcontracts

1.Percentageofcompletionbasis

2.Completedcontractbasis

Note:Section48oftheNIRCprovidesthatPersonswhosegrossincomeisderiveinwholeorinpartfromsuch(longterm)contractsshall
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reportsuchincomeuponthebasisofpercentageofcompletion.

Thereturnshouldbeaccompaniedbyareturncertificateofarchitectsorengineersshowingthepercentageofcompletion
duringthetaxableyearoftheentireworkperformedunderthecontract.

Salesofdealersinpersonalproperty

Apersonwhoregularlysellsorotherwisedisposesofpersonalpropertyontheinstallmentplanmayreturnasincometherefromin
anytaxableyearthatproportionoftheinstallmentpaymentsactuallyreceivedinthatyear,whichthegrossprofitrealizedortobe
realizedwhenpaymentiscompleted,bearstothetotalcontractprice.[Section49,NIRC]

Treatmentofsalesofrealtyandcasualsalesofpersonalty

Theseinclude:

1.Casualsaleorothercasualdispositionofpersonalproperty(otherthanpropertyincludedintheinventoryatthecloseofthe
taxableyear)forapriceexceedingP1000and

2.Saleorotherdispositionofrealproperty.

Treatedeitheroninstallmentbasisordeferredsalesbasis.

Installmentbasisiftheinitialpaymentsdonotexceed25%ofthesellingprice.

Deferredsalesbasisiftheinitialpaymentsexceed25%ofthesellingprice[Section49,NIRCandSection175,RevenueRegulations
2]

Initialpayments

Theseincludethepaymentsreceivedincashorpropertyotherthanevidencesofindebtednessofthepurchaserduringthetaxable
periodinwhichthesaleorotherdispositionismade.

Theterminitialpaymentscontemplatesatleastoneotherpaymentinadditiontotheinitialpayment.[Section175,Revenue
Regulations2]

Terminationofleasehold

Lessorwhoacquiresbuildingorimprovementsmadebythelesseeaftertheterminationoftheleasehastwooptionsinreportingsaid
income:

1.Lessormayreportasincomeatthetimewhensuchbuildingsorimprovementsarecompletedthefairmarketvalueofsuch
buildingsorimprovementsor

2.Lessormayspreadoverthelifeoftheleasetheestimateddepreciatedvalueofsuchbuildingsorimprovementsatthe
terminationoftheleaseandreportasincomeforeachoftheleaseanadequatepartthereof.[Section49,Revenue
Regulations2]

Allocationofincomeanddeductions

Inthecaseoftwoormoreorganizations,tradesorbusinesses(whetherornotincorporatedandwhetherornotorganizedinthe
Philippines)ownedorcontrolled,directlyorindirectly,bythesameinterests,theCommissionerisauthorizedtodistribute,apportionor
allocategrossincomeordeductionsbetweenoramongsuchorganization,tradeorbusiness,ifhedeterminesthatsuchdistribution,
apportionmentorallocationisnecessaryinordertopreventevasionoftaxesorclearlytoreflecttheincomeofanysuchorganization,
tradeorbusiness.[Section50,NIRC]

RETURNSANDPAYMENTOFTAX

INDIVIDUALINCOMETAXRETURNS

Whoarerequiredtofileindividualreturns?

1.EveryFilipinocitizenresidinginthePhilippines

2.EveryFilipinocitizenresidingoutsidethePhilippines,onhisincomefromsourceswithinthePhilippines

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3.EveryalienresidinginthePhilippines,onincomederivedfromsourceswithinthePhilippines

4.EverynonresidentalienengagedintradeorbusinessorintheexerciseofaprofessioninthePhilippines

Whoarenotrequiredtofileindividualreturns?

1.Anindividualwhosegrossincomedoesnotexceedhistotalpersonalandadditionalexemptions.

However,aFilipinocitizenandanyalienindividualengagedinbusinessorpracticeofprofessionwithinthePhilippinesshallfile
anincometaxreturn,regardlessoftheamountofgrossincome.

2.AnindividualwithrespecttopurecompensationincomederivedfromsourceswithinthePhilippines,theincometaxonwhichhasbeen
correctlywithheld.

However,anindividualderivingcompensationconcurrentlyfromtwoormoreemployeesatanytimeduringthetaxableyear
shallfileanincometaxreturn.

Further,anindividualwhosepurecompensationincomederivedfromsourceswithinthePhilippinesexceedsP60,000shallalso
fileanincometaxreturn.

3.Anindividualwhosesoleincomehasbeensubjectedtoafinalwithholdingtax.

