Income Tax Rates & Classifications

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Income Taxation Reviewer
UNIVERSITY OF THE PHILIPPINES COLLEGE OF LAW TAXATION I Atty. Rachel P. Follosco INCOME TAXATION PART I INTRODUCTION A. Definition of Income Tax/nature/purpose Income Tax is a tax on the net income or the entire income realized in one taxable year. It is levied upon corporate ad individual incomes in excess of specified amounts, less certain deductions and/or specified exemptions in cases permitted by law. Income Tax is defined as a tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on the persons income, emoluments, profits and the like (Fisher v. Trinidad). Nature and Purpose ARANDIA-VILLANUEVA: 1. It is a national tax, or one imposed by the national government. 2. It is an excise tax, because it is imposed on the right to generate or receive income through labor, capital, and others, and not a tax on persons or property. 3. It is a direct tax since it is imposed on the person who is personally bound to pay the tax, a burden he cannot shift to another. 4. It is a general tax because it is primarily intended to provide large amounts of revenue to the government, and secondarily, to offset the regressive sales and consumption taxes, and to mitigate the evils of inequalities in the distribution of wealth. 5. It is progressive because the tax rate increases as the tax base increases. B. Overview of the Present Philippine Income Tax System
income tax rates, in the case of individuals, or the two-tiered income tax rates, in the case of corporations. It did not matter whether the income received by the taxpayer is classified as compensation income, business or professional income, passive investment income, capital gain, or other income. All items of gross income, deductions, and personal and additional exemptions, if any, are reported in one income tax return, and one set of tax rates are applied on the tax base. Schedular tax system Different types of incomes are subject to different sets of graduated or flat income tax rates. The applicable tax rate(s) will depend on the classification of the taxable income and the basis could be gross income or net income. Semi-schedular or semi-global tax system Either the global tax system or the scheduler tax system, or both tax systems, may be applied, depending on the nature of the income realized by the taxpayer during the year.
b. General classifications of income i.

Compensation income In general, the term compensation means all remuneration for services performed by an employee for his employer under an employeremployee relationship unless specifically excluded by the Tax Code. Ex. salaries, wages, bonus, remuneration, honorarium, benefits and allowances, etc. However, compensation shall not include remuneration paid: (a) For agricultural labor paid entirely in products of the farm where the labor is performed; (b) For domestic service in a private home; (c) For casual labor not in the course of the employers trade or business; or (d) For the services by a citizen or resident of the Philippines for a foreign government or an international organization (Sec. 78(A), NIRC)
1. Schedular in nature - income is taxed

depending on the source/classification of the income
ii.
Business income Business income of a taxpayer generally comes from the sales of goods, properties, or services. The term engaged in trade or business implies a continuity of commercial dealings and arrangements and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial
a. Schedular tax system v. global tax system

MAMALATEO: Global tax system The total allowable deductions as well as personal and additional exemptions, in the case of individuals, or the total allowable deductions only, in the case of corporations, are deducted from the gross income to arrive at the net taxable income subject to graduated
1 | Follosco Tax Reviewer
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gain or for the purpose and object of the business organization. aa. Income from trading/ merchandising/ manufacturing/mining Gross Income means the total sales, less the cost of goods sold, plus any income from investments and from the incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing cost of goods sold. (Sec.43, Rev. Reg. 2) bb. Income from practice of profession Professional income refers to the fees received by a professional from the practice of his profession, provided that there is no employeremployee relationship between him and his clients. The existence or absence of the EE-ER relationship determines whether the income shall be treated as compensation income or professional fee. This fact is material fro the purposes of taxation because there is no deduction allowed against compensation income, whereas allowable deductions may be made from professional income. cc. Income from sale of services Gross income is computed by deducting all direct costs and expenses as prescribed in RMC 4-2003. iii. Passive income It is when an asset does not actively participate or is involve in business but the asset still earns income (e.g. royalties, dividends, annuities, rentals). It is taxable by the mere fact of ownership of property that earns income. It is subject to final tax and not included in the computation of gross income for purposes of determining income tax due. (Arandia-Villanueva) aa. Passive income from Philippine sources subject to final tax bb. Passive income from Philippine sources NOT subject to final tax cc. Passive income from sources outside of the Philippines (I couldnt find anything for aa, bb, cc above, sorry. See discussion on Passive Income under Part II) Final Withholding Tax the amount of income withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as withholding
agent. In case of failure to withhold or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. Creditable Withholding Tax taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee of said income. The income recipient is still required to file an income tax return, to report the income and/or pay the difference between the tax withheld and the tax due. iv. Capital gains These are gains from sale of capital assets. The term Capital assets is defined under Section 39 A (1). Interest Income can never be considered as capital gains because it does not involve sale of capital assets aa. Income from dealings in shares of stock of domestic corporations 1. If Seller or Transferor is dealer in securities the shares of stock shall be treated as ordinary assets 2. If NOT a Dealer in Securities shares of stock are regarded as capital assets (capital assets and ordinary assets will be discussed further later under Types of Properties) bb. Income from dealings in real property located in the Philippines The rules on the sale or exchange of real property located in the Philippines are summarized as follows: a. If the seller or transferor is a real estate dealer, the real property sold is an ordinary asset b. If the seller or transferor is NOT a real estate dealer, determine whether the real property sold or transferred is (a) used in the taxpayers trade, business, or profession, or (b) treated as fixed asset as used in his trade, business, or profession, subject to depreciation. If YES, property is ordinary asset If NO, property is capital asset cc. Income from dealings in other capital assets other than items (iv)(aa and bb) above All other capital assets, except shares of stocks of a domestic corporation and real property, shall be subject to the graduated income tax (if a resident citizen) or normal corporate income tax (if a domestic corporation), since they are taxed on worldwide income. Such income is exempt from income tax in the case of non-resident
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citizens, alien individuals, and foreign corporations because they are taxed only from sources within the Philippines. v. Income from whatever source derived The words income from any source whatever are broad enough to cover gains contemplated here. These words disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains. (Gutierrez
only on income derived from sources within the Philippines. Note: In short, only resident citizens and domestic corporations are taxable on income derived from all sources, while other kinds of taxpayers are subject only to tax derived from Philippines sources (De 180 day rule the moment an alien stays in the Philippines for 180 days, he is considered as a nonresident alien engaged in trade and business whether or not he is engaged in business and he earned income.
Leon).
v. Collector)
2. a.
Income is taxed depending classification of the taxpayer Basis of classification of taxpayers
on
the
Corporations v. Individuals Individuals are subject to compensation income tax; Corporations are not subject to compensation income tax Limited number of allowable deductions for individuals; almost all spectrum of allowable deductions available for corporations ii. Nationality (Citizen or Alien) iii. Residence (Resident or Non-Resident) b. General principles of income taxation in the Philippines
i.
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise
provided in this code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is
income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement vessel engaged exclusively in international trade shall be treated as an oversea contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable
working and deriving income from abroad as an overseas contract worker is taxable only on
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BASIS OF CLASSIFICATION OF TAXPAYERS
Resident (Taxable for income from within and without) ( Citizens Non-Resident (Taxable only for income from within)
Individuals
Resident Aliens (Taxable only for income from within)
Non-Resident Engaged in Trade and Business Non-Resident NOT Engaged in Trade and Business
Non-Resident
Resident (Taxable for income from within and without) Corporations ( Resident Foreign (Taxable only for income from within)
Non-Resident
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D. Basic Accounting Income Taxation 1. Taxable period
Concepts
Related
to
a. Calendar year b.
Starts from January 1 and ends on December 31 Fiscal year A year that commences on any other date other than January 1
SEC. 22 (P). The term taxable year means the calendar year or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. Taxable year includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the period for which such return is made. SEC. 22 (Q). The term fiscal year means an accounting period of twelve (12) months ending on the last day of any month other than December. SEC. 22 (R). The terms paid or incurred and paid or accrued shall be construed according to the method of accounting upon the basis of which the net income is computed under this Title. SEC. 43 General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year. SEC. 6. Power of the Commissioner to Make
remove his property therefrom or to hide or conceal his property, or is performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partly ineffective unless such proceedings are begun immediately, the Commissioner shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid, and said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time fixed in the demand made by the Commissioner. SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47. SEC. 47. Final or Adjustment Returns for a
Period of Less than Twelve (12) Months. (A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer,
assessments and Prescribe additional Requirements for Tax Administration and Enforcement. (D) Authority to Terminate Taxable Period. - When it
shall come to the knowledge of the Commissioner that a taxpayer is retiring from business subject to tax, or is intending to leave the Philippines or to
other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. (B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made.
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SEC. 51. Individual Return. (C) When to File. (1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year. (2) Individuals subject to tax on capital gains; (a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and (b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition. SEC. 52(B) Corporation Returns. (B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code. SEC. 166-172 Rev. Reg. #2 SECTION 166. General rule. The method of accounting regularly employed by the taxpayer in keeping his books, if such method clearly reflects his income is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting which clearly reflects his income, the computation shall be made in such manner as in the opinion of the Commissioner of Internal Revenue clearly reflects it. (See Section 137 of these regulations for computation of net income, and Section 38 for bases of computation. For the use of inventories, see Sections 144 to 151 of these regulations.) SECTION 167. Methods of accounting. It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Any approved standard method of accounting which reflects taxpayer's income may be adopted. Among the essentials are the following: (1) In all cases in which the production, purchase, or sale of merchandise of any kind is an income producing factor, inventories of the merchandise on hand (including finished goods, work
in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year in accordance with Sections 144 to 151 of these regulations; (2) Expenditures made during the year should be properly classified as between capital and income; that is to say, expenditures for items of plant, equipment, etc., which have a useful life extending substantially beyond the year should be charged to a capital account and not to an expense account; and (3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion, or obsolescence, any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve and not to current expenses. SECTION 168. Changes in accounting methods. The true income, computed under the law shall in all cases be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to his return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change. A taxpayer who changes the method of accounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purposes of this action, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deductions, such as a change from cash receipts and disbursements method to the accrual method, or vice versa; a change involving the basis of valuation employed in the computation of inventories (see Sections 144 to 151 of these regulations); a change from the cash or accrual method to the long-term contract method, or vice versa; a change in the long-term contract method from the percentage of completion basis to the completed contract basis or vice versa (see Section 44 of these regulations); or a change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for permission to change the method of accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the taxable year to be covered by the return. The application shall be accompanied by a statement specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless the taxpayer and the Commissioner of Internal
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Revenue agree to the terms and conditions under which the change will be effected. SECTION 169. Accounting period. Income tax returns, whether for individuals or for corporations, associations, or partnerships, are required to be made and their income computed for each calendar year ending on December 31st of every year. However, corporations, associations, or partnerships may with the approval of the Commissioner of Internal Revenue first secured, file their returns and compute their income on the basis of a fiscal year which means an accounting period of twelve months ending on the last day of any month other than December. But in no instance shall individual taxpayers be authorized to establish a fiscal year as basis for filing their returns and computing their income. (For authority to file on fiscal year basis see Section 172 of these regulations.) (Section 39 of the Code) SECTION 170. When included in gross income. Except as otherwise provided in Section 39 in the case of the death of a taxpayer, gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included as of a different period in accordance with the approved method of accounting followed by him. If a taxpayer has died there shall also be included in computing net income for the taxable period in which he died amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period, regardless of the fact that the decedent may have kept his books and made his returns on the basis of cash receipts and disbursements. (For income not reduced to possession but considered as constructively received and for examples of constructive receipt, see Sections 52 and 53 of these regulations. For the treatment of income from longterm contracts, see Section 44 of these regulations.) (Section 40 of the Code) SECTION 171. "Paid or incurred" and "paid or accrued". (a) The terms "paid or incurred" and "paid or accrued" will be construed according to the method of accounting upon the basis of which the net income is computed by the taxpayer. The deductions and credits must be taken for the taxable year in which "paid or accrued" or "paid or incurred", unless in order clearly to reflect the income such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was "paid or accrued" or "paid or incurred", he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner of Internal Revenue together with a complete statement of the facts upon which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period in which it was actually "paid or incurred", or "paid or accrued", as the case may be. Upon the audit of the return, the
Commissioner of Internal Revenue will decide whether the case is within the exception provided by the law, and the taxpayer will be advised as to the period for which the deduction or credit is properly allowable. (b) The provisions of paragraph (a) of this section in general are not applicable with respect to the taxable period during which the taxpayer dies. In such case there shall also be allowed as deductions and credits for such taxable period amounts accrued up to the date of his death if not otherwise allowable with respect to such period or a prior period, regardless of the fact that the decedent was required to keep his books and make his returns on the basis of cash receipts and disbursements. (See also Section 76 of these regulations.) (Section 41 of the Code) 2. Methods of accounting for taxable income and deductible expenses
Income and cost allocation and recognition rules (matching principle; cash method/accrual/mixed method of income recognition, depending on which method clearly reflects income) a. Cash v. accrual method of accounting
CLASS NOTES: Cash Method Income is recorded upon receipt Expenses is recorded upon disbursement Used more by small businesses Accrual Method Income recorded upon accrual or upon the moment you have done what is incumbent upon you to do If income is not yet accrued, it is considered as unearned income or liability even if you have been paid already Expenses considered as not incurred or paid but subject to matching. This means that expenses are allocated over the useful life of the asset Matching income to corresponding asset More accurate basis for accounting especially for big businesses. The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, when there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. For a taxpayer using the accrual method, the
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determinative question is, when do the facts present themselves in such as manner that the taxpayer must recognize income or expense?
prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business. SEC. 22 (R) (R) The terms "paid or incurred" and 'paid or accrued' shall be construed according to the method of accounting upon the basis of which the net income is computed under this Title. Sec. 51-53 Rev. Reg. 2 SECTION 51. When income is to be reported. Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefore in a later year, income is realized in that year, assuming that the money or property would have been income in the earlier year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off. SECTION 52. Income constructively received. Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt. SECTION 53. Examples of constructive receipt. When interest coupons have matured and are payable, but have not been cashed, such interest payment though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The distributive
(CIR v. Isabela Cultural Corporation)
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year. SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, 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 properly includible in respect of such period or a prior period. SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title shall be taken for the taxable year 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 clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, 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 properly allowable in respect of such period or a prior period. SEC. 50. Allocation of Income and Deductions. In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to
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share of the profits of a partner in a general copartnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has taxable status as income for the year of the credit. When the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of maturity of the share. SEC. 44 Rev. Reg. 2 SECTION 44. Long term contracts. Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term "longterm" contracts means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in par from such contracts may, as to such income, prepare their returns upon the following bases: (a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects, or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner of Internal Revenue may permit or require an amended return. (b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any
material and supplies charged to the work under the contract but remaining on hand at the time of the completion. Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return. b. Installment v. deferred payment plan v. percentage of completion (in long-term contracts)
Installment and deferred payment plan CLASS NOTES: If the total amount of initial payments received during the year of sale is: In excess of 25%, sale was made on deferred payment basis Less than 25%, sale was made on installment payment basis There is a difference with regard the tax treatment. Deferred payment plan (DPP) is considered as a cash sale. In short, income is recognized at the commencement of the transaction. Illustration: Purchase price = P100,000 DPP Installment Month July 5,000 1,000 Aug 5,000 1,000 Sept 5,000 1,000 Oct 5,000 1,000 Nov 5,000 1,000 5,000 1,000 Dec TOTAL 30,000 6,000 VAT Y=100K Y=6K Explanation: Under the DPP system, since the amount of initial payments during the taxable year was more than 25% of the purchase price (P30,000 is 30% of P100,000), then the taxpayer should declare as his income during that year the whole purchase price of P100,000. In installment plan, the taxpayer declares only what he receives during the year. Percentage of Completion 'Long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion.
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SEC. 48. Accounting for Long-Term Contracts. Income from long-term contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year. Persons 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 by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return. SEC. 49. Installment Basis. (A) Sales of Dealers in Personal Property. Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. (B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. (C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the
gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. (D) Change from Accrual to Installment Basis. If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded. SECS. 175-179 Rev. Reg. No. 2 (RR2) SECTION 175. Sale of real property involving deferred payments. Under Section 43 deferredpayment sales of real property include (a) agreements to purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments. Such sales either under (a) or (b), fall into two classes when considered with respect to the terms of sale, as follows: (1) Sales of property on the installment plan, that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made do not exceed 25 per cent of the selling price. (2) Deferred-payment sales not on the installment plan, that is sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made exceed 25 per cent of the selling price. In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as a part of the "selling price" but the amount of the mortgage, to the extent that it does not exceed the basis to the vendor of the property sold, shall not be considered as a part of the "initial payments" or of the "total contract price", as those terms are used in Section 43 of the Code, in Sections 174 and 176 of these regulations, and in this section. The term "initial payments" does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years. Commissions and other selling expenses paid or incurred by the vendor are not to be deducted or taken into account in determining the amount of the "initial payments," the "total contract price", or "the selling price". The term "initial
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payments" contemplates at least one other payment in addition to the initial payment. If the entire purchase price is to be paid in a lump sum in a later year, there being no payment during the first year, the income may not be returned on the installment basis. Income may not be returned on the installment basis where no payment in cash or property, other than evidences of indebtedness of the purchaser, is received during the first year, the purchaser having promised to make two or more payments, in later years. SECTION 176. Sale of real property on installment plan. In transactions included in class (1) in the preceding section the vendor may return as income from such transactions in any taxable year that proportion of the installment payments actually `received in that year which the total profit realized or to be realized when the property is paid for bears to the total contract price. If the purchaser defaults in any of his payments, and the vendor returning income on the installment basis reacquires the property sold, whether title thereto had been retained by the vendor or transferred to the purchaser, gain or loss for the year in which the reacquisition occurs is to be computed upon any installment obligations of the purchaser which are satisfied or discharged upon the reacquisition or are applied by the vendor to the purchase or bid price of the property. Such gain or loss is to be measured by the difference between the fair market value of the property acquired (including the fair market value of any fixed improvements placed on the property by the purchaser) and the basis in the hands of the vendor of the obligations of the purchaser which are so satisfied, discharged, or applied, with proper adjustment for any other amounts realized or costs incurred in connection with the reacquisition. The basis in the hands of the vendor of the obligations of the purchaser satisfied, discharged, or applied upon the reacquisition of the property will be the excess of the face value of such obligations over an amount equal to the income which would be returnable were the obligations paid in full. No deduction for a bad debt shall in any case be taken on account of any portion of the obligations of the purchaser which are treated by the vendor as not having been satisfied, discharged, or applied upon the reacquisition of the property, unless it is clearly shown that after the property was reacquired the purchaser remained liable for such portion; and in no event shall the amount of the deduction exceed the basis in the hands of the vendor of the portion of the obligations with respect to which the purchaser remained liable after the acquisition. If the property reacquired is bid in by the vendor at a foreclosure sale, the fair market value of the property shall be presumed to be the purchase or bid price thereof in the absence of clear and convincing proof to the contrary. If the property reacquired is subsequently sold, the basis for
determining gain or loss is the fair market value of the property at the date of reacquisition (including the fair market value of any fixed improvements placed on the property by the purchaser). If the vendor chooses as a matter of consistent practice to turn the income from installment sales on the straight accrual or cash receipts and disbursements basis, such a course is permissible, and the sales will be treated as deferred-payment sales not on the installment plan. SECTION 177. Deferred-payment sale of real property not on installment plan. In transactions included in class (2) in Section 175 of these regulations, the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash. If the vendor has retained title to the property and the purchaser defaults in any of his payments, and the vendor repossesses the property, the difference between (1) the entire amount of the payments actually received on the contract and retained by the vendor plus the fair-market value at the time of repossession of fixed improvements placed on the property by the purchaser and (2) the sum of the profits previously returned as income in connection therewith and an amount representing what would have been a proper adjustment for exhaustion, wear and tear, obsolescence, amortization, and depletion of the property during the period the property was in the hands of the purchaser had the sale not been made will constitute gain or loss, as the case may be to the vendor for the year in which the property is repossessed, and the basis of the property in the hands of the vendor will be the original basis at the time of the sale plus the fair market value at the time of repossession, of fixed improvements placed on the property by the purchaser. If the vendor has previously transferred title to the purchaser, and the purchaser defaults in any of his payments and the vendor reacquired the property, such reacquisition shall be regarded as a transfer by the vendor, in exchange for the property for such of the purchaser's obligations as are applied by the vendor to the purchase or bid price of the property. Such an exchange will be regarded as having resulted in the realization by the vendor of gain or loss, as the case may be for the year of reacquisition, measured by the difference between the fair market value of the property including fixed improvements placed by the purchaser on the property, and the amount of the obligations of the purchaser which were applied by the vendor to the purchase or bid price of the property. The fair market value of the property reacquired shall be presumed to be the amount for which it is bid in by the vendor in the absence of clear and convincing proof to the contrary. If the property reacquired is subsequently sold the basis for determining gain or loss is the fair market value of the property at the date of reacquisition including the
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fair market value of the fixed improvements placed on the property by the purchaser. SECTION 178. Sale of real estate in lots. Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the entire fair market value as of March 1, 1913, or the cost, if acquired subsequently to that date, shall be equitably apportioned to the several lots or parcels and made a matter of record on the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels may be returned as income for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss on every lot or parcel sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain or loss will be accounted for accordingly. SECTION 178(a). In all cases where a taxpayer sells during the year real or personal property on the installment basis, there should be attached to the income tax return a statement of each sale made during the year containing the following information: (a) Name of buyer (b) Address of buyer (c) Date of sale (d) Selling price (e) Payments received during the year corresponding to each sale. SECTION 179. Determination of the taxable net income of a controlled taxpayer. (A) DEFINITIONS. When used in this section (1) The term "organization" includes any organization of any kind, whether it be a sole proprietorship, a partnership, a trust, an estate, or a corporation or association, irrespective of the place where organized, where operated, or where its trade or business is conducted, and regardless of whether domestic or foreign, whether exempt or taxable, or whether affiliated or not. (2) The terms "trade" or "business" include any trade or business activity of any kind, regardless of whether or where organized, whether owned individually or otherwise, and regardless of the place where carried on. (3) The term "controlled" includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise. A presumption of control arises if income or deductions have been arbitrarily shifted. (4) The term "controlled taxpayer" means any one of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests.
(5) The terms "group" and "group of controlled taxpayers" mean the organizations, trades, or businesses owned or controlled by the same interests. (6) The term "true net income" means, in the case of a controlled taxpayer, the net income (or, as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the particular contract, transaction, arrangement, or other act) dealt with the other member or members of the group at arm's length. It does not mean the income, the deductions, or the item or element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrangement, the controlled taxpayer, or the interests controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding upon the parties thereto). (b) SCOPE AND PURPOSE. The purpose of Section 44 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. The interests controlling a group of controlled taxpayers are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its transactions and accounting record truly reflect the net income from the property and business of each of the controlled taxpayers. If, however, this has not been done, and the taxable net incomes are thereby understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene, and, by making such distributions, apportionments, or allocations as he may deem necessary of gross income or deductions, or of any item or element affecting net income, between/or among the controlled taxpayers constituting the group, shall determine the true net income of each controlled taxpayer dealing at arm's length with another uncontrolled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue to apply such provisions. (c) APPLICATION. Transactions between the controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid, or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in
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whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer. (Section 45 of the Code) 3. Distinction between tax accounting and financial accounting
CLASS NOTES: Basic difference is the timing and the requisites for deductability. In income taxation, there is delay in recognition of expenses, and there is recognition of income at the earliest time possible. The definition of GROSS INCOME is also different. In financial accounting, only the direct costs of production of the product (cost of goods sold) is deducted from gross sales. In tax accounting, there is a listing of allowable deductions in NIRC (see Sec. 32). For example, it may include Admin and Selling Expenses. CIR v. Wyeth Suaco 202 SCRA 135 FACTS: Wyeth Suaco was paying royalties, remuneration for technical services, and cash dividends to Wyeth International in London. Wyeth Suaco failed to remit withholding tax at source on these items during 1973. It argues that it was not liable to pay withholding tax at source on the accrued royalties and dividends because they have yet to be remitted or paid abroad. HELD: The records show that Wyeth Suaco adopted the accrual method of accounting wherein the effect of transactions and other events on assets and liabilities are recognized and reported in the time periods to which they relate rather than only when cash is received or paid. The "Report of Investigation" submitted by the tax examiner indicated that accrual was the basis of the taxpayer's return. Thus, private respondent recorded accrued royalties and dividends payable as well as the withholding tax at source payable on these incomes. Having deducted and withheld the tax at source and having recorded the withholding tax at source payable in its books of accounts, private respondent was obligated to remit the same to the Bureau of Internal Revenue. Consolidated Mines v. CTA 58 SCRA 618 FACTS: CIR argues that Consolidated Mines is using a hybrid or mixed method of accounting since it did not deduct as an expense the one-half of the Accounts Receivables as part of the 50-50 profit sharing scheme between Consolidated and Benguet Mines. HELD: Here we have to distinguish between (1) the method of accounting used by the Company in
determining its net income for tax purposes; and (2) the method of computation agreed upon between the Company and Benguet in determining the amount of compensation that was to be paid by the former to the latter. The parties, being free to do so, had contracted that in the method of computing compensation the basis were "cash receipts" and "cash payments." Once determined in accordance with the stipulated bases and procedure, then the amount due Benguet for each month accrued at the end of that month, whether the Company had made payment or not. To make the Company deduct as an expense one-half of the "Accounts Receivable" would, in effect, be equivalent to giving Benguet a right which it did not have under the contract, and to substitute for the parties' choice a mode of computation of compensation not contemplated by them. 18 Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not accruing said one-half as a deduction. The Company was not using a hybrid method of accounting, but was consistent in its use of the accrual method of accounting. (From footnote 1 of the case) While taxable income is based on the method of accounting used by the taxpayer, it will almost always differ from accounting income. This is so because of a fundamental difference in the ends the two concepts serve. Accounting attempts to match cost against revenue. Tax law is aimed at collecting revenue. It is quick to treat an item as income, slow to recognize deductions or losses. Thus, the tax law will not recognize deductions for contingent future losses except in very limited situations. Good accounting, on the other hand, requires their recognition, Once this fundamental difference in approach is accepted, income tax accounting methods can be understood more easily. 33 Am. Jur. 2d 688.
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PART II CONCEPT OF INCOME A. 1. a. Income Subject to Tax What is Income Definition of Income - Income means accession to wealth/gain/flow of wealth
Conwi v. CTA 213 SCRA 83 FACTS: Petitioners Conwi et al. are Filipino citizens and employees of P&G. During the years 19701971, they were assigned to other foreign subsidiaries of P&G for which they were paid in dollars. They filed their corresponding income tax returns but subsequently claimed a refund. The alleged overpayment of income tax resulted from the use of floating rates as dollar-to-peso conversion basis provided under BIR Ruling 70-027. In its amended return, petitioners claimed that the par value of the peso should be used as conversion basis under RA 265. HELD: No overpayment of tax. Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment. Unless otherwise specified, it means cash or its equivalent. 4 Income can also be thought of as a flow of the fruits of one's labor. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of P&G. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services. Since petitioners are citizens of the Philippines, their incomes, within or without, are subject to income tax in accordance with Sec. 21 NIRC (now, Sec. 23). As income of the petitioners, RMC 7-71 and 41-71, reiterating BIR Ruling 70-027, shall apply. These RMCs were issued to prescribe a uniform rate of exchange for internal revenue tax purposes. Commissioner v. BOAC 149 SCRA 395 FACTS: British Overseas Airways Corp. (BOAC), a wholly owned British corporation, is engaged in international airline business. From 1959 to 1972, it had no landing rights for traffic purposes in the Phil. but maintained a general sales agent in the Phil. which was responsible for selling BOAC tickets covering passengers and cargoes. The CIR assessed deficiency income taxes against BOAC.
HELD: The definition of gross income in the Tax Code is broad and comprehensive to include proceeds from sales of transport documents. The words 'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws. Income means "cash received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it means something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occured within, Philippine territory, enjoying the protection accorded by the Philippine Government. Hence, income of BOAC from the ticket sales is subject to Phil. income tax. Madrigal v. Rafferty 38 Phil. 414 FACTS: Vicente Madrigal and Susana Paterno were married with CPG as their property relations. Vicente filed his 1914 income tax return but later claimed a refund on the contention that it was the income of the conjugal partnership. Vicente claimed that the income should be divided into two with each spouse filing a separate return. Hence, Vicente claimed that each spouse should be entitled to the P8,000 exemption, which would result in a lower amount of income tax due. HELD: The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. A tax on income is not a tax on property. Income can be defined as profits or gains. Susana, has an inchoate right in the property of her husband during the life of the conjugal partnership. Her interest in the ultimate property
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rights and in the ultimate ownership of property acquired as income lies after such income has become capital. She has no absolute right to the income of the conjugal partnership. Not being seized of a separate estate, Susana cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husbands property, the income cannot properly be considered the separate income of the wife for purposes of the additional tax. Fisher v. Trinidad 43 Phil. 973 FACTS: Frederick Fisher is a stockholder of the Philippine American Drug Company, a corporation duly organized and existing under the Philippine laws. In 1919, the corporation declared stock dividends. The proportionate share issued to Fisher of said stock dividend was P24, 800. The CIR assessed deficiency income tax on said stock dividends against Fisher. HELD: The stock dividends are capital, hence they are not subject to income tax. Definition of Income. Income, in Income Tax Law, unless it is otherwise specified, means cash or its equivalent. It does not mean choses in action or unrealized increments in the value of the property (Towne vs. Eisner). Income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale
fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. Capital is the tree, while income is the fruit; labor is a tree, income the fruit; property is a tree, income the fruit
2. a.
(Madrigal v. Rafferty)
Return of capital is not subject to income tax, while income is subject to tax
When is income taxable
Realized i. Tests of realization There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income (Eisner v. Macomber). Thus, in Fisher v. Trinidad,it was held that stock dividends are not income subject to tax on the part of the stockholder, because he merely holds more shares representing the same equity interest in the corporation that declared the stock dividends. Fisher v. Trinidad 43 Phil. 973 HELD: Essential and controlling fact is that the stockholder has received nothing out of the companys assets for his separate use and benefit; on the contrary, his original investment + accretions and accumulations, still remains the property of the company, subject to business risks execution against the corporation. In such a case, the stockholder would have received nothing from his investment.) The stockholder by virtue of the SD has no separate or individual control over the interest represented thereby. He cannot use it for the reason that it is still the property of the corporation. A certificate of stock represented by the SD is simply a statement or representation of
or firms, joint stock companies etc for a particular period. They are used to show the increased interest or proportional share in the capital of each stockholder. When SDs are issued, it shows that the companys accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. They form part the CAPITAL or ASSETS of the corporation. Moreover, an income subject to taxation under the law must be an ACTUAL INCOME and NOT A PROMISED OR PROSPECTIVE INCOME. b.
or a conversion of assets (Eisner vs. Macomber). SDs represent SDS NOT income. undistributed increase in the capital of corporations
which may result in wiping out the entire investment. (Hence, it may be reached by an
his proportional interest or participation in the capital of a corporation.

ii. Actual vs. constructive receipt
Income distinguished from Capital Capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a
Limpan vs. CIR 17 SCRA 703 FACTS: The Petitioner is engaged in the business of leasing real properties. It was made liable for deficiency income tax in 1957 for unreported rental income. Petitioner contended that a certain tenant deposited in court his rentals of P10,800, over which the corporation had no actual or constructive control. Petitioner declared the rentals as income
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only in 1958 as the same were withdrawn only in that year. HELD: The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same and was not the fault of its tenants. Hence, petitioner is deemed to have constructively received such rentals in 1957. Republic v. dela Rama 18 SCRA 861 FACTS: The BIR assessed deficiency income tax against the estate of the late Esteban dela Rama for the cash dividends it allegedly received but failed to include in its income tax return. The cash dividends were declared by the Dela Rama Steamship Co in favor of the decedent and were applied as payment of the latters account with the former. HELD: If the debts to which the dividends were applied really existed and legally demandable and chargeable against the deceased, there was constructive receipt of the dividends. If there were no such debts, then there was no constructive receipt. The existence and validity of the first debt was in dispute and no proof was adduced to show the existence and validity of the debt. As to the second debt, the alleged debtor Hijos dela Rama, Inc. was an entity separate and distinct from the deceased. Hence, its debts could not be charged against the estate. b. 3. Not exempt from taxation Items of Gross Income
services rendered in the Philippines. The employer is constituted as the withholding agent.
Convenience of the Employer Rule Generally,
the value of the living quarters and meals furnished to an employee shall be added to the remuneration paid for the purpose of determining the amount of compensation. If, however, living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as compensation. SEC. 78. Definitions As used in this Chapter: (A) Wages. The term wages means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other then cash, except that such term shall not include remuneration paid: (1) For agricultural labor paid entirely in products of the farm where the labor is performed, or (2) For domestic service in a private home, or (3) For casual labor not in the curse of the employers trade or business, or (4) For services by a citizen or resident of the Philippines for a foreign government or an international organization. If the remuneration paid by an employer to an employee for services performed during or more of any payroll period of not more then 31 consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages. Collector v. Henderson 1 SCRA 649 FACTS: Arthur Henderson is the president of the American International Underwriters for the Phils., Inc., a domestic corporation engaged in insurance business. The CIR included as part of the spouses income the allowances for rental of the apartment furnished by the employer-corporation, including utilities, and the allowance for travel expenses of Mrs. Henderson. Hence, the CIR assessed deficiency income taxes against the spouses. HELD: The fact that the taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayers employer-corporation is of
a. Compensation income compensation for services such as fees, commissions, salaries, wages and similar items SEC. 32 (A) (1) (A) General Definition Except when otherwise provided in this title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and similar items; SEC. 2.78 RR 2-98 WITHHOLDING TAX ON COMPENSATION The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for
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no moment, for no part of the allowances in question redounded to their benefit or was retained by them. The Hendersons are only two in the family and the apartment exceeded their personal needs, but the exigencies of Mr. Hendersons high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters. The Hendersons are entitled only to a ratable value of the allowances the reasonable amount they would have spent for house rental and utilities which wuld be subject to tax, and the excess considerd as expense f the corporation. No part of the allowance for traveling expenses redounded to the benefit of the Hendersons. Neither was a part thereof retained by them. Hence, the traveling allowance is not taxable. Pirovano v. Commissioner 14 SCRA 832 FACTS: De la Rama Steamship Co. insured the life of Enrico Pirovano who was then its President and General Manager. The company initially designated itself as the beneficiary of the policies but, after Pirovanos death, it renounced all its rights, title and interest therein. The SC ruled that the donation was valid and remunerative in nature. Thereupon, the CIR, upheld by the CTA, subjected the donation to donees tax. Pirovano heirs contended that the grant was not a simple donation as it was made for a full and adequate compensation for the valuable services by the late Priovano. HELD: There is nothing on record to show that when the late Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that, because they were "largely responsible for the rapid and very successful development of the activities of the company". The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs REMAIN A GIFT OR A DONATION. The true consideration for the donation was, therefore, the company's gratitude for his services, and NOT THE SERVICES themselves. Like love and affection, gratitude has no economic value and is not consideration in the sense that the word is used in the Tax Code. b. Income from business
SEC. 32 (A) General Definition Except when otherwise provided in this title, gross income means all income derived from whatever source, including (but not limited to) the following items: (2) Gross income derived from the conduct of trade or business or the exercise of a profession; SEC. 43. RR 2 Gross income from business. In the case of a manufacturing, merchandising, or mining business, "gross income" means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. ii. Practice of profession Partners distributive share of the gross income of the general professional partnership (NIRC Sec. 32 (a) (11)). SEC. 32 (A,11) Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (11) Partner's distributive share from the net income of the general professional partnership. iii. Income from farming/agribusiness REVENUE REGULATION 2 SEC. 45. Gross income of farmers. A farmer reporting on the basis of receipts and disbursements (in which no inventory to determine profits is used) shall include in his gross income for the taxable year (1) the amount of cash or the value of merchandise or other property received from the sale of live stock and produce which were raised during the taxable year or prior years, (2) the profit from the sale of any live stock or other items which were purchased, and (3) gross income from all other sources. In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine profits), his gross profits are ascertained by adding to the inventory value of live stock and products on hand at the end of the year the amount received from the sale of live stock products, and miscellaneous receipts for hire of teams, machinery, and the like, during the year, and
i. commercial transactions (merchandising/manufacturing/sales of services)
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deducting from this sum the inventory value of live stock and products on hand at the beginning of the year and the cost of live stock and products purchased during the year. iv. Income from the performance of functions of a public office NIRC, SEC. 22 (S). The term trade or business includes the performance of the functions of a public office. c. Income derived from dealings in property SEC. 32 (A, 3)Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (3) Gains derived from dealings in property; Rodriguez v. CIR 28 SCRA 119 The fact that a portion of the purchase price of the property was paid by the government in the form of tax-exempt bonds does not operate to exempt said income from income tax. The income from the sale of the land and the bonds are two distinct taxable items so that the exemption of one does not operate to exempt the other. Gonzales v. CIR 14 SCRA 71 Income from the sale or disposition of property through expropriation constitutes a capital gain. However, interest on the value of the land expropriated is taxable as ordinary income and not as capital gain. This is because interest is compensation for the delay in the return of such capital. For income tax purposes, interest does not form part of the price paid by government for the property; it my not be treated as capital gain. Gutierrez v. CIR 101 Phil. 173 The acquisition by government of private property through expropriation proceedings, said property being justly compensated, is embraced within the meaning of the term sale or disposition of property, and the proceeds of the transaction clearly fall within the definition of gross income. i. Types of properties aa. Ordinary assets
Ordinary assets include those assets excluded in Sec.39 (A)(1): 1. 2. Stock in trade of the taxpayer included in the inventory of the taxpayer Property primarily for sale to customers in the ordinary course of his trade or business property used in the trade or business, of a character and subject to depreciation allowance Real property used in trade or business of the taxpayer
3.
4.
bb. capital assets NIRC, SEC. 39 (A) (1). Capital assets. The term capital assets means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer at hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. Long-term capital asset Capital asset held for more than twelve months. Short-term capital asset Capital asset held for less than twelve months. ii. Types of gains from dealings in property aa. Ordinary income v. capital gain NIRC, SEC. 22 (Z). The term ordinary income includes any gain from the sale or exchange of property which is not a capital asset as described in Section 39 (A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as ordinary income shall be treated as gain from the exchange or sale of property which is not a capital asset as defined in Section 39 (A)(1). bb. Actual v. presumed gain
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NIRC, SEC. 6 (E). Authority of the Commissioner to Prescribe Real Property Values. xxx For the purposes of computing any internal revenue tax, the value of the property shall be whichever is the higher of: 1. The fair market value as determined by the Commissioner; or 2. The fair market value as shown in the schedule of value of the Provincial and City Assessors. CLASS NOTES: Deemed Income exceptional cases wherein income tax is due even though no income is realized. Example: Sale of Real Property In this case, the tax is not based on the gain or selling price. Rather, it is based on the fair market value determined by an assessor or zonal value assessed by the BIR. Thus, when the selling price is lower than the FMV, there is no actual gain but there is presumed gain. Ratio: people tend to understate the price of the property before to avoid paying taxes cc. Net capital gain (loss) NIRC, SEC. 39 (A) (1). Net capital gain. The term net capital gain means the excess of the gains from the sales or exchanges of capital assets over the losses from such sales and exchanges. Tuason v. Lingad 58 SCRA 170 A net capital gain is a the gain realized by the taxpayer from the sale or exchange of a capital asset held for more than twelve months; only 50% of the net capital gain shall be taken into account in computing the net income. Calasanz v. CIR 144 SCRA 664 Property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayers trade or business. The important inquiry is what the taxpayer did with the property. Gonzales v. CIR 14 SCRA 79 Income from the sale or disposition of property through expropriation constitutes a capital gain. However, interest on the value of the land expropriated is taxable as ordinary income and not as capital gain. This is because interest is compensation for the delay in the return of such capital. For income tax purposes, interest does not
form part of the price paid by government for the property; it my not be treated as capital gain. Rodriguez v. Collector 28 SCRA 119 The fact the portion of the purchase price of the property was paid by the government in the form of tax exempt bonds does not operate to exempt said income (expropriation of property) from income tax. The income from the sale of land I question and the bonds are 2 different and distinct taxable items so that the exemption of one does not operate to exempt the other, unless the law expressly provides. Income from expropriation proceedings is income from sales or exchange and therefore taxable. Special rules pertaining to income/loss from dealings in property classified as capital asset aa. Computation of the amount of gain/loss Cost or basis of property sold - Sec 40 (A) and (B) ; ;
where a= amount realized and b = basis or adjusted basis for determining gain amount realized = where x = sum of money received and y = fair market value of the property received Values of b: if property is acquired (cost or basis of property sold, Sec 40 (B)): 1.
2. By purchase the cost of property By inheritance fair market price or value as of date of acquisition
By gift the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, BUT if : Basis > Fair Market value at the time of the gift, then for purpose of determining LOSS, Basis = FMV 3. For less than an adequate consideration in money or moneys worth amount paid by transferee for property IN SHORT: 4.
Where a = x+y
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Cost or basis of property exchanged in corporate readjustment - Sec 40 (C) (5)
Where, X =Basis of stock or securities received by transferor upon the exchange b= basis of the property, stock or securities exchanged m= money received f=FMV of the property received d= amount treated as dividend of the shareholder g= amount of any gain that was recognized on the exchange
Provided: 1. The basis for property received as boot FMV 2. If as part of consideration to transferor, transferee assumes a liability of transferor or acquires from the latter property subject to a liability, such assumption or acquisition shall be treated as money received by the transferor on the exchange 3. If transferor receives several kinds of stock or securities, the Commissioner is authorized to allocate the basis among several classes of stocks or securities 4. Basis for property transferred in the hands of transferee the same as it would be in hands of transferor + amount of gain recognized to the transferor on the transfer Recognition of gain/loss in exchange of property
General rule sec 40 (C) (1); Sec 132, RR2 General Rule. - Except as herein provided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized. Sec 136 RR2 For the purpose of ascertaining the gain or loss from the sale or exchange of property the basis is the cost of such property, In the case of property which should be included in the inventory its latest inventory value. But in the case of property acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost, the gain to be included in gross income is the excess of the amount realized therefor over such fair market value.
Also in the case of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost the deductible loss is the excess of such fair market value over the amount realized therefor. No gain or loss is recognized in the case of property sold or exchanged (a) at more than cost but less than its fair market value as of March 1, 1913 or (b) at less than cost but at more than its fair market value as of March 1, 1913. In any case proper adjustment must be made in computing gain or loss from the exchange or sale of property for any depreciation or depletion sustained and allowable as deduction in computing net income; the amount of depreciation previously charged off by the taxpayer shall be deemed to be true depreciation sustained unless shown by clear and convincing evidence to be incorrect. What the fair market value of property was as of March 1, 1913, is a question of fact to be established by evidence which will reasonably and adequately make it appear. The nature and extent of the sales and the circumstances under which they were made should be considered. Prices received at forced sales or for small lots of property may be and often are no real indication of the value of the amount of property in question. For instance, sales from time to time of a small number of shares of stock is little indication of the value of a large or controlling interest in the corporation. If the taxpayer cannot determine the cost of securities purchased prior to March 1, 1913, because of the loss, destruction, or failure to keep records, the value of the securities at the date of approximate date of acquisition may be used in determining the cost basis for purposes of computing the gain or loss from the sale of the securities. When the date or approximate date of acquisition is unknown, no general rule can be stated for determining the cost value of such securities. Each case must be considered separately upon its own facts. DE LEON: Acquisition before March 1, 1913 If the property sold or exchanged was acquired by purchase before March 1, 1913, its cost is the basis for determining gain or loss from the sale or disposition thereof. See for example Sec. 137 of RR2: (1) If the FMV of the property sold is in excess of the Cost, the taxable gain shall be the excess of the Selling Price (SP) over the FMV of the property: ILLUSTRATION: Cost: P20,000 FMV: 30,000 SP: 40,000 Thus, SP (40,000) FMV (30,000) = Gain (10,000)
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(2) If the SP is more than Cost but less than FMV, no gain or loss is recognized.
ILLUSTRATION: Cost: P20,000 FMV: 60,000 SP: 40,000 NO GAIN OR LOSS (3) If the FMV is lower than Cost, the deductible loss is the excess of FMV over SP ILLUSTRATION: Cost: P20,000 FMV: 10,000 SP: 6,000 Thus, FMV (10,000) SP (6,000) = Loss (4,000) (4) If the SP is more than FMV but less than Cost, no gain or loss is recognized
the cost or basis depends upon the mode of acquisition as follows: 1. By purchase cost thereof 2. By gratuitous title a. Inheritance the FMV at the date of acquisition b. Gift or donation transferred for less than adequate and full consideration in money or moneys worth the same as it would be in the hands of the donor or transferor. Exceptions When no gain/loss shall be recognized Sec 40 (c) (2) General rule: In exchange of property the entire amount of the gain or loss shall be recognized. Exceptions: no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation: (a)If a corporation party to merger exchanges property solely for stock in a corporation also party to merger or consolidation. (b) if a shareholder exchanges stock in a corporation party to the merger or consolidation solely for the stock of another corporation also party to the merger or consolidation (c) A security holder of a corporation party to the merger or consolidation exchanges his securities in such corporation, solely for stock or securities in such corporation party to the merger or consolidation. (d) if a person by exchanging property to a corporation results in his (alone or together with others not exceeding 4 persons) gaining control of the corporation. Provided, that stocks issued for services shall not be considered as issued in return for property. (e) a corporation which is a party to a merger or consolidation receives in exchange for property not only stock of another corporation but also money and/or other property, and distributes it in pursuance of the plan of merger or consolidation.
ILLUSTRATION: Cost: P20,000 FMV: 6,000 SP: 10,000 NO GAIN OR LOSS (5) If the SP is more than the Cost, but Cost is equal or bigger than FMV, the taxable gain is the excess of SP over Cost
ILLUSTRATION: Cost: P20,000 FMV: 10,000 SP: 40,000 Thus, SP (40,000) Cost (20,000) = Gain (20,000) (6) If the SP is less than Cost, but the FMV is equal or bigger than Cost, the deductible loss is the excess of Cost over SP ILLUSTRATION: Cost: P20,000 FMV: 30,000 SP: 10,000 Thus, Cost (20,000) SP (10,000) = Loss (10,000) Acquisition on or after March 1, 1913 in the case the property acquired on or after March 1, 1913,
[this (e) is not part of the provisions enumeration, but is added by De Leon and can be gleaned from Maams outline] (See below.) Meaning of securities
Sec 40(c)(6)
merger/consolidation/control
"Securities" means bonds and debentures but not "notes" of whatever class or duration. "Merger" or "Consolidation" :
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(i) (ii)
the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Requisites: 1. it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation 2. in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit 3. in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor. "Control", means ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. CIR v. Rufino 148 SCRA 142 Where stocks for stocks were exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to the plan of reorganization, such exchange is exempt from capital gains tax. The basic consideration for a valid merger is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. CIR v. Binalbagan Estate 13 SCRA 142 To determine the gain or loss from the sale of the BISCOM shares, the basis is the acquisition cost of said shares. Usually the cost of the shares is the money paid for them. But in this case the Binalbagan did not pay in money but in the form of tangible assets and sugar quota, the FMV of which were determined by the Westley Committee, a group of impartial technical experts. RMO 26-92 RAM 1-93 BIR RULING 010-91 HELD: No gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock in such a corporation
of which as a result of such exchange, said person, alone or together with others, not exceeding 4 persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received i.e., total subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to a maximum of 5. It should be emphasized, however, that Section 34 (c) (2) (c) of the Tax Code merely defers recognition of the gain or loss from such transaction, for in determining the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or stocks is considered. Thus, if the transferor later sells or exchanges the shares of stock acquired by it in the exchange, it shall be subject to income tax on gains derived from such sale or exchange, taking into consideration that the cost basis of the shares shall be the same as the original acquisition cost or adjusted cost basis to the transferor of the properties exchanged therefore; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands of the transferor. Requirements for availing non-recognition of gains: A. The transferor must file with its income tax return for the taxable year in which the exchange was consummated, a complete statement of all facts pertinent to the exchange, including: a. A description of the properties transferred or of its interest in such properties, with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; b. The kind of stock received and preferences, if any; c. The number of shares of each class received, and d. The fair market value per share of each class at the date of the exchange. B. On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the
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C.
D.
exchange was consummated the following; a. A complete description of all properties received from the transferor; b. A statement of the original acquisition cost or other basis of the properties in the hands of the transferor and the adjusted cost basis thereof at the time of the transfer; and c. Information with respect to the capital stock of the corporation including: i. The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stock; ii. The classes of stocks and number of shares issued to the transferor in the exchange; and iii. The fair market value as of the date of the exchange of the capital stock issued to the transferor. Permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stocks/properties received in the exchange. The parties shall also cause to be annotated on the Transfer Certificate of Titles and at the back of Certificate of Stocks, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock involved, and the fact that no gain or loss was recognized as a result of such exchange. A conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A
E.
F.
stock in corporation is a valuable consideration for transfer of real property. In case of failure to affix the proper documentary stamps to a document or instrument, there shall, for every violation, be imposed, in addition to the amount of documentary stamp tax required to be paid, an amount equivalent to 25% of such unpaid amount which shall be in lieu of the interest prescribed in Section 249 of the same Code. Certificates of stocks must be in the original, subject to the documentary stamp tax.
BIR RULING 019-91 HELD: No gain or loss shall be recognized if property is transferred to a corporation by a person, in exchange for stock 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. (Refer to previous ruling for control) (The facts of this case is different in that the transfer will not result in the person gaining control) In this case of exchange CLI will not gain control of the corporation, the exchange is subject to the capital gains tax of 35% pursuant to Section 24 (a) in relation to Section 34(a) of the Tax Code. CLI, the transferor of real property, shall be subject to creditable withholding tax at the rate of 5% pursuant to RR1-90. BIR RULING 030-91 FACTS: ASB and HDC will effect a statutory merger. ASB will be the surviving corporation. 1. HDC will transfer all its assets and liabilities to ASB, in exchange for new shares of the capital stock of ASB 2. The number of ASB shares to be issued to HDCs stockholders shall be based on the net transfer value of the assets conveyed to ASB 3. In the exchange, the stockholders of HDC will surrender their HDC shares of stock to HDC 4. The liabilities of HDC will be assumed by ASB, but not exceeding the cost basis of the assets of HDC to be transferred to ASB. 5. ASB and HDC are operating at a net income position, and that the business
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activities of both companies are parallel and complementary. HELD: The above reorganization is a merger within the contemplation of Section 34(c)(2) and 5(b) of the Tax Code because a corporation (ASB) will acquire all the assets and assume all the liabilities of HDC solely for stocks, the transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. 1. No gain or loss shall be recognized to HDC upon the distribution of ASB shares to HDC stockholders in complete redemption of their stocks under Section 34(c) (2) of the Tax Code. 2. The basis of the assets received by ASB shall be the same as it would be in the hands of HDC. The basis of ASB stocks received by the stockholders of HDC shall be the same as the basis of the HDC stocks surrendered in exchange therefor; 3. The above mentioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. 4. If the total liabilities to be assumed by ASB, upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by HDC, the excess shall be recognized as gain of HDC. It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. Requirements in order to be considered a merger under the Tax Code: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted, responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization shall file, as part of its return for the taxable year within which the reorganization occurred a complete statement of all facts pertinent to the nonrecognition of gain or loss in connection with the reorganization, including:
B.
A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and in detail all transactions incident to, or pursuant to the plan. b. A complete statement of the cost or other basis of all property, including all stocks or securities, transferred incident to the plan. c. A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distribution or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange. d. A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. Every taxpayer, other than a corporation, a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange including: a. A statement of the cost or other basis of the stock or securities transferred in the exchange; and b. A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is
a.
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C.
subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. c. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange. In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporation participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. Transactions where gain recognized but not the loss is
Limitation: But this should not be in excess of his proportionate share of the undistributed earnings and profits of the corporation. The remainder of the gain recognized shall be treated as a capital gain. PARAPHRASING Sec 40 (c) (3b): Referring once again to 40 b, and in particular to the transferor of the corporation, who receives also money and/or property. If such corporation distributes the money and/or property and distributes it in pursuance of the plan of merger or consolidation, THEN no gain to the corporation shall be recognized from the exchange If such corporation does not distribute it in pursuance of the plan of merger or consolidation, the gain BUT not the LOSS shall be recognized. The amount to be recognized shall not exceed the sum of such money and the FMV of such other property so received but not distributed.
Exchange not solely in kind Sec 40 (c)(3)

