Taxation One Complete

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Taxation One: Outline with Codals Course Outline Tax I A. In General Taxable Income The essential difference between capital and income is that capital is a fund; and income is a flow. Capital is wealth, while income is the service of wealth. ropert! is a tree, income is the fruit. "abor is a tree, income is the fruit. Capital is a tree, income the fruit. Income means profits or gains. #$adrigal v %affert!& Income ma! be defined as the amount of mone! coming to a person or corporation within a specified time, whether as pa!ment for services, interest or profit from investment. o ' mere advance in the value of propert! of a person or a corporation in no sense constitutes the (income) specified in the law. *uch advance constitutes and can be treated merel! as an increase in capital. #+isher v Trinidad& Cash dividends is taxed as income because it has been reali,ed-received, while stoc. dividends is not taxed as income because it is merel! inchoate as it is a mere anticipation of income #it becomes income once !ou sell it&. o One is an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of a corporation. #+isher v Trinidad& When dealing with money or property, the questions you should ask are: o Is this capital or is this income? o Has it been realized/received or is it merely inchoate? B. General Principles
*/C. 01. 2eneral rinciples of Income Taxation in the hilippines. 3 /xcept when otherwise provided in this Code: #'& ' citi,en of the hilippines residing therein is taxable on all income derived from sources within and without the hilippines; #4& ' nonresident citi,en is taxable onl! on income derived from sources within the hilippines; #C& 'n individual citi,en of the hilippines who is wor.ing and deriving income from abroad as an overseas contract wor.er is taxable onl! on income derived from sources within the hilippines: rovided, That a seaman who is a citi,en of the hilippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusivel! in international trade shall be treated as an overseas contract wor.er; #5& 'n alien individual, whether a resident or not of the hilippines, is taxable onl! on income derived from sources within the hilippines; #/& ' domestic corporation is taxable on all income derived from sources within and without the hilippines; and #+& ' foreign corporation, whether engaged or not in trade or business in the hilippines, is taxable onl! on income derived from sources within the hilippines.
6ho are taxable on income derived from all sources, whether within or outside the hilippines7 Taxed worldwide8 9. %esident citi,ens. 0. 5omestic corporations. The other .inds of taxpa!ers are sub:ect to tax onl! on income derived from hilippine sources. Taxable Income Inside RP ;es ;es ;es ;es Taxable Income Outside RP ;es <o <o <o
Citizenship & Residency %esident Citi,en <on3resident Citi,en Overseas Contract 6or.er %esident 'lien
$ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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Taxation One: Outline with Codals <on3resident 'lien 5omestic Corp +oreign Corp C. Income Tax on Indi iduals e!initions %esident citi,ens and resident aliens
*ection 00 #+& The term Aresident alienA means an individual whose residence is within the hilippines and who is not a citi,en thereof.
;es ;es ;es
<o ;es <o
%esident alien is an individual: 9. 6hose residence is within the hilippines 0. 6ho is not a citi,en $ere ph!sical or bod! presence is enough. <ot intention to ma.e the countr! one)s abode. #2arrison v C'&
<on3resident citi,ens
*ec 00 #/&. The term Anonresident citi,enA means: #9& ' citi,en of the hilippines who establishes to the satisfaction of the Commissioner the fact of his ph!sical presence abroad with a definite intention to reside therein. #0& ' citi,en of the hilippines who leaves the hilippines during the taxable !ear to reside abroad, either as an immigrant or for emplo!ment on a permanent basis. #1& ' citi,en of the hilippines who wor.s and derives income from abroad and whose emplo!ment thereat reBuires him to be ph!sicall! present abroad most of the time during the taxable !ear. #?& ' citi,en who has been previousl! considered as nonresident citi,en and who arrives in the hilippines at an! time during the taxable !ear to reside permanentl! in the hilippines shall li.ewise be treated as a nonresident citi,en for the taxable !ear in which he arrives in the hilippines with respect to his income derived from sources abroad until the date of his arrival in the hilippines. #C& The taxpa!er shall submit proof to the Commissioner to show his intention of leaving the hilippines to reside permanentl! abroad or to return to and reside in the hilippines as the case ma! be for purpose of this *ection.
$eaning of non3resident citi,en: 9. Citi,en who establishes to the satisfaction of the Commissioner the fact of his ph!sical presence abroad with a definite intention to reside therein 0. Citi,en who leaves the hilippines during the taxable !ear to reside abroad, either as an immigrant or for emplo!ment on a permanent basis 1. Citi,en who wor.s and derives from abroad and whose emplo!ment thereat reBuires him to be ph!sicall! present abroad most of the time during the taxable !ear ?. Citi,en who has been previousl! considered as nonresident citi,en and who arrives in the hilippines at an! time during the taxable !ear to reside permanentl! in the hilippines shall li.ewise be treated as a nonresident citi,en for the taxable !ear in which he arrives in the hilippines with respect to his income derived from sources abroad until the date of his arrival in the hilippines. 6ho are non3resident citi,ens7 #%% 93DE& 9. Immigrant @ one who leaves the hilippines to reside abroad as an immigrant for which a foreign visa has been secured 0. ermanent emplo!ee @ one who leaves the hilippines to reside abroad for emplo!ment on a more or less permanent basis 1. Contract wor.er @ one who leaves the hilippines on account of a contract of emplo!ment which is renewed from time to time under such circumstance as to reBuire him to be ph!sicall! present abroad most of the time #not less than 9F1 da!s& <on3resident citi,ens who are exempt from tax with respect to income derived from
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Taxation One: Outline with Codals sources outside the hilippines shall no longer be reBuired to file information returns from sources outside the hilippines beginning 0==9. #%% C30==9& The phrase Gmost of the timeH shall mean that the said citi,en shall have sta!ed abroad for at least 9F1 da!s in a taxable !ear. The same exemption applies to an OC6 but as such wor.er, the time spent abroad is not material for tax exemption purposes all that is reBuired is for the wor.er)s emplo!ement contract to pass through and be registered with the O/'. #4I% %uling 1130===&.
<on3resident aliens engaged in business in the hilippines

*ec 00. #2& The term Anonresident alienA means an individual whose residence is not within the hilippines and who is not a citi,en thereof.
6ho are non3resident aliens7 9. 'n individual whose residence is not within the hilippines 0. <ot a citi,en of the hilippines o 5etermination is b! his intention with regard to the length and nature of his sta!. #*ec C, %% 0& "oss of residence b! alien o 'n alien who has acBuired residence in the hilippines retains his status until he abandons the same and actuall! departs from the hilippines. o ' mere intention to change his residence does not change his status. 'n alien who has acBuired a residence is taxable as a resident for the remainder of his sta! in the hilippines. #*ec. I, %% 0&
$inimum wage earner

*ec 00. #22& The term (statutor! minimum wage) earner shall refer to rate fixed b! the %egional Tripartite 6age and roductivit! 4oard, as defined b! the 4ureau of "abor and /mplo!ment *tatistics #4"/*& of the 5O"/. #JJ& The term (minimum wage earner) shall refer to a wor.er in the private sector paid the statutor! minimum wage; or to an emplo!ee in the public sector with compensation income of not more than the statutor! minimum wage in the non3agricultural sector where he-she is assigned.
+ixed b! the %egional Tripartite 6age and roductivit! 4oard. $inimum wage earner: o rivate sector @ paid the statutor! minimum wage o ublic sector @ not more than the statutor! minimum wage in the non3 agricultural sector where he-she is assigned
5ependent
*ec 1C. #4& +or purposes of this *ubsection, a AdependentA means a legitimate, illegitimate or legall! adopted child chiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!3one #09& !ears of age, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self3support because of mental or ph!sical defect.
5ependent is aK o "egitimate, illegitimate or legall! adopted child and living with the taxpa!er o 6ho must be: <ot more than 09, >nmarried, and <ot gainfull! emplo!ed, O% if such, 5ependent, regardless of age, is incapable of self3support because of mental or ph!sical defect.
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Taxation One: Outline with Codals To summari,e, individual taxpa!ers are classified into: 9. Citi,ens, who are divided into: o %esident citi,ens @ those citi,ens whose residence is within the hilippines; and o <on3resident citi,ens @ those citi,ens whose resident is not within the hilippines. 0. 'liens, who are divided into: o %esident aliens @ those individuals whose residence is within the hilippines and are not citi,ens thereof; and o <on3resident aliens @ those individuals whose residence is not within the hilippines but temporaril! in the countr! and are not citi,ens thereof. The! are: Those engaged in trade or business within the hilippines; and Those who are not so engaged. #see *ec 0130C& "inds o! income and income ta# o! individuals Tax formula
*/C. 0?. Income Tax %ates. 3 #'& %ates of Income Tax on Individual Citi,en and Individual %esident 'lien of the hilippines. #9& 'n income tax is hereb! imposed: #a& On the taxable income defined in *ection 19 of this Code, other than income sub:ect to tax under *ubsections #4&, #C& and #5& of this *ection, derived for each taxable !ear from all sources within and without the hilippines be ever! individual citi,en of the hilippines residing therein; #b& On the taxable income defined in *ection 19 of this Code, other than income sub:ect to tax under *ubsections #4&, #C& and #5& of this *ection, derived for each taxable !ear from all sources within the hilippines b! an individual citi,en of the hilippines who is residing outside of the hilippines including overseas contract wor.ers referred to in *ubsection#C& of *ection 01 hereof; and #c& On the taxable income defined in *ection 19 of this Code, other than income sub:ect to tax under *ubsections #b&, #C& and #5& of this *ection, derived for each taxable !ear from all sources within the hilippines b! an individual alien who is a resident of the hilippines. #0& %ates of Tax on Taxable Income of Individuals. 3 The tax shall be computed in accordance with and at the rates established in the following schedule: #:ust see chart below, it)s the same thing& +or married individuals, the husband and wife, sub:ect to the provision of *ection C9 #5& hereof, shall compute separatel! their individual income tax based on their respective total taxable income: $rovided, that if an! income cannot be definitel! attributed to or identified as income exclusivel! earned or reali,ed b! either of the spouses, the same shall be divided eBuall! between the spouses for the purpose of determining their respective taxable income. A$rovided, That minimum wage earners as defined in *ection 00 #JJ& of this Code shall be exempt from the pa!ment of income tax on their taxable income: $rovided, !urther, That the holida! pa!, overtime pa!, night shift differential pa! and ha,ard pa! received b! such minimum wage earners shall li.ewise be exempt from income tax.
<ot over 9=,=== Over 9=,=== but not over 1=,=== Over 1=,=== but not over D=,=== Over D=,=== but not over 9?=,=== Over 9?=,=== but not over 0C=,=== Over 0C=,=== but not over C==,=== Over C==,===
CL C== + 9=L of the excess over 9=,=== 0,C== + 9CL of the excess over 1=,=== F,C== + 0=L of the excess over D=,=== 00,C== + 0CL of the excess over 9?=,=== C=,=== + 1=L of the excess over 0C=,=== 90C,=== + 10L of the excess over C==,===
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Taxation One: Outline with Codals 2ross Income "ess: 5eductions Taxable Income Tax %ate Tax 5ue "now the ta# base and the ta# rate% Onl! resident citi,ens and domestic corporations are taxed on income derived from abroad. 6orldwide taxable8 The tax is imposed upon taxable compensation or emplo!ment income, business income, and income derived from the practice of professions derived b! citi,ens and resident aliens. $arried individuals shall compute separatel! their individual income tax based on their respective total taxable income. o If an! income cannot be definitel! attributed to, or identified as income exclusivel! earned or reali,ed b! either of the spouses, the same shall be divided eBuall! between them for the purpose of determining their respective taxable income. $inimum wage earners are exempt from the pa!ment of income tax on their taxable income. Jolida! pa!, overtime pa!, night shift differential pa!, and ha,ard pa! received b! them are li.ewise exempt from income tax. ' non3resident alien individual engaged in trade or business in the hilippines is sub:ect to the income tax in the same manner as an individual citi,en and a resident alien on taxable income received from sources within the hilippines. +or non3resident aliens not so engaged, the tax is o 0CL of the entire or gross income received from sources within the hilippines and o 9CL of the gross income received as compensation, salaries, and other emoluments b! reason of his emplo!ment b!: regional or area headBuarters and regional operating headBuarters of multinational corporations; offshore ban.ing units established b! a foreign corporation in the hilippines; or b! foreign petroleum service contractor or subcontractors operating in the hilippines. #*ec 0C #'3/&&
&inal income ta# ' interests, royalties, awards, dividends, capital gains on sale o! shares, realty
!ec "#. $B% Rate o& Tax on Certain Passi e Income. #9& Interests, %o!alties, ri,es, and Other 6innings. 3 ' final tax at the rate of twent! percent #0=L& is hereb! imposed upon the amount of interest from an! currenc! ban. deposit and !ield or an! other monetar! benefit from deposit substitutes and from trust funds and similar arrangements; ro!alties, except on boo.s, as well as other literar! wor.s and musical compositions, which shall be imposed a final tax of ten percent #9=L&; pri,es #except pri,es amounting to Ten thousand pesos # 9=,===& or less which shall be sub:ect to tax under *ubsection #'& of *ection 0?; and other winnings #except hilippine Charit! *weepsta.es and "otto winnings&, derived from sources within the hilippines: rovided, however, That interest income received b! an individual taxpa!er #except a nonresident individual& from a depositor! ban. under the expanded foreign currenc! deposit s!stem shall be sub:ect to a final income tax at the rate of seven and one3half percent #D 9-0L& of such interest income: rovided, further, That interest income from long3term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced b! certificates in such form prescribed b! the 4ang.o *entral ng ilipinas #4* & shall be exempt from the tax imposed under this *ubsection: rovided, finall!, That should the holder of the certificate pre3terminate the deposit or investment before the fifth #Cth& !ear, a final tax shall be imposed on the entire income and shall be deducted and withheld b! the depositor! ban. from the proceeds of the long3term deposit or investment certificate based on the remaining $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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Taxation One: Outline with Codals

maturit! thereof: +our #?& !ears to less than five #C& !ears 3 CL; Three #1& !ears to less than #?& !ears 3 90L; and "ess than three #1& !ears 3 0=L #0& Cash and-or ropert! 5ividends 3 ' final tax at the following rates shall be imposed upon the cash and-or propert! dividends actuall! or constructivel! received b! an individual from a domestic corporation or from a :oint stoc. compan!, insurance or mutual fund companies and regional operating headBuarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership #except a general professional partnership& of which he is a partner, or on the share of an individual in the net income after tax of an association, a :oint account, or a :oint venture or consortium taxable as a corporation of which he is a member or co3venturer: *ix percent #IL& beginning Manuar! 9, 9EEF; /ight percent #FL& beginning Manuar! 9, 9EEE; and Ten percent #9=L beginning Manuar! 9, 0===. rovided, however, That the tax on dividends shall appl! onl! on income earned on or after Manuar! 9, 9EEF. Income forming part of retained earnings as of 5ecember 19, 9EED shall not, even if declared or distributed on or after Manuar! 9, 9EEF, be sub:ect to this tax. #C& Capital 2ains from *ale of *hares of *toc. not Traded in the *toc. /xchange. 3 The provisions of *ection 1E#4& notwithstanding, a final tax at the rates prescribed below is hereb! imposed upon the net capital gains reali,ed during the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc. in a domestic corporation, except shares sold, or disposed of through the stoc. exchange. <ot over 9==,===KKKKKKKKKKK........ CL On an! amount in excess of 9==,===KKKK 9=L #5& Capital 2ains from *ale of %eal ropert!. 3 #9& In 2eneral. 3 The provisions of *ection 1E#4& notwithstanding, a final tax of six percent #IL& based on the gross selling price or current fair mar.et value as determined in accordance with *ection I#/& of this Code, whichever is higher, is hereb! imposed upon capital gains presumed to have been reali,ed from the sale, exchange, or other disposition of real propert! located in the hilippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, b! individuals, including estates and trusts: rovided, That the tax liabilit!, if an!, on gains from sales or other dispositions of real propert! to the government or an! of its political subdivisions or agencies or to government3owned or controlled corporations shall be determined either under *ection 0? #'& or under this *ubsection, at the option of the taxpa!er. #0& /xception. 3 The provisions of paragraph #9& of this *ubsection to the contrar! notwithstanding, capital gains presumed to have been reali,ed from the sale or disposition of their principal residence b! natural persons, the proceeds of which is full! utili,ed in acBuiring or constructing a new principal residence within eighteen #9F& calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this *ubsection: rovided, That the historical cost or ad:usted basis of the real propert! sold or disposed shall be carried over to the new principal residence built or acBuired: rovided, further, That the Commissioner shall have been dul! notified b! the taxpa!er within thirt! #1=& da!s from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: rovided, still further, That the said tax exemption can onl! be availed of once ever! ten #9=& !ears: rovided, finall!, that if there is no full utili,ation of the proceeds of sale or disposition, the portion of the gain presumed to have been reali,ed from the sale or disposition shall be sub:ect to capital gains tax. +or this purpose, the gross selling price or fair mar.et value at the time of sale, whichever is higher, shall be multiplied b! a fraction which the unutili,ed amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph #9& of this *ubsection shall be imposed thereon. *ec 00 #;& The term (deposit substitutes( shall mean an alternative from of obtaining funds from the public #the term NpublicN means borrowing from twent! #0=& or more individual or corporate lenders at an! one time& other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments ma! include, but need not be limited to ban.ersN acceptances, promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b! and between the 4ang.o *entral ng ilipinas #4* & and an! authori,ed agent ban., certificates of assignment or participation and similar instruments with recourse: rovided, however, That debt instruments issued for interban. call loans with maturit! of not more than five #C& da!s to cover deficienc! in reserves against deposit liabilities, including those between or among ban.s and Buasi3ban.s, shall not be considered as deposit substitute debt instruments.
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Taxation One: Outline with Codals Tax Rate on Certain Passi e Income on Citizens and Resident Aliens 9. Interest under the expanded foreign currenc! deposit s!stem #see %% 9=3EF below& )onresident citizens: e#empt 0. %o!alt! from boo.s, literar! wor.s, O musical compositions 1. %o!alt! other than above ?. Interest on an! current ban. deposit, !ield or other monetar! benefits from deposit substitute, trust fund O similar arrangement C. ri,e exceeding 9=,=== I. Other winnings, except hil Charit! *weepsta.es O "otto D. 5ividend from a domestic corp, or from a :oint stoc. compan!, insurance or mutual fund compan!, O regional operating headBuarters of multinational compan! or share in the distributive net income after tax o a partnership #except a general professional partnership&, :oint stoc. or :oint venture or consortium taxable as a corporation *ut what about dividends !rom !oreign corporations !or citizens +not resident aliens,? 6ell, the income here enters into the computation for *ec 0? #a& tax calendar. +or resident aliens, the! are not taxed since it)s income derived from abroad. F. Interest on long3term deposit or investment in ban.s #with maturit! of C !ears or more& ri,e @ the result of an effort #li.e a pri,e in a beaut! contest& 6inning @ the result of a transaction where the outcome depends upon chance #li.e betting& 5eposit substitute @ a means of borrowing mone! from the public #0= or more individual or corporate lenders& other than b! wa! of deposit with ban.s through the issuance of debt instruments #li.e ban.er)s acceptances, promissor! notes, repurchase agreements, certificates of assignment or participation& Tax Rate on Interest Income &rom 'orei(n Currency )eposit $RR *+,-.% 9. Interest income actuall! received b! a resident citi,en or resident alien from +C5 0. If it was deposited b! an OC6 or seaman or nonresident citi,en 1. If it was in a ban. account in the :oint names of an OC6 and his spouse #who is a resident& ?. Interest income actuall! received b! a domestic corporation or resident foreign corporation from +C5 'inal Tax D.CL
#vs exempt for nonresident aliens engaged in trade-bi,&
9=L 0=L 0=L 0=L 0=L 9=L

#vs 0=L for non3resident aliens engaged in trade-bi,&
exempt
D.CL final withholding tax /xempt C=L exemptC=L final withholding tax of D.CL D.CL final withholding tax
Interest income which is actuall! or constructivel! received b! a resident citi,en of the hilippines or b! a resident alien individual from a foreign currenc! ban. deposit will be sub:ect to a final withholding tax of D.CL. The depositor! ban. will withhold and remit the tax. If a ban. account is :ointl! in the name of a non3resident citi,en, C=L of the interest income from such ban. deposit will be treated as exempt while the other C=L will be sub:ect to a final withholding tax of D.CL. The %egulations will appl! on taxable income derived beginning Manuar! 9, 9EEF pursuant to the provisions of *ection F of %' F?0?. In case of deposits which were made in 9EED, onl! that portion of interest which was actuall! or constructivel! received b! a depositor starting Manuar! 9, 9EEF is
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Taxation One: Outline with Codals taxable. #%% 9=3EF& Tax Rate on Capital Gains 9. On sale of shares of stoc. of a domestic corporation )-. listed and )-. traded thru a local stoc. exchange held as a capital asset, o Capital gains not over 9==,=== o Capital gains in excess of 9==,=== #see %% I30==F below& 0. On sale of real propert! in the hilippines held as a capital asset #see %% F3EF below&
CL of the net capital gains 9=L of the net capital gains
IL of the gross selling price, or the current mar.et value at the time of sale, whichever is higher
Tax Rate on Income &rom !ale/ Barter/ 0xchan(e or other )isposition o& !hares o& !toc1 $RR 2,"++.% If shares of stoc. are listed and traded through the local stoc. exchange If shares not traded through the local stoc. exchange o Capital gains not over 9==,=== o Capital gains in excess of 9==,===
P of 9L #or .==CL& of the gross selling price or gross value in mone! of the shares of stoc. CL of the net capital gains 9=L of the net capital gains
6ho are liable7 9. Individual taxpa!er, whether citi,en or alien; 0. Corporate taxpa!er, whether domestic or foreign; 1. Other taxpa!ers not falling under #9& and #0& above, such as estate, trust, trust funds and pension funds, among others. 6ho are exempt7 9. 5ealers in securities 0. Investors in shares of stoc. in a mutual fund compan!, as defined in *ec 00 #44&, and *ection 0#s& of these %egulations, in ocnnection with the gains reali,ed b! said investor upon redemption of said shares of stoc. in a mutual fund compan!l and 1. 'll other persons, whether natural or :uridical, who are specificall! exempt from national internal revenue taxes under existing investment incentives and other special laws.
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Taxation One: Outline with Codals 3o4 to determine the tax base o& disposition o& stoc1 $RR 2,"++.% *ales of stoc. listed and traded through the "*/ *ales of stoc. listed but not traded through the "*/ 'air 5ar1et 6alue +$Q is the actual selling price +$Q is the closing price on the da! when the shares were sold, transferred, etc #if no sale was made on that da! in the "*/, then the closing price on the da! nearest to the date of sale, transfer, or exchange of the said shares& +$Q is the boo. value of the shares of stoc. as shown in the financial statements dul! certified b! an independent C ' nearest to the date of sale
*ales of stoc. not listed and not traded through the "*/
'inal Tax Rate on !ales/ 0xchan(es/ or Trans&ers or Real Properties Classi&ied as Capital Assets $RR .,-.% *ale of real propert! in the hilippines
If sale was made to the government or to 2OCCs
IL of the gross selling price, or the current mar.et value at the time of sale, whichever is higher /ither IL of the gross selling price-current mar.et value or under the normal income tax rate, taxpa!er)s option
Creditable 7ithholdin( Tax on !ales/ 0xchan(es or Trans&ers o& Real Properties classi&ied as Ordinary Assets $RR .,-.% 9. If the seller is habitually engaged in the real estate business o *elling price is less than C==,=== o *elling price is C==,=== to 0m o *elling price is above 0m
0. If the seller is not habituall! engaged in the real estate business 1. If the seller is exempt from creditable withholding tax as per %% 03EF
9.CL 1L CL of gross selling price-current mar.et value, whichever is higher D.CL of gross selling price-current mar.et value, whichever is higher 0xempt
Conditions to be exempt &rom capital (ains tax o& 28 on the sale/ exchan(e/ or disposition o& a principal residence $RR *9,--% 9. The proceeds from the sale, exchange, or disposition of his principal residence must be full! utili,ed in acBuiring or construing a new principal residence within 9F months. There must be proof. 0. This can onl! be availed of O<"; O<C/ ever! 9= !ears
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Taxation One: Outline with Codals 1. The historical cost of his old principal residence shall be carried over to the cost basis of his new residence ?. If there is no full utili,ation, he shall be liable for the deficienc! capital gains tax of the utili,ed portion C. If the principal residence is disposed in exchange for a condo, and if it is used as his new residence, then he is exempt I. The IL capital gains tax otherwise due must be deposited in escrow with an authori,ed agent ban., and can onl! be released when sufficient proof is shown that the proceeds have been full! utili,ed within 9F months. 6hat is the principal residence an!wa!7 #RR *#,"+++% o It is the dwelling house, where the husband or wife or unmarried individual resides; actual occupanc! is not interrupted or abandoned b! temporar! absence due to travel, studies, or wor. abroad o If the ownership of the land and the dwelling house belong to different persons, onl! the dwelling house shall be treated as principal residence a!ment of capital gains tax on foreclosure of mortgaged propert! #RR #,--% o If the mortgagor exercises his right of redemption within 9 !ear @ no capital gains tax because none has been derived and no transfer of propert! was reali,ed In case of non3redemption, the capital gains will be due based on the bid price of the highest bidder ersonal and 'dditional /xemptions
!0C. 9:. Allowance of Personal Exemption for Individual Taxpayer. $A% In General. 3 +or purposes of determining the tax provided in *ection 0? #'& of this Title, there shall be allowed a basic personal exemption amounting to C=,=== for each individual taxpa!er. In the case of married individuals where onl! one of the spouses is deriving gross income, onl! such spouse shall be allowed the personal exemption. $B% Additional Exemption for Dependents . 3 There shall be allowed an additional exemption of twent! five thousand pesos # 0C,===& for each dependent not exceeding four #?&. The additional exemption for dependent shall be claimed b! onl! one of the spouses in the case of married individuals. In the case of legall! separated spouses, additional exemptions ma! be claimed onl! b! the spouse who has custod! of the child or children: rovided, That the total amount of additional exemptions that ma! be claimed b! both shall not exceed the maximum additional exemptions herein allowed. +or purposes of this *ubsection, a AdependentA means a legitimate, illegitimate or legall! adopted child chiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!3one #09& !ears of age, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self3support because of mental or ph!sical defect. #'mended b! %' EC=?&
Personal and additional exemption &or indi idual taxpayer 4asic personal exemption for each individual taxpa!er o If married and onl! one of the spouses is deriving gross income, onl! such spouse shall be allowed the personal exemption. 'dditional exemption for each dependent, not exceeding four #?& o Claimed b! onl! one spouse in case of married individuals o If legall! separated, additional exemptions claimed onl! b! spouse who has custod!; should not exceed maximum additional exemptions allowed
C=,===
0C,=== per dependent
/xemption statutes are not retroactive. # ensacola v CI%& 5iscounts for senior citi,ens is now treated as tax deductions, as per %' E0CD. This
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Taxation One: Outline with Codals suc.s for the taxpa!er because he doesn)t get the Gpeso for pesoH benefit which he would have gotten if it were considered a tax credit as before. #$./. Joldings Corp v CI% O CT'& *enior Citi,ens are o %esident citi,ens o 't least I= !ears old The! are not exempt from income taxes unless the! are considered minimum wage earners. #%' EEE?, which also too. out the previous I=,=== reBuirement&
Change of status
Sec 35. (C) Change of Status. - If the taxpa!er marries or should have additional dependent#s& as defined above during the taxable !ear, the taxpa!er ma! claim the corresponding additional exemption, as the case ma! be, in full for such !ear. If the taxpa!er dies during the taxable !ear, his estate ma! still claim the personal and additional exemptions for himself and his dependent#s& as if he died at the close of such !ear. If the spouse or an! of the dependents dies or if an! of such dependents marries, becomes twent!3one #09& !ears old or becomes gainfull! emplo!ed during the taxable !ear, the taxpa!er ma! still claim the same exemptions as if the spouse or an! of the dependents died, or as if such dependents married, became twent!3one #09& !ears old or became gainfull! emplo!ed at the close of such !ear.
ersonal exemption allowable to nonresident alien individuals

!ec. 9: $)% Personal 0xemption Allo4able to ;onresident Alien Indi idual . 3 ' nonresident alien individual engaged in trade, business or in the exercise of a profession in the hilippines shall be entitled to a personal exemption in the amount eBual to the exemptions allowed in the income tax law in the countr! of which he is a sub:ect 3 or citi,en, to citi,ens of the hilippines not residing in such countr!, not to exceed the amount fixed in this *ection as exemption for citi,ens or resident of the hilippines: rovided, That said nonresident alien should file a true and accurate return of the total income received b! him from all sources in the hilippines, as reBuired b! this Title.
Personal 0xemptions allo4able to nonresident alien indi iduals If engaged in trade, business or in the exercise of a profession
If not engaged in trade, business or in the exercise of a profession
/ntitled to a personal exemption in the amount eBual to the exemptions allowed in the income tax law of his countr! for +ilipinos, but it shouldn)t exceed the amount fixed here for exemptions <one, because *ec 0C #4& states that he will be taxed upon his entire income.
5e "eon states that nonresident aliens are not entitled to additional e#emptions for dependents. # . 91C, +undamentals of Taxation 0==E&
Optional *tandard 5eduction