4.AnindividualwhoisexemptfromincometaxpursuanttotheNIRCandotherlaws,generalorspecial.

Wheretofile

1.Authorizedagentbank

2.RevenueDistrictOfficer

3.Collectionagent

4.DulyauthorizedTreasurerofthecityormunicipalityinwhichsuchpersonhashislegalresidenceorprincipalplaceofbusinessinthe
Philippines

5.OfficeoftheCommissioneriftherebenolegalresidenceorplaceofbusinessinthePhilippines

Whentofile

OnorbeforeApril15ofeachyearcoveringincomefromtheprecedingtaxableyear

Thirty(30)daysfromeachtransactionandafinalconsolidatedreturnonorbeforeApril15coveringallstocktransactionsofthe
precedingyearincaseofsaleorexchangeofsharesofstocknottradedthroughalocalstockexchange

Thirty(30)daysfollowingeachsaleorotherdispositionincaseofsaleordispositionofrealproperty

Husbandandwife

Marriedindividuals,whethercitizens,residentornonresidentaliens,whodonotderiveincomepurelyfromcompensation,shallfilea
returnforthetaxableyeartoincludetheincomeofbothspouses.

However,ifitisimpracticableforthespousestofileonereturn,eachspousemayfileaseparatereturnofincomebutthereturnsso
filedshallbeconsolidatedbytheBIRforpurposesofverificationforthetaxableyear.

Returnofparenttoincludeincomeofchildren

Theincomeofunmarriedminorsderivedfrompropertyreceivedfromalivingparentshallbeincludedinthereturnoftheparent,
except:

1.Whenthedonorstaxhasbeenpaidonsuchpropertyor

2.Whenthetransferofsuchpropertyisexemptfromdonorstax.

SELFEMPLOYEDINDIVIDUALS

Declarationofincometaxforindividuals

Everyindividualsubjecttoincometax,whoisreceivingselfemploymentincome,whetheritconstitutesthesolesourceofhisincome
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orincombinationwithsalaries,wagesandotherfixedordeterminableincome,shallmakeandfileadeclarationofhisestimated
incomeforthecurrenttaxableyearonorbeforeApril15ofthesametaxableyear.

NonresidentFilipinocitizenswithrespecttoincomefromwithoutthePhilippinesandnonresidentaliensnotengagedintradeor
businessinthePhilippinesarenotrequiredtorenderadeclarationofestimateincometax.

Selfemploymentincome

Selfemploymentincomeconsistsoftheearningsderivedbytheindividualfromthepracticeofprofessionorconductoftradeor
businesscarriedonbyhimasasoleproprietororbyapartnershipofwhichheisamember.

Returnandpaymentofestimateincometaxbyindividuals

Theamountofestimatedincomeshallbepaidinfour(4)installments.

Estimatedtax

Estimatedtaxmeanstheamountwhichtheindividualdeclaredasincometaxinhisfinaladjustedandannualincometaxreturnfor
theprecedingtaxableyearminusthesumofthecreditsallowedagainstthesaidtax.

If,duringthecurrenttaxableyear,thetaxpayerreasonablyexpectstopayabiggerincometax,heshallfileanamendeddeclaration
duringanyintervalofinstallmentpaymentdates.

CORPORATERETURNS

Corporationreturns

Everycorporationsubjecttoincometax,exceptforeigncorporationsnotengagedintradeorbusinessinthePhilippines,shallrender,
induplicate,atrueandaccurate:

1.Quarterlyincometaxreturnand

2.Finaloradjustmentreturn.

Thereturnshallbefiledbythepresident,vicepresidentorotherprincipalofficer,andshallbesworntobysuchofficerandbythe
treasurerorassistanttreasurer.

Acorporationmayemployeitherthecalendaryearorfiscalyearasbasisforfilingitsannualincometaxreturn.

Everycorporationderivingcapitalgainsfromthesaleorexchangeofsharesofstocknottradedthroughalocalstockexchangeshall
fileareturnwithinthirty(30)daysaftereachtransactionandafinalconsolidatedreturnofalltransactionsduringthetaxableyearon
orbeforethefifteenth(15th)dayofthefourthmonthfollowingthecloseofthetaxableyear.

Declarationofquarterlycorporateincometax

Everycorporationshallfileinduplicateaquarterlysummarydeclarationofitsgrossincomeanddeductionsonacumulativebasisfor
theprecedingquarterorquartersuponwhichtheincometaxshallbelevied,collectedandpaid.