PARAPHRASING Sec 40 (c) (3a): In relation to the above scenario (40 B), if the individual, shareholder, security holder or corporation receives also money and/or property, the gain but NOT the LOSS shall be recognized. The gain in this instance will be in an amount not in excess of the sum of the money and FMV of such other money and/or property. Referring to a shareholder: Provided however that if the money and/or property received has the effect of a distribution of taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized.
DE LEON: Gain, if any, but not the loss shall be recognized, if in connection with the exchange described in the exceptions pursuant to a plan of merger or consolidation: 1. A shareholder or security holder receives not only stocks or securities permitted to be received without recognition of gain or loss but also money and/or other property. The gain, if any, shall be recognized in any amount not in excess of the sum of the money and the fair market value of other property received. However, if the distribution of such other property and/or money to a shareholder in the course of a merger or consolidation has the effect of a distribution of a taxable dividend, there shall be taxed to the distribute as dividend such an amount of the gain recognized in the exchange not in excess of the distributees proportionate share of the undistributed earnings and profits of the corporation, and as capital gain, the remainder if any, of the gain so recognized. 2. A corporation which is a party to the merger or consolidation receives not only stock permitted to be received without the recognition of gain or loss, but also money and/or other property, and does not distribute it in pursuance of the plan or merger or consolidation. 3. A taxpayer receives stock or 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 party to the
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exchange assumes a liability of the taxpayer, or acquires from the taxpayer property subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and, therefore, any gain or loss would still not be recognized if no money and/or property was involved in the exchange. If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject, exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. 38 and 39(F)
Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets; and Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses. DE LEON: Wash sale a sale of securities where substantially identical securities are acquired or purchased within a 61-day period beginning 30 days before the sale and ending 30 days after the sale (Sec. 38(A)). General rule: losses arising from sales or exchanges of stock and securities are deductible as losses from sales or exchanges or property. Exception: losses from wash sales of stock. The wash sales provisions do not apply to: 1. individual or corporations acting as dealers in stock or securities such as stock brokers and banks and trust companies, if the sale or other disposition is made in the ordinary course of the business of such dealers 2. short sale transactions 3. gains in wash sales as such gains are taxable. Conditions/Requisites for non-deductibility: 1. the sale or other disposition of stocks or securities resulted in a loss 2. there was an acquisition, or contract or option for acquisition of stock or securities within 30 days before the sale or 30 days after the sale 3. the stock or securities sold were substantially the same as those acquired within 61-day period. Meaning of acquired means acquired by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into a contract or option within the 61-day period to acquire by a purchase or by such an exchange. Meaning of substantially the same the stock must be of the same class, or in the case of bonds, the terms thereof must be the same. There must be similarities on all important particulars. Treatment of loss on wash sales: A. where more than 1 loss is claimed to have been sustained within the taxable year: 1. the provisions on wash sales shall be applied to the losses in the order in which the stock or securities the disposition of which resulted in the respective losses were disposed of (beginning with the earliest disposition) 2. if the order of disposition of stock or securities disposed of at a loss at the same
Wash sales compared with short selling Sec
Loss sustained from sale or disposition of shares of stock or securities NO DEDUCTION for such loss, where it appears that Requisites: 1. If within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date 2. the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or loss was recognized by law), 3. or has entered into a contact or option so to acquire, 4. substantially identical stock or securities, Exception: unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. If x > y, then the particular shares of stock or securities, the loss from the sale or other disposition which is not deductible shall be determined by the rules and regulations prescribed by Sec. Of Finance upon recommendation of CIR.
Where, X = amount of stock or securities acquired or covered by the contract or option to acquire; and Y = amount of stock or securities sold or otherwise disposed of.
If the amount of stock or securities acquired (or covered by the contract or option to acquire which) resulted in the non-deductibility of the loss, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
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day cannot be determined, the stock or securities will be considered to have been disposed in the order in which they were regularly acquired, beginning with the earliest acquisition. B. Where the amount of stock or securities acquired is less than that sold: the stock or securities acquired will be matched in accordance with the order of their acquisition (beginning with the earliest acquisition) with an equal number of the shares of stock or securities sold or otherwise disposed of. C. Where the amount of stock or securities acquired is not less than that sold: the stock or securities sold or otherwise disposed of will be matched with an equal number of shares of stock or securities in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired. Basis of stock or securities acquired in wash sales shall be that of the substantially identical stock or securities sold or disposed of, increased or decreased, as the case may be, by the difference, if any, between the price at which the stock or securities were acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of. (Sec. 143) Short Sales Meaning of short sale a short sale takes place when a seller first makes a sale of stock which does not own (he merely borrows the stock certificate through or from his stock broker) and subsequently buys or covers the stock to complete the transaction. He sells the shares short in the expectation of a decrease in value thereof within a reasonably short period of time. He covers his short sale when the expected decrease in value materializes or when the time for the return of the borrowed shares comes. It is not deemed consummated until the delivery of the property to cover the short sale. If the short sale is made through a broker and the broker borrows property to make a delivery, the short sale is not deemed to be consummated until the obligation of the seller created by the short sale is finally discharged by a delivery of property to the broker to replace the property borrowed by such broker. Gain or loss on short sales is always a short-term capital gain or loss.
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust.
Illegal Transactions
Gains and losses attributed to exercise privilege or options to buy/sell property percentage of gain or loss are taken into account o Note: This rule applies only to and not to individuals corporations
Sec. 39 (B). In computing the net capital gain, net capital loss, and net income of a taxpayer (other than a corporation), the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be recognized: (1) 100% = where capital asset was held for not
more than 12 mos.; than 12 mos.
(2) 50% = where capital asset was held for more
Where property was held for exactly 12 mos. = charge 100% b. Income Tax Treatment of Capital Loss CAPITAL LOSS LIMITATION RULE (Applies to both individuals and corporations)
Transactions between related taxpayers
Sec 36 (B) NO DEDUCTION (for losses from sales or exchanges of property, directly/indirectly) on transactions between related taxpayers. Enumeration of transactions under this:
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Sec. 39 (C). Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.
(iv)
Mutual fund certificates.
Exception. A bank or trust company incorporated

under Philippine laws, a substantial part of whose business is: (i) (ii)
Follosco: Note that the definition provided in the NIRC is broader in scope than the simple definition of shares as stocks issued by a corporation as part of its capital. d. PASSIVE INCOME
(iii)
The receipt of deposits; Sale of any bond, debenture note or certificate or other evidence of indebtedness issued by any corporation (including those of the government or any political subdivision thereof); With interest coupons or in registered form.
Refers to those items of gross income earned by the taxpayer w/o his active/direct participation in the earning process. Example: Interest, dividends, royalties, prizes & winnings Sec 22 (z). RA 8424 The term 'ordinary income' includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Sec. 39(A)(1) The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a capital asset.
Any loss arising resulting from such sale shall not be subject to this limitation; And shall not be included in determining the applicability to such limitation or other limitations. NET LOSS CARRY-OVER RULE (Applies only to individuals) Sec. 39 (D). If a taxpayer (other than a corporation) sustains a net capital loss in any taxable year, such loss shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 mos. The amount [to be carried over] shall not be in excess of the net income of [succeeding] year. iv. Income from Dealings in Capital Asset Subject to Special Rules a. b. Dealings in REAL PROPERTY situated in the Philippines Dealings in SHARES OF Philippine Corporations STOCK of
i.
Interest Income
money.
It is the revenue acquired from the forbearance of
What is a SHARE? Sec. 22 (L). The term share of stock shall include: (i) (ii) (iii) Shares of stock of a corporation; Warrants and/or options to purchase shares of stock; Units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations and recreation or amusement clubs (such as golf, polo and similar clubs); and
Sec. 32 (A) (4). Except as otherwise provided in this title, gross income means all income derived from whatever source, including (but not limited to) the ff: 4. Interests; x x x. Sec. 24 (B) (1). Interest from Philippine currency bank deposits and yield from deposit substitute and from trust funds or other similar arrangements are subject to a final tax of 20%. Interest income earned from deposits maintained with a bank under the expanded foreign currency deposit system is subject to a final tax of 7.5%.
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Exempted: Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BSP shall not be subject to this tax. Provided: Where the holder of the certificate preterminates the deposit or investment before the 5th year, a final tax shall be imposed on the entire income, to be deducted and withheld by the depositary bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: 4yrs. to less than 5 yrs = 5% 3 yrs. To less than 4 yrs = 12% Less than 3 yrs = 20% Vitug and Acosta: In the case of non-resident aliens not engaged in trade or business, the
tan 5 days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. What are LONG-TERM DEPOSIT or INVESTMENT CERTIFICATES? Sec. 22 (FF). They refer to certificate of time deposit or investment in the form savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than 5 years, the form of which shall be prescribed by the BSP and issued by banks only (not by nonblank financial intermediaries and finance companies) to individuals in denominations of P10,000 and other denominations as may be prescribed by the BSP. MANNER OF COLLECTION Sec. 57, RR2. Sec. 2.57. WITHHOLDING OF TAX AT SOURCE (A) Final Withholding Tax The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding the deficiency tax shall be collected from the payor-withholding agent. The payee is not required to file an income tax return for the particular income. The finality of the withholding tax is limited only to the payee's income tax liability on the particular income. It does not extend to the payee's other tax liability on said income (i.e. when income is further subject to a percentage tax; such as a bank that receives income subject to final withholding tax, the same shall be subject to a percentage tax) (B) Creditable Withholding Tax Taxes withheld on certain income payments are intended to equal or at law approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return (as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended) and to report the income and/or pay the difference between the tax withheld and the tax due on the income. Example: Taxes withheld on (1) income payments covered by the expanded withholding tax and (2) compensation income are creditable in nature.
amount received by them as interest from sources within the Philippines shall form part of their gross income subject to a flat 25% income tax.
tax rate of 34% on their gross income from all sources within the Philippines and which shall slide down to 33% and 32% for the years 1999 and 2000, respectively. Note: Interest (and royalties) can never be a capital asset. This is so because in order for property to be a capital asset, there must be a sale or exchange. In the case of interests (and royalties), you profit from the property itself. What are DEPOSIT SUBSTITUTES? Sec. 22 (Y). Deposit substitutes shall mean an alternative for of obtaining funds from the public (public means borrowing from 20 or more individual or corporate lenders at any 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 may include, but not be limited to, bankers acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into between the BSP and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, that debt instruments issued for inter-bank call loans with maturity of not more
The above rules are inapplicable to non-resident foreign corporations not engaged in trade or business in the Philippines which are subject to a
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ii. Rentals/Leases Sec. 32 (A) (5). Except as otherwise provided in this title, gross income means all income derived from whatever source, including (but not limited to) the ff: 5. Rents; x x x. Sec. 58, RR2. RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. (A) Monthly return and payment of taxes withheld at source (1) WHERE TO FILE Creditable and final withholding taxes deducted and withheld by the withholding agent shall be paid upon filing a return in duplicate with the authorized agent banks located within the Revenue District Office (RDO) that has jurisdiction over the residence or principal place of business of the withholding agent In places where there is no authorized agent banks, file return with the Revenue District Officer, Collection Officer or the duly authorized Treasurer of the city or municipality of withholding agents residence/principal place of business OR where the withholding agent is a corporation, where the principal office is located Except in cases where the Commissioner otherwise permits. (2) WHEN TO FILE Return to be filed and payment made within 10 days after the end of each month o Except for taxes withheld for December which shall be filed on or before January 25 of the following year. In the case of large taxpayers, the return shall be filed and payment made within 25 days after the end of each month. The return for final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements shall be filed and the payment made within twenty five (25) days from the close of each calendar quarter. (B) x x x (C) Withholding tax statement for taxes withheld Every payor required to deduct and withhold taxes under these regulations shall furnish
each payee, whether individual or corporate, with a withholding tax statement, using the prescribed form (BIR Form 2307) showing the income payments made and the amount of taxes withheld therefrom, for every month of the quarter within twenty (20) days following the close of the taxable quarter x x x. (D) x x x Limpan v. Commissioner 17 SCRA 703 FACTS: Limpan Investment Co., a corp. engaged in leasing real properties, filed its ITRs for 1956 & 1957. After an investigation, the BIR found that pet. had underdeclared its rental incomes & had claimed excessive depreciation of its buildings. Thus deficiency income taxes & surcharges were demanded against them. Pet. argues that the rents in question were not received in 1957, but were turned over by the president to the company only in 1959 & that the rates of depreciation applied by the BIR were unfair & inaccurate.The issue is WON the assessment of deficiency taxes were accurate HELD: The assessment was valid. Pet.s denial & explanation of the non-receipt of the remaining unreported income for 1957 was not substantiated by the president nor by his 1957 personal income tax return in order to establish that the rental income w/c he allegedly collected & received in 1957 were reported therein. The w/drawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of pet, to accept the same, & was not the fault of its tenants. Pet. is thus deemed to have constructively received such rentals in 1957. OPERATING LEASE V. FINANCIAL LEASE An operating lease is a contract under w/c the asset is not wholly amortized during the primary period of the lease, & where the lessor DOES NOT rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs & for the rest of his profits fr. the sale or re-lease of the returned assets at the end of the primary lease period. (RR 19-06, Sec. 2.02/1) Verily, it is where amount received as rent is not yet sufficient to amortize the amount paid by lessor as capital outlay Finance lease or full payout lease is a contract involving payment over an obligatory period (also called primary or basic period) of specified rental amounts for the use of a lessors property,
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sufficient in total to amortize the capital outlay of the lessor & to provide for the lessors borrowing costs & profits. The obligatory period refers to the primary or basic non-cancelable period of the lease w/c in no case shall be less than 730 days. The lessee, not the lessor, exercises the choice of the asset & is normally responsible for maintenance, insurance, & such other expenses pertinent to the use, preservation & operation of the asset. Finance leases may be extended, after the expiration of the primary period, by non-cancelable secondary or subsequent periods w/ the rentals significantly reduced. The residual value shall in no instance be less than five per centum (5%) of the lessors acquisition cost of the leased asset. (RR 19-06, Sec. 2.02/2) Note: A Lease can become a conditional sale if, at the end of the lease term, the lessor intends to transfer the property to the lessee. In such a case, the lessor-seller shall recognize the income received as sale and not rental. On the other hand, the lessee-buyer shall charge depreciation, and not rental income. bb. Lease of Real Property cc. Tax treatment of Leasehold improvements by lessee CLASS NOTES: Leasehold improvements Improvements shall redound to the benefit of lessor. It becomes an additional income of lessor. There is a need to determine the depreciation value during the turn-over. This is called the residual value. If the lessor, passes the obligation to pay real property taxes to the lessee, this amount becomes part of the rental income of the lessor. VAT Added to the rental/paid by the lessee Advance rental/long-term lease
The cost borne by the lessee in erecting buildings or making permanent improvements on ground of w/c he is a lessee is held to be a capital investment & not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of the lease, & such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life value of the buildings erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation. Sec. 49. Improvements by lessees---When buildings are erected or improvements made by a lessee in pursuance of an agreement w/ the lessor & such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases: (a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease. (completion
basis)
REV. REGULATION NO. 2 Sec. 74. Rentals---Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an adequate part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business property are ADDITIONAL RENT & constitute a deductible item to the tenant & TAXABLE INCOME to the landlord; the amount of the tax being deductible by the latter.
(b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease & report as income for each of the lease an adequate part thereof. (Pro-rated basis) If for any other reason than a bona fide purchase from the lessee by the lessor, the lease is terminated so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in w/c the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the premature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings. or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the
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value subject to the lease to the extent that such loss was not compensated for by insurance. REV. REGs. NO. 19-86 Sec. 3.01 If the payments are so arranged as to constitute advance rentals, such payments will be apportioned over the lease term. In computing the term of the lease, all options to renew, shall be taken into consideration if there is reasonable expectation that such option will be exercised. iii. Royalties SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (6) Royalties; SEC. 42. Income from Sources Within the Philippines.(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: (4) Rentals and royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use:
(i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting MAMALATEO: Rentals and Royalties If the property or interest is located or used in the Philippines, the income is from sources within the Philippines. Royalty a valuable property that can be developed and sold on a regular basis for consideration Any gain derived therefrom is considered as an active business income subject to corporate income tax. Where a person pays royalty to another for the use of its intellectual property, such royalty is a passive income of the owner thereof, subject to final withholding tax. Rules on Royalty as Passive income. a. Royalty paid by domestic corporation When RECIPIENT is a citizen or a resident alien, or a non-resident alien engaged in trade or business in the Philippines, or a domestic corporation, or a resident foreign corporation. GENERAL RULE: Royalty income from sources within the Philippines is subject to 20% final withholding tax EXCEPT, royalty on books, other literary works and musical compositions received by individuals cited above, which is subject to 10% final tax. When RECIPIENT is a resident alien not engaged in trade or business in the Philippines GENERAL RULE: Royalty income from sources within the Philippines is subject to 25% final withholding tax UNLESS, a lower tax rate is allowed under an existing treaty. When RECIPIENT is a non-resident foreign corporation GENERAL RULE: Royalty income from sources within the Philippines is subject to the 32% final withholding tax, UNLESS, a lower tax rate is allowed under an existing tax treaty. Most-favored-nation-clause.
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The purpose is to grant to the other Contracting State a tax treatment that is no less favorable than that which is granted to the most favored among countries. GENERAL RULE: Royalty income paid by a domestic corporation to a non-resident foreign corporation which is a resident of a Contracting State with which the Philippines has an effective tax treaty is subject to 15% final withholding tax BUT, the rate may be reduced to 10% for certain royalty payments or under the most-favored-nation clause of a tax treaty. b. Royalty paid by a foreign corporation When RECIPIENT is a resident citizen and a domestic corporation
corporation to the stockholders out of its earnings or profits. bb. What are the different kinds of dividends BLACKS DICTIONARY: Cash dividend. A dividend paid to shareholders in the form of money. Stock dividend. A dividend paid in stock expressed as a percentage of the number of shares already held by the shareholder. Property dividend. (also termed Asset dividend) A dividend paid in the form of property, usually, the companys product, rather than in cash or stock. Liquidating dividend. (also termed Liquidation dividend) A dividend paid to a dissolving corporations shareholders, usually from the capital of the corporation, upon the decision to suspend all or part of its business operations. Disguised dividend. (also termed Informal dividend) A payment of salary, rent, interest, or the like to or for a shareholder as a substitute for dividend. CLASS NOTES: Dividends Distribution of earnings or income of a corporation Cash dividend Individuals TAXED Corporation NOT TAXED must be a domestic corporation Property dividend Convenient for closely held corporations TAXED Stock dividend Convert retained earnings into equity NOT TAXED It is treated as an unrealized income and it will only be realized upon sale. However, to the extent that the stock distribution will become irregular, (which changes the equity of shareholders) it may be TAXABLE as to the shareholder with an increased holding Liquidating dividend Distribution of the assets of the corporation in the process of liquidation NOT dividend per se but CAPITAL GAIN Shares are sold for its cash equivalent Disguised dividend
RULE: Royalty income paid by a foreign corporation to a resident citizen and a domestic corporation is subject to tax at graduated rates of tax ranging from 5% to 32% (in case of resident citizens) or at 32% (in the case of domestic corporations), because they are liable to income tax on worldwide income. When RECIPIENT is a non-resident citizen, an alien, and a foreign corporation RULE: They are exempt from income on the royalties received from a foreign corporation whose property or interest is not located or used in the Philippines. CLASS NOTES: Royalties Does not only cover Intellectual Property Rights but also covers services rendered on scientific equipment, etc. It has a BROAD definition. iv. Dividends aa. What are dividends BLACKS DICTIONARY: Dividend. A portion of a companys earnings or profits distributed pro rata to its shareholders, usually in the form of cash or additional shares. DE LEON: Dividends They comprise any distribution, whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign
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Distributions of income of the corporation, usually found in family-owned corporations, which disguises that which is paid as some other form of payment but are in fact dividends.
accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received (D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not. Revenue Regulation 2 Sec. 250-253, 58, 71 SECTION 250. Dividends. Dividends, for the purpose of the law, comprise any distribution whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign corporation, joint-stock company, partnership, joint account (cuentas en participacion), association, or insurance company to the shareholders or members out of its earnings or profits accumulated since March 1, 1913. Although interest on certain Government bonds and other similar obligations is not taxable when received by a corporation, upon amalgamation with the other funds of the corporation, such income loses its identity and when distributed to shareholders, is taxable to the same extent as other dividend. A taxable distribution made by a corporation to individual stockholders or members shall be included is the gross income of the distributees when the cash of other property is unqualifiedly made subject to their demand. Dividends, in cash or other property received by an individual, are subject to tax in his hands in the same manner another income. Dividends, whether in cash or other property, received by a domestic or resident foreign corporation from a domestic corporation are taxable only to the extent of 25 per cent thereof in accordance with Section 24 of the Code. Dividends received by a domestic corporation from a foreign corporation, whether resident or nonresident, are taxable to the extent that they constitute income from sources within the Philippines, as provided in Section 37 (a) (2) (b) of the Code. Dividends paid by the domestic corporation to a nonresident foreign corporation are taxable in full. (For
SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (7) Dividends; REVENUE MEMORANDUM ORDER NO. 31-90 Subject: Prescribing the Use of the Revised BIR Form No. 1951 All Revenue Officers doing field work as examiners, seizure agents and inspectors are now required to use the Revised BIR Form No. 1951, Revenue Officers Field Report, in preparing their monthly report which serves as an attachment to the Traveling Expense Voucher. SEC. 73. Distribution of dividends or Assets by Corporations. (A) Definition of Dividends. - The term 'dividends' when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be. (B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits (C), NIRC. Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution made to the shareholders or members of a corporation shall be deemed to have been made form the most recently
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definition of the different classes of corporations, see Section 84 of the Code). SECTION 251. Dividends paid in property. Dividends paid in securities or other property (other than its own stock), in which the earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such property when receivable by individual stockholders. When receivable by corporations, the amount of such dividends includible for purposes of the tax on corporations are specified in Section 24 of the Code. (See also Section 250 of these regulations). A dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed was acquired through the transfer by the corporation declaring the dividends of property to the corporation the stock of which is distributed as a dividend. Where a corporation declares a dividend payable in a stock of another corporation, setting aside the stock to be so distributed and notifying the stockholders of its action, the income arising to the recipients of such stock is its market value at the time the dividend becomes payable. Scrip dividends are subject to tax in the year in which the warrants are issued. SECTION 252. Stock dividends. A stock dividend which represents the transfer of surplus to capital account is not subject to income tax. However a dividend in stock may constitute taxable income to the recipients thereof notwithstanding the fact that the officers or directors of the corporation (as defined in Section 84) choose to call such distribution as a stock dividend. The distinction between a stock dividend which does not, and one which does, constitute income taxable to the shareholder is the distinction between a stock dividend which works no change in the corporate entity, the same interest in the same corporation being represented after the distribution by more shares of precisely the same character, and a stock dividend where there either has been a change of corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest of the shareholders after the distribution is essentially different from his former interests. A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stock holdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interests than did the old the new certificates plus the old representing the same proportionate interest in the net assets of the corporation as did the old.
SECTION 253. Sale of stock received as dividends. Stock issued by a corporation, as a dividend, does not constitute taxable income to a stockholder in such corporation, but gain may be derived or loss sustained by the stockholder, whether individual or corporate, from the sale of such stock, which gain or loss will be treated as arising from the sale or exchange of a capital asset. (See Section 34 of the Code.) The amount of gain derived or loss sustained from the sale of such stock, or from the sale of the stack with respect to which it is issued, shall be determined in accordance with the following rules: (a) Where the stock issued as dividend is all or substantially the same character or preference as the stock upon which the stock dividend is paid, the cost of each share (or when acquired prior to March 1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair market value) of the old shares of stock divided by the total number of the old and new shares. (b) Where the stock issued as a dividend is in whole or in part of a character or preference materially different from the stock upon which the stock dividend is paid, the cost (and when acquired prior to March 1, 1913, the fair market value as of such date) of the old shares of stock shall be divided between such old stock and the new stock, in proportion, as nearly as may be, to the respective value of each class of stock, old and new, at the time the new shares of stock are issued, and the cost (or when acquired prior to March 1, 1913, the fair market value as of such date) of each share of stock will be the quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share belongs divided by the number of shares in that class. (c) Where the stock with respect to which a stock dividend is issued was purchased at different times and at different prices and the identity of the lots can. not be determined, any sale of the original stock, will be charged to the earliest purchases of such stock, and any sale of dividend stock issued with respect to such stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the dividend chargeable to such stock. (d) Where the stock with respect to which a stock dividend is declared was purchased at different times and at different prices, and the dividend stock issued with respect to such stock can not be identified as having been issued with respect to any particular lot of such stock, then any sale of such dividend stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the stock dividend chargeable to such stock.
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SECTION 58. Income of corporation from leased property. Where a corporation has leased its property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a certain rate of dividend on the lessor's capital stock or the interest on the lessor's outstanding indebtedness, together with taxes, insurance or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor corporation as income, notwithstanding the fact that the dividends and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The fact that a corporation has conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax. While the payments made by the lessee directly to the bondholders or shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and the shareholders, such amounts are interest and dividend payments received as from the lessor and as such shall be accounted for in their returns. SECTION 71. Treatment of excessive compensation. The income tax liability of the recipient in respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or profits, the excessive payments will be treated as dividend. If such payments constitute payment for property, they should be treated by the payer as a capital expenditure and by the recipient as part of the purchase price.
UNLESS, less than 50% of the gross income of the foreign corporation for the 3-year period preceding the declaration of such dividends were derived from sources within the Philippines, IN WHICH CASE, only the amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources shall be treated as income from sources within the Philippines. Distinction between interest income and dividend income. The most important tax distinction between debt and equity is that periodic payments on debt, called INTEREST, can be DEDUCTED by the debtorcorporation from its gross income, while equivalent payment on equity, which is DIVIDEND, CANNOT BE DEDUCTED. Tests provided by US Tax Courts in determining whether an interest payment is actually interest or dividend. a) Whether the parties intend at the time of the issuance of the original document to create a debtor-creditor relationship b) The nomenclature/label used c) Whether the obligation has a definite maturity date fixed or ascertainable d) Whether the holders of the securities have voting powers e) Whether the instrument bear a fixed rate of interest f) Whether the obligation to pay interest is positive and unconditional Distinctions between dividend and loan. If the amounts withdrawn were at the time of withdrawals intended to be repaid, they are considered loans and are thus not considered as income subject to tax. But if the withdrawals are substantially in proportion to stockholdings, especially in a close corporation, if no notes are executed, no interest is charged or paid, no repayment is made and no effort is exerted to enforce collection, they are held as dividends subject to tax if made by individuals and non-resident foreign corporations. GENERAL RULE: Dividends are included in the gross income of the stockholder, UNLESS they are exempt from tax or subject to final tax at preferential rate under the Tax Code. Cash dividend and property dividend are subject to income tax. Whereas, stock dividend is generally exempt from income tax.
MAMALATEO:
Commissioner)
Dividends are prima facie the income of the record owner of the stock and are taxable to such owner. But where the record owner has sold the stock under an escrow agreement under which title is to be retained by him, the dividends received by the owner and applied in reduction of the purchase price are not taxable to him. (Moore vs. GENERAL RULE: Dividends received from a domestic corporation or from a foreign corporation are treated as income from sources within the Philippines,
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HOWEVER, any type of dividend must come from the unappropriated retained earnings of the corporation. Distinctions between cash dividend and stock dividend. CASH DIVIDEND Disbursement to the stockholder of the accumulated earnings, and the corporation parts irrevocably with all interest therein. STOCK DIVIDEND Dividend payable in reserve or increase of additional stock of the corporation. Involves no disbursement, and the corporation parts with nothing to the stockholders who receive, not an actual dividend but a certificate of stock. Still being the property of the corporation, may be reached by an execution against the corporation and may be sold as part of the corporate property.
cannot be subjected to income tax until that gain has been realized. HOWEVER, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution or cancellation, in whole or part, essentially equivalent to the distribution of taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profit. Stock dividends cannot be declared out of outstanding corporate stocks. A stock dividend, being payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings; hence, it has no tax consequence. Rules on taxation of dividends. a. Dividend is paid by a domestic corporation Recipient is a citizen or resident alien Beginning January 1, 1998, cash dividend or property dividend paid by A domestic corporation, or Joint stock company, Insurance or mutual fund company, 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, joint account, or joint venture or consortium taxable as a corporation of which he is a member or a co-venturer, out of its earnings or profits in 1993 or succeeding years, is generally subject to the following final withholding tax rates: 6% - beginning January 1, 1998; 8% - beginning January 1, 1999; or 10% - beginning January 1, 2000 HOWEVER, the tax on dividends shall apply only on income earned on or after January 1, 1998. The appropriate tax rate to be deducted and withheld on the cash dividend by the paying corporation shall be the rate prescribed in the year of the receipt of such dividend. Recipient is a non-resident alien engaged in trade or business in the Philippines Cash and/or property dividends shall be subject to 20% final withholding tax.
Becomes the absolute property of the stockholders and cannot be reached by the creditors of the corporation in the absence of fraud.
Dividend distinguished from profits. Profits in the hands of a corporation do not become dividends until they have been set apart, or at least declared, as dividends and transferred to the separate property of the stockholders. GENERAL RULE ON STOCK DIVIDENDS: NOT subject to income tax. However, in some cases, it may become part of taxable income. Taxable vs. NOT Taxable DIVIDEND TAXABLE NOT TAXABLE Stock dividend where Stock dividend which there either has been a works no change in the change of corporate corporate entity, the identity or a change in same interest in the the interest of the same corporation being shareholders after the represented after the distribution. distribution of more shares of precisely the same character Subsequent cancellation or redemption of stock dividend is essentially equivalent to the declaration of cash dividend. GENERAL RULE: Stock dividends, issued by the corporation, are considered unrealized gain, and
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Recipient is a non-resident not engaged in trade or business in the Philippines Cash and/or property dividends shall be subject to final withholding tax rate of 25%. Recipient is a domestic corporation or a resident foreign corporation NOT subject to tax. Recipient is a non-resident foreign corporation Dividends received by a non-resident foreign corporation from a domestic corporation is subject to the 15% final withholding tax, subject to the condition that the country in which the non-resident foreign corporation is domiciled, shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% - 1997 19% - 1998 18% - 1999 17% - 2000 and thereafter, which represents the difference between the regular income tax of 35% - 1997 34% - 1998 33% - 1999 32% - 2000 And the 15% tax on dividends actually paid as provided for in this paragraph. b. Dividend is paid by a foreign corporation Recipient is a resident citizen or a domestic corporation Dividend income is subject to Philippine income
of a foreign corporate stockholder, the income of which is required to be withheld by the paying corporation. Commisioner v. Manning 66 SCRA 14 FACTS: MANTRASCO had 25,000 common shares, wherein 24,700 of which was owned by Reese. The rest of the shares were owned by private respondents. A trust agreement was executed between them, the manifest intention of which was to make respondents the sole owners of Reeses interest in MANTRASCO upon his death. When Reese died, MANTRASCO made partial payment of Reeses shares and a new certificate was issued in the favor of MANTRASCO. Thereafter, MANTRASCOs stockholders issued a Resolution declaring that the 24,700 be reverted to the capital account of the company as a stock dividend to be distributed to respondent. Eventually, all the shares were paid and distributed to private respondents. BIR claims that the distribution of Reeses share as stock dividend was in effect a distribution of the asset or property of the corporation as may be gleamed from the payment of cash for the redemption of said stock and upon distribution of the same to respondents; hence, taxable as income of respondents. On the other hand, respondents claim that their respective shares remained the same before and after the declaration of the stock dividends and only the number of shares held by them had changed, therefore, they are not liable for taxes. Both parties were on the assumption that the stock dividends were treasury shares. HELD: They were not treasury shares. Treasury shares are stocks issued and fully paid for and reacquired by the same corporation either by purchase, donation, forfeiture or other means. Although they are issued shares, they do not have the status of outstanding shares being in the treasury. Such share, as long as it is held by the corporation as such, participates neither as dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as a voting stock, for otherwise equal voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation. These essential features of a treasury stock are lacking in the questioned shares. The intention of the parties to the trust agreement was to treat the 24,700 shares of Reese as absolutely outstanding shares of Reeses estate until they were fully paid. Such being their nature, their declaration as treasury stock was a complete nullity, being violative of public policy. A stock dividend, being one payable in capital stock, cannot
tax. HOWEVER, the foreign income tax paid or withheld on such dividend may be credited against the Philippine income tax due, subject to limitation. GENERALLY, the tax rate applied is the graduated income tax rates, UNLESS, a lower tax rate is allowed under an effective treaty. Recipient is a non-resident citizen or an alien or a foreign corporation Dividend income received from a foreign corporation not doing business in the Philippines shall be treated GENERALLY, as income from foreign sources; hence, exempt from Philippine income tax if received by a non-resident citizen, an alien or a foreign corporation. Dividends of a domestic corporation, which are delivered in cash to foreign corporations as stockholders are subject to the payment of income tax, the exemption clause in the charter of the paying corporation notwithstanding. Tax exemptions are personal to the franchise grantee. What is being taxed is the dividend income
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be declared out of outstanding corporate stock, but only from retained earnings. When the companies involved parted of their earnings to buy the corporate holdings of Reese, they were in ultimate effect making a distribution of such earnings to the respondents. All these amounts are subject to income tax. C.M. Hoskin v. Commissioner 30 SCRA 434 FACTS: The petitioner company is engaged in the real estate business as brokers, managing agents and administrators. It was founded by Mr. C.M. Hoskins who owned 996 shares out of its 1,000 shares. The other 4 shares were owned by other officers of the corporation. At the time that this controversy arose, Hoskin was the President, Chairman of the Board of Directors, stockholder and was also a salesmanbroker of the company which entitled him to salaries and bonuses including 50% of the supervision fees that was collected by the company from its clients (amounting to Php99,977.91). The CIR disallowed the deduction made by the petitioner in its income tax return of the amount representing the supervision fees. HELD: The payment by the taxpayer to its controlling stockholder of 50% of its supervision fees is not deductible ordinary and necessary expense and should be treated as distribution of earnings and profits of the taxpayer. (1) The amount was inordinately large. Bonus to employees made in good faith and as additional compensation are deductible, PROVIDED, such payment, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The conditions precedent to the deduction of bonuses are as follows: (a) the payment of the bonuses is in fact compensation; (b) it must be for personal services actually rendered; and (c) the bonuses, when added to the salaries, are reasonable. Although theres no fixed test in determining what is reasonable, some tests used are as follows: i. Amount and quality of the services performed; ii. Good faith; iii. Character of the taxpayers business; iv. Volume and amount of its earnings; v. locality, type and extent of the services rendered; vi. Salary policy; vii. Size of the business; viii. Employees qualifications and contributions to the business; and ix. General economic condition. For income tax purposes, the employer cannot legally such bonuses as deductible unless they are shown to be reasonable. (2) The question of allowing or disallowing as deductible expenses the amounts paid to corporate officers by way of bonus is determined by the CIR exclusively for income tax purposes.
Although admittedly, it is the corporations discretion to fix the amounts to be paid to its corporate officers, this right is NOT absolute. It cannot be used for the purpose of evading payment of taxes. (3) The corporation was practically of a sole proprietorship of Hoskin. Hoskin had virtually absolute control of the company and as he has chosen to conduct his business as a corporation, he has also bound himself with the corporate norms and obligations. He is bound to pay income tax imposed on corporations and may not diminish his tax liability by way of corporate resolutions authorizing payment of inordinately large commissions and fees to its controlling stockholder. Kuenzle v. Commisioner 28 SCRA 365 FACTS: Petitioner, a domestic corporation, declared net losses in its income tax returns from 1953-1955. During these years, CIR disallowed as deductible expenses the bonuses paid by Kuenzle & Streiff to its officers (ranging from Php9,000Php50,000) basing its decision on Section 30(a) 1 of the Revenue Code which allows the deduction from gross income all the ordinary and necessary expenses incurred during the taxable year in carrying on the trade or business of the taxpayer, including the reasonable allowance for salaries and other compensation for personal services actually rendered. Petitioner contends that the Tax Court acted in a purely arbitrary manner in concluding that the bonuses were not reasonable; it based its ruling exclusively upon the fact that they suffered losses during these years; and erred in not considering individually the total compensation paid to each of the petitioners officers to determine the reasonableness of the bonuses in question. Petitioner also relied on a previous case wherein the court allowed as deductible bonuses of amounts bigger than the ones in question in the present case. In addition, petitioner aimed to justify the award of huge bonuses on account of its alleged salary policy of giving small basic salaries but substantial bonuses. Lastly, petitioner claims good faith. HELD: Bonuses in question were not reasonable considering all the material and relevant factors. (SEE: Hoskin vs. Commissioner on tests of reasonableness) The previous case, which allowed deductions of the bonuses, is distinguished from the present case considering the fact that in the former, notwithstanding the payment of the bonuses, the petitioner had substantial net profits. The inevitable result of allowing the deduction of the bonuses, in this case, are net losses.
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(1) There is no evidence nor any claim that the officers paid substantial bonuses were gifted with some special talent, or had undergone some extraordinary training, or had accomplished any particular task, that contributed materially to the success of petitioners business during the taxable years in question. (2) All of the working personnel of petitioner (who were mostly Filipinos) received no pay increase at all during the same years. (3) Salaries and bonuses were paid to the top officials in spite the fact that according to its income tax returns, it suffered net losses. Moreover, it was shown that petitioner took the funds from the general reserve of the company and such resort to the general reserve could not be considered as ordinary and necessary. Although the salary policy of petitioner is not unreasonable, its application should still not result on producing a net loss for the employer as such scheme may be used to evade taxes. Reliance on good faith was also rejected as: (a) good faith cannot decide whether payment was reasonable; (b) petitioners alleged good faith is not clearly manifest in this case as petitioner already knew that it was going to suffer losses. Although admittedly, it is the corporations discretion to fix the amounts to be paid to its corporate officers, this right is NOT absolute. It cannot be used for the purpose of evading payment of taxes. Republic vs. Dela Rama 18 SCRA 861 FACTS: Plaintiff-appellant argues that the deficiency income tax in this case was assessed in a sum representing cash dividends declared in 1950 by the Dela Rama Steamship Co., Inc. in favor of Esteban dela Rama and was applied as payment of the latters account with the former. He maintains that this crediting of accounts in the books of the company constituted constructive receipt by the estate or the heirs of Esteban of the dividends, and this dividend was an income of the estate and was therefore, taxable. HELD: It is not disputed that the dividends in question were not actually paid either to the estate, or to the heirs of Esteban. Rule on constructive receipt of dividends: If the debts to which the dividends were applied really existed, and were legally demandable and chargeable against the deceased, there was constructive receipt of the dividends. If there were no such debts, then there was no constructive receipt. As regards the first debt, it does not appear that De la Rama Steamship Co., Inc. had ever filed a claim
against the estate in connection with that indebtedness. The existence and the validity of the debt is, therefore, in dispute, and there was no proof to show the existence and validity of the debt. As regards the second debt to which the dividends were partly applied were accounts due from Hijos de I. de la Rama. The alleged debtor here was an entity separate and distinct from the deceased. If that was so, its debts could not be charged against the deceased, even if the deceased was the principal owner thereof, in the absence of proof of substitution of debtor. NOTE: Distribution of partners share in the net income of a taxable partnership = distribution of dividends in a corporation v. Annuities/Proceeds from insurance/other types of insurance CHAPTER 3 LIFE ANNUITY Art. 2021. The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once with the burden of the income. SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (8) Annuities; SEC. 48, RR2 SECTION 48. Annuities and insurance policies. Annuities paid by religious, charitable, and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds the amounts paid by him as consideration for the contract. An annuity charged upon devised land is taxable to a donee-annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as gross income the amount of rent paid to the annuitant, and he is not entitled to deduct from his gross income any sums paid to the annuitant. Amounts received by an insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, such as the socalled "dividends" of a mutual insurance company, life
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which may be credited against the current premium, are not subject to tax. Distributions on paid-up policies which are made out of earnings of the insurance company subject to tax are in the nature of corporate dividends and should be included in the taxable income of the individual, without any credit for the amount of tax paid by the corporation at source. CLASS NOTES: Life insurance proceeds are NOT Taxable Endowment policy allows one to get the money during his or her lifetime TAXABLE for amounts in excess of premium payments DE LEON: Annuity is an amount payable yearly or at other regular intervals (ex. Quarterly) for a certain or uncertain period (as for years or for life as in life insurance or in perpetuity as in the case of an endowment fund). The term may refer to the right to receive such annuities, or to the agreement or contract whereby in return for capital consisting money or other property given by the annuitant (one entitled to receive the benefits), the recipient binds himself to pay the stipulated annuity. Life insurance proceeds paid to beneficiaries upon the death of the insured are not subject to tax as they are considered more as an INDEMNITY rather than as gain or profits, and payments for injuries or sickness as they are compensatory in nature. They are not, therefore, strictly income.
Philippines shall withholding tax.
be
subject
to
20%
final
When RECIPIENT is a non-resident alien not engaged in trade or business in the Philippines RULE: Prizes and other winnings shall be subject to 25% final withholding tax. When RECIPIENT is a corporation (domestic or foreign) RULE: the prizes and other winnings are added to the corporations operating income and the net income is subject to 32% corporate income tax. EXCEPTION: Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement are EXCLUDED from gross income only if a) The recipient was selected without any action on his part to enter the contest or proceeding; and b) The recipient is not required to render substantial future services as a condition to receiving the prize or award. MOREOVER, prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations are EXCLUDED from gross income. vii. Pensions/retirement benefits/separation pay SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (10) Pensions; and DE LEON: EXCEPTION: Retirement benefits, pensions, etc. received by government officials and employees from the GSIS and SSS in recognition for their services to the government, and retirement benefits received by officials and employees of private firms under certain conditions are EXCLUDED from the determination of gross income. MAMALATEO: Pensions are paid for past employment services rendered and are subject to specific regulations. CLASS NOTES:
Includes: gambling winnings/contests/raffle prizes/small town lottery winnings

SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (9) Prizes and winnings; MAMALATEO: When RECIPIENT is a citizen resident alien or a non-resident alien engaged in trade or business in the Philippines RULE: Prizes (except those amounting to Php10,000 or less) and other winnings (except PCSO and lotto winnings) from sources within the
vi. Prizes and winnings/awards/rewards
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Take note of 2 kinds of retirement benefits: (1) Retirement Law (2) Under a qualified benefit plan those adopted by the employer and must satisfy the requirements of Revenue Regulations Must be a trust, set up towards the payment of retirement benefits IRREVOCABLE Must be duly-registered Tax EXEMPT insofar as its INTEREST earned is concerned Distinguish CURRENT FUNDS vs. NON-CURRENT FUNDS Current funds amount that must be contributed to the retirement fund in a given year DEDUCTIBLE as expense Non-current funds amount that must be paid at the start of the retirement fund, which covers the previous years NOT DEDUCTIBLE AS A WHOLE Only the current year may be deducted + (amount that covers the previous years / no. of years that have elapsed) Ex. Php 10M is needed to cover the past 10 years; Php 1M is assessed as funds needed to cover any given year DEDUCTIBLE: Php 1M (current fund, deductible) + Php10M/10 years (allowed deductible in a given year to cover the past 10 years) vii. Pensions/retirement benefits/separation pay SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items:
remuneratory donations under civil law); or the use or opportunity to use of capital shall be deemed as part of taxable income. e. Income from whatever source derived i. ii. Recovery of accounts previously written off Tax refunds receivable
Note: Items (e)(i) and (e)(ii) are subject to the application of the so-called Tax Benefit Rule Tax Benefit Rule MAMALATEO: Bad debts claimed in the preceding year(s) but subsequently recovered shall be included as part of the taxpayers gross income in the year of such recovery to the extent of the income tax benefit of said deduction. Ex.: If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer did not benefit from a deduction of the said bad debts written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not treated as a receipt of realized taxable income. Recoveries of bad debts previously deducted do not constitute taxable income unless the deductions of bad debts in prior years resulted in a reduction of the tax liability. VITUG: For Bad Debts to be deductible, the following must exist: a. There is a valid and subsisting debt. b. The obligation is connected with the taxpayers trade or business, and it is not between related parties under Sec. 36 (B) of the Tax Code. Uncollected income is not deductible as bad debts unless the amount has earlier been reported as income as when the taxpayer is on accrual basis. c. There is an actual ascertainment that the debt is worthless (bankruptcy, insolvency, prescribed
(10) Pensions
viii. Income from gifts/bequests/devises Note: The receipt of a gift/bequest/devise is not treated as a receipt of taxable income but the income from such properties received is subject to income tax. Vitug: Gifts, bequests, and devises (which are, instead, subject to estate or gift tax) are excluded from gross income and not thus subject to taxable net income. However, income from such property; or the amount received is on account of services rendered (Pirovano vs Com 14 SCRA 834), whether constituting a demandable debt or not (such as
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debts). Mere failure of efforts to collect, without proof of incapability or inability to pay of the debtor is not enough to constitute a bad debt. d. The debt is charged-off within the taxable year. A partial writing off of a bad debt is not allowed; it must be charged-off in full or not at all. Sec. 36 (B) (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust. iii. Found treasures iv. Cancellation of indebtedness B. Income Not Subject to Tax - Exclusions from Gross Income/Income Exempt from Tax 1. Certain passive income of foreign government from their Philippine investments CLASS NOTES:
Tax collection on those not exempted is pursuant to the governmental functions of the state.
SEC. 32. Gross Income. (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (7) Miscellaneous Items. (a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. Com. v. Mitsubishi Metal 181 SCRA 214 FACTS: Atlas entered into a loan and sale contract with Mitsubishi for the expansion of the productivity capacity of Atlas mines. Under the contract, Mitsubishi agreed to extend to Atlas a loan for the installation of a new concentrator for copper production. Atlas in turn undertook to sell to Mitsubishi all the copper concentrates produced from the said machinery for a period of 15 yrs. Mitsubishi thereafter applied for a loan with the Eximbank to finance its loan grant to Atlas. 15% tax was withheld from the interest payments made by Atlas to Mitsubishi. Mitsubishi then filed a claim for tax credit to be applied to their existing and future tax liabilities. Due to the inaction of the CIR, Mitsubishi filed a petition claiming that it was only a mere agent of Eximbank, which was a financing institution owned, controlled and financed by the Japanese Government (tax exempt). Such status of Eximbank is the basis of Mitsubishis claim of exemption from paying tax. ISSUE: WON interest income from the loan extended to Atlas by Mitsubishi is exempt from income taxation and, therefore, exempt from withholding tax. *collateral issue: WON Mitsubishi is only a conduit for Eximbank, which will then be considered as the creditor whose investments in the Phils on loans are exempt from taxes. HELD: NO. Mitsubishi secured such loans in its independent capacity as a private entity and not as a mere conduit of Eximbank. The Loan and Sales agreement does not contain any direct or inferential reference to Eximbank, nor is Eximbank a signatory to such contract. The contract was not a simple contract of loan but a reciprocal obligation. The transaction between Mitsubishi and Eximbank was a
This is in the nature of an exemption. Not all kinds of this income are exempted. There is no blanket exemption; the exemption is restricted to those specifically included in the list.
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distinct and separate contract from that entered into by Mitsubishi and Atlas. The subject of the 15% withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to Atlas. Laws granting exemption are strictly construed strictissimi juris against the taxpayer. Mitsubishi is not even among the entities which, under the Tax Code, are entitled to exemption. 2. Interest income from long term deposit or investment
This is for the purpose of encouraging people to save money. If the long-term deposit is terminated earlier than the period originally stipulated, termination tax must be paid.
SEC. 22. Definitions - When used in this Title: (FF) The term "long-term deposit or investment certificates" shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP. Sec. 24. Income Tax Rates B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
CLASS NOTES:
interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20%
SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the Philippines. (2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarters of multinational company, 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 joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall
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be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years 5%; Three (3) years to less than four (4) years - 12%; and Less than three (3) years - 20%.
4.
Mr. Oono is sent by Mitsubishi Japan to Marubeni Phils. The income he will earn from the Phils. If he stays here for less than 183 days will be governed by the tax treaty, if there is any, and not the NIRC.
SEC. 32. Gross Income. (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. 4. Proceeds of life insurance
What is life insurance? Is casualty insurance a life insurance contract? Are proceeds of non-life or property insurance taxable? Pre-need contracts? Casualty insurance policies are written to cover loss that is the direct result of accident. It may include Auto liability insurance for car accidents, Marine insurance for shipwrecks or losses at sea, and etc. Life, health and property insurance are typically excluded from the definition. Loosely used to describe an area of insurance not particularly or directly concerned with life insurance, fire insurance or automobile insurance.. (Wikipedia)
CLASS NOTES:
Note: Exemption applies only to individual taxpayers except nonresident alien not engaged in trade or business. They are taxed at 25% For corporate taxpayers no exemption
3. Income exempt under a tax treaty
This applies only to: (1) non-resident alien and (2) non-resident corporation. Once he/it is a resident, the tax treaty no longer applies. Illustrations: The income of a subsidiary of Japan in 1. the Philippines is governed by the NIRC because it is already a domestic corporation. It doesnt matter that its stockholders are Japanese. The income of the Mitsubishi branch 2. office in the Philippines, a resident foreign corporation, is governed by the NIRC. But if income earners are foreigners, one must look if a tax treaty applies to it. If Mitsubishi Phils. Corp. declares 3. dividends income to Japanese shareholders, one must look if a tax treaty applies to it.
CLASS NOTES:
Proceeds of life insurance are not taxable as income.
Endowment (received during the lifetime) is not considered life insurance it is not exempt amount in excess of premiums paid is taxable Medical/accident insurance proceeds not taxable as income merely restores what one has lost indemnification technically a case of tax exclusion
SEC. 32. Gross Income. (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single
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sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. proceeds of life insurance policies are taxexempt interest payments on proceeds of life insurance are taxable RR2 SECTION 62. Proceeds of insurance. The proceeds of life-insurance policies, paid by reason of the death of an insured to his estate or to any beneficiary (individual, partnership, or corporation, but not a transferee for a valuable consideration), directly or in trust, are excluded from the gross income of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in installments. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in gross income. Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance, endowment, or annuity contract are excluded from gross income but, if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation. - amounts received (other than those paid by reason of the death of the insured and interest payments on such amounts) under a life insurance, endowment, or annuity contract: excluded from gross income - BUT if such amounts (when added to amounts received before the taxable year under such contract) exceed the total premiums or consideration paid: the excess shall be included in gross income - in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein: only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are tax-exempt
5. Return of premium paid
What is cash surrender value?

amount of money which the insurer agrees to pay to the holder of an insurance policy if he surrenders it and releases his claims upon it the more premiums the insured has paid, the greater will be the surrender value which is always a lesser sum than the total amount of premiums paid (Moreno) SEC. 32. Gross Income. (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. RR2 SECTION 48. Annuities and insurance policies. Annuities paid by religious, charitable, and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds the amounts paid by him as consideration for the contract. An annuity charged upon devised land is taxable to a donee-annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as gross income the amount of rent paid to the annuitant, and he is not entitled to deduct from his gross income any sums paid to the annuitant. Amounts received by an insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, such as the so-called "dividends" of a mutual insurance company, which may be credited against the current premium, are not subject to tax. Distributions on paid-up policies which are made out of earnings of the insurance company subject to tax are in the nature of corporate dividends and should be included in the taxable income of the individual, without any credit for the amount of tax paid by the corporation at source. - The amount received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts is tax-exempt. 6. Compensation for Injuries or Sickness
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Sec. 32 (B) (4): (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: xxx (4) Compensation for Injuries or Sickness. amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. 2 Sec. 63. Amounts received as compensation for injuries or sickness. The RR amounts received by an insured or his estate or beneficiaries through accident or health insurance or under workmen's compensation acts as compensation for personal injuries or sickness are excluded from the gross income of the insured, his estate, and other beneficiaries. Any damages recovered by suit or agreement on account of such injuries or sickness are similarly excluded from the gross income of the individual injured or sick, if living, or of his estate or other beneficiaries entitled to receive such damages, if dead.
Congress is to impose only one tax either the income tax or transfer tax. e.g. Value of property acquired by gift, bequest, devise, or descent is exempt from income tax because it is covered by transfer taxes.
3)
The theory is that recoupment on account of such losses is not income, since it is not derived from capital, from labor or from both combined. The fact that the payment of the compensation for such loss was voluntary does not change its exempt status. It was in fact compensation for a loss which impaired petitioners capital. It is important to determine which items are excluded/exempt because it is generally difficult to claim from the government what was already paid. The burden of proving the credit is on the taxpayer and the right is subject to the statue of limitations a written claim must be filed with the BIR and the CTA within two years from the date of payment, otherwise it shall be barred forever.
They are income, gain, profit that are expressly exempt under the Consti, tax treaty, tax code, or general or special laws
PROF. FOLLOSCO: This is properly called an exclusion and not an exemption because it is not a tax on income. This section contemplates a form of compensation a restoration to your original status. e.g. If your arm gets amputated, that arm is, in a sense, lost capital and so the payment for that loss is compensation and not income. MAMALALETEO: Exclusions refer to items which are not included in the determination of gross income either because: 1) They represent return of capital or are not income, gain, or profit. These may take many forms. - Capital may be recovered from the sale of property by deducting the cost or adjusted basis of the property sold form the gross selling price, or by deducting depreciation from the gross income relating to the property used in the trade or business. - It may relate to indemnities such as life insurance paid by the insurance company to the insured - it may include damages when the damages awarded represent capital 2) They are subject to another kind of internal revenue tax. The policy of
VITUG: This section does not include damages or compensation recovered for loss of profit (lucrum cessans) in loss or damage to property (not for death or injury). Such will be taxable. Other examples of exclusions (from Mamalateo) 1. Compensation for damages to personal or family rights, damages from slander and libel, award for loss of life, damages for injuries to the good will of a taxpayers business are not taxable, unless they exceeded its cost. 2. Payments in settlement of an action for breach of promise to marry 3. Compromise payments in settlement of an action for damages against a bank on account of conduct impairing the taxpayers goodwill by injuring its reputation 4. Damages received for patent infringement, breach of contract or fiduciary duty and recoveries (except punitive damages) for antitrust violations are excluded from gross income to the extent that the losses
to which the damages relate did not give rise to a tax benefit either in the recovery year or earlier tax years.
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However, insider profits recovered by a corporation form the insider (major stockholder or director) are taxed to the corporation. 7. Winnings/Prizes i. Philippine Charity Sweepstakes and lotto winnings Section 24 (B)(1) Interests, Royalties, Prizes, and Other Winnings - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from longterm deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: ii. Prizes and awards in Sports Competition Section 32 (B) (7.d)
AND COMPETITIONS FROM THE PAYMENT OF INCOME AND OTHER FORMS OF TAXES AND FOR OTHER PURPOSES. Section 1. All prizes and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax: Provided, That such prizes and awards given to said athletes shall be deductible in full from the gross income of the donor: Provided, further, That the donors of said prizes and awards shall be exempt from the payment of donor's tax. The benefits herein provided shall cover the XVIth Southeast Asian Games (SEA Games) held in Manila from November 25 to December 5, 1991. Sec. 2. As used in this Act the term: (1) "Sports tournaments and competitions" shall mean those tournaments and competitions sanctioned by the national sports associations in accordance with the rules and regulations pursuant to Section 3 hereof; and (2) "National sports association" shall mean those duly accredited by the Philippine Olympic Committee. Sec. 3. Upon the recommendation of the Commissioner of the Bureau of Internal Revenue, the Philippine Sport Commission (PSC) and the Department of Finance shall, within thirty (30) days from the effectivity of this Act, jointly promulgate rules and regulations necessary for the effective implementation of this Act. Sec. 4. All laws, decrees, executive orders, other executive issuances, rules and regulations, or parts thereof, which are inconsistent with this Act, are hereby repealed or modified accordingly. Sec. 5. This Act shall take effect upon the completion of its publication in at least two (2) newspapers of general circulation. Approved: May 22, 1992 MAMALATEO: To be eligible for exemption, the national sports association referred to in the law that should sanction said sport activity is the Philippine Olympic Committee. e.g. The P1M price won by Filipino International Chess Grand Master from the First Pamabansa Millenium Chess grand Priz sanctioned bu the National Chess Federation is subject to 20% withholding tax. e.g. The prize money won by boxer Lusito Espinoso from the WBC Featherwieght Championship Fight in Cotobato is exempt form income tax. But the prize of challenger Carlos Rios of Argentino is subject to 25% withholding tax.
Prizes and Awards in Sports Competition. - All
prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. RA 7549: AN ACT EXEMPTING ALL PRIZES AND AWARDS GAINED FROM LOCAL AND INTERNATIONAL SPORTS TOURNAMENTS
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e.g. Cash prizes won by local players in golf tournaments are not passive income inasmuch as participating in golf tournaments is their profession. The cash prizes they will receive will be subject to the rates in Sec. 24(A) and not to the 20% withholding tax in Sec. 23(B). iii. Prizes and Awards religious/ charitable/scientific/artistic/literary
Requisites for exclusion

Sec. 32 (B)(7,c)
Prizes and Awards. - Prizes and awards made

primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.
8. Gain derived from buying and selling shares of stocks as capital asset listed and traded in the local exchange excluded/exempt from income tax but subject to percentage tax
(pay attention to D. Common Provisions it tells you that the gains derived from this section is exempt from income tax BUT subject to the percentage taxes found herein)
Sec. 127 Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock Exchange or Through Initial Public Offering. (A) Tax on Sale, Barter or Exchange of Shares
of Stock Listed and Traded Through the Local Stock Exchange. - There shall be levied, assessed
and collected on every sale, barter, exchange, or other disposition of shares of stock listed and traded through the local stock exchange other than the sale by a dealer in securities, a tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor.
(B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. - There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price
or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange: Up to twenty-five percent (25%) - 4% Over twenty-five percent (25%) but not over thirtythree and one third percent (331/3%) - 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term "closely held corporation" means any corporation at least fifty percent (50%) in value of outstanding capital stock or at least fifty percent (505) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. (2) Family and Partnership Ownerships. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of the paragraph, the 'family of an individual' includes only his brothers and sisters (whether by whole or halfblood), spouse, ancestors and lineal descendants. (3) Option. - If any person has an option acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of options shall be considered as an option to acquire such stock. (4) Constructive Ownership as Actual Ownership. Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock.
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(C) Return on Capital Gains Realized from
Sale of Shares of Stocks. (1) Return on Capital Gains Realized from Sale of Shares of Stock Listed and Traded in the Local Stock Exchange. - It shall be the
duty of every stock broker who effected the sale subject to the tax imposed herein to collect the tax and remit the same to the Bureau of Internal Revenue within five (5) banking days from the date of collection thereof and to submit on Mondays of each week to the secretary of the stock exchange, of which he is a member, a true and complete return which shall contain a declaration of all the transactions effected through him during the preceding week and of taxes collected by him and turned over to the Bureau Of Internal Revenue. (2) Return on Public Offerings of Share Stock. - In case of primary offering, the corporate issuer shall file the return and pay the corresponding tax within thirty (30) days from the date of listing of the shares of stock in the local stock exchange. In the case of secondary offering, the provision of Subsection (C)(1) of this Section shall apply as to the time and manner of the payment of the tax. (D) Common Provisions. - Any gain derived from the sale, barter, exchange or other disposition of shares of stock under this Section shall be exempt from the tax imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the regular individual or corporate income tax. Tax paid under this Section shall not be deductible for income tax purposes.
shares of stock listed and traded through the local stock exchange. - There shall be levied, assessed,
and collected on every sale, barter, exchange, or other disposition of shares of stock listed and traded through the local stock exchange other than the sale by a dealer in securities, a tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged, or otherwise disposed which shall be paid by the seller or transferor. It shall be the duty of every stock broker who effected the sale subject to the tax imposed herein to collect the tax and remit the same to the Bureau of Internal Revenue in five (5) banking days from the date of collection thereof and to submit on Mondays of each week to the secretary of the stock exchange, of which he is a member, a true and complete return which shall contain a declaration of all the transactions effected through him during the preceding week and of taxes collected by him and turned over to the Bureau of Internal Revenue.
(b) Tax on shares of stock sold or exchanged through initial public offering. - There shall be
levied, assessed, and collected on every sale, barter, exchange, or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged, or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged, or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange: 33 1/3% or below 4% Over 33 1/3% but below 2% 50% Over 50% 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondaryoffering. For purposes of this section, the term "closely held corporation" means any corporation at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: 1. Stock not owned by individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned
(again, pay attention to (c) Common Provisions)