!ec. 9# $<% Optional !tandard )eduction. 3 In lieu of the deductions allowed under the preceding *ubsections, an individual sub:ect to tax under *ection 0?, other than a nonresident alien, ma! elect a standard deduction in an amount not exceeding fort! percent #?=L& of his gross sales or gross receipts, as the case ma! be. In the case of a corporation sub:ect to tax under section 0D#'& and 0F#'&#9&, it ma! elect a standard deduction in an amount not exceeding fort! percent #?=L& of it gross income as defined in *ection 10 of this Code. >nless the taxpa!er signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding *ubsections. *uch election when made in the return shall be irrevocable for the taxable !ear for which the return is made: rovided, That an individual who is entitled to and claimed for the optional standard shall not be reBuired to submit with his tax return such financial statements otherwise reBuired under this Code: rovided, further, That except when the Commissioner otherwise $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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permits, the said individual shall .eep such records pertaining to his gross sales or gross receipts, or the said corporation shall .eep such records pertaining to his gross income as defined in *ection 10 of this Code during the taxable !ear, as ma! be reBuired b! the rules and regulations promulgated b! the *ecretar! of +inance, upon recommendation of the Commissioner.
Optional standard deduction is the deduction which an individual other than a non3 resident alien, or a corporation, sub:ect to income tax, ma! elect in an amount not exceeding ?=L of his gross sales or gross receipts, as the case ma! be, or a corporation, in an amount not exceeding ?=L of its gross income, in lie of ta.ing itemi,ed deductions. The O*5 ma! be availed of b!: o ' citi,en, whether resident or non3resident o %esident alien, and o Taxable estate and trust. ' non3resident alien cannot claim O*5. The O*5 allowed to individual taxpa!er shall be a maximum of ?=L of gross sales or gross receipts during the taxable !ear. o If one uses the accrual basis of accounting for his income and deductions, the O*5 shall be based on the gross sales during the taxable !ear. o If one uses the cash basis, the O*5 shall be based on his gross receipts during the taxable !ear. o The law is specific that for individual taxpa!ers the basis of the ?=L O*5 shall be gross sales or gross receipts, not gross income, for which reason the Gcost of salesH and the Gcost of servicesH are not allowed to be deducted for purposes of determining the basis of the O*5. o +or other individual taxpa!ers allowed b! law to report their income and deductions under a different method of accounting, the gross sales or gross receipts shall be determined in accordance with the said acceptable method of accounting. /xample: o *uppose a retailer of goods, an individual, whose accounting method is under the accrual basis has a gross sales of 9m with a cost of sales amounting to F==.. the computation of the O*5 shall be determined as follows: 2ross *ales 9,===,=== /ess: 0o12 33333333333333 4asis of the O*5 9,===,=== # -2 4ate +ma#, .?= O*5 'mount ?==,=== If the taxpa!er opts to use the O*5 in lieu of the itemi,ed deductions allowed under *ec 1? of the Tax Code, his net taxable income shall be as follows: 2ross *ales 9,===,=== /ess: 0o12 333333333333 2ross *ales-2ross Inome 9,===,=== /ess: -2 +ma#, ?==,=== <et Income I==,=== remium pa!ments on health and-or hospitali,ation insurance
!ec. 9# $5% Premium Payments on Health and or Hospitali!ation Insurance of an Individual Taxpayer 5 3 The amount of premiums not to exceed Two thousand four hundred pesos # 0,?==& per famil! or Two hundred pesos # 0==& a month paid during the taxable !ear for health and-or hospitali,ation insurance ta.en b! the $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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taxpa!er for himself, including his famil!, shall be allowed as a deduction from his gross income: $rovided, That said famil! has a gross income of not more than Two hundred fift! thousand pesos # 0C=,===& for the taxable !ear: $rovided, !inally, That in the case of married taxpa!ers, onl! the spouse claiming the additional exemption for dependents shall be entitled to this deduction.
The taxpa!er is allowed a deduction of 0,?==-famil! or 0==-month for health and-or hospitali,ation insurance premiums, provided: o *aid famil!)s gross income is not more than 0C=,=== for the taxable !ear. If married, onl! the spouse claiming the additional exemption for dependents can avail of this.
/xclusions and deductions #discussion from 5e "eon)s boo.& /xclusions are incomes that are exempt from the tax. The! are not to be included in the tax return unless information regarding it is specificall! called for. o /xamples: "ife insurance proceeds paid to beneficiaries upon the death of the insured. Qalue of the propert! acBuired b! inheritance or donation, because it is sub:ect to estate or donor)s tax. %etirement benefits, pensions, etc, received b! government officials and emplo!ees from the 2*I* and *** in recognition of their services. *o with retirement benefits of private firms, under certain conditions. ri,es and awards made primaril! in recognition of religious, charitable, scientific, educational, artistic, etc, competitions and tournaments. Christmas bonus, 91th month pa!, productivit! incentives, and other benefits received up to a max of 1=,===. 2ains from the sale or retirement of bonds or other certificates of indebtedness with a maturit! of more than C !ears. 5eductions are items or amounts which the law allows to be deducted under certain conditions from the gross income of a taxpa!er in order to arrive at the taxable income. 4oth reduce actual gross income although exclusions are not included in the income tax return. *ome general principals governing deductions include: o The taxpa!er see.ing a deduction must point to some specific provision of the statute authori,ing the deduction; and o Je must be able to prove that he is entitled to the deduction authori,ed or allowed. The! are allowed onl! where there is a clear provision in the statute for the deduction claimed. Taxable gross income is affected b! exclusions because the latter are omitted from the former and are not reported on the income tax return but is not affected b! deductions because the! are subtracted after gross income is determined and are reported on the return. Rinds of deductions: 9. 5eductions from compensation income. 0. 5eductions from business-professional income. 1. 5eductions from corporate income. ?. *pecial deductions C. 5eductions allowed b! special laws. Tax on non3resident aliens <on3resident aliens engaged in business in the hilippines
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!0C. ":. Tax on "onresident Alien Individual. 3 $A% "onresident Alien En#a#ed in trade or $usiness %ithin the Philippines. 3 #9& In 1eneral. 3 ' nonresident alien individual engaged in trade or business in the hilippines shall be sub:ect to an income tax in the same manner as an individual citi,en and a resident alien individual, on taxable income received from all sources within the hilippines. ' nonresident alien individual who shall come to the hilippines and sta! therein for an aggregate period of more than one hundred eight! #9F=& da!s during an! calendar !ear shall be deemed a Nnonresident alien doing business in the hilippinesN. *ection 00 #2& of this Code notwithstanding. #0& Cash and-or ropert! 5ividends from a 5omestic Corporation or Moint *toc. Compan!, or Insurance or $utual +und Compan! or %egional Operating JeadBuarters or $ultinational Compan!, or *hare in the 5istributable <et Income of a artnership #/xcept a 2eneral rofessional artnership&, Moint 'ccount, Moint Qenture Taxable as a Corporation or 'ssociation., Interests, %o!alties, ri,es, and Other 6innings. 3 Cash and-or propert! dividends from a domestic corporation, or from a :oint stoc. compan!, or from an insurance or mutual fund compan! or from a regional operating headBuarters of multinational compan!, or the share of a nonresident alien individual in the distributable net income after tax of a partnership #except a general professional partnership& of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a :oint account, or a :oint venture taxable as a corporation of which he is a member or a co3venturer; interests; ro!alties #in an! form&; and pri,es #except pri,es amounting to Ten thousand pesos # 9=,===& or less which shall be sub:ect to tax under *ubsection #4&#9& of *ection 0?& and other winnings #except hilippine Charit! *weepsta.es and "otto winnings&; shall be sub:ect to an income tax of twent! percent #0=L& on the total amount thereof: $rovided, however, that ro!alties on boo.s as well as other literar! wor.s, and ro!alties on musical compositions shall be sub:ect to a final tax of ten percent #9=L& on the total amount thereof: $rovided, !urther, That cinematographic films and similar wor.s shall be sub:ect to the tax provided under *ection 0F of this Code: $rovided, !urthermore, That interest income from long3term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced b! certificates in such form prescribed b! the 4ang.o *entral ng ilipinas #4* & shall be exempt from the tax imposed under this *ubsection: $rovided, !inally, that should the holder of the certificate pre3terminate the deposit or investment before the fifth #C th& !ear, a final tax shall be imposed on the entire income and shall be deducted and withheld b! the depositor! ban. from the proceeds of the long3term deposit or investment certificate based on the remaining maturit! thereof: = +our #?& !ears to less than five #C& !ears 3 CL; = Three #1& !ears to less than four #?& !ears 3 90L; and = "ess than three #1& !ears 3 0=L. #1& 0apital 1ains. 3 Capital gains reali,ed from sale, barter or exchange of shares of stoc. in domestic corporations not traded through the local stoc. exchange, and real properties shall be sub:ect to the tax prescribed under *ubsections #C& and #5& of *ection 0?.
' nonresident alien engaged in trade or business in the hilippines is sub:ect to the same income tax rate as citi,ens and resident aliens, on taxable income received from all sources within the hilippines. ' nonresident alien who sta!s in the hilippines for an aggregate period of more than 9F= da!s shall be deemed as nonresident alien doing business in the hilippines. 'inal Tax exempt 9=L 0=L 0=L 0=L 0=L 0=L #compare with citi,ens and resident aliens&
Tax Rate on Certain Passi e Income on ;onresident Aliens 0n(a(ed in Trade/ Business or 0xercisin( a Pro&ession 9. Interest under the expanded foreign currenc! deposit s!stem 0. %o!alt! from boo.s, literar! wor.s, O musical compositions 1. %o!alt! other than above ?. Interest on an! current ban. deposit, !ield or other monetar! benefits from deposit substitute, trust fund O similar arrangement C. ri,e exceeding 9=,=== I. Other winnings, except hil Charit! *weepsta.es O "otto D. 5ividend from a domestic corp, or from a :oint stoc. compan!, insurance or mutual fund compan!, O regional operating headBuarters of multinational compan! or share in the distributive net income after tax o a partnership #except a general professional partnership&, :oint stoc. or :oint venture or consortium taxable as a corporation
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Taxation One: Outline with Codals 6hat about dividends from foreign corps7 /xempt. <onresident aliens are not taxed worldwide. F. 2ross income from cinematographic films O similar wor.s E. Interest on long3term deposit or investment in ban.s #with maturit! of C !ears or more& Tax Rate on Capital Gains $same 4ith residents/ and nonresident aliens not en(a(ed in business% 0. On sale of shares of stoc. of a domestic corporation )-. listed and )-. traded thru a local stoc. exchange held as a capital asset, o Capital gains not over 9==,=== o Capital gains in excess of 9==,=== 0. On sale of real propert! in the hilippines held as a capital asset
0CL exempt
CL of the net capital gains 9=L of the net capital gains IL of the gross selling price, or the current mar.et value at the time of sale, whichever is higher
<on3resident aliens not engaged in business in the hilippines

!ec. ": $B% "onresident Alien Individual "ot En#a#ed in Trade or $usiness %ithin the Philippines. 3 There shall be levied, collected and paid for each taxable !ear upon the entire income received from all sources within the hilippines b! ever! nonresident alien individual not engaged in trade or business within the hilippines as interest, cash and-or propert! dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax eBual to twent!3five percent #0CL& of such income. Capital gains reali,ed b! a nonresident alien individual not engaged in trade or business in the hilippines from the sale of shares of stoc. in an! domestic corporation and real propert! shall be sub:ect to the income tax prescribed under *ubsections #C& and #5& of *ection 0?.
<onresident aliens not engaged in business are taxed 0CL of their entire income within the hilippines. That means the! have no deductions8 Their capital gains are the same with nonresident aliens engaged in business #see table above8&
*pecial aliens
!ec. ": $C% Alien Individual Employed &y 'e#ional or Area Head(uarters and 'e#ional )peratin# Head(uarters of *ultinational +ompanies . 3 There shall be levied, collected and paid for each taxable !ear upon the gross income received b! ever! alien individual emplo!ed b! regional or area headBuarters and regional operating headBuarters established in the hilippines b! multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headBuarters and regional operating headBuarters, a tax eBual to fifteen percent #9CL& of such gross income: $rovided, however, That the same tax treatment shall appl! to +ilipinos emplo!ed and occup!ing the same position as those of aliens emplo!ed b! these multinational companies. +or purposes of this Chapter, the term Nmultinational compan!N means a foreign firm or entit! engaged in international trade with affiliates or subsidiaries or branch offices in the 'sia3 acific %egion and other foreign mar.ets. #5& 6lien Individual 7mployed by -!!shore *anking 8nits . 3 There shall be levied, collected and paid for each taxable !ear upon the gross income received b! ever! alien individual emplo!ed b! offshore ban.ing units established in the hilippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off3shore ban.ing units, a tax eBual to fifteen percent #9CL& of such gross income: $rovided, however, That the same tax treatment shall appl! to +ilipinos emplo!ed and occup!ing the same positions as those of aliens emplo!ed b! these offshore ban.ing units. #/& 6lien Individual 7mployed by $etroleum 2ervice 0ontractor and 2ubcontractor5 3 'n 'lien individual who is a permanent resident of a foreign countr! but who is emplo!ed and assigned in the hilippines b! a foreign service $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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contractor or b! a foreign service subcontractor engaged in petroleum operations in the hilippines shall be liable to a tax of fifteen percent #9CL& of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: $rovided, however, That the same tax treatment shall appl! to a +ilipino emplo!ed and occup!ing the same position as an alien emplo!ed b! petroleum service contractor and subcontractor. 'n! income earned from all other sources within the hilippines b! the alien emplo!ees referred to under *ubsections #C&, #5& and #/& hereof shall be sub:ect to the pertinent income tax, as the case ma! be, imposed under this Code.
!pecial Aliens 9. /mplo!ed b! regional or area headBuarters O regional 9CL on gross income operating headBuarters established in the hilippines b! multinational; 0. /mplo!ed b! offshore ban.ing units 9CL on gross income 1. ermanent resident of a foreign countr! but who is emplo!ed 9CL and assigned in the hilippines b! a foreign service contractor or b! a foreign service subcontractor engaged in petroleum operations in the hilippines rovided the same tax shall appl! to +ilipinos emplo!ed and occup!ing the same position as these aliens. These appl! onl! to positions of a highly technical or highly managerial nature. #6tty5 9ontero, 'll income earned from all other sources within the hilippines b! the special alien emplo!ees shall be sub:ect to the pertinent income tax imposed b! the Code. Tips on answering Thought process in answering problems: 9. Is this income7 If not, then it)s not reall! a income tax problem. 0. 6ho)s the taxpa!er7 'nd what)s the source7 %efer to *ec 018 1. 6hat)s the specific rate7 *ee sec 0?30C8 +or example, what is the tax rate of on income derived from dividends from foreign corporations for 9. Citi,ens 0. %esident aliens and 1. <onresident aliens engaged in trade or business7 9. Citi,ens a. ;es, it)s income. b. The source is outside the hilippines. 're the! liable for sources from outside the hilippines7 ;es8 Citi,ens are taxed worldwide8 c. 6hat)s the specific tax rate7 JmmK since it)s not in an! of the charts, but the! still have to be taxed, then the income the! derive from dividends from foreign corporations will be considered in computing the tax rate based on the tax calendar of *ec 0?#a& 0. %esident aliens a. ;es, it)s income. b. The source is outside the hilippines. 're the! liable for sources from outside the hilippines7 <o8 The! aren)t taxed worldwide. 1. <onresident aliens engaged in trade or business a. ;es, m! dear, it)s income. b. The source is outside the hilippines. 're the! liable for source from outside the hilippines7 <o8 The! aren)t taxed worldwide either. ). )e&initions
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*ection 00, Tax Code
5efinition of corporations
!ec "" $B% The term AcorporationA shall include partnerships, no matter how created or organi,ed, :oint3stoc. companies, :oint accounts #cuentas en participacion&, association, or insurance companies, but does not include general professional partnerships and a :oint venture or consortium formed for the purpose of underta.ing construction pro:ects or engaging in petroleum, coal, geothermal and other energ! operations pursuant to an operating consortium agreement under a service contract with the 2overnment. A2eneral professional partnershipsA are partnerships formed b! persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in an! trade or business.
Corporations include: o artnerships, no matter how created or organi,ed o Moint3stoc. companies o Moint accounts o 'ssociations o Insurance companies It does not include o 2eneral professional partnerships; o Moint venture or consortium formed for the purpose of underta.ing construction pro:ects, or engaging in petroleum, coal, geothermal and other energ! operations pursuant to an operating or consortium agreement under a service contract with the government. %emember !our partnership lessons8 #'+I*CO and ascual cases& 'll co3owernships are not deemed unregistered partnerships.#Obillos v CI%& The moment inheritance shares are used as part of the common assets to be used in ma.ing profits, it is considered part of the taxable income of an unregistered partnership. #Ona v CI%& %eBuisites of a MQ: 9. Contribution b! each part! 0. rofits are shared among the parties 1. There is :oint right of mutual control over the sub:ect matter ?. There is a single business transaction rather than a general or continuous transaction #4I% %uling 19D3E0, in this case, the first agreement of the two parties to construct the IDC= 4ldg was not taxable because the! had not derived income-profits from it. the construction of the building was mere return of the capital which the! shelled out. Jowever, once the two corporations were placed under one sole management to operate the business affairs of the two, the MQ was taxable separate from the two corporations comprising it. The distribution b! the MQ to the two constituent corporations was not taxable because it was considered intra3corporate dividends.&
0. Income Tax Rates

!0C. "=. 'ates of Income tax on Domestic +orporations. #'& In 2eneral. 3 /xcept as otherwise provided in this Code, an income tax of thirt!3five percent #1CL& is hereb! imposed upon the taxable income derived during each taxable !ear from all sources within and without the hilippines b! ever! corporation, as defined in *ection 00#4& of this Code and taxable under this Title as a corporation, organi,ed in, or existing under the laws of the hilippines: rovided, That effective Manuar! 9, 0==E, the rate of income tax shall be thirt! percent #1=L&. In the case of corporations adopting the fiscal3!ear accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal !ear shall be deemed to have been earned and spent eBuall! for each month of the period. The corporate income tax rates shall be applied on the amount computed b! multipl!ing the number of months covered b! the new rates within the fiscal !ear b! the taxable income of the corporation for the period, divided b! twelve. $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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rovided, further, That the resident, upon the recommendation of the *ecretar! of +inance, ma! effective Manuar! 9, 0===, allow corporations the option to be taxed at fifteen percent #9CL& of gross income as defined herein, after the following conditions have been satisfied: #9& ' tax effort ratio of twent! percent #0=L& of 2ross <ational roduct #2< &; #0& ' ratio of fort! percent #?=L& of income tax collection to total tax revenues; #1& ' Q'T tax effort of four percent #?L& of 2< ; and #?& ' =.E percent #=.EL& ratio of the Consolidated ublic *ector +inancial osition #C *+ & to 2< . The option to be taxed based on gross income shall be available onl! to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fift!3five percent #CCL&. The election of the gross income tax option b! the corporation shall be irrevocable for three #1& consecutive taxable !ears during which the corporation is Bualified under the scheme. +or purposes of this *ection, the term Ngross incomeN derived from business shall be eBuivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. ACost of goods soldA shall include all business expenses directl! incurred to produce the merchandise to bring them to their present location and use. +or a trading or merchandising concern, Acost of goodsA sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actuall! sold, including insurance while the goods are in transit. +or a manufacturing concern, Acost of goods manufactured and soldA shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factor! or warehouse. In the case of taxpa!ers engaged in the sale of service, Ngross incomeN means gross receipts less sales returns, allowances and discounts.
Tax rate of 5omestic Corporations
1=L of taxable income from all sources within and outside the hilippines, or 0L of gross income if $CIT applies, or 9CL of gross income i! the following conditions are met: 9. tax effort ratio of 0=L of 2< 0. ratio of ?=L of income tax collection to total tax revenues 1. Q'T tax effort of ?L of 2< ; and ?. .EL ratio of the Consolidated ublic *ector +inancial osition #C *+ & to 2< #this last one has !et to be implemented& Option to be taxed based on gross income shall be available onl! to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed CCL /lection of the gross income tax option b! the corporation shall be irrevocable for 1 consecutive taxable !ears 5omestic corporations are sub:ect to an! or some of the following: Capital gains tax +inal tax on passive income <ormal tax $inimum corporate income tax #$CIT& 2ross income tax #2IT& Improperl! accumulated earnings tax #I'/T& Gross Income Computation 2ross *ales "ess: *ales %eturns 5iscounts 'llowances Co2* #all business expenses directl! incurred to produce the merchandise and bring them to their present location or use& Total 2ross Income CoG! &or a Tradin( or 5erchandise Concern
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Taxation One: Outline with Codals Invoice cost of goods sold Import duties +reight in transporting the goods to the place where the goods are actuall! sold Insurance while the goods are in transit CoG! &or a 5anu&acturin( Concern 'll costs of production of finished goods such as raw materials, direct labor O manufacturing overhead +reight cost Insurance premiums Other costs incurred to bring the raw materials to the factor! or warehouse Gross Income Computation &or a !er ice Concern 2ross *ales "ess: *ales %eturns 5iscounts 'llowances Cost of *ervices #all direct costs O expenses necessaril! incurred to provide the services reBuired b! the customers O clients including: *alaries O emplo!ee benefits of personnel, consultants O specialists directl! rendering the service Cost of facilities directl! utili,ed in providing the service such as depreciation or rental of eBuipment use O cost of supplies If it)s a ban., interest expense is included Total 2ross income of a service concern '. Proprietary 0ducational Institutions and 3ospitals
#4& roprietar! /ducational Institutions and Jospitals. 3 roprietar! educational institutions and hospitals which are nonprofit shall pa! a tax of ten percent #9=L& on their taxable income except those covered b! *ubsection #5& hereof: rovided, that if the gross income from unrelated trade, business or other activit! exceeds fift! percent #C=L& of the total gross income derived b! such educational institutions or hospitals from all sources, the tax prescribed in *ubsection #'& hereof shall be imposed on the entire taxable income. +or purposes of this *ubsection, the term Nunrelated trade, business or other activit!N means an! trade, business or other activit!, the conduct of which is not substantiall! related to the exercise or performance b! such educational institution or hospital of its primar! purpose or function. ' A roprietar! educational institutionA is an! private school maintained and administered b! private individuals or groups with an issued permit to operate from the 5epartment of /ducation, Culture and *ports #5/C*&, or the Commission on Jigher /ducation #CJ/5&, or the Technical /ducation and *.ills 5evelopment 'uthorit! #T/*5'&, as the case ma! be, in accordance with existing laws and regulations.
roprietar! educational institution is: o 'n! private school maintained O administered b! private individuals or groups o 6ith an issued permit to operate from the 5/C* or CJ/5 or T/*5' 9=L on their taxable income #except for passive income&, or 1=L on their entire taxable income if the gross income from unrelated trade, business or other activit! exceeds C=L of the total gross income of the institution >nrelated trade, business or other activit! means o 'n! trade, business or other activit! o The conduct of which is not substantially related to the exercise or performance
Tax rate of proprietar! educational institutions and hospitals
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Taxation One: Outline with Codals b! such its institution of its primar! purpose or function. +or non3stoc., non3profit educational institutions, all revenues use actuall!, directl! and exclusivel! for educational purposes are exempt. o Their exemption refers onl! to revenues derived from assets used actuall!, directl! and exclusivel! for educational purposes. o Income from cafeterias, canteens O boo.stores are also exempt if the! are owned O operated b! the educational institution and are located within the school premises. o Jowever, the! shall be sub:ect to internal revenue taxes on income from trade, business or other activit!, the conduct of which is not related to the exercise or performance b! such educational institutions of their educational purposes or functions, i. e. rental pa!ment from their building-premises. #RR =2,"++9% +or non3stoc., non3profit corporations who are exempt, the! are still liable for taxes on: o Income derived from an! of their real properties #rental pa!ment form their building premises& o 'n! activit! conducted from profit regardless of disposition thereof o Interest income from an! ban. deposits or !ield on deposit substitutes #final tax of 0=L& o If its foreign currenc! deposit, final tax of D.CL o The! shall also be withholding agents for their emplo!ee)s compensation income sub:ect to withholding tax #RR =2,"++9% +or private educational institutions, the! are exempt from Q'T, but the! must be accredited with either 5/C* or CJ/5. o Jowever, income derived from trade, business or other activit! is still taxable. o Their ban. deposits and foreign currenc! deposits are exempt from withholding taxes but the! must show proof that such income is used to fund proposed pro:ects for their institution)s improvement. o The! shall also be the withholding agents for their emplo!ee)s compensation income sub:ect to withholding tax.
G. GOCCs
!ec. "= $C% Government-owned or +ontrolled-+orporations, A#encies or Instrumentalities 5 3 The provisions of existing special or general laws to the contrar! notwithstanding, all corporations, agencies, or instrumentalities owned or controlled b! the 2overnment, except the 2overnment *ervice Insurance *!stem #2*I*&, the *ocial *ecurit! *!stem #***&, the hilippine Jealth Insurance Corporation # JIC&, and the hilippine Charit! *weepsta.es Office # C*O&, shall pa! such rate of tax upon their taxable income as are imposed b! this *ection upon corporations or associations engaged in s similar business, industr!, or activit!.
2OCCs are taxed on the same rate upon their taxable income upon corporations or associations engaged in similar business, industr!, or activit!. o /xempt 2OCCs: 2*I* *** JIC C*O 's per %' E11D, '2CO% was deleted from the list of exempt 2OCCs.
3. Passi e Income
!ec. "= $)% 'ates of Tax on +ertain Passive Incomes. -
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#9& Interest !rom eposits and :ield or any other 9onetary *ene!it !rom eposit 2ubstitutes and !rom .rust &unds and 2imilar 6rrangements, and 4oyalties5 3 ' final tax at the rate of twent! percent #0=L& is hereb! imposed upon the amount of interest on currenc! ban. deposit and !ield or an! other monetar! benefit from deposit substitutes and from trust funds and similar arrangements received b! domestic corporations, and ro!alties, derived from sources within the hilippines: $rovided, however, That interest income derived b! a domestic corporation from a depositor! ban. under the expanded foreign currenc! deposit s!stem shall be sub:ect to a final income tax at the rate of seven and one3half percent #D 9-0L& of such interest income. #0& 0apital 1ains !rom the 2ale o! 2hares o! 2tock )ot .raded in the 2tock 7#change5 3 ' final tax at the rates prescribed below shall be imposed on net capital gains reali,ed during the taxable !ear from the sale, exchange or other disposition of shares of stoc. in a domestic corporation except shares sold or disposed of through the stoc. exchange: <ot over 9==,===KKKKKKKKK..... CL 'mount in excess of 9==,===KKKKK.. 9=L #1& .a# on Income erived under the 7#panded &oreign 0urrency eposit 2ystem5 - Income derived b! a depositor! ban. under the expanded foreign currenc! deposit s!stem from foreign currenc! transactions with nonresidents, offshore ban.ing units in the hilippines, local commercial ban.s including branches of foreign ban.s that ma! be authori,ed b! the 4ang.o *entral ng ilipinas #4* & to transact business with foreign currenc! deposit s!stem shall be exempt from all taxes, except net income from such transactions as ma! be specified b! the *ecretar! of +inance, upon recommendation b! the $onetar! 4oard to be sub:ect to the regular income tax pa!able b! ban.s: $rovided, however, That interest income from foreign currenc! loans granted b! such depositor! ban.s under said expanded s!stem to residents other than offshore ban.ing units in the hilippines or other depositor! ban.s under the expanded s!stem shall be sub:ect to a final tax at the rate of ten percent #9=L&. 'n! income of nonresidents, whether individuals or corporations, from transactions with depositor! ban.s under the expanded s!stem shall be exempt from income tax #?& Intercorporate ividends. 3 5ividends received b! a domestic corporation from another domestic corporation shall not be sub:ect to tax. #C& 0apital 1ains 4ealized !rom the 2ale, 7#change or isposition o! /ands and/or *uildings5 3 ' final tax of six percent #IL& is hereb! imposed on the gain presumed to have been reali,ed on the sale, exchange or disposition of lands and-or buildings which are not actuall! used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair mar.et value as determined in accordance with *ection I#/& of this Code, whichever is higher, of such lands and-or buildings.
Tax Rate on Passi e Income o& )omestic Corporations 9. Interest under the expanded foreign currenc! deposit s!stem 0. %o!alt! of all t!pes within the hilippines o %o!alt! from abroad7 /nters the taxable income 1=L tax rate 1. Interest on an! current ban. deposit, !ield or other monetar! benefits from deposit substitute, trust fund O similar arrangement ?. 5ividend from domestic corporations #inter3corporate dividend&
'inal Tax D.CL 0=L 0=L exempt
Tax Rate on Capital Gains $same as indi iduals% 1. On sale of shares of stoc. of a domestic corporation )-. listed and )-. traded thru a local stoc. exchange held as a capital asset, o Capital gains not over 9==,=== o Capital gains in excess of 9==,=== 0. On sale of real propert! in the hilippines held as a capital asset
CL of the net capital gains 9=L of the net capital gains IL of the gross selling price, or the current mar.et value at the time of sale, whichever is higher 'inal Tax
Tax Rate o& BA;>! on Income )eri ed under the 0xpanded 'C) !ystem
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Taxation One: Outline with Codals 9. Income derived b! a depositor! 4'<R from foreign currenc! exempt transactions with non3residents, O4>s, etc 0. Interest income from foreign currenc! loans granted b! a ban. to 9=L residents other than O4>s Income of non3residents #individuals or corporations& from transactions with depositor! ban. under the expanded +C5 s!stem are exempt. 6hat are deposit substitutes7
#;& The term Adeposit substitutesA shall mean an alternative from of obtaining funds from the public #the term NpublicN means borrowing from twent! #0=& or more individual or corporate lenders at an! one time& other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments ma! include, but need not be limited to ban.ersN acceptances, promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b! and between the 4ang.o *entral ng ilipinas #4* & and an! authori,ed agent ban., certificates of assignment or participation and similar instruments with recourse: rovided, however, That debt instruments issued for interban. call loans with maturit! of not more than five #C& da!s to cover deficienc! in reserves against deposit liabilities, including those between or among ban.s and Buasi3ban.s, shall not be considered as deposit substitute debt instruments.
' deposit substitute is a means of borrowing mone! from the public #0= or more individual or corporate lenders& other than b! wa! of deposit with ban.s through the issuance of debt instruments.
*ale of shares Tax Rate on Income &rom !ale/ Barter/ 0xchan(e or other )isposition o& !hares o& !toc1 $RR 2,"++.% If shares of stoc. are listed and traded through the local stoc. exchange If shares not traded through the local stoc. exchange o Capital gains not over 9==,=== o Capital gains in excess of 9==,===
P of 9L #or .==CL& of the gross selling price or gross value in mone! of the shares of stoc. CL of the net capital gains 9=L of the net capital gains
+C5> Income of non3residents #individuals or corporations& from transactions with depositor! ban. under the expanded +C5 s!stem are exempt. Intercorporate dividends 5ividends received b! a domestic corporation from another domestic corporation shall not be sub:ect to tax. o 6h!7 "aw assumes that the dividends received will be in:ected to the capital, which will eventuall! be taxed when the corporation gets income from the use of the capital. *ale of realt! 'inal Tax Rate on !ales/ 0xchan(es/ or Trans&ers or Real Properties Classi&ied as Capital Assets $RR .,-.% *ale of real propert! in the hilippines
If sale was made to the government or to 2OCCs

IL of the gross selling price, or the current mar.et value at the time of sale, whichever is higher /ither IL of the gross selling price-current
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Taxation One: Outline with Codals mar.et value or under the normal income tax rate, taxpa!er)s option Creditable 7ithholdin( Tax on !ales/ 0xchan(es or Trans&ers o& Real Properties classi&ied as Ordinary Assets $RR .,-.% 9. If the seller is habitually engaged in the real estate business o *elling price is less than C==,=== o *elling price is C==,=== to 0m o *elling price is above 0m
0. If the seller is not habituall! engaged in the real estate business
1. If the seller is exempt from creditable withholding tax as per %% 03EF If the mortgagor exercises his right of redemption within 9 !ear, no capital gains tax. In case of non3redemption, the capital gains will be due based on the bid price of the highest bidder. #%% ?3EE& I. 5inimum Corporate Income Tax $5CIT%
9.CL 1L CL of gross selling price-current mar.et value, whichever is higher D.CL of gross selling price-current mar.et value, whichever is higher 0xempt
!ec "= $0% *inimum +orporate Income Tax on Domestic +orporations 5 ' #9& Imposition o! .a#5 3 ' minimum corporate income tax of two percent #0L= of the gross income as of the end of the taxable !ear, as defined herein, is hereb! imposed on a corporation taxable under this Title, beginning on the fourth taxable !ear immediatel! following the !ear in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under *ubsection #'& of this *ection for the taxable !ear. #0& 0arry &orward o! 7#cess 9inimum .a# . 3 'n! excess of the minimum corporate income tax over the normal income tax as computed under *ubsection #'& of this *ection shall be carried forward and credited against the normal income tax for the three #1& immediatel! succeeding taxable !ears. #1& 4elie! !rom the 9inimum 0orporate Income .a# 8nder 0ertain 0onditions . 3 The *ecretar! of +inance is hereb! authori,ed to suspend the imposition of the minimum corporate income tax on an! corporation which suffers losses on account of prolonged labor dispute, or because of force ma:eure, or because of legitimate business reverses. The *ecretar! of +inance is hereb! authori,ed to promulgate, upon recommendation of the Commissioner, the necessar! rules and regulation that shall define the terms and conditions under which he ma! suspend the imposition of the minimum corporate income tax in a meritorious case. #?& 1ross Income e!ined5 3 +or purposes of appl!ing the minimum corporate income tax provided under *ubsection #/& hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. (0ost o! goods sold; shall include all business expenses directl! incurred to produce the merchandise to bring them to their present location and use. +or a trading or merchandising concern, (cost o! goods sold; shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actuall! sold including insurance while the goods are in transit. +or a manufacturing concern, cost of (goods manu!actured and sold( shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factor! or warehouse. In the case of taxpa!ers engaged in the sale of service, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of services. (0ost o! services( shall mean all direct costs and expenses necessaril! incurred to provide the services reBuired b! the customers and clients including #'& salaries and emplo!ee benefits of personnel, consultants and specialists directl! rendering the service and #4& cost of facilities directl! utili,ed in providing the service such as depreciation or rental of eBuipment used and cost of supplies: $rovided, however, That in the case of ban.s, (cost o! services( shall include interest expense.
4eginning with the fourth !ear of operations, a domestic corporation is taxed b!
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Taxation One: Outline with Codals whichever is higher: o <ormal tax of 1=L, or o $inimum corporate income tax of 0L The minimum corporate income tax is 0L of gross income #compare with the normal tax which has taxable income as its tax base& 'n! excess of the over the normal tax of a !ear shall be carried forward and credited against the normal tax for the three immediatel! succeeding taxable !ears. o +or the carr! forward to appl!, the normal tax should be higher than the minimum corporate income tax. o >suall! follows the first3in, first3out #+I+O& method #'tt!. $ontero& o *o, !ou usuall! compute both first, then appl! either the $CIT or <ormal Tax, whichever is higher. ;ear ? 0== 9== 0== #9==& ;ear C ?== 0== ;ear I 9== 1== ;ear D 9== 0==
/xample $CIT <ormal Income tax /xcess $CIT
?== = 0== #9==& ubos na yung year < e#cess #0==& $CIT is implemented on domestic and resident foreign corporations whenever the! have ,ero or negative taxable income, or when the $CIT is greater than the normal income tax due. #RR -,-.% The following are exempted from the $CIT: o %esident foreign corporations engaged in business as international carriers #see below for more discussion& o %esident foreign corporations engaged in business as offshore ban.ing units o %esident foreign corporations engaged in business as regional operating headBuarters o +irms that are taxed under a special income tax regime #li.e those under /S' or other economic ,ones&
?. Income Tax on Resident 'orei(n Corporations

!ec ".$A% Tax on 'esident -orei#n +orporations. . #9& In 1eneral. 3 /xcept as otherwise provided in this Code, a corporation organi,ed, authori,ed, or existing under the laws of an! foreign countr!, engaged in trade or business within the hilippines, shall be sub:ect to an income tax eBuivalent to thirt!3five percent #1CL& of the taxable income derived in the preceding taxable !ear from all sources within the hilippines: $rovided, That effective Manuar! 9, 9EEF, the rate of income tax shall be thirt!3four percent #1?L&; effective Manuar! 9, 9EEE, the rate shall be thirt!3three percent #11L&, and effective Manuar! 9, 0=== and thereafter, the rate shall be thirt!3two percent #10L&. In the case of corporations adopting the fiscal3!ear accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal !ear shall be deemed to have been earned and spent eBuall! for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed b! multipl!ing the number of months covered b! the new rates within the fiscal !ear b! the taxable income of the corporation for the period, divided b! twelve. $rovided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent #9CL& on gross income under the same conditions, as provided in *ection 0D #'&. #0& 9inimum 0orporate Income .a# on 4esident &oreign 0orporations5 3 ' minimum corporate income tax of two $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
24
+ amdg

percent #0L& of gross income, as prescribed under *ection 0D #/& of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph #9& of this *ubsection.
' foreign corporation is one which is not domestic #ie organi,ed-incorporated here&. It ma! be a resident or non3resident corporation. ' resident corporation is a foreign corporation engaged in business in the hilippines. o ' foreign corporation can engage in business in the hilippines onl! after it had registered with, and had been allowed b!, the regulator! agencies of the hilippine government to engage in business in the hilippines. 1=L of taxable income from all sources within the hilippines, or 0L of gross income if $CIT applies, or 9CL of gross income #again, the 1I. has yet to be implemented, 'inal Tax D.CL 0=L
Tax rate o& 'orei(n Resident Corporations
Tax Rate on Passi e Income o& 'orei(n Resident Corporations 9. Interest under the expanded foreign currenc! deposit s!stem 0. %o!alt! of all t!pes within the hilippines o %o!alt! from abroad7 0xempt. #remember, onl! taxed from sources within the hilippines& 1. Interest on an! current ban. deposit, !ield or other monetar! benefits from deposit substitute, trust fund O similar arrangement ?. 5ividend from domestic corporations #inter3corporate dividend&
0=L exempt
Tax Rate on Capital Gains ?. On sale of shares of stoc. of a domestic corporation )-. listed and )-. traded thru a local stoc. exchange held as a capital asset, o Capital gains not over 9==,=== o Capital gains in excess of 9==,=== 0. On sale of real propert! in the hilippines
CL of the net capital gains 9=L of the net capital gains )o provision !or capital gains !or sale o! realty5 6tty5 9ontero says that you apply it to the normal corporate ta# o! =>?
International Carrier
*ec 0F #'& #1& International 0arrier. 3 'n international carrier doing business in the hilippines shall pa! a tax of two and one3 half percent #0 9-0L& on its (1ross $hilippine *illings( as defined hereunder: #a& International 6ir 0arrier5 3 (1ross $hilippine *illings( refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the hilippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of pa!ment of the tic.et or passage document: $rovided, That tic.ets revalidated, exchanged and-or indorsed to another international airline form part of the 2ross hilippine 4illings if the passenger boards a plane in a port or point in the hilippines: $rovided, !urther, That for a flight which originates from the hilippines, but transshipment of passenger ta.es place at an! port outside the hilippines on another airline, onl! the aliBuot portion of the cost of the tic.et corresponding to the leg flown from the hilippines to the point of transshipment shall form part of 2ross hilippine 4illings. #b& International 2hipping. 3 (1ross $hilippine *illings( means gross revenue whether for passenger, cargo or mail originating from the hilippines up to final destination, regardless of the place of sale or pa!ments of the passage or freight documents.
25
+ amdg
Taxation One: Outline with Codals Tax rate for international carriers is 0.CL of 2ross hilippine 4illings 2ross hilippine 4illings refers to o 2ross revenue derived from carriage of persons, excess baggage, cargo and mail o -riginating !rom the $hilippines in a continuous and uninterrupted flight o Irrespective of the place of sale or issue and the place of pa!ment of the tic.et or passage document In CI% v 4O'C, 4ritish Overseas 'irwa!s did not have an! landing rights here nor did the! have license to operate here. The! also did not carr! passengers or cargo to or from the hilppines. The! did, however, have a general sales agent which sold 4O'C tic.ets. The! were taxed for the sale of the tic.ets #because of the situs of taxation principle&, even if the service to be rendered was outside the hilippines. The! weren)t liable for carrier)s tax though. o 5oing business has no specific criterion. 's long as there was a continuit! of conduct and intention to establish a continuous business and not one of a temporar! character, then !ou are doing business in the hilippines. #%emember !our corp8& 'n offline airline which has a branch-agent in the hilippines and sells passage documents to cover offline flights of its principal or other airlines in considered engaged in business as an international air carrier in the countr! and is <OT sub:ect to the 2 4 nor to the 1L common carrier)s tax. If the airline has flights which originate from an! point in the hilippines, it is sub:ect to the 0.CL 2 4 tax unless it is sub:ect to a different tax rate under a tax treat! to which the hilippines is a signator!. 6hat is included in computing the 2 47 o 2ross revenue from passage of persons #actual amount as reflected in the tax coupon part of the plane tic.et& o /xcess baggage o Cargo and mail originating from the hilippines in a continuous and uninterrupted flight To compute the 2 4: #monthl! average net fare of all the tax coupons of plane tic.ets per point of final destination, per class of passage, per classification of passenger& $>"TI "I/5 b! the #total number of passengers flown for the month as declared in the flight manifest& In case of passengers) flights from an! point in the hilippines and bac., that portion of revenue pertaining to the return trip to the hilippines is <OT included as part of the 2 4. #RR *:,"++"%
Offshore 4an.ing >nits