Thetaxcomputedshallbedecreasedbytheamountoftaxpreviouslypaidorassessedduringtheprecedingquartersandshallbe
paidnotlaterthansixty(60)daysfromthecloseofeachofthefirstthree(3)quartersofthetaxableyear,whethercalendarorfiscal
year.

Finaladjustmentreturn

Everycorporationliablefortaxshallfileafinaladjustmentreturncoveringthetotaltaxableincomefortheprecedingcalendarorfiscal
year.

Ifthesumofthequarterlytaxpaymentsmadeduringthesaidtaxableyearisnotequaltothetotaltaxdueontheentiretaxable
incomeofthatyear,thecorporationshalleither:

1.Paythebalanceoftaxstilldueor

2.Carryovertheexcesscreditor

3.Becreditedorrefundedwiththeexcessamountpaid,asthecasemaybe.
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Carryingoverorcreditingofexcesstosucceedingquarters

Incasethecorporationisentitledtoataxcreditorrefundoftheexcessestimatedquarterlyincometaxespaid,theexcessamount
shownonitsfinaladjustmentreturnmaybecarriedoverandcreditedagainsttheestimatedquarterlyincometaxliabilitiesforthe
taxablequartersofthesucceedingtaxableyears.

Butthisisnotautomatic.Needtoapplyforcreditingofsuchexcessortaxcredittosucceedingquarters.

PAYMENTANDASSESSMENTOFINCOMETAX

Paymentoftax,ingeneral

Thetotalamountoftaxshallbepaidbythepersonsubjecttheretoatthetimethereturnisfiled.

Installmentpayment

Ataxpayer,otherthanacorporation,mayopttopaythetaxintwoequalinstallmentswhenthetaxdueisinexcessoftwothousand
pesos(P2,000).

Insuchcases,thefirstinstallmentshallbepaidatthetimethereturnisfiledandthesecondinstallmentonorbeforeJuly15
followingthecloseofthecalendaryear.

Paymentofcapitalgainstax

Itshallbepaidonthedatethereturnprescribedthereforisfiledbythepersonliablethereto.

Incasethetaxpayerelectsandisqualifiedtoreportthegainbyinstallments,thetaxduefromeachinstallmentpaymentshallbe
paidwithinthirty(30)daysfromthereceiptofsuchpayments.

Assessmentandpaymentofdeficiencytax

Afterthereturnisfiled,theCommissionershallexamineitandassessthecorrectamountoftax.

ThetaxordeficiencyincometaxsodiscoveredshallbepaiduponnoticeanddemandfromtheCommissioner.

Deficiency

Thetermdeficiencymeans:

1.TheamountbywhichthetaximposedbythisTitleexceedstheamountshownasthetaxbythetaxpayeruponhisreturn.

However,theamountsoshownonthereturnshallbeincreasedbytheamountpreviouslyassessed(orcollected
withoutassessment)asadeficiency,anddecreasedbytheamountpreviouslyabated,credited,returnedorotherwiserepaid
inrespectofsuchtaxor

2.Ifnoamountisshownasthetaxbythetaxpayeruponhisreturn,orifnoreturnismadebythetaxpayer,thentheamountby
whichthetaxexceedstheamountspreviouslyassessed(orcollectedwithoutassessment)asadeficiency.

However,suchamountspreviouslyassessedorcollectedwithoutassessmentshallfirstbedecreasedbytheamounts
previouslyabated,credited,returnedorotherwiserepaidinrespectofsuchtax.

WITHHOLDINGOFTAXATSOURCE

Twokindsofwithholding

1.Withholdingoffinaltaxoncertainincomes

2.Withholdingofcreditabletaxatsource

Fundwithheldheldintrustbywithholdingagent

Thetaxesdeductedandwithheldbythewithholdingagentshallbeheldasaspecialfundintrustforthegovernmentuntilpaidtothe
collectingofficers.

AlltaxeswithheldpursuanttotheNIRCanditsimplementingrulesandregulationsareherebyconsideredtrustfundsandshallbe
maintainedinaseparateaccountandnotcommingledwithanyotherfundsofthewithholdingagent.
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ESTATESANDTRUSTS

Taxationofestatesandtrusts

Incometaximposeduponindividualsshallalsoapplytotheincomeofestatesorofanykindofpropertyheldintrust.

Thetaxshallbecomputedupontaxableincomeoftheestateortrustandshallbepaidbythefiduciary.

Whataretheincomeoftheestatesortrustswhichareincludedfortaxation?