REPUBLIC ACT NO. 7717 AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF SECTION 1. A new section is hereby inserted in the National Internal Revenue Code, as amended, as Section 124-A, which shall read as follows: SEC. 124-A. Tax on Sale, Barter or Exchange of
Shares of Stock Listed and Traded through the Local Stock Exchange or through Initial Public Offering. - (a) Tax on sale, barter or exchange of
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proportionately by its shareholders, partners, or beneficiaries. 2. Family and partnership ownerships. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of this paragraph, the family of an individual includes only his brothers and his sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants. 3. Option. - If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of options shall be considered as an option to acquire such stock. 4. Constructive ownership as actual ownership. Stock constructively-owned by reason of the application of paragraph or (3) shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by the individual by reason of the application of paragraph hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. In case of primary offering, the corporate issuer shall file the return and pay the corresponding tax within thirty (30) days from the date of listing of the shares of stock in the local stock exchange. In the case of secondary offering, the provision of subsection (a) of this section shall apply as to the time and manner of the payment of the tax. (c) Common provisions. - Any gain derived from the sale, barter, exchange, or other disposition of shares of stock under this section shall be exempt from the tax imposed in Sections 21(d), 24(e)(2), 25(a)(6)(C), and 25(b)(5)(C) of this Code and from the regular individual or corporate income tax. Tax paid under this section shall not be deductible for income tax purposes. SEC. 2. For a period of one (1) year after the effectivity of this Act, the tax imposed on the sale, barter, exchange, or other disposition of stock listed and traded through the local stock exchange shall be three-eighths of one percent (3/8 of 1%). SEC. 3. Sections 21(d)(2), 24(e)(2)(B), 25(a)(6)(C)(ii), and 25(b)(5)(C)(ii) of the National Internal Revenue Code, as amended, are hereby repealed. SEC. 4. The Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, shall within ninety (90) days from the effectivity of this Act promulgate such rules and
regulations as may be necessary for the effective implementation hereof. SEC. 5. This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in at least two (2) national newspapers of general circulation whichever comes earlier. Approved, May 5, 1994. 9. Income Derived by the Government or its political subdivision from the exercise of any essential governmental function Sec. 32 (B)(7) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: xxx
Income Derived by the Government or its Political Subdivisions. - Income derived from
any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.
PD 1931 PRESIDENTIAL DECREE NO. 1931 DIRECTING THE RATIONALIZATION OF DUTY AND TAX EXEMPTION PRIVILEGES GRANTED TO GOVERNMENT-OWNED OR -CONTROLLED CORPORATIONS AND ALL OTHER UNITS OF GOVERNMENT WHEREAS, government-owned or controlled corporations as well as entities performing quasigovernmental functions are still enjoying exemptions from duties, taxes, fees, imposts and other charges despite the fact that they are able to earn profits or pass on these duties and taxes to other parties with whom they transact business; WHEREAS, these duty and tax exemption privileges have resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises; cdtai WHEREAS, such privileges make more difficult the accomplishment of the overall program for economic development in general and compete with private industries to a great extent, thus disturbing the equity feature of the tax system; WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of tax privileges to any government-owned or controlled corporation and all other units of government; and WHEREAS, there is need for government-owned or controlled corporations and all other units of government enjoying tax privileges to share in the requirements of development, fiscal or otherwise, by paying the duties, taxes and other charges due from them; casia NOW, THEREFORE, I, FERDINAND E. MARCOS,
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President of the Republic of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order and decree: SECTION 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries, are hereby withdrawn. SECTION 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the Fiscal Incentives Review Board created under Presidential Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions withdrawn by Section 1 above, or otherwise revise the scope and coverage of any applicable tax and duty, taking into account, among others, any or all of the following: 1) The effect on the relative price levels; cdtai 2) The relative contribution of the corporation to the revenue generation effort; 3) The nature of the activity in which the corporation is engaged in; or 4) In general, the greater national interest to be served. SECTION 3. The Ministry of Finance shall promulgate the necessary rules and regulations to effectively implement the provisions of this Decree. cda SECTION 4. The provisions of this Decree are hereby declared to be separable, and in the event one or more of such provisions are declared unconstitutional, the validity of the other provisions shall not be affected. SECTION 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees, executive orders, administrative orders, rules, regulations or parts thereof which are inconsistent with this Decree are hereby repealed, amended or modified accordingly. SECTION 6. This Decree shall take effect immediately after promulgation. DONE in the City of Manila, this 11th day of June, in the year of Our Lord, Nineteen Hundred and Eighty-Four. PD 1955 PRESIDENTIAL DECREE NO. 1955 WITHDRAWING, SUBJECT TO CERTAIN CONDITIONS, THE DUTY AND TAX PRIVILEGES GRANTED TO PRIVATE BUSINESS ENTERPRISES AND/OR PERSONS ENGAGED IN ANY ECONOMIC ACTIVITY, AND FOR OTHER PURPOSES WHEREAS, the current economic crisis amounts to a grave emergency which affects the stability of the nation and requires immediate action; cdasia WHEREAS, the issuance of this decree is an
essential and necessary component of the national economic recovery program formulated to meet and overcome the emergency; WHEREAS, Section 20 of Batas Pambansa Blg. 391, otherwise known as the Investment Incentives Policy Act of 1983, authorizes the President to restructure/rationalize all existing incentives systems/legislations to align them with overall economic development objectives and make them more responsive and meaningful to changing circumstances; NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Republic of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order and decree: SECTION 1. The provisions of any special or general law to the contrary notwithstanding, all exemptions from or any preferential treatment in the payment of duties, taxes, fees, imposts and other charges heretofore granted to private business enterprises and/or persons engaged in any economic activity are hereby withdrawn, except those enjoyed by the following: (a) Those registered by the Board of Investments under Presidential Decree No. 1789, as amended by Batas Pambansa Blg. 391, and those registered by the Export Processing Zone Authority under Presidential Decree No. 66, as amended by Presidential Decree Nos. 1449, 1776, 1776-A and 1786; acd (b) The copper mining industry in accordance with the provisions of LOI 1416; (c) Those covered by international agreements to which the Philippines is a signatory; (d) Those covered by the non-impairment clause of the Constitution; and (e) Those that will be approved by the President of the Philippines upon the recommendation of the Minister of Finance. SECTION 2. The Ministry of Finance shall promulgate the necessary rules and regulations to effectively implement the provisions of this Decree. SECTION 3. All other laws, decrees, executive orders, administrative orders, rules, regulations or parts thereof which are inconsistent with this Decree are hereby repealed, amended or modified accordingly. SECTION 4. This Decree shall take effect on October 15, 1984. cd i DONE in the City of Manila, this 10th day of October, in the year of Our Lord, Nineteen Hundred and Eighty-Four. Published in the Official Gazette, Vol. 80 No. 42 Page 5439 on October 15, 1984. Executive Order 93 December 17, WITHDRAWING ALL TAX
AND
1986 DUTY
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INCENTIVES, SUBJECT TO CERTAIN EXCEPTIONS, EXPANDING THE POWERS OF THE FISCAL INCENTIVES REVIEW BOARD AND FOR OTHER PURPOSES WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment, of government and private entities with certain exceptions, in order that the requirements of national economic development, in terms of fiscal and other resources, may be met more adequately; cdtai WHEREAS, both issuances provided for a review by the Fiscal Incentives Review Board (FIRB) of petitions initiated by affected entities for restoration of withdrawn tax and duty exemption privileges either on a total or partial basis; WHEREAS, a number of affected entities, government and private were able to get back their tax and duty exemption privileges through the review mechanism implemented by the Fiscal Incentives Review Board (FIRB); WHEREAS, in addition to those whose tax and duty exemption privileges were restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and private, had their tax and duty exemption privileges restored or granted by Presidential action without benefit of review by the Fiscal Incentives Review Board (FIRB); WHEREAS, the continued enjoyment of these tax and duty exemption privileges has resulted in serious tax base erosion and considerable distortions in the tax treatment of similarly situated entities; WHEREAS, these privileges have become convenient opportunities for tax manipulation or avoidance, especially in case of interrelated entities; WHEREAS, the availability of such privileges makes more difficult the attainment of the overall program for national economic development, considering government's fiscal exigencies; WHEREAS, private entities whose tax and duty exemption privileges are to be withdrawn may still remain competitive by improving on their operational capacity and competence, rather than by relying on fiscal incentives which create distortions in the overall pricing and market systems; WHEREAS, assistance to government and private entities may be better provided where necessary by explicit subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the fiscal monitoring aspects of government operations; NOW, THEREFORE, I, CORAZON C. AQUINO, President of the Philippines, do hereby order:
SECTION 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn, except: a) those covered by the non-impairment clause of the Constitution; b) those conferred by effective international agreements to which the Government of the Republic of the Philippines is a signatory; cdasia c) those enjoyed by enterprises registered with: (i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended; (ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended; (iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, as amended; d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No. 1416; e) those conferred under the four basic codes namely: (i) the Tariff and Customs Code, as amended; (ii) the National Internal Revenue Code, as amended; (iii) the Local Tax Code, as amended; (iv) the Real Property Tax Code, as amended; f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board. SECTION 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is hereby authorized to: a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part; b) revise the scope and coverage of tax and/or duty exemption that may be restored; c) impose conditions for the restoration of tax and/or duty exemption; d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption; e) formulate and submit to the President for approval, a complete system for the grant of subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries and the terms and conditions for the grant thereof taking into consideration the international commitments of the Philippines and the necessary precautions such that the grant of subsidies does not become the basis for countervailing action. cdasia SECTION 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into account any or all of the following considerations:
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a) the effect on relative price levels; b) relative contribution of the beneficiary to the revenue generation effort; c) nature of the activity the beneficiary is engaged; and d) in general, the greater national interest to be served. SECTION 4. The Ministry of Finance shall promulgate the necessary rules and regulations and shall establish and maintain a Secretariat for the Fiscal Incentives Review Board to effectively implement the provisions of this Executive Order. SECTION 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this Executive Order are hereby repealed or modified accordingly. SECTION 6. This Executive Order shall take effect upon the promulgation of the rules and regulations stated in Section 4. cdasia DONE in the City of Manila, this 17th day of December, in the year of Our Lord, Nineteen Hundred and Eighty-Six. Published in the Official Gazette, Vol. 83 No. 2 page 96 on January 12, 1987. Consti: Art. XIV Sec 4(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment. Consti: Art. XIV Sec 4 (4). Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax.
Consti Art. VI. Sec 28 (3). Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. MAMALATEO: Charitable Organizations - only property tax is exempted. Income from the property (e.g. rentals) is taxable, regardless of how it is used.
Educational Organization - The Education Act of 1982 defines an educational institution as one with a formal education school system. This refers to the hierarchically structured and chronologically graded learning organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to higher levels. - Two ways to be exempted: 1) If it is a non-stock, non-profit private educational institution, whose assets and income are used exclusively, directly, and actually for its educational purposes, it is exempt. 2) If the institution does not fall in the above description, it may claim partial exemption form the normal corporate income tax under Sec. 27(B) of NIRC. That section provides that it will be entitled to 10% preferential tax rate on its net taxable income, provided that the gross income from unrelated trade, business, or other activity, does not exceed 50% of the total gross income derived from all sources. the relief given to the schools from paying tax is expected to be passed on the students in the form of lower tuition fees. It has to be non-stock because once a stock corporation is formed, there is expected to be dividends or profits. The isolated sale of property by non-stock, non-profit foundation is exempt. e.g. GAUF is a non-stock, non-profit organization which sold a parcel of land, the proceeds of which will be used for the improvement of a new building which it will use for its expansion project. Considering that the income derived did not result from the productive use of the real property but form a single transaction which is merely incidental the purpose for which the institution was organized, the income is exempt. (BIR Ruling No. 115-92, Apr. 2, 1992) Failure to observe requirement does not constitute waiver to right of exemption e.g. (medyo malabo iyong facts sa p.167) In this case, the court held that the institution established by Sinco which violated DepEds requirement that colleges should be incorporated, is still exempt from taxes. The requirement was intended to relieve the taxpayer from the duty of filing returns and paying taxes, and the failure to comply should not constitute a waiver to the right to enjoy the exemption. To hold otherwise would be tantamount to unwarrantedly adding to the law through administrative regulation.
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The fact that the institution charges tuition fees and other fees for the different services it renders to the students, which is the only source of income, does not make the school a profit-making enterprise The making of profit does not destroy the exemption of the educational institution. e.g. In one case, the Court reasoned that the fact that a college is administered to assure that it will not incur a deficit should not subject it to income tax. Every responsible organization should be run so as to at least insure its existence. It should strive whenever possible to have surplus. However, it is required that NO part of the income inure to the benefit of any private stockholder or individual Private educational institution that engages in profitable undertaking is subject to tax. A private educational institution which deviates from purely educational activities shall be treated like any private domestic corporation engaged in business for profit with respect to income derived therefrom. The protective mantle of the law will not extend to them.
fact that he the alien has never set foor in the Philippines 2. Classification of income as to source
SEC. 42. Income from Sources Within the Philippines.(A) Gross Income From Sources Within the Philippines. - The following items of gross income
C. Situs of the Sources of Income 1. Meaning of Situs in income taxation / determining factors in fixing the situs of income under the Philippine tax law
Mamalateo: The Philippine Income Tax law, when levying against resident citizens and domestic corporations, adopts the most comprehensive tax situs of nationality and residence But when dealing with taxpayers other than resident citizens and domestic corporations, , the law adopts the source rule (see definition below). The criteria in imposing Philippine tax are: 1) Citizenship Principle A citizen is subject to income tax: a) on his worldwide income if he resides in the Philippines, OR b) only on his income from sources within the Philippines, if he qualifies as a non-resident citizen; his income from outside the Phil is exempt 2) Residence Principle A resident alien is subject to income tax only on his income from sources within the Philippines but exempt from sources outside. 3) Source Principle an alien is subject to Philippine income tax because he derives income from sources within the Philippines (e.g. dividends, interest, rent, etc) despite the
shall be treated as gross income from sources within the Philippines: (1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise; (2) Dividends. - The amount received as dividends: (a) from a domestic corporation; and (b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year 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 Philippines as determined under the provisions of this Section; but only 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 Philippines bears to its gross income from all sources. (3) Services. - Compensation for labor or personal services performed in the Philippines; (4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the
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installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting. (5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. - Gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section. (B) Taxable Income From Sources Within the
Philippines. (1) General Rule. - From the items of gross
income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. (2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines. (C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines. (D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines. (E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines.
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Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement. (F) Definitions. - As used in this Section the words "sale" or "sold" include "exchange" or "exchanged"; and the word "produced" includes "created", "fabricated", "manufactured", "extracted", "processed", "cured" or "aged". Sec. 152-165 RR2 SECTION 152. Income from sources within the Philippines. The law divides the income of taxpayers into three classes: (1) Income which is derived in full from sources within the Philippines; (2) Income which is derived in full from sources without the Philippines; and (3) Income which is derived partly from sources within and partly from sources without the Philippines. Non-resident alien individuals and foreign corporations are taxable only upon income from sources within the Philippines. Citizens and residents of the Philippines and domestic corporations are taxable upon income derived from sources both within and without the Philippines. The taxable income from sources within the Philippines includes that derived in full from sources within the Philippines and that portion of the income which is derived partly from sources within and partly from sources without the Philippines which is allocated or apportioned to sources within the Philippines. SECTION 153. Interest. Interest on bonds or notes or other interest bearing obligations of
residents, corporate or otherwise, constitutes income from sources within the Philippines. SECTION 154. Dividends. Gross income from sources within the Philippines includes dividends, as defined by Section 83 of the Code: (a) From a domestic corporation; and (b) From a foreign corporation unless less than 50 per cent of its gross income for the threeyear period ending with the close of its taxable year preceding the declaration of such dividends, or for such part of such period as it has been in existence, was derived from sources within the Philippines; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. Dividends will be treated as an income from sources within the Philippines unless the taxpayer submits sufficient data to establish to the satisfaction of the Commissioner of Internal Revenue that they should be excluded from gross income under Section 37(a)(2)(B). SECTION 155. Compensation for labor or personal services. Gross income from sources within the Philippines includes compensation for labor or personal services performed within the Philippines regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of payment. If a specific amount is paid for labor or personal services performed in the Philippines, such amount shall be included in the gross income. If no accurate allocation or segregation of compensation for labor or personal services performed in the Philippines can be made, or when such labor or service is performed partly within and partly without the Philippines, the amount to be included in the gross income shall be determined by an apportionment of the time basis, i.e., there shall be included in the gross income an amount which bears the same relation to the total compensation as the number of days of performance of the labor or services within the Philippines bears to the total number of days performance of labor or services for which the payment is made. Wages received for services rendered inside the territorial limits of the Philippines and wages of an alien seaman earned on a coastwise vessel are to be regarded as from sources within the Philippines. SECTION 156. Rentals and royalties. Gross income from sources within the Philippines includes rentals or royalties from property located within the Philippines or from any interest in such property, including rentals or royalties for the use of or the privilege of using in the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. The income arising from the
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rental of property whether tangible or intangible located within the Philippines, or from the use of property, whether tangible or intangible, located within the Philippines, is from sources within the Philippines. SECTION 157. Sale of real property. Gross income from sources within the Philippines includes gain, computed under the provisions of Section 35, derived from the sale or other disposition of real property located in the Philippines. For the treatment of capital gains and losses, see Sections 132 to 135 of these regulations. SECTION 158. Income from sources without the Philippines. Gross income from sources without the Philippines includes: (1) Interest other than that specified in Section 37(a)(1), as being derived from sources within the Philippines; (2) Dividends other than those derived from sources within the Philippines as provided in Section 37(a)(2); (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties derived from property without the Philippines or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trade-marks, trade brands, franchises, and other like property; and (5) Gain derived from the sale of real property located without the Philippines. SECTION 159. Sale of personal property. Income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The world "sold" includes "exchanged". The "country in which sold" ordinarily means the place where the property is marketed. This section does not apply to income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and sold within the Philippines. (See Section 162 of these regulations.) SECTION 160. Apportionment of deductions. From the items specified in Section 37(a) as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income. EXAMPLE: A non-resident alien individual whose taxable year is the calendar year, derived gross
income from all sources for 1939 of P180,000, including therein: Interest on bonds of a domestic corporation P9,000 Dividends on stock of domestic corporation 4,000 Royalty for the use of patents within the Philippines 12,000 Gain from sale of real property located within the Philippines 11,000 Total P36,000 that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the gross income was from sources without the Philippines, determined under Section 37(c). The expenses of the taxpayer for the year amounted to P78,000. Of these expenses the amount of P8,000 is properly allocated to income from sources within the Philippines and the amount of P40,000 is properly allocated to income from sources without the Philippines. The remainder of the expense, P30,000, cannot be definitely allocated to any class of income. A ratable part thereof, based upon the relation of gross income from sources within the Philippines to the total gross income, shall be deducted in computing net income from sources within the Philippines. Thus, there are deducted from the P36,000 of gross income from sources within the Philippines expenses amounting to P14,000 (representing P8,000 properly apportioned to the income from sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses which could not be allocated to any item or class of gross income). The remainder, P22,000, is the net income from sources within the Philippines. SECTION 161. Other income from sources within the Philippines. Items of gross income other than those specified in Section 37(a) and (c) shall be allocated or apportioned to sources within or without the Philippines, as provided in Section (37)(e). The income derived from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or timber, located within the Philippines, and from the sale by the producer of the products thereof within or without the Philippines, shall ordinarily be included in gross income from sources within the Philippines. If, however, it is shown to the satisfaction of the Commissioner of Internal Revenue that due to the peculiar conditions of productions and sale in a specific case or for other reasons all of such gross income should not be allocated to sources within the Philippines and to sources without the Philippines shall be made as provided in Section 162 of these regulations. Where items of gross income are separately allocated to sources within the Philippines, there
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shall be deducted therefrom, in computing net income, the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. SECTION 162. Income from the sale of personal property derived from sources partly within and partly without the Philippines. Items of gross income not allocated by Sections 152 to 159 or 161 of these regulations to sources from within or without the Philippines shall (unless unmistakably from a source within or a source without the Philippines) be treated as derived from sources partly within and partly without the Philippines. The portion of such income derived from sources partly within the Philippines and partly within a foreign country which is attributable to sources within the Philippines shall be determined according to the following rules and cases: PERSONAL PROPERTY PRODUCED AND SOLD: Gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country, or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines shall be treated as derived partly from sources within the Philippines and partly from sources within a foreign country under one of the cases below. As used herein the word "produced" includes created, fabricated, manufactured, extracted, processed, cured, or aged. CASE 1. Where the manufacturer or producer regularly sells a part of his output to wholly independent distributors or other selling concerns in such a way as to establish fairly an independent factory or production price or shows to the satisfaction of the Commissioner of Internal Revenue that such an independent factory or production price has been otherwise established unaffected by considerations of tax liability, and the selling or distributing branch or department of the business is located in a different country from that in which the factory is located or the production carried on, the net income attributable to sources within the Philippines shall be computed by an accounting which treats the products as sold by the factory or productive department of the business to the distributing or selling department at the independent factory price as established. In all such cases the basis of the accounting shall be fully explained in a statement attached to the return. CASE 2. Where an independent factory or production price has not been established as provided under Case 1, the net income shall first be computed by deducting from the gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer
within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, the expenses, losses, or other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. Of the amount of net income so determined, one-half shall be apportioned in accordance with the value of the taxpayer's property within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one half by a fraction the numerator of which consists of the value of the taxpayer's property within the Philippines, and the denominator of which consists of the value of the taxpayer's property both within the Philippines and within the foreign country. The remaining one-half of such net income shall be apportioned in accordance with the gross sales of the taxpayer within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one-half by a fraction the numerator of which consists of the taxpayer's gross sales for the taxable year or period within the Philippines, and the denominator of which consists of the taxpayer's gross sales for the taxable year, or period both within the Philippines and within the foreign country. The "gross sales of the taxpayer within the Philippines" means the gross sales made during the taxable year which were principally secured, negotiated, or effected by employees, agents, offices, or branches of the taxpayer's business resident or located in the Philippines. The term "gross sales" as used in this paragraph refers only to the sales of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign county and sold within the Philippines, and the term "property" includes only the property held or used to produce income which is derived from such sales. Such property should be taken at its actual value, which in the case of property valued or appraised for purposes of inventory, depreciation, depletion, or other purposes of taxation shall be the highest amount at which so valued or appraised, and which in other cases shall be deemed to be its book value in the absence of affirmative evidence showing such value to be greater or less than the actual value. The average value during the taxable year or period shall be employed. The average value of property as above prescribed at the beginning and end of the taxable year or period ordinarily may be used, unless by reason of material changes during the taxable year or period such average does not fairly
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represent the average for such year or period, in which event the average shall be determined upon a monthly or daily basis. Bills and accounts receivable shall (unless satisfactory reason for a different treatment is shown) be assigned or allocated to the Philippines when the debtor resides in the Philippines. CASE 3. Applications for permission to base the return upon the taxpayer's books of account will be considered by the Commissioner of Internal Revenue in the case of any taxpayer who, in good faith and unaffected by considerations of tax liability, regularly employs in his books of account a detailed allocation of receipts and expenditures which reflects more clearly than the processes or formulas herein prescribed, the income derived from sources within the Philippines. SECTION 163. Foreign steamship companies. The returns of foreign steamship companies whose vessels touch ports of the Philippines should include as gross income, the total receipts of all out-going business whether freight or passengers. With the gross income thus ascertained, the ratio existing between it and the gross income from all parts, both within and without the Philippines of all vessels, whether touching ports of the Philippines or not, should be determined as the basis upon which allowable deductions may be computed, the principle being that allowable deductions shall be computed upon a basis which recognizes that the income arising and accruing from business done if any from this country shall bear its share, and no more, of expense, incident to the earning or creation of such income, in the ratio that the gross income arising in and from this country bears to the entire gross income arising from business done both within and without this country. In other words, the net income of a foreign steamship company doing business in or from this country is ascertained for the purpose of the income tax, by deducting from the gross receipts from outgoing business such a portion of the aggregate expenses, losses, etc., as such receipts bear to the aggregate receipts from all ports of all vessels, including in each case incoming of a nonshipping character but incidental, to the shipping business such as dividends from investments, interests on deposits, etc. For example Given (a) Gross receipts from outgoing freights and passengers from P.I. ports P20,000 (b) Gross receipts from outgoing freights and passengers from all ports other than those of P. I 200,000 (c) Interests and other nonshipping income received by P.I. office 5,000
(d) Interests, dividends, and other nonshipping income received by all offices other than those in P.I. 50,000 (e) Total expenses and deductions of the company as a whole, including those incurred by P.I. office 150,000 Computation of P.I. Net Income (f) P.I. Gross Income: Freights and passengers P20,000 Interest and other income 5,000 Total 25,000 (g) P.I. expenses: P.I. gross income x World's expenses, or World's gross income 20,000 plus 5,000 x 150,000, or 200,000 plus 20,000 plus 50,000 plus 5,000 25,000 x 150,000 = 13,636 275,000 (h) P.I. net income: P.I. gross income less P.I. expenses, or P25,000 less P13,636 = P11,364 SECTION 164. Telegraph and cable service. A foreign corporation carrying on the business of transmission of telegraph or cable messages between points in the Philippines and points outside the Philippines derives income partly from sources within and partly from sources without the Philippines. (1) GROSS INCOME. The gross income from sources within the Philippines derived from such services shall be determined by adding (a) its gross revenues derived from messages originating in the Philippines and (b) amounts collected abroad on collect messages originating in the Philippines and deducting from such sum amounts paid or accrued for transmission of messages beyond the company's own circuit. Amounts received by the company in the Philippines with respect to collect messages originating without the Philippines shall be excluded from gross income. (2) NET INCOME. In computing net income from sources within the Philippines there shall be allowed as deductions from gross income determined in accordance with paragraph (1): (a) all expenses incurred in the Philippines (not including any general overhead expenses), incident to the carrying on of the business in the Philippines; (b) all direct expenses incurred abroad in the transmission of messages originating in the
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Philippines (not including any general overhead expenses or maintenance, repairs, and depreciation of cable and not including any amount already deducted in computing gross income); (c) depreciation of property (other than cables) located in the Philippines and used in the trade or business therein; and (d) a proportionate part of the general overhead expenses [not including any items incurred abroad corresponding to those enumerated in (a), (b), and (c)], and of maintenance, repairs, and depreciation of cables of the entire cable system of the enterprise based on the ratio which the number of words originating in the Philippines bears to the total words transmitted by the enterprise. SECTION 165. Computation of income. If a taxpayer has gross income from sources within or without the Philippines as defined by Section 37 (a) or (c) together with gross income derived partly from sources within and partly from sources without the Philippines, the amounts thereof, together with the expenses and investment applicable thereto, shall be segregated, and the net income from sources within the Philippines shall be separately computed therefrom. (Section 38 of the Code) a. Gross or taxable from sources within the Philippines Sec. 42 (A), (B) see above Commissioner v. JAL 202 SCRA 450 FACTS: Japan Air Lines, Inc. is a foreign corporation engaged in the business of international air carriage. From 1959 to 1963, JAL did not have planes that lifted or landed passengers and cargo in the Philippines as it had not been granted then by the Civil Aeronautics Board (CAB) a certificate of public convenience and necessity to operate here. However, since mid-July, 1957, JAL had maintained an officeat the Filipinas Hotel, Roxas Boulevard, Manila. Said office did not sell tickets but was maintained merely for the promotion of the company's public relations and to hand out brochures, literature and other information playing up the attractions of Japan as a tourist spot and the services enjoyed in JAL planes. On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales agent in the Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane tickets and reservations for cargo spaces which were used by the passengers or customers on the facilities of JAL. On June 2, 1972, JAL received deficiency income tax assessment which it protested. HELD: There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there
can be no conclusion other than that JAL is a resident foreign corporation, doing business in the Philippines. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the paramount objective Commisioner v. BOAC 149 SCRA 395 FACTS: BOAC is a 100% British government owned corporation engaged in international airline business. From 1959 to 1972, it had no landing rights for traffic purposes to or from the Philippines and thus did not carry passenger and/or cargo to and from the Philippines. But it did maintain a general sales agent in the Philippines for selling BOAC tickets covering passengers and cargoes. HELD: The income BOAC gained from its ticket sales is income from the Philippines and is hence, taxable. The source of income is the property, activity, or service that produced the income. For the source to be considered as coming from the Philippines, it is sufficient that the income, as in this case, is derived form an activity within the Philippines. The flow of wealth proceeded from and occurred within the Philippines. The absence of flight operations to and form the Philippines is not determinative of the source of income or the site of income taxation. NDC v. Commissioner 151 SCRA 472 FACTS: The National Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The purchase price was to come from the proceeds of bonds issued by the Central Bank. Initial payments were made in cash and through irrevocable letters of credit. (14 promissory notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the Philippines. The remaining payments and the interests thereon were remitted by the NDC to Tokyo.) The vessels were eventually completed and delivered to the NDC in Tokyo. The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. The NDC went to the Court of Tax Appeals. The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00, representing the compromise penalty. The NDC then came to the Supreme Court in a petition for certiorari.
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HELD: The Japanese shipbuilders were liable on the interest remitted to them under Section 37 of the Tax Code. The NDC is not the one taxed. The imposition of the deficiency taxes on the NDS is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code. NDC was remiss in the discharge of its obligation of its obligation as the withholding agent of the government and so should be liable for its omission. The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code (Income from sources within the Philippines). The interest paid by NDC, which is admittedly a resident of the Philippines, is on the promissory notes issued by it. The interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels acquired by NDC is interest derived from sources within the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal Revenue Code. Howden v. Collector 13 SCRA 601 FACTS: Commonwealth Insurance Co. (a domestic corporation), entered into reinsurance contracts with 32 British insurance companies (not engaged in trade or business in the Philippines). The former agreed to cede to the latter a portion of the premiums on insurances on fire, marine and other risks it has underwritten in the Philippines. Alexander Howden and Co. Ltd. (also a British corporation not engaged in business in the Phils, represented the aforesaid British companies. Pursuant to the contracts, Commonwealth Insurance Company remitted P798, 397.47 to Alexander Howden and Co. Ltd., as reinsurance premiums. Also, in Alexander Howden and Co.s behalf, the Commonwealth Insurance Company filed the following: a) Income tax return declaring the sum of P 798, 397.47 (reinsurance premiums) and b) Accrued interest: P 4, 985.77 Also, it paid income tax to the BIR: P 66, 112.00 Within the two-year period provided by law, Alexander Howden and Co. filed with the BIR a refund of the income tax that it had paid (P 66, 112.00- the value of which was later reduced to P 65, 112.99). To bolster their claim for a refund, Alexander Howden and Co. invoked a ruling of the Commissioner of Internal Revenue, stating that it exempted from withholding tax, reinsurance premiums received from domestic insurance companies by foreign insurance companies, not authorized to do business in the Philippines. HELD: The reinsurance premiums are taxable as income coming from sources in the PhilippinesThe sources of reinsurance premiums (income) are the reinsurance contracts. Thus, it is important to
establish that these contracts have situs in the Philippines, to say that they are taxable (Sec 49A,B: income of sources in the Philippines are taxable). The court believes so because not only are the reinsured, liabilities insured and the risks were all situated in the Philippines, record shows that the contract was perfected in the Philippines, being last signed by Commonwealth Insurance Co. in Manila. Parties of the contract intended Philippine law to govern (shown in Art 11 of the contract and usage of Philippine currency as medium of exchange and payment of taxes. SC has negated appellants claim by differentiating the terms, business and activity. An activity may consist of a single act while a business implies a continuity of transactions. What is taxable is not income from businesess but income from activities. So even though companies engage in businesses outside the Philippines, if they conduct activities in the Philippines (as it is in this case) that produce income, such is taxable in this country. Although reinsurance premiums are not among those mentioned in Sec 37 of the Tax Code as income from sources in the Philippines, they must still be considered as such. Sec 37 is not an allexclusive enumeration. Not being part of the enumeration does not automatically follow that it is not to be considered as income from the sources in the Philippines. b. Gross or taxable income from sources without the Philippines
SEC. 42.
shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines. (D) Taxable Income From Sources Without the Philippines. - From the items of gross income
Income from Sources Within the Philippines.(C) Gross Income From Sources Without the Philippines. - The following items of gross income
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specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines. DE LEON: Gross Income from Sources Without the Philippines: (1) Interests that are not derived from sources within the Philippines Therefore, interests on bonds, notes or other interest-bearing obligations of residents, corporations or otherwise are NOT included. (2) Dividends not derived from sources within the Philippines. Therefore, dividends from domestic corporations are NOT included. Dividends from foreign corporations are included, as long as less than 50% of the gross income of such corporation for the 3-year period ending with the close of its taxable year preceding the declarations of such dividends (or for such part of the period the corporation has been in existence) was derived from sources within the Philippines. (3) Compensation for labor or personal services performed without the Philippines. The income is considered derived from sources outside the Philippines even though the compensation is remitted from the Philippines. (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines.
Taxable Income Philippines
from
Sources
Outside
the
Ratable Part ratio of gross income from sources without the Philippines to the total gross income c. Income partly within and party without the Philippines
Income Tax Formula for Taxable Income from Outside the Philippines:
Gross Income from sources outside the Philippines Less: Expenses, losses and other deductions properly apportioned or allocated thereto Less: Ratable part of deductions which cannot definitely be allocated to some item or class or gross income
income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as
Income from Sources Within the Philippines.(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross
SEC. 42.
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derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement. Partly Within and Partly Without when for instance personal property (or any other product from which gains, profits or income may be realzed) is produced within the Philippines and sold outside the Philippines, or vice versa. DE LEON: Gains or profits derived from the sales of shares of stock of a domestic corporation, even if consummated abroad or done by a non-resident alien or foreign corporation, should be deemed as income from Philippine sources. The Special Economic Zone Act of 1995 (RA 7916) states that no taxes (national or local) shall be imposed on business establishments operating within the Ecozone and that in lieu of paying taxing, 5% of the gross income earned by all businesses and enterprises from their registered operations within the Ecozone shall be remitted to the National Government. The Ecozone is treated as a separate customs territory from the rest of the Philippines, and the rule on income from sources partly within and partly without the Philippines is applied by analogy. When an expense of a multinational corporation is clearly related to the production of Philippinederived income or to Philippine operations (ex. salaries of Philippine personnel or rental or office building in the Philippines), it can be deducted from the gross income acquired in the Philippines without resorting to apportionment. HOWEVER, items that cannot be definitely allocated or identified with the operations of the Philippine branch (ex. overhead expenses relating to finance, administration, research, etc.), even though they are directly beneficial to all its branches including the Philippines, fall under a different category. A foreign professional partnership, no member of which resides in the Philippines, which merely
maintains an office in the Philippines and hires Filipino draftsmen to prepare plans for projects located in its home country or elsewhere, falls under the class of a place of business for the supply of information, scientific research, or for similar activities which have preparatory or auxiliary character, the maintenance of which does not give rise to a permanent establishment in the Philippines. Hence, NOT subject to Philippine taxes.
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PART III COMPUTATION OF INCOME TAX A. General Formula
i. ii.
Tax payable by a taxpayer is computed as follows:

Applicable tax base x Applicable Tax Rate ______________________ c.
Under the NIRC generally: in the case of passive income Under Special Laws PEZA, SBMA and Clark Devt Corp. registered entities
Gross Selling Price or Fair Market Value, Whichever is Higher
Income Tax Less: any tax credit (either creditable withholding tax or foreign income taxes paid) _______________________ TAX PAYABLE B. Concept of a Tax Base
1. Meaning of Tax Base Tax Base [Blacks Law Dictionary, 8th ed.] the total property, income, or wealth subject to taxation in a given jurisdiction; the aggregate value of the property being taxed by a particular tax 2. Kinds of Tax Base
Tax base varies depending on the type of income and the classification of the taxpayer.
DE LEON: a. Taxable Income amount of income upon which the tax rate prescribed by law is applied to get the amount of income tax payable i. Gross Income all income of whatever kind and derived by a taxpayer from whatever source, but NOT INCLUDING exempt income (exclusions) and items of gross income subject to final income tax (passive income) ii. Deductions items or amounts which the law allows to be deducted under certain conditions from the gross income of a tax payer in order to arrive at the taxable income iii. Exemptions incomes that are exempt from tax; not considered in determining gross income b. Gross Income
Commissioner is hereby authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be, whichever is the higher of: (1) the fair market value as determined by the Commissioner, or (2) the fair market value as shown in the schedule of values of the Provincial and City Assessors.
SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax Administration and Enforcement Authority of the Commissioner to (E) Prescribe Real Property Values. - The
DE LEON: The reason for the non-application of market values of real property as reflected in the tax declarations of provincial and city assessors is the fact that said market values are invariably lower than the fair market value, or do not represent the actual fair market value of the properties. This is why the Commissioner has been authorized to determine zonal values as basis for real property valuation for internal revenue purposes in specific zones or areas upon consultation with competent appraisers. Improvement valuable addition made to property, or an amelioration in its condition, amounting to more than mere repairs or replacement of waste, costing labor or capital, and intended to enhance its value, beauty or utility, or to adopt it for new or further purposes the percentage of increase in the market value of real property (land and improvement) per latest tax declaration filed with the assessor is fixed at 10%/50%, depending on the location of said real property.
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for commercial or industrial property, the increase in market value is 50% (uniform rate), regardless of regional location. if the property were classified as a fishpond, and agricultural land planted to coconut, tobacco, sugar, rice, corn, citrus and vegetable, the market value of the land and improvements shall also be increased by 50%, regardless of regional location. the disposition of real property WITHOUT any improvements shall be accompanied by a CERTIFICATION from the Office of the City or Provincial Assessor, and an affidavit by the taxpayer that there is no existing improvement of the real property being sold, transferred or disposed of.
DE LEON: Capital losses sustained during the taxable year from sales or exchanges of shares of stock classified as capital assets MAY be deducted currently(as opposed to year end) from capital gains derived during the same taxable year from such sales of exchange. The law taxes ONLY the net capital gains realized from the sale or exchange or other disposition of shares of stock NOT traded through a local stock exchange. Thus the BIR prescribed a Capital Gains Tax Return, which every person making such sale or exchange or other disposition of shares of stock of a domestic corporation is required to file within 30 days after each transaction. The Return takes into account, in determining the capital gains tax due on the stock transactions covered by the tax return, prior capital gain/loss realized during the year. C. 1. Tax Rate Flat Rate (generally) in the case of corporations
With regard to the determination of zonal values of condominiums or townhouses, the value of the land and the value of the building/improvements will be: treated as one IF the title is a Condominium Certificate of Title (CCT), or treated separately IF the title is a Transfer Certificate of Title (TCT) d. Net Capital Gain in case of capital gain from the sale of shares of domestic corporations not listed and traded in the stock exchange
SEC. 27. Rates of Income tax on Domestic (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year 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 year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the
Corporations. -
SEC. 39. Capital Gains and Losses. (A) Definitions. - As used in this Title (1) Capital Assets. - The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. (2) Net Capital Gain. - The term "net capital gain" means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. (3) Net Capital Loss. - The term "net capital loss" means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.
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option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied: (1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP); (2) A ratio of forty percent (40%) of income tax collection to total tax revenues; (3) A VAT tax effort of four percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%). The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme. For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of 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 actually sold, including insurance while the goods are in transit. For a manufacturing concern, "cost of goods manufactured 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 factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances and discounts. SEC. 28. Rates of Income Tax on Foreign (A) Tax on Resident Foreign Corporations. (1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year 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 year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder: (a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of
Corporations. -
gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. (b) International Shipping. - "Gross Philippine Billings" means gross revenue
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whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. (4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, 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 by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. (6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. (a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income.
Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (b) Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (c) Capital Gains from Sale of Shares of
A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000 5% On any amount in excess of P100,000 10% (d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title. (B) Tax on Nonresident Foreign Corporation.
Stock Not Traded in the Stock Exchange. -
Foreign Corporation. -
(7) Tax on Certain Incomes Received by a Resident (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar
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this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, 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 subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees. (5) Tax on Certain Incomes Received by a
(1) In General. - Except as otherwise provided in
Stock not Traded in the Stock Exchange. -
twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; (c) Capital Gains from Sale of Shares of A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange: Not over P100,000 5% On any amount in excess of P100,000 10%
Nonresident Foreign Corporation. -
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; (b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country 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 Philippines equivalent to
DE LEON: Corporations for tax purposes, this term shall include: Partnerships, no matter how created or organized Joint-stock companies Joint accounts (cuentas en participacion) Associations, or Insurance companies. It does NOT include: General professional partnerships, and Joint ventures or consortiums, formed for the purpose of undertaking construction projects OR engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. Partnerships (except general professional partnerships), whether registered or unregistered, are treated as corporations and subject to tax as such in line with the separate judicial personality doctrine. The partners are considered as stockholders and, therefore, profits distributed to them by the partnership are considered dividends. The exclusion of general professional partnerships from the payment of corporate income tax is NOT an exemption
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clause but a CLASSIFICATION clause (i.e. it specifies the persons or property subject to tax), which must be construed liberally in favour of the taxpayer. Joint Ventures as provided in Sec. 22(B) are exempt from income tax and are not subject to expanded withholding tax under sec. 57(B). HOWEVER, each of the ventures is liable for the payment of separate income tax imposed under Secs. 27 and 28 on the respective income derived from the project or activity undertaken. Other joint ventures, although not formally incorporated, are taxable as ordinary corporations. The following are the requisites necessary to constitute a joint venture taxable as a corporation: (a) Each party to the venture must make a contribution to a common fund in the form of capital, services or property; (b) The purpose must be to obtain profits and divide them among the parties; (c) The parties must have a joint proprietary interest AND right of mutual control over the subject matter of the enterprise; and (d) The parties must be constituted as a single entity. If each member corporation manages its own allocated tasks and receives individual fees in accordance with the work performed or rendered, where the rights and obligations of the members were made distinct and separate from one another, there is no joint venture subject to corporate income tax. With respect to corporations adopting the fiscal year accounting period, the formula for applying reduced income tax rates is as follows: TI x #MC ----------- X NTR = INCOME TAX PAYABLE 12 TI = Taxable Income #MC = No. of months covered by new tax rate NTR = New tax rate Quick Look at Corporate Tax Rates: (a) Domestic Corporations and Partnerships (excluding general professional pertnerships) are subject to a tax equal to 32% (as of Jan. 1, 2000) on tacable income received during each taxable year from all sources within or without the Philippines; (b) Resident Foreign Corporations to a tax of 32% (as of Jan. 1, 2000) upon taxable income from
(c)
(d) (e)
(f)
(g)
the preceding taxable year from sources within the Philippines; Non-resident Foreign Corporations to a tax of 32% (as of Jan. 1, 2000) upon gross income from the preceding taxable year from all sources within the Philippines; Proprietary Educational Institutions and NonProfit Hospitals: 10% of taxable income; Domestic and Resident Foreign Corporations are subject to a separate and final tax on certain passive incomes fixed at 5-20%; On the fourth year immediately following the year in which they commenced their business operations, a minimum corporate income tax (MCIT) of 2% of gross income when said tax is greater than the normal income tax; Corporations are given the option to be taxed at 15% of their gross income, provided they meet the ff. requirements: It is allowed by the President upon the recommendation of the Secretary of Finance The option was exercised on or after January 1, 2000 The four conditions with respect to the minimum tax effort and consolidated public sector financial position (CPSFP) ratios are satisfied The ratio of cost of sales to gross sales or receipts from all sources of the corporation exercising the option does not exceed 55%
(h) Lower rates of tax are paid by the following non-resident foreign corporations: Owners, lessors or distributors of cinematographic films: 2.5% of gross income Owners or lessors of vessels chartered by Philippine Nationals: 4.5% of gross rentals or charter fees Owners or lessors of aircrafts, machineries and other equipment: 7.5% of gross rentals or fees (i) An improperly accumulated earnings tax equal to 10% of the improperly accumulated taxable income is imposed on every corporation formed or availed of for the purpose of avoiding the income tax with respect to its stockholders of any other corporation, by
The election of this option is irrevocable for three (3) consecutive years.
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permitting earnings and profits to accumulate instead of being divided or distributed (j) A final tax of 32% payable by the employer is imposed on the grossed up monetary value of fringe benefits UNLESS the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, OR when the fringe benefit is for the convenience or advantage of the employer. Income Tax Formula for Resident Foreign Corporations (other than international carriers) Gross Income Within the Philippines Less: Deductions from such income Taxable Income X 32% Amount of Income Tax Due Resident foreign corporations are taxed in the same manner as domestic corporations but ONLY with respect to their Philippine source income. The provisions on the application of the reduced corporate income tax rates on the taxable income, 15% gross income tax option, and the minimum 2% corporate income tax on domestic corporations and resident foreign corporations, are the same. A foreign corporation with a branch office or liaison office in the Philippines is considered to have a permanent establishment in the Philippines. Hence, the commission to be paid to said corporation abroad is subject to expanded withholding tax. 2. Schedular Rates (generally) in the case of individuals
overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. The tax shall be computed in accordance with and at the rates established in the following schedule: Not over P10,0005% Over P10,000 but not over P30,000 P500+10% of the excess over P10,000 Over P30,000 but not over P70,000 P2,500+15% of the excess over P30,000 Over P70,000 but not over P140,000 P8,500+20% of the excess over P70,000 Over P140,000 but not over P250,000 P22,500+25% of the excess over P140,000 Over P250,000 but not over P500,000 P50,000+30% of the excess over P250,000 Over P500,000 P125,000+34% of the excess over P500,000 in 1998.
Provided, That effective January 1, 1999, the top
SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein; (b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including
and Individual Philippines.
Resident
Alien
of
the
marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%). For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. Income Tax is self-assessing or self-computed. Section 24(A) imposes progressive rates of income taxes on citizens and resident aliens. The progressive scheme of income taxation has been introduced in our tax system as a measure of raising more revenues to adequately meet the increasing needs of the government and at the same time correct inequalities in taxation by equitably distributing the tax burden based on the principle of ability to pay.
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Section 24(A) restores the system of taxing compensation and business income from the scheduler to the global income tax system. Schedular Approach system employed where the income tax treatment varies and made to depend on the kind of category of taxable income of the taxpayer Global Treatment system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer Under this system, gross compensation income is aggregated (globalized) with the net income from business, trade or profession to arrive at the global taxable income (after allowable exemptions), which is then subjected to UNITARY BUT PROGRESSIVE, GRADUATED RATES. Under this scheme, employees, selfemployed and professionals are all subjected to the same tax rates. Employees USED TO BE subjected to a tax rate different from self-employed individuals and professionals. The Simplified Net Income Taxation System (SNITS) for the latter individual taxpayers has been abolished. NOTE: Contrary to what de Leon claims, Prof. Follosco stated in her outline that schedular rates are generally used in case of individuals. Every employer making payment of compensation income shall deduct and withhold a tax in the amount equal to the tax due on the employees compensation income tax for the entire year in accordance with Sec. 24(A). Married individuals used to have the option to either compute separately their individual income tax or consolidate their respective aggregate taxable income and deduct the personal and additional exemptions. Only one graduated rate structure was applied in the latter case. Now, husband and wife are treated as separate taxable units; they no longer have an option to compute their income tax separately or jointly. It is mandatory that they compute separately the tax due on their respective incomes. The respective aggregate taxable income of each shall be taxed at the graduated rates of 5% up to the top marginal rate of 32% effective January 2000, and their total income tax payable is the sum of their individual income tax determined
separately. Both, however, should file only one consolidated return. D. Tax Credit SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; (C) Taxes.(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary 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 year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. An 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. (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the
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same taxable year. (5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. (7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: (a) The total amount of income derived from sources without the Philippines; (b) The amount of income derived from each country, 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 by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits. RR2 SECTION 84. Analysis of credit for taxes: If the taxpayer signifies in his return his desire to claim a credit for taxes, the basis of such credit, in
the case of a citizen of the Philippines, whether resident or non-resident, and in the case of a domestic corporation, is as follows: (a) The amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country; and (b) an individual's proportionate share of any such taxes of which he is a partner or of an estate or trust of which he is a beneficiary paid or accrued during the taxable year to a foreign country if his distributive share of the income of such partnership or trust is reported for taxation under Title II of the Code. In the case of an alien resident of the Philippines who signifies in his return his desire to claim a credit for such taxes the basis of the credit is as follows: (a) The amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the Philippines residing in such country; and (b) his proportionate share of any such taxes of a partnership of which he is a partner or an estate or trust of which he is a beneficiary paid or accrued during the taxable year to any foreign country if his distributive share of the net income of such partnership or trust is reported for taxation under Title II of the Code, and if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the Philippines residing in such country. If a taxpayer signifies in his return his desire to claim credit for taxes, such action will be considered to apply to income, war-profits, and excess-profits taxes paid to all foreign countries (including the United States and possessions thereof), and no portion of any such taxes shall be allowed as a deduction from gross income. SECTION 85. Meaning of terms. The "amount of any income, war-profits, and excessprofits taxes paid or accrued during the taxable year" means taxes proper (no credit being given for amounts representing interest or penalties) paid or accrued during the taxable year on behalf of the taxpayer claiming credit. "Foreign country" means any foreign state or political subdivision thereof, or any foreign political entity, which levies and collects income, war-profits, or excess-profits taxes, and includes the United States or any political subdivision thereof. SECTION 86. Conditions of allowance of credits. If the taxpayer signifies in his return his desire to claim credit for income, war-profits, or excess-profits taxes paid other than to the Philippines, the income tax return must be accompanied by the appropriate form prescribed by the Commissioner of Internal Revenue. The form must be carefully filled in with all the information
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there called for and with the calculations of credits there indicated, and must be duly signed and sworn to or affirmed. If credit is sought for taxes already paid the form must have attached to it the receipt for each such tax payment. If credit is sought for taxes accrued, the form must have attached to it the return on which each such accrued tax was based. This receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original, or a duly certified or authenticated copy. If the receipt of the return is in a foreign language, a certified translation thereof must be furnished by the taxpayer. Any additional information necessary for the determination of the amount of income derived from sources without the Philippines and from each foreign country shall, upon the request of the Commissioner of Internal Revenue, be furnished by the taxpayer. In the case of a credit sought for a tax accrued but not paid, the Commissioner of Internal Revenue may in addition require as a condition precedent to the allowance of credit a bond from the taxpayer. It shall be in such sum as the Commissioner of Internal Revenue may prescribe, and shall be conditioned for the payment by the taxpayer of any amount of tax found due upon any redetermination of the tax made necessary by such credit proving incorrect, with such further conditions as the Commissioner of Internal Revenue may require. This bond shall be executed by the taxpayer, or the agent or representative of the taxpayer, as principal, and by sureties satisfactory to and approved by the Commissioner of Internal Revenue. If it is the desire of the taxpayer to claim as a credit and not as a deduction accrued income, warprofits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States but at the time the return is made it is impossible to estimate the amount of such taxes that may have accrued for the period for which the return is made, the form required under this section may be filed at a later date but a credit cannot be allowed for such taxes unless the taxpayer signifies in his return his desire to have to any extent the benefits of Section 30(c) (3) to (9). SECTION 87. Redetermination of tax when credit proves incorrect. In case credit has been given for taxes accrued, or a proportionate share thereof, and the amount that is actually paid on account of such taxes, or a proportionate share thereof, is not the same as the amount of such credit, or in case any tax payment credited is refunded in whole or in part, the taxpayer shall
immediately notify the Commissioner of Internal Revenue. The Commissioner of Internal Revenue will thereupon redetermine the amount of the tax of such taxpayer for the year or years for which such incorrect credit was granted. The amount of tax, if any, due upon such redetermination shall be paid by the taxpayer upon notice and demand by the Commissioner of Internal Revenue. The amount of tax, if any, shown by such redetermination to have been overpaid shall be credited or refunded to the taxpayer in accordance with the provisions of Section 309 of the Code. SECTION 88. Countries which do or do not satisfy the similar credit requirements. A country satisfies the similar credit requirement of Section 30(c)(3)(B), as to income tax paid to such country, either by allowing to citizens of the Philippines residing in such country a credit for the amount of income taxes paid to the Philippines. A country does not satisfy the similar credit requirement of Section (30)(c)(3)(B) if it does not allow any credit to citizens of the Philippines residing in such country for the amount of income taxes paid to the Philippines, or if such country does not impose any income taxes. If the country of which a resident alien is a citizen or subject does not allow to a Filipino citizen residing in such country a credit for taxes paid by such citizen to another foreign country, no credit is allowed to such resident alien for taxes paid by him to such foreign country. SECTION 89. When credit for taxes may be taken. The credit for taxes provided by Section (30)(c)(3) to (9) may ordinarily be taken either in the return for the year in which the taxes accrued or in which the taxes were paid, dependent upon whether the accounts of the taxpayer are kept and his returns filed upon the accrual basis or upon the cash receipts and disbursements basis. Section 30(c)(6) allows the taxpayer, at his option and irrespective of the method of accounting employed in keeping his books, to take such credit for taxes as may be allowable in the return for the year in which the taxes accrued. An election thus made must be followed in returns for all subsequent years, and no portion of any such taxes will be allowed as a deduction from gross income. SECTION 90. Domestic corporation owning a majority of the stock of foreign corporation. In the case of a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends in any taxable rear, the credit for foreign taxes includes not only the income, war profits and excess-profits taxes paid or accrued during the taxable year to any foreign country by such domestic corporation, but also income, war-profits and excess-profits taxes deemed to have been paid determined by
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taking the same proportion of any income, warprofits, and excess-profits taxes paid or accrued by such controlled foreign corporation to any foreign country upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of any such dividends received bears to the amount of such accumulated profits. The amount of taxes deemed to have been paid is limited, however, to an amount of the tax against which the credit for foreign taxes is taken, which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. If dividends are received from more than one controlled foreign corporation, the limitation is to be computed separately for the dividends received from each controlled foreign corporation. If the credit for foreign taxes includes taxes deemed to have been paid, the taxpayer must furnish the same information with respect to the taxes deemed to have been paid as it is required to furnish with respect to the taxes actually paid or accrued by it. Taxes paid or accrued by a controlled foreign corporation are deemed to have been paid by the domestic corporation for purposes of credit only. SECTION 91. Non-resident aliens and foreign corporations not allowed credits against the tax. Non-resident aliens and foreign corporations may not claim credits against the tax from taxes of foreign countries. SECTION 92. Limitation on credit for foreign taxes. The amount of credit for foreign taxes shall be subject to the following limitations: (a) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources within such country taxable under Title II bears to his entire net income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources without the Philippines taxable under Title II bears to his entire net income for the same taxable year. (Section 30(d) of the Code) DE LEON: Tax Credits amounts allowed as deduction from the tax due in the form of withholding tax on wages, rents and other creditable withholding taxes and foreign income tax paid or accrued Differentiated from Tax Deduction
[caveat emptor this is the result of theorizing; the review-er was not able to find anything in the book explaining this] Tax Deduction - items or amounts which the law allows to be deducted under certain conditions from the gross income of a tax payer in order to arrive at the taxable income Therefore, deductions take place before any taxes are paid they come into play in order to determine the taxable income in the first place. Tax credits, on the other hand, are deducted from the tax due because the taxpayer has already paid something in advance. Gross Income Less: Tax deductions Taxable Income X Tax Rate Tax Due Less: Tax Credits Final Tax Due As contemplated in Sec. 34(C), TAX CREDIT refers to the taxpayers right to deduct from the income tax due the amount of tax the taxpayer has paid to a foreign country, subject to limitations. It may also refer to the amount which is allowed as a reduction of Philippine income tax. Essential Feature: The taxpayers home country treats the foreign income tax so paid as if it were paid to itself, and collects only the residual tax, if any. The taxpayer is given the option to treat the foreign income tax as ordinary deduction from gross income. Entitled to Tax Credit for Foreign Taxes Paid: (1) Resident citizens (2) Domestic corporations, which include business partnerships (3) Members of professional partnerships (4) Beneficiaries of estates and trusts NOT entitled: (1) Non-resident citizens (2) Resident and non-resident aliens (3) Resident and non-resident foreign corporations Tax credits for foreign taxes are allowed ONLY for income derived from sources outside the Philippines. Non-resident citizens, aliens and
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foreign corporations are not taxable on foreign source income. Limitations on Amount Creditable Purpose: To avoid the impairment of the Philippines power to tax. [Prof. Follosco]
Formula for Computing Limitations on Tax Credit: (a) For taxes paid to one foreign country:
TI from FC ------------- X Phil. Income Tax = Credit Limit TI from AS TI = Taxable Income FC = Foreign Country AS = All Sources
(b) For taxes paid to two or more foreign countries:

TI from OS ------------- X Phil. Income Tax = Credit Limit TI from AS OS = Outside Sources FC = Foreign Country AS = All Sources
The tax credit limit is the lower amount between the credit computed under (a) and (b).
Prof. Follosco:
Re: choosing between crediting or deducting the tax
Not all taxes can be credited or deducted; only foreign taxes may be either credited or deducted all the time.
Must be INCOME TAX paid to foreign COUNTRY.
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PART IV TAXATION OF INDIVIDUALS B. Classification of Individual Taxpayers
1. Citizens of the Philippines MAMALATEO: Under the Sec. 1, Art. IV of the 1987 Constitution, the following individuals are considered as citizens of the Philippines: [1] Those who are citizens of the Philippines at the time of the adoption of this Constitution; [2] Those whose fathers or mothers are citizens of the Philippines; [3] Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and [4] Those who are naturalized in accordance with law. a. Resident (RC)
abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. 23. General Principles of Income Taxation in the Philippines. - Except when SEC.
MAMALATEO: A resident citizen can be (a) engaged in the trade or business or in the exercise of his profession in the Philippines (without the existence of employeremployee relationship) (b) not engaged in trade or business or in the exercise of his profession (e.g. professional who is an employee of a company) (c) engaged on trade or business or in the exercise of his profession and at the same time deriving compensation and/or other income (mixed income) It is important to determine whether or not a resident citizen is enganged in trade or business or in the exercise of his profession, since he is entitled to deduct certain items of deductions from his business or professional income, capital gain not subject to final tax, passive income not subject to final tax, and other income. b. Non-resident (NRC)
otherwise provided in this Code: (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and
Individual Resident Alien of the Philippines.
(1) An income tax is hereby imposed: (b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; MAMALATEO: Based on the statutory definition of NRC, there are 3 types: (1) immigrants; (2) employees of foreign entities on a permanent basis; (3) overseas contract workers. Immigrants and employees of foreign entities on a permanent basis are treated as NRC from the time they depart from the Philippines. However, OCWs must be physically present abroad most of the time during the calendar year to qualify as NRC.
Sec. 22(E) The term "nonresident citizen" means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
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The trip to Manila of a NRC under the Balikbayan program did not interrupt his residence abroad. The phrase uninterrupted period should not be interpreted literally as to negate the continuity of residence abroad. F the reason for the physical residence abroad is established such as employment on a more or less regular tenure, such physical presence abroad is not deemed interrupted by reason of visits or travels to the Philippines, no matter how often. (Sec. 2, RR 9-73; BIR Ruling 74004, Mar. 5 1974) Pilots, stewardess and other crews of airlines plying international routes, who are holders of immigrant visas or foreign working visas and have left the Philippines, qualify as NRCs. The fat the their salaries are paid locally does not remove them from this category. The employees of the company who are assigned abroad through secondment agreement with its overseas clients are classified as NRCs or OCWs, of they spend at least 183 days abroad during any given taxable year, or if the workers employment contract passes through the POEA (BIR ruling no. 0332000, Sept. 5, 2000)
RR2, SECTION 5 .Definition. A "non-resident alien individual" means an individual (a) Whose residence is not within the Philippines; and (b) Who is not a citizen of the Philippines. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. i. NRA-engaged in trade or business (NRA-TB) Restatement of 180-day test If an alien stays in the Philippines for 10 days or less during the calendar year, he shall be deemed a non-resident not doing business in the Philippines, regardless of whether he actually engages in trade or business therein. If his stay exceeds 180 days during the calendar year, he shall be deemed engaged in trade or business in the Philippines, although he does not actually engage in trade or business therein. SEC. 25. Tax on Nonresident Alien Individual.
Conwi v. IAC 213 SCRA 83 FACTS: Petitioners are Filipino citizen and employees of Procter and Gamble (P&G) Philippines, assigned to subsidiaries of P&G abroad for 2 years. HELD: The dollar earning of petitioners are fruits of their labor in the foreign subsidiaries of P&G. It was a definite amount of money which came to them within a specified period of time of 2 years as payment for their services. Pursusant to sec. 21 of NIRC, a tax is imposed upon the taxable net income received during the taxable year from all
sources of every individual, whether citizen of the Philippines residing in the Philippines or abroad
2. Aliens a. Resident (RA)
(A) Nonresident Alien Engaged in trade or Business
Within the Philippines. (1) In General. - A nonresident alien
Sec. 22(F) The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof. b. Non-resident alien (NRA)
Sec. 22(G) The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof.
individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.
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ii. Non-resident alien not engaged in trade or business (NRA-XTB) iii. Aliens employed by regional headquarters of multinational/by offshore banking units/petroleum service contractors MAMALATEO: Certain alien individuals who are employed in the Philippines are entitled to the 15% preferential income tax rate on their gross compensation income from sources WITHIN the Philippines. These are alien individuals employed by: (a) (b) (c) Regional or area headquarters and regional operating headquarters of multinational companies in the Philippines Offshore Banking Units (OBUs) established in the Philippines Foreign service contractors or subcontractors engaged in petroleum operations in the Philippines.
The term "regional operating headquarters" shall mean a branch established in 22(EE)
the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing 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. iv. Aliens employed by OBUs
SEC. 25. Tax on Nonresident Alien Individual.
SEC. 25. Tax on Nonresident Alien Individual.
(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied,
collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. 22(DD) The term "regional or area headquarters" shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. v. Aliens employed by petroleum contractors/subcontractor SEC. 25. Tax on Nonresident Alien Individual.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case
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may
be,
imposed
under
this
Code.
B.
Taxation of Income of Resident Citizens from ALL sources and Resident Aliens insofar as their income from sources WITHIN the Philippines is concerned
Revenue Regulation 1-68 (Private Retirement Benefit Plan Regulations): prescribing the terms and conditions under which a qualified employee benefit plan may avail of the tax exemption provided by Republic Act No. 4917 and the application of the other provisions of said law. SECTION 1. Scope. Republic Act No. 4917 exempts from all taxes the retirement benefits received by officials and employees of private firms under a reasonable private benefit plan maintained by the employer and all amounts received by such officials and employees from their employers on account of involuntary separation, such as death, sickness, or physical disability, or any other cause beyond the control of said officials and employees. In order to avail of the exemption, with respect to retirement benefits, the following requirements must be met: (a) The plan must be reasonable; (b) The retiring official or employee must have been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of retirement; and (c) The retiring official or employee shall not have previously availed of the privilege under a retirement benefit plan of the same or another employer. A reasonable benefit plan may consist of a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both. It may be contributory or non-contributory on the part of the officials or employees. SECTION 2. Requisites of a Reasonable Retirement Benefit Plan: (a) Written Program. It must be a definite written program setting forth all provisions essential for qualification; (b) Permanency. It must be a permanent and continuing program unless sooner terminated by virtue of a valid business reason; (c) Coverage. (1) Percentage Basis. It must cover at least 70% of all officials and employees. If the plan provides eligibility requirements and at least 70% of all officials and employees meet the eligibility requirements, at least 80% of those eligible must be covered. Under this basis, the following employees are excluded: (a) Employees who have been employed less than the minimum length of time stated in the plan;
1. General:
Income
Taxation
of
Compensation
a. Inclusions i.
Monetary compensation Regular salary/wage
Separation pay/retirement benefit not otherwise exempt under Sec. 32(B)Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this title:
Gratuities, etc.-
(6)
Retirement
Benefits,
Pensions,
(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. Revenue Regulations:
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(b) Employees who work 20 hours a week or less; and (c) Seasonal employees who work 5 months a year or less. (2) Classification Basis. If the employee does not wish to cover the greater portion of his employees, he may set up a plan under a classification set-up prescribed by him and limit coverage to employees in a certain classification, over a prescribed age, employed for a stated number of years; etc. provided that the coverage of the plan must not discriminate in favor of officers, shareholders, supervisors, or highly compensated employees. A classification shall not be considered discriminatory merely because it is limited to salaried or clerical employees. Neither shall a plan be considered discriminatory merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basis or regular rate of compensation, and the employees' length of service. (d) Contribution. The employer, or officials and employees, or both, shall contribute to a trust fund for the purpose of distributing to the officials and employees or their beneficiaries, the corpus and income of the fund accumulated by the trust in accordance with the plan. (e) Impossibility of Diversion. The corpus or income of the trust fund must at no time be used for, or diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (f) Non-discriminatory. There must be no discrimination in contributions or benefits in favor of officials and employees who are officers, shareholders, supervisors, or highly compensated. (g) Non-forfeitures. It must provide for non-forfeitable rights, that is upon the termination of the plan or upon the complete discontinuance of contributions under the plan, the rights of each official or employee to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the rights of each employee to the amounts credited to his account at such time are non-forfeitable. (h) Forfeitures. The plan must expressly provide that forfeitures arising from severance of employment, death or for any other reason, must not be applied to increase the benefits any employee would otherwise receive under the plan at any time prior to the termination of the plan at the complete discontinuance or employer contributions thereunder. The amounts so forfeited must be used as soon as possible to reduce the employer's contributions under the plan.
SECTION 3. Involuntary Separation. All amounts received by officials and employees, or their heirs upon separation from the service of the employer by reason of death, sickness or other physical disability or for any cause beyond the control of said officials or employees are also exempt from all terms and from attachment, garnishment, levy or seizure except to pay a debt of the official or employees concerned arising from liability imposed in a criminal action. In contradistinction to the qualification for exemption under a qualified plan, the exemption under an involuntary separation is not qualified as to the length of service and age of the official or employee. Therefore, amounts received by reason of involuntary separation remains exempt from tax even if the official or employee at the time of separation had less than 10 years of service and/or is below 50 years in age. SECTION 7. Coverage of the Exemption. Republic Act No. 4917 took effect on June 17, 1967. Employees retiring after this date under a benefit plan established prior to said date but which qualifies as herein provided shall be entitled to exemption. Such plan must, however, be submitted for determination of its qualification as provided for in the proceeding section. cdasia Exemption shall also apply to employees involuntarily separated from the services of their employers after said date. Revenue Regulation 1-83 (amending RR 1-68) "Sec. 6. Determination of qualification. (A) Issuance of certificate of qualification. Before availing of the privileges afforded by pension, gratuity, profit-sharing, or stock bonus plans, a certificate must be secured by the employer to the effect that the qualification of the plan for taxexemption has been determined. In securing such certification, the employer must file a written application therefor with the Commissioner of Internal Revenue, attaching thereto the following documents: "(1) In the case of a trusteed Plan. (a) B.I.R. Form No. 17.60 duly accomplished; (b) A copy of the written program constituting the Plan; (c) A copy of the Trust Agreement executed by and between the employer as trustor and the trustee/trustees of the employees retirement trust fund, duly signed by the parties to the trust and acceptance by the trustee/trustees indicated; (d) Statement of Actuarial Assumption or Valuation duly certified to by an independent consulting actuary who must be a Fellow of the
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Actuarial Society of the Philippines (in the case of a fixed-benefit type of Plan); and (e) Such other documents which the Commissioner may consider necessary in the final determination of the qualification of the Plan for tax-exemption under Republic Act No. 4917 (now Section 29(c)(7)(A) of the Tax Code and these regulations. (2) In the case of a non-trusteed/insured Plan. (a) B.I. R. Form No. 17.60 duly accomplished; (b) A copy of the written program constituting the Plan; (c) A copy of the Deposit Administration Contract Deferred Annuity Contract executed by and between the employer or the insured or policyholder and the Insurance Company as the insurer; and (d) Such other documents which the Commissioner may consider necessary in the final determination of the publication of the Plan for taxexemption. ac (3) In the case of Multi-employer Plans. "The same documentation requirements as in paragraph (A)(1) or paragraph (A)(2), as the case may be, this Section should be submitted for each of the participating employers together with the Participating Agreement. "Upon receipt of the application, the same together with the supporting documents shall be referred to the Government and Tax Exempt Corporation Division for field investigation and verification of the employee's trust's (Retirement Plan) compliance with the requirements provided for by Section 29(c)(7)(A) of the Tax Code and these regulations, after which the Commissioner of Internal Revenue shall decide whether or not the plan is so qualified. If the Commissioner decides that the plan is qualified, he shall issue a certificate of qualification, upon payment of the corresponding fee prescribed in paragraph (B) of this Section. However, if he decides that the Plan is not qualified, he shall inform the employer of his decision and the reasons supporting the same. cd i "During the period that the Plan is in operation, amendments thereto may be introduced. Such amendments should also be submitted for certification that the amendment or amendments do not affect the qualification of the Plan. If found to be beneficial to the employee-members of the Plan, an amendatory certification of qualification shall be issued by the Commissioner of Internal Revenue, upon payment of the corresponding fee prescribed in paragraph (B) of this section. "(B) Fees to be paid by the employer: "1. Upon issuance of the certificate of qualification 82 | Follosco Tax Reviewer
"(a) "(b) "(c)
employers not having more than 50 employers P250 employers having more than 50 but not over 100 employees P350 employers having more than 100 employees P500
"2. Upon issuance of an amendatory certificate of qualification "(a) employers not having more than 50 employees P200 "(b) employers having more than 50 but not over 100 employees P300 "(c) employers having more than 100 employees P450 "Provided, however, that employers not having more than five (5) employees shall be exempt from the fees prescribed by these regulations. cd "Said fees shall accrue to the General Fund and shall be deposited with the National Treasury." SEC. 32. Gross Income. xxx (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: xxx (7) Miscellaneous Items. (e) 13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i). Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii). Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii). Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv). Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.
Christmas bonus
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(Not in outline) REPUBLIC ACT NO. 6686 As amended by RA 8441 Sec. 1. All officials and employees of the National Government who have rendered at least four months of service from January 1 to October 31 of each year and who are employed in the government service as of October 31 of the same year shall each receive a Christmas bonus equivalent to one month basic salary and additional cash gift of Five thousand pesos (P5,000.00) to be implemented over a period of three (3) years, to wit: (a) Two thousand pesos (P2,000.00) for the Christmas Year 1997; (b) Three thousand pesos (P3,000.00) for the Christmas Year 1998; and (c) Five thousand pesos (P5,000.00) for the Christmas Year 1999 and thereafter Sec. 2. Officials and employees of the National Government who have rendered less than four months of service from January 1 to October 31 of each year and who are employed in the government service as of October 31 of the same year shall be entitled solely to the following percentage of the cash gift: Length of Service Percentage 3 months but less than 4 months 40% 2 months but less than 3 months 30% 1 month but less than 2 months 20% Less than one month 10% Sec. 3. For CY 1997, the amount needed to implement this Act for national officials and employees, and barangay chairmen under Sec. 5 hereof shall be taken from current year's appropriations for the Miscellaneous Personnel Benefits Fund and appropriation savings and reserves authorized under Republic Act No. 8250, the General Appropriations Act for 1997. For the succeeding years, the amount shall be included in the annual General Appropriations Act. Sec. 4. All officials and employees of local government units may receive the same benefits as are provided under Sec.s 1 and 2 of this Act chargeable against their respective local funds. For CY 1997, local government units (municipalities, cities and provinces) may realign their budgets to give priority to the funding requirements under this Act and any deficiency may be booked as accounts payable to be paid on a first priority basis in succeeding years
Sec. 5. Barangay chairmen shall each receive a cash gift of Five thousand pesos (P5,000.00) payable out of the funds provided for in Sec. 3 hereof. This shall be implemented in accordance with Sec.s 1 and 2 of this Act. Sec. 6. No official or employee shall receive Christmas bonus from any and all sources in excess of the one month basic salary and cash gift as provided under Sec.s 1 and 2 of this Act. Sec. 7. The Department of Budget and Management shall issue the implementing rules and regulations to carry out the provisions of this Act. Sec. 8. This Act shall take effect upon its approval. Approved: December 14, 1988 RA 8441 Approved; December 22, 1997
DE LEON: Christmas bonus refers to cash gifts, gratuity, and incentive pay given by government offices and private entities to their workers at the end of the year. 13th Month Pay (Not in outline) PRESIDENTIAL DECREE NO. 851 REQUIRING ALL EMPLOYERS TO PAY THEIR EMPLOYEES A 13th-MONTH PAY
WHEREAS, it is necessary to further protect the

level of real wages from the ravage of worldwide inflation; minimum wage rates since
WHEREAS, there has been no increase in the legal

1970;
WHEREAS, the Christmas season is an opportune
time for society to show its concern for the plight of the working masses so they may properly celebrate Christmas and New Year. NOW, THEREFORE, I, FERDINAND E. MARCOS, by virtue of the powers vested in me by the Constitution, do hereby decree as follows: Section 1. All employers are hereby required to pay all their employees receiving a basic salary of not more than P1,000 a month, regardless of the nature of their employment, a 13th-month pay not later than December 24 of every year. Sec. 2. Employers already paying their employees a 13th-month pay or its equivalent are not covered by this Decree. xxx
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(Not in outline) ADMINISTRATIVE ORDER NO. 2, SERIES OF
2. The Field Service Division of the Regional Office concerned shall see to it that all covered employees comply with P.D. No. 851. 1976 The Regional Director shall submit a monthly progress report of compliance with the Decree. The reports of the Regional Offices shall be submitted to the LSS and BLS, and shall contain the following: (a) The total number of establishments; (b) total number of workers benefited; and (c) total amount of benefits paid. 3. The Regional Office shall compile, analyze and evaluate compliance reports and update the listing of establishments on the basis of the reports submitted. Any prior order, circular, instruction or memorandum or parts thereof, inconsistent herewith are hereby revoked. This Order shall take effect immediately. Manila, 9 January 1976.
In the interest of public service and efficiency, more particularly to facilitate the disposition of cases involving petitions for exemption, complaints, enforcement and implementation of P.D. No. 851 and its implementing rules and regulations, the following guidelines shall be followed: I. Petition for exemption 1. The Regional Office concerned shall transmit immediately the petition for exemption to the Chairman, Wage Commission with comments and recommendations, if any. The petition shall contain a sworn statement on the inability to implement the Decree and the reasons, therefore, and shall be accompanied by the following documents and statements: (a) A certified true copy of the income tax returns for the last two (2) years; (b) A certified copy of the financial reports for the last two (2) years filed with the Government entities, such as the Securities and Exchange Commission, Department of Trade, Department of Industries and Board of Investments; (c) A detailed sworn statement of the actual monthly losses not covered by the report required under paragraph (b) above and such other proofs or documents as may be required by the Chairman, Wage Commission to establish such exemption. 2. The Chairman, Wage Commission and the duly designated staff, shall evaluate all petitions for exemption and make appropriate recommendations within 20 working days from receipt of the petition to the Secretary of Labor. 3. Whenever a petition for exemption has been filed, and complaint for non-compliance shall be held in abeyance pending the disposition or resolution of the petition for exemption. II. Complaint, enforcement and/or implementation 1. All complaints for non-payment of the 13thmonth pay shall be filed with the Field Services Division of the Regional Office concerned. The Regional Director shall direct the said Division to conduct an inspection and investigation in connection with the complaint filed.
(Not in outline) RULES AND REGULATIONS IMPLEMENTING PRESIDENTIAL DECREE NO.
851
By virtue of the powers vested in me by law, the following rules and regulations implementing Presidential Decree No. 851 are hereby issued for the guidance of all concerned. Section 1. Payment of 13th-month Pay. - All employers covered by Presidential Decree No. 851, hereinafter referred to as the "Decree", shall pay to all their employees receiving a basic salary of not more than P1,000 a month a thirteenth-month pay not later than December 24 of every year. Sec. 2. Definition of certain terms. - As used in this issuance: (a) "Thirteenth-month pay" shall mean one twelfth (1/12) of the basic salary of an employee within a calendar year; (b) "Basic salary" shall include all remunerations or earnings paid by an employer to an employee for services rendered but may not include cost-of-living allowances granted pursuant to Presidential Decree No. 525 or Letter of Instructions No. 174, profitsharing payments, and all allowances and monetary benefits which are not considered or integrated as
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part of the regular or basic salary of the employee at the time of the promulgation of the Decree on December 16, 1975. Sec. 3. Employers covered. - The Decree shall apply to all employers except to: (a) Distressed employers, such as (1) those which are currently incurring substantial losses or (2) in the case of non-profit institutions and organizations, where their income, whether from donations, contributions, grants and other earnings from any source, has consistently declined by more than forty (40%) percent of their normal income for the last two (2) years, subject to the provision of Section 7 of this issuance; (b) The Government and any of its political subdivisions, including government-owned and controlled corporations, except those corporations operating essentially as private subsidiaries of the Government; (c) Employers already paying their employees 13month pay or more in a calendar year or its equivalent at the time of this issuance; (d) Employers of household helpers and persons in the personal service of another in relation to such workers; and (e) Employers of those who are paid on purely commission, boundary, or task basis, and those who are paid a fixed amount for performing a specific work, irrespective of the time consumed in the performance thereof, except where the workers are paid on piece-rate basis in which case the employer shall be covered by this issuance insofar as such workers are concerned. As used herein, workers paid on piece-rate basis shall refer to those who are paid a standard amount for every piece or unit of work produced that is more or less regularly replicated, without regard to the time spent in producing the same. The term "its equivalent" as used in paragraph c) hereof shall include Christmas bonus, mid-year bonus, profit-sharing payments and other cash bonuses amounting to not less than 1/12th of the basic salary but shall not include cash and stock dividends, cost of living allowances and all other allowances regularly enjoyed by the employee, as well as non-monetary benefits. Where an employer pays less than 1/12th of the employees basic salary, the employer shall pay the difference. Sec. 4. Employees covered. - Except as provided in Section 3 of this issuance, all employees of covered employers shall be entitled to benefit provided
under the Decree who are receiving not more than P1,000 a month, regardless of their position, designation or employment status, and irrespective of the method by which their wages are paid, provided that they have worked for at least one month during the calendar year. Sec. 5. Option of covered employers. - A covered employer may pay one-half of the 13th-month pay required by the Decree before the opening of the regular school year and the other half on or before the 24th day of December of every year. In any establishment where a union has been recognized or certified as the collective bargaining agent of the employees therein, the periodicity or frequency of payment of the 13th-month pay may be the subject of agreement. Nothing herein shall prevent employers from giving the benefits provided in the Decree to their employees who are receiving more than One Thousand (P1,000) Pesos a month or benefits higher than those provided by the Decree. Sec. 6. Special feature of benefit. - The benefits granted under this issuance shall not be credited as part of the regular wage of the employees for purposes of determining overtime and premium pay, fringe benefits, as well as premium contributions to the State Insurance Fund, social security, medicare and private welfare and retirement plans. Sec. 7. Exemption of Distressed employers. Distressed employers shall qualify for exemption from the requirement of the Decree upon prior authorization by the Secretary of Labor. Petitions for exemptions may be filed within the nearest regional office having jurisdiction over the employer not later than January 15, 1976. The regional offices shall transmit the petitions to the Secretary of Labor within 24 hours from receipt thereof. Sec. 8. Report of compliance. - Every covered employer shall make a report of his compliance with the Decree to the nearest regional labor office not later than January 15 of each year. The report shall conform substantially with the following form: REPORT ON COMPLIANCE WITH P.D. NO. 851 1. Name of establishment 2. Address 3. Principal product or business 4. Total employment 5. Total number of workers benefited 6. Amount granted per employee 7. Total amount of benefits granted
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8. Name, position and tel. no. of person giving information Sec. 9. Adjudication of claims. - Non-payment of the thirteenth-month pay provided by the Decree and these rules shall be treated as money claims cases and shall be processed in accordance with the Rules Implementing the Labor Code of the Philippines and the Rules of the National Labor Relations Commission. Sec. 10. Prohibition against reduction or elimination
complaints with the Regional Offices of the Department of Labor. 2. Private school teachers, including faculty members of colleges and universities, are entitled to 1/12 of their annual basic pay regardless of the number of months they teach or are paid within a year. 3. New establishments operating for less than one year are not covered except subsidiaries or branches of foreign and domestic corporations. 4. Overtime pay, earnings and other remunerations which are not part of the basic salary shall not be included in the computation of the 13th-month pay. 5. In view of the lack of sufficient time for the dissemination of the provisions of P.D. No. 851 and its Rules and the unavailability of adequate cash flow due to the long holiday season, compliance and reporting of compliance with this Decree are hereby extended up to March 31, 1976 except in private schools where compliance for 1975 may be made not later than 30 June 1976. 6. Nothing herein shall sanction the withdrawal or diminution of any compensation, benefits or any supplements being enjoyed by the employees on the effective date of this issuance.
of benefits. - Nothing herein shall be construed to
authorize any employer to eliminate, or diminish in any way, supplements, or other employee benefits or favorable practice being enjoyed by the employee at the time of promulgation of this issuance. Sec. 11. Transitory Provision. - These rules and regulations shall take effect immediately and for purposes of the 13th-month pay for 1975, the same shall apply only to those who are employees as of December 16, 1975. Manila, Philippines, 22 December 1975. (Not in outline) SUPPLEMENTARY RULES AND REGULATIONS IMPLEMENTING P.D. NO.
851
Manila, January 16, 1976
To insure uniformity in the interpretation, application and enforcement of the provisions of Presidential Decree No. 851 and its implementing regulations, the following clarifications are hereby made for the information and guidance of all concerned: 1. Contractors and Subcontractors, including Security and Watchman Agencies, are exempt for the year 1975 subject to the following conditions: (a) that the contracts of such enterprises were entered into before December 16, 1975; (b) that such enterprises have complied with all labor standards laws during the year; (c) that the contract cannot really accomodate 13month pay or its equivalent; and (d) that the contract does not provide for cost escalation clause. This exemption is without prejudice on the part of the workers to negotiate with their employers or to seek payment thereof by filing appropriate
(Not in outline) REVISED GUIDELINES ON THE IMPLEMENTATION OF THE 13TH MONTH PAY LAW. 1. Removal of Salary Ceiling. On August 13, 1986, President Corazon C. Aquino issued Memorandum Order No. 28 which provides as follows: "Section 1 of Presidential Decree No. 851 is hereby modified to the extent that all employers are hereby required to pay all their rank-and-file employees a 13th month pay not later than December 24 of every year."chan robles virtual law library Before its modification by the aforecited Memorandum Order, P.D. No. 851 excludes from entitlement to the 13th month pay those employees who were receiving a basic salary of more than P1,000.00 a month. With the removal of the salary ceiling of P1,000.00, all rank and file employees are now entitled to a 13th month pay regardless of the amount of basic salary that they receive in a month if their employers are not otherwise exempted from the application of P.D. No. 851. Such employees
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are entitled to the benefit regardless of their designation or employment status, and irrespective of the method by which their wages are paid, provided that they have worked for at least one (1) month during a calendar year. 2. Exempted Employers. The following employers are still not covered by P.D. No. 851: a. The Government and any of its political subdivisions, including government-owned and controlled corporations, excepts those corporations operating essentially as private subsidiaries of the Government; b. Employers already paying their employees a 13th month pay or more in a calendar year or its equivalent at the time of this issuance; c. Employers of household helpers and persons in the personal service of another in relation to such workers; and d. Employers of those who are paid on purely commission, boundary, or task basis, and those who are paid a fixed amount for performing specific work, irrespective of the time consumed in the performance thereof, except where the workers are paid on piece-rate basis in which case the employer shall grant the required 13th month pay to such workers. As used herein, workers paid on piece-rate basis shall refer to those who are paid a standard amount for every piece or unit of work produced that is more or less regularly replicated, without regard to the time spent in producing the same. The term "its equivalent" as used on paragraph (b) hereof shall include Christmas bonus, mid-year bonus, cash bonuses and other payments amounting to not less than 1/12 of the basic salary but shall not include cash and stock dividends, cost of living allowances and all other allowances regularly enjoyed by the employee, as well as nonmonetary benefits. Where an employer pays less than required 1/12th of the employees basic salary, the employer shall pay the difference. 3. Who are Rank-and File Employees. The Labor Code distinguishes a rank-and-file employee from a managerial employee. It provides that a managerial employee is one who is vested with powers of prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall discharge, assign or discipline employees, or to effectively recommend such managerial actions. All employees not falling within this definition are considered rank-and-file employees. The above distinction shall be used as guide for the purpose of determining who are rank-and-file employees entitled to the mandated 13th month pay. 4. Amount and payment of 13th Month Pay
(a) Minimum of the Amount. The minimum 13th month pay required by law shall not be less than one-twelfth of the total basic salary earned by an employee within a calendar year. For the year 1987, the computation of the 13th month pay shall include the cost of living allowances (COLA) integrated into the basic salary of a covered employee pursuant to Executive Order 178. E.O. No. 178 provides, among other things, that the P9.00 of the daily COLA of P17.00 for nonagricultural workers shall be integrated into the basic pay of covered employees effective 1 May 1987, and the remaining P8.00 effective 1 October 1987. For establishments with less than 30 employees and paid-up capital of P500,000 or less, the integration of COLAs shall be as follows: P4.50 effective on 1 May 1987; P4.50 on 1 October 1987; and P8.00 effective 1 January 1988. Thus, in the computation of the 13th month pay for 1987, the COLAs integrated into the basic pay shall be included as of the date of their integration. Where the total P17.00 daily COLA was integrated effective 1 May 1987 or earlier the inclusion of said COLA as part of the of the basic pay for the purpose of computing the 13th month pay shall be reckoned from the date of actual integration. The "basic salary" of an employee for the purpose of computing the 13th month pay shall include all remunerations or earning paid by this employer for services rendered but does not include allowances and monetary benefits which are not considered or integrated as part of the regular or basic salary, such as the cash equivalent of unused vacation and sick leave credits, overtime, premium, night differential and holiday pay, and cost-of-living allowances. However, these salary-related benefits should be included as part of the basic salary in the computation of the 13th month pay if by individual or collective agreement, company practice or policy, the same are treated as part of the basic salary of the employees. (b) Time of Payment. The required 13th month pay shall be paid not later than December 24 of each year. An employer, however, may give to his employees one half () of the required 13th month pay before the opening of the regular school year and the other half on before the 24th of December of every year. The frequency of payment of this monetary benefit may be the subject of agreement between the employer and the recognized/collective bargaining agent of the employees. 5. 13th Month Pay for Certain Types of Employees. (a) Employees Paid by Results. Employees who are paid on piece work basis are by law entitled to the 13th month pay. Employees who are paid a fixed or guaranteed wage plus commission are also entitled to the mandated 13th month pay, based on their total
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earnings during the calendar year, i.e., on both their fixed or guaranteed wage and commission. (b) Those with Multiple Employers. Government employees working part time in a private enterprise, including private educational institutions, as well as employees working in two or more private firms, whether on full or part time basis, are entitled to the required 13th month pay from all their private employers regardless of their total earnings from each or all their employers. (c) Private School Teachers. Private school teachers, including faculty members of universities and colleges, are entitled to the required 13th month pay, regardless of the number of months they teach or are paid within a year, if they have rendered service for at least one (1) month within a year. 6. 13th Month Pay of Resigned or Separated Employee. An employee who has resigned or whose services were terminated at any time before the time for payment of the 13th month pay is entitled to this monetary benefit in proportion to the length of time he worked during the year, reckoned from the time he started working during the calendar year up to the time of his resignation or termination from the service. Thus, if he worked only from January up to September his proportionate 13th month pay should be equivalent of 1/12 his total basic salary he earned during that period. The payment of the 13th month pay may be demanded by the employee upon the cessation of employer-employee relationship. This is consistent with the principle of equity that as the employer can require the employee to clear himself of all liabilities and property accountability, so can the employee demand the payment of all benefits due him upon the termination of the relationship. 7. Non-inclusion in Regular Wage. The mandated 13th month pay need not be credited as part of regular wage of employees for purposes of determining overtime and premium pays, fringe benefits insurance fund, Social Security, Medicare and private retirement plans. 8. Prohibitions against reduction or elimination of benefits Nothing herein shall be construed to authorize any employer to eliminate, or diminish in any way, supplements, or other employee benefits or favorable practice being enjoyed by the employee at the time of promulgation of this issuance. (Sgd.) Secretary FRANKLIN M. DRILON
CLASS NOTES: The BIR cannot collect a tax from an individual on income exempted from taxation. The Thirteenth Month Pay is not taxable being an exclusion from Gross Income. Withholding tax system, as a mode of collection, cannot apply to it.) However, the 14th month and succeeding months pay, which some firms give their workers as part of their year end benefits, are covered by the withholding tax system because they form part of the employees compensation income. The law speaks only of 13th Month Pay. It also prescribes that the total tax-free grant of benefits enumeration in Subsection (B) 7 e should not exceed P30,000. If the taxpayer gets a Christmas bonus of P12,000 and 13th month pay of P25,000 or a total of P37,000, the excess of P7,000 is subject to withholding tax. For Bonuses, 13th Month Pay and Other Benefits to be excluded from Gross Income, the total amount must not exceed P30,000. Any excess over that cap is taxable as part of Gross Income. Hence, it is subject to the provisions on withholding tax at source. Other Benefits DE LEON: Monetization of leave credits The scheme for the monetization of leave credits is in the nature of a facility or privilege of relatively small value which are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of its employees. EO No. 291 (Sept 27, 2000) abrogated all previous ruling including section 2.78.1 (A)(7) of RR 2-98 which subjects the monetization of leave credits of government officials and employees to income tax for being inconsistent with the provisions of RA No. 8424 the Tax Reform Act of 1997. Benefits enjoyed by Philippine National Police (PNP members. RA 6975 Sections 71 and 77 thereof, exempts from income tax certain benefits accorded to the uniformed personnel as define in the Act. Accordingly, benefits enjoyed by the uniformed members of the PNP and the Bureau of Jail Management and Penology (BJMP), such as quarters allowance, clothing allowance, cost of living allowance, hazard pay and longevity pay are exempt from income tax. Directors Fees April 15, 2008
DE LEON: Thirteenth Month Pay is also exempted from the withholding tax system.
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REVENUE 034-08
MEMORANDUM
CIRCULAR
NO.
SUBJECT : Tax Treatment of Director's Fees for Income Tax and Business Tax Purposes TO : All Internal Revenue Officers and Others Concerned It is a well-settled rule that director's fees are taxable, for income tax purposes, as compensation income when the recipient/director is an employee of the corporation which pays the same. Being embraced within the term "compensation income", the director's fees are subject to the withholding tax on wages imposed under Section 79, in relation to Section 24 (A), both of the National Internal Revenue Code (Code). The above tax treatment applies whenever it is established that the director and the corporation has an employer-employee relationship, i.e. President of a corporation sitting as a member of the Board of Directors. Revenue Regulations No. 2-98 provides that "the term "compensation" means all remuneration for services performed by an employee for his employer under an employeremployee relationship, unless specifically excluded by the Code". Thus, fees including director's fees, if the director is, at the same time, an employee of the employer/corporation constitute compensation income (Section, 2.78.1, RR No. 2-98). Accordingly, the director's fees received by employees are exempt from the value-added tax under Section 109 of the Code. However, if these fees are paid to a director who is not an employee of the corporation paying such fees (i.e., whose duties are confined to the attendance of and participation in the meetings of the board of directors), such fees are not treated as compensation income because of the absence of employer-employee relationship, but rather, the same should squarely fall under Section 32 (A) (2) of the Code under the caption "Gross income derived from the conduct of trade or business or exercise of a profession." The fees received by the director who is not an employee of the payor/corporation are subject to ten percent (10%) creditable withholding tax if his gross income for the current year do not exceed P720,000.00 or fifteen percent (15%) if his gross income exceeds P720,000.00 pursuant to Revenue Regulations No. 30-2003. These payments fall under "Professional Fees, talent fees, etc., for services rendered by individuals" which include under its purview "Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in meetings of the board of directors." (Section 2.57.2 (A) (9), RR No. 2-98). It is also emphasized that the amount subject to the 10% or 15% creditable withholding
tax is not only confined to fees, but also per diems, allowances and any other form of income payment made to the director. Aside from being liable to the payment of the income tax imposed under Title II of the Code, these directors who are not employees, having received fees which had been subsequently reported in their annual income tax returns as part of their gross income should likewise be liable to pay business tax on account of such receipt of income. They fall under the category of sellers of services under Title IV of the Code who are liable to pay the 12% VAT on their gross receipts pursuant to Section 108 thereof, or to the 3% percentage tax imposed under Section 116, should they fail to meet the VAT threshold. All internal revenue officers are hereby enjoined to give this Circular as wide a publicity as possible. (SGD.) LILIAN B. HEFTI Commissioner of Internal Revenue Errata Published in The Philippine Star on April 25, 2008.
SEC. 108. Value-added Tax on Sale of Services and
Use
or
Lease
of
Properties.
(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties; Provided, That the President, upon the recommendation of the Secretary of Finance, shall effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: xxx The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes,
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including persons who transport goods or cargoes for hire another domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: xxx The term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding valueadded tax. SEC. 116. Tax on Persons Exempt From ValueAdded Tax (VAT). - Any person whose sales or receipts are exempt under Section 109(v) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided, That cooperatives shall be exempt from the three percent (3%)gross receipts tax herein imposed. SEC. 109. Exempt Transactions. - The following shall be exempt from the value-added tax: xxx (v) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million Five hundred thousand pesos (P1,500,000): Provided, That not later than January 31st 2009 and every three years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO). Classification of Directors: 1. A director who is an employee of the corporation 2. A director whose duties are confined to the attendance of and participation in the meetings of the board of directors Treatment of directors fees:
1.
Director who is an employee of the corporation: Directors fees constitute compensation income under Section 32 (A) 1 Exempt from VAT Director who is not an employee of the corporation: Directors fees are not compensation income They are considered gross income derived from the conduct of trade or business or exercise of a profession under Section 32 (A) 2 Subject to withholding tax as follows: Gross Income for Current Year % Not exceeding P720,000 10% Exceeding P720,000 15%
2.
Aside from Income Tax, the directors fees are subject to business taxes ie: If annual receipts exceed P1,500,000, then subject to 12% VAT. If annual receipts do not exceed P1,500,000, then subject to percentage tax of 3% of gross quarterly receipts. ii. Non-monetary compensation income Fringe benefits not subject to fringe benefits tax (FBT)-Sec. 33, RR 2-98, RR 3-98
SEC. 33. Special Treatment of Fringe Benefit.(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirtythree percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossedup monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-
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eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25. (B) Fringe Benefit defined.- For purposes of this Section, the term 'fringe benefit' means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. (C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) Fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the
peculiar nature and special need of the trade, business or profession of the employer. RR 2-98 Section 6.D.3. Non-taxable Fringe Benefits - The following fringe benefits are not subject to the fringe benefits tax. (a) Fringe benefits paid to rank and file employees. - Fringe benefits furnished or granted to rank and file employees shall form part of the employees gross compensation income subject to the withholding tax table on compensation under Section 2.79 (B) of these Regulations. (b) Fringe benefits which are authorized and exempted from income tax and consequently from withholding tax under the Code, as amended, or under any special law. (c) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans. (d) De minimis benefits. For purposes of determining whether the fringe benefit shall be considered payments of de minimis benefits, the employer shall submit a written representation to the Commissioner for the issuance of a ruling taking into account the peculiar nature and special need of the said employer's trade, business or profession. The term "de minimis benefits which is exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges (such as entertainment, Christmas party and other cases similar thereto; medical and dental services; or the so-called courtesy discount on purchases), furnished or offered by an employer to his employees, provided such facilities or privileges we of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.
RR 3-98 SEC. 2.33 (C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following fringe benefits: (1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;
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(4) De minimis benefits as defined in these Regulations; (5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or (6) If the grant of the fringe benefit is for the convenience of the employer. The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall not be interpreted to mean exemption from any other income tax imposed under the Code except if the same is likewise expressly exempt from any other income tax imposed under the Code or under any other existing law. Thus, if the fringe benefit is exempted from the fringe benefits tax, the same may, however, still form part of the employee's gross compensation income which is subject to income tax, hence, likewise subject to a withholding tax on compensation income payment. The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following: (1) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year; (2) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month; (3) Rice subsidy of P350 per month granted by an employer to his employees; (4) Uniforms given to employees by the employer; (5) Medical benefits given to the employees by the employer; (6) Laundry allowance of P150 per month; (7) Employee achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding one-half () month of the basic salary of the employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees; (8) Christmas and major anniversary celebrations for employees and their guests; (9) Company picnics and sports tournaments in the Philippines and are participated exclusively by employees; and (10) Flowers, fruits, books or similar items given to employees under special circumstances, e.g.
on account of illness, marriage, birth of a baby, etc.. Fringe Benefits not subject to Fringe Benefits Tax: (1) Fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits (5) Those required by the nature of or necessary to the trade, business or profession of the employer (6) Those granted for the convenience or advantage of the employer.
DE LEON: Fringe benefits, provided they fall under the definition of ordinary and necessary business expenses are deductible as expenses by the employer. Fringe Benefits received by rank and file employees are generally includible in their gross income pursuant to Section 32 (A) 1. When the amounts received, together with the 13th Month Pay and Other Benefits do not exceed P30,000, they are exempt from income tax as provided under Section 32 (b) 7. The benefits given to rank and file employees may be in the form of educational assistance. The exemption of any fringe benefit tax shall not be interpreted to mean exemption from any other income tax imposed under the Tax Code except if the same is likewise expressly exempt from any other income tax imposed under the Tax Code or under any other existing law. Thus, if the fringe benefit is exempted from the fringe benefits tax, the same may, however, still form part of the employees gross compensation income which is subject to income tax; hence, likewise subject to a withholding tax on compensation income payment. b i Exclusions Fringe benefits already subject to FBT--RR 3-98, as amended by RR 8-00; RR 10-00; RR 5-08
May 21, 1998 January 1, 1998 REVENUE REGULATIONS NO. 03-98 SUBJECT : Implementing Section 33 of the National Internal Revenue Code, as Amended by
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Republic Act No. 8424 Relative to the Special Treatment of/ Fringe Benefits TO : All Internal Revenue Officers and Others Concerned Pursuant to Section 244, in relation to Section 33 of the National Internal Revenue Code of 1997, these Regulations are hereby promulgated to govern the collection at source of the tax on fringe benefits which have been furnished, granted or paid by the employer beginning January 1, 1998. cda SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS (A) Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed on the grossedup monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees as defined in these Regulations, whether such employer is an individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities except when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the following rates: Effective January 1, 1998 34% Effective January 1, 1999 33% Effective January 1, 2000 32% The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the employee which shall be withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of the fringe benefit by the following percentages and in accordance with the following schedule: Effective January 1, 1998 66% Effective January 1, 1999 67% Effective January 1, 2000 68% The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee, pursuant to the provisions of this Section.
Coverage These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory employees and not to the rank and file. The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. "Supervisory employees" are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. Moreover, these regulations do not cover those benefits properly forming part of compensation income subject to withholding tax on compensation in accordance with Revenue Regulations No. 2-98. Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these Regulations. Determination of the Amount Subject to the Fringe Benefit Tax In general, the computation of the fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of the proportion or percentage of the benefit which is subject to the fringe benefit tax. That the Tax Code allows for the cases where only a portion (i.e. less than 100 per cent) of the fringe benefit is subject to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates that fringe benefits which are "required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail joint benefits to the employer and employee, the portion which shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are defined under these rules and regulations. Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as follows: (1) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for. (2) If the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 6 (E) of
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the Code (Authority of the Commissioner to Prescribe Real Property Values). (3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property. Taxation of fringe benefit received by a nonresident alien individual who is not engaged in trade or business in the Philippines A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%). Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company; (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines; and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees. A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five per cent (85%). Taxation of fringe benefit received by employees in special economic zones Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above. (B) Definition of Fringe Benefit In general, except as otherwise provided under these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. For this purpose, the guidelines for valuation of specific types of fringe benefits and the determination of the monetary value of the fringe benefits are give below. The taxable value shall be the grossed-up monetary value of the fringe benefit. (1) Housing privilege (a) If the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. (b) If the employer owns a residential property and the same is assigned for the use of his employee as his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the market value of the land and improvement, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. The monetary value of the housing fringe benefit is equivalent to the following: MV = [5%(FMV or ZONAL VALUE] X 50% WHERE: MV = MONETARY VALUE FMV = FAIR MARKET VALUE (c) If the employer purchases a residential property on installment basis and allows his employee to use the same as his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the acquisition cost, exclusive of interest. The monetary value of fringe benefit shall be fifty per cent (50%) of the value of the benefit. (d) If the employer purchases a residential property and transfers ownership thereof in the
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name of the employee, the value of the benefit shall be the employer's acquisition cost or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the fringe benefit shall be the entire value of the benefit. (e) If the employer purchases a residential property and transfers ownership thereof to his employee for the latter's residential use, at a price less than the employer's acquisition cost, the value of the benefit shall be the difference between the fair market value, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to Sec. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher, and the cost to the employee. The monetary value of the fringe benefit shall be the entire value of the benefit. (f) Housing privilege of military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force shall not be treated as taxable fringe benefit in accordance with the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible from the military camp so that they can be readily on call to meet the exigencies of their military service. (g) A housing unit which is situated inside or adjacent to the premises of a business or factory shall not be considered as a taxable fringe benefit. A housing unit is considered adjacent to the premises of the business if it is located within the maximum of fifty (50) meters from the perimeter of the business premises. (h) Temporary housing for an employee who stays in a housing unit for three (3) months or less shall not be considered a taxable fringe benefit. (2) Expense account (a) In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee. (b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits except only when the expenditures are duly receipted for and in the name of the employer and the expenditures do
(c)
(d)
(3) (i)
(ii)
(iii)
(iv)
not partake the nature of a personal expense attributable to the said employee. Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer. Representation and transportation allowances which are fixed in amounts and are regular received by the employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same shall be considered as taxable compensation income subject to the tax imposed under Sec. 24 of the Code. Motor vehicle of any kind If the employer purchases the motor vehicle in the name of the employee, the value of the benefit is the acquisition cost thereof. The monetary value of the fringe benefit shall be the entire value of the benefit, regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. If the employer provides the employee with cash for the purchase of a motor vehicle, the ownership of which is placed in the name of the employee, the value of the benefits shall be the amount of cash received by the employee. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer, unless the same was subjected to a withholding tax as compensation income under Revenue Regulations No. 2-98. If the employer purchases the car on installment basis, the ownership of which is placed in the name of the employee, the value of the benefit shall be the acquisition cost exclusive of interest, divided by five (5) years. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. If the employer shoulders a portion of the amount of the purchase price of a motor vehicle the ownership of which is placed in the name of the employee, the value of the benefit shall be the amount shouldered by the employer. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal
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purpose and partly for the benefit of his employer. (v) If the employer owns and maintains a fleet of motor vehicles for the use of the business and the employees, the value of the benefit shall be the acquisition cost of all the motor vehicles not normally used for sales, freight, delivery service and other non-personal used divided by five (5) years. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. The monetary value of the motor vehicle fringe benefit is equivalent to the following: MV = [(A)/5] X 50% where: MV = Monetary value A = acquisition cost (vi) If the employer leases and maintains a fleet of motor vehicles for the use of the business and the employees, the value of the benefit shall be the amount of rental payments for motor vehicles not normally used for sales, freight, delivery, service and other non-personal use. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. (vii) The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as business use and not be subject to the fringe benefits tax. (viii) The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe benefit. The value of the benefit shall be measured based on the depreciation of a yacht at an estimated useful life of 20 years. (4) Household expenses Expenses of the employee which are borne by the employer for household personnel, such as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for homeowners association dues, garbage dues, etc.) shall be treated as taxable fringe benefits. (5) Interest on loan at less than market rate (a) If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%), such interest foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe benefit. (b) The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation. (c) This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%) starting January 1, 1998.
(6) Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs or other similar organizations. These expenditures shall be treated as taxable fringe benefits of the employee in full. (7) Expenses for foreign travel (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit tax. (b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidenced by official communications from business associates abroad indicating the purpose of the meetings. Business conventions shall be evidenced by official invitations/communications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee. (c) Travelling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee. (8) Holiday and vacation expenses Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe benefits. (9) Educational assistance to the employee or his dependents (a) The cost of the educational assistance to the employee which are borne by the employer shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or profession, and
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there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business. (b) The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company. (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit, except the following: (a) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282, as amended) or under the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar contributions arising from the provisions of any other existing law; and (b) the cost of premiums borne by the employer for the group insurance of his employees. CLASS NOTES: Income subject cannot be subjected to both income tax and final tax. <Discussed during the very first meeting.> Fringe Benefit Tax is a final tax. Hence, it is not subject to Income Tax. The Fringe Benefit is, thus, excluded from the computation of Gross Income. Fringe Benefits were previously not taxable. The fringe benefits tax is an innovation of the drafters of the 1997 NIRC. It was the practice of most employers to grant employees benefits especially non-cash without being obligated to withhold the tax thereon. The principle behind the FBT is that had the benefits enjoyed by the employee been given as part of its compensation instead, the Government could have taxed it as such. To illustrate, assume the employee is renting an apartment with a monthly rental of P10,000. In order to be able to come up with the rent of P10,000, the employee would have had to earn compensation income in the amount of P14,705.88 (P10,000/68%) and pay P4,705.88 in Income Taxes. The process is thus:
1. 2. 3.
Payment of compensation income by employer to employee (100%) Payment by employee of income tax (32%) Use by employee of the net amount as payment for the rent (68%)
If said employee were granted, instead, a housing benefit for the same apartment, the government would not have been able to collect the P4,705.88 Income Tax. Per Maam illustration, steps 1 and 2 of the process were, thus, skipped. The scheme, then, of imposing the FBT is to trace back the value of the benefit back through process above in order to collect the tax of 32%.) DE LEON: The fringe benefit tax is a final tax of 32% (now) payable by the employer, whether an individual or a corporation, (and should be withheld by said employer) in the same manner as a final withholding tax. It is imposed on the grossed-up monetary value (GMV) of the fringe benefit furnished or granted to a managerial or supervisory employee. It is a condition sine qua non that the recipient of the fringe benefit must be an employee of the company granting it regardless of whether a fixed monthly income is given or not. The GMV of the fringe benefit on which the final withholding tax is paid is deductible on the part of the employer as ordinary and necessary business expense provided the final tax (the FBT) has been paid. The GMV is determined by dividing its actual monetary value by the applicable percentage factor. That is: Citizens and Resident Aliens, the divisor is 68% Non-resident alien employee under Sec 24 C, D, D, 85% Non-resident alien employee not engaged in trade or business, 75%
Summary of Guidelines for valuation of specific types of fringe benefits in RR3-98:

1. Housing Privileges 2. Motor Vehicles If Ownership is transferred to the employee, the entire amount (100%) of the monetary value of the fringe benefit shall be used as basis in computing the FBT If Ownership remains with the employer, only 50% of the monetary
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value of the fringe benefit shall be used as basis in computing the FBT Use of aircraft not subject to FBT Use of yacht subject to FBT
Expenditure was incurred for the convenience and in furtherance of employers trade or business.
Requisites for exception:

a.
2. Expense Account > Personal Expenses of employee paid for or reimbursed by employer always subject to FBT whether or not receipted in the name of the employer > Expenses incurred by employee and paid for or reimbursed by employer General Rule: Subject to FBT Exception: Requisites b. not personal expenses c. duly receipted in the name of employer > Representation and transportation allowance not subject to FBT but as part of compensation income if: a. fixed in amounts and b. are regularly received by employee 3. Household expenses borne by employersubject to FBT 4. Membership fees, dues etc in social and athletic clubs etcsubject to FBT 5. Holiday and vacation expensessubject to FBT 6. Reasonable business expenses for foreign travel General rule: Not subject to FBT Exceptions: a. Inland Travel Expenses in excess of $300 per day b. If travel is by first class, 30% of the cost of the ticket is subject to FBT c. Absence of documentary evidence showing that the travel abroad was in connection with business meetings or conventionsthe costs shouldered by employer are subject to FBT d. Traveling expenses of employees family member-subject to FBT 7. Interest on loan at less than market rate difference between interest granted and 12% is subject to FBT 8. Life or health insurance and other non-life insurance in excess of what the law allows. 9. Educational assistance > To employee General Rule: subject to FBT Exception:
b.
education or study is directly connected with employers trade, business or profession and There is a written contract between them obligating the employee to remain in the employ of the employer for a period of time mutually agreed upon
> To employees dependents General Rule: subject to FBT Exception: If the assistance were granted through a competitive scheme under the scholarship program of the company, then it is not subject to FBT. ii De Minimis benefits
RR 3-98, as amended by RR 8-00, RR 10-00, RR 5-08 The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following: (a) Monetized unused vacation leave credits of PRIVATE employees not exceeding (10) days during the year and the monetized value of leave credits paid to government officials and employees (b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; (c) Rice subsidy of P1,500.00 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500.00, (d) Uniform and Clothing allowance not exceeding P4,000.00 per annum; (e) Actual yearly medical benefits not exceeding P10,000 per annum; (f) Laundry allowance not exceeding P300 per month; (g) Employees achievement awards e. g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value of not exceeding P10,000 received by the employee under an
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established written plan which does not discriminate in favor paid employees; (h) Gifts given during Christmas and major anniversary celebrations not exceeding P3, 000 per employee per annum; (i) Flowers, fruits, books or similar items given to employees under special circumstances (j) Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage. The amount of "de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in determining the p30,000 ceiling of "other benefits" provided under section 32(b)(7)(e) of the code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the p30,000.00 ceiling. Provided, further, that any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. DE LEON: De minimis benefits which are exempt from the fringe benefit tax and compensation income tax and are, therefore, not subject to withholding tax as well, shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. The intent of the Regulations is to treat each item of de minimis benefit independently of each other by separately providing maximum values. Thus, there can be no aggregation of de minimis values for rice allowance and meal allowance through meal and for vouchers. In such case, in order to clearly conform with the prescribed de minimis standard, separate vouchers should be used for the rice allowance and the meal and food benefit. With respect to medical benefits, the amount given to the employee must be for his own medical expenses for a given taxable year, and must be fully substantiated with official receipts in his name. In the absence of actual substantiation the amount granted is considered compensation subject to income tax. ii 13th-month pay and other benefits and payments specifically excluded from taxable compensation income, Sec. 32(B)(7, e)
(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: xxx (7)Miscellaneous Items. xxx (e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year. c. Deductions DEDUCTION- Items or amounts which the law allows to be deducted from gross income in order to arrive at the taxable income. BASIC PRINCIPLES GOVERNING DEDUCTIONS a. The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the deduction; and b. He must be able to prove that he is entitled to the deduction authorized or allowed. c. Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed, shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR.
[Sec. 34(K), NIRC]
NOTE: Deductions for income tax purposes partake

of the nature of tax exemptions; hence, if tax exemptions are to be strictly construed, then it follows that deductions must also be strictly construed.
SEC. 32. Gross Income. - xxx
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CLASSES OF DEDUCTIONS FOR INDIVIDUALS a. With gross compensation income from employer-employee relationship only (1) premium payments on health and/or hospitalization insurance (2) personal exemption and (3) additional exemption if with dependents. b. Gross income from business or practice of profession (1) Optional Standard Deduction (OSD) (2) Itemized deductions (3) premium payments on health and/or hospitalization insurance (4) personal exemption and (5) additional exemption if with dependents. KINDS OF DEDUCTIONS a. Optional standard deductions (OSD) 10% of the gross income. The OSD may be availed of only by individuals (except nonresident alien) who are not purely compensation income earners. b. Personal and additional exemptions Available only to individuals (business income and compensation income earners).
deductions and OPTIONAL STANDARD DEDUCTION. i. Personal Exemptions
NRAETB may be entitled to personal exemptions (only) subject to reciprocity, i.e., a. the country of which he is a subject or citizen has an income tax law; and b. the income tax law of his country allows personal exemption to citizens of the Philippines not residing therein, but deriving income therefrom and not to exceed the amount allowed in NIRC. The personal exemption shall be equal to that allowed by the income tax law of his country to a citizen of the Philippines not residing therein, or the amount provided in the NIRC, whichever is lower.
Who can avail of deductions?
GENERAL RULE: All taxpayers EXCEPTION: Those earning compensation income arising from personal services rendered under an employer-employee relationship Rules: 1. Compensation income earners can avail themselves only of the deduction in Sec. 34 (M), i.e., premium payments on health and/or hospitalization insurance (in addition to the appropriate personal exemption). 2. The following can claim ITEMIZED deductions: a. Corporations, whether domestic or (resident) foreign b. General Professional Partnerships c. Individuals engaged in trade, profession or business (citizen, resident alien, non-resident alien doing business in the Philippines) d. Estates and trusts engaged in trade or business e. Proprietary educational institutions and hospitals (non-profit) f. Government-owned or controlled corporations 3. Only individuals, EXCEPT non-resident aliens, can elect between itemized
INDIVIDUALS NOT ENTITLED TO THESE EXEMPTIONS: a. Non-resident Alien not engaged in trade or business b. Alien individual employed by Regional or Area Headquarters of Multinational Companies c. Alien individual employed by Offshore Banking Units d. Alien individual employed by Petroleum Service Contractor and Subcontractor Pansacola vs. CIR GR No. 159991 FACTS:On January 1, 1998, the 1997 NIRC took effect. It increased the amounts of personal and additional exemptions. Carmelino Pansacola filed his Income Tax Return (ITR) for the Calendar Year 1997 on April 13, 1998. He claims that the increased personal and additional exemptions should already be applied to his income in 1997, the income for which he is filing his ITR. But his certificate of Income Tax withheld on compensation indicated a lesser amount of personal and additional exemptions. So in his ITR, he claimed for a refund for an overpayment of P5,950. The BIR denied his claim. The Court of Tax Appeals likewise denied his claim saying that it would be absurd for the law to allow the deduction from a taxpayers gross income earned on a certain year of exemptions availing on a different taxable year. The CA held that 1. Umali v. Estanislao, the case on which Pansacola relies, is not applicable to this case and 2.the increased exemptions were effective only to cover taxable year 1998 and cannot be applied retroactively.
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ISSUE: Could the exemptions under Section 35 of the NIRC, which took effect on Jan 1 1998, be availed of for taxable year 1997? HELD: NO RATIO:Prefatorily, personal and additional exemptions under Section 35 of the NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens) are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. Conformably too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken. They cannot be extended by mere implication or inference. And, where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms. By the terms of the NIRC, the correct taxable income and corresponding allowable deductions eg personal and additional exemptions, if any, are to be determined as of the end of a calendar year. Section 24 imposes income taxes derived for each taxable year from all sources xxx by every individual citizen of the Philippines residing therein. Taxable Income is defined in Section 31 as the pertinent items of gross income specified in the NIRC less the deductions and/or personal and additional exemptions xxx. And Taxable Year means calendar year upon the basis of which the net income is computed. Also, Section 43 states that the taxable income of an individual shall be computed on the basis of the calendar year. Plus, Section 45 provides that the deductions shall be taken for the taxable year in which they are paid or accrued or paid or incurred. (ie, both Income and Deductions of individual taxpayers are to be determined by the calendar period.) Further, Section 79 (H) requires the employer to determine, on or before the end of the calendar year but prior to the payment of the compensation
for the last payroll period, the tax due from each employees taxable compensation income for the entire taxable year for purposes of withholding tax. Clearly, what the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the ITR is file and the tax due is paid. Umali is not applicable because the law involved in that case, RA 7167 was enacted to remedy the non-adjustment of the poverty threshold of previous years and was thus considered by the court to be a social legislation. Further, in that case, the intention to have it applied retroactively was clear. Here, no such intention can be seen. Petition dismissed. Amount of Exemption, Sec. 35(A) SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. (A) In General. - For purposes of determining the tax provided in Section 24(A) of this title, there shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer. In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. (As amended by Ra 9504) Change of status
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. xxx (C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. For any other event and for which there are no specific rules applicable from the above-
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taxpayer)
mentioned, the status of the taxpayer at the end of the year shall determine his exemptions. (strictly construed against the
ii. Additional Exemptions Amount of Exemption
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. - xxx (B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of Twenty-five thousand pesos (25,000) for each dependent not exceeding four (4). The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. (As amended by RA 9504) Change in Dependents the Number of
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. xxx (C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. xxx If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. iii. Health and hospitalization insurance
Sec. 34(M) SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income: xxx (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2)effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law. General Rule: Items specified in Sec 34 are not deductible from compensation income arising from personal services rendered under an ER-EE relationship An Exception: health and hospitalization premium payments Requisites for this deduction to be allowed: 1. family has gross income of 250,000 pesos or less for the taxable year
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2. 3.
in case of married taxpayers, only the spouse claiming the additional exemption for dependents may enjoy this deduction ceiling for this type of deduction is P2,400 per family or P200/month paid during the taxable year
Over P500k (500k < x)
P125,000+32% of the excess over P500,000
d.
Computation
SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines by every individual citizen of the Philippines residing therein; (b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. (2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates established in the following schedule: Not over P10k (x 5% P500+10% of the excess over P10,000 P2,500+15% of the excess over P30,000 P8,500+20% of the excess over P70,000 P22,500+25% of the excess over P140,000 P50,000+30% of the excess over P250,000
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. (as amended by RA 9504) i. Pure Compensation Income
Gross Compensation Income Less: Personal & Additional Exemptions and hospitalization/health insurance premium Taxable Income x Rate Income Tax Less: Creditable Withholding Tax on Compensation Income Tax Payable
ii.
Mixed-Income (i.e., compensation income and business income/income from the practice of profession
10k)
Over P10k but not over P30k (10k < x 30k) Over P30k but not over P70k (30k < x 70k) Over P70k but not over P140k (70k < x
140k)
Over P140k but not over P250k (140k < x
250k)
Over P250k but not over P500k (250k < x
500k)
Gross Compensation Income xxx Less: Personal & Additional Exemptions and hospitalization/health insurance premium x Taxable Compensation Income xx ADD: Gross Business Income &/or Income from Practice of Profession xxx Less: Allowable Deduction (itemized or optional deduction) xx x Total Taxable Income xxx x Rate Income Tax xx Less: Creditable Withholding Tax on Compensation Income/Other Allowable Tax Credit x
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Tax Payable 2.
Taxation of Compensation Income of a Minimum Wage Earner
Includes all income from business or practice of profession during the taxable year (whether accrued or actually received, depending on the accounting method used) Directors Fee April 15, 2008 REVENUE MEMORANDUM 034-08
Sec. 22 Definitions. When in this Title: (GG) The term statutory minimum wage shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). (HH) The term minimum wage earner shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned. Those that come under the term minimum wage earners as defined by Sec 22 HH of this Code are exempted from the payment of income tax on their taxable income, and the holiday pay, overtime pay, night shift differential pay and hazard pay they receive are likewise exempt from income tax [cf. Sec 24 (A), last para, as amended by RA 9504] 3. Taxation of Business from the Practice Income/Income of Profession
CIRCULAR
NO.
SUBJECT: Tax Treatment of Director's Fees for Income Tax and Business Tax Purposes TO : All Internal Revenue Officers and Others Concerned It is a well-settled rule that director's fees are taxable, for income tax purposes, as compensation income when the recipient/director is an employee of the corporation which pays the same. Being embraced within the term "compensation income", the director's fees are subject to the withholding tax on wages imposed under Section 79, in relation to Section 24 (A), both of the National Internal Revenue Code (Code). The above tax treatment applies whenever it is established that the director and the corporation has an employer-employee relationship, i.e. President of a corporation sitting as a member of the Board of Directors. Revenue Regulations No. 298 provides that "the term "compensation" means all remuneration for services performed by an employee for his employer under an employeremployee relationship, unless specifically excluded by the Code". Thus, fees including director's fees, if the director is, at the same time, an employee of the employer/corporation constitute compensation income (Section, 2.78.1, RR No. 2-98). Accordingly, the director's fees received by employees are exempt from the value-added tax under Section 109 of the Code. However, if these fees are paid to a director who is not an employee of the corporation paying such fees (i.e., whose duties are confined to the attendance of and participation in the meetings of the board of directors), such fees are not treated as compensation income because of the absence of employer-employee relationship, but rather, the same should squarely fall under Section 32 (A) (2) of the Code under the caption "Gross income derived from the conduct of trade or business or exercise of a profession." The fees received by the director who is not an employee of the payor/corporation are subject to ten percent (10%) creditable withholding tax if his gross income for the current year do not exceed P720,000.00 or
Formula (pure business/professional income) Gross Business Income &/or Income from Practice of Profession Less: (a) Allowable Deduction (itemized or optional deduction) (b) Personal & Additional Exemptions and hospitalization/health insurance premium x xxx x xx
Total Taxable Income x Rate Income Tax Less: Creditable Withholding Tax on Compensation Income/Other Allowable Tax Credit x Tax Payable
xxx
xx
a. ss Income
Gro
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fifteen percent (15%) if his gross income exceeds P720,000.00 pursuant to Revenue Regulations No. 30-2003. These payments fall under "Professional Fees, talent fees, etc., for services rendered by individuals" which include under its purview "Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in meetings of the board of directors." (Section 2.57.2 (A) (9), RR No. 2-98). It is also emphasized that the amount subject to the 10% or 15% creditable withholding tax is not only confined to fees, but also per diems, allowances and any other form of income payment made to the director. Aside from being liable to the payment of the income tax imposed under Title II of the Code, these directors who are not employees, having received fees which had been subsequently reported in their annual income tax returns as part of their gross income should likewise be liable to pay business tax on account of such receipt of income. They fall under the category of sellers of services under Title IV of the Code who are liable to pay the 12% VAT on their gross receipts pursuant to Section 108 thereof, or to the 3% percentage tax imposed under Section 116, should they fail to meet the VAT threshold. All internal revenue officers are hereby enjoined to give this Circular as wide a publicity as possible. Rules: 1.
(1) itemized deductions (2) optional standard deduction BUT in Profs outline, she placed Expenses (which is accdg to De Leon under Itemized Deductions) under General. DE LEON: 1) Distinctions between itemized and optional standard deductions: (a) as to amount no limit in itemized (b) itemized can be claimed by corporations and non-resident aliens (c) itemized needs receipts or evidence to support every item 2) Others If the taxpayer failed to elect the kind of deduction in his ITR, he shall be considered as having availed himself of the itemized deduction. Deduction elected for one taxable year is irrevocable for that year. Only one kind of deduction allowed for one taxable year. (If the taxpayer elected both deductions in one taxable year, the optional standard deduction will be disregarded.) ITEMIZED DEDUCTIONS 1. ordinary and necessary trade, business or professional expenses 2. interests 3. taxes 4. losses 5. bad debts 6. depreciation of property; 7. depletion of oil and gas wells and mines; 8. charitable and other contributions; 9. research and development; 10. pension trust contributions of employees; and 11. premium payments on health and/or hospitalization insurance. (This is the only
2.
if director is an EE: his directors fee is considered part of compensation income i. subject to income tax (cf. tax table of Sec 24 as amended by RA 5904) ii. exempt from VAT (cf. Section, 2.78.1, RR No. 2-98 and Sec 109) if director is not an EE: his directors fee (including allowances, per diems, etc) is subject to i. 10% withholding tax if P720k or less, or ii. 15% withholding tax if more than P720k the fee is also liable to business tax i. of 12% VAT, or ii. 3% percentage tax, if VATexempt
deduction which a compensation income earner may claim as a deduction.)

General
i.
(Sec 34(A) provision in full on next page)
(on the page ff Sec 34 (A) provision)

SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section
Requisites
b.
Allowable Deductions from Gross Income
According to De Leon, there are only two kinds of deductions:
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other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income: (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: i. A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; ii. A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; iii. A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; iv. A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly 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 Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. (b) Substantiation Requirements. No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (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 taxpayer. (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. Requisites for deductibility of business expenses: 1. it must be ordinary and necessary; 2. it must be paid or incurred during the taxable year; 3. it must be paid or incurred in carrying on or which are directing attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession; 4. it is not contrary to law, public policy or morals; (Sec. 34 A.1.a.iv) 5. it must be supported by adequate invoices or receipts; (Substantiation requirement) 6. payment must be legitimate (Sec. 34 A.1.c) Sec 34 (A)(1)(a) covers the nature of expense (ordinary and necessary), its purpose, the time its paid and incurred, and not contrary to law, public policy or morals. These are the first 4 requisites. NECESSARY EXPENSE appropriate and helpful in the development of taxpayer's business and are intended to minimize losses or to increase profits. These are the day-to-day expenses. ORDINARY EXPENSE normal or usual in relation to the taxpayers business and the surrounding circumstance CAPITAL EXPENDITURE An expenditure that benefits not only the current period but also future periods. It is not deductible but depreciable, except, if the taxpayer is a non-profit proprietary educational institution which may elect either to deduct the capital expense or depreciate it. Requisites in detail
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(1) Nature: Ordinary and necessary CIR v. General Foods (Phils.), Inc. 401 SCRA 545 FACTS: General Foods (Phils.) Inc. manufactures beverages such as Kool-Aid, Calumet and Tang. In Feb 1985, they claimed as deduction P9,461,246 (the media advertising for Tang). CIR disallowed half of this amount and assessed the company a deficiency income tax of P2,635,141.42. MR was denied, CTA affirmed CIR. CA reversed CTA and cancelled the assessment. HELD: The advertising expense is not an ordinary and necessary expense, but a capital expenditure that should be spread out over a reasonable time. It failed to meet the two conditions set by US jurisprudence: (1) reasonableness of the amount incurred [their advertising expense was almost double the amount of their administrative expense] and (2) not be a capital outlay to create goodwill. Advertising is generally of 2 kinds: (1) stimulate current sale of merchandise and (2) stimulate future sale of merchandise. The first kind is allowed, subject to reasonableness of the expenditure. The second is normally spread out over time. The companys advertising expense falls under the second kind, as the company admitted it is to protect the brand franchise. (2) Paid and incurred during the taxable year CIR v. Isabela Cultural Corporation 515 SCRA 556 FACTS: Isabela Cultural Corporation (ICC), a domestic corporation using the accrual method of accounting, incurred auditing and legal services in 1984 and 1985 which it claimed as deduction only in its 1986 ITR. BIR assessed ICC for deficiency income tax. CTA cancelled the assessment reasoning that even if the services were rendered in 1984 or 1985, it was only in 1986 that the amounts were determined. CA affirmed CTA. HELD: ICC is barred from declaring the 1984 and 1985 expenses as deductions in its 1986 ITR. The propriety of an accrual must be judged by the fact that a taxpayer knew or could reasonably be expected to have known it at the closing of the books for the taxable year. The burden is on the taxpayer to prove the propriety of the accrual. In this case, ICC can be expected to have reasonably known the retainer and other legal services fees, since the law firm has been its long-time legal consultant. It also failed to present evidence that they could not with reasonable accuracy ascertain the auditing expense. (3) Paid and incurred in carrying on the business
SEC. 34. Deductions from Gross Income. xxx (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, xxx (4) Purpose SEC. 34. Deductions from Gross Income. xxx (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise of a profession, xxx
(5) Substantiation requirement SEC. 34. Deductions from Gross Income. xxx (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.xxx (b) Substantiation Requirements. No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (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 taxpayer. (6) Payment must be legitimate SEC. 34. Deductions from Gross Income. xxx (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.xxx (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income
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shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. Salaries, wages and other forms of compensation for personal services actually rendered, INCLUDING the grossed-up monetary value of the fringe benefit subjected to FBT which tax should have been paid [Sec 34 (A)(1)(a)(i), NIRC in relation to Sec 7073 RR2] SEC. 34. Deductions from Gross Income. xxx (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses xxx including: i. A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; RR2 SEC 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: (1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An
ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfers of their business. (2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the
employer and the individual made before the services are rendered, not influenced by any
consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater
than the amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not exceed what is reasonable in all
the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned.
ostensible salary paid by a corporation may be a distribution of dividend on stock. This is likely to occur in the case of a
corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those
SEC 71. Treatment of excessive compensation. The income tax liability of the recipient in respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or profits, the excessive payments will be
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treated as dividend. If such payments constitute payment for property, they should be treated by the payer as a capital expenditure and by the recipient as part of the purchase price. SEC 72. Bonuses to employees. Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payment, when added to the stipulated salaries, do not exceed a reasonable compensation for the service rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are not deductible from gross income. SEC 73. Pensions, compensation for injuries. Amounts paid for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such payments may be deducted. Salaries paid by employers to employees who are absent in the military, naval or other service of the Government, but who intend to return at the conclusion of such service, are allowable deductions. (See Section 118 of these regulations, relative to pension trust.) RR2 Sec 70 Notes Test of deductibility: 1. reasonableness 2. purely for services actually rendered Watch out for payments for compensation which are actually not compensation for personal services (and thus NOT deductible): 1. ostensible salary paid by corporation to stockholders which may be in reality distributions of dividend on stock 2. ostensible salary may in fact be in part payment for property sample scenario: partnership sells to corporation (the partners continuing to serve in corporation). The salaries the former partners receive may in fact be partially in payment for the transfer of the business [per Sec 72
RR2 Sec 71 Notes Income tax liability depends upon the circumstances In scenarios in the Watch out section above: 1. treated as dividend 2. treated by payor as capital expenditure; treated by recipient as part of the purchase price RR2 Sec 72 Notes 1. Bonuses to EE will be allowed as gross income deductions if a. made in good faith b. for services actually rendered (but such bonuses, when added to the actual salary must still meet the reasonableness test) 2. Other notes immaterial if bonus is in cash, in kind, or mixed donations are generally not deductible (unless it meets the for services actually rendered test) RR2 Sec 73 Notes Allowable deductions 1. Pensions paid to retired employees or their families/dependents 2. Compensation for injuries 3. Salaries paid for a limited period to a deceased officer/EE to his widow/heir after such death (in recognition of the services rendered by the deceased) 4. Salaries of EEs who are serving the military, naval or other govt service provided that EEs intend to return at the conclusion of such military service C.M. Hoskins, Inc. v CIR 30 SCRA 434 FACTS: C.M. Hoskins, Inc. is a domestic corporation engaged in the real estate business as brokers, managing agents and administrators. In its ITR it listed as a deduction a supervision fee it paid to C.M. Hoskins, its founder and controlling stockholder (he held 996 of the corporations 1000 shares, the other 4 shares held by four other officers). This supervision fee paid to founder Hoskins is actually 50% of the payment the corporation receives as a managing agent of Paradise Farms. CIR disallowed the deduction. CTA affirmed. HELD: The supervision fee is not deductible. The corporation is paying its founder Hoskins the supervision fee regardless of whether services were actually rendered by Hoskins. Furthermore, if this supervision fee is added to founder Hoskins salary and bonus, the amount Hoskins will receive would be double the corporations reported net income.
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Aguinaldo Industries v CIR 112 SCRA 33 FACTS: Aguinaldo Industrices Corporation is a domestic corporation engaged in 2 lines of business: manufacture of fishing nets (which is taxexempt because it is a new and necessary industry per RA 901) and manufacture of furniture. The 2 lines have separate accounting books and file separate ITRs, which are handled by the Fish Nets Division and Furniture Division, respectively. The corporation bought a Muntinlupa lot as its fishing net factory, which it subsequently sold since it found a better factory site in Marikina. The corporation made a profit from this brokered Muntinlupa lot sale, which profits they gave as bonus to the officers in accordance with their bylaws. The corporation then listed the bonus (Officers Remuneration) as a deduction. CIR disallowed this. CTA affirmed. HELD: The bonus is not deductible because there was no actual service rendered by the officers, especially since the sale was made through a broker. It cannot be treated as a reasonable or necessary expense. (The corporation is liable for the deficiency income tax assessed.) Travel expenses
cost of such meals and lodging may be deducted therefrom. A payment for the use of a sample room at a hotel for the display of goods is a business expense. Only such expenses as are reasonable and necessary in the conduct of the business and directly attributable to it may be deducted. A taxpayer claiming the benefit of the deductions referred to herein must attach to his return a statement showing (1) the nature of the business in which he is engaged; (2) the number of days away from home during the taxable year on account of business; (3) the total amount of expenses incident to meals and lodging while absent from home and business during the taxable year; (4) the total amount of other expenses incident to travel and claimed as a deduction. Claim for the deductions referred to herein must be substantiated, when required by the Commissioner of Internal Revenue by record showing in detail the amount and nature of the expenses incurred. RR2 Sec 66 Notes Traveling expenses include: 1. RR 3-98 Section 2.33 B Expenses for foreign travel (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit tax. (b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidenced by official communications from business associates abroad indicating the
RR2 SEC 66. Traveling expenses. Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip is undertaken for other than business purposes, the transportation expenses are personal expenses, and the meals and lodging are living expenses, and therefore, not deductible. If the trip is solely on business, the reasonable and necessary traveling expenses, including transportation expenses, meals and lodging, become business instead of personal expenses. (a) If, then, an individual, whose business requires him to travel receives a salary as full compensation for his services, without reimbursement for traveling expenses, or is employed on a commission basis with no expense allowance, his traveling expenses, including the entire amount expended far meals and lodging, are deductible from gross income. (b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall include in gross income, the amount so repaid and may deduct such expenses. (c) If an individual receives a salary and also an allowance for meals and lodging, as for example, a per diem allowance in lieu of subsistence, the amount of the allowance should be included in gross income and the
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purpose of the meetings. Business conventions shall be evidenced by official invitations/communications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee. (c) Traveling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee. transportation expenses 2. meal expenses 3. lodging expenses A. B. If travel is done solely for business Traveling expenses are business expenses If travel is done other than business purposes Transportation expenses are personal expenses Meal and lodging expenses are living expenses (not deductible)
Traveling expenses deductible from gross income: 1. EE receives salary in full compensation of service but without reimbursement for travel expenses 2. EE on commission basis with no expense allowance 3. EE receives salary but also repaid his actual travel expenses (but he must include the amount repaid in his gross income) 4. EE receives salary and allowances for meal and lodging, such allowance must be included in his gross income, and then he may then deduct the cost of his meal and lodging To claim travel expense deduction, EE must return a statement with the ff: 1. nature of the business in which he is engaged 2. number of days away from home on account of business (must be during the taxable year) 3. total amount of expenses for meal and lodging while absent from home & business during the taxable year 4. total amount of other expenses incident to travel and claimed as deduction Test for the travel expenses to be allowed as a deduction: 1. reasonable and necessary in the conduct of the business 2. directly attributable to travel RR 3-98
Section 2.33 B Expenses for foreign travel (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit tax. (b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidenced by official communications from business associates abroad indicating the purpose of the meetings. Business conventions shall be evidenced by official invitations/communications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee. (c) Traveling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee. What are not subject to fringe benefit tax: Reasonable business expenses paid for by the ER for the foreign travel of EE to attend business meetings and conventions which include Meal and local transportation (inland expenses) Economy or business-class airplane ticket But these must be substantiated What are subject to fringe benefit tax: 1. 30% of the cost of EEs first-class airplane ticket 2. traveling expenses of the EEs family members if paid for by the ER 3. unsubstantiated reasonable business expenses (refer to the note above)
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Rentals and/or other payments for use or possession of property
Revenue Regulations No.2 Section 74. Rentals. Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an aliquot part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord, the amount of the tax being deductible by the latter. The cost borne by a lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the buildings erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation. Revenue Regulations 19-86 Section 2. Reporting of Income and Deductions by a Lessor or a Vendor. 2.01 Lessor if contract is a lease. The amount paid for the use of property under an agreement which is determined under these regulations to be a lease shall be considered as rental (and therefore includible in gross income) of the lessor. Such lessor may deduct all ordinary and necessary expenses paid or incurred during the taxable year which are attributable to the earning of the income. In addition, the lessor, with respect to properties subject to an "operating lease" as defined in subparagraph 2.01/1 of this Section, will be allowed a deduction for depreciation determined pursuant to Section 30 (f) of the National Internal Revenue Code (NIRC) and the Regulations thereunder: Provided, however, that tangible personal properties listed in Annex "A" of these Regulations which are subject to "finance lease" (as defined in subparagraph 2.01/2 of this Section) may be depreciated during the primary lease period but such period shall not be less than 60% of the depreciable life of the property as indicated in Annex "A". If, under the agreement, the lessee pays to the lessor a stipulated rental, and in addition pays certain other expenses which are properly payable by the lessor, the lessor is deemed to have received as rental income not only
the stipulated rental but also the amount of such other expenses paid by the lessee to, or for the account of, the lessor. 2.01/1 Operating lease defined. An "operating lease" is a contract under which the asset is not wholly amortized during the primary period of the lease, and where the lessor does not rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or re-lease of the returned asset of the primary lease period. Section 3. Deductions Allowable to Lessee or Purchaser. 3.01 Lessee, if contract is a lease. If under the criteria set forth in these Regulations, an agreement constitutes a lease, the lessee may deduct the amount of rent paid or accrued, including all expenses which under the terms of the agreement the lessee is required to pay to, or for the account of, the lessor. If the payments are so arranged as to constitute advance rentals, such payments shall be duly apportioned over the lease term. In computing the term of the lease, all options to renew, shall be taken into consideration if there is a reasonable expectation that such options will be exercised. 3.02 Vendee, if contract is a conditional sale. If under the provisions of these Regulations, the agreement is to be treated as a sale, the amounts paid to the vendor will be considered as payments which are part of the purchase price to the extent such amounts do not represent interest or other charges. acd Section 4. General criteria for characterizing an agreement as a conditional sale. 4.01 Statutory basis for distinguishing a lease from a sale. A lease is a contract whereby one of the parties (lessor) binds himself to give to another (lessee) the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite (Article 1643, Civil Code). In other words, a lease is an agreement between a lessor and a lessee giving the lessee possession and use of a specific property upon payment of rentals over a period of time. The lessor retains ownership of the asset so that it shall not become the property of the lessee or any related third party during the term of the lease. On the other hand, a sale is a contract whereby one of the contracting parties (seller or vendor) obligates himself to transfer ownership of and to deliver a determinate thing while the other party (buyer or vendee) obligates himself to pay for said thing a price certain in money or its equivalent. (Article 1458, Civil Code.) 4.02 Characterizing a transaction that does not readily fit statutory concepts. In
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cases where the true character of the transaction cannot be definitely determined from the terms and conditions of the agreement, the Commissioner shall make the determination on the basis of all relevant facts and circumstances of each transaction, among which are (but not limited) those indicated in the following subparagraphs. 4.03 Factors to be considered. 4.03/1 In general. Whether an agreement, which in form is a lease, is in substance a conditional sales contract depends upon the intent of the parties as evidenced by the provisions of the agreement, read in the light of the facts and circumstances existing at the time the agreement was executed. In ascertaining such intent no single test or any special combination of tests is absolutely determinative. No general rule, applicable to all cases can be laid down. 4.03/2 Compelling persuasive factors. A contract or agreement purported to be a lease shall be treated as conditional sales contract if one or more of the following compelling persuasive factors are present: (A) The lessee is given the option to purchase the asset at anytime during the obligatory period of the lease, notwithstanding that the option price is equivalent to or higher than the current fair market value of the asset; (B) The lessee acquires automatic ownership of the asset upon payment of the stated amount of "rentals" which under the contract he is required to make; (C) Portions of the periodic rental payments are credited to the purchase price of the asset; cdtai (D) The receipts of payment indicate that the payment made were partial or full payments of the asset. 4.03/3 Absence of compelling persuasive factors. In the absence of the above compelling persuasive factors or contrary implication, an intent warranting treatment of a transaction for tax purposes as a purchase and sale rather than as a lease or rental agreement, may in general be said to exist if, for example, one or more of the following conditions are present: (a) Portions of the periodic payments are made specifically applicable to an equity to be acquired by the lessee. (b) The property may be acquired under a purchase option, at a price which is nominal in relation to the value of the property at the time when the option may be exercised, as determined at the time entering into the original agreement, or which is a relatively small amount when compared with the total payments which are required to be made. Section 5. Advance Ruling Required to Recognize Existence of a lease. The parties to a
lease agreement may secure from the Commissioner an advance ruling recognizing the fact that an agreement actually constitutes a lease for tax purposes. In cases where a lessor is engaged in the leasing business and frequently enters into a contract with various lessees under the same or essentially similar terms and conditions, the lessor may submit a model lease agreement on which to base an advance ruling. Thereafter, any specific lease agreement entered into by the lessor and a lessee which does not substantially deviate from the terms and conditions of the model contract on the basis which the advance ruling had been secured, need not be submitted for advance ruling. Entertainment, amusement recreation expenses and
Revenue Regulations 3-98 Section 2.33. Special Treatment of Fringe Benefits (B) Definition of Fringe Benefit. In general, except as otherwise provided under these regulations, for purposes of this Section, the term FRINGE BENEFITS means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Revenue Regulations 10-02 Section 2. Definition of Terms. For purposes of these Regulations, the term Entertainment, Amusement and Recreation Expenses includes representation expenses and/or depreciation or rental expense relating to entertainment facilities, as described below.
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The term Representation Expenses shall refer to expenses incurred by a taxpayer in connection with the conduct of his trade, business or exercise of profession, in entertaining, providing amusement and recreation to, or meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting event, and similar events or places. For purposes of these Regulations, representation expenses shall not refer to fixed representation allowances that are subject to withholding tax on wages pursuant to appropriate regulations. In the case particularly of a country, golf, sports club, or any other similar club where the employee or officer of the taxpayer is the registered member and the expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can prove that these are actually representation expenses. For purposes of proving that said expenses is a representation expense and not fringe benefits, the taxpayer should maintain receipts and adequate records that indicate the (a) amount of expense (b) date and place of expense (c) purpose of expense (d) professional or business relationship of expense (e) name of person and company entertained with contact details. The term Entertainment Facilities shall refer to (1) yacht, vacation home or condominium; and (2) any similar item of real or personal property used by the taxpayer primarily for the entertainment, amusement of recreation of guests or employees. To be considered an entertainment facility, such yacht, vacation home or condominium, or item of real or personal property must be owned or form part of the taxpayers trade, business, or profession, or rented by such taxpayer, for which the taxpayer claims a depreciation of rental expense. A yacht shall be considered an entertainment facility under these Regulations if its use is in fact not restricted to specified officers or employees or positions in such a manner as to make the same a fringe benefit for purposes of imposing the fringe benefits tax. Section 3. Exclusions. The following expenses are not considered entertainment, amusement and recreation expenses as defined under Section 2 hereof. (a) Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee relationship, pursuant to RR 298, 3-98 and amendments thereto. (b) Expenses for charitable or fund raising events; (c) Expenses for bonafide business meeting of stockholders, partners or directors; (d) Expenses for attending or sponsoring an employee to a business league or professional organization meeting; (e) Expenses for events organized for promotion, marketing and advertising including concerts,
conferences, seminars, workshops, conventions, and other similar events; (f) Other expenses of a similar nature. Notwithstanding the foregoing, such items of exclusions may, nonetheless, qualify as items of deduction under Section 34 of the Tax Code of 1997, subject to conditions for deductibility stated therein. Roxas vs. CTA 23 SCRA 276 Roxas y Compania deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmea and P28.00 for San Miguel beer given as gifts to various persons. The deductions were claimed as representation expenses. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence doesnt show such link between the expenses and the business of Roxas y Compania. Other Expenses Repairs Revenue Regulations No. 2 Section 68. Repairs. The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property should be charged against the depreciation reserves if such account is kept. Commissioner vs. Soriano 38 SCRA 67 In 1960, Soriano y Cia engaged the services of Architect J.M. Zaragosa and entered into a piledriving contract with A. M. Oreta & Co. in the year 1960 to construct an office building. The plans for the proposed office building and the pile-driving were done in the same year. The fees for the services constitute capital expenditures which Soriano y Cia were entitled to consider as part of the total cost of its property in determining the amount of the profit it had realized in the sale of the land on which the office building was to be constructed to J.M. Tuason & Co. Expenditures for replacements, alterations, improvements or
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additions which either prolong the life of the property or increase its value are capital in nature and having arrived at the conclusion that the expenditures referred to above increased the value of the property, the same must be considered as capital expenditures that formed part of the Soriano y Cias Intramuros property. Gutierrez vs. Collector 14 SCRA Section 30(a) of the Tax Code allows business expenses to be deducted from gross income. To be deductible, therefore, an expense must be (1) ordinary and necessary; (2) paid or incurred within the taxable year; and, (3) paid or incurred in carrying on a trade or business. In this case, Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid real estate brokers privilege tax. The electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry and labor used to repair the taxpayers rental apartments did not increase the value of such apartments or prolong their life. The merely kept the apartments in an ordinary operating condition. Hence, the expenses incurred therefore are deductible as necessary expenditures for the maintenance of the taxpayers business. Expenses of agribusiness farmers and those in
regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with Section 149 of these regulations. The purchase price of transportation equipment even when wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction. Gancayco vs. Collector 1 SCRA 980 Santiago Gancayco claims a deduction for farming expense in his income tax return for 1949. He claims that the entire amount was spent exclusively for clearing and developing the farm which were necessary to place it in a productive state. Section 75 of RR2 does not include the cost of farm machinery, equipment and farm buildings which represent a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Further, Section 31 of the Tax Code states that as a general rule, in computing net income, no deductions shall be made in respect of (A)(2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate. Apart from the absence of receipts, invoices or vouchers of the expenditures in question, Gancayco could not specify the items constituting the same, or when or on whom or on what they were incurred. ii. Specific items of deduction Interest
Revenue Regulations No. 2 Section 75. Expenses of farmers. A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business of farming. The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not including the value of farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm machinery, equipment, and farm buildings represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Amounts expended in purchasing work, breeding or dairy animals are
Section 34. Deductions from Gross Income. (B) Interest.
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(1) In General. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax: Forty-one percent (41%) beginning January 1, 1998; Thirty-nine percent (39%) beginning January 1, 1999; and Thirty-eight percent (38%) beginning January 1, 2000; (2) Exceptions. No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or (c)If the indebtedness is incurred to finance petroleum exploration. (3) Optional Treatment of Interest Expense. At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. Revenue Regulatons 13-00 Section 3. Requisites for Deductibility of Interest Expense. In general, subject to certain limitations, the following are the requisites for the deductibility of interest expense from gross income, viz: (a) There must be an indebtedness; (b) There should be an interest expense paid or incurred upon such indebtedness; (c) The indebtedness must be that of the taxpayer; (d) The indebtedness must be connected with the taxpayers trade, business or exercise of profession; (e) The interest expense must have been paid or incurred during the taxable year; (f) The interest must have been stipulated in writing; (g) The interest must be legally due;
(h) The interest payment arrangement must not be between related taxpayers as mandated in Section 34(B)(2)(b), in relation to Section 36(B), both of the Tax Code of 1997; (i) The interest must not be incurred to finance petroleum operations; and (j) In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure. Revenue Regulations No. 2 Section 78. Interest. Interest paid or accrued within the taxable year on indebtedness may be deducted from gross income, except that interest on indebtedness incurred or continued to purchase bonds and other securities, the interest upon which is exempt from tax, is not deductible. Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or not secured by such mortgage, may be deducted as interest on his indebtedness. In the case of a non-resident alien individual or foreign corporation, the allowable deduction will be the proportion of such interest which the amount of gross income from sources within the Philippines bears to the amount of gross income from all sources within and without this country; however, to avail of this deduction, such non-resident alien individual or foreign corporation shall include in the return all the information necessary for its calculation. Interest paid by a corporation on scrip dividends is an allowable deduction. So-called interest on preferred stock, which is in reality a dividend thereon, can not be deducted in computing net income. In the case of banks and loan or trust companies, interest paid within the year on deposits or on moneys received for investment and secured by interest-bearing certificates of indebted issued by such hank or loan or trust company may be deducted from gross income. Section 79. Interest on capital. Interest calculated for cost-keeping or other purposes on account of capital or surplus invested in the business, which does not represent a charge arising under an interest-bearing obligation, is not allowable deduction from gross income. (Section 30(c) of the Code)
Requisites for deductibility

Commissioner of Customs vs. Prieto 109 Phil. 592 Prieto conveyed by way of gift to her four children real property. The CIR assessed Prieto of P117,706.50 as donors gift tax, interests and compromises thereon. Of the sum assessed,
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P55,978.65 represents the total interest on account of delinquency. The said sum was claimed as deduction by Prieto in her 1954 income tax return. The term indebtedness as used in the US Tax Code (which is similar to ours) has been defined as an unconditional and legally enforceable obligation for the payment of money. It is apparent that a tax may be considered an indebtedness, since the term debt embraces not merely money due by contract but whatever one is bound to render to another, either for contract, or the requirement of the law. It follows that the interest paid by Prieto for the late payment of her donors tax is deductible from her gross income under Section 30(b) of the Tax Code. Kuenzle vs. Collector 106 Phil. 355 It is a general rule that bonuses to employees made in good faith and as additional compensation for services actually rendered by the employees are deductible, provided such payments when added to the stipulated salaries do not exceed a reasonable compensation for services rendered. There is no fixed test in determining reasonableness of a given bonus as compensation; the situation must be considered as a whole. The condition precedents to the deduction of bonuses to employees are: 1. The payment of the bonuses is in fact compensation 2. It must be for personal services actually rendered 3. Bonuses when added to the salaries are reasonable when measured by the amount and quality of the services performed with relation to the business of a particular taxpayer
(c)If the indebtedness is incurred to finance petroleum exploration. Section 36. Items Not Deductible. (B) Losses from Sales or Exchanges of Property. In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly: (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust.
Non-deductible interest
Section 34. Deductions from Gross Income. (B) Interest. (2) Exceptions. No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or
Interest subject to special rules

Section 34. Deductions from Gross Income. (B) Interest. (2) Exceptions. No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or
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(c)If the indebtedness is incurred to finance petroleum exploration. (3) Optional Treatment of Interest Expense. At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. Taxes
Section 34. Deductions from Gross Income. (C) Taxes. (1) In General. Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (2) Limitations on Deductions. In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. (3) Credit Against Tax for Taxes of Foreign Countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary 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 year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title.
An 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. (4) Limitations on Credit. The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. (5) Adjustments on Payment of Incurred Taxes. If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. (6) Year in Which Credit Taken. The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. (7) Proof of Credits. The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:
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(a) The total amount of income derived from sources without the Philippines; (b) The amount of income derived from each country, 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 by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits. Revenue Memorandum Circular No. 13-80 1. Refunds/Tax Credits under Section 295 of the Tax Code. Taxes previously claimed and allowed as deductions, but subsequently refunded or granted as tax credit pursuant to Section 295 of the Tax Code, should be declared as part of the gross income of the taxpayer in the year of receipt of the refund or tax credit. However, the following taxes, when refunded or in credited, are not declarable for income tax purposes inasmuch as they are not allowable as deductions: (a) Income tax imposed on Title III of the Tax Code; (b) Income, war-profit and excess profits taxes imposed by authority of a foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries; (c) Estate and gift taxes; (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; (e) Stock transaction tax; (f) Energy tax; and (g) Taxes which are not allowable as deductions under the law. Revenue Regulations No. 2 Section 80. Taxes in general. As a general rule, taxes are deductible with the exception of those with respect to which the law does not permit deduction. However, in the case of a non-resident alien individual and a foreign corporation, deduction is allowed only if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the Philippines. Import duties paid to the proper customs officers, and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible. The word "taxes" means taxes proper and no deductions should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a
tax. Automobile registration fees are considered taxes. Taxes are deductible as such only by the person upon whom they are imposed. Thus the merchants' sales tax imposed by law upon sales is not deductible by the individual purchaser even though the tax may be billed to him as a separate item. In computing the net income of an individual no deduction is allowed for the taxes imposed upon his interest as shareholder of a bank or other corporation, which are paid by the corporation without reimbursement from the taxpayer. The amount so paid should not be included in the income of the shareholder. In the case of corporate bonds or other obligations containing a tax-free covenant clause the corporation paying a tax or any part of it, for someone else pursuant to its agreement is not entitled to deduct such payment from gross income on any ground. Section 81. Income tax imposed by the Government of the Philippines. The law does not permit the deduction of the income tax paid to or accrued in favor of the Government of the Philippines, and in no case may the taxpayer avail of such deduction. Section 82. Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country. Income, warprofits, and excess-profits taxes imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed as deduction. Section 83. Estate, inheritance, and gift taxes: taxes assessed against local benefits. Estate, inheritance, and gift taxes are not deductible. So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare, by the proper
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taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible. Requisites for deductibility Non-deductible taxes Treatment of surcharges/ interests/ fines for delinquency Treatment of special assessment Foreign taxes paid
(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. (3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary 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 year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. An 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 (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. (5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon
(For the above items, see discussion below)
SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; xxx (C) Taxes.(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except: (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.
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such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. (7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: (a) The total amount of income derived from sources without the Philippines; (b) The amount of income derived from each country, 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 by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits.
April 10, 1980 REVENUE MEMORANDUM CIRCULAR NO. 1380 SUBJECT : Treatment of Tax Refunds and Tax Credits when Received To: All Internal Revenue Officers and Others Concerned. 1. Refunds/Tax Credits under Section 295 of the Tax Code. Taxes previously claimed and allowed as deductions, but subsequently refunded or granted
as tax credit pursuant to Section 295 of the Tax Code, should be declared as part of the gross income of the taxpayer in the year of receipt of the refund or tax credit. However, the following taxes, when refunded or credited, are not declarable for income tax purposes inasmuch as they are not allowable as deductions: a. Income tax imposed in Title III of the Tax Code; b. Income, war-profit and excess profits taxes imposed by authority of a foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries); c. Estate and gift taxes; d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; e. Stock transaction tax; f. Energy tax; and g. Taxes which are not allowable as deductions under the law. 2. Special Tax Credits granted under R.A. 5186; R.A. 6135 and P.D. 535. These tax credits and their tax consequences are as follows: a. Sales, compensating and specific taxes are paid on supplies and raw materials imported by a registered export producer. Said taxes are given as tax credit to be used in the payment of taxes, duties, charges and fees due to the national government in connection with its operations. (Sec. 7(a), R.A. No. 6135) The tax credits granted should form part of the gross income to the enterprise in the year of receipt of tax credit as said taxes paid are considered allowable deductions for income taxes purposes. b. In some cases, a registered BOI and tourism enterprise assumes payment of taxes withheld and due from the foreign lender-remittee on interest payments on foreign loans. In such cases, the enterprise is given a tax credit for taxes withheld subject to certain conditions. (Sec. 7(f), R.A. No. 5186; Sec. 8(c), P.D. No. 535) Said taxes assumed by the registered enterprise represent necessary and ordinary expenses incurred by the enterprise; hence, deductible from its gross income. Therefore, the tax credits granted necessarily constitute taxable income of the enterprise. It is desired that this Circular be given as wide a publicity as possible.
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EFREN I. PLANA Acting Commissioner RR2 SECTION 80. Taxes in general. As a general rule, taxes are deductible with the exception of those with respect to which the law does not permit deduction. However, in the case of a non-resident alien individual and a foreign corporation, deduction is allowed only if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the Philippines. Import duties paid to the proper customs officers, and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible. The word "taxes" means taxes proper and no deductions should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. Taxes are deductible as such only by the person upon whom they are imposed. Thus the merchants' sales tax imposed by law upon sales is not deductible by the individual purchaser even though the tax may be billed to him as a separate item. In computing the net income of an individual no deduction is allowed for the taxes imposed upon his interest as shareholder of a bank or other corporation, which are paid by the corporation without reimbursement from the taxpayer. The amount so paid should not be included in the income of the shareholder. In the case of corporate bonds or other obligations containing a tax-free covenant clause the corporation paying a tax or any part of it, for someone else pursuant to its agreement is not entitled to deduct such payment from gross income on any ground. SECTION 81. Income tax imposed by the Government of the Philippines. The law does not permit the deduction of the income tax paid to or accrued in favor of the Government of the Philippines, and in no case may the taxpayer avail of such deduction. SECTION 82. Income, war-profits, and excessprofits taxes imposed by the authority of a foreign country. Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of
law allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed as deduction. SECTION 83. Estate, inheritance, and gift taxes: taxes assessed against local benefits. Estate, inheritance, and gift taxes are not deductible. So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare, by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible. Taxes mean TAXES PROPER, and therefore no deductions are allowed for: 1. interest 2. surcharges 3. penalties or fines incident to delinquency (Sec.
80, Rev. Reg. 2)
GENERAL RULE: All taxes, national or local, paid or incurred during the taxable year in connection with the taxpayer's profession, trade or business, are deductible from gross income. EXCEPTIONS: Philippine income tax, except the fringe benefit tax Income tax imposed by authority of any foreign country
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Except when the taxpayer does NOT signify his desire to avail of the tax credit for taxes of foreign countries, in which case the amount may be allowed as a deduction subject to the limitations set forth by law. (Note that a taxpayer qualified to take tax credits for foreign income taxes paid or incurred may alternatively claim them as deductions from gross income.) Estate and donors taxes Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special Assessments) Value Added Tax Fines and penalties due to late payment of tax Final taxes Capital Gains Tax
necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible.
REQUISITES FOR DEDUCTIBILITY: 1. It must be paid or incurred within the taxable year. 2. It must be paid or incurred in connection with the taxpayers trade, profession or business. 3. It must be imposed directly on the taxpayer. 4. It must not be specifically excluded by law from being deducted from the taxpayers gross income. EXAMPLES: Import duties Business taxes Occupation taxes Privilege and license taxes Excise taxes Documentary stamp taxes Automobile registration fees Real property taxes Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare, by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. o When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments paid as an expense incurred in business, if the payment of such assessments is
LIMITATION: In the case of a nonresident alien individual engaged in trade or business (NRAETB) and a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. Special Treatment of Foreign Income Tax: A taxpayer qualified to take tax credits for foreign income taxes paid or incurred may alternatively claim them as deductions from gross income. EXCEPTIONS to requirement that only such persons on whom the tax is imposed by law can claim deduction thereof: 1. Taxes of shareholder upon his interest as such and paid by the corporation without reimbursement from him, can be claimed by the corporation as deduction. 2. A corporation paying the tax for the holder its bonds or other obligation containing a tax-free covenant clause cannot claim deduction for such taxes paid by it pursuant to such covenant.
TAX CREDIT- A credit for foreign income tax paid or incurred reduces the Philippine income tax that should be paid. Tax credit is given to a taxpayer in order to provide relief from too onerous a burden of taxation where the same income is subject to both foreign income tax and the Philippine income tax. In determining the tax credit that may be allowed a taxpayer, the foreign income tax should be understood to mean tax proper only; no credit shall be taken for any amount paid or incurred to the foreign country which represents interest, surcharge or penalty incident to delinquency on the payment of the tax. In taking a tax credit:
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Tax credit is taken for Tax credit is taken against
The foreign income tax The Philippine income tax
THE FOLLOWING CAN CLAIM A TAX CREDIT TO THE CORRESPONDING AMOUNT1 1. The amount of income taxes paid or incurred during the taxable year to any foreign country a. Citizens b. Domestic corporations 2. The taxpayers proportionate share of such taxes of the general professional partnership/estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership/estate or trust is reported for taxation a. Members of general professional partnerships b. Beneficiaries of estates or trusts THE FOLLOWING ARE NOT ENTITLED TO TAX CREDIT (1) non-resident citizens (2) resident aliens, if without reciprocity (3) resident aliens whose income is derived solely from sources within the Philippines (4) foreign corporations (resident and nonresident) SUBSTANTIATION REQUIREMENTS: The tax credits shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: 1. The total amount of income derived from sources without the Philippines; 2. The amount of income derived from each country, 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 by the Secretary of Finance; and Taxable Income, Country A Taxable Income, Country B Taxable Income, Philippines Income Tax Paid Country A Income Tax Paid Country B 3. P200,000 P100,000 P700,000 P 60,000 P 38,000
Limitations: The amount of tax credit allowed is equivalent to the tax paid or incurred to a foreign country during the taxable year but not to exceed the following limits: 1. [Per Country Limit] The amount of tax credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable year; and 2. [Worldwide Limit] The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable bears to his entire taxable income for the same taxable year.
FORMULA FOR COMPUTING LIMITATION Per country limitation Taxable income from Phil. = Tax Credit foreign country X Taxable income income tax Limit from all sources 2. Over-all limitation Taxable income from Phil. = Tax Credit outside sources X Taxable income income tax Limit from all sources NOTE: The second limitation applies where the taxpayer derives income from more than one foreign country. ILLUSTRATION: D Co., a domestic corporation, had the following data for a year on taxable income and income taxes paid: What is the Philippine income tax still due, after credit for foreign income taxes? Should D Co. choose to treat income taxes paid to foreign countries as deductions from gross income, what is its Philippine income tax? Answer: Step 1: Compute for total taxable income and Philippine income tax Taxable Income, Country A 200,000 Taxable Income, Country B 100,000 Taxable Income, Philippines 700,000 1.
All other information necessary for the verification and computation of such credits.
Scenario A: Tax Credit option is chosen.
Amounts are subject to the limitations (per country and overall) set forth by law. 124 | Follosco Tax Reviewer
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Total Taxable Income from sources within and without the Phils Philippine Income Tax (P1Mx 35%)
1,000,000 350,000
Amount Allowed (Whichever is Lower) Overall Limit: 300/1000 x 350,000 Total foreign income taxes paid Tax credit allowed under Limitation B 105,000 98,000 98,000
Step 2: Compute for Limitation A (Per Country Basis). To get tax credit per country under Limitation A, this formula is followed:
Taxable Income from Foreign Country Taxable Income from all sources x Phil. income = tax tax credit
The result after applying the formula above is compared to the tax actually paid for each foreign country. The lower of the two amounts for each foreign country will be added to get the total tax credit allowed under Limitation A. Amount Allowed (Whichever is Lower)
Step 4: Compare the respective tax credits allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable tax credit. In this case, the amount computed under Limitation A (P95,000) is lower, thus it becomes the final allowable tax credit. Step 5: Compute for the income tax still due. Philippine Income tax Less: Allowable Tax Credit Philippine Income Tax still due 350,000 95,000 255,000
Country A
Limitation A (200/1000 x 350,000) Actually paid to Country A 70,000 60,000 60,000
Country B
Limitation B (100/1000 x 350,000) Actually paid to Country B Tax credit allowed under Limitation A 35,000 38,000 95,000 35,000
Scenario B: Deduction option is chosen.

Taxable Income, Country A Taxable Income, Country B Taxable Income, Phils. Total Taxable Income (before deduction for foreign income tax) Less: Deductions for Foreign Income Taxes Paid Country A P60,000 Country B P38,000 Net Taxable Income Philippine Income (902,000 x 35%) Tax P 315,700 P 200,000 100,000 700,000 P1,000,000
Step 3: Compute for Limitation B (Overall Basis). To get tax credit (overall basis) under Limitation B, this formula is followed:
Taxable Income from sources outside the Phils Taxable Income from all sources x Phil. income = tax tax credit
(98,000) P 902,000
The result after applying the formula above is compared to the tax actually paid in total to foreign countries. The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.
Com v. Lednicky 11 SCRA 603 FACTS: Spouses VE and Maria Valero Lednicky are American citizens residing in the Philippines, and have derived all their income from Philippine sources since 1947. In 1955, the spouses filed with the US Internal Revenue agent in Manila their Federal income tax return for 1947, 1951 to 1954 on income from Philippine sources. From 1956 to 1958, they filed their domesic income tax returns in
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compliance with local laws. They amended their tax returns in 1959 to include their taxes paid to the US Federal Government, interests, and exchange and bank charges. They filed their claims for refund. HELD: The laws intent is that the right to deduct income taxes paid to foreign government from the taxpayers gross income is given only as an alternative or substitute to his right to claim a tax credit for sich foreign income taxes; so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. The prupose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from gross income and by tax credit. To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to confer on the latter power to reduce the tax income of the Philippine Government. Such result is incompatible with the status of the Philippines as an independent and sovereign state. Any relief from the alleged double taxation should come from the United States, since its right to burden the taxpayer is solely predicated on the taxpayers citizenship, without contributing to the production of the wealth that is being taxed. Losses Sec. 34 (D), RR 14-01, Sec. 94-100/104 RR2, RR 12-77 Definition Classification Requisites for deductibility
authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss. (c) No loss shall be allowed as a deduction under this Subsection 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. (2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and (3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that i. i. Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or ii. ii. Not less than seventy-five percent (75%) of the paid up capital of the
SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; xxx (D) Losses. (1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: (a) If incurred in trade, profession or business; (b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. The Secretary of Finance, upon recommendation of the Commissioner, is hereby
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corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. iii. For purposes of this subsection, the term 'not operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year. Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years. (4) Capital Losses. (a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39. (b) Securities Becoming worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year 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 day of such taxable year, of capital assets. (5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as provided in Section 38. (6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions. (7) Abandonment Losses. (a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any 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 subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment
directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be. RR 14-2001 SUBJECT : Implementing Section 34(D)(3) of the National Internal Revenue Code of 1997, Relative to the Allowance of Net Operating Loss Carry-Over (NOLCO) as a Deduction from Gross Income. TO: All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. - Pursuant to the provisions of Section 244 of the National Internal Revenue Code of 1997 (hereinafter referred to as the Code), these Regulations are hereby promulgated to govern the deduction from gross income of the Net Operating Loss Carry-Over (NOLCO) pursuant to Section 34 (D) (3) of the Code, which provides:
"Net Operating Loss Carry-over.- The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that "(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or "(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. "For purposes of this Subsection, the term 'net operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year:
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"Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives providedfor under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining four (4) years. "
SEC. 2. General Principles and Policies. 2.1 For purposes of these Regulations, the allowance for deduction of NOLCO shall be limited only to net operating losses accumulated beginning January 1, 1998. 2.2 In general, NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who sustained and accumulated the net operating losses regardless of the change in its ownership. This rule shall also apply in the case of a merger where the taxpayer is the surviving entity. 2.3 Unless otherwise provided in these Regulations, NOLCO of the taxpayer shall not be transferred or assigned to another person, whether directly or indirectly, such as, but not limited to, the transfer or assignment thereof through a merger, consolidation or any form of business combination of such taxpayer with another person. 2.4 NOLCO shall also be allowed if there has been no substantial change in the ownership of the business or enterprise in that not less than 75% in nominal value of outstanding issued shares or not less than 75% of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons. The 75% equity, ownership or interest rule prescribed in these Regulations shall only apply to a transfer or assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation or business combination with another person. In case the transfer or assignment of the taxpayer's net operating losses arises from the said taxpayer's merger, consolidation or combination with another person, the transferee or assignee shall not be entitled to claim the same as deduction from gross income unless, as a result of the said merger, consolidation or combination, the shareholders of the transferor/assignor, or the transferor (in case of other business combinations) gains control of at
least 75% or more in nominal value of the outstanding issued shares or paid up capital of the transferee/assignee (in case the transferee/assignee is a corporation) or 75% or more interest in the business of the transferee/assignee (in case the transferee/assignee is other than a corporation). 2.5 Unless otherwise provided in these Regulations, an individual (including estate or trust) engaged in trade or business or in the exercise of profession, or a domestic or resident foreign corporation may be allowed to claim deduction of his/its corresponding NOLCO: Provided, however, that an individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of the NOLCO: Provided, further, that the threeyear reglementary period shall continue to run notwithstanding the fact that the aforesaid individual availed of the 10% optional standard deduction during the said period. 2.6 The three-year reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation paid its income tax under the "Minimum Corporate Income Tax" computation. 2.7 NOLCO shall be availed of on a "first-in, firstout" basis. 2.8 The net operating loss incurred by a taxpayer in the year in which a substantial change in ownership in such taxpayer occurs shall not be affected by such change in ownership, notwithstanding subsections 2.3 and 2.4. SEC. 3. Definition of Terms. - For purposes of these Regulations, the words and phrases herein provided shall mean as follows: 3.1 Gross Income - Except as otherwise provided in these Regulations, the term "Gross Income" means the pertinent items of income referred to in Section 32(A) of the Tax Code of 1997 which are required to be declared in the taxpayer's Income Tax Return for purposes of computing his taxable income as defined in Section 31 of the same Code. All exempt income and other items of income subject to final tax shall not form part of the gross income. 3.2 Allowable Deductions The term "Allowable Deductions" means the items of deduction enumerated under Section 34(A) to (J) and Section 34(M), including the special deductions allowed to insurance companies under Section 37 of the Code, but excluding NOLCO and any item of incentive deduction allowable under any special law that does not actually involve cash outlay: Provided, that, in the case of an individual entitled to claim the Optional Standard Deduction (OSD) under Section 34(L), in lieu of the deductions
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enumerated under Section 34(A) to (K), the term "allowable deductions" shall mean the aforesaid OSD plus deduction of premium payments on health and/or hospitalization insurance as provided under Section 34(M) of the Code, if applicable. 3.3 Net Operating Loss - The term "Net Operating Loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year. 3.4 Nominal Value of Outstanding Issued Shares - The term "Nominal Value of Outstanding Issued Shares" shall refer to the par value (in case of par value shares of stock) or stated value (in case of no par value shares of stock) of shares of stock issued to the stockholders of the corporation. 3.5 Paid Up Capital of the Corporatin The term "Paid Up Capital of the Corporation" shall refer to the total amount paid by stockholders for their subscriptions in the shares of stock of the corporation, including any amount paid over and above the par value or stated value of the share of stock (e.g., premium on capital). For this purpose, the taxpayers shall maintain complete and accurate records of the paid-up capital of the shareholders. 3.6 Taxable Income The term "Taxable Income" means the excess amount of the pertinent items of gross income over the allowable deductions and/or personal and additional exemptions, if any, authorized under the Code or under any special law. 3.7 Taxable Year - The term "Taxable Year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under Title II of the Code. Taxable year includes, in the case of a return made for a fractional part of a year, the period for which such return is made. The term "Fiscal Year" means an accounting period of twelve (12) months ending on the last day of any month other than December. 3.8 Substantial Change in the Ownership of the Business or Enterprise - The term " Substantial Change in the Ownership of the Business or Enterprise" shall refer to a change in the ownership of the business or enterprise as a result of or arising from its merger or consolidation or combination with another person in the manner as provided in subsection 2.4 of these Regulations. Any change in ownership as a result of or arising thereunder shall not be treated as a substantial change for as long as the stockholders of the party thereto, to whom the net operating loss is attributable, gains or retains 75% or more interest after such merger or consolidation or combination. 3.9 Merger - For purposes of these Regulations, the term "Merger" shall refer to the absorption of a corporation by another corporation,
the latter retaining its own name and identity and acquiring the assets, liabilities, franchises and powers of the former, and the absorbed corporation ceasing to exist as a separate juridical person. 3.10 Consolidation - For purposes of these Regulations, the term "Consolidation" shall refer to a situation when two or more corporations are extinguished, and by the same process a new one is created, taking over the assets and assuming the liabilities of the said extinguished corporations; or the unification of two or more corporations into a single new corporation, having the combined capital, franchises and powers of all its constituents. 3.11 Combination - For purposes of these Regulations, the term "Combination" shall refer to a situation when an owner of a business, organized as a sole proprietorship, admits a partner in his business for the purpose of forming a copartnership, or any such business combination which, in effect, is similar or synonymous thereto. 3.12 By or on Behalf of the Same Persons - The term "By or on Behalf of the Same Persons" shall refer to the maintenance of ownership despite change as when: 1. No actual change in ownership is involved in case the transfer involves change from direct ownership to indirect ownership, or vice versa. Illustration: Facts: P Corporation owns Q Corporation that has NOLCO. P Corporation transfers Q Corporation's shares to R Corporation in exchange for 100% of R Corporation shares. Held: Q Corporation's NOLCO is retained because Q Corporation's shares are held "by" R Corporation "on behalf of "P Corporation, the original owner. 2. No actual change in ownership is involved as in the case of merger of the subsidiary into the parent company. Illustration: Facts: X Corporation owns 100% of Y Corporation. Y Corporation owns 100% of Z Corporation. Z Corporation has NOLCO. Z Corporation is merged into Y Corporation Held: Z Corporation's NOLCO should be retained and transferred to Y Corporation. Prior to the merger, X Corporation already indirectly owned Z Corporation, i.e., Z Corporation's shares were held "by" Y Corporation "on behalf of " X Corporation. After the merger, X now directly owns Z Corporation [absorbed corporation] which continues to exist in Y Corporation.
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Any reference in these Regulations to the "75% equity, ownership, or interest rule", "75% or more in nominal value", "75% or more interest", and other similar terms shall be construed within the context of this definition. Notwithstanding the above, in determining whether there is actual change in ownership in the abovementioned and similar cases, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit. SEC. 4. Taxpayers Entitled to Deduct NOLCO from Gross Income. - Any individual (including estates and trusts) engaged in trade or business or in the exercise of his profession, and domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers and traders) or preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters) on their taxable income as defined in Section 3 of these Regulations shall be entitled to deduct from his/its gross income for the current year his/its accumulated net operating losses for the immediately preceding three (3) consecutive taxable years: Provided, however, that net operating losses incurred or sustained prior to January 1, 1998 shall not qualify for purposes of the NOLCO. Provided, further, that any provision of these Regulations notwithstanding, the following shall not be entitled to claim deduction of NOLCO 4.1 Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency Deposit Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such by the Bangko Sentral ng Pilipinas (BSP); 4.2 An enterprise registered with the Board of Investments (BOI) with respect to its BOIregistered activity enjoying the Income Tax Holiday incentive. Its accumulated net operating losses incurred or sustained during the period of such Income Tax Holiday shall not qualify for purposes of the NOLCO; 4.3 An enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to R.A. No. 7916, as amended, with respect to its PEZA-registered business activity. Its accumulated net operating losses incurred or sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO; 4.4 An enterprise registered under R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, e.g., SBMA-registered enterprises, with respect to its registered business activity. Its accumulated net operating losses incurred or sustained during the
period of its said registered operation shall not qualify for purposes of the NOLCO; 4.5 Foreign corporations engaged in international shipping or air carriage business in the Philippines; and 4.6 In general, any person, natural or juridical, enjoying exemption from income tax, pursuant to the provisions of the Code or any special law, with respect to its operation during the period for which the aforesaid exemption is applicable. Its accumulated net operating losses incurred or sustained during the said period shall not qualify for purposes of the NOLCO.
SEC 5. Determination of Substantial Change in the Ownership of the Business. 5.1 Time of Determination of Substantial Change in the Ownership of the Business; Determined as of the End of the Taxable Year. - The substantial
change in the ownership of the business or enterprise shall be determined as of the end of the taxable year when NOLCO is to be claimed as deduction. Whether or not substantial change in ownership occurred shall be determined on the basis of any change in the ownership of interest in the said business or enterprise arising from or incident to its merger, or consolidation, or combination with another person (e.g., in the case of merger or consolidation of two or more corporations, such change shall be determined based on the ownership of the outstanding shares of stock issued or based on paid-up capital as of the end of the taxable year, and as a result of or arising from the said merger or consolidation). 5.2 When Change Occurs. - A change in the ownership of the business occurs when the person who sustained net operating losses enters into a merger, or consolidation or combination with another person, thereby resulting to the transfer or conveyance of the said net operating losses, to another person, in the course of the said merger or consolidation or combination. (a) When No Substantial Change Occurs. - No substantial change in ownership of the business occurs if, as a result of the said merger or consolidation or combination, the stockholders of the transferor, or the transferor, in case of other business combinations, gains control of at least 75% or more in nominal value of the outstanding issued shares or paid-up capital of the transfereeassignee (in case the transferee-assignee is a corporation) or 75% or more interest in the business of the transferee-assignee (in case the transferee-assignee is other than a corporation). (b) When Substantial Change Occurs. - A substantial change in ownership of the business occurs if, as a result of the transaction referred to
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in subsection 5.2 (a) hereof, the stockholders of the transferor or the transferor, in case of other business combinations, gains control of the aforesaid transferee-assignee only to the extent of less than 75%. SEC. 6. Entitlement to Net Operating Loss Carry-
Over. In General - In general, only net operating losses
incurred by a qualified taxpayer for the period beginning January 1, 1998 may be carried over to the next three (3) immediately succeeding taxable years following the year of such loss for purposes of the NOLCO deduction. Provided, however, that for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, as amended , incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. Provided, further, that the entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining (4) four years. 6.1 Transitory Apportionment of NOLCO,
in Case of Corporation Using the Fiscal Year Accounting Period. - In general, only net operating
losses incurred beginning January 1, 1998 may be claimed as a NOLCO deduction. In the case of a corporation using a fiscal year accounting period as of the said date, whose result of operations for the fiscal year 1997-1998 shows a net operating loss, the allowable NOLCO for the succeeding fiscal years shall be determined, as follows: NOLCO for the entire fiscal year (1997-1998) xxx Multiplied by the ratio of: No. of months in 1998 12 mos. covering FY 97-98 xxx NOLCO to be carried over to FYs 1998-1999, 19992000, and/or 2000-2001 xxx 6.3 Where Taxpayer is Exempt, or PartlExempt
from Income Tax, or Enjoying Preferential Tax Treatment Under Special Laws. - Net operating loss
or losses incurred by any person who is exempt from income tax, or enjoying preferential tax treatment pursuant to the provisions of special laws, shall not be allowed a NOLCO deduction (e.g., any BOI-registered enterprise enjoying income tax
holiday pursuant to E.O. No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987; or any PEZA-registered enterprise enjoying preferential tax treatment or income tax holiday pursuant to R.A. No. 7916, as amended; any person enjoying preferential tax treatment pursuant to R.A. No. 7227, otherwise known as the Bases Conversion and Development Act of 1992. See Section 4 of these Regulations for further discussion). In case any of the aforementioned persons is engaged in both registered and unregistered business activities under any of the aforesaid laws (e.g., a corporation with a BOI-registered activity enjoying income tax holiday; and other unregistered business activities not enjoying any BOI incentive) the net operating loss or losses sustained or incurred by the said BOI-enterprise from its registered activities shall not be allowed as NOLCO deduction from its gross income derived from the unregistered business activities. 6.4 Quarterly and Annual Availment of NOLCO. NOLCO shall be allowed as deduction in computing the taxpayer's income taxes per quarter and annual final adjustment income tax returns. Provided, however, that if per the taxpayer's final annual adjustment income tax return, the entire operations for the year resulted to a net operating loss, such net operating loss may be claimed as NOLCO deduction in the immediately succeeding taxable year: Provided, further, that NOLCO may be claimed as deduction only within a period of three (3) consecutive taxable years immediately following the year the net operating loss was sustained or incurred. In order that compliance with this threeyear statutory requisite may be effectively monitored, the taxpayer shall, at all times, show its NOLCO deduction, in its income tax return, as a separate item of deduction. In no case may NOLCO be claimed, as a part of the taxpayer's other itemized deductions, like under deduction of "losses," in general. 6.5 NOLCO in Relation to the Minimum Corporate Income Tax (MCIT). - In general, domestic and resident foreign corporations subject to the normal income tax rate are liable to the 2% MCIT, if applicable, computed based on gross income, whenever the amount of the MCIT is greater than the normal income tax due (computed with the benefit of NOLCO, if any), pursuant to Sections 27 or 28 of the Code. Thus, such corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any taxable year. Provided, however, that the running of the three-year period for the expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT in any taxable year during such three-year period.
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SEC. 7. Presentation of NOLCO in the Tax Return and Unused NOLCO in the Income Statement. -The NOLCO shall be separately shown in the taxpayer's income tax return (also shown in the Reconciliation Section of the Tax Return) while the Unused NOLCO shall be presented in the Notes to the Financial Statements showing, in detail, the taxable year in which the net operating loss was sustained or incurred, and any amount thereof claimed as NOLCO deduction within three (3) consecutive years immediately following the year of such loss. Failure to comply with this requirement will disqualify the taxpayer from claiming the NOLCO. SEC. 8. Repealing Clause. - Any revenue ruling or issuance inconsistent herewith shall be considered repealed, amended or modified accordingly. Clause SEC. 9. Effectivity. - These Regulations shall take effect beginning January 1, 1998. (Original Signed) RENE G. BANEZ Commissioner of Internal Revenue Recommended Approval (Original Signed) JOSE ISIDRO N. CAMACHO Secretary of Finance RR2 SECTION 94. Losses by corporations. Domestic corporations may deduct losses actually sustained and charged off within the year and not compensated for by insurance or otherwise. SECTION 95. Losses by non-resident alien and foreign corporation. Non-resident aliens and foreign corporations are allowed only losses sustained in business or trade conducted within the Philippines, losses of property within the Philippines arising from fires, storms, shipwreck, or other casualty and from robbery, theft, or embezzlement, and losses actually sustained in transactions entered into for profit in the Philippines, although not connected with their trade or business, not compensated by insurance or otherwise. SECTION 96. Losses generally. Losses must usually be evidenced by closed and completed transactions. Proper adjustment must be made in each case for expenditures or items of loss properly chargeable to capital account, and for depreciation, obsolescence, amortization, or depletion. Moreover, the amount of the loss must be reduced by the amount of any insurance or other compensation received, and by the salvage value, if any, of the property. A loss on the sale of residential property is not deductible unless the property was purchased or constructed by the taxpayer with a view to its
subsequent sale for pecuniary profit. No loss is sustained by the transfer of property by gift or death. Losses sustained in illegal transactions are not deductible. SECTION 97. Voluntary removal of buildings. Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements will be deductible from gross income. When a taxpayer buys real estate upon which is located a building, which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building. SECTION 98. Loss of useful value. When through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use of such business, he may claim as deduction the actual loss sustained. In determinating the amount of the loss, adjustment must be made, however, for improvements, depreciation and the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowance are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be charged off in the books and fully explained in returns of income. SECTION 99. Shrinkage in value of stocks. A person possessing stock of a corporation can not deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of such stock through fluctuation of the market or
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otherwise. The loss allowable in such case is that actually suffered when the stock is disposed of. If stock of a corporation becomes worthless, its cost or other basis determined in accordance with these regulations may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made, as in the case of bad debts. SECTION 100. Losses of farmers. Losses incurred in the operation of farms as business enterprises are deductible from gross income. If farm products are held for favorable markets, no deduction on account of shrinkage in weight or physical value or by deterioration in storage shall be allowed, except as such shrinkage may be reflected in an inventory if used to determine profits. The total loss by storm, flood, or fire of a prospective crop is not a deductible loss in computing net income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the value of animals that perish from among those animals that were raised on the farm, except as such loss is reflected in an inventory if used. If livestock has been purchased after March 1, 1913, for any purpose, and afterwards dies from disease, exposure, or injury, or is killed by order of the authorities, the actual purchase price of such stock, less any depreciation allowable as a deduction in computing net income, with respect to such perished, livestock, and also any insurance or indemnity recovered, may be deducted as a loss. The actual cost of other property (with proper adjustment for depreciation), which is destroyed by order of the authorities, may in like manner be claimed as a loss; but if reimbursement is made in whole or in part on account of stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made. The cost of any feed, pasturage, or care which has been deducted as an expense of operation shall not be included as part of the cost of the stock for the purpose of ascertaining the amount of a deductible loss. If gross income is ascertained by inventories, no deduction can be made for livestock or products lost during the year, whether purchased for resale, produced on the farm, as such losses will be reflected in the inventory by reducing the amount of livestock or products on hand at the close of the year. If an individual owns and operates a farm, in addition to being engaged in another trade, business or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure.
SECTION 104. Securities becoming worthless. If any securities which are capital assets are ascertained to be worthless and charged off within the taxable year, the loss resulting therefrom shall, except in the case of a bank or trust company incorporated under the laws of the Philippines or of the United States a substantial part of whose business is the receipt of deposits, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (Section 30(f) of the Code) RR 12-77 Within 45 days after the date of the occurrence of casualty or robbery, theft or embezzlement, a corporation that sustained there from and intends to claim the loss as a deduction for the taxable year in which the loss was sustained shall file a sworn declaration of loss with the nearest Revenue District Officer. The sworn declaration of loss shall contain, among other things, the following information: (1) The nature of the event giving rise to the loss and the |time of its occurrence: (2) A description of the damaged property and its location; (3) The items needed to compute the loss such as cost or illier basis of the property; depreciation allowed or allowable, if jjyi value of property before and after the event; and cost of repair; and (4) Amount of insurance or other compensation received or Steivable. Evidence to support these items should be furnished, if available. Examples are purchase contracts and deeds, receipted bills for improvements, and pictures and competent appraisals lie property before and after the casualty. (Sec. 3, Rev. Regs. 1,12-77.) LOSSES refer to such losses which do not come under the category of bad debts, inventory losses, depreciation, etc., and which arise in taxpayer's profession, trade or business. Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: o If incurred in trade, profession or business; o Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.
REQUISITES: (CATT DID) 1. The loss must be that of the TAXPAYER.
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2.
3.
4. 5. 6. 7.
-The loss is personal to the taxpayer and is not transferable or usable by another. The loss of a predecessor partnership is not deductible by a successor corporation. The loss of the parent company may not be deducted by its subsidiary. The loss must be ACTUALLY sustained and charged off within the taxable year. -However, if the loss is compensated by insurance or otherwise, the loss is postponed to a subsequent year in which it appears that no compensation at all can be had, or there is a remaining net loss (or there is no full compensation). Deduction will be denied if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, the taxpayer must first exhaust his remedies to recover or reduce his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187) The loss is evidenced by a CLOSED and completed transaction. -There should be an identifiable event that fixes the loss. For instance, when a loss results from a sale, the consummation of the sale is the identifiable event that fixes the loss, and the deduction should be claimed in the year that the sale was consummated. A sale is consummated only when there is delivery. The loss is not claimed as a DEDUCTION for estate tax purposes. The loss must not be compensated by INSURANCE or other forms of indemnity. The loss must be connected with the taxpayers TRADE, business or profession. In the case of casualty loss, declaration of loss (Sworn DECLARATION of Loss) must be filed within 45 days from the occurrence of the casualty loss. (RR 12-77) Despite concurrence of requisites, when is loss nonetheless NOT deductible? --In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly [between related taxpayers (Sec. 36 (B) ] 1. Between members of a family - Family -includes brothers and sisters (whole and half-blood), spouse, ancestors, and lineal descendants
2.
3.
4. 5.
6.
Between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or Between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual; Between the grantor and a fiduciary of any trust; Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; Between a fiduciary of a trust and beneficiary of such trust.
CATEGORY AND TYPES OF LOSSES 1. Ordinary Losses 1. Incurred in trade or business, or practice of profession Net operating loss carry-over (NOLCO) [Sec. 34(D)(3)] The net operating loss2 of the business for any taxable year immediately preceding the current taxable year, which had not been
previously offset as deduction from gross income shall be carried over as
a deduction from gross income for the next three (3) consecutive taxable years3 immediately following the year of such loss.
REQUISITES: 1. Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction. 2. A net operating loss carry-over (NOLCO) shall be allowed only if
2
Net operating loss is the excess of allowable deductions over gross income (as defined in Sec. 32(A) of the NIRC). 3 Exception to the Three-Year Rule For mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years.
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business or enterprise. There is no substantial change when: a. 75% or more in nominal value of outstanding issued shares, if the business is in the name of the corporation, is held by or on behalf of the same persons; or b. 75% or more of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons. Applicability of the 75% interest rule o The 75% equity, ownership or interest rule shall only apply to a transfer or assignment of the taxpayer's net operating losses as a result of or arising from the said taxpayer's merger or consolidation or business combination with another person. In case the transfer or assignment of the taxpayer's net operating losses arises from the said taxpayer's merger, consolidation or combination with another person, the transferee or assignee shall NOT be entitled to claim the same as deduction from gross income UNLESS, as a result of the said merger, consolidation or combination, the shareholders of the transferor/assignor, or the transferor (in case of other business combinations) gains control of at least 75% or more in nominal value of the outstanding issued shares or paid up capital of the transferee/assignee (in case the transferee/assignee is a corporation) or 75% or more interest in the business of the transferee/assignee (in case the transferee/assignee is other than a corporation). (Sec. 2.4, RR 14-2001) o BIR Ruling 011-02, March 27, 2002 The 75% equity, ownership or interest rule does not apply in this case, since the transfer of the shares by the previous stockholders were through straight purchase and sale and not through
there has been NO SUBSTANTIAL CHANGE in the ownership of the
merger, consolidation or business combination, such transfer did not cause a substantial change in ownership. Time of Determination of Substantial Change in the Ownership of the Business the end of the taxable year when NOLCO is to be claimed as deduction (e.g., in the case of merger or consolidation of two or more corporations, such change shall be determined based on the ownership of the outstanding shares of stock issued or based on paid-up capital as of the end of the taxable year, and as a result of or arising from the said merger or consolidation). (Sec. 5, RR 14-2001) By or on Behalf of the Same
Persons
o
refers to the maintenance of ownership despite change as when:
No actual change in ownership is involved in case the transfer involves change from direct ownership to indirect ownership, or vice versa.
ILLUSTRATION: Facts: P Corporation owns Q Corporation that has NOLCO. P Corporation transfers Q Corporation's shares to R Corporation in exchange for 100% of R Corporation shares. Held: Q Corporation's NOLCO is retained because Q Corporation's shares are held "by" R Corporation "on behalf of" P Corporation, the original owner.
No actual change in ownership is involved as in the case of merger of the subsidiary into the parent company.
ILLUSTRATION: Facts: X Corporation owns 100% of Y Corporation. Y Corporation owns 100% of Z Corporation. Z Corporation has NOLCO. Z Corporation is merged into Y Corporation. Held: Z Corporation's NOLCO should be retained and transferred to Y Corporation. Prior to the merger, X Corporation already indirectly owned Z Corporation, i.e., Z Corporation's shares were held "by" Y Corporation "on behalf of" X Corporation. After the merger, X now directly owns
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Z Corporation [absorbed corporation] continues to exist in Y Corporation.
which 2.
Taxpayers Entitled to Deduct NOLCO from Gross Income. 1) Any individual (including estates and trusts) engaged in trade or business or in the exercise of his profession -Special Rule: An individual who claims the 10% optional standard deduction shall not simultaneously claim deduction of the NOLCO. Further, the three-year reglementary period shall continue to run notwithstanding the fact that the aforesaid individual availed of the 10% optional standard deduction during the said period. 2) Domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers and traders) or preferential tax rates under the Code (e.g., private educational institutions, hospitals, and regional operating headquarters) -Special Rule: Corporations cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any taxable The three-year year. reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation paid its income tax under the "Minimum Corporate Income Tax" computation. EXCEPTIONS (Who are not entitled to deduct NOLCO): (bob-pie) 1. Offshore Banking Unit (OBU) of a foreign banking corporation, and
3.
authorized as such by the Bangko Sentral ng Pilipinas (BSP); An enterprise registered with the Board of Investments (BOI) with respect to its BOI-registered activity enjoying the Income Tax Holiday incentive. Its accumulated net operating losses incurred or sustained during the period of such Income Tax Holiday shall not qualify for purposes of the NOLCO; An enterprise registered with the
Philippine Economic Zone Authority (PEZA), pursuant to R.A. No. 7916,
as amended, with respect to its PEZA-registered business activity. Its accumulated net operating losses incurred or sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO;
4.
Foreign
(FCDU) of a domestic or foreign banking corporation, duly
Currency
Deposit
Unit
enterprises, with respect to its registered business activity. Its accumulated net operating losses incurred or sustained during the period of its said registered operation shall not qualify for purposes of the NOLCO; 5. Foreign corporations engaged in international shipping or air carriage business in the Philippines; and 6. In general, any person, natural or juridical, enjoying exemption from income tax, pursuant to the provisions of the Code or any special law, with respect to its operation during the period for which the aforesaid exemption is applicable. Its accumulated net operating losses incurred or sustained during the said period shall not qualify for purposes of the NOLCO ILLUSTRATION OF NOLCO:
An enterprise registered under R.A. No. 7227, otherwise known as the Bases Conversion and Devt Act of e.g., SBMA-registered 1992,
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net operating loss of P220,000 (400,000 100,000 80,000) of the year 2000 could not be carried over beyond 2003. The net operating loss of 2002 could be carried over to 2004, since it is within the threeyear period. (* - whichever is applicable)
Explanation: The unused
(In Pesos)
Gross Income Less: Deductions Net Loss [OR] Net Income before NOLCO* Less: NOLCO From 2000 From 2002 Taxable Income
2000 500,000 900,000 (400,000)
2001 600,000 500,000
2002 700,000 750,000 (50,000)
2003 500,000 420,000
2004 800,000 450,000
extent
100,000
> (100,000)
0 0 0
>
Therefore, if there are no 80,000 350,000 wagering gains, wagering loss cannot be (80,000) deducted. [Wagering (50,000) gains and losses gains 0 300,000 and losses from transactions where the outcome depends upon chance.]
of wagering gains.
>
Q: As of yearend of 2004, what amount of NOLCO is available to the company for offsetting against (potential) gross income of succeeding taxable years? Answer: None. While there was an unused portion of the 2000 NOLCO, such had already expired by yearend of 2003. The 2002 NOLCO (P50,000) was completely used up in 2004. There is, therefore, no NOLCO available to the company for year 2005 and thereafter. 2. Capital losses (losses are deductible only to the extent of capital gains) a. Losses from sale or exchange of capital assets b. Losses resulting from securities becoming worthless and which are capital assets. c. Losses from short sales of property. d. Losses due to failure to exercise privilege or option to buy or sell property.
1. 2.
[Sec. 38] A loss from a wash sale of stock or securities is generally not deductible from gross income. A wash sale is a sale under the following circumstances: There was a sale or other disposition of stock or securities at a loss. Within a period beginning thirty days before, and ending thirty days after, the date of sale or disposition (known as the sixty-one day period), there was an acquisition of shares or securities (or option to acquire shares or securities).
Loss from Wash Sales of Stocks or Securities
i.e.:
Date of sale
---------------- x ---------------Acquisition occurred EITHER:

30 days PRIOR to the sale OR 30 days AFTER the sale
3. Other Types of losses Recognized by the Tax Code Shrinkage in Value of Stocks (Sec. 99, RR-2) no loss can be deducted from a mere shrinkage in value of such stock through fluctuation of the market. The loss allowable in such case is that actually suffered when the stock is disposed of. If stock of a corporation becomes worthless, its cost or other basis determined in accordance with Revenue Regulation 2-98 may be deducted by the owner in the taxable year in which the stock became worthless, provided a
3. 4. 5.
satisfactory showing of its worthlessness be made, as in the case of bad debts.
Wagering
Losses [Sec. 34 (D)(6)] Wagering losses are deductible only to the
The acquisition, or option, should be a purchase or exchange upon which gain or loss is recognized under the income tax law. The stock or securities acquired were substantially the same as those disposed of. The taxpayer is NOT a dealer in securities. INCOME TAX RULE: On the shares sold at a loss with covering acquisitions, NO LOSS shall be recognized. On the shares sold at a loss with no covering acquisitions, CAPITAL LOSS shall be recognized (See XIII. Capital Gains and Losses, for the income tax treatment). The loss not recognized shall be adjusted into (i.e., added to) the basis of the shares acquired within the sixtyone day period.
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ILLUSTRATION: S Co., not a dealer in securities, on December 27, 2000, sold for P90,000, 1,000 shares of common stock of ZZ Company, that it acquired on January 20, 2000 for P110,000. On January 5, 2001, or nine days after the sale, it acquired 900 shares of common stock of the same company for P90,000. On June 10, 2001, the latest acquisition was sold for P120,000. INCOME TAX IMPLICATIONS: There would have been a loss not recognized of P18,000 on the sale of December 27, 2000. There would have been a gain of P12,000 on the sale of June 10, 2001.
Selling Price Less: Adjusted Basis Gain on the Sale
P120,000 108,000 12,000
What if the taxpayer is a dealer in securities, and the transaction from which the loss resulted, was made in the ordinary course of the business of such dealer? The loss is deductible in full.
Abandonment Losses [Sec. 34(D)(7)]

In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, ALL accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: o Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. o In all cases, notices of abandonment shall be filed with the Commissioner. In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: o Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.
SUPPORTING SOLUTION:
a.
Determine if the sale is a wash sale YES, because nine days after the December 27, 2000 sale (or within the sixty-one day period), S. Co. (which is not a dealer in securities) acquired shares of stock which were the same as those disposed of. Computation of loss not recognized
b.
Acquisition Cost Less: Selling Price Total Loss No. of shares sold at a loss Less: Number of shares acquired within the 61-day period No. of shares acquired with no
P110,000 90,000 P 20,000 1,000 900 100
matching acquisition
Loss on a wash sale, recognized (900/1,000 * 20,000) Capital Loss recognized (100/1,000 * 20,000) c.
not P18,000 P2,000
Computation of basis of the shares acquired on January 5, 2001 (i.e., adjusted cost). P 90,000 18,000
Acquisition Cost Loss not Add: recognized Basis of the shares acquired on January 5, 2001 d.
P108,000
Computation of the gain on the sale of June 10, 2001
Plaridel Security v. Com 21 SCRA 1187 FACT: Plaridel Surety Insurance, as surety, and San Jose as principal, executed a performance bond in the penal sum of P30,600 in favor of P.L. Galang Machinery Co., Inc. to secure the principal contractual obligation to produce and supply logs to the latter. The agreement was backed by an indemnity agreement with San Jose and Cuervo, both of them constituting mortgages as security. San Jose failed to deliver the logs. HELD: The rule is that loss deduction will be denied if there is a measure right to compensate for the loss, with the ultimate collection reasonably clear. So where there is reasonable ground for reimbursement,
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the tax payer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. Taxpayer must first exhaust his remedies to recover or reduce his loss. Since Plaridel has not exhausted all his remedies (the mortgages), then it was too premature for Plaridel to claim a loss deduction. Com. V. Priscilla Estate 11 SCRA 130 FACTS: Priscilla Estate Inc. ,a domestic corporation in the business of leasing real estate, filed its income tax returns for the years 1949, 1950 and 1951. On September 1952, it claimed a refund of P4,941 for overpaid income tax for the year 1950. According to Priscilla Estate, it failed to deduct the amount of P39,673.25 as its loss in the sale of a lot and building and instead deducted only P6,013.85, causing the overpayment. The claimed deduction represents the value of a building, which it had to demolish in 1949. HELD:The costs of the demolished building should be deducted from the gross income as loss. It was not the corporations intention to demolish the old building for the purpose of building a new one. The tax court found that the removal of the building (a barong-barong) was forced upon the corporation by the city engineer because the structure was a fire hazard. The removal was thus involuntary. It was likewise found that the rental of the old building was P3730/mo and the corporation had to borrow money in order to construct a new building. Since the demolished building was not compensated for by insurance, its loss should be charged as a deduction Fernandez Hermanos v. Com 29 SCRA 552 FACTS: Fernandez Hermanos, Inc., (FHI) is a domestic corporation engaged in the business as an investement company. CIR assessed additional income taxes for the year 1951 till 1954 as discrepancy arising from losses and depreciation. According to CIR the declared losses, which included shares of stocks of Mati Lumber Co. (which had closed), cash advances to Palawan Manganese Mines (which continued to suffer losses), and losses in the operation of Hacienda Dalupiri and Hacienda Samal (which according to CIR was operated for pleasure), should be disallowed. HELD: SC sustains the findings of CTA. As to the shares of stock of Mati Lumber Co., there was adequate basis for the writing off the stocks as worthless securities. Assuming that the company would later realize some proceeds its saw mill and equipment, which was still existing according to CIR, and such proceeds would later be distributed to its stockholders, the amount so received would then be properly be reported as income of the taxpayer in the year it was received.
As to the cash advances made to the Palawan Manganese Mining, the agreement provided that FHI as consideration would get 15% of the net profit of the former, hence when there was no earnings or profit, there was no obligation to repay the advances. It has been held that voluntary advances made without expectation of repayment do not result in deductible losses. Even assuming that there was a valid and subsisting debt, it has been held that if the debtor corporation, although losing money or insolvent was still operating at the end of the taxable year, the debt is not considered worthless and therefore not deductible. The advances made are investment s and not loan. As to the haciendas, the Tax Court found that it was operated for business, and hence entitled to deduct expenses and losses in connection with the operation of the said farm. Its income or losses in the operation was based on inventories. Bad Debts Sec. 34 (E), Secs. 102-103 RR2, RR 252002; RR 5-99 Definition Requisites for deductibility
SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;xxx (E) Bad Debts. (1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines 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 day of such taxable year, of capital assets.
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RR2 SECTION 102. Bad debts. Where all the surrounding circumstances indicate that a debt is worthless, and the debt is charged off on the books of the taxpayer within the year, the same may be allowed as a deduction in computing net income. There should accompany the return a statement showing the propriety of any deduction claimed for bad debts. Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate, with a reasonable degree of certainty, the uncollectibility of the debt. Any amount subsequently received on account of a bad debt previously charged off and allowed as a deduction for income tax purposes, must he included in gross income for the taxable year in which received. In determining whether a debt is worthless the Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor. Where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all proability not result in the satisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. Bankruptcy is generally an indication of the worthlessness of at least a part of an unsecured and unpreferred debt. Actual determination of worthlessness in bankruptcy is sometimes possible before and at other times only when a settlement in bankruptcy shall have been had. Where a taxpayer ascertained a debt to be worthless and charged it off in one year, the mere fact that bankruptcy proceedings instituted against the debtor are terminated in a later year, confirming the conclusion that the debt is worthless, will not authorize shifting the deduction to such later year. If a taxpayer computes his income upon the basis of valuing his notes or accounts receivable at their fair market value when received, which may be less than their face value, the amount deductible for bad debts in any case is limited to such original valuation. SECTION 103. Examples of bad debts. Worthless debts arising from unpaid wages, salaries, rents, and similar items of taxable income will not be allowed as a deduction unless the income such items represent has been included in the return of income for the year in which the deduction as a bad debt is sought to be made or in a previous year. Only the difference between the amount received in distribution of the assets of a bankrupt and the amount of the claim may be deducted as a bad debt. The difference between the amount received by a creditor of a decedent in distribution of the assets of the decedent's estate and the amount of his claim may be
considered a worthless debt. A purchaser of accounts receivable which can not be collected and are consequently charged off the hooks as bad debt is entitled to deduct them, the amount of deduction to be based upon the price he paid for them and not upon their face value. Where under foreclosure of a mortgage, the mortgagee buys the mortgaged property and credits the indebtedness with the purchase price, the difference between the purchase price and the indebtedness will not be allowable as a deduction for a bad debt, for the property which was security for the debt stands in the place of the debt. The determination of loss in such case is deferred until the disposal of the property. March 10, 1999 REVENUE REGULATIONS amended by RR 25-02
NO.
05-99,
as
SUBJECT : Implementing Section 34(E) of the Tax Code of 1997 on the Requirements for Deductibility of Bad Debts from Gross Income TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to the provisions of Section 244 of the Tax Code of 1997, these regulations are hereby promulgated to implement the provisions of Section 34(E) of the same Code on the requirements for deductibility of bad debts from the gross income of a corporation or an individual engaged in trade or business or a professional engaged in the practice of his profession. SECTION 2. Definition of Terms. For purposes of these regulations, the following words and phrases shall have the following meaning, viz: 1. "Bad debts" shall refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. 2. "Securities" shall mean shares of stock in a corporation and rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form. 3. "Actually ascertained to be worthless" In general, a debt is not worthless simply because it is of doubtful value or difficult to collect. Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The determination of worthlessness in a given
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case must depend upon the particular facts and the circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of a mere hope of ultimate collection or because of a continuance of attempts to collect notes which have long become overdue, and where there is no showing that the surrounding circumstances differ from those relating to other notes which were charged off in a prior year. While a mere hope probably will not justify postponement of the deduction, a reasonable possibility of recovery will permit the account to be carried along notwithstanding that the probabilities are that the debt may not be collected at all. The creditor may offer evidence to show some expectation that the debt would have been paid in the intervening years, and that subsequently, the hope was shattered or appeared to have been unfounded. If, for example, the creditor could show that during the years he attempted to collect the debt, the debtor had property the title of which was in dispute but which would enable him to pay his debts when the title was cleared, the creditor would be entitled to defer the deduction on the ground that there was no genuine ascertainment of worthlessness. Thus, accounts receivable, the amount whereof is insignificant and the collection of which through court action may be more costly to the taxpayer, may be written-off as bad debts even without conclusive evidence that the taxpayer's receivable from a debtor has definitely become worthless. Good faith does not require that the taxpayer be an "incorrigible optimist" but on the other hand, he may not be unduly pessimistic. Creditors do not have to wait until some turn of the wheel of fortune may bring their debtors into affluence. The taxpayer may strike a middle course between pessimism and optimism and determine debts to be worthless in the exercise of sound business judgment based upon as complete information as is reasonably ascertainable. The taxpayer need not have perfect discernment. 4. Actually charged off from the taxpayers books of accounts" This phrase means that the amount of money lent by the taxpayer (in the course of his business, trade or profession) to his debtor had been recorded in his books of account as a receivable has actually become worthless as of the end of the taxable year, that the said receivable has been cancelled and written-off from the said taxpayer's books of account. A mere recording in the taxpayer's books of account of estimated uncollectible accounts does not constitute a write-off of the said receivable, hence, shall not be a valid basis for its deduction as a bad debt expense. In no
case may any bad debt deduction be allowed unless the facts pertaining to the money or property lent and its cancellation or write-off from the taxpayer's accounting records, after having been determined that the same has actually become worthless, have been complied with by the taxpayer. SECTION 3. Requisites for valid deduction of bad debts from gross income. The requisites for deductibility of bad debts are: (1) There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; (2) The same must be connected with the taxpayer's trade, business or practice of profession; (3) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; (4) The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and (5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate with reasonable degree of certainty the uncollectibility of the debt. The Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor in determining whether a debt is worthless, or the assigning of the case for collection to an independent collection lawyer who is not under the employ of the taxpayer and who shall report on the legal obstacle and the virtual impossibility of collecting the same from the debtor and who shall issue a statement under oath showing the propriety of the deductions thereon made for alleged bad debts. Thus, where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. In the case of banks, the Commissioner of Internal Revenue shall determine whether or not bad debts are worthless and uncollectible in the manner provided in the immediately preceding paragraph. Without prejudice to the Commissioner's determination of the worthlessness and uncollectibility of debts, the taxpayer shall submit a Bangko Sentral ng Pilipinas/Monetary Board written approval of the writing off of the indebtedness from the banks' books of accounts at the end of the taxable year.
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Also, in no case may a receivable from an insurance or surety company be written-off from the taxpayer's books and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for any such similar reason by the Insurance Commissioner. (As amended by RR 25-02) SECTION 4. Tax Benefit Rule. The recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer's gross income in the year of such recovery to the extent of the income tax benefit of said deduction. Example: If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income. SECTION 5. Securities Becoming Worthless. If securities, as defined under Sec. 2(b) hereof, held as capital asset, are ascertained to be worthless and charged off within the taxable year, the loss resulting therefrom shall be considered as a loss from the sale or exchange of capital asset made on the last day of such taxable year. The taxpayer, however, has to prove through clear and convincing evidence that the securities are in fact worthless. This rule, however, is not true in the case of banks or trust companies incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits. SECTION 6. Repealing Clause. The provision of any revenue regulations, revenue memorandum order, revenue memorandum circular or any other revenue issuances inconsistent with these Regulations are hereby repealed, amended, or modified accordingly. SECTION 7. Effectivity Clause. These Regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation. (SGD.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (SGD.)BEETHOVEN L. RUALO Commissioner of Internal Revenue
BAD DEBTS- debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec. 2, RR 5-99 as amended by RR 25-2002) -Deduction Allowed: Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year REQUISITES FOR DEDUCTIBILITY 1. Existing indebtedness due to the taxpayer which must be valid and legally demandable; 2. Connected with the taxpayer's trade, business or practice of profession; 3. Must not be sustained in a transaction entered into between related parties; 4. Actually ascertained to be worthless and uncollectible as of the end of the taxable year.; and 5. Actually charged off in the books of accounts of the taxpayer as of the end of the taxable year. EQUITABLE DOCTRINE OF TAX BENEFIT A recovery of bad debts previously deducted from gross income constitutes taxable income if in the year the account was written off, the deduction resulted in a tax benefit. (Tax Benefit Rule)
Illustration:
Case A Net income (loss) before write off for bad debts P10,000 Less: Accounts written off as bad debts Final Net Income (Loss) Bad debts recovery in a subsequent year TAXABLE INCOME upon the bad debt recovery (P 9,000) P 5,000 Case B Case C
3,000 P 7,000
2,000 (P11,000)
6,000 (P1,000)
3,000
2, 000
6, 000
P3,000
-0-
P5,000
ASCERTAINMENT OF WORTHLESSNESS Proof of Two Facts:
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1.
2.

taxpayer did in fact ascertain the debt to be worthless, in the year for which deduction is sought, that in so doing, he acted in good faith.
Depends upon the particular facts and the circumstances of the case. Good faith does not require that the taxpayer be an incorrigible optimist but on the other hand, he may not be unduly pessimistic.
(Collector vs. Goodrich International Rubber, GR No. L-22265, Dec. 22, 1967)
2.
EXCEPTIONS: The following are not deductible as bad debts: 1. debts not connected with profession, trade or business 2. debts sustained in a transaction entered into between family members or related taxpayers. DETERMINING UNCOLLECTIBILITY Before a taxpayer may charge off and deduct a debt, he must ascertain and must be able to demonstrate with reasonable degree of certainty the uncollectibility of the debt. The Commissioner of Internal Revenue will consider ALL PERTINENT EVIDENCE, including the value of the collateral, if any, securing the debt and the financial condition of the debtor in determining whether a debt is worthless, or the assigning of the case for collection to an independent collection lawyer who is not under the employ of the taxpayer and who shall issue a statement under oath showing the propriety of the deductions thereon made for alleged bad debts. (Sec. 3, RR 5-99 as amended by RR 25-2002) Other factors The flight or disappearance of the debtor, the insolvency of the debtor, or the death of the debtor with insufficient properties to pay creditors, may indicate worthlessness of the debt. GENERAL RULE: The determination by the Commissioner of Internal Revenue as to the worthlessness of bad debt is adequate. o EXCEPTIONS: Who are required to submit additional documents or to secure approval from their regulatory agencies before they are allowed to deduct bad debts from gross income? 1. Banks: Without prejudice to the Commissioners determination of the worthlessness and uncollectibility of debts, the taxpayer shall submit a
closed due to insolvency or for any such similar reason by the Insurance Commissioner.
banks' books of accounts at the end of the taxable year. Requirements for deductibility (RR 5-99) o Bad debts uncollected for 6 months o Resolution by the BOD of the bank o Approval by the monetary board In no case may a receivable from an insurance or surety company be written-off from the taxpayer's books and claimed as bad debts deduction unless such company has been declared
Monetary Board written approval of the writing off of the indebtedness from the
Bangko Sentral ng Pilipinas (BSP) /
Collector v. Goodrich 21 SCRA 1336 FACTS: The Government Appealed from the decision of the Court of Tax Appeals which set aside the assessment made by the Commissioner of Internal Revenue. The Court of Tax Appeals allowed the deduction for bad debts, but disallowed the alleged representation expenses. According to the Commissioner of Internal Revenue, his assessments were based on disallowed deductions, claimed by Goodrich, consisting of several alleged bad debts for the year 1951, and the as representation expenses allegedly incurred in the year 1952. On the other hand, the claim for deduction of Goodrich is based on receipts it issued and not by the entities in which the alleged expenses had been incurred. HELD: Claim for deduction should not be allowed. should . If the expenses had really been incurred, receipts or chits would have been issued by the entities to which the payments had been made, and it would have been easy for Goodrich or its officers to produce such receipts. Those issued by said officers merely attest to their claim that they had incurred and paid said expenses. They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurred. The Court of Tax Appeals erred, therefore, in allowing the deduction thereof. ISSUE: Whether or not the Court of Tax Appeals erred in deducting as bad debts for the year 1951. HELD: The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthless, in the year for which the deduction is sought; and (2) that, in so doing, he acted in good faith.
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Good faith on the part of the taxpayer is not enough. He must show, also, that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. 2 Respondent herein has not adequately made such showing. Fernandez Hermanos v. Com 29 SCRA 551 FACTS: Fernandez Hermanos, Inc., (FHI) is a domestic corporation engaged in the business as an investment company. CIR assessed additional income taxes for the year 1951 till 1954 as discrepancy arising from losses and depreciation. According to CIR, the depreciation the reasonable depreciation rate is only 3% per annum, not the 10% depreciation allowance used by FHI for its building. HELD: The Tax Court found that FHI did not submit adequate proof of the correctness of the taxpayers claim that the depreciable assets or buildings in question had a useful life of only 10 years as to justify the 10% rate. PRC v. CA, GR No. 118794 FACTS: PRC was assessed by respondent CIR to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00 based on alleged findings of erroneous deductions in the form of bad debts and interest expenses. As such, these accounts were added back to the companys gross income and PRC was taxed accordingly. PRC protested the assessment, saying that the subject bad debts and interest expenses were allowable deductions. However, the CIR issued an order of garnishment of PRCs deposits with City Trust Bank. PRC filed a petition for review with the CTA, which set aside the findings of the Commissioner regarding the interest expense but held that thirteen (13) out of the sixteen (16) bad debts were indeed erroneously deducted by PRC. The companys appeal with the CA was denied. HELD: CA Affirmed. Only 3 of the 16 accounts met the REQUIREMENTS of WORTHLESSNESS. The Court of Appeals relied on the ruling of this Court in Collector vs. Goodrich International Rubber Co., which established the rule in determining the "worthlessness of a debt." For debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. The case enumerates the excuses propounded by PRCs Financial Manager as to why the debts were uncollectible (ie. The debtors store caught fire, the owner of the company was murdered, etc.), all of which, however, were not supported by any documentary evidence. Hence both the Court of Appeals and the CTA ruled that said contentions per se cannot prove that the debts were indeed uncollectible and can be considered as bad debts as to make them deductible. Depreciation Sec. 34 (F), Sec. 110-115 RR2 Definition Requisites for deductibility Computation/straight line method
SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;xxx (F) Depreciation. (1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. (2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: (a) The straight-line method;
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(b) Declining-balance 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 Subsection (F) (1); (c) The sum-of-the-years-digit method; and (d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. (3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement: Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. (4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or decliningbalance method of depreciation at the option of the service contractor. However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line method. The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. Properties not used directly in the production of petroleum shall be depreciated under the straightline method on the basis of an estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows: (a) At the normal rate of depreciation if the expected life is ten (10) years or less; or (b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used. (6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines. RR2 SECTION 110. Obsolescence. With respect to physical property the whole or any portion of which is clearly shown by the taxpayer as being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life, so that depreciation deductions alone are insufficient to return the cost (or other basis) at the end of its economic term of usefulness, a reasonable deduction for obsolescence, in addition to depreciation, may be allowed in accordance with the facts obtaining with respect to each item of property concerning which a claim for obsolescence is made. No deductions for obsolescence will be permitted merely because, in the opinion of a taxpayer, the property may become obsolete at some later date. This allowance will be confined to such portion of the property on which obsolescence is definitely shown to be sustained and can not be held applicable to an entire property unless all portions thereof are affected by the conditions to which obsolescence is found to be due. SECTION 111. Depreciation of patent or copyright. In computing depreciation allowance in the case of a patent or copyright, the capital sum to be replaced is the cost or other basis of the patent or copyright. The allowance should be computed by an apportionment of the cost or other basis of the patent or copyright over the life of the patent or copyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913, as the case may be. If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, cost of
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drawings, experimental models, attorney's fees, development or experimental expenses, etc., actually paid. Deprecation of a patent can be taken on the basis of the fair market value as of March 1, 1913, only when affirmative and satisfactory evidence of such value is offered. Such evidence should whenever practicable be submitted with the return. If the patent becomes obsolete prior to its expiration, such proportion of the amount on which its depreciation may be based as the number of years of its remaining life bears to the whole number of years intervening between the basic date when it legally expires may be deducted, if permission to do so is specifically secured from the Commissioner of Internal Revenue. Owing to the difficulty of allocating to a particular year the obsolescence of a patent, such permission will be granted only if affirmative and satisfactory evidence that the patent became obsolete in the year for which the return is made is submitted to the Commissioner of Internal Revenue. The fact that depreciation has not been taken in prior years does not entitle the taxpayer to deduct in any taxable year a greater amount for depreciation than would otherwise be allowable. SECTION 112. Depreciation of drawings and models. Where a taxpayer has incurred expenditures in his business for designs, drawings, patterns, models, or work of an experimental nature calculated to result in improvement of his facilities or his product, if the period of usefulness of any such asset may be estimated from experience with reasonable accuracy, it may be the subject of depreciation allowances spread over such estimated period of usefulness. The facts must be fully shown in the return or prior thereto to the satisfaction of the Commissioner of Internal Revenue. Except for such depreciation allowances no deduction shall be made by the taxpayer against any sum so set up as an asset except on the sale or other disposition of such asset at a loss or on proof of a total loss thereof. SECTION 113. Charging off depreciation. A depreciation allowance, in order to constitute an allowable deduction from gross income, must be charged off. The particular manner in which it shall be charged off is not material, except that the amount measuring a reasonable allowance for depreciation must be either deducted directly from the book value of the assets or preferably credited to a depreciation reserve account, which must be reflected in the annual balance sheet. The allowances should be computed and charged off with express reference to specific items, units, or groups of property, each item or unit being considered separately or specifically included in a group with others to which the same factors apply. The taxpayer should keep such records to each item or unit of depreciable property as will permit the ready verification of the factors used in
computing the allowance for each year for each item, unit, or group. SECTION 114. Depreciation in the case of farmers. A reasonable allowance for depreciation may be claimed on farm buildings (other than a dwelling occupied by the owner), farm machinery, and other physical property. A reasonable allowance for depreciation may also be claimed on live stock acquired for work, breeding, or dairy purposes, unless they are included in an inventory used to determine profits in accordance with these regulations. Such depreciation should be based on the cost or other basis and the estimated life of the live stock. If such live stock be included in an inventory no depreciation thereof will be allowed, as the corresponding reduction in their value will be reflected in the inventory. SECTION 115. Statement to be attached to return. To each return in which depreciation charges are claimed, there should be attached a statement showing the item, unit, or group of depreciable property, the cost price or its market value as of March 1, 1913, if acquired prior to that date, the rate of charge, amount previously deducted, and the amount claimed in the return. These data must agree with those appearing in the books of the taxpayer. (Section 30(g) of the Code) DEPRECIATION is the gradual diminution of the useful value of tangible property resulting from wear and tear and normal obsolescence. The term is also applied to amortization of the value of intangible assets (i.e., patents), the use of which in the trade or business is definitely limited in duration. REQUISITES FOR DEDUCTIBILITY 1. The allowance for depreciation must be for property used in the TRADE or business, or those not being used temporarily during the year (Conwell Bros. Co. v. Collector, CTA Case No. 411). 2. The asset must have a limited USEFUL life. 3. The allowance for depreciation must be REASONABLE. 4. The allowance must be CHARGED off during the taxable year from the taxpayers books of accounts. 5. The total allowances must not EXCEED the cost of the property. If the property is used in business and for personal purposes, the depreciation expense must be pro-rated; only the portion attributable to business use is deductible. e.g., the car of the petitioner was used more for business than for personal purposes. He was a law practitioner, a law professor and engaged in business. He
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had only one car. Consequently, of the value of the depreciation of the car may be considered as business related, while thereof represents non-deductible personal expense. (Jamir v. Collector, CTA Case No. 443, November 28, 1959) sustains an economic loss from the decrease in property value due to depreciation gets the deduction. Ordinarily, this is the person who owns and has a capital investment in the property. depreciation starts when the asset is placed in service. It ends when the asset is disposed of, or its usefulness exhausted.
1.
Straight-line method
Methods and Rates of Depreciation The depreciation expense deductible in each of the years of the propertys estimated useful life is constant.
= Cost Salvage Value__ Estimated Useful Life of the Property
Who may take depreciation: The person who
Formula: Deduction for Depreciation
NOTE: (Cost Salvage Value) is known as the depreciable cost. Alternative Method: Depreciation = Rate 1 __ Estimated Useful Life of the Property
When to deduct depreciation: The period of
What is the appropriate useful life of the property? What rate of depreciation must be applied?
o o
Deduction for = Depreciation x (Cost Salvage Value) Depreciation Rate
Generally, the estimated useful life is determined by the taxpayer himself. HOWEVER, where the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and
ILLUSTRATION: H Co. acquired a machine at a cost of P380,000. It has no scrap (or salvage) value, and the useful life is estimated at 25 years. The depreciation expense per year is P15,000, computed as follows:
Depreciation Expense = = [(380,000 0) / 25] [OR] (1/25) x (380,000 0)
circumstances not taken into consideration during the adoption of such agreement.
o
2.
such change to the other party to the agreement. Exception: Where the taxpayer has adopted such useful life and depreciation rate for any depreciable property and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the depreciable asset.
prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating
General Rule: Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years
Declining-balance method, using a rate not exceeding twice the rate for straight line method Under this method, the depreciation allowance per year varies. Depreciation
is largest in the first year and continually decreases towards the end of the useful life of the property. The depreciation rate under the straight-line method is first computed, and the result is multiplied with the rate relative to the straight-line method rate. The product (the declining balance rate) is then multiplied to the yearly declining balance of the property (i.e., book value of the property at the start of the current year, which is equal to its original cost minus its accumulated depreciation) to determine the deduction for depreciation for the current year. However, in the last year of the assets estimated life, the depreciation is equal to the book value of the property at the start of that year (i.e., the amount of depreciation must be just enough to reduce the propertys book value to zero). Note that the salvage value is ignored in the declining balance method.
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ILLUSTRATION: P Company acquired a machine on January 1, 2002 at a cost of P400,000. It had a scrap value of P50,000, and a useful life of 4 years. The company uses the declining balance method, at a rate of one and a half that of the straight line method. Determine the depreciation chargeable in years 2002, 2003, 2004 and 2005. Step 1: Compute for the depreciation rate under the straight-line method.
Straight Line = 1 __ Depreciation Rate Estimated Useful Life = , or 25%
Year 2002 P150,000 Year 2003 P93,750 243,750 Book Value of the Property, start of current year Multiplied by: DBR Deduction for Depreciation P 156,250 37.5% P58,593.75
Step 2: Compute for the Declining Balance Rate (DBR).

Declining = Straight Line Rate Relative to Balance Rate Depreciation Rate x the Straight Line Depreciation Rate = = x 1.5 37.5%
Step 3: Apply the Declining Balance Rate to the book value of the property at the start of the current year.
Original Cost Less: Accumulated Depreciation Year 2002 P150,000 Year 2003 P93,750 Year 2004 P58,593.75 Book Value of the Property, start of current year Deduction for Depreciation ***
Year 2005:
400,000
302,343.75
P 97,656.25
P97,656.25
Year 2002:
Book value of the property *** Multiplied by: DBR Deduction for Depreciation
P400,000 37.5% P150,000
*** The deduction for depreciation in 2005 is equal to the book value of the property at the start of the year because the machine had a useful life of 4 years, which ended in 2005.
3. Sum-of-the-years-digit method
*** Since this is the year of the acquisition, the book value of the property at the start of the year is equal to its original cost.
Year 2003:
Original Cost Less: Accumulated Depreciation Book Value of the Property, start of current year Multiplied by: DBR Deduction for Depreciation
400,000 150,000
Under this method, the annual depreciation is computed by applying a changing fraction to the depreciable cost of the property (original cost reduced by the salvage value). In the fraction, the numerator is the number of remaining years of the estimated useful life of the property and the denominator is the sum of the numbers representing the years of the propertys life.
P P
250,000 37.5% 93,750
ILLUSTRATION: On January 1, 2001, J Company acquired a machine at a cost of P105,000. It had a salvage value of P5,000, and an estimated useful life of 5 years. The company uses the sum-of-the-years method in determining depreciation. Determine the depreciation chargeable in years 2001, 2002, 2003, 2004 and 2005. Step 1: Compute for the sum of the numbers representing the years of the propertys life.
Original Cost Less: Accumulated Depreciation
Year 2004:
P 400,000
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The property has an estimated useful life of 5 years. The sum, therefore, is 15 (5 + 4 + 3 + 2 + 1). This sum will be used as the denominator in the fraction. Step 2: Compute for the depreciable cost of the property. The depreciable cost is P100,000 (P105,000 P5,000). Step 3: Compute for the yearly deduction for depreciation (Column D).
life if the latter is more than ten (10) years, and the depreciation thereon
allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed will be used.
A Year
2001 2002 2003 2004 2005
g Point: Start of the Year) 5 4 3 2 1
Remaining Resultin Useful Life g (Reckonin Fraction
(A/15)
Depreciable Deduction Cost for Depreciatio n

P105,000 P105,000 P105,000 P105,000 P105,000 P35,000 P28,000 P21,000 P14,000 P7,000
(= B x C)
DEPRECIATION DEDUCTIBLE BY NONRESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS (NRAETB) OR RESIDENT FOREIGN CORPORATIONS (RFC) -A reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business, trade or profession shall be permitted only when such property is located in the Philippines. Basilan v. Com 21 SCRA 17 FACTS: Basilan Estates, Inc. a Philippine corporation engaged in the coconut industry filed its ITR for 1953 and paid an income tax of P8,028. On February 26, 1959, the CIR assessed Basilan a deficiency income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to section 25 of the Tax Code Notice was served the corporation that the warrant of distraint and levy would be executed Basilan filed before the CTA a petition for review of the CIRs assessment. Basilan is claiming deductions for the depreciation of its assets up to 1949 on the basis of their acquisition cost. As of January 1950, it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement. So that it deducted from gross income the value of depreciation computed on the reappraised value. HELD: Depreciation should be determined based on acquisition cost. Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescence. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired so that at the end of any given term of years; the original investment remains as it was in the beginning. The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot
5/15 4/15 3/15 2/15 1/15
4.
Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner
SPECIAL RULES: Depreciation of Properties Used in Petroleum Operations o Depreciation of all properties directly related to production of petroleum shall be allowed under straight-line (SL) or declining balance (DB) method o May shift from DB to SL method o Useful life: 10 years or shorter life as allowed by the Commissioner o Useful life of property not directly related to production: 5 years under straight line method o DEPRECIATION OF PROPERTIES USED IN MINING OPERATIONS -An allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows: At the normal rate of depreciation if the expected life is ten (10) years or less; or Depreciated over any number of years between five (5) years and the expected
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be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law. Limpan v. Commissioner 17 SCRA 703 FACTS: Limpan Corporation is engaged in the business of leasing real properties, since 7/1/55. Its principal stockholders are Isabelo Lim (also the president and chairman of the board) and Purificacion who own and control 99% of its total paid-up capital. The corporation filed its 1956 and 1957 Income Tax Returns (ITR) for which it paid the corresponding taxes. BIR investigated such ITRs and discovered that the corporation had undeclared its rental incomes by and claimed excessive depreciation of its buildings. According to BIR, the rates of depreciation applied by BIR to its buildings are unfair and inaccurate. According to Limpan Corp, some of its buildings are old and out of style, hence they are entitled to higher rates of depreciation than those adopted by BIR. HELD: Depreciation is a question of fact and is not measured by theoretical yardstick but should be determined by a consideration of actual facts. The findings of the Tax Court should not be disturbed when not shown to be arbitrary or in abuse of discretion. The Tax Court applied rates of depreciation in accordance with Bulletin F of the US Federal Internal Revenue Service which has strong persuasive effect in this jurisdiction for having been the result of scientific studies and observation for a long period in the US, after whose Income Tax Laws ours is patterned. Depletion Sec. 34 (g), Sec. 3 RR 5-76 Definition Requisites for deductibility
equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. Intangible costs in petroleum operations' refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection. Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. (2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. 'Net income from mining operations', as used in this Subsection, shall mean gross income from operations less 'allowable deductions' which are necessary or related to mining operations. 'Allowable deductions' shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation.
SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;xxx (G) Depletion of Oil and Gas Wells and Mines. (1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the costdepletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the allowance for depletion shall
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In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas. The term 'exploration expenditures' means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit. The term 'development expenditures' 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 quantity and quality and shall end upon commencement of actual commercial extraction. (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. - In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines. DEPLETION is the exhaustion of natural resources due to production. It is the reduction of cost or value of natural resources such as oil and gas wells and mines as the resources are converted into inventories.
resources from the land in 2005 was 500,000 tons, how much was the deduction for the year? Purchase Price Less: Residual