#?& -!!shore *anking 8nits5 3 The provisions of an! law to the contrar! notwithstanding, income derived b! offshore ban.ing units authori,ed b! the 4ang.o *entral ng ilipinas #4* & to transact business with offshore ban.ing units, including an! interest income derived from foreign currenc! loans granted to residents, shall be sub:ect to a final income tax at the rate of ten percent #9=L& of such income. 'n! income of nonresidents, whether individuals or corporations, from transactions with said offshore ban.ing units shall be exempt from income tax.
Tax rate of offshore ban.ing units authori,ed b! the 4* #including an! interest income foreign currenc! loans granted to residents& is 9=L final tax. Income of nonresidents !rom transactions with O4>s shall be exempt from income tax. 'n offshore ban.ing unit is a branch of a foreign ban. whish is authori,ed b! the 4* to transact offshore ban.ing business in the hilippines. ' foreign currenc! deposit unit is a department of a local ban. or an inexisting local branch of a foreign ban. which is authori,ed b! the 4* to operated under the expanded foreign currenc! deposit s!stem.
26
+ amdg
Taxation One: Outline with Codals 2ross onshore income covers all income arising from transactions allowed b! the 4* conducted b! and between an offshore ban. with another offshore ban. or with an +C5> or with a non3resident. #RR *+,=2% The following are included in computing the gross onshore income of O4>s and +C5>s7 o 2ross interest income arising from foreign currenc! loans and advances and investments with residents o +ees, commissions and other charges which are integral parts of the income from foreign currenc! loan transactions are /T/$ T. The! are not to be included in computing the final tax. #RR *#,==% o Tax Rate on Interest Income &rom 'orei(n Currency )eposit $RR *+,-.% 9. Interest income actuall! received b! a resident citi,en or resident alien D.CL final from +C5 withholding tax 0. If it was deposited b! an OC6 or seaman or nonresident citi,en /xempt 1. If it was in a ban. account in the :oint names of an OC6 and his C=L exemptspouse #who is a resident& C=L final withholding tax of D.CL ?. Interest income actuall! received b! a domestic corporation or D.CL final resident foreign corporation from +C5 withholding tax 4ranch rofit %emittance Tax
#C& .a# on *ranch $ro!its 4emittances. 3 'n! profit remitted b! a branch to its head office shall be sub:ect to a tax of fifteen #9CL& which shall be based on the total profits applied or earmar.ed for remittance without an! deduction for the tax component thereof #except those activities which are registered with the hilippine /conomic Sone 'uthorit!&. The tax shall be collected and paid in the same manner as provided in *ections CD and CF of this Code: provided, that interests, dividends, rents, ro!alties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received b! a foreign corporation during each taxable !ear from all sources within the hilippines shall not be treated as branch profits unless the same are effectivel! connected with the conduct of its trade or business in the hilippines.
'n! profit remitted b! a branch to its head office shall be sub:ect to a tax of 9CL, except those registered with /S' #the! have their own tax rules as incentives& 6hat)s the base for the 4 %T7 o It)s the total profits applied for remittance or earmar.ed for remittance without an! deduction for the tax component, not the pro!it actually remitted abroad5 o If it is a foreign corporation, the following are not included: Interests 5ividends %ents %o!alties a!ment for technical services *alaries and wage premiums 'nnuities, emoluments, or other fixed or determinable casual gains rofits, income O capital gains 7#cept i! the above are connected with the conduct o! its business in the $hilippines5 assive income is not included in computing for the 4 %T. It is sub:ect to a final tax. #Compania 2eneral de Tabacos v CI%& o /xcept when it arises from business activit! in which the corporation is engaged or connected with the conduct of its business in the hilippines.
27
+ amdg
Taxation One: Outline with Codals %egional or 'rea JeadBuarters and %OJUs
*ec 00#55& The term (regional or area headquarters( shall mean a branch established in the hilippines b! multinational companies and which headBuarters do not earn or derive income from the hilippines and which act as supervisor!, communications and coordinating center for their affiliates, subsidiaries, or branches in the 'sia3 acific %egion and other foreign mar.ets. #//& The term (regional operating headquarters( shall mean a branch established in the hilippines b! multinational companies which are engaged in an! of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisor! services; mar.eting control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communications; and business development.
%egional or 'rea JeadBuarters is a branch established in the hilippines b! multi3 nationals and which headBuarters: o 5o <OT earn or derive income from the hilippines, and o 6hich act as supervisor!, communications and coordinating center for their affiliates, subsidiaries or branches in the 'sia3 acific %egions. The! are /T/$ T from income tax. %egional Operating JeadBuarters is a branch established in the hilippines b! multi3 nationals which are engaged in an! of the following services: o 2eneral admin and planning o 4usiness planning and coordination; o *ourcing and procurement of raw materials and components; o Corporate finance advisor! services; o $ar.eting control and sales promotion; o Training and personnel management; o "ogistic services; o %esearch and development services and product development; o Technical support and maintenance; o 5ata processing and communications; and o 4usiness development. The! are taxed 9=L on taxable income.
>. Income Tax on ;on,resident 'orei(n Corporations In general

#4& Tax on <onresident +oreign Corporation. 3 #9& In 1eneral. 3 /xcept as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the hilippines shall pa! a tax eBual to thirt!3five percent #1CL& of the gross income received during each taxable !ear from all sources within the hilippines, such as interests, dividends, rents, ro!alties, salaries, premiums #except reinsurance premiums&, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains sub:ect to tax under subparagraph C#c& $rovided, That effective Manuar! 9, 0==E, the rate of income tax shall be thirt! percent #1=L&
<on3resident foreign corporations are sub:ect to 1=L income tax on the gross income derived during each taxable !ear from all sources within the hilippines onl! o *pecial corporations #seen below& are sub:ect to a different tax rate 6hen the foreign corporation transacts business in the hilippines independentl! of its branch in the countr!, the principal agent relationship is set aside. The transaction becomes that of the foreign corporation, not of the branch, hence, the corporation is considered a foreign non3resident corporation for that isolated and independent transaction. #$arubeni v CI%& ' casual activit! in the hilippines b! a foreign corporation does not amount to engaging in trade or business in the hilippines for income tax purposes. In order that a foreign
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Taxation One: Outline with Codals corporation ma! be considered engaged in trade or business, its business transactions must be continuous. #<Q %eederi: v CI%& *pecial non3resident foreign corporations
#0& )onresident 0inematographic &ilm -wner, /essor or istributor5 3 ' cinematographic film owner, lessor, or distributor shall pa! a tax of twent!3five percent #0CL& of its gross income from all sources within the hilippines. #1& )onresident -wner or /essor o! @essels 0hartered by $hilippine )ationals5 3 ' nonresident owner or lessor of vessels shall be sub:ect to a tax of four and one3half percent #? 9-0L& of gross rentals, lease or charter fees from leases or charters to +ilipino citi,ens or corporations, as approved b! the $aritime Industr! 'uthorit!. #?& )onresident -wner or /essor o! 6ircra!t, 9achineries and -ther 7quipment5 3 %entals, charters and other fees derived b! a nonresident lessor of aircraft, machineries and other eBuipment shall be sub:ect to a tax of seven and one3half percent #D 9-0L& of gross rentals or fees.
!P0CIA< CORPORATIO;! Tax %ate <on3resident owner of lessor of ?.CL vessel <on3resident cinematographic film 0CL owner, lessor, or distributor <on3resident lessor of aircraft, D.CL machiner! and other eBuipment roprietar! educational institution 9=L and non3profit hospital %esident international carrier 0.CL %egional operating headBuarters or 9=L multinational corporation There)s no $CIT for special corporations Tax 4ase 2ross rentals, lease and charter fees from the hil 2ross income from the hil 2ross rentals, charges and other fees from hil sources Taxable income from all sources 2ross hilippine billings hilippine Taxable income
Tax rate on certain incomes of non3resident foreign corporations

#C& .a# on 0ertain Incomes 4eceived by a )onresident &oreign 0orporation5 3 #a& Interest on &oreign /oans. 3 ' final withholding tax at the rate of twent! percent #0=L& is hereb! imposed on the amount of interest on foreign loans contracted on or after 'ugust 9, 9EFI; #b& Intercorporate ividends5 3 ' final withholding tax at the rate of fifteen percent #9CL& is hereb! imposed on the amount of cash and-or propert! dividends received from a domestic corporation, which shall be collected and paid as provided in *ection CD #'& of this Code, sub:ect to the condition that the countr! in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the hilippines eBuivalent to twent! percent #0=L&, which represents the deifference between the regular income tax of 1CL and the 9CL tax on dividends as provided in this subparagaprh: $rovided, that effective Manuar! 9, 0==E, the credit against the tax due shall be eBuivalent to 9CL, which represents the difference between the regular income tax of 1=L and the 9CL tax on dividends. # 6s amended by 46 A==B, #c& 7#change5 3 ' final tax at the rates prescribed below is hereb! imposed upon the net capital gains reali,ed during the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc. in a domestic corporation, except shares sold, or disposed of through the stoc. exchange: <ot over 9==,===KKKK..KKKKKK..........CL On an! amount in excess of 9==,===KKKK 9=L
Tax Rate on Passi e Income o& 'orei(n ;on,Resident Corporations 9. Interest on foreign loans )on3resident lends to a domestic corporation 0. 5ividend from domestic corporations #inter3corporate dividend& .his is subCect to the condition that the country in which the non3 resident !oreign corporation is domiciled allows a credit against the ta# due !rom the non3resident !oreign corp ta#es deemed to have been paid in the $hilippines equivalent to DE?5 I! they donFt, the dividends will be ta#ed at =>?5
'inal Tax 0=L 9CL
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Taxation One: Outline with Codals Tax Rate on Capital Gains $same as &orei(n resident corporations% C. On sale of shares of stoc. of a domestic corporation )-. listed and )-. traded thru a local stoc. exchange held as a capital asset, o Capital gains not over 9==,=== o Capital gains in excess of 9==,=== 0. On sale of real propert! in the hilippines
CL of the net capital gains 9=L of the net capital gains )o provision !or capital gains !or sale o! realty5 6tty5 9ontero says that you apply it to the normal corporate ta# o! =>?
Income covered b! tax treaties In negotiating tax treaties, the underl!ing rationale for reducing the tax rate is that the hilippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed b! the other countr!. There would be some incentives on the part of the foreigners to invest in the hilippines because the rates of tax are lowered and at the same time, the! are credited against the domestic tax abroad a figure higher than what was collected in the hilippines. o Thus, if the rates of tax are lowered here, there should be a concomitant commitment on the part of the state of residence #of the foreign corp& to grant some form of tax relief, whether this be in the form of a tax credit or exemption. Otherwise, the tax which would have been collected here will simpl! be collected b! another state, defeating the ob:ect of the tax treat! since the tax burden imposed would remain unrelieved. o The purpose of the most favored nation clause is to establish the principle of eBualit! of international treatment b! providing that citi,ens of the contracting nations ma! en:o! the privileges accorded b! either part! to those of the most favored nation. This allows the taxpa!er in one state to avail of more liberal provisions granted to another tax treat! to which his countr! or residence is also a part!. Jowever, the use of the most favored nation clause is sub:ect to the rationale of tax treaties. o If the state of residence does not grant some form of tax relief to the investor #the foreign non3resident corp&, no benefit would redound to the hilippines. #CI% v *C Mohnson and *on& <. Improperly Accumulated 0arnin(s Tax $IA0T%
*/C. 0E. Imposition of Improperl! 'ccumulated /arnings Tax. 3 #'& In 2eneral. 3 In addition to other taxes imposed b! this Title, there is hereb! imposed for each taxable !ear on the improperl! accumulated taxable income of each corporation described in *ubsection 4 hereof, an improperl! accumulated earnings tax eBual to ten percent #9=L& of the improperl! accumulated taxable income. #4& Tax on Corporations *ub:ect to Improperl! 'ccumulated /arnings Tax. 3 #9& In 2eneral. 3 The improperl! accumulated earnings tax imposed in the preceding *ection shall appl! to ever! corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of an! other corporation, b! permitting earnings and profits to accumulate instead of being divided or distributed. #0& /xceptions. 3 The improperl! accumulated earnings tax as provided for under this *ection shall not appl! to: #a& ublicl!3held corporations; #b& 4an.s and other nonban. financial intermediaries; and #c& Insurance companies. #C& /vidence of urpose to 'void Income Tax. 3 #9& rima +acie /vidence. 3 the fact that an! corporation is a mere holding compan! or investment compan! shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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#0& /vidence 5eterminative of urpose. 3 The fact that the earnings or profits of a corporation are permitted to accumulate be!ond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, b! the clear preponderance of evidence, shall prove to the contrar!. #5& Improperl! 'ccumulated Taxable Income. 3 +or purposes of this *ection, the term Nimproperl! accumulated taxable incomeN means taxable incomeN ad:usted b!: #9& Income exempt from tax; #0& Income excluded from gross income; #1& Income sub:ect to final tax; and #?& The amount of net operating loss carr!3over deducted; 'nd reduced b! the sum of: #9& 5ividends actuall! or constructivel! paid; and #0& Income tax paid for the taxable !ear. rovided, however, That for corporations using the calendar !ear basis, the accumulated earnings under tax shall not appl! on improperl! accumulated income as of 5ecember 19, 9EED. In the case of corporations adopting the fiscal !ear accounting period, the improperl! accumulated income not sub:ect to this tax, shall be rec.oned, as of the end of the month comprising the twelve #90&3month period of fiscal !ear 9EED39EEF. #/& %easonable <eeds of the 4usiness. 3 +or purposes of this *ection, the term Nreasonable needs of the businessN includes the reasonabl! anticipated needs of the business.
'n improperl! accumulated earnings tax of 9=L of improperl! accumulated taxable income is imposed on corporations which permit earnings and profits to accumulate instead of being divided or distributed. 6ho are covered7 o 'll domestic corporations which are classified as closel! held corporations7 o ' closel!3held corporation are those at least C=L in value of the outstanding capital stoc. or at least C=L of the total combined voting power of all classes of stoc. is owned directl! or indirectl! b! not more than 0= individuals. #RR ",+*% Jow do !ou determine if a corporation is a closel!3held one7 "oo. at stoc.3ownership8 If stoc. not owned b! individuals, it will be considered to be owned proportionatel! b! its shareholders. If it)s a famil! O partnership ownership, an individual shall be considered to own the stoc. for his famil! members or partners. If there)s an option to acBuire stoc.s, it shall be considered as being owned b! the person with the option. #BIR Rulin( ":,+"% 6ho are not covered7 9. ublicl!3held corporations 0. 4an.s and other financial institutions 1. Insurance companies ?. Taxable partnerships C. 2eneral professional partnerships I. <on3taxable :oint ventures D. /nterprises registered with /S' or with the 4C5' or with other special economic ,ones #the last !our are based on RR ",+*% 6hat)s prima facie evidence of I'/7 o The fact that an! corporation is a mere holding compan! or investment compan! o The fact that the earnings or profits of a corporation are permitted to accumulate be!ond the reasonable needs of the business o Investment of substantial earnings in unrelated business or in stoc. or securities of an unrelated business o Investment in bonds and other long term securities o 'ccumulation of earnings in excess of 9==L of paid up capital #the last three are based on RR ",+*%
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Taxation One: Outline with Codals Jow do !ou compute for the improperl! accumulated taxable income7 Taxable Income, I<C%/'*/5 4;: Income exempt from tax Income excluded from gross income Income sub:ect to final tax The amount of net operating loss carr! over #<O"CO& 5/5>CT/5 4;: 5ividends actuall! or constructivel! paid Income tax paid for the taxable !ear 6mount reserved !or reasonable needs o! the business emanating !rom the covered yearFs ta#able income +from %e!es, p. D9& /U>'"*: Improperl! accumulated taxable income T 9=L #I'/T& 6hat !ou have to pa! G%easonable needsH means the immediate needs of the business. If the corporation can not prove this, then it is not an immediate need. In order to determine whether profits are accumulated for the reasonable needs of the business as to avoid the surtax upon shareholders, the controlling intention of the taxpa!er is that which is manifested at the time of accumulation, not subseBuentl! declared intentions which are merel! the product of afterthought. #$anila 6ine $erchants v CI%& o This is the immediac! test in RR ",+*. %easonable needs means the immediate needs of the business including reasonabl! anticipated needs. The burden of proof is with the corporation. The touchstone of liabilit! is the purpose behind the accumulation of the income and not the conseBuences of the accumulation. *o, if the failure to pa! dividends were for the purpose of using the undistributed earnings and profits for the reasonable needs of the business, that purpose would not fall within the interdiction of the statute. #CI% v Tuason& The tax on improper accumulation of surplus is essentiall! a penalt! tax designed to comple corporations to distribute earnings so that the said earnings b! shareholders, could, in turn, be taxed. 6hen corporations do not declare dividends, income taxes are not paid on the undeclared dividends received b! the shareholders. #C!anamid v CT'& 6hat are considered reasonable7 a. 'llowance for the increase of accumulated earnings up to 9==L of the paid3up capital b. /arnings reserved for building, plant, or eBuipment acBuisitions as approved b! the 4oard of 5irectors #expansion, improvement, and repairs& c. /arnings reserved for compliance with an! loan or obligation established under a legitimate business agreement #debt retirement& d. In case of subsidiaries of foreign corporations in the hilippines, all undistributed earnings intended or reserved for investments in the hilippines e. /arnings reBuired b! law to be retained #RR ",+*% f. 'nticipated losses or reverses in business #%e!es, p. D=&
5. Tax,exempt Corporations
*/C. 1=. /xemptions from Tax on Corporations. 3 The following organi,ations shall not be taxed under this Title in respect to income received b! them as such: #'& "abor, agricultural or horticultural organi,ation not organi,ed principall! for profit; $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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#4& $utual savings ban. not having a capital stoc. represented b! shares, and cooperative ban. without capital stoc. organi,ed and operated for mutual purposes and without profit; #C& ' beneficiar! societ!, order or association, operating fort he exclusive benefit of the members such as a fraternal organi,ation operating under the lodge s!stem, or mutual aid association or a nonstoc. corporation organi,ed b! emplo!ees providing for the pa!ment of life, sic.ness, accident, or other benefits exclusivel! to the members of such societ!, order, or association, or nonstoc. corporation or their dependents; #5& Cemeter! compan! owned and operated exclusivel! for the benefit of its members; #/& <onstoc. corporation or association organi,ed and operated exclusivel! for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of an! member, organi,er, officer or an! specific person; #+& 4usiness league chamber of commerce, or board of trade, not organi,ed for profit and no part of the net income of which inures to the benefit of an! private stoc.3holder, or individual; #2& Civic league or organi,ation not organi,ed for profit but operated exclusivel! for the promotion of social welfare; #J& ' nonstoc. and nonprofit educational institution; #I& 2overnment educational institution; #M& +armersN or other mutual t!phoon or fire insurance compan!, mutual ditch or irrigation compan!, mutual or cooperative telephone compan!, or li.e organi,ation of a purel! local character, the income of which consists solel! of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and #R& +armersN, fruit growersN, or li.e association organi,ed and operated as a sales agent for the purpose of mar.eting the products of its members and turning bac. to them the proceeds of sales, less the necessar! selling expenses on the basis of the Buantit! of produce finished b! them; <otwithstanding the provisions in the preceding paragraphs, the income of whatever .ind and character of the foregoing organi,ations from an! of their properties, real or personal, or from an! of their activities conducted for profit regardless of the disposition made of such income, shall be sub:ect to tax imposed under this Code.
The following organi,ations are tax3exempt, providing the! are not organi,ed for profit @ 9. "abor, agricultural and horticultural organi,ations 0. $utual savings ban. without capital stoc. represented b! shares O cooperative ban.s without capital stoc. 1. ' beneficiar! societ!, order or association operating for the exclusive benefit of the members #li.e a frat operating under the lodge s!stem, a mutual aid association, a non3stoc. corporation organi,ed b! emplo!ees providing for the pa!ment of life, sic.ness, or other benefits exclusive to its members& ?. Cemeter! compan! owned O operated exclusivel! for the benefit of its members C. <on3stoc. corporations or associations organi,ed and operated exclusivel! for religious, charitable, scientific, athletic or cultural purposes or for the rehab of veterans, no part of its net income or asset shall belong to or inures to the benefit of an! member or specific person I. 4usiness league chamber of commerce or board of trade, no part of its income inures to an! individual D. Civic league or organi,ation operated exclusivel! for the promotion of social welfare F. ' non3stoc. and non3profit educational institution E. 2overnment educational institution 9=. +armers) or other mutual t!phoon or fire insurance compan!, mutual ditch or irrigation compan!, mutual or cooperative telephone compan!, or li.e organi,ations or a purel! local character, the income of which consists solel! of dues, assessments O fees collected from members for the sole purpose of meeting its expenses 99. +armers), fruit growers) or li.e associations organi,ed and operated as sales agent for the purpose of mar.eting the products of its members O turning bac. to them the proceeds less expenses The! are not sub:ect to income tax on income received b! them from underta.ings which are essential to or necessaril! connected with the purposes for which the! were organi,ed and operated. o 4ut the! are sub:ect to income tax on income of whatever .ind and character from an! of their properties #real or personal&, or from an! of their activities #unrelated& conducted for profit, regardless of the disposition made of such income.
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Taxation One: Outline with Codals *ome stuff from the Omnibus Investment Code of 9EFD #Art 9-/ 0O ""2 , Incenti es to Re(istered 0nterprises under the In estment Priorities Plan & @ these are activit!3driven incentives: o Income Tax Jolida! +or pioneer firms @ I !ears from commercial operation +or non3pioneer firms @ ? !ears from commercial operation +or newl! registered firms @ full! exempt from income taxes /xtension of tax exemption for more than 9 !ear: If the pro:ect meets the prescribed ratio of capital eBuipment to number of wor.s set b! the 4oard If the utili,ation of indigenous raw materials are at rates set b! the 4oard If the net foreign exchange savings or earnings amount to at least VCm annuall! during the first 1 !ears of operation o 4ut no registered firm ma! avail of this incentive for a period exceeding F !ears /xemption for registered expanding firms: +or a period of 1 !ears form commercial operation, registered expanding firms are entitled to tax3exemption proportionate to their expansion, but if it availed of this incentive during this period, it is <OT entitled to additional deduction for incremental labor expense This incentive cannot be extended be!ond 1 !ears o 'dditional deduction for labor expense +or the first C !ears from registration, a registered enterprise is allowed an additional deduction of C=L of the wages corresponding to the increment in the number of 5I%/CT labor for s.illed and uns.illed labors if the pro:ect meets the prescribed ratio of capital eBuipment to number of wor.ers set b! the 4oard This exemption shall be doubled if the activit! is located in less developed areas o Tax O 5ut! exemption on imported capital eBuipment 6ithin C !ears from the effectivit! of this code #until 9EE0&, importations of machiner! and eBuipment and spare parts of registered enterprises shall be 9==L exempt of customs duties and revenue tax, but the importation must compl! with the following conditions: The! are not manufactured domesticall! in sufficient Buantit! of comparable Bualit! and at reasonable prices The! are reasonabl! needed and will be used exclusivel! b! the registered enterprise in the manufacture of its products The approval of the 4oard was obtained for such importation o Tax credit for domestic capital eBuipment ' tax credit of 9==L of the value of the revenue tax and customs duties that would have been waived on the machiner! and eBuipment had these been imported is given to registered enterprises which purchase them from a domestic manufacturer o /xemption from contractor)s tax The registered enterprise is exempt from contractor)s tax *ome stuff from the *pecial /conomic Sone 'ct of 9EEC #RA =-*2/ !ec "9,":% A these are activit!3 and location3driven incentives. o +iscal Incentives
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Taxation One: Outline with Codals 4usinesses operating within the /COSO</* shall be entitled to fiscal incentives as per 5 II #/ S'& or with /O 00I. /xporters using local materials as inputs shall get tax credits same as those provided in the /xport 5evelopment 'ct of 9EE? /xemption from Taxes under the <I%C <o taxes #local O national& shall be imposed on businesses operating iwhtin the /COSO</s In lieu of taxes, CL of the gross income shall be remitted to the national government 'pplicable national taxes 'll income derived b! persons and all services establishments in the /COSO</ are sub:ect to taxes under the Tax Code
;. Taxable Income
!0C. 9*. Taxa&le Income Defined. , The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and-or personal and additional exemptions, if an!, authori,ed for such t!pes of income b! this Code or other special laws.
2ross Income "ess: deductions "ess: ersonal exemptions Taxable income O. Gross Income
*/C. 10. 2ross Income. 3 #'& 2eneral 5efinition. 3 /xcept when otherwise provided in this Title, gross income means all income derived from whatever source, including #but not limited to& the following items: #9& Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; #0& 2ross income derived from the conduct of trade or business or the exercise of a profession; #1& 2ains derived from dealings in propert!; #?& Interests; #C& %ents; #I& %o!alties; #D& 5ividends; #F& 'nnuities; #E& ri,es and winnings; #9=& ensions; and #99& artnerNs distributive share from the net income of the general professional partnership.
2ross income means '"" I<CO$/ derived from 6J'T/Q/% *O>%C/. This includes, but is not limited to, the enumeration in the codal. In answering problems, the first thing !ou should as. is GIs this gross income7H, and then !ou as. Gis this excludible7H #that)s the thought process to follow8&
Compensation Compensation for services in whatever form paid, including, but not limited to: o fees, o salaries, o wages, o commissions, o and similar items. Compensation earners are not allowed to deduct an! other deductions from their salar! o but the! ma! have deductions applied to income earned from other sources.
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Taxation One: Outline with Codals 4usiness income 2ross income derived from the conduct of trade or business or the exercise of a profession In the case of manufacturing, merchandising or other business, gross income means: Total *ales "ess: cost of goods sold 'dd: all income from incidental and outside sources 2ross Income 2ains 2ains derived from dealings in propert! 2ain or loss on sale or exchange of propert! is recogni,ed when the propert! received in exchange is essentiall! different from the propert! disposed and the propert! received has mar.et value. In sale or exchange of real or personal propert!, distinguish first between ordinar! versus capital assets because capital assets have special rules governing them. *ee % and * for more details Interests Income from interests are also to be included in computing for the gross income In the case of 0 or more organi,ations, trades or businesses #whether organi,ed O incorporated here or not& are owned or controlled 5I%/CT"; or I<5I%/CT"; b! the same interests, the CI% is authori,ed to distribute, apportion or allocate gross income or deductions between or among such orgs, trades or businesses, if the CI% determines that such is necessar! in order to prevent tax evasion. #!ec :+/ ;IRC% o This is called Gtransfer pricingH o The standard to determine the fairness of related part! transactions is the arm)s length standard. It means that there should be no intimac! between the two. It means that the corporation should deal with the related corporation in the same manner it would with an uncontrolled taxpa!er. o If a member of a group of controlled entities ma.es a loan or advances directl! or indirectl! to another member of such group and does <OT charge an! interest or charges interest not eBual to an arm)s length, the CI% ma! ma.e appropriate allocations to reflect arm)s length interest rate. #meaning the CI% can come in and impose an interest on the transaction& o The arm)s length interest rate shall be: The same rate of interest which would have been charged at the time the indebtedness arose in an independent transaction between unrelated parties under similar circumstances, or The 4an. %eference rate b! the 4* #R5O 29,--% %ents %ents are included in the gross income 4ut what about improvements b! lessees7 #!ection #-/ RR "% o 6hen a lessee erects a building or ma.es improvements per agreement with the lessor, the lessor ma! report the income therefrom upon either of the follow, at his option: 't the time when such building or improvements are completed, the fair mar.et value of such building or improvement The lessor ma! spread over the life of the lease the estimated depreciated value of such building or improvement at the termination of the lease and
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Taxation One: Outline with Codals o report the income for each of the adeBuate part. If the lease is terminated, and it is not through purchase b! the lessor, so that the lessor comes into possession of the propert! prior to the time originall! fixed, the lessor is considered to receive additional income for that !ear #if the value of the building exceeds the amount alread! reported as income& <o appreciation value due to causes other than premature termination of the lease shall be included. If the building is destro!ed before the expiration of the lease, the lessor is entitled to deduct as loss for the !ear when such destruction occurred the amount previousl! reported as income, less an! salvage value to the extent that such loss was not compensated b! insurance.
%o!alties %o!alties are an! pa!ment of an! .ind received as consideration for the use of or right to use: 9. 'n! patent, trademar., design or model 0. *ecret formula or process 1. Industrial, commercial or scientific eBuipment ?. Information concerning industrial, commercial or scientific experience. 5ividends 5ividends are an! distribution whether in cash or in other propert! in the ordinar! course of business even if extraordinar! in amount, made b!: o ' domestic or resident foreign corporation o ' :oint stoc. corporation o ' partnership o ' :oint account o 'n association o 'n insurance compan! To the shareholders or members out of its earnings or profits. Tidbits: o 6hen the corporation receives dividends which are tax3fee #li.e intercorporate dividends&, it becomes taxable as dividends when it distributes the same to its shareholders. o 6hen the dividend is paid b! a domestic corporation to a non3resident foreign corporation, it is taxable in full. #*ec 0F #Cb& of <I%C& 2eneral rule: Cash and propert! dividends are taxable. *toc. dividends are not taxable. ropert! dividends #or securities other than its own stoc.& #!ection ":*/ RR "% o These are considered income in the amount of the full mar.et value as when received b! the stoc.holder. o The! are taxed 9=L. o If it was paid in stoc. of another corporation, it is not considered a stoc. dividend. o The valuation is the mar.et value at the time the dividend becomes pa!able. #+or shares of stoc. of another corporation given as dividends, it is the mar.et value when the shares of stoc. are received& *toc. dividends o The! are not taxable. /TC/ T when the stoc. dividend causes change in the corporate identit! or a change in the nature of the shares issued whereb! the proportional interest of the stoc.holders after the distribution is essentiall! different
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Taxation One: Outline with Codals from his former interest. $!ection ":"/ RR "% ' stoc. dividend constitutes income if it gives the shareholder an interest different from that which his former stoc. represented. 6hen a stoc.holder receives a stoc. dividend which is taxable income, the measure of income is the fair mar.et value of the shares of stoc. received. *ale of stoc. received as dividends #!ection ":9/ RR "% o Once the recipient sells the stoc. dividend, he ma! reali,e gain or loss. This gain or loss is treated as arising form the sale or exchange of a capital asset. o Computation of gain or loss #the new basis per share is used in comuting an! gain or loss upon an! subseBuent sale of the shares&: 6hen stoc. dividend is the same character as the stoc. upon which it is paid: Cost: Old *hares - #total number of old and new shares& 6hen stoc. dividend materiall! differs from stoc. upon which it is paid: Cost: Cost of shares of 9 class - number of shares in that class 6hen stoc. was purchased at different times and at different prices so that the identit! cannot be determined: Cost: resumed to be from stoc. issued with respect to earliest purchased stoc. *toc. declaration and subseBuent redemption o If after the stoc. dividend declaration, a corporation cancels or redeems the same in such time and manner as to ma.e the distribution-redemption essentiall! eBuivalent to a distribution of a taxable dividend, the amount received shall be considered as a taxable dividend #9=L final tax for individuals&. #!ection ":#/ RR "% 6h! do corporations do this7 *o that the shareholder will avoid pa!ing tax. %emember, stoc. dividends are not taxable, but cash dividends are sub:ect to 9=L final tax for individuals #remember !our passive income charts8&. *o corporations declare stoc. dividends, and then redeem them #b! giving their shareholders cash& to go around the tax. 4ut because of the law, their subseBuent redemptions are now taxable. The issuance of stoc. dividends and its subseBuent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. o 5epending on each case, the exempting provision of *ec F1#b& of the 9E1E Code #now, *ec 0C?, %%0&, ma! not be applicable if the redeemed shares were issued with bona !ide business purpose, which is :udged after each and ever! step of the transaction have been considered and the whole transaction does not amount to a tax evasion scheme. o It is in the issuance of the stoc.s which are subseBuentl! redeemed that must have a bona !ide business purpose, not the redemption. The existence of legitimate business purposes in support of the redemption of stoc. dividends is immaterial in income taxation. The test of taxabilit! under the exempting clause is whether income was reali,ed through the redemption of stoc. dividends. $CIR CA & Anscor% In other words, if there was a legitimate business
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+ amdg
Taxation One: Outline with Codals purpose in issuing the shares, '<*CO% wouldn)t have been taxed for the redemption. 4ut, the! failed to show an! business purpose, their actuations were mere afterthought. *ources of distribution o /ver! distribution is made out of earnings or profits. o 5etermine them to be coming from the earnings or profits of the taxable !ear. If not, then to the past taxable !ears. #!ection "::/ RR "% 5istribution in liBuidation o 6hen a corporation distributes all its properties or assets in complete liBuidation, the gain reali,ed from this is taxable. o Computation is based on *ec 1? #b& or #c& of the Tax Code #!ection ":2/ RR "% 6hen a corporation distributes all of its assets in complete dissolution and liBuidation, there is no dividend income to the shareholder receiving the liBuidating dividend. There is, instead, a sale or exchange of propert!. 'n! gain reali,ed or loss sustained b! the stoc.holder, whether individual or corporate, is taxable income or deductible loss, as the case ma! be. 6hen a corporation was dissolved and in process of complete liBuidation and its shareholders surrendered their stoc. to it and it paid the sums in Buestion to them in exchange, a transaction too. place, which was no different in its essence from a sale of the same stoc. to a third part! who paid therefore. #6ise v $eet& In other words, the gain or loss one incurs when a corporation liBuidates goes into !our ordinar! income #schedular rate for individuals, 1=L for resident corporations.& o The 903month C=L-9==L of gains threshold applies #see below& That)s the difference between redeemed shares #taxed at 9=L& and liBuidating shares #schedular rate for individuals, or 1=L for resident corporations& +or a trading compan! that is in the process of liBuidation, and whose stoc.holders are to receive liBuidating dividends in excess of their investment, the gain is taxable because the shareholders will reali,e capital gain or loss. o *uch gain is the difference between the fair mar.et value of the liBuidating dividends and the ad:usted cost to the stoc.holders of their respective shareholdings. #BIR Rulin( 9"",.=% 4ut because of *ection 1? #b& of the tax code, If the shareholder held his shares for more than 90 months, onl! C=L of the capital gains is taxable. If less than 90 months, the entire 9==L of the capital gains is taxable.
'nnuities 'n annuit! is a sum of mone! pa!able !earl! or at regular intervals. 'nnuities are tax3exempt. ri,es and 6innings ri,es and winnings are generall! taxable #the! are similar to gains derived from labor& o /TC/ T: #these are not taxable& 9. If the recipient was selected without an! action on his part to enter the contest and he was not reBuired to render substantial future services as a condition for receiving the pri,e or award
39
+ amdg
Taxation One: Outline with Codals 0. Those granted to athletes are exempt 1. Those that are in the nature of gifts ensions ' pension is a gratuit! granted as a favor or reward or one paid under given conditions to a person following retirement from service or to surviving dependents ensions are tax3exempt *hare in 2 )s Income
*/C. 0I. Tax "iabilit! of $embers of 2eneral rofessional artnerships. 3 ' general professional partnership as such shall not be sub:ect to the income tax imposed under this Chapter. ersons engaging in business as partners in a general professional partnership shall be liable for income tax onl! in their separate and individual capacities. +or purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. /ach partner shall report as gross income his distributive share, actuall! or constructivel! received, in the net income of the partnership.
The 2 is tax3exempt, but the income of the individual partners are sub:ect to tax. /ach partner shall report as gross income his distributive share in the net income of the partnership.
+rom whatever source Cancellation or forgiveness of debt ma! amount to o a!ment of income @ that)s taxable. #a person performs service for a creditor who cancels his debt& o ' capital transaction @ that)s taxable #a corporation forgives the debt of a stoc.holder, that)s li.e pa!ing a dividend& o ' gift @ that)s exempt. #a creditor merel! wants to benefit a debtor b! canceling the debt without an! consideration& #!ection :+/ RR "% %efunds O Tax Credits o Taxes which were previousl! claimed and allowed as deductions but subseBuentl! was refunded or granted as tax credit should be declared as part of the gross income of that !ear. The purpose of this is put !ou bac. in eBuilibrium @ to bring !our gross income bac. up. o /TC/ T: /state and donor)s tax Income, war3profit and excess profit taxes imposed b! a foreign countr! /state and gift taxes Taxes assessed against local benefits of a .ind tending to increase the value of the propert! assessed *toc. transaction tax /nerg! tax Taxes which are not allowable as deductions under the law 6hen refunded, the! are not declarable as gross income because the! are not allowable as deductions. *pecial tax credits o *ales, compensating and specific taxes paid on supplies and raw materials imported b! a registered export producer7 That)s given as tax credit. o 6hen a registered 4OI O Tourism enterprise assumes pa!ment of taxes withheld due from the foreign lender on interest pa!ments on foreign loans, that)s given as a tax credit too. #R5C *9,.+%
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Taxation One: Outline with Codals /xclusions

!ection 9" $B% 0xclusions &rom Gross Income. 3 The following items shall not be included in gross income and shall be exempt from taxation under this title: #9& "ife Insurance. 3 The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held b! the insurer under an agreement to pa! interest thereon, the interest pa!ments shall be included in gross income. #0& 'mount %eceived b! Insured as %eturn of remium. 3 The amount received b! the insured, as a return of premiums paid b! him under life insurance, endowment, or annuit! contracts, either during the term or at the maturit! of the term mentioned in the contract or upon surrender of the contract. #1& 2ifts, 4eBuests, and 5evises. 3 The value of propert! acBuired b! gift, beBuest, devise, or descent: rovided, however, That income from such propert!, as well as gift, beBuest, devise or descent of income from an! propert!, in cases of transfers of divided interest, shall be included in gross income. #?& Compensation for In:uries or *ic.ness. 3 amounts received, through 'ccident or Jealth Insurance or under 6or.menNs Compensation 'cts, as compensation for personal in:uries or sic.ness, plus the amounts of an! damages received, whether b! suit or agreement, on account of such in:uries or sic.ness. #C& Income /xempt under Treat!. 3 Income of an! .ind, to the extent reBuired b! an! treat! obligation binding upon the 2overnment of the hilippines. #I& %etirement 4enefits, ensions, 2ratuities, etc.3 #a& %etirement benefits received under %epublic 'ct <o. DI?9 and those received b! officials and emplo!ees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained b! the emplo!er: rovided, That the retiring official or emplo!ee has been in the service of the same emplo!er for at least ten #9=& !ears and is not less than fift! #C=& !ears of age at the time of his retirement: rovided, further, That the benefits granted under this subparagraph shall be availed of b! an official or emplo!ee onl! once. +or purposes of this *ubsection, the term Nreasonable private benefit planN means a pension, gratuit!, stoc. bonus or profit3sharing plan maintained b! an emplo!er for the benefit of some or all of his officials or emplo!ees, wherein contributions are made b! such emplo!er for the officials or emplo!ees, or both, for the purpose of distributing to such officials and emplo!ees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall an! part of the corpus or income of the fund be used for, or be diverted to, an! purpose other than for the exclusive benefit of the said officials and emplo!ees. #b& 'n! amount received b! an official or emplo!ee or b! his heirs from the emplo!er as a conseBuence of separation of such official or emplo!ee from the service of the emplo!er because of death sic.ness or other ph!sical disabilit! or for an! cause be!ond the control of the said official or emplo!ee. #c& The provisions of an! existing law to the contrar! notwithstanding, social securit! benefits, retirement gratuities, pensions and other similar benefits received b! resident or nonresident citi,ens of the hilippines or aliens who come to reside permanentl! in the hilippines from foreign government agencies and other institutions, private or public. #d& a!ments of benefits due or to become due to an! person residing in the hilippines under the laws of the >nited *tates administered b! the >nited *tates Qeterans 'dministration. #e& 4enefits received from or en:o!ed under the *ocial *ecurit! *!stem in accordance with the provisions of %epublic 'ct <o. F0F0. #f& 4enefits received from the 2*I* under %epublic 'ct <o. F0E9, including retirement gratuit! received b! government officials and emplo!ees. #D& $iscellaneous Items. 3 #a& Income 5erived b! +oreign 2overnment. 3 Income derived from investments in the hilippines in loans, stoc.s, bonds or other domestic securities, or from interest on deposits in ban.s in the hilippines b! #i& foreign governments, #ii& financing institutions owned, controlled, or en:o!ing refinancing from foreign governments, and #iii& international or regional financial institutions established b! foreign governments. #b& Income 5erived b! the 2overnment or its olitical *ubdivisions. 3 Income derived from an! public utilit! or from the exercise of an! essential governmental function accruing to the 2overnment of the hilippines or to an! political subdivision thereof. #c& ri,es and 'wards. 3 ri,es and awards made primaril! in recognition of religious, charitable, scientific, educational, artistic, literar!, or civic achievement but onl! if: #i& The recipient was selected without an! action on his part to enter the contest or proceeding; and #ii& The recipient is not reBuired to render substantial future services as a condition to receiving the pri,e or award. #d& ri,es and 'wards in *ports Competition. 3 'll pri,es and awards granted to athletes in local and international sports competitions and tournaments whether held in the hilippines or abroad and sanctioned b! their national sports associations. #e& 91th $onth a! and Other 4enefits. 3 2ross benefits received b! officials and emplo!ees of public and private entities: rovided, however, That the total exclusion under this subparagraph shall not exceed Thirt! thousand pesos # 1=,===& which shall cover: #i& 4enefits received b! officials and emplo!ees of the national and local government pursuant to %epublic 'ct <o. IIFI; #ii& 4enefits received b! emplo!ees pursuant to residential 5ecree <o. FC9, as amended b! $emorandum Order $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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<o. 0F, dated 'ugust 91, 9EFI; #iii& 4enefits received b! officials and emplo!ees not covered b! residential decree <o. FC9, as amended b! $emorandum Order <o. 0F, dated 'ugust 91, 9EFI; and #iv& Other benefits such as productivit! incentives and Christmas bonus: rovided, further, That the ceiling of Thirt! thousand pesos # 1=,===& ma! be increased through rules and regulations issued b! the *ecretar! of +inance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable !ear. #f& 2*I*, ***, $edicare and Other Contributions. 3 2*I*, ***, $edicare and ag3ibig contributions, and union dues of individuals. #g& 2ains from the *ale of 4onds, 5ebentures or other Certificate of Indebtedness. 3 2ains reali,ed from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturit! of more than five #C& !ears. #h& 2ains from %edemption of *hares in $utual +und. 3 2ains reali,ed b! the investor upon redemption of shares of stoc. in a mutual fund compan! as defined in *ection 00 #44& of this Code.
The following are tax3exempt and are <OT included in gross income: 9. "ife insurance #except if the proceeds are held b! the insurer under an agreement to pa! interest thereon. The interest pa!ments onl! are included in the gross income& 0. 'mount received b! insured as return of premium 1. 2ifts, beBuests, devises or descents #but the income from such propert! acBuired b! these which shall be included in gross income& ?. Compensation for income personal in:uries or sic.ness #plus the amounts of an! damages received on account of such& C. Income exempt under an! treat! I. 4enefits received from the >* Qeterans 'dministration D. %etirement benefits, pensions, gratuities #provided, the retiring person has been in the service of the same emplo!er for at least 9= !ears and is not less than C= !ears of age at the time of his retirement. This benefit can onl! be availed of once& WRA #-*=B F. *eparation pa!, caused b! death, sic.ness or other disabilit! #RA #-*=% E. *ocial securit! benefits, retirement gratuities, pensions and similar benefits from foreign government agencies 9=. *** benefits 99. 2*I* benefits $iscellaneous tax3exempt items: 9. Income earned b! foreign governments in the hilippines 0. Income earned b! the hil government or its political subdivisions #li.e public utilities& 1. ri,es and awards made primaril! in recognition of religious, charitable, scientific, educational, artistic, literar! or civic achievement @ but onl! if he was selected without an! action on his part to enter the contest and he is not reBuired to render substantial future services as a condition to receiving the pri,e or award ?. ri,es and awards in sports competitions sanctioned b! the national sports associations C. 91th month pa!, Christmas bonus, productivit! incentives, and other benefits #but exemptions appl! onl! to the first 1=,===& WRA =.99B I. 2*I*, ***, $edicare, ag3ibig union dues and other contributions D. 2ains from sale of bonds, debentures or other certificate of indebtedness with maturities of more than C !ears F. 2ains from redemption of shares in mutual funds E. Interest received b! a non3resident individual or a non3resident corp from deposits with depositor! ban.s under the expanded +C5> 9=. Intercompan! dividends #resident-domestic corps from domestic corps& 99. e minimis benefits received b! a managerial or supervisor 90. Those under special laws # C*O and lotto winnings8&
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Taxation One: Outline with Codals $inimum wage earners shall be exempt from the pa!ment of income tax too. Jolida! pa!, overtime pa!, night shift differential pa! and ha,ard pa! received b! such minimum wage earners shall li.ewise be exempt from income tax. Income from emplo!ees) trusts are exempt from '"" .inds of taxes, including final withholding tax on interest income. #CI% v C' O 2C"& Terminal leave pa! is not part of gross salar!. It is a retirement benefit and is tax exempt. #CI% v C' O Castaneda, and %eBuest of 'tt!. Sialcita& If the emplo!ee is separated from a previous emplo!er, but is not emplo!ed b! another emplo!er, he shall be refunded or credited the taxes withheld on his exempt 91 th month pa! and other benefits b! his present emplo!er. If the emplo!ee is separated but has no present :ob, he shall claim his refund with the 4I%. #RR ",-: & R5C 92,-#%
Income derived b! foreign government +or it to be exempt, the income should be received b!: 4! foreign governments 4! financing institutions owned, controlled or en:o!ing re3financing from foreign governments 4! international or regional financial institutions established b! foreign governments P. 'rin(e Bene&its Tax $'BTC 7hut upC%
*/C. 11. *pecial Treatment of +ringe 4enefit.3 #'& Imposition of Tax.3 ' final tax of thirt!3four percent #1?L& effective Manuar! 9, 9EEF; thirt!3three percent #11L& effective Manuar! 9, 9EEE; and thirt!3two percent #10L& effective Manuar! 9, 0=== and thereafter, is hereb! imposed on the grossed3up monetar! value of fringe benefit furnished or granted to the emplo!ee #except ran. and file emplo!ees as defined herein& b! the emplo!er, whether an individual or a corporation #unless the fringe benefit is reBuired b! the nature of, or necessar! to the trade, business or profession of the emplo!er, or when the fringe benefit is for the convenience or advantage of the emplo!er&. The tax herein imposed is pa!able b! the emplo!er which tax shall be paid in the same manner as provided for under *ection CD #'& of this Code. The grossed3up monetar! value of the fringe benefit shall be determined b! dividing the actual monetar! value of the fringe benefit b! sixt!3six percent #IIL& effective Manuar! 9, 9EEF; sixt!3seven percent #IDL& effective Manuar! 9, 9EEE; and sixt!3eight percent #IFL& effective Manuar! 9, 0=== and thereafter: rovided, however, That fringe benefit furnished to emplo!ees and taxable under *ubsections #4&, #C&, #5& and #/& of *ection 0C shall be taxed at the applicable rates imposed thereat: rovided, further, That the grossed 3>p value of the fringe benefit shall be determined b! dividing the actual monetar! value of the fringe benefit b! the difference between one hundred percent #9==L& and the applicable rates of income tax under *ubsections #4&, #C&, #5&, and #/& of *ection 0C. #4& +ringe 4enefit defined.3 +or purposes of this *ection, the term Afringe benefitA means an! good, service or other benefit furnished or granted in cash or in .ind b! an emplo!er to an individual emplo!ee #except ran. and file emplo!ees as defined herein& such as, but not limited to, the following: #9& Jousing; #0& /xpense account; #1& Qehicle of an! .ind; #?& Jousehold personnel, such as maid, driver and others; #C& Interest on loan at less than mar.et rate to the extent of the difference between the mar.et rate and actual rate granted; #I& $embership fees, dues and other expenses borne b! the emplo!er for the emplo!ee in social and athletic clubs or other similar organi,ations; #D& /xpenses for foreign travel; #F& Jolida! and vacation expenses; #E& /ducational assistance to the emplo!ee or his dependents; and #9=& "ife or health insurance and other non3life insurance premiums or similar amounts in excess of what the law allows. #C& +ringe 4enefits <ot Taxable. 3 The following fringe benefits are not taxable under this *ection: #9& fringe benefits which are authori,ed and exempted from tax under special laws; #0& Contributions of the emplo!er for the benefit of the emplo!ee to retirement, insurance and hospitali,ation benefit plans; #1& 4enefits given to the ran. and file emplo!ees, whether granted under a collective bargaining agreement or not; and $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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+ amdg

#?& 5e minimis benefits as defined in the rules and regulations to be promulgated b! the *ecretar! of +inance, upon recommendation of the Commissioner. The *ecretar! of +inance is hereb! authori,ed to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessar! to carr! out efficientl! and fairl! the provisions of this *ection, ta.ing into account the peculiar nature and special need of the trade, business or profession of the emplo!er.
+ringe benefit is an! good, service, or other benefit granted in cash or in .ind b! an emplo!er to an emplo!ee #except ran. O file& such as: 9. Jousing 0. /xpense account 1. Qehicle of an! .ind ?. Jousehold personnel, li.e maids and drivers C. Interest on loan at less than mar.et rate, to the extent of the difference between the mar.et rate and the actual rate granted I. $embership fees, dues O other expenses in social O athletic clubs or similar orgs D. /xpenses for foreign travel F. Jolida! and vacation expenses E. /ducational assistance to the emplo!ee or his dependents 9=. "ife or health insurance O other non3life premiums This list is not exclusive. +ringe benefit tax7 ' final tax of 10L on the grossed up monetar! value of fringe benefits will be imposed. o The fringe benefit tax on the taxable fringe benefit is computed as follows: i. 5etermine the grossed3up monetar! value of the fringe benefit. This is the monetar! value of the benefit divided b! IFL ii. Compute the fringe benefit tax b! multipl!ing the grossed3up monetar! value of the fringe benefit b! 10L 'ctual $onetar! Qalue-IFL X 2rossed3up $onetar! Qalue 2rossed3up $onetar! Qalue x 10L X +4T 'BT 0CL 9CL 0C L or 9CL #depends&
!pecial Cases &or 'BT %eceived b! non3resident alien not engaged in trade or business %eceived b! alien or +ilipino emplo!ed b! a %OJU or %'JU %eceived b! emplo!ees in a special economic ,one
The +4T is also an expense which is deductible from the emplo!er)s gross income. o The deduction for the emplo!er is the grossed3up monetar! value of the fringe benefit. The following fringe benefits are not sub:ect to the +4T: 9. Those that are necessar! or reBuired b! the trade O business of the emplo!er 0. Those for the convenience or advantage of the emplo!er 1. Those exempt under special laws ?. Contributions to retirement, insurance and hospitali,ation benefit plans C. 5e minimis benefits #these are of relativel! small value O are furnished merel! as a means of promoting the health, goodwill of the emplo!ees. *ee RR .,++ for examples& I. Those given to ran. O file emplo!ees #those who are holding neither managerial nor supervisor! positions& Clarifications from RR 9,-. #a bit malabo, so chec. the %e!es boo. and that excel
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Taxation One: Outline with Codals reviewer thing& On housin( pri ile(es If emplo!er leases a residential propert! for the use of the emplo!ee and the propert! is the usual place of residence of the emplo!ee If the emplo!er purchases a residential propert! on installment basis and allows the emplo!ee to use it as his usual place of residence If the emplo!er purchases a residential propert! and transfers ownership to the emplo!ee Jousing of militar! officials Jousing which is situated inside or ad:acent to the premises of a business or factor! #within C= meters& Temporar! housing for emplo!ee who sta!s for not more than 1 months 0xpense Account If the expense was dul! receipted for and in the name of the emplo!er, and the expense is not in the nature of a personal expense attributable to the emplo!ee If these are personal expenses such as groceries, paid for or reimbursed b! the emplo!er, even if these are dul! receipted for in the name of the emplo!er %'T' which are fixed in amount O regularl! given as part of monthl! compensation 5onetary 6alue C=L of the monthl! rental paid *ee page 19I of %e!es *ee page 19I of %e!es /xempt /xempt /xempt
!ubDect to 'BT or notE <ope. ;up. <ope, but to be treated as income of the emplo!ee. 5onetary 6alue 9==L of the value #acBuisition cost& 'mount shouldered b! the emplo!er C=L of the value /xempt Qalue based on depreciation 5onetary 6alue /xempt /xempt /xempt 1=L of the value 9==L of the value 5onetary 6alue /xempt
5otor 6ehicles If emplo!er purchases vehicle in the name of the emplo!ee, regardless of usage of the vehicle If emplo!er shoulders a portion of the amount of the purchase price of a vehicle owned b! the emplo!ee If emplo!er owns O maintains a fleet of vehicles for the use of the business and the emplo!ees >se of aircraft owned O maintained b! the emplo!er >se of !acht
0xpenses &or 'orei(n Tra el If it is reasonable for the purpose of attending business meetings or conventions If it)s for local travel expenses not more than >*V1== per da! #not including lodging& Cost of plane tic.et if econom! or business class Cost of plane tic.et if first class Travel expense of famil! members of the emplo!ee 0ducational Assistance I+ the emplo!ee was granted a scholarship b! the emplo!er and the education or stud! is directl! connected to the trade or business of the emplo!er, and there is a written contract that the emplo!ee must remain in emplo! for a period of time If the assistance was extended to the emplo!ee)s dependents and was
/xempt
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Taxation One: Outline with Codals provided through a scholarship program of the compan! <i&e or 3ealth Insurance/ etc Premiums in 0xcess o& 7hat the 5onetary 6alue <a4 Allo4s If the contribution is pursuant to existing law such as to the 2*I* or /xempt *** If it is for the group insurance of the emplo!ees /xempt +or the others #household e#penses, membership !ees G other e#penses in social G athletic clubs, holiday G vacation e#penses,, these monetar! value will be 9==L of the value of the benefit received. The following are considered de minimis benefits of '"" t!pes of emplo!ees. These are exempt from tax. $RR .,++% 9. $oneti,ed unused vaction leave, not exceeding 9= da!s per !ear 0. $edical cash allowance to dependents of emplo!ees not exceeding DC=-emplo!ee per sem or 90C-month 1. %ice subsid! of 9=== or 9 sac. of C= .g rice per month #sarap%, ?. >niforms and clothing allowance not exceeding 1,===-month #ubos sa Hara%, C. 'ctual !earl! medical benefits not exceeding 9=,===-month I. "aundr! allowance not exceeding 1==-month D. /mplo!ee achievement awards for length of service or safet! achievement in the form of tangible propert! with value not exceeding 9=,=== F. +lowers, fruits, boo.s given under special circumstances li.e illness, marriage, birth of bab! E. 2ifts given during Christmas O ma:or anniversaries not exceeding C,===-!ear 9=. 5ail! meal allowance for overtime wor., not exceeding 0CL of the basic minimum wage The amount of de minimis benefits is not computed in determining the 1=,=== ceiling of Gother benefitsH provided in *ec 10#b& of the Tax Code #see e#clusions,, o but if the emplo!er pa!s $O%/ than the ceilings prescribed above, the excess is taxable to the emplo!ee O<"; if it is be!ond the 1=,=== ceiling. o In other words, when a benefit is de minimis with a ceiling, the benefit exempt from the fringe benefit tax is up to the ceiling. 'n! excess over the ceiling shall be part of the benefits which are exempt #exclusions from gross income& up to 1=,===. 'n! amount given b! the emplo!er as benefits, whether de minimis or others, shall be deductible as business expense. %emember this8 #RR *+,++% To recap@ o +ringe benefit given to ran. and file emplo!ee is not sub:ect to the fringe benefit tax. o +ringe benefit given to a supervisor! or managerial emplo!ee is sub:ect to the fringe benefit tax. o e minimis benefit, whether given to ran. and file emplo!ee or to supervisor! or managerial emplo!ee, is not sub:ect to the fringe benefit tax. F. )eductions
*/C. 1?. 5eductions from 2ross Income. 3 /xcept for taxpa!ers earning compensation income arising from personal services rendered under an emplo!er3emplo!ee relationship where no deductions shall be allowed under this *ection other than under subsection #$& hereof, in computing taxable income sub:ect to income tax under *ections 0? #'&; 0C #'&; 0I; 0D #'&, #4& and #C&; and 0F #'& #9&, there shall be allowed the following deductions from gross income;
5eductions are amounts allowed b! law to reduce the gross income to taxable income. These amounts are allowed to taxpa!ers b! legislative grace and the taxpa!er claiming
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Taxation One: Outline with Codals them must prove compliance with the provisions of the law authori,ing the deductions. The following are the deductions from gross income: o +or individuals with gross compensation income #from emplo!er3emplo!ee relationship& onl!: i. remium pa!ments on health and-or hospitali,ation insurance # JJI& ii. ersonal exemptions o +or individuals with gross income from business or practice of profession: i. Optional standard deduction #O*5&, or ii. Itemi,ed deductions, iii. JJI, iv. ersonal exemptions. o +or corporations: i. Optional standard deduction #O*5&, or ii. Itemi,ed deductions Itemi,ed deductions are expenses and losses related to trade or business or the practice of a profession. o Itemi,ed deductions are what *ec. 1? tal.s about, and these do not appl! to taxpa!ers earning compensation income from an emplo!er3emplo!ee relationship. The following are the itemi,ed deductions: 9. /xpenses 0. Interest 1. Taxes ?. "osses C. 4ad debts I. 5epreciation D. 5epletion F. Charitable and other contributions E. %esearch and development 9=. ension trusts
/xpenses, in general
#'& /xpenses. 3 #9& Ordinar! and <ecessar! Trade, 4usiness or rofessional /xpenses.3 #a& In 2eneral. 3 There shall be allowed as deduction from gross income all the ordinar! and necessar! expenses paid or incurred during the taxable !ear in carr!ing on or which are directl! attributable to, the development, management, operation and-or conduct of the trade, business or exercise of a profession, including: #i& ' reasonable allowance for salaries, wages, and other forms of compensation for personal services actuall! rendered, including the grossed3up monetar! value of fringe benefit furnished or granted b! the emplo!er to the emplo!ee: rovided, That the final tax imposed under *ection 11 hereof has been paid; #ii& ' reasonable allowance for travel expenses, here and abroad, while awa! from home in the pursuit of trade, business or profession; #iii& ' reasonable allowance for rentals and-or other pa!ments which are reBuired as a condition for the continued use or possession, for purposes of the trade, business or profession, of propert! to which the taxpa!er has not ta.en or is not ta.ing title or in which he has no eBuit! other than that of a lessee, user or possessor; #iv& ' reasonable allowance for entertainment, amusement and recreation expenses during the taxable !ear, that are directl! connected to the development, management and operation of the trade, business or profession of the taxpa!er, or that are directl! related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the *ecretar! of +inance ma!, b! rules and regulations prescribe, upon recommendation of the Commissioner, ta.ing into account the needs as well as the special circumstances, nature and character of the industr!, trade, business, or profession of the taxpa!er: rovided, That an! expense incurred for entertainment, amusement or recreation that is contrar! to law, morals public polic! or public order shall in no case be allowed as a deduction. #b& *ubstantiation %eBuirements. 3 <o deduction from gross income shall be allowed under *ubsection #'& hereof unless the taxpa!er shall substantiate with sufficient evidence, such as official receipts or other adeBuate records: $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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#i& the amount of the expense being deducted, and #ii& the direct connection or relation of the expense being deducted to the development, management, operation and-or conduct of the trade, business or profession of the taxpa!er. #c& 4ribes, Ric.bac.s and Other *imilar a!ments. 3 <o deduction from gross income shall be allowed under *ubsection #'& hereof for an! pa!ment made, directl! or indirectl!, to an official or emplo!ee of the national government, or to an official or emplo!ee of an! local government unit, or to an official or emplo!ee of a government3owned or 3controlled corporation, or to an official or emplo!ee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entit!, if the pa!ment constitutes a bribe or .ic.bac.. #0& /xpenses 'llowable to rivate /ducational Institutions. 3 In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under *ection 0D #4& of this Code, ma! at its option elect either: #a& to deduct expenditures otherwise considered as capital outla!s of depreciable assets incurred during the taxable !ear for the expansion of school facilities or #b& to deduct allowance for depreciation thereof under *ubsection #+& hereof.
The codal considers as deductions all ordinar! and necessar! expenses in carr!ing on the development, management, and operation of a trade, business or profession, including a reasonable allowance for: 9. *alaries, wages, and other forms of compensation including fringe benefits 0. Travel expenses, here and abroad, in pursuit of trade and business 1. %entals and others which are reBuired for the continued use of propert! ?. /ntertainment, amusement and recreation expenses that are directl! connected to the trade, business, or profession #but should not be contrar! to law, morals, etc& 'ccording to the codal, these are the reBuirements for deductible claims: 9. *ufficient evidence #li.e official receipts& 0. ' direct connection of the expense to the development, management, operation, and-or conduct of the trade, business or profession a!ments of bribes O .ic.bac.s are not deductible. Murisprudence expounded on the reBuirements with the following reBuisites for the deductibilit! of ordinar! and necessar! trade, business, or professional expenses #CI% v Isabela&: 9. /xpense must be ordinar! and necessar! 0. $ust have been paid or incurred during the taxable !ear 1. $ust have been paid or incurred in carr!ing on the trade-business ?. $ust be supported b! receipts, records or other pertinent papers ' taxpa!er who is authori,ed to deduct certain expenses and other allowable deductions for the current !ear but failed to do so cannot deduct the same for the next !ear. It is ordinar! when it is normal in relation to the business of the taxpa!er. It need not be recurring. It is necessar! when it is appropriate and helpful in the development of the taxpa!er)s business. *ee if it is intended to minimi,e losses, or to maximi,e profits. %egarding advertising expenses #CI% v 2eneral +oods%: o 'dvertising is generall! of two .inds: i. To stimulate the current sale of merchandise or use of services ii. To stimulate the future sale of merchandise or use of services o The second t!pe involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpa!er)s trade or business or for the industr! or profession of which the taxpa!er is a member. o If it)s the first .ind, it)s definitel! deductible as a business expense, the onl! Buestion to be answered is if it)s reasonable or not. o If it)s the second .ind, normall! the! should be spread out over a reasonable time. o In the case, the amount was not onl! huge #ie unreasonable&, but was also used to protect the brand franchise. The *upreme Court said that it was analogous to
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Taxation One: Outline with Codals the maintenance of goodwill or title to one)s propert!. Thus, it was a capital expenditure which should have been spread out over a reasonable period of time. It was a.in to the acBuisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures. /xpenses paid to advertising firms to promote sale of capital stoc. for acBuisition of additional capital is not deductible from taxable income. /fforts to establish reputation are a.in to acBuisition of capital assets, and therefore, expenses related thereto are not business expense but capital expenditures. #'tlas Consolidated v CI%& "itigation expenses incurred in defense of title to propert! is capital in nature and not deductible. #'tlas& 4onuses to emplo!ees made in good faith and as additional compensation for the services actuall! rendered b! the emplo!ees are deductible, provided such pa!ments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. #Ruen,le v CI%& o 4onus given to corporate officers out of sale of corporate land not deductible as an ordinar! business expenses in the absence of showing what role said officers performed to effectuate said sale. The taxpa!er must show that personal services had been rendered and that the amount was reasonable. #'guinaldo Industries v CI%& o +or income tax purposes, the emplo!er cannot legall! claim such bonuses as deductible expenses unless the! are shown to be reasonable. The conditions precedent to the deduction of bonuses are: 9. The pa!ment of the bonuses is in fact compensation 0. It must be for personal services actuall! rendered, and 1. The bonuses, when added to the salaries, are reasonable when measured b! the amount and Bualit! of the services performed with relation the business of the taxpa!er. #C$ Jos.ins v CI%& Contributions to a private entit! that gives dividends to stoc.holders not deductible because the net income of the recipient inures to the benefit of its stoc.holders. o Contributions to a government entit! is deductible when used exclusivel! for public purposes #%oxas v CT'& a!ment for police protection is illegal as it is a compensation given b! the petitioner to the police for the performance b! the latter of the functions reBuired of them to be rendered b! law. #Calanoc v CI%& rivate educational institutions have special deductibles.: 9. The! are allowed to deduct expenditures otherwise considered as capital outla!s of depreciable assets incurred for the expansion of school facilities, or 0. The! are allowed to capitali,e the expenditure, and claim deduction b! wa! of depreciation.
4epresentation, amusement, recreation e#penses and entertainment !acilities + RR *+,+"% %epresentation expenses are expenses incurred in connection with the conduct of one)s trade, business or profession in: o /ntertaining, providing amusement O recreation to, or meeting with guests o 't a dining place, place of amusement, countr! club, theater, concert, pla!, sporting event O similar places i. If the taxpa!er is the registered member of a countr!, golf, or sports club, the presumption is that the expenses are fringe benefits sub:ect to the +4T unless the taxpa!er can prove that these are actuall! representation expenses. /ntertainment facilities refer to a !acht, vacation home or condominium O similar items
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Taxation One: Outline with Codals of real or personal propert! used b! the taxpa!er primaril! for entertainment, amusement, or recreation of guests or emplo!ees. o It must be owned or form part of the taxpa!er)s trade, bi,, or profession for which he claims a rental expense. o ' !acht is considered an entertainment facilit! if its use is not restricted to specified officers or emplo!ees. If it was restricted to them, it would be a fringe benefit, sub:ect to the +4T. The following are not considered entertainment, amusement O recreation expenses: 9. Those that are treated as compensation for fringe benefits 0. /xpenses for charitable O fund3raising events 1. /xpenses for bona fide meeting of stoc.holders, partners or directors ?. /xpenses for attending or sponsoring an emplo!ee to a business league or professional org meeting C. /xpenses for events organi,ed for promotion, mar.eting O advertising including concerts, conferences, seminars, wor.shops, conventions, etc I. Other expenses of a similar nature o 4>T8 These ma! still be Bualified as deductions under other provisions of *ection 1?. o ossible legal implication7 The! won)t be sub:ect to the ceiling of representation expenses #my opinion lang ah%, %eBuisites of deductibilit! for entertainment, amusement, and recreational expense: 9. aid or incurred during the taxable !ear 0. $ust be directl! connected to the development, management O operation of the trade, bi, or profession of the taxpa!er; or directl! related to or in furtherance of, his or its trade, bi, or exercise of profession 1. <ot be contrar! to blah blah blah ?. <ot been paid to an official of the government as a bribe or .ic.bac. C. $ust be substantiated b! adeBuate proof I. $ust been withheld, if applicable, and paid to the 4I% Ceilin( &or Representation/ 0ntertainment and Amusement 0xpenses Taxpa!ers engaged in sale of goods or properties =.CL of net sales Taxpa!ers engaged in sale of services, including exercise of 9L of net revenue profession and use or lease of properties Interests
#4& Interest.3 #9& In 2eneral. 3 The amount of interest paid or incurred within a taxable !ear on indebtedness in connection with the taxpa!erNs profession, trade or business shall be allowed as deduction from gross income: rovided, however, That the taxpa!erNs otherwise allowable deduction for interest expense shall be reduced b! ?0L of the interest income sub:ect to final tax: $rovided, that effective Manuar! 9, 0==E, the percentage shall be 11L. #0& /xceptions. 3 <o deduction shall be allowed in respect of interest under the succeeding subparagraphs: #a& If within the taxable !ear an individual taxpa!er reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: rovided, That such interest shall be allowed a a deduction in the !ear the indebtedness is paid: rovided, further, That if the indebtedness is pa!able in periodic amorti,ations, the amount of interest which corresponds to the amount of the principal amorti,ed or paid during the !ear shall be allowed as deduction in such taxable !ear; #b& If both the taxpa!er and the person to whom the pa!ment has been made or is to be made are persons specified under *ection 1I #4&; or #c&If the indebtedness is incurred to finance petroleum exploration. #1& Optional Treatment of Interest /xpense. 3 't the option of the taxpa!er, interest incurred to acBuire propert! used in trade business or exercise of a profession ma! be allowed as a deduction or treated as a capital expenditure.
Interests paid on debts are allowed as deductions but: o These must be incurred in connection with the taxpa!er)s profession, trade or bi,
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Taxation One: Outline with Codals The allowable deduction is onl! 11L of the interest income sub:ect to final tax. #more on this below, %eBuisites for deductibilit! of interest expense #RR *9,++%: 9. There must be an indebtedness 0. There should be an interest expense paid or incurred upon the indebtedness #incurred meaning that it was due and demandable& 1. The indebtedness must be that of the taxpa!er ?. It must be connected with the taxpa!er)s trade, bi, or profession C. The interest expense must have been paid or incurred during the taxable !ear I. The interest must have been stipulated in writing D. The interest must be legall! due F. The interest pa!ment arrangement must not be between related taxpa!ers E. The interest must not be incurred to finance petroleum operations 9=. In case the interest was incurred to acBuire propert! used in trade, bi, or profession, it was not treated as capital expenditure. o In cases li.e this, the axpa!er has the option to treat it as either i. interest expense deductible in full or ii. as a capital expenditure and claim as deduction onl! the periodic amorti,ation-depreciation. o 4ut he can onl! choose one, or else double deduction, that ain)t allowed. #*ec 1? #4.1&, and icop Q C' where the *C allowed interest expense on a loan to bu! machiner! as deductible.& Interest is not deductible if: o 4oth the taxpa!er and the person to whom interest was paid are related taxpa!ers, meaning: i. $embers of a famil! ii. 'n individual and a corp where more than C=L of the outstanding stoc. of the corp is owned b! the individual iii.Two corps where more than C=L of the outstanding stoc. of each is owned b! the other or b! the same individual iv. 4etween grantor and fiduciar! of an! trust v. 4etween fiduciar! of a trust and the fiduciar! of another trust if the same person is a grantor with respect to each trust vi. 4etween fiduciar! of a trust and the beneficiar! If an individual is on the cash basis of accounting, interest paid in advance, through discount or otherwise, shall be allowed as deduction not in the !ear that the interest was paid in advance, but in the !ear that the indebtedness was paid. o 4ut if the indebtedness is pa!able in periodic amorti,ation, the amount of the interest which corresponds to the amount of the principal amorti,ed or paid during the !ear shall be allowed as deduction in such taxable !ear. "ate pa!ment of tax is considered a debt, and therefore interest on taxes is interest on indebtedness and is thus deductible. #CI% v de rieto& If a taxpa!er has interest income sub:ect to final tax, the otherwise allowable deduction for interest expense shall be reduced b! an amount eBual to 11L of interest income sub:ected to final tax. This 11L rule will onl! appl! if there is interest income sub:ect to final tax. If none, then !ou can deduct in full. The law assumes that the mone! borrowed is used to reinvest, legitimate business purpose is irrelevant. #'tt!. $ontero& +or example, Muan borrowed mone! from 4 I. It had an interest expense of F,===. Je then deposited the mone! which he borrow with J*4C, and it had an interest income on it of E===. Jow much is his deducible interest expense7 #p. 0=E, %e!es& Interest expense, unad:usted F,=== o
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Taxation One: Outline with Codals "ess: 'd:ustment for interest Income sub:ect to final tax #11L of E,===& 'd:usted balance, deduction for interest expense o Taxes
#C& Taxes.3 #9& In 2eneral. 3 Taxes paid or incurred within the taxable !ear in connection with the taxpa!erNs profession, trade or business, shall be allowed as deduction, except #a& The income tax provided for under this Title; #b& Income taxes imposed b! authorit! of an! foreign countr!; but this deduction shall be allowed in the case of a taxpa!er who does not signif! in his return his desire to have to an! extent the benefits of paragraph #1& of this subsection #relating to credits for taxes of foreign countries&; #c& /state and donorNs taxes; and #d& Taxes assessed against local benefits of a .ind tending to increase the value of the propert! assessed. rovided, That taxes allowed under this *ubsection, when refunded or credited, shall be included as part of gross income in the !ear of receipt to the extent of the income tax benefit of said deduction. #0& "imitations on 5eductions. 3 In the case of a nonresident alien individual engaged in trade or business in the hilippines and a resident foreign corporation, the deductions for taxes provided in paragraph #9& of this *ubsection #C& shall be allowed onl! if and to the extent that the! are connected with income from sources within the hilippines. #1& Credit 'gainst Tax for Taxes of +oreign Countries. 3 If the taxpa!er signifies in his return his desire to have the benefits of this paragraph, the tax imposed b! this Title shall be credited with: #a& Citi,en and 5omestic Corporation. 3 In the case of a citi,en of the hilippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable !ear to an! foreign countr!; and #b& artnerships and /states. 3 In the case of an! such individual who is a member of a general professional partnership or a beneficiar! of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable !ear to a foreign countr!, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. 'n alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. #?& "imitations on Credit. 3 The amount of the credit ta.en under this *ection shall be sub:ect to each of the following limitations: #a& The amount of the credit in respect to the tax paid or incurred to an! countr! shall not exceed the same proportion of the tax against which such credit is ta.en, which the taxpa!erNs taxable income from sources within such countr! under this Title bears to his entire taxable income for the same taxable !ear; and #b& The total amount of the credit shall not exceed the same proportion of the tax against which such credit is ta.en, which the taxpa!erNs taxable income from sources without the hilippines taxable under this Title bears to his entire taxable income for the same taxable !ear. #C& 'd:ustments on a!ment of Incurred Taxes. 3 If accrued taxes when paid differ from the amounts claimed as credits b! the taxpa!er, or if an! tax paid is refunded in whole or in part, the taxpa!er shall notif! the Commissioner; who shall redetermine the amount of the tax for the !ear or !ears affected, and the amount of tax due upon such redetermination, if an!, shall be paid b! the taxpa!er upon notice and demand b! the Commissioner, or the amount of tax overpaid, if an!, shall be credited or refunded to the taxpa!er. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit ma! reBuire the taxpa!er to give a bond with sureties satisfactor! to and to be approved b! the Commissioner in such sum as he ma! reBuire, conditioned upon the pa!ment b! the taxpa!er of an! amount of tax found due upon an! such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner ma! reBuire. #I& ;ear in 6hich Credit Ta.en. 3 The credits provided for in *ubsection #C&#1& of this *ection ma!, at the option of the taxpa!er and irrespective of the method of accounting emplo!ed in .eeping his boo.s, be ta.en in the !ear which the taxes of the foreign countr! were incurred, sub:ect, however, to the conditions prescribed in *ubsection #C&#C& of this *ection. If the taxpa!er elects to ta.e such credits in the !ear in which the taxes of the foreign countr! accrued, the credits for all subseBuent !ears shall be ta.en upon the same basis and no portion of an! such taxes shall be allowed as a deduction in the same or an! succeeding !ear. #D& roof of Credits. 3 The credits provided in *ubsection #C&#1& hereof shall be allowed onl! if the taxpa!er establishes to the satisfaction of the Commissioner the following: #a& The total amount of income derived from sources without the hilippines; #b& The amount of income derived from each countr!, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed b! the *ecretar! of +inance; $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
0,ED= C,=1=
4ut interest paid or accrued on taxes related to business or practice of profession can be deducted in full #it is not sub:ect to this rule on downward ad:ustment&
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and #c& 'll other information necessar! for the verification and computation of such credits.
Taxes paid or accrued within the taxable !ear in connection with the taxpa!er)s trade or business or exercise of a profession are deductible from gross income. o /TC/ T: i. hilippine income tax #but the fringe benefit tax can be deducted8& ii. /state or donor)s tax iii. *pecial assessment iv. Income tax imposed b! a foreign countr! for income sourced outside the hilippines #but it shall be allowed if the taxpa!er does not signif! his desire to en:o! an! benefits of the tax credit for taxes paid to foreign countries& v. *toc. transaction tax vi. Q'T on business #last two e#ceptions cited by 4eyes, p5 IDI, 6ith regard to tax credits, onl! resident citi,ens and domestic corporations are affected b! this, because the! are onl! ones taxed worldwide. 6hen a taxpa!er is Bualified for a credit, he has the option of either: o 5educting the foreign income tax from his gross income, or o Claiming the tax credit. Jow do we determine the amount of tax to be credited7 Must follow the formulas below, and choose which of them is lower8 9. <et income from foreign countr! x Taxes paid in the % X YYYYYY <et income worldwide 0. +oreign income tax paid X YYYYYYYYYY
/xample 4lessings had a taxable income from the hilippines of 1==,=== and from the >* of 9==,===. 'n income tax of ?=,=== was paid to the >*. If 4lessings chose to ta.e a tax credit for the income tax paid to the *tates, how much tax does he have to pa! the hilippine government after the tax credit would have been computed7 /ine everything up and know the ta#able income worldwide and the total ta#es paid here% Taxable income before tax credit, >*' 9==,=== Taxable income before tax credit, hil 1==,=== Taxable income, worldwide ?==,=== Corporate income tax of 1=L 90=,=== "ess: Tax credit for foreign tax $lug in the values% #9==,===-?==,===& x 90=,=== X 1=,=== +oreign income tax paid X ?=,=== 0hoose whatFs lower% 'llowed tax credit 1=,=== hilippine income tax still due E=,=== 6hat would 4lessings bring home if the! chose to do the tax credit7 Taxable income, worldwide ?==,=== E=,=== 19=,=== If 4lessings chose to deduct, this is what would have happened: Taxable income worldwide ?==,=== 5eduction for foreign income tax paid ?=,===
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Taxation One: Outline with Codals Taxable income 1I=,=== Income tax at 1=L 9=F,=== Income after tax #what 4lessings ta.es home& 9C0,=== It)s prett! obvious that !ou should go for a tax credit. ;ou end up with more cash in !our poc.ets at the end of the da!8 's 'tt!. $ontero said, !ou get 9==L benefit, as compared to deductions where all expenses benefit to the extent onl! of 1=L #for corporations&.
"osses
#5& "osses. 3 #9& In 2eneral.3 "osses actuall! sustained during the taxable !ear and not compensated for b! insurance or other forms of indemnit! shall be allowed as deductions: #a& If incurred in trade, profession or business; #b& Of propert! connected with the trade, business or profession, if the loss arises from fires, storms, shipwrec., or other casualties, or from robber!, theft or embe,,lement. The *ecretar! of +inance, upon recommendation of the Commissioner, is hereb! authori,ed to promulgate rules and regulations prescribing, among other things, the time and manner b! which the taxpa!er shall submit a declaration of loss sustained from casualt! or from robber!, theft or embe,,lement during the taxable !ear: rovided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirt! #1=& da!s nor more than ninet! #E=& da!s from the date of discover! of the casualt! or robber!, theft or embe,,lement giving rise to the loss. #c& <o loss shall be allowed as a deduction under this *ubsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. #0& roof of "oss. 3 In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actuall! sustained during the !ear incurred in business, trade or exercise of a profession conducted within the hilippines, when such losses are not compensated for b! insurance or other forms of indemnit!. The *ecretar! of +inance, upon recommendation of the Commissioner, is hereb! authori,ed to promulgate rules and regulations prescribing, among other things, the time and manner b! which the taxpa!er shall submit a declaration of loss sustained from casualt! or from robber!, theft or embe,,lement during the taxable !ear: rovided, That the time to be so prescribed in the rules and regulations shall not be less than thirt! #1=& da!s nor more than ninet! #E=& da!s from the date of discover! of the casualt! or robber!, theft or embe,,lement giving rise to the loss; and
"osses actuall! sustained during the taxable !ear and not compensated b! insurance or other form of indemnit! are deductible from gross income: o If incurred in trade, bi, or profession; o Of propert! connected with trade, bi, or profession, if the loss arises from fire, storm, shipwrec. or other casualt!, or from robber!, theft or embe,,lement. +or non3resident individuals and foreign corporations, the losses should be those actuall! sustained during the taxable !ear, incurred in trade, bi, or profession conducted within the hilippines. If the loss has alread! been claimed as deduction for estate tax purposes, it is no longer deductible from gross income. Casualt! means the complete or partial destruction of propert! resulting from an identifiable event of a sudden, unexpected or unusual nature. The taxpa!er bears the burden of proof. #RR *",==%
)-/0#1& <et Operating "oss Carr!3Over. 3 The net operating loss of the business or enterprise for an! taxable !ear immediatel! preceding the current taxable !ear, which had not been previousl! offset as deduction from gross income shall be carried over as a deduction from gross income for the next three #1& consecutive taxable !ears immediatel! following the !ear of such loss: rovided, however, That an! net loss incurred in a taxable !ear during which the taxpa!er was exempt from income tax shall not be allowed as a deduction under this *ubsection: rovided, further, That a net operating loss carr!3over shall be allowed onl! if there has been no substantial change in the ownership of the business or enterprise in that 3 #i& <ot less than sevent!3five percent #DCL& in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held b! or on behalf of the same persons; or #ii& <ot less than sevent!3five percent #DCL& of the paid up capital of the corporation, if the business is in the name of a corporation, is held b! or on behalf of the same persons. $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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+or purposes of this subsection, the term Anot operating lossA shall mean the excess of allowable deduction over gross income of the business in a taxable !ear. rovided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under /xecutive Order <o. 00I, as amended, otherwise .nown as the Omnibus Investments Code of 9EFD, incurred in an! of the first ten #9=& !ears of operation ma! be carried over as a deduction from taxable income for the next five #C& !ears immediatel! following the !ear of such loss. The entire amount of the loss shall be carried over to the first of the five #C& taxable !ears following the loss, and an! portion of such loss which exceeds, the taxable income of such first !ear shall be deducted in li.e manner form the taxable income of the next remaining four #?& !ears.
<et operating loss is the excess of allowable deduction over gross income of the business in a taxable !ear. o <O"CO: The net operating loss of the business which has not been previousl! offset as deduction shall be carried over as deduction from gross income for the next 1 consecutive !ears immediatel! following the !ear of such loss o This is allowed if there has been no substantial change in ownership of the business, meaning i. 6here not less than DCL of outstanding shares in the business is in the name of a corporation held b! the same persons, or ii. 6here not less than DCL of the paid3up capital of the corporation is held b! the same persons o +or mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for b! the Omnibus Investments Code ma! be carried over as deduction for the next C !ears immediatel! following the !ear of loss <O"CO is allowed regardless of the change in the ownership of a compan! in case of a merger where the taxpa!er who accumulated the <O"CO is the surviving entit! If the <O"CO arises from a merger, consolidation or combination, the transferee-assignee is not entitled to cleaim the same <O"CO as deduction unless the transferor gains control of at least DCL of he outstanding issues or paid=up capital of the transferee. <O"CO is not transferable or assignable to another person /TC/ T if there has been no substantial change in the ownership of the business in that not less than DCL of the paid3up capital of the business is held b! the same fol. 'n individual who claims the ?=L O*5 cannot claim deduction of <O"CO simultaneousl!. /ven if the <O"CO was not claimed, the 1 !ear period shall continue to run. If the taxpa!er paid its income tax under the $CIT computation, the 1 !ear period still runs. #RR *#,+*% 6ho aren)t Bualified to <O"CO7 9. O4>s for a foreign ban.ing corporation and +C5> of a domestic ban.ing corp 0. /nterprise registered with the 4OI en:o!ing the Income Tax Jolida! Incentive 1. /S'3registered enterprise ?. *4$'3registered enterprise C. +oreign corp engaged in international shipping or air carriage business in the hilippines I. 'n! person, natural or :uridical, en:o!ing exemption from income tax
/xample of <O"CO 2ross Income "ess:deductions <et loss 0==C C== E== ?== 0==I I== C== 0==D D== DC= C= 0==F C== ?0= 0==E F== ?C=
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Taxation One: Outline with Codals <et income "ess: <olco +rom 0==C +rom 0==D Taxable income 9== 9== = = = F= F= = C= 1== 1C=
#?& Capital "osses. 3 #a& "imitation. 3 "oss from sales or /xchanges of capital assets shall be allowed onl! to the extent provided in *ection 1E. #b& *ecurities 4ecoming 6orthless. 3 If securities as defined in *ection 00 #T& become worthless during the taxable !ear and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last da! of such taxable !ear, of capital assets. #C& "osses +rom 6ash *ales of *toc. or *ecurities. 3 "osses from Awash salesA of stoc. or securities as provided in *ection 1F. #I& 6agering "osses. 3 "osses from wagering transactions shall b allowed onl! to the extent of the gains from such transactions. #D& 'bandonment "osses. 3 #a& In the event a contract area where petroleum operations are underta.en is partiall! or wholl! abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: rovided, That accumulated expenditures incurred in that area prior to Manuar! 9, 9EDE shall be allowed as a deduction onl! from an! income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner. #b& In case a producing well is subseBuentl! abandoned, the unamorti,ed costs thereof, as well as the undepreciated costs of eBuipment directl! used therein, shall be allowed as a deduction in the !ear such well, eBuipment or facilit! is abandoned b! the contractor: rovided, That if such abandoned well is reentered and production is resumed, or if such eBuipment or facilit! is restored into service, the said costs shall be included as part of gross income in the !ear of resumption or restoration and shall be amorti,ed or depreciated, as the case ma! be.
&ore# losses 6hen foreign currenc! is acBuired in connection with the regular course of bi,, ordinar! gain or loss results from the fluctuations. *uch loss is deductible onl! in the !ear that it is sustained. 4ut since loans have not actuall! been paid !et, therefore the losses have not !et been reali,ed and are not deductible !et. #BIR Rulin( "+2,-+% 'nnual increase in value of an asset is not taxable income because such increase has not !et been reali,ed. The increase in value can onl! be taxed when such is disposed and there was a gain. The same is true of decrease in value. It is onl! when the decrease is reali,ed, before it is allowed to be deducted. #BIR Rulin( *##,.:% 4ad debts
#/& 4ad 5ebts. 3 #9& In 2eneral. 3 5ebts due to the taxpa!er actuall! ascertained to be worthless and charged off within the taxable !ear except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under *ection 1I #4& of this Code: rovided, That recover! of bad debts previousl! allowed as deduction in the preceding !ears shall be included as part of the gross income in the !ear of recover! to the extent of the income tax benefit of said deduction. #0& *ecurities 4ecoming 6orthless. 3 If securities, as defined in *ection 00 #T&, are ascertained to be worthless and charged off within the taxable !ear and are capital assets, the loss resulting therefrom shall, in the case of a taxpa!er other than a ban. or trust compan! incorporated under the laws of the hilippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange, on the last da! of such taxable !ear, of capital assets.
4ad debts are deductible provided that: 9. There is an existing indebtedness due to the taxpa!er which is valid and legall! demandable #and not losses from investments, as in Jermanos v CI%& 0. The! are connected with trade, bi, or profession of the taxpa!er 1. The! are actuall! ascertained to be worthless, uncollectible, and charged off within the taxable !ear ?. The taxpa!er must show that it its uncollectible even in the future # hil %efining v
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Taxation One: Outline with Codals CT'& C. The! are not sustained between related parties I. If the! are recovered, the! should be included as part of gross income in the !ear of recover! 4ad debts are debts resulting from worthlessness or uncollectibilit! of amounts due the taxpa!er b! others, arising from mone! lent or from uncollectible amounts of income from goods sold or services rendered. "osses or bad debts must be ascertained to be so and written off during the taxable !ear. The! are therefore deductible in full or not at all. There)s no partial deductions. #Jermanos v CI%& Its worthless3ness depends on the particular facts of each case. It can)t be considered worthless :ust because of its doubtful value or difficult! to collect. If it)s a ban., the 4* is the one that will ascertain the worthlessness and uncollectibilit! of the bad debts. If the receivable is from an insurance compan!, it cannot be claimed as bad debt unless the insurance compan! has been declared closed or insolvent b! the Insurance Commish *ecurities become worthless are considered to be a loss from sale of capital assets on the last da! of the taxable !ear except for a ban. or trust compan!.
5epreciation
#+& 5epreciation. 3 #9& 2eneral %ule. 3 There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear #including reasonable allowance for obsolescence& of propert! used in the trade or business. In the case of propert! held b! one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the propert! and shall be allowed to the life tenant. In the case of propert! held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. #0& >se of Certain $ethods and %ates. 3 The term Areasonable allowanceA as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, under an! of the following methods: #a& The straight3line method; #b& 5eclining3balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in *ubsection #+& #9&; #c& The sum3of3the3!ears3digit method; and #d& an! other method which ma! be prescribed b! the *ecretar! of +inance upon recommendation of the Commissioner. #1& 'greement as to >seful "ife on 6hich 5epreciation %ate is 4ased. 3 6here under rules and regulations prescribed b! the *ecretar! of +inance upon recommendation of the Commissioner, the taxpa!er and the Commissioner have entered into an agreement in writing specificall! dealing with the useful life and rate of depreciation of an! propert!, the rate so agreed upon shall be binding on both the taxpa!er and the national 2overnment in the absence of facts and circumstances not ta.en into consideration during the adoption of such agreement. The responsibilit! of establishing the existence of such facts and circumstances shall rest with the part! initiating the modification. 'n! change in the agreed rate and useful life of the depreciable propert! as specified in the agreement shall not be effective for taxable !ears prior to the taxable !ear in which notice in writing b! certified mail or registered mail is served b! the part! initiating such change to the other part! to the agreement: rovided, however, that where the taxpa!er has adopted such useful life and depreciation rate for an! depreciable and claimed the depreciation expenses as deduction from his gross income, without an! written ob:ection on the part of the Commissioner or his dul! authori,ed representatives, the aforesaid useful life and depreciation rate so adopted b! the taxpa!er for the aforesaid depreciable asset shall be considered binding for purposes of this *ubsection. #?& 5epreciation of roperties >sed in etroleum Operations. 3 'n allowance for depreciation in respect of all properties directl! related to production of petroleum initiall! placed in service in a taxable !ear shall be allowed under the straight3line or declining3balance method of depreciation at the option of the service contractor. Jowever, if the service contractor initiall! elects the declining3balance method, it ma! at an! subseBuent date, shift to the straight3line method. The useful life of properties used in or related to production of petroleum shall be ten #9=& !ears of such shorter life as ma! be permitted b! the Commissioner. roperties not used directl! in the production of petroleum shall be depreciated under the straight3line method on the basis of an estimated useful life of five #C& !ears. $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
57
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#C& 5epreciation of roperties >sed in $ining Operations. 3 an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows: #a& 't the normal rate of depreciation if the expected life is ten #9=& !ears or less; or #b& 5epreciated over an! number of !ears between five #C& !ears and the expected life if the latter is more than ten #9=& !ears, and the depreciation thereon allowed as deduction from taxable income: rovided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed b! this *ection will be used. #I& 5epreciation 5eductible b! <onresident 'liens /ngaged in Trade or 4usiness or %esident +oreign Corporations. 3 In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of ropert! arising out of its use or emplo!ment or its non3use in the business trade or profession shall be permitted onl! when such propert! is located in the hilippines.
5epreciation is the gradual dimunition in the useful value of tangible propert! resulting from war and tear and normal obsolescence ' reasonable allowance for depreciation is deductible *ome methods to determine reasonable allowance can be found in the codal. o If the taxpa!er and the CI% come to an agreement of the useful life on which depreciation will be based, this agreement will be considered binding. 5epreciation is allowed on tangible propert! and intangible propert!. ' compan! has the right to claim depreciation, but the law does not allow depreciation be!ond its acBuisition cost. #4asilan v CI%&
Certain cases o& depreciation roperties used directl! in production of petroleum 9= !ears #straight3line-declining method& roperties used indirectl! in production of C !ears #straight3line& petroleum roperties used in mining operations If expected life is 9= !ears or less, normal rate of depreciation If expected life is more than 9= !ears, notif! the CI%, bro. +or non3resident aliens engaged in trade, or ' reasonable rate is allowed onl! on business here, or resident foreign corporations properties located in the hilippines 5epletion
#2& 5epletion of Oil and 2as 6ells and $ines. 3 #9& In 2eneral. 3 In the case of oil and gas wells or mines, a reasonable allowance for depletion or amorti,ation computed in accordance with the cost3depletion method shall be granted under rules and regulations to be prescribed b! the *ecretar! of finance, upon recommendation of the Commissioner. rovided, That when the allowance for depletion shall eBual the capital invested no further allowance shall be granted: rovided, further, That after production in commercial Buantities has commenced, certain intangible exploration and development drilling costs: #a& shall be deductible in the !ear incurred if such expenditures are incurred for non3producing wells and-or mines, or #b& shall be deductible in full in the !ear paid or incurred or at the election of the taxpa!er, ma! be capitali,ed and amorti,ed if such expenditures incurred are for producing wells and-or mines in the same contract area. AIntangible costs in petroleum operationsA refers to an! cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessar! for the drilling of wells and preparation of wells for the production of petroleum: rovided, That said costs shall not pertain to the acBuisition or improvement of propert! of a character sub:ect to the allowance for depreciation except that the allowances for depreciation on such propert! shall be deductible under this *ubsection. 'n! intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the !ear shall not be ta.en into consideration in computing the ad:usted cost basis for the purpose of computing allowable cost depletion. #0& /lection to 5educt /xploration and 5evelopment /xpenditures. 3 In computing taxable income from mining operations, the taxpa!er ma! at his option, deduct exploration and development expenditures accumulated as cost or ad:usted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
58
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paid or incurred during the taxable !ear: rovided, That the amount deductible for exploration and development expenditures shall not exceed twent!3five percent #0CL& of the net income from mining operations computed without the benefit of an! tax incentives under existing laws. The actual exploration and development expenditures minus twent!3five percent #0CL& of the net income from mining shall be carried forward to the succeeding !ears until full! deducted. The election b! the taxpa!er to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable !ears. A<et income from mining operationsA, as used in this *ubsection, shall mean gross income from operations less Aallowable deductionsA which are necessar! or related to mining operations. A'llowable deductionsA shall include mining, milling and mar.eting expenses, and depreciation of properties directl! used in the mining operations. This paragraph shall not appl! to expenditures for the acBuisition or improvement of propert! of a character which is sub:ect to the allowance for depreciation. In no case shall this paragraph appl! with respect to amounts paid or incurred for the exploration and development of oil and gas. The term Aexploration expendituresA means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or Bualit! of an! deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit. The term Adevelopment expendituresA means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial Buantit! and Bualit! and shall end upon commencement of actual commercial extraction. #1& 5epletion of Oil and 2as 6ells and $ines 5eductible b! a <onresident 'lien individual or +oreign Corporation. 3 In the case of a nonresident alien individual engaged in trade or business in the hilippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph #9& of this *ubsection shall be authori,ed onl! in respect to oil and gas wells or mines located within the hilippines.
Oil O gas wells or mines are allowed a reasonable allowance for depletion or amorti,ation computed using the cost3depletion method 6hen the allowance for depletion eBuals the capital invested, no further allowance shall be granted 'fter production in commercial Buantities has started, certain intangible exploration O drilling costs will be deducted in the e!ar incurred if such were incurred for non3 producing wells or mines, or these ma! be capitali,ed O amorti,ed if such were incurred for producing wells or mines in same contract area If it was a non3resident alien or a resident foreign corporation, the allowance for depletion is limited to oil wells O mines in the hilippines The formula for rate of depletion is #cost of mine propert!&-#estimated ore deposit& WConsolidated $ines v CT'&
Charitable and other Contributions

#J& Charitable and Other Contributions. 3 #9& In 2eneral. 3 Contributions or gifts actuall! paid or made within the taxable !ear to, or for the use of the 2overnment of the hilippines or an! of its agencies or an! political subdivision thereof exclusivel! for public purposes, or to accredited domestic corporation or associations organi,ed and operated exclusivel! for religious, charitable, scientific, !outh and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non3government organi,ations, in accordance with rules and regulations promulgated b! the *ecretar! of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of an! private stoc.holder or individual in an amount not in excess of ten percent #9=L& in the case of an individual, and five percent #L& in the case of a corporation, of the taxpa!erNs taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. #0& Contributions 5eductible in +ull. 3 <otwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full; #a& 5onations to the 2overnment. 3 5onations to the 2overnment of the hilippines or to an! of its agencies or political subdivisions, including full!3owned government corporations, exclusivel! to finance, to provide for, or to be used in underta.ing priorit! activities in education, health, !outh and sports development, human settlements, science and culture, and in economic development according to a <ational riorit! lan determined b! the <ational /conomic and 5evelopment 'uthorit! #</5'&, In consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions: rovided, That an! donation which is made to the 2overnment or to an! of its agencies or political subdivisions not in accordance with the said annual priorit! plan shall be sub:ect to the limitations prescribed in paragraph #9& of this *ubsection; #b& 5onations to Certain +oreign Institutions or International Organi,ations. 3 5onations to foreign institutions or $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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international organi,ations which are full! deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into b! the 2overnment of the hilippines and the foreign institutions or international organi,ations or in pursuance of special laws; #c& 5onations to 'ccredited <ongovernment Organi,ations. 3 The term Anongovernment organi,ationA means a non profit domestic corporation: #9& Organi,ed and operated exclusivel! for scientific, research, educational, character3building and !outh and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of an! private individual; #0& 6hich, not later than the 9Cth da! of the third month after the close of the accredited nongovernment organi,ations taxable !ear in which contributions are received, ma.es utili,ation directl! for the active conduct of the activities constituting the purpose or function for which it is organi,ed and operated, unless an extended period is granted b! the *ecretar! of +inance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; #1& The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, but in no case to exceed thirt! percent #1=L& of the total expenses; and #?& The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organi,ed for similar purpose or purposes, or to the state for public purpose, or would be distributed b! a court to another organi,ation to be used in such manner as in the :udgment of said court shall best accomplish the general purpose for which the dissolved organi,ation was organi,ed. *ub:ect to such terms and conditions as ma! be prescribed b! the *ecretar! of +inance, the term Autili,ationA means: #i& 'n! amount in cash or in .ind #including administrative expenses& paid or utili,ed to accomplish one or more purposes for which the accredited nongovernment organi,ation was created or organi,ed. #ii& 'n! amount paid to acBuire an asset used #or held for use& directl! in carr!ing out one or more purposes for which the accredited nongovernment organi,ation was created or organi,ed. 'n amount set aside for a specific pro:ect which comes within one or more purposes of the accredited nongovernment organi,ation ma! be treated as a utili,ation, but onl! if at the time such amount is set aside, the accredited nongovernment organi,ation has established to the satisfaction of the Commissioner that the amount will be paid for the specific pro:ect within a period to be prescribed in rules and regulations to be promulgated b! the *ecretar! of +inance, upon recommendation of the Commissioner, but not to exceed five #C& !ears, and the pro:ect is one which can be better accomplished b! setting aside such amount than b! immediate pa!ment of funds. #1& Qaluation. 3 The amount of an! charitable contribution of propert! other than mone! shall be based on the acBuisition cost of said propert!. #?& roof of 5eductions. 3 Contributions or gifts shall be allowable as deductions onl! if verified under the rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner.
5onations to the following are partiall! deductible: 9. To the government, exclusivel! for public purposes 0. To accredited domestic corporations or associations which are organi,ed and operated exclusivel! for religious, charitable, scientific, !outh O sports development, cultural or educational purposes, or for the rehabilitation of veterans 1. To social welfare institutions ?. To non3accredited <2Os o The amount that can be deducted should not exceed: i. 9=L #individuals&, or ii. CL #corporations& of the taxpa!er)s taxable income derived from trade, bi, or profession before the deduction for contributions and donations. *o, loo. at two things: 9. !our charitable contributions and 0. 9=L or CL #as the case ma! be& of !our taxable income, and then see what)s lower. That amount is what !our allowed to deduct. 5onations to the following are full! deductible: 9. To the government, exclusivel! to finance activities in education, !outh, health, sports development, human settlements, science and culture, and in economic development according to the </5' lan #in other words, government priorit! activities& 0. To certain foreign institutions or international organi,ations #treat!3based, etc& 1. To accredited <2Os
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Taxation One: Outline with Codals <2O)s are non3profit domestic corporations organi,ed and operated exclusivel! for scientific research, educational, character3building and !outh O sports development, etc, where no part of the net income inures to the benefit of an! private individual or stoc.holder. Their level of admin expenses cannot exceed 1=L of the total expenses, and the! must utili,e contributions not later than 9Cth da! of the 1rd monthK #see codal8&
%esearch and 5evelopment

#I& %esearch and 5evelopment.3 #9& In 2eneral. 3 a taxpa!er ma! treat research or development expenditures which are paid or incurred b! him during the taxable !ear in connection with his trade, business or profession as ordinar! and necessar! expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable !ear when paid or incurred. #0& 'morti,ation of Certain %esearch and 5evelopment /xpenditures. 3 't the election of the taxpa!er and in accordance with the rules and regulations to be prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, the following research and development expenditures ma! be treated as deferred expenses: #a& aid or incurred b! the taxpa!er in connection with his trade, business or profession; #b& <ot treated as expenses under paragraph E9& hereof; and #c& Chargeable to capital account but not chargeable to propert! of a character which is sub:ect to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratabl! distributed over a period of not less than sixt! #I=& months as ma! be elected b! the taxpa!er #beginning with the month in which the taxpa!er first reali,es benefits from such expenditures&. The election provided b! paragraph #0& hereof ma! be made for an! taxable !ear beginning after the effectivit! of this Code, but onl! if made not later than the time prescribed b! law for filing the return for such taxable !ear. The method so elected, and the period selected b! the taxpa!er, shall be adhered to in computing taxable income for the taxable !ear for which the election is made and for all subseBuent taxable !ears unless with the approval of the Commissioner, a change to a different method is authori,ed with respect to a part or all of such expenditures. The election shall not appl! to an! expenditure paid or incurred during an! taxable !ear for which the taxpa!er ma.es the election. #1& /imitations on eduction. 3 This *ubsection shall not appl! to: #a& 'n! expenditure for the acBuisition or improvement of land, or for the improvement of propert! to be used in connection with research and development of a character which is sub:ect to depreciation and depletion; and #b& 'n! expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or Bualit! of an! deposit of ore or other mineral, including oil or gas.
/xpenses for %O5 can be treated as ordinar! and necessar! expenses provided that: 9. It is incurred during the taxable !ear 0. It is incurred in connection with his trade or business The taxpa!er can either full! deduct it or amorti,e the deductions. This is not applicable to the expenses: 9. for the acBuisition or improvement of land or propert! to be used in connection with %O5 #these are sub:ect to depreciation or depletion& 0. incurred for the purpose of ascertaining the existence, location, extent or Bualit! of an! deposit of minerals O oil. ension trusts
$?% Pension Trusts. 3 'n emplo!er establishing or maintaining a pension trust to provide for the pa!ment of reasonable pensions to his emplo!ees shall be allowed as a deduction #in addition to the contributions to such trust during the taxable !ear to cover the pension liabilit! accruing during the !ear, allowed as a deduction under *ubsection #'& #9& of this *ection & a reasonable amount transferred or paid into such trust during the taxable !ear in excess of such contributions, but onl! if such amount #9& has not theretofore been allowed as a deduction, and #0& is apportioned in eBual parts over a period of ten #9=& consecutive !ears beginning with the !ear in which the transfer or pa!ment is made.
The emplo!er who established the pension trust for his emplo!ee)s benefit can deduct it but: o The amount paid to the trust is reasonable o It must not have been previousl! allowed for deduction #double deduction& o It is apportioned in eBual parts over a period of 9= consecutive !ears, beginning with the !ear in which the pa!ment is made.
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Taxation One: Outline with Codals 'dditional reBuirements for deductibilit!

$>% Additional 'e(uirements for Deducti&ility of +ertain Payments 5 3 'n! amount paid or pa!able which is otherwise deductible from, or ta.en into account in computing gross income or for which depreciation or amorti,ation ma! be allowed under this *ection, shall be allowed as a deduction onl! if it is shown that the tax reBuired to be deducted and withheld therefrom has been paid to the 4ureau of Internal %evenue in accordance with this *ection CF and F9 of this Code
If the item to be deducted is from gross income is depreciated or amorti,ed, it must be proven to have been withheld and paid to the 4I%, otherwise it won)t be allowed ot be deducted. Taxes which were not originall! withheld O paid, but were onl! paid during audit are deductible in these conditions: o <o withholding tax was made, but the pa!ee reported the income and the withholding agent pa!s during the audit #with penalties& o <o withholding tax was made and the pa!ee did not report the income, but the withholding agent pa!s it during the audit o The withholding agent erroneousl! underwithheld the tax but pa!s the difference during the audit o 6hen shown that pa!ee reported the income, and paid the income tax #no need to pa! withholding, nabayaran na eh,
Optional *tandard 5eduction

$<% )ptional /tandard Deduction . 3 In lieu of the deductions allowed under the preceding *ubsections, an individual sub:ect to tax under *ection 0?, other than a nonresident alien, ma! elect a standard deduction in an amount not exceeding fort! percent #?=L& of his gross sales or gross receipts, as the case ma! be. In the case of a corporation sub:ect to tax under section 0D#'& and 0F#'&#9&, it ma! elect a standard deduction in an amount not exceeding fort! percent #?=L& of it gross income as defined in *ection 10 of this Code. >nless the taxpa!er signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding *ubsections. *uch election when made in the return shall be irrevocable for the taxable !ear for which the return is made: $rovided, That an individual who is entitled to and claimed for the optional standard shall not be reBuired to submit with his tax return such financial statements otherwise reBuired under this Code: $rovided, !urther, That except when the Commissioner otherwise permits, the said individual shall .eep such records pertaining to his gross sales or gross receipts, or the said corporation shall .eep such records pertaining to his gross income as defined in *ection 10 of this Code during the taxable !ear, as ma! be reBuired b! the rules and regulations promulgated b! the *ecretar! of +inance, upon recommendation of the Commissioner.
The taxpa!er, except a non3resident alien, can choose to :ust have the O*5 of ?=L of his gross income, instead of going with the itemi,ed deductions.
<on3deductible expenses
*/C. 1I. Items <ot 5eductible.3 #'& 2eneral %ule. 3 In computing net income, no deduction shall in an! case be allowed in respect to 3 #9& ersonal, living or famil! expenses; #0& 'n! amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of an! propert! or estate; This *ubsection shall not appl! to intangible drilling and development costs incurred in petroleum operations which are deductible under *ubsection #2& #9& of *ection 1? of this Code. #1& 'n! amount expended in restoring propert! or in ma.ing good the exhaustion thereof for which an allowance is or has been made; or #?& remiums paid on an! life insurance polic! covering the life of an! officer or emplo!ee, or of an! person financiall! interested in an! trade or business carried on b! the taxpa!er, individual or corporate, when the taxpa!er is directl! or indirectl! a beneficiar! under such polic!. #4& "osses from *ales or /xchanges of ropert!. 3 In computing net income, no deductions shall in an! case be allowed in respect of losses from sales or exchanges of propert! directl! or indirectl! 3 #9& 4etween members of a famil!. +or purposes of this paragraph, the famil! of an individual shall include onl! his brothers and sisters #whether b! the whole or half3blood&, spouse, ancestors, and lineal descendants; or #0& /xcept in the case of distributions in liBuidation, between an individual and corporation more than fift! percent #C=L& in value of the outstanding stoc. of which is owned, directl! or indirectl!, b! or for such individual; or $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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#1& /xcept in the case of distributions in liBuidation, between two corporations more than fift! percent #C=L& in value of the outstanding stoc. of which is owned, directl! or indirectl!, b! or for the same individual if either one of such corporations, with respect to the taxable !ear of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable !ear, a personal holding compan! or a foreign personal holding compan!; #?& 4etween the grantor and a fiduciar! of an! trust; or #C& 4etween the fiduciar! of and the fiduciar! of a trust and the fiduciar! of another trust if the same person is a grantor with respect to each trust; or #I& 4etween a fiduciar! of a trust and beneficiar! of such trust.
The following are not deductible: 9. ersonal, living or famil! expenses 0. 'n! amount paid for new buildings or for permanent improvements made to increase the value of an! propert! or estate 1. 'n! amount spent in resotring propert! or in ma.ing good the exhaustion thereof for which an allowance has been made ?. remiums paid on an! life insurance polic! covering the life of an! officer, or emplo!ee or if the taxpa!er is directl! or indirectl! a beneficiar! under the polic!. <o deductions shall be allowed for: 9. "osses from sales or exchanges of propert!; or 0. Interest expense; or 1. 4ad debts o 6here the transaction is between related taxpa!ers. 6ho are the!7 #see page C9& The following personal expenses are not deductible either: 9. Insurance paid on a dwelling owned O occupied b! the taxpa!er 0. remiums paid for life insurance 1. 6hen a professional man rents a propert! for residential purposes but receives clients in connection with his wor., no part of the rent is allowable as business expense. #4ut if he uses part of his house as an office, that portion is considered business expense, thus deductible& ?. 'llowance given b! dadd! to .ids C. 'limon! or allowance paid under a separation agreement The following capital expenses are not deductible: 9. <ew buildings, permanent improvements, or an! amount spent in restoring propert! 0. Cost of defending or perfecting title to propert! 1. 'rchitect)s services ?. /xpense for administration of estate, court costs, attorne!)s fees and executor)s commissions C. 'mount assess O paid under an agreement between bondholders O shareholders of a corp, to be used in the reorgani,ation of the corp #!ec *--,*""/ RR "% $argin levies are not deductible. #/sso v CI%&
R. Capital Gains and <osses Capital 'ssets

*/C. 1E. Capital 2ains and "osses. 3 #'& 5efinitions. 3 's used in this Title 3 #9& Capital 'ssets. 3 The term Acapital assetsA means propert! held b! the taxpa!er #whether or not connected with his trade or business&, but does not include stoc. in trade of the taxpa!er or other propert! of a .ind which would properl! be included in the inventor! of the taxpa!er if on hand at the close of the taxable !ear, or propert! held b! the taxpa!er primaril! for sale to customers in the ordinar! course of his trade or business, or propert! used in the trade or business, of a character which is sub:ect to the allowance for depreciation provided in *ubsection #+& of *ection 1?; or real propert! used in trade or business of the taxpa!er. $B% Percenta#e Ta0en Into Account. 3 In the case of a taxpa!er, other than a corporation, onl! the following percentages of the gain or loss recogni,ed upon the sale or exchange of a capital asset shall be ta.en into account in computing net capital gain, net capital loss, and net income: #9& One hundred percent #9==L& if the capital asset has been held for not more than twelve #90& months; and $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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#0& +ift! percent #C=L& if the capital asset has been held for more than twelve #90& months; $C% 1imitation on +apital 1osses . 3 "osses from sales or exchanges of capital assets shall be allowed onl! to the extent of the gains from such sales or exchanges. If a ban. or trust compan! incorporated under the laws of the hilippines, a substantial part of whose business is the receipt of deposits, sells an! bond, debenture, note, or certificate or other evidence of indebtedness issued b! an! corporation #including one issued b! a government or political subdivision thereof&, with interest coupons or in registered form, an! loss resulting from such sale shall not be sub:ect to the foregoing limitation and shall not be included in determining the applicabilit! of such limitation to other losses. $)% "et +apital 1oss +arry-over. 3 If an! taxpa!er, other than a corporation, sustains in an! taxable !ear a net capital loss, such loss #in an amount not in excess of the net income for such !ear& shall be treated in the succeeding taxable !ear as a loss from the sale or exchange of a capital asset held for not more than twelve #90& months. $0% 'etirement of $onds, Etc5 3 +or purposes of this Title, amounts received b! the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued b! an! corporation #including those issued b! a government or political subdivision thereof& with interest coupons or in registered form, shall be considered as amounts received in exchange therefor. $'% Gains or 1osses -rom /hort /ales, Etc. 3 +or purposes of this Title 3 #9& 2ains or losses from short sales of propert! shall be considered as gains or losses from sales or exchanges of capital assets; and #0& 2ains or losses attributable to the failure to exercise privileges or options to bu! or sell propert! shall be considered as capital gains or losses.
It is important to .now whether the asset sold or exchanged was held as ordinar! asset or capital asset because of the different rules which appl! to each. *o, what are capital assets7 6ell, we .now what the! '%/<)T. Capital assets are propert! held b! the taxpa!er #whether or not connected with his trade or business& but does <OT include: 9. *toc. in trade of the taxpa!er, 0. Other propert! of a .ind which would properl! be included in the inventor! of the taxpa!er if on hand at the close of the !ear 1. ropert! held b! the taxpa!er primaril! for sale to customers in the ordinar! course of his trade or business ?. ropert! used in trade or business of a character which is sub:ect to allowance for depreciation, C. %eal propert! used in trade or business. The codal enumerates what are ordinar! assets. 'll assets other than ordinar! assets are capital assets. ropert! initiall! classified as capital asset ma! later become an ordinar! asset and vice versa. #Calasan, v CI%, wherein inherited land was developed into a subdivision, changing it from capital to ordinar! asset& *hares of stoc. would be ordinar! assets onl! to a dealer in securities or a person engaged in the purchase and sale of, or an active trader in, securities. #China 4an. v C'& The rules on capital gains and losses are the following: 9. +irst, .eep me in mind that these rules do not appl! to: a. %eal propert! with a capital gain tax, and b. *hares of stoc. of a domestic corporation with a capital gain tax, i. These two .inds of capital assets have their own rates. #%emember the capital gains tax8 The whole IL, CL-9=L rates8 'n! capital gain sub:ect to the capital gain tax shall not be included in the computation of the taxable income and income tax at the end of the !ear.& 0. <ext, the transaction on the capital asset should be a sale or exchange 1. In the case of a taxpa!er other than a corporation #for individuals onl!&, the following percentages of the gain or loss shall be ta.en into account in computing net capital gain, net capital loss and net income: a. 9==L of the gain-loss, if the asset has been held for not more than 90 months
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Taxation One: Outline with Codals b. C=L of the gain-loss, if the asset has been held for more than 90 months. o +or corporations, capital gains and losses are alwa!s considered at 9==L. ?. "osses from sales or exchanges of capital assets shall be allowed onl! to the extent of the gains from such sales or exchanges #see example below&, o If the taxpa!er incurs net capital loss, such loss cannot be deducted from his ordinar! income because the loss can be deducted onl! to the extent of capital gains. C. If an! taxpa!er, other than a corporation, sustains in an! taxable !ear a net capital loss, such loss, in an amount not in excess of the net income #taxable income& of such !ear, shall be treated in the succeeding !ear as a loss from a sale or exchange of a capital asset held for not more than twelve months #meaning, 9==L of the loss&. This is what !ou call the net capital loss carr! over. o Corporations don)t have net capital loss carr!3over. /xample $ao is in the bu! and sell business, and he had ordinar! income of 0=,===, capital gains of C,=== #from the sale of his personal art collection, which he held for 1 !ears&, and capital losses of 1,=== #from the sale of his !acht, which he held for 0 !ears. Ordinar! net income 2ains from sale of capital asset 4ut held for 1 !ears8 so C=L "oss from sale of capital asset 4ut held for 0 !ears8 so C=L <et taxable gain Taxable Income C,=== 1,=== 0,C== 9,C== 9,=== 09,=== 0=,===
*ame facts, but $ao had capital gains of 0,===, and capital losses of D,===. Ordinar! net income 0=,=== 2ains from sale of capital asset 0,=== C=L onl!8 9,=== "oss from sale of capital asset D,=== C=L onl!8 1,C== <et capital loss 0,C== Taxable income 0=,=== :ou canFt deduct the capital loss o! $I,E>> because you can only deduct to the e#tent o! your capital gains5 BIR Rulin( "=,+" gives some steps to determine the tax in real estate transactions 9. +irst, determine the character of propert! being sold. i. If propert! is not used in business of seller, then it)s a capital asset and the gain of the seller is sub:ect to IL capital gains tax based on gross selling price or fair mar.et value. ii. If the propert! is used in the business of the seller, it is treated as ordinar! asset, so that the withholding tax rates shall appl!. These rates will depend on: 6hether the seller is exempt or taxable 6hether the seller is engaged in real estate business or not If he is engaged in real estate business, what was the gross selling price7
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Taxation One: Outline with Codals )i&&erent !cenarios o& !ale o& Real Property $seller not exempt and real property is OR)I;ARG asset% *eller 4u!er Tax Treatment Corp engaged in real Corp engaged in real Creditable withholding tax based on gross estate business #sells estate business selling price or fair mar.et value is I parcels of land deducted b! the bu!er #to be credited to within a !ear& the seller& If selling price is C==,=== or less 9.CL If it)s C==,=== to 0$ 1L If its above 0m CL Corp engaged in real Corp <OT engaged in *ame as above estate business real estate business Corp <OT engaged in Corp engaged in real If propert! considered ordinar! asset IL real estate business estate business creditable withholding If propert! considered capital asset IL final tax Corp engaged in real Individual <OT If on installment basis, no withholding tax estate business engaged in trade or on periodic installments, it will be withheld business on the last pa!ment If on cash basis or deferred pa!ment, bu!er withholds the tax on the first installment If on installment, tax withheld b! the bu!er on /Q/%; installment
Corp engaged in real estate business
Individual engaged in trade or business
If it was on cash or deferred pa!ment, bu!er withholds the tax on the first installment Installment plan: where the total pa!ment in the !ear of sale 5O/* <OT exceed 0CL of the total selling price 5eferred pa!ment plan: where the total pa!ment in the !ear of sale exceeds 0CL of the total selling price
Ordinar! income
#S& The term (ordinary income( includes an! gain from the sale or exchange of propert! which is not a capital asset or propert! described in *ection 1E#'&#9&. 'n! gain from the sale or exchange of propert! which is treated or considered, under other provisions of this Title, as Nordinar! incomeN shall be treated as gain from the sale or exchange of propert! which is not a capital asset as defined in *ection 1E#'&#9&. The term Nordinar! lossN includes an! loss from the sale or exchange of propert! which is not a capital asset. 'n! loss from the sale or exchange of propert! which is treated or considered, under other provisions of this Title, as Nordinar! lossN shall be treated as loss from the sale or exchange of propert! which is not a capital asset.
Ordinar! income is an! gain from sale or exchange of propert! which is not a capital asset. Ordinar! loss is the opposite. <et capital gain is the excess of the gains from such sales or exchanges of capital assets over the losses from such sales or exchanges. <et capital loss is the opposite. Is it better for real propert! to be considered capital or ordinar! asset7 o 5epends. o +or example, the corporation !ou)re counsel for sells a piece of land for 9==.. 5o !ou want to consider it as capital or ordinar!7 i. If it were capital, !ou)d get taxed IL of 9==. #capital gains tax&, that)s I,===. ;ou go home with E?..
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Taxation One: Outline with Codals ii. If it were ordinar!, it)ll be part of !our gross income, which will be taxed 1=L after all the deductions have been accounted for. The Buestion is, do !ou have enough deductions #and proof& which will enable !ou to get a better deal #i.e. more mone! after all the taxes are paid out&7 !. )etermination o& Gain or <oss &rom !ale or Trans&er o& Property *ec ?= is chopped up in 1 parts. Reep this in mind for a better understanding of the provision. 9. *ection ?= #'& which tells us how to arrive at the gain #or loss&. 0. *ection ?= #C 930& which tells us the general rule and the exceptions #tax3free exchanges& 1. *ection ?= #C C& which gives us the substituted basis; i.e. the basis for tax3free exchanges when the transferor later sells the stoc. he got in the tax3free exchange.
*/C. ?=. 5etermination of 'mount and %ecognition of 2ain or "oss. 3 #'& Computation of 2ain or "oss. 3 The gain from the sale or other disposition of propert! shall be the excess of the amount reali,ed therefrom over the basis or ad:usted basis for determining gain, and the loss shall be the excess of the basis or ad:usted basis for determining loss over the amount reali,ed. The amount reali,ed from the sale or other disposition of propert! shall be the sum of mone! received plus the fair mar.et value of the propert! #other than mone!& received;
2ain is the excess amount reali,ed over the basis for determining gain "oss is the opposite The amount reali,ed is the sum of mone! received plus the fair mar.et value of the propert! #other than mone!& received 6hat is the basis of determining gain or loss7
#4& 4asis for 5etermining 2ain or "oss from *ale or 5isposition of ropert!. 3 The basis of propert! shall be 3 #9& The cost thereof in the case of propert! acBuired on or after $arch 9, 9E91, if such propert! was acBuired b! purchase; or #0& The fair mar.et price or value as of the date of acBuisition, if the same was acBuired b! inheritance; or #1& If the propert! was acBuired b! gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner b! whom it was not acBuired b! gift, except that if such basis is greater than the fair mar.et value of the propert! at the time of the gift then, for the purpose of determining loss, the basis shall be such fair mar.et value; or #?& If the propert! was acBuired for less than an adeBuate consideration in mone! or mone!Ns worth, the basis of such propert! is the amount paid b! the transferee for the propert!; or #C& The basis as defined in paragraph #C&#C& of this *ection, if the propert! was acBuired in a transaction where gain or loss is not recogni,ed under paragraph #C&#0& of this *ection.
Basis &or )eterminin( Gain or <oss &rom !ale or )isposition o& Property $Ori(inal Basis% $ode of acBuisition Cost basis 9. 'cBuired b! purchase The actual cost 0. 4! inheritance +air mar.et value 1. 4! gift The same as if it would be in the hands of the donor or the last preceding owner, 4>T if the basis is greater than the fmv, then the basis shall be the fmv #so, whatever)s lower& ?. 'cBuired for less than an adeBuate 'mount paid b! the transferee for the consideration in mone! or its worth propert! /xample $ao sold a car worth 9== to 'pple Inc, in exchange for 99= worth of 'pple Inc stoc., 9= cash and 0= propert!. Jow much is the gain for $ao7 6hat about the loss for 'pple Inc7 1et the amount realized !irst: 9?= #cash + stoc. + propert!&
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Taxation One: Outline with Codals educt the basis: 9== #value of car& 2ain: ?= #gain for $ao&, loss of ?= for 'pple Inc Jow do !ou ma.e the transaction a tax3free exchange7 Chec. the codal below. It)s one of the most used provisions.
#C& /xchange of ropert!. 3 #9& 2eneral %ule. 3 /xcept as herein provided, upon the sale or exchange or propert!, the entire amount of the gain or loss, as the case ma! be, shall be recogni,ed. #0& /xception. 3 <o gain or loss shall be recogni,ed if in pursuance of a plan of merger or consolidation 3 #a& ' corporation, which is a part! to a merger or consolidation, exchanges propert! solel! for stoc. in a corporation, which is a part! to the merger or consolidation; or #b& ' shareholder exchanges stoc. in a corporation, which is a part! to the merger or consolidation, solel! for the stoc. of another corporation also a part! to the merger or consolidation; or #c& ' securit! holder of a corporation, which is a part! to the merger or consolidation, exchanges his securities in such corporation, solel! for stoc. or securities in such corporation, a part! to the merger or consolidation. <o gain or loss shall also be recogni,ed if propert! is transferred to a corporation b! a person in exchange for stoc. or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four #?& persons, gains control of said corporation: rovided, That stoc.s issued for services shall not be considered as issued in return for propert!.
/xchange of propert!, and tax3free exchange. 2eneral rule: in a sale or exchange of propert!, the entire amount of gain or loss is recogni,ed o /TC/ T #no gain or loss is reali,ed&: i. In a merger-consolidation #m-c&, where a corp exchanges propert! solel! for stoc. in another corporation, which is also a part! to the m-c ii. In a m-c, where a shareholder exchanges stoc. in a corp for the stoc. of another corp, also a part! to the m-c iii. In a m-c, where a securit! holder of a corp exchanges his securities in such corp solel! for stoc. or securities in another corp also a part! to the m-c iv. 6here propert! is transferred to a corp b! a person in exchange for stoc. in the corp, and the result of such exchange is that the person #and up to ? other persons& gains control of the corp, but the stoc.s issued for services are not considered as issued in return for propert!. %ule of momentar! control o If two tax3free exchanges are done in the same taxable !ear, the! are not considered tax3free. #'tt!. $ontero&
#I& 5efinitions. 3 #a& The term AsecuritiesA means bonds and debentures but not AnotesA of whatever class or duration. #b& The term AmergerA or AconsolidationA, when used in this *ection, shall be understood to mean: #i& the ordinar! merger or consolidation, or #ii& the acBuisition b! one corporation of all or substantiall! all the properties of another corporation solel! for stoc.: rovided, That for a transaction to be regarded as a merger or consolidation within the purview of this *ection, it must be underta.en for a bona fide business purpose and not solel! for the purpose of escaping the burden of taxation: rovided, further, That in determining whether a bona fide business purpose exists, each and ever! step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: rovided, finall! , That in determining whether the propert! transferred constitutes a substantial portion of the propert! of the transferor, the term Npropert!N shall be ta.en to include the cash assets of the transferor. #c& The term AcontrolA, when used in this *ection, shall mean ownership of stoc.s in a corporation possessing at least fift!3one percent #C9L& of the total voting power of all classes of stoc.s entitled to vote. #d& The *ecretar! of +inance, upon recommendation of the Commissioner, is hereb! authori,ed to issue rules and regulations for the purpose Asubstantiall! allA and for the proper implementation of this *ection.
*ecurities means bonds and debentures, but not notes of whatever class or duration. $erger or consolidation means: o The ordinar! merger or consolidation o The acBuisition b! one corporation of all or almost all the properties of another corporation solel! for stoc.
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Taxation One: Outline with Codals ' corporate merger where the new corporation continued to operate the business of the old corporation is not sub:ect to capital gains tax. The merger, however, must be underta.en for a bona fide business purpose and not solel! for the purpose of escaping the burden of taxation. #CI% v %ufino, where the merger was done to extend the life of the corporation, this was legitimate& Transfer of substantiall! GallH the assets means a transfer of at least F=L of the assets, including cash, with some degree of permanence. Transfer of propert! for shares of stoc.: no gain or loss is recogni,ed when a person transfers propert! #not services& to a corporation in exchange for shares of stoc. #alone or with ? others&, where such person gains control of the corporation #at least C9L of the total voting power& The transfer of assets b! one corporation to another must have a business purpose. #2regor! v Jelving& 'dministrative reBuirements in case of tax3free exchanges. o ;ou have to submit the following to the 4I%: i. *worn certificate on the basis of propert! to be transferred ii. Certified true copies #ctc& of the TCT iii. Ctc of the corresponding tax declaration of the real properties to be transferred iv. Ctc of the certificates of stoc. evidencing shares of stoc. to be transferred v. Ctc of the inventor! of the propert! to be transferred #RR *.,+*% /lements of a de factor merger #valid merger& 9. Transfer of all or substantiall! all of the properties of the transferor corp solel! for stoc. 0. >nderta.en for a bona fide bi, purpose, not for escaping taxes 5ifference between a de facto merger v a statutor! merger o In a de facto merger, the transferor is not automaticall! dissolved o In a de facto merger, there is no automatic transfer to the transferee of all the rights, privileges and liabilities of the transferor 5ifference between a de facto merger v a transfer to a controlled corporation o In a de facto merger, the transferor is a corp. in the latter, the transferor ma! be an individual. o In a de facto merger, the reBuirement is that the transferee acBuires all or substantiall! all of the properties of the transferor. In the latter, the reBuirement is that the transferor gains control of the transferee #own C9L of the voting power&
#1& /xchange <ot *olel! in Rind. 3 #a& If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a securit! holder or a corporation receives not onl! stoc. or securities permitted to be received without the recognition of gain or loss, but also mone! and-or propert!, the gain, if an!, but not the loss, shall be recogni,ed but in an amount not in excess of the sum of the mone! and fair mar.et value of such other propert! received: rovided, That as to the shareholder, if the mone! and-or other propert! received has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain recogni,ed not in excess of his proportionate share of the undistributed earnings and profits of the corporation; the remainder, if an!, of the gain recogni,ed shall be treated as a capital gain. #b& If, in connection with the exchange described in the above exceptions, the transferor corporation receives not onl! stoc. permitted to be received without the recognition of gain or loss but also mone! and-or other propert!, then #i& if the corporation receiving such mone! and-or other propert! distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recogni,ed from the exchange, but #ii& if the corporation receiving such other propert! and-or mone! does not distribute it in pursuance of the plan of merger or consolidation, the gain, if an!, but not the loss to the corporation shall be recogni,ed but in an amount not in excess of the sum of such mone! and the fair mar.et value of such other propert! so received, which is not distributed. #?& 'ssumption of "iabilit!. 3 #a& If the taxpa!er, in connection with the exchanges described in the foregoing exceptions, receives stoc. or $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as part of the consideration, another part! to the exchange assumes a liabilit! of the taxpa!er, or acBuires from the taxpa!er propert!, sub:ect to a liabilit!, then such assumption or acBuisition shall not be treated as mone! and-or other propert!, and shall not prevent the exchange from being within the exceptions. #b& If the amount of the liabilities assumed plus the amount of the liabilities to which the propert! is sub:ect exceed the total of the ad:usted basis of the propert! transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of propert! which is not a capital asset, as the case ma! be.
'ssumption of liabilit! in tax3free exchanges: If the transferor receives stoc. or securities in a transfer of propert!, and as part of the consideration, the other part! also assumes the liabilit! of the transferor or that the propert! he assumes has a liabilit!, then the propert!-liabilit! acBuired will <OT be treated as mone! or other propert!, so that it still falls under the exception of the *ec ?= #C& and no gain or loss is recogni,ed. 4ut if the amount of the liabilit! assumed exceeds the total of the ad:usted basis of the propert! transferred, then the excess is considered a gain from sale of either a capital asset or an ordinar! asset, as the case ma! be. /xample Tob! transfers propert! to 'pple Inc with an ad:usted basis of 9Cm in exchange for 'pple Inc)s stoc. plus 'pple Inc assumes Tob!)s liabilit! of 9=m. The exchange is considered tax3free. 4ut if the liabilit! of Tob! is 0=m, then this will exceed the ad:usted basis of 9Cm. *o the Cm will be considered a gain and it will be taxable. Cost or basis in tax3free exchanges
#C& *asis 3 #a& The basis of the stoc. or securities received b! the transferor upon the exchange specified in the above exception shall be the same as the basis of the propert!, stoc. or securities exchanged, decreased b! #9& the mone! received, and #0& the fair mar.et value of the other propert! received, and increased b! #a& the amount treated as dividend of the shareholder and #b& the amount of an! gain that was recogni,ed on the exchange: $rovided, That the propert! received as (boot( shall have as basis its fair mar.et value: $rovided, !urther, That if as part of the consideration to the transferor, the transferee of propert! assumes a liabilit! of the transferor or acBuires form the latter propert! sub:ect to a liabilit!, such assumption or acBuisition #in the amount of the liabilit!& shall, for purposes of this paragraph, be treated as mone! received b! the transferor on the exchange : $rovided, !inally, That if the transferor receives several .inds of stoc. or securities, the Commissioner is hereb! authori,ed to allocate the basis among the several classes of stoc.s or securities. #b& The basis of the propert! transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased b! the amount of the gain recogni,ed to the transferor on the transfer.
6hen the transferor later on sells or exchanges the stoc. he got tax3free, the basis for determining the gain or loss is the substituted basis. This will also be the cost basis when the transferee later on sells the propert! acBuired. Jow to compute the substituted basis: 9. Ta.e the original basis of the propert! #usuall! the cost or boo. value& 0. *ubtract an! mone! or the fair mar.et value of an! propert! that ma! have been received aside from the shares of stoc. 1. 'dd the amount treated as dividend b! the shareholder O an! gain that was recogni,ed on the exchange #if an!& /xample Ja!le! transfers propert! to 'pple Inc for shares of stoc.. The propert!)s boo. value was Cm and Ja!le! received an extra 9m from stoc.. If she later sells her shares of stoc. to $el, the substituted basis will be computed as # Cm3 9m&X ?m. If Ja!le! sells the shares to $el for Im, her gain will be # I3 ?m& 0m and it will be sub:ect to capital gains tax. "osses from 6ash *ales of *toc.s or *ecurities
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*/C. 1F. "osses from 6ash *ales of *toc. or *ecurities. 3 #'& In the case of an! loss claimed to have been sustained from an! sale or other disposition of shares of stoc. or securities where it appears that within a period beginning thirt! #1=& da!s before the date of such sale or disposition and ending thirt! #1=& da!s after such date, the taxpa!er has acBuired #b! purchase or b! exchange upon which the entire amount of gain or loss was recogni,ed b! law&, or has entered into a contact or option so to acBuire, substantiall! identical stoc. or securities, then no deduction for the loss shall be allowed under *ection 1? unless the claim is made b! a dealer in stoc. or securities and with respect to a transaction made in the ordinar! course of the business of such dealer. #4& If the amount of stoc. or securities acBuired #or covered b! the contract or option to acBuire& is less than the amount of stoc. or securities sold or otherwise disposed of, then the particular shares of stoc. or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner. #C& If the amount of stoc. or securities acBuired #or covered b! the contract or option to acBuire which& resulted in the non3deductibilit! of the loss, shall be determined under rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner.
"osses are not allowed to be claimed in sales of stoc. or securities o 6ithin a period of 1= da!s before the sale, and 1= da!s after the sale #I9 da!s total& o 6hen the taxpa!er acBuires or enters into an option to purchase o If substantiall! the same-identical stoc.s or securities "osses are allowed onl! if the taxpa!er is a stoc.bro.er and the sale-purchase was made in the regular course of business. The important thing to remember is the I9 da! period. #!ec *9*/ RR "% o /xample: Moe! bu!s share of stoc. in a corporation and within 1= da!s, bu!s more shares. Then within another 1= da!s, he sells those shares at a loss. Je cannot claim this loss.
T. !itus o& Taxation

*/C. ?0. Income from *ources 6ithin the hilippines.3 #'& 2ross Income +rom *ources 6ithin the hilippines. 3 The following items of gross income shall be treated as gross income from sources within the hilippines: #9& Interests. 3 Interests derived from sources within the hilippines, and interests on bonds, notes or other interest3bearing obligation of residents, corporate or otherwise; #0& 5ividends. 3 The amount received as dividends: #a& from a domestic corporation; and #b& from a foreign corporation, unless less than fift! percent #C=L& of the gross income of such foreign corporation for the three3!ear period ending with the close of its taxable !ear preceding the declaration of such dividends or for such part of such period as the corporation has been in existence& was derived from sources within the hilippines as determined under the provisions of this *ection; but onl! in an amount which bears the same ration to such dividends as the gross income of the corporation for such period derived from sources within the hilippines bears to its gross income from all sources. #1& *ervices. 3 Compensation for labor or personal services performed in the hilippines; #?& %entals and %o!alties. 3 %entals and ro!alties from propert! located in the hilippines or from an! interest in such propert!, including rentals or ro!alties for 3 #a& The use of or the right or privilege to use in the hilippines an! cop!right, patent, design or model, plan, secret formula or process, goodwill, trademar., trade brand or other li.e propert! or right; #b& The use of, or the right to use in the hilippines an! industrial, commercial or scientific eBuipment; #c& The suppl! of scientific, technical, industrial or commercial .nowledge or information; #d& The suppl! of an! assistance that is ancillar! and subsidiar! to, and is furnished as a means of enabling the application or en:o!ment of, an! such propert! or right as is mentioned in paragraph #a&, an! such eBuipment as is mentioned in paragraph #b& or an! such .nowledge or information as is mentioned in paragraph #c&; #e& The suppl! of services b! a nonresident person or his emplo!ee in connection with the use of propert! or rights belonging to, or the installation or operation of an! brand, machiner! or other apparatus purchased from such nonresident person; #f& Technical advice, assistance or services rendered in connection with technical management or administration of an! scientific, industrial or commercial underta.ing, venture, pro:ect or scheme; and #g& The use of or the right to use: #i& $otion picture films; #ii& +ilms or video tapes for use in connection with television; and #iii& Tapes for use in connection with radio broadcasting. #C& *ale of %eal ropert!. 3 2ains, profits and income from the sale of real propert! located in the hilippines; and #I& *ale of ersonal ropert!. 3 2ains; profits and income from the sale of personal propert!, as determined in $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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*ubsection #/& of this *ection. #4& Taxable Income +rom *ources 6ithin the hilippines. 3 #9& 2eneral %ule. 3 +rom the items of gross income specified in *ubsection #'& of this *ection, there shall be deducted the expenses, losses and other deductions properl! allocated thereto and a ratable part of expenses, interests, losses and other deductions effectivel! connected with the business or trade conducted exclusivel! within the hilippines which cannot definitel! be allocated to some items or class of gross income: rovided, That such items of deductions shall be allowed onl! if full! substantiated b! all the information necessar! for its calculation. The remainder, if an!, shall be treated in full as taxable income from sources within the hilippines. #0& /xception. 3 <o deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection #'& unless indebtedness was actuall! incurred to provide funds for use in connection with the conduct or operation of trade or business in the hilippines.
This section is not relevant to domestic corporations and resident citi,ens because the! are taxed worldwide an!wa!. The following are treated as gross income from sources within the hilippines: 9. Interests @ including interests on bonds, notes and other interest bearing obligations: a. The loan was used here in the hilippines, or b. The debtor is in the hilippines 0. 5ividends @ from a domestic corporation and a foreign corporation, a. >nless less than C=L of the gross income of the foreign corporation was derived from the hilippines #the amount will be based on the same ratio to dividends as the gross income for such period derived from sources within hilippines to its gross income from all sources. 6hut78& i. /xample, a Mapanese corporation, who derives income more than C=L of its income in the hilippines, declares dividends to an 'merican in "os 'ngeles. That will be taxed. I :ust don)t .now how much. 1. *ervices @ compensation for labor or personal services performed in the hilippines ?. %entals O %o!alties @ from propert! located in the hilippines or from an! interest in such propert! for: a. the use of an! cop!right, patent, design or model, plan, secret formula or process, goodwill, trademar., trade brand or other similar stuff b. the use of an! industrial, commercial or scientific eBuipment c. the suppl! of scientific, technical, industrial or commercial .nowledge or info d. the suppl! of services b! a non3resident person in connection with thuse of propert! or rights, or the installation or operation of an! brand, machiner!, or other apparatus purchased from such non3resident person e. technical advise, assistance or services rendered in connection with technical management of an! scientific, industrial or commercial underta.ing f. the use of motion picture films, films for tv, tapes for radio broadcast C. *ale of real propert! @ the gains, profits O income from sale of real propert! located in the hilippines I. *ale of personal propert! @ gains, profits and income from sale of personal propert!, determined b! subsection #/& The place of the singing of a contract is </Q/% an issue or a factor for determining the source of income. #'tt! $ontero& In the CI% v $arubeni case, what was involved was a turn.e! contract. $arubeni was a non3resident foreign corporation. 6hat was interesting here, according to sir, is that a turn.e! contract could be argued to be a divisible contract which has 1 stages @ engineering, procurement, and construction. The tax implication of this is that certain stages of the contract could be argued to be be!ond the taxing :urisdiction of the hilippines. o +or the engineering stage: i. %o!alties is sourced here, so that)s taxed. #'ccording to hil3'm "ife v CT', ro!alties are technical fees&
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Taxation One: Outline with Codals ii. *ervice fees are probabl! situated abroad, so that)s not taxed here. +or the procurement stage: i. 6here was the stuff bought7 It could be here #which would be taxed& or abroad #then it wouldn)t be taxed& o +or the construction stage: i. That would definitel! be here, so it)ll be taxed. o The implication here is that if !ou can argue that the contract is indivisible, !ou can also argue that some stages of the contract were not sourced here in the hilippines, and thus be!ond the taxing :urisdiction of the hilippines. o This would be huge, considering that if the contract was considered indivisible, then ever!thing would be considered situated here in the hilippines and thus the whole contract would be full! taxed. Thin. of how much !ou)d save8 /xpenses of a multination corporation directl! related to the production of hilippine3 derived income can be deducted from gross income in the hilippines without need of apportionment, but overhead expenses of its parent compan! belong to a different categor!. o These are items which can)t be definitel! allocated or identified with the operations of the hilippine branch. *o, the compan! can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch)s gross income to the total gross income, worldwide, of the multinational corporation. #CI% v CT' and *mith Rline& %einsurance premiums ceded to foreign reinsurers are considered income from hilippine sources. o It is the place of activit! creating the income which is controlling, and not the place of business. # hil 2uarant! v CI%& RA5O *,-: applies only to the income tax of: 9. hilippine brances and liason offices of Mapanese trading firms 0. 'll other foreign trading companies &or solicitation and trading activities o
6orldwide Operating Income T *ales to the hil x 'ttribution %ate #DCL& x Tax %ate #1CL& 6orldwide *ales &or construction <et Income from Construction and other activities x Tax %ate #1CL& The order was implemented because the hilippine liaison offices of some multinational companies are soliciting orders form local importers. 4ut then, these liaison offices are not reporting as income the sales made to local importers because the! claim that the sale was actuall! consummated b! their head office abroad. The other wa! is that the hilippine liaison office solicits orders from local importers. It then rela!s the information to its foreign head office which loo.s for exporters of the product and earns a commission. 4ut the commission is earned b! the head office. *o, the hilippine liaison office does not pa! tax on these bro.er)s commissions here. o *o now, these transactions will be considered as constructivel! consummated b! the hilippine liaison office-branch office as trading activities or bro.ering activities. #RA5O *,.2% The problem here is that deductions being made b! the hilippine branch offices of foreign corps are hard to chec. because the supporting documens O boo.s of accounts are not accessible to the 4I%. *o, the hil branch offices onl! submit an audit certification to bac.3up their claims for deductions. This order provides several procedures for the 4I% to determine the correct deductions such as functional anal!sis, relevance tests, reasonableness tests and other measures. #RA5O #,.2%
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Taxation One: Outline with Codals 2ross income form sources outside #without& the hilippines
$C% Gross Income -rom /ources %ithout the Philippines 5 3 The following items of gross income shall be treated as income from sources without the hilippines: #9& Interests other than those derived from sources within the hilippines as provided in paragraph #9& of *ubsection #'& of this *ection; #0& 5ividends other than those derived from sources within the hilippines as provided in paragraph #0& of *ubsection #'& of this *ection; #1& Compensation for labor or personal services performed without the hilippines; #?& %entals or ro!alties from propert! located without the hilippines or from an! interest in such propert! including rentals or ro!alties for the use of or for the privilege of using without the hilippines, patents, cop!rights, secret processes and formulas, goodwill, trademar.s, trade brands, franchises and other li.e properties; and #C& 2ains, profits and income from the sale of real propert! located without the hilippines.
9. 0. 1. ?.
Interests other than those derived from sources within 5ividends other than those derived from sources within Compensation for labor or personal services performed outside the hil %entals or ro!alties from propert! located outside the hilippines or an! interest in such propert! C. 2ains, profits, income from sale of real propert! located outside the hilippines Income from sources partl! within and partl! without the hilippines
$)% Taxa&le Income -rom /ources %ithout the Philippines 5 3 +rom the items of gross income specified in *ubsection #C& of this *ection there shall be deducted the expenses, losses, and other deductions properl! apportioned or allocated thereto and a ratable part of an! expense, loss or other deduction which cannot definitel! be allocated to some items or classes of gross income. The remainder, if an!, shall be treated in full as taxable income from sources without the hilippines. $0% Income -rom /ources Partly %ithin and Partly %ithout the Philippines 53 Items of gross income, expenses, losses and deductions, other than those specified in *ubsections #'& and #C& of this *ection, shall be allocated or apportioned to sources within or without the hilippines, under the rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner. 6here items of gross income are separatel! allocated to sources within the hilippines, there shall be deducted #for the purpose of computing the taxable income therefrom& the expenses, losses and other deductions properl! apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitel! be allocated to some items or classes of gross income. The remainder, if an!, shall be included in full as taxable income from sources within the hilippines. In the case of gross income derived from sources partl! within and partl! without the hilippines, the taxable income ma! first be computed b! deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of an! expense, loss or other deduction which cannot definitel! be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the hilippines ma! be determined b! processes or formulas of general apportionment prescribed b! the *ecretar! of +inance. 2ains, profits and income from the sale of personal propert! produced #in whole or in part& b! the taxpa!er within and sold without the hilippines, or produced #in whole or in part& b! the taxpa!er without and sold within the hilippines, shall be treated as derived partl! from sources within and partl! from sources without the hilippines. 2ains, profits and income derived from the purchase of personal propert! within and its sale without the hilippines, or from the purchase of personal propert! without and its sale within the hilippines shall be treated as derived entirel! form sources within the countr! in which sold: $rovided, however, That gain from the sale of shares of stoc. in a domestic corporation shall be treated as derived entirel! form sources within the hilippines regardless of where the said shares are sold. The transfer b! a nonresident alien or a foreign corporation to an!one of an! share of stoc. issued b! a domestic corporation shall not be effected or made in its boo. unless: #9& the transferor has filed with the Commissioner a bond conditioned upon the future pa!ment b! him of an! income tax that ma! be due on the gains derived from such transfer, or #0& the Commissioner has certified that the taxes, if an!, imposed in this Title and due on the gain reali,ed from such sale or transfer have been paid. It shall be the dut! of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this reBuirement. $'% Definitions. 3 's used in this *ection the words (sale( or (sold( include (e#change( or (e#changed(; and the word (produced( includes (created(, (!abricated(, (manu!actured(, (e#tracted(, (processed(, (cured( or (aged(.
+or the gross income items allocated to sources partl! within and partl! without the hilippines, o there shall be deducted the expenses, losses and other deductions properl! apportioned, and
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Taxation One: Outline with Codals and a ratable part of other expenses, losses O deductions which cannot properl! be allocated to some item of gross income. If there is an! remainder, it shall be included in full as taxable income from sources within the hilippines o
*itus of sale of personal propert! 2ains, profits and income derived from purchase of personal propert! within and sold without, or from purchase without and sale within, are treated as derived entirel! from sources with the countr! in which it is *O"5. *itus of sale of stoc.s in a domestic corporation 2ains from sale of shares of stoc. in a domestic corporation are treated as 5/%IQ/5 /<TI%/"; from sources within the hilippines regardless of where the said shares are sold. H. Accountin( Periods and 5ethods
!0C. #9. General 'ule. 3 The taxable income shall be computed upon the basis of the taxpa!erNs annual accounting period #fiscal !ear or calendar !ear, as the case ma! be& in accordance with the method of accounting regularl! emplo!ed in .eeping the boo.s of such taxpa!er, but if no such method of accounting has been so emplo!ed, or if the method emplo!ed does not clearl! reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearl! reflects the income. If the taxpa!erNs annual accounting period is other than a fiscal !ear, as defined in *ection 00#U&, or if the taxpa!er has no annual accounting period, or does not .eep boo.s, or if the taxpa!er is an individual, the taxable income shall be computed on the basis of the calendar !ear.
Taxable income is computed on the basis of the taxpa!er)s annual accounting period in accordance with the method of accounting regularl! emplo!ed in .eeping his boo.s. If there is no method emploed or he doesn)t .eep boo.s, the taxable income shall be computed on the basis of the calendar !ear. If the taxpa!er is an individual, it shall be the calendar !ear. 'lthough the taxpa!er is allowed to do his own accounting method, some guidelines should be followed: o 6hen the production, purchase or sale of merchandise of an! .ind is an income producing factor, inventories should be ta.en at the beginning and at the end of the !ear o /xpenses should be properl! classified between capital and income. Capital expenses are those which have a long useful life extending substantiall! be!ond the !ear o 6hen the cost of capital assets is being recovered thru deductions for wear O tear, etc, an! expenses made to restore the propert! or prolong its useful life should be added to the propert! account, and not to current expenses 'ccrual basis is the default @ meaning, !ou report income when earned and report expense when incurred, i.e. when it)s legall! due, demandable and enforceable.
!0C. ##. Period in which Items of Gross Income Included. 3 The amount of all items of gross income shall be included in the gross income for the taxable !ear in which received b! the taxpa!er, unless, under methods of accounting permitted under *ection ?1, an! such amounts are to be properl! accounted for as of a different period. In the case of the death of a taxpa!er, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properl! includible in respect of such period or a prior period.
The items of gross income are included in the taxable !ear that the! are received b! the taxpa!er, unless the! are properl! accounted for as of a different period.
!0C. #:. Period for which Deductions and +redits Ta0en . 3 The deductions provided for in this Title shall be ta.en for the taxable !ear in which (paid or accrued( or (paid or incurred(, dependent upon the method of accounting the basis of which the net income is computed, unless in order to clearl! reflect the income, the $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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deductions should be ta.en as of a different period. In the case of the death of a taxpa!er, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properl! allowable in respect of such period or a prior period.
The deduction shall be ta.en for the taxable !ear in which it is incurred.
!0C. #2. +han#e of Accountin# Period. If a taxpa!er, other than an individual, changes his accounting period from fiscal !ear to calendar !ear, from calendar !ear to fiscal !ear, or from one fiscal !ear to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, sub:ect to the provisions of *ection ?D.
If the taxpa!er, other than an individual, changes his accounting period, the net income will be computed on the basis of his new accounting period.
!0C. #=. -inal or Ad2ustment 'eturns for a Period of 1ess than Twelve 3456 *onths. 3 $A% 'eturns for /hort Period 'esultin# from +han#e of Accountin# Period 5 3 If a taxpa!er, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal !ear to calendar !ear, a separate final or ad:ustment return shall be made for the period between the close of the last fiscal !ear for which return was made and the following 5ecember 19. If the change is from calendar !ear to fiscal !ear, a separate final or ad:ustment return shall be made for the period between the close of the last calendar !ear for which return was made and the date designated as the close of the fiscal !ear. If the change is from one fiscal !ear to another fiscal !ear, a separate final or ad:ustment return shall be made for the period between the close of the former fiscal !ear and the date designated as the close of the new fiscal !ear. $B% Income +omputed on $asis of /hort Period5 3 6here a separate final or ad:ustment return is made under *ubsection #'& on account of a change in the accounting period, and in all other cases where a separate final or ad:ustment return is reBuired or permitted b! rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, to be made for a fractional part of a !ear, then the income shall be computed on the basis of the period for which separate final or ad:ustment return is made.
If the taxpa!er changes his accounting period, a separate return must be made for the gap caused b! the change. Income will be apportioned properl!. *hort3term periods are also needed in instances of death and dissolution of a corporation.
!0C. #.. Accountin# for 1on#-Term +ontracts . 3 Income from long3term contracts shall be reported for tax purposes in the manner as provided in this *ection. 's used herein, the term Nlong3term contractsN means building, installation or construction contracts covering a period in excess of one #9& !ear. ersons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. The return should be accompanied b! a return certificate of architects or engineers showing the percentage of completion during the taxable !ear of the entire wor. performed under contract. There should be deducted from such gross income all expenditures made during the taxable !ear on account of the contract, account being ta.en of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the wor. under the contract but not !et so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearl! reflected for an! !ear or !ears, the Commissioner ma! permit or reBuire an amended return.
"ong term means building, installation or construction contracts covering a period in excess of 9 !ear. ersons reporting long3term contracts must report it on basis of percentage of completion. Total is C=$ %unning cost <et Income ;ear 9 0=L 9=m Cm Cm ;ear 0 D=L 1Cm 1=m = #<I ;ear ;ear 1 9==L C=m ?=m 03 <I ;ear 9&
!0C. #-. Installment $asis5 3 $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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$A% /ales of Dealers in Personal Property 5 3 >nder rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, a person who regularl! sells or otherwise disposes of personal propert! on the installment plan ma! return as income therefrom in an! taxable !ear that proportion of the installment pa!ments actuall! received in that !ear, which the gross profit reali,ed or to be reali,ed when pa!ment is completed, bears to the total contract price. $B% /ales of 'ealty and +asual /ales of Personality . 3 In the case #9& of a casual sale or other casual disposition of personal propert! #other than propert! of a .ind which would properl! be included in the inventor! of the taxpa!er if on hand at the close of the taxable !ear&, for a price exceeding One thousand pesos # 9,===&, or #0& of a sale or other disposition of real propert!, if in either case the initial pa!ments do not exceed twent!3five percent #0CL& of the selling price, the income ma!, under the rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this *ection. 's used in this *ection, the term (initial payments( means the pa!ments received in cash or propert! other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. $C% /ales of 'eal Property +onsidered as +apital Asset &y Individuals . 3 'n individual who sells or disposes of real propert!, considered as capital asset, and is otherwise Bualified to report the gain therefrom under *ubsection #4& ma! pa! the capital gains tax in installments under rules and regulations to be promulgated b! the *ecretar! of +inance, upon recommendation of the Commissioner. $)% +han#e from Accrual to Installment $asis . 3 If a taxpa!er entitled to the benefits of *ubsection #'& elects for an! taxable !ear to report his taxable income on the installment basis, then in computing his income for the !ear of change or an! subseBuent !ear, amounts actuall! received during an! such !ear on account of sales or other dispositions of propert! made in an! prior !ear shall not be excluded.
*ales of dealers in personal propert! o ' person who regularl! sells personal propert! on the installment plan ma! return as income in an! taxable !ear that proportion of the installment pa!ment which the gross profit reali,ed bears to the total contract price *ale of real propert! and casual sales of personal propert! o If the price exceeds 9=== or where the initial pa!ment does not exceed 0CL of the selling price, the same basis as above ma! be followed *ales of real propert! considered as capital asset b! individuals o 'n individual who sells real propert! considered as capital asset ma! pa! the capital gains tax in installments under the rules of the 4I% Changes from 'ccrual to installment basis o 6hen a taxpa!er decides to report his taxable income on the installment basis, the amounts actuall! received in prior !ears are not excluded If postdated chec.s were given to pa! a sale on installments, and then the postdated chec.s were discounted #i.e. sold to a 1rd person to get the cash immediatel!&, this is still considered a sale on installment. #4anas v C', because the postdated chec.s were evidences o! indebtedness&
!0C. :+. Allocation of Income and Deductions. 3 In the case of two or more organi,ations, trades or businesses #whether or not incorporated and whether or not organi,ed in the hilippines& owned or controlled directl! or indirectl! b! the same interests, the Commissioner is authori,ed to distribute, apportion or allocate gross income or deductions between or among such organi,ation, trade or business, if he determined that such distribution, apportionment or allocation is necessar! in order to prevent evasion of taxes or clearl! to reflect the income of an! such organi,ation, trade or business.
6hen two or more organi,ations, trades or businesses are owned or controlled directl! or indirectl! b! the same interests, the CI% can distribute, apportion or allocate gross income or deductions between or among such orgs, trades or businesses, in order to prevent tax evasion.
6. Returns and Payment o& Taxes Individual %eturn

*/C. C9. Individual %eturn. 3 #'& %eBuirements. 3 #9& /xcept as provided in paragraph #0& of this *ubsection, the following individuals are reBuired to file an income $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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tax return: #a& /ver! +ilipino citi,en residing in the hilippines; #b& /ver! +ilipino citi,en residing outside the hilippines, on his income from sources within the hilippines; #c& /ver! alien residing in the hilippines, on income derived from sources within the hilippines; and #d& /ver! nonresident alien engaged in trade or business or in the exercise of profession in the hilippines.
6ho are reBuired to file7 9. %esident citi,en, on income within and without the hilippines 0. <on3resident citi,en, on income within onl! 1. %esident alien, on income within onl! ?. <on3resident alien #engaged in bi, here&, on income within onl!
#0& The following individuals shall not be reBuired to file an income tax return; #a& 'n individual whose gross income does not exceed his total personal and additional exemptions for dependents under *ection 1C: rovided, That a citi,en of the hilippines and an! alien individual engaged in business or practice of profession within the hilippine shall file an income tax return, regardless of the amount of gross income; #b& 'n individual with respect to pure compensation income, as defined in *ection 10#'&#9&, derived from such sources within the hilippines, the income tax on which has been correctl! withheld under the provisions of *ection DE of this Code: $rovided, That an individual deriving compensation concurrentl! from two or more emplo!ers at an! time during the taxable !ear shall file an income tax return; #c& 'n individual whose sole income has been sub:ected to final withholding tax pursuant to *ection CD#'& of this Code; and #d& ' minimum wage earner as defined in *ection 00#JJ& of this Code or an individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. #1& The forgoing notwithstanding, an! individual not reBuired to file an income tax return ma! nevertheless be reBuired to file an information return pursuant to rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner.
6ho are not reBuired to file7 9. Those whose gross income does not exceed his total personal and additional exemptions o 4ut those engaged in bi, or practices a profession must file, regardless of the amount of gross income 0. Those who earn pure compensation income and the income tax on which has alread! been correctl! withheld #substituted filing, done b! emplo!er&, provided that an individual deriving compensation concurrentl! from 0 or or more emplo!ers at an! time during the table !ear shall file an income tax return 1. The following are not reBuired to file, regardless of income amount #final withholding taxed alread!& a. Those whose income consists solel! of ro!alties, interests, pri,es, winnings, dividends, etc and the share in a partnership or association, :oint venture, or consortium taxable as a corp b. 'liens emplo!ed b! %OJUs with respect to their compensation income c. 'liens emplo!ed b! O4>s with respect to their compensation income d. 'liens emplo!ed b! foreign service contractors and subcontractors engaged in petroleum exploration, with respect to their compensation income ?. $inimum wage earners C. Those exempted b! the Tax code and other special laws
#?& The income tax return shall be filed in duplicate b! the following persons: #a& ' resident citi,en 3 on his income from all sources; #b& ' nonresident citi,en 3 on his income derived from sources within the hilippines; #c& ' resident alien 3 on his income derived from sources within the hilippines; and #d& ' nonresident alien engaged in trade or business in the hilippines 3 on his income derived from sources within the hilippines. $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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Taxation One: Outline with Codals 6here and when to file

#4& 6here to +ile. 3 /xcept in cases where the Commissioner otherwise permits, the return shall be filed with an authori,ed agent ban., %evenue 5istrict Officer, Collection 'gent or dul! authori,ed Treasurer of the cit! or municipalit! in which such person has his legal residence or principal place of business in the hilippines, or if there be no legal residence or place of business in the hilippines, with the Office of the Commissioner. #C& 6hen to +ile. 3 #9& The return of an! individual specified above shall be filed on or before the fifteenth #9Cth& da! of 'pril of each !ear covering income for the preceding taxable !ear. #0& Individuals sub:ect to tax on capital gains; #a& +rom the sale or exchange of shares of stoc. not traded thru a local stoc. exchange as prescribed under *ection 0?#c& shall file a return within thirt! #1=& da!s after each transaction and a final consolidated return on or before 'pril 9C of each !ear covering all stoc. transactions of the preceding taxable !ear; and #b& +rom the sale or disposition of real propert! under *ection 0?#5& shall file a return within thirt! #1=& da!s following each sale or other disposition. #5& Jusband and 6ife. 3 $arried individuals, whether citi,ens, resident or nonresident aliens, who do not derive income purel! from compensation, shall file a return for the taxable !ear to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse ma! file a separate return of income but the returns so filed shall be consolidated b! the 4ureau for purposes of verification for the taxable !ear. #/& %eturn of arent to Include Income of Children. 3 The income of unmarried minors derived from properl! received from a living parent shall be included in the return of the parent, except #9& when the donorNs tax has been paid on such propert!, or #0& when the transfer of such propert! is exempt from donorNs tax. #+& ersons >nder 5isabilit!. 3 If the taxpa!er is unable to ma.e his own return, the return ma! be made b! his dul! authori,ed agent or representative or b! the guardian or other person charged with the care of his person or propert!, the principal and his representative or guardian assuming the responsibilit! of ma.ing the return and incurring penalties provided for erroneous, false or fraudulent returns. #2& *ignature resumed Correct. 3 The fact that an individualNs name is signed to a filed return shall be prima facie evidence for all purposes that the return was actuall! signed b! him.
6here 9. 0. 1. ?. C.
to file7 'uthori,ed agent ban. %evenue district officer Collection agent 5ul! authori,ed cit! treasurer where he is legall! residing Office of the commissioner
6hen to file7 On or before 'pril 9C of each !ear 6hat if husband and wife7 Those married individuals who do not derive income purel! from compensation shall file a return to include income from both spouses. 4ut if impractical, then the! ma! file separate returns. Jow about parents and .ids7 arents must include the income of unmarried minors derived from propert! received from a living parent. o /TC/ T i. 6hen the donor)s tax has alread! been paid on such propert! ii. 6hen the transfer of such propert! is exempt from donor)s tax 6hen to pa! #applies to both individuals and corporations&
*/C. CI. a!ment and 'ssessment of Income Tax for Individuals and Corporation. 3 #'& a!ment of Tax. 3 #9& In 2eneral. 3 The total amount of tax imposed b! this Title shall be paid b! the person sub:ect thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and-or the husbanding agents, and in their absence, the captains thereof are reBuired to file the return herein provided and pa! the tax due thereon $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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before their departure. >pon failure of the said agents or captains to file the return and pa! the tax, the 4ureau of Customs is hereb! authori,ed to hold the vessel and prevent its departure until proof of pa!ment of the tax is presented or a sufficient bond is filed to answer for the tax due. #0& Installment of a!ment. 3 6hen the tax due is in excess of Two thousand pesos # 0,===&, the taxpa!er other than a corporation ma! elect to pa! the tax in two #0& eBual installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before Mul! 9C following the close of the calendar !ear. If an! installment is not paid on or before the date fixed for its pa!ment, the whole amount of the tax unpaid becomes due and pa!able, together with the delinBuenc! penalties. #1& a!ment of Capital 2ains Tax. 3 The total amount of tax imposed and prescribed under *ection 0? #c&, 0?#5&, 0D#/&#0&, 0F#'&#F&#c& and 0F#4&#C&#c& shall be paid on the date the return prescribed therefor is filed b! the person liable thereto: rovided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such pa!ments shall be reBuired : rovided, further, That in case of failure to Bualif! for exemption under such special laws and implementing rules and regulations, the tax due on the gains reali,ed from the original transaction shall immediatel! become due and pa!able, sub:ect to the penalties prescribed under applicable provisions of this Code: rovided, finall!, That if the seller, having paid the tax, submits such proof of intent within six #I& months from the registration of the document transferring the real propert!, he shall be entitled to a refund of such tax upon verification of his compliance with the reBuirements for such exemption. In case the taxpa!er elects and is Bualified to report the gain b! installments under *ection ?E of this Code, the tax due from each installment pa!ment shall be paid within #1=& da!s from the receipt of such pa!ments. <o registration of an! document transferring real propert! shall be effected b! the %egister of 5eeds unless the Commissioner or his dul! authori,ed representative has certified that such transfer has been reported, and the tax herein imposed, if an!, has been paid. #4& 'ssessment and a!ment of 5eficienc! Tax. 3 'fter the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficienc! income tax so discovered shall be paid upon notice and demand from the Commissioner. 's used in this Chapter, in respect of a tax imposed b! this Title, the term Adeficienc!A means: #9& The amount b! which the tax imposed b! this Title exceeds the amount shown as the tax b! the taxpa!er upon his return; but the amount so shown on the return shall be increased b! the amounts previousl! assessed #or collected without assessment& as a deficienc!, and decreased b! the amount previousl! abated, credited, returned or otherwise repaid in respect of such tax; or #0& If no amount is shown as the tax b! the taxpa!er upon this return, or if no return is made b! the taxpa!er, then the amount b! which the tax exceeds the amounts previousl! assessed #or collected without assessment& as a deficienc!; but such amounts previousl! assessed or collected without assessment shall first be decreased b! the amounts previousl! abated, credited returned or otherwise repaid in respect of such tax.
It is Gpa!3as3!ou3fileH and Gpa!3where3!ou3fileH ' person ma! pa! in installments if the tax due exceeds 0,===. erin( Capital Gains 6ithin 1= da!s after each transaction O final consolidated return on or before 'pril 9C 6ithin 1= da!s following each sale or other disposition 6ithin 1= da!s from receipt of each installment
'ilin( o& Return co *ale or exchange of stoc. <OT traded thru the local stoc. exchange *ale or disposition of real propert! 2ains received b! installment 'nnual 5eclaration of income tax
*/C. D?. 5eclaration of Income Tax for Individuals. 3 #'& In 2eneral. 3 /xcept as otherwise provided in this *ection, ever! individual sub:ect to income tax under *ections 0? and 0C#'& of this Title, who is receiving self3emplo!ment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall ma.e and file a declaration of his estimated income for the current taxable !ear on or before 'pril 9C of the same taxable !ear. In general, self3emplo!ment income consists of the earnings derived b! the individual from the practice of profession or conduct of trade or business carried on b! him as a sole proprietor or b! a partnership of which he is a member. <onresident +ilipino citi,ens, with respect to income from without the hilippines, and nonresident aliens not engaged in trade or business in the hilippines, are not reBuired to render a declaration of estimated income tax. The declaration shall contain such pertinent information as the *ecretar! of +inance, upon recommendation of the Commissioner, ma!, b! rules and regulations prescribe. 'n individual ma! ma.e amendments of a declaration filed during the taxable !ear under the rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner. #4& %eturn and a!ment of /stimated Income Tax b! Individuals. 3 The amount of estimated income as defined in *ubsection #C& with respect to which a declaration is reBuired under *ubsection #'& shall be paid in four #?& $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid on 'ugust 9C and <ovember 9C of the current !ear, respectivel!. The fourth installment shall be paid on or before 'pril 9C of the following calendar !ear when the final ad:usted income tax return is due to be filed. #C& 5efinition of /stimated Tax. 3 In the case of an individual, the term Aestimated taxA means the amount which the individual declared as income tax in his final ad:usted and annual income tax return for the preceding taxable !ear minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable !ear, the taxpa!er reasonable expects to pa! a bigger income tax, he shall file an amended declaration during an! interval of installment pa!ment dates.
Individuals who receive self3emplo!ment income must ma.e and file a declaration of his estimated income for the current !ear on or before 'pril 9C *elf3emplo!emnet income consists of earnings from the practice of a profession or conduct of trade or business carried on as the sole proprietor or a partnership of which he is a member Uuarterl! pa!ment of income tax, in ? installments o +irst at time of declaration o *econd 'ugust 9C o Third <ovember 9C o +ourth On or before 'pril 9C
Corporate returns
*/C. C0. Corporation %eturns. 3 #'& %eBuirements. 3 /ver! corporation sub:ect to the tax herein imposed, except foreign corporations not engaged in trade or business in the hilippines, shall render, in duplicate, a true and accurate Buarterl! income tax return and final or ad:ustment return in accordance with the provisions of Chapter TII of this Title. The return shall be filed b! the president, vice3president or other principal officer, and shall be sworn to b! such officer and b! the treasurer or assistant treasurer. #4& Taxable ;ear of Corporation. 3 ' corporation ma! emplo! either calendar !ear or fiscal !ear as a basis for filing its annual income tax return: rovided, That the corporation shall not change the accounting period emplo!ed without prior approval from the Commissioner in accordance with the provisions of *ection ?D of this Code. #C& %eturn of Corporation Contemplating 5issolution or %eorgani,ation. 3 /ver! corporation shall, within thirt! #1=& da!s after the adoption b! the corporation of a resolution or plan for its dissolution, or for the liBuidation of the whole or an! part of its capital stoc., including a corporation which has been notified of possible involuntar! dissolution b! the *ecurities and /xchange Commission, or for its reorgani,ation, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the *ecretar! of +inance, upon recommendation of the commissioner, shall, b! rules and regulations, prescribe. The dissolving or reorgani,ing corporation shall, prior to the issuance b! the *ecurities and /xchange Commission of the Certificate of 5issolution or %eorgani,ation, as ma! be defined b! rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the 4ureau of Internal %evenue which certificate shall be submitted to the *ecurities and /xchange Commission. #5& %eturn on Capital 2ains %eali,ed from *ale of *hares of *toc. not Traded in the "ocal *toc. /xchange. 3 /ver! corporation deriving capital gains from the sale or exchange of shares of stoc. not traded thru a local stoc. exchange as prescribed under *ections 0? #c&, 0C #'&#1&, 0D #/&#0&, 0F#'&#F&#c& and 0F #4&#C&#c&, shall file a return within thirt! #1=& da!s after each transactions and a final consolidated return of all transactions during the taxable !ear on or before the fifteenth #9Cth& da! of the fourth #?th& month following the close of the taxable !ear. */C. C1. /xtension of Time to +ile %eturns. 3 The Commissioner ma!, in meritorious cases, grant a reasonable extension of time for filing returns of income #or final and ad:ustment returns in case of corporations&, sub:ect to the provisions of *ection CI of this Code.
'll corporations, except foreign corporation not engaged in trade or bi, in hilippines #because the!)re sub:ect to final withholding tax alread!&, are reBuired to file: o Uuarterl! income tax return, on a cumulative basis for the preceding Buarters o ' final or ad:ustment return, on or before 'pril 9C ' corporation ma! use either calendar !ear or fiscal e!ar basis for filing
Uuarterl! income tax return

!0C. =:. Declaration of 7uarterly +orporate Income Tax. , /ver! corporation shall file in duplicate a Buarterl! summar! declaration of its gross income and deductions on a cumulative basis for the preceding Buarter or Buarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased b! the amount of tax previousl! paid or assessed during the preceding $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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Buarters and shall be paid not later than sixt! #I=& da!s from the close of each of the first three #1& Buarters of the taxable !ear, whether calendar or fiscal !ear.
' corporation must file tax return for preceding Buarter within I= da!s following the close of each Buarter
+inal ad:ustment return

!0C. =2. -inal Ad2ustment 'eturn. 3 /ver! corporation liable to tax under *ection 0D shall file a final ad:ustment return covering the total taxable income for the preceding calendar or fiscal !ear. If the sum of the Buarterl! tax pa!ments made during the said taxable !ear is not eBual to the total tax due on the entire taxable income of that !ear, the corporation shall either: #'& a! the balance of tax still due; or #4& Carr!3over the excess credit; or #C& 4e credited or refunded with the excess amount paid, as the case ma! be. In case the corporation is entitled to a tax credit or refund of the excess estimated Buarterl! income taxes paid, the excess amount shown on its final ad:ustment return ma! be carried over and credited against the estimated Buarterl! income tax liabilities for the taxable Buarters of the succeeding taxable !ears. Once the option to carr!3 over and appl! the excess Buarterl! income tax against income tax due for the taxable Buarters of the succeeding taxable !ears has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.
' corp will file the final return at the end of either fiscal or calendar !ear If the sum of the Buarterl! retruns is not eBual to the total tax due, the corporation shall either o a! the balance; o Carr! over the excess credit perpetuall!, or o 4e credited or refunded with the excess amount. i. 4ut the corporation can choose onl! 9 option and it is irrevocable, even if !ou didn)t get the benefit of the overpa!ment. The carr! over of the excess can be used perpetuall!. #*!stra v CI%& *ubseBuent acts can show the exercise of the carr!3over, even if the corp didn)t chec. the little box that said Gcarr! overH # hilam v CI%&
6here and when to file

*/C. DD. lace and Time of +iling and a!ment of Uuarterl! Corporate Income Tax. 3 #'& lace of +iling. 3 /xcept as the Commissioner other wise permits, the Buarterl! income tax declaration reBuired in *ection DC and the final ad:ustment return reBuired in *ection DI shall be filed with the authori,ed agent ban.s or %evenue 5istrict Officer or Collection 'gent or dul! authori,ed Treasurer of the cit! or municipalit! having :urisdiction over the location of the principal office of the corporation filing the return or place where its main boo.s of accounts and other data from which the return is prepared are .ept. #4& Time of +iling the Income Tax %eturn. 3 The corporate Buarterl! declaration shall be filed within sixt! #I=& da!s following the close of each of the first three #1& Buarters of the taxable !ear. The final ad:ustment return shall be filed on or before the fifteenth #9Cth& da! of 'pril, or on or before the fifteenth #9Cth& da! of the fourth #?th& month following the close of the fiscal !ear, as the case ma! be. #C& Time of a!ment of the Income Tax. 3 The income tax due on the corporate Buarterl! returns and the final ad:ustment income tax returns computed in accordance with *ections DC and DI shall be paid at the time the declaration or return is filed in a manner prescribed b! the Commissioner.
6here to file: same as individuals 6hen to file: o +or Buarterl! declarations: within I= da!s following the close of the Buarter o +or final: on or before 'pril 9C, or the 9Cth da! of the ?th month following the close of the fiscal !ear 6hen to pa!: same as individuals
+iling of return covering capital gains from shares of stoc.

!ec :" $)% 'eturn on +apital Gains 'eali!ed from /ale of /hares of /toc0 not Traded in the 1ocal /toc0 Exchan#e. 3 /ver! corporation deriving capital gains from the sale or exchange of shares of stoc. not traded thru a local stoc. exchange as prescribed under *ections 0? #c&, 0C #'&#1&, 0D #/&#0&, 0F#'&#F&#c& and 0F #4&#C&#c&, shall file a return within thirt! #1=& da!s after each transactions and a final consolidated return of all transactions $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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during the taxable !ear on or before the fifteenth #9Cth& da! of the fourth #?th& month following the close of the taxable !ear.
+or sale of exchange of stoc. not traded thru local stoc. exchanges, within 1= da!s after each transaction and a final consolidated return of '"" transactions during the !ear
%eturn of corporations contemplating dissolution-reorgani,ation

!ec :"$C% 'eturn of +orporation +ontemplatin# Dissolution or 'eor#ani!ation 5 3 /ver! corporation shall, within thirt! #1=& da!s after the adoption b! the corporation of a resolution or plan for its dissolution, or for the liBuidation of the whole or an! part of its capital stoc., including a corporation which has been notified of possible involuntar! dissolution b! the *ecurities and /xchange Commission, or for its reorgani,ation, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the *ecretar! of +inance, upon recommendation of the commissioner, shall, b! rules and regulations, prescribe. The dissolving or reorgani,ing corporation shall, prior to the issuance b! the *ecurities and /xchange Commission of the Certificate of 5issolution or %eorgani,ation, as ma! be defined b! rules and regulations prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the 4ureau of Internal %evenue which certificate shall be submitted to the *ecurities and /xchange Commission.
'fter the corp adopts a plan or resolution for its dissolution, it must submit to the 4I%, within 1= da!s, a return specif!ing the terms of the resolution and other information. It must secure a tax clearance certificate from the 4I% which it will submit to the */C before its dissolution. The! have to submit to the 4I%: o ' copo! of the resulotuion o 4alance sheet at the date of dissolution and the income statement covering the beginning of the !ear to the date of dissolution o <ames and addresses of the shareholders and their holdings o Qalue and a description of the assets received in liBuidation b! each shareholder The approval of the */C of liBuidation is the starting point.
%eturn of 2eneral rofessional artnerships

!0C. ::. 'eturns of General Professional Partnerships . 3 /ver! general professional partnership shall file, in duplicate, a return of its income, except income exempt under *ection 10 #4& of this Title, setting forth the items of gross income and of deductions allowed b! this Title, and the names, Taxpa!er Identification <umbers #TI<&, addresses and shares of each of the partners
2eneral professional partnerships and :oint ventures for construction, and other exempt corporations are *TI"" %/U>I%/5 to file their tax return, which should specif!: o The items of gross income, o The deductions allowed, and o The names, TI<, addresses and shares of each partner
7. 7ithholdin( Tax +inal 6ithholding Tax at *ource

*/C. CD. 6ithholding of Tax at *ource. 3 #'& 6ithholding of +inal Tax on Certain Incomes. 3 *ub:ect to rules and regulations the *ecretar! of +inance ma! promulgate, upon the recommendation of the Commissioner, reBuiring the filing of income tax return b! certain income pa!ees, the tax imposed or prescribed b! *ections 0?#4&#9&, 0?#4&#0&, 0?#C&, 0?#5&#9&; 0C#'&#0&, 0C#'& #1&, 0C#4&, 0C#C&, 0C#5&, 0C#/&, 0D#5&#8&, 0D#5&#0&, 0D#5&#1&, 0D#5&#C&, 0F #'&#?&, 0F#'&#C&, 0F#'&#D&#a&, 0F#'& #D&#b&, 0F#'&#D&#c&, 0F#4&#9&, 0F#4&#0&, 0F#4&#1&, 0F#4&#?&, 0F#4&#C&#a&, 0F#4&#C&#b&, 0F#4&#C&#c&; 11; and 0F0 of this Code on specified items of income shall be withheld b! pa!or3corporation and-or person and paid in the same manner and sub:ect to the same conditions as provided in *ection CF of this Code.
Once full pa!ment has been withheld and remitted, there is no more tax obligation. The withholding agent is entitled to refund or tax credit. #CI% v 6ander& rinciples of +inal 6ithholding Tax #!ection ".:= $A%/ RR ",-.% o The amount of tax withheld is full and final o The liabilit! for pa!ment of the tax rests primaril! on the withholding agent as pa!or.
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Taxation One: Outline with Codals i. In case he fails to withhold, he will be liable for the deficienc!. The pa!ee is not reBuired to file and income tax return for the particular income. The finalit! of the withheld tax is limited on the at particular income and will not extend to the pa!ees) other tax liabilit! on said income. i. +or example a ban. received income sub:ect to final withholding tax, the same income can still be sub:ect to a percentage tax. 4asicall!, items under passive income are sub:ect to +I<'" T'T. 'nd then !ou have other +I<'" T'T/* here and there #li.e the +4T, 4 %T, Capital 2ains Tax, etc&. 'n!wa!, here)s a rundown. 'gain, these ma! or ma! not be complete. Income subDect to 'inal 7ithholdin( Tax o& CITII0;! and 'inal Tax R0!I)0;T A<I0;! 9. Interest under the expanded foreign currenc! deposit s!stem D.CL 0. %o!alt! from boo.s, literar! wor.s, O musical compositions 9=L 1. %o!alt! other than above 0=L ?. Interest on an! current ban. deposit, !ield or other monetar! benefits 0=L from deposit substitute, trust fund O similar arrangement C. ri,e exceeding 9=,=== 0=L I. Other winnings, except hil Charit! *weepsta.es O "otto 0=L D. 5ividend from a domestic corp, or from a :oint stoc. compan!, insurance or mutual fund compan!, O regional operating headBuarters of 9=L multinational compan! or share in the distributive net income after tax o a partnership #except a general professional partnership&, :oint stoc. or :oint venture or consortium taxable as a corporation F. Capital gains from %/'" %O /%T; located here classified as C' IT'" IL assets E. Capital gains from sale of shares of stoc. of a domestic corporation, CL-9=L not listed and traded thru a local stoc. exchange o o ;O;,R0!I)0;T A<I0; 0;GAG0) I; TRA)0 OR BII 9. Interest under the expanded foreign currenc! deposit s!stem 0. %o!alt! from boo.s, literar! wor.s, O musical compositions 1. %o!alt! other than above ?. Interest on an! current ban. deposit, !ield or other monetar! benefits from deposit substitute, trust fund O similar arrangement C. ri,e exceeding 9=,=== I. Other winnings, except hil Charit! *weepsta.es O "otto D. 5ividend from a domestic corp, or from a :oint stoc. compan!, insurance or mutual fund compan!, O regional operating headBuarters of multinational compan! or share in the distributive net income after tax o a partnership #except a general professional partnership&, :oint stoc. or :oint venture or consortium taxable as a corporation F. Capital gains from %/'" %O /%T; located here classified as C' IT'" assets E. Capital gains from sale of shares of stoc. of a domestic corporation, not listed and traded thru a local stoc. exchange
7#empt% 9=L 0=L 0=L 0=L 0=L I>?
6%
CL-9=L
4asicall!, citi,ens-resident aliens and non3resident aliens are the same except for the italicized items
;on,resident Alien ;OT en(a(ed in trade or biz On income from '"" sources within the hilippines Capital gains from %/'" %O /%T; located here classified as C' IT'"
0CL IL
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Taxation One: Outline with Codals assets Capital gains from sale of shares of stoc. of a domestic corporation, not listed and traded thru a local stoc. exchange !pecial Aliens /mplo!ed b! %OJU /mplo!ed b! O4> /mplo!ed b! +oreign etroleum *ervice Contractors O *ubcontractors )omestic Corporations 9. Interest under the expanded foreign currenc! deposit s!stem 0. %o!alt! of all t!pes within the hilippines o %o!alt! from abroad7 /nters the taxable income 1=L tax rate 1. Interest on an! current ban. deposit, !ield or other monetar! benefits from deposit substitute, trust fund O similar arrangement ?. Income 4; ' 5/ O*ITO%; 4'<R under the +C5> C. Capital gains from %/'" %O /%T; located here classified as C' IT'" assets I. Capital gains from sale of shares of stoc. of a domestic corporation, not listed and traded thru a local stoc. exchange 'orei(n Resident Corporations 9. Interest under the expanded foreign currenc! deposit s!stem 0. %o!alt! of all t!pes within the hilippines o %o!alt! from abroad7 0xempt. #remember, onl! taxed from sources within the hilippines& 1. Interest on an! current ban. deposit, !ield or other monetar! benefits from deposit substitute, trust fund O similar arrangement ?. Capital gains from %/'" %O /%T; located here classified as C' IT'" assets C. Capital gains from sale of shares of stoc. of a domestic corporation, not listed and traded thru a local stoc. exchange I. 4ranch rofit %emittances D. Offshore 4an.ing >nit 'orei(n ;on,resident Corp 9. income from '"" *O>%C/* within the hilippines 0. b! a non3resident cinematographic film owner-distributor 1. gross rentals, lease and charter fees b! a non3resident owner or lessor of vessels to +ilipino citi,ens or corps ?. dividends from a domestic foreign corp #sub:ect to mutual tax credit& C. interest on foreign loans Others +ringe 4enefit Taxes Informer)s reward Creditable 6ithholding Tax
$B% %ithholdin# of +redita&le Tax at /ource . 3 The *ecretar! of +inance ma!, upon the recommendation of the Commissioner, reBuire the withholding of a tax on the items of income pa!able to natural or :uridical persons, residing in the hilippines, b! pa!or3corporation-persons as provided for b! law, at the rate of not less than one $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
CL-9=L
9CL #except income sub:ect to +4T& 9CL 9CL 'inal Tax D.CL 0=L 0=L 9=L IL CL-9=L
D.CL 0=L
0=L IL CL-9=L 9CL 9=L 10L 0CL ?.CL 9CL 0=L 10L on grossed up monetar! value 9=L
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percent #9L& but not more than thirt!3two percent #10L& thereof, which shall be credited against the income tax liabilit! of the taxpa!er for the taxable !ear.
Creditable tax must be withheld 'T *O>%C/, but should still be included in the tax return of the recipient. o 'n! excess shall be refunded and an! deficienc! shall be paid b! the taxpa!er. The liabilit! to withhold tax arises upon the accrual, not upon actual remittance5 The purpose of the withholding tax is to compel the agent to withhold under all circumstances. o Thus, it is when the right to receive income arises that determines when to include that income as gross income, and when to appl! withholding tax. #+ilipinas *!nthetic v C'& Creditable withholding tax intends to approximate the tax on the pa!ee. The subseBuent remittal does not remove the burden on the income recipient. Je still has to file for the credit. The pa!or withholds, and the pa!ee gets credit. This is done so that the pa!or has expenses that can be deducted, according to *ection 1? #.&
!ome Income !ubDect to CR0)ITAB<0 7ithholdin( Tax $!ection ".:=B & ".:=."/ RR ",-.% professional fees, talent fees, rendered b! individuals 9=L same, but rendered b! :uridical persons CL %entals for continued use or possession of real properties used in bi,, which CL the pa!or has not ta.en title cinematorgraphic film rentals and other pa!ments CL Income pa!ments to certain contractors, general engineering, general 9L building, specialt! and other contractors Income distributed to the beneficiaries of estates O trusts #except if alread! 9CL sub:ect to final withhold or tax3exempt& Income pa!ment to certain bro.ers O agents, customs, insurance, real CL estate O commercial bro.ers O fees of agents of pro entertainers ro fees paid to medical practitioners b! hospitals or clinics or b! patients 9=L #see %% 903EF below& %eal propert! which are <OT capital assets sold b! a person engaged in the 9.CL-1L-CL real estate bi, If <OT engaged in real estate bi, #see p. E& D.CL On additional pa!ments b! importers, shipping O airline companies to 9CL government personnel for overtime services On the amount paid b! an! credit card compan! to an! bi, entit! .CL representing the sale of goods, services made b! them to cardholders a!ments made b! an! of the top C,=== corporations to their local supplier 9L of goods a!ments b! the government to local supplier of goods #except if below 9L 9=,===& If the service b! a medical practitioner was thru a pro partnership of the CL medical profession $RR *",-.% The hospital-clinic must withhold the tax <o withholding tax applies if there is proof that no professional fee has been charged If the pa!or is a "'%2/ T'T ';/%, all pa!ments are sub:ect to withholding tax of 9L if engaged in goods or 0L if engaged in services, if no specific rates under 03EF. *o that a pa!or can be exempt from withholding tax, the pa!ee should also be exempt.
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%eturn and a!ment of Tax

*/C. CF. %eturns and a!ment of Taxes 6ithheld at *ource. 3 #'& Uuarterl! %eturns and a!ments of Taxes 6ithheld. 3 Taxes deducted and withheld under *ection CD b! withholding agents shall be covered b! a return and paid to, except in cases where the Commissioner otherwise permits, an authori,ed Treasurer of the cit! or municipalit! where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld b! the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. The return for final withholding tax shall be filed and the pa!ment made within twent!3five #0C& da!s from the close of each calendar Buarter, while the return for creditable withholding taxes shall be filed and the pa!ment made not later than the last da! of the month following the close of the Buarter during which withholding was made: rovided, That the Commissioner, with the approval of the *ecretar! of +inance, ma! reBuire these withholding agents to pa! or deposit the taxes deducted or withheld at more freBuent intervals when necessar! to protect the interest of the government. #4& *tatement of Income a!ments $ade and Taxes 6ithheld. 3 /ver! withholding agent reBuired to deduct and withhold taxes under *ection CD shall furnish each recipient, in respect to his or its receipts during the calendar Buarter or !ear, a written statement showing the income or other pa!ments made b! the withholding agent during such Buarter or !ear, and the amount of the tax deducted and withheld therefrom, simultaneousl! upon pa!ment at the reBuest of the pa!ee, but not late than the twentieth #0=th& da! following the close of the Buarter in the case of corporate pa!ee, or not later than $arch 9 of the following !ear in the case of individual pa!ee for creditable withholding taxes. +or final withholding taxes, the statement should be given to the pa!ee on or before Manuar! 19 of the succeeding !ear. #C& 'nnual Information %eturn. 3 /ver! withholding agent reBuired to deduct and withhold taxes under *ection CD shall submit to the Commissioner an annual information return containing the list of pa!ees and income pa!ments, amount of taxes withheld from each pa!ee and such other pertinent information as ma! be reBuired b! the Commissioner. In the case of final withholding taxes, the return shall be filed on or before Manuar! 19 of the succeeding !ear, and for creditable withholding taxes, not later than $arch 9 of the !ear following the !ear for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved b! the *ecretar! of +inance, upon recommendation of the Commissioner, shall be sufficient compliance with the reBuirements of *ection IF of this Title in respect to the income pa!ments. The Commissioner ma!, b! rules and regulations, grant to an! withholding agent a reasonable extension of time to furnish and submit the return reBuired in this *ubsection. #5& Income of %ecipient. 3 Income upon which an! creditable tax is reBuired to be withheld at source under *ection CD shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him sub:ect to the provisions of *ection 0=?; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of *ection CI. 'll taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereb! considered trust funds and shall be maintained in a separate account and not commingled with an! other funds of the withholding agent. #/& %egistration with %egister of 5eeds. 3 <o registration of an! document transferring real propert! shall be effected b! the %egister of 5eeds unless the Commissioner or his dul! authori,ed representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if an!, has been paid: rovided, however, That the information as ma! be reBuired b! rules and regulations to be prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, shall be annotated b! the %egister of 5eeds in the Transfer Certificate of Title or Condominium Certificate of Title: rovided, further, That in cases of transfer of propert! to a corporation, pursuant to a merger, consolidation or reorgani,ation, and where the law allows deferred recognition of income in accordance with *ection ?=, the information as ma! be reBuired b! rules and regulations to be prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner, shall be annotated b! the %egister of 5eeds at the bac. of the Transfer Certificate of Title or Condominium Certificate of Title of the real propert! involved: rovided, finall!, That an! violation of this provision b! the %egister of 5eeds shall be sub:ect to the penalties imposed under *ection 0IE of this Code.
6ithholding agents must file a return and pa! to: o 'n authori,ed agent ban. o %evenue district officer o Collection agent o 5ul! authori,ed treasure of the cit! or municipalit! where he resides or has his place of bi,ness These taxes must be maintained in a separate account and <OT co3mingled with an! other funds of the withholding agent
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Taxation One: Outline with Codals 6hen to file and pa! o +or +I<'" withholding tax, within 0C da!s from the close of each calendar Buarter o +or C%/5IT'4"/ withholding tax, not later than the last da! of the month following the close of the Buarter which withholding was made If there is an! excess, it shall be either credited or refunded. If there is deficienc!, then it shall be paid b! the taxpa!er.
6ithholding on 6ages 'pplies to '"" /$ "O;/5 individuals whether citi,ens or aliens deriving income from compensation for services rendered in the hil
!0C. =.. Definitions. 3 's used in this Chapter: $A% %a#es. 3 The term NwagesN means all remuneration #other than fees paid to a public official& for services performed b! an emplo!ee for his emplo!er, including the cash value of all remuneration paid in an! medium other than cash, except that such term shall not include remuneration paid: #9& +or agricultural labor paid entirel! in products of the farm where the labor is performed, or #0& +or domestic service in a private home, or #1& +or casual labor not in the course of the emplo!erNs trade or business, or #?& +or services b! a citi,en or resident of the hilippines for a foreign government or an international organi,ation. If the remuneration paid b! an emplo!er to an emplo!ee for services performed during one3half #9-0& or more of an! pa!roll period of not more than thirt!3one #19& consecutive da!s constitutes wages, all the remuneration paid b! such emplo!er to such emplo!ee for such period shall be deemed to be wages; but if the remuneration paid b! an emplo!er to an emplo!ee for services performed during more than one 3half #9-0& of an! such pa!roll period does not constitute wages, then none of the remuneration paid b! such emplo!er to such emplo!ee for such period shall be deemed to be wages. $B% Payroll Period. 3 The term Npa!roll periodN means a period for which pa!ment of wages is ordinaril! made to the emplo!ee b! his emplo!er, and the term (miscellaneous payroll period( means a pa!roll period other than, a dail!, wee.l!, biwee.l!, semi3monthl!, monthl!, Buarterl!, semi3annual, or annual period. $C% Employee. 3 The term Nemplo!eeN refers to an! individual who is the recipient of wages and includes an officer, emplo!ee or elected official of the 2overnment of the hilippines or an! political subdivision, agenc! or instrumentalit! thereof. The term (employee( also includes an officer of a corporation. $)% Employer. 3 The term (employer( means the person for whom an individual performs or performed an! service, of whatever nature, as the emplo!ee of such person, except that: #9& If the person for whom the individual performs or performed an! service does not have control of the pa!ment of the wages for such services, the term (employer( #except for the purpose of *ubsection #'& means the person having control of the pa!ment of such wages; and #0& In the case of a person pa!ing wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the hilippines, the term (employer( #except for the purpose of *ubsection #'& means such person.
6ages are all remuneration other than fees paid to a public official for services performed b! an emplo!ee for his emplo!er #cash or .ind&. o /TC/ T i. 'gricultural labor paid entirel! in products of the farm where the labor is perfomed ii. 5omestic service in a private home #maids& iii. Casual labor not in the course of the emplo!er)s trade or bi, iv. *ervices b! a citi,en or resident of the hil for a foreign gov or international org
!0C. =-. Income Tax +ollected at /ource.$A% 'e(uirement of %ithholdin#5 3 /xcept in the case of a minimum wage earner as defined in *ection 00#JJ& of this code, ever! emplo!er ma.ing pa!ment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed b! the *ecretar! of +inance, upon recommendation of the Commissioner $B% Tax Paid &y 'ecipient. 3 If the emplo!er, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as reBuired under this Chapter, and thereafter the tax against which such tax ma! be credited is paid, the tax so reBuired to be deducted and withheld shall not be collected from the emplo!er; but this *ubsection shall in no case relieve the emplo!er from liabilit! for an! penalt! or addition to the tax otherwise applicable in respect of such failure to deduct and withhold. $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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$C% 'efunds or +redits5 3 #9& 7mployer5 3 6hen there has been an overpa!ment of tax under this *ection, refund or credit shall be made to the emplo!er onl! to the extent that the amount of such overpa!ment was not deducted and withheld hereunder b! the emplo!er. #0& 7mployees5 3The amount deducted and withheld under this Chapter during an! calendar !ear shall be allowed as a credit to the recipient of such income against the tax imposed under *ection 0?#'& of this Title. %efunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated b! the *ecretar! of +inance, upon recommendation of the Commissioner. 'n! excess of the taxes withheld over the tax due from the taxpa!er shall be returned or credited within three #1& months from the fifteenth #9C & da! of 'pril. %efunds or credits made after such time shall earn interest at the rate of six percent #IL& per annum, starting after the lapse of the three3month period to the date the refund of credit is made. %efunds shall be made upon warrants drawn b! the Commissioner or b! his dul! authori,ed representative without the necessit! of counter3signature b! the Chairman, Commission on 'udit or the latterNs dul! authori,ed representative as an exception to the reBuirement prescribed b! *ection ?E, Chapter F, *ubtitle 4, Title 9 of 4oo. Q of /xecutive Order <o. 0E0, otherwise .nown as the 'dministrative Code of 9EFD. $ )% Personal Exemptions. 3 $*% In General. 3 >nless otherwise provided b! this Chapter, the personal and additional exemptions applicable under this Chapter shall be determined in accordance with the main provisions of this Title. $"% Exemption +ertificate 5 3 #a& When to &ile5 3 On or before the date of commencement of emplo!ment with an emplo!er, the emplo!ee shall furnish the emplo!er with a signed withholding exemption certificate relating to the personal and additional exemptions to which he is entitled. #b& 0hange o! 2tatus. 3 In case of change of status of an emplo!ee as a result of which he would be entitled to a lesser or greater amount of exemption, the emplo!ee shall, within ten #9=& da!s from such change, file with the emplo!er a new withholding exemption certificate reflecting the change. #c& 8se o! 0erti!icates. 3 The certificates filed hereunder shall be used b! the emplo!er in the determination of the amount of taxes to be withheld. #d& &ailure to &urnish 0erti!icate. 3 6here an emplo!ee, in violation of this Chapter, either fails or refuses to file a withholding exemption certificate, the emplo!er shall withhold the taxes prescribed under the schedule for ,ero exemption of the withholding tax table determined pursuant to *ubsection #'& hereof. $0% %ithholdin# on $asis of Avera#e %a#es. 3 The Commissioner ma!, under rules and regulations promulgated b! the *ecretar! of +inance, authori,e emplo!ers to: #9& estimate the wages which will be paid to an emplo!ee in an! Buarter of the calendar !ear; #0& determine the amount to be deducted and withheld upon each pa!ment of wages to such emplo!ee during such Buarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and #1& deduct and withhold upon an! pa!ment of wages to such emplo!ee during ;such Buarter such amount as ma! be reBuired to be deducted and withheld during such Buarter without regard to this *ubsection. $'% Hus&and and %ife. 3 6hen a husband and wife each are recipients of wages, whether from the same or from different emplo!ers, taxes to be withheld shall be determined on the following bases: #9& The husband shall be deemed the head of the famil! and proper claimant of the additional exemption in respect to an! dependent children, unless he explicitl! waives his right in favor of his wife in the withholding exemption certificate. #0& Taxes shall be withheld from the wages of the wife in accordance with the schedule for ,ero exemption of the withholding tax table prescribed in *ubsection #5&#0&#d& hereof. $G% "onresident Aliens. 3 6ages paid to nonresident alien individuals engaged in trade or business in the hilippines shall be sub:ect to the provisions of this Chapter. $3% 8ear-End Ad2ustment. 3 On or before the end of the calendar !ear but prior to the pa!ment of the compensation for the last pa!roll period, the emplo!er shall determine the tax due from each emplo!ee on taxable compensation income for the entire taxable !ear in accordance with *ection 0?#'&. The difference between the tax due from the emplo!ee for the entire !ear and the sum of taxes withheld from Manuar! to <ovember shall either be withheld from his salar! in 5ecember of the current calendar !ear or refunded to the emplo!ee not later than Manuar! 0C of the succeeding !ear.
th
2eneral rule: /ver! emplo!er ma.ing pa!ment of wages shall deduct from O withhold tax o /xcept: for $inimum 6age /arners %efunds or credits o To the emplo!er @w hen there was an overpa!ment but onl! to the extent that the amount of overpa!ment was not withheld b! the emplo!er o To the emplo!ee @ an! excess of taxes withheld shall be returned or credited within 1 monts from 'pril 9C, these refunds will earn interest at IL per annum
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Taxation One: Outline with Codals after the lapse of the 1 month period 4efore the start of emplo!ment, the emplo!ee should furnish the emplo!er with a signed withholding exemption certificate and additional exemptions to which he is entitled. o If he doesn)t, the emplo!er shall withhold tax under S/%O exemption. 6ages paid to non3resident aliens engaged in trade or bi, are also paid sub:ect to withholding tax. *ee codal for husband and wife.
!0C. .+. 1ia&ility for Tax5 ' $A% Employer. @ The emplo!er shall be liable for the withholding and remittance of the correct amount of tax reBuired to be deducted and withheld under this Chapter. If the emplo!er fails to withhold and remit the correct amount of tax as reBuired to be withheld under the provision of this Chapter, such tax shall be collected from the emplo!er together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit. $B% Employee5 3 6h@re an emplo!ee fails or refuses to file the withholding exemption certificate or willfull! supplies false or inaccurate information thereunder, the tax otherwise reBuired to be withheld b! the emplo!er shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of pa!ment. On the other hand, excess taxes withheld made b! the emplo!er due to: #9& failure or refusal to file the withholding exemption certificate; or #0& false and inaccurate information shall not be refunded to the emplo!ee but shall be forfeited in favor of the 2overnment.
/mplo!er liable if he fails to withhold O remit. It shall be collected from him with penalties. /mplo!ee liable if he fails to file the withholding tax certificate. The tax withheld b! the emplo!er shall be collected from the emplo!ee including penalties. /xcess taxes withheld because of his refusal to file certificate or giving false information shall be forfeited to the government.
!0C. .*. -ilin# of 'eturn and Payment of Taxes %ithheld . 3 /x@ept as the Commissioner otherwise permits, taxes deducted and withheld b! the emplo!er on wages of emplo!ees shall be covered b! a return and paid to an authori,ed agent ban.; Collection 'gent, or the dul! authori,ed Treasurer of the cit! or municipalit! where the emplo!er has his legal residence or principal place of business, or in case the emplo!er is a corporation, where the principal office is located. The return shall be filed and the pa!ment made within twent!3five #0C& da!s from the close of each calendar Buarter: $rovided, however, That the Commissioner ma!, with the approval of the *ecretar! of +inance, reBuire the emplo!ers to pa! or deposit the taxes deducted and withheld at more freBuent intervals, in cases where such reBuirement is deemed necessar! to protect the interest of the 2overnment. The taxes deducted and withheld b! emplo!ers shall be held in a special fund in trust for the 2overnment until the same are paid to the said collecting officers.
*hould be filed and paid within 0C da!s from the close of each calendar Buarter.
!0C. .". 'eturn and Payment in +ase of Government Employees . 3 If@the emplo!er is the 2overnment of the hilippines or an! political subdivision, agenc! or instrumentalit! thereof, the return of the amount deducted and withheld upon an! wage shall be made b! the officer or emplo!ee having control of the pa!ment of such wage, or b! an! officer or emplo!ee dul! designated for the purpose.
6ithholding tax b! government agencies: o Income pa!ments, except an! single purchase of 9=,=== O below, made b! a government office, national or local, including 2OCCs, on their purchase og foods from local suppliers sub:ect to withholding tax of 9L
!0C. .9. /tatements and 'eturns5 3 $A% 'e(uirements5 3 /v@r! emplo!er reBuired to deduct and withhold a tax shall furnish to each such emplo!ee in respect of his emplo!ment during the calendar !ear, on or before Manuar! thirt!3first #19 st& of the succeeding !ear, or if his emplo!ment is terminated before the close of such calendar !ear, on the same da! of which the last pa!ment of wages is made, a written statement confirming the wages paid b! the emplo!er to such emplo!ee during the calendar !ear, and the amount of tax deducted and withheld under this Chapter in respect of such wages. The statement reBuired to be furnished b! this *ection in respect of an! wage shall contain such other $ic.e! Ingles 0' #0C& 'teneo "aw 0=90 'tt!. $ontero #>pdated: 5ecember 9?, 0=99 @ $ic.e!&
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information, and shall be furnished at such other time and in such form as the *ecretar! of +inance, upon the recommendation of the Commissioner, ma!, b! rules and regulation, prescribe. $B% Annual Information 'eturns. 3 /v@r! emplo!er reBuired to deduct and withhold the taxes in respect of the wages of his emplo!ees shall, on or before Manuar! thirt!3first #19 st& of the succeeding !ear, submit to the Commissioner an annual information return containing a list of emplo!ees, the total amount of compensation income of each emplo!ee, the total amount of taxes withheld therefrom during the !ear, accompanied b! copies of the statement referred to in the preceding paragraph, and such other information as ma! be deemed necessar!. This return, if made and filed in accordance with rules and regulations promulgated b! the *ecretar! of +inance, upon recommendation of the Commissioner, shall be sufficient compliance with the reBuirements of *ection IF of this Title in respect of such wages. $C% Extension of time. 3 Th@ Commissioner, under such rules and regulations as ma! be promulgated b! the *ecretar! of +inance, ma! grant to an! emplo!er a reasonable extension of time to furnish and submit the statements and returns reBuired under this *ection.
emplo!ees must submit annual return on or before Man 19 of the succeeding !ear containing all relevant emplo!ee info.
;O> $'5/ IT888 6OOJOOO88888 #unless !ou want to review again, then good luc.8&
91

Taxation One Complete

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Copyright:

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Taxation One Complete

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+ amdg

;es ;es ;es

<o ;es <o

<on3resident aliens engaged in business in the hilippines

$inimum wage earner

Taxation One: Outline with Codals

9=L 0=L 0=L 0=L 0=L 9=L

CL of the net capital gains 9=L of the net capital gains

If sale was made to the government or to 2OCCs

0C,=== per dependent

ersonal exemption allowable to nonresident alien individuals

If not engaged in trade, business or in the exercise of a profession

Optional *tandard 5eduction

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Taxation One: Outline with Codals

<on3resident aliens not engaged in business in the hilippines

Taxation One: Outline with Codals

Taxation One: Outline with Codals

0. Income Tax Rates

Taxation One: Outline with Codals

Tax rate of 5omestic Corporations

Tax rate of proprietar! educational institutions and hospitals

Taxation One: Outline with Codals

'inal Tax D.CL 0=L 0=L exempt

If sale was made to the government or to 2OCCs

0. If the seller is not habituall! engaged in the real estate business

4eginning with the fourth !ear of operations, a domestic corporation is taxed b!

/xample $CIT <ormal Income tax /xcess $CIT

?. Income Tax on Resident 'orei(n Corporations

Taxation One: Outline with Codals

Tax rate o& 'orei(n Resident Corporations

Offshore 4an.ing >nits

>. Income Tax on ;on,resident 'orei(n Corporations In general

Tax rate on certain incomes of non3resident foreign corporations

'inal Tax 0=L 9CL

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Taxation One: Outline with Codals /xclusions

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Charitable and other Contributions

Taxation One: Outline with Codals

%esearch and 5evelopment

Taxation One: Outline with Codals 'dditional reBuirements for deductibilit!

Optional *tandard 5eduction

Taxation One: Outline with Codals

R. Capital Gains and <osses Capital 'ssets

Taxation One: Outline with Codals

Corp engaged in real estate business

Individual engaged in trade or business

Taxation One: Outline with Codals

Taxation One: Outline with Codals

T. !itus o& Taxation

Taxation One: Outline with Codals

Taxation One: Outline with Codals

Taxation One: Outline with Codals