1.Incomeaccumulatedintrustforthebenefitofunbornorunascertainedpersonorpersonswithcontingentinterests,andincome
accumulatedorheldforfuturedistributionunderthetermsofthewillortrust.

2.Incomewhichistobedistributedcurrentlybythefiduciarytothebeneficiaries,andincomecollectedbyaguardianofaninfantwhich
istobeheldordistributedasthecourtmaydirect.

3.Incomereceivedbyestatesofdeceasedpersonsduringtheperiodofadministrationorsettlementoftheestate.

4.Incomewhich,inthediscretionofthefiduciary,maybeeitherdistributedtothebeneficiariesoraccumulated.

Exceptionfromtaxationofestatesortrusts

Employeestrustwhichformspartofapension,stockbonusorprofitsharingplanofanemployerforthebenefitofsomeorallofhis
employeesshallbeexemptfromincometax:

1.Ifcontributionsaremadetothetrustbysuchemployer,oremployees,orboth,forthepurposeofdistributingtosuch
employeestheearningsandtheprincipalofthefundaccumulatedbythetrustinaccordancewithsuchplanand

2.Ifunderthetrustinstrument,itisimpossible,atanytimepriortothesatisfactionofallliabilitieswithrespecttoemployees
underthetrust,foranypartofthecorpusorincometobeusedforordivertedtopurposesotherthanfortheexclusive
benefitoftheemployees.

However,anyamountactuallydistributedtoanyemployeeordistributeeshallbetaxabletohimintheyearinwhichsodistributedto
theextentthatitexceedstheamountcontributedbysuchemployeeordistributee.

Taxableincomeofestatesortrusts

Thetaxableincomeoftheestateortrustshallbecomputedinthesamemannerandonthesamebasisasinthecaseofan
individual.

However,thereshallbeallowedasadeductionincomputingthetaxableincomeoftheestateortrusttheamountoftheincomeof
theestateortrustforthetaxableyearwhichistobedistributedcurrentlybythefiduciarytothebeneficiaries,andtheamountofthe
incomecollectedbyaguardianofaninfantwhichistobeheldordistributedasthecourtmaydirect,buttheamountsoallowedasa
deductionshallbeincludedincomputingthetaxableincomeofthebeneficiaries,whetherdistributedornot.

Inthecaseofincomereceivedbyestatesofdeceasedpersonsduringtheperiodofadministrationorsettlementoftheestate,andin
thecaseofincomewhich,inthediscretionofthefiduciary,maybeeitherdistributedtothebeneficiaryoraccumulated,thereshallbe
allowedasanadditionaldeductionincomputingthetaxableincomeoftheestateortrusttheamountoftheincomeoftheestateor
trustforitstaxableyear,whichisproperlypaidorcreditedduringsuchyeartoanylegatee,heirorbeneficiary,buttheamountso
allowedasadeductionshallbeincludedincomputingthetaxableincomeofthelegatee,heirorbeneficiary.

Thedeductionsallowedaboveshallnotbeallowedincaseofatrustadministeredinaforeigncountry.

Exemptionallowedtoestatesandtrusts

Thereshallbeallowedanexemptionoftwentythousandpesos(P20,000)fromtheincomeoftheestateortrust.

Fiduciaryreturns

Guardians,trustees,executors,administrators,receivers,conservatorsandallpersonsorcorporationsactinginanyfiduciarycapacity
shallrenderareturnoftheincomeofthepersons,trustorestateforwhomorwhichtheyact,andbesubjecttoalltheprovisionsof
thisTitle,whichapplytoindividualsincasesuchperson,estateortrusthasagrossincomeoftwentythousandpesos(P20,000)or
overduringthetaxableyear.

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IncomeTaxation

Suchfiduciaryorpersonfilingthereturnforhimorit,shalltakeoaththathehassufficientknowledgeoftheaffairsofsuchperson,
trustorestatetoenablehimtomakesuchreturnandthatthesameis,tothebestofhisknowledgeandbelief,trueandcorrect,and
besubjecttoalltheprovisionsofthisTitlewhichapplytoindividuals.

Fiduciariesindemnifiedagainstclaimsfortaxespaid

Trustees,executors,administratorsandotherfiduciariesareindemnifiedagainsttheclaimsordemandsofeverybeneficiaryforall
paymentsoftaxeswhichtheyshallberequiredtomakeundertheprovisionsofthisTitle,andtheyshallhavecreditfortheamount
ofsuchpaymentsagainstthebeneficiaryorprincipalinanyaccountingwhichtheymakeassuchtrusteesorotherfiduciaries.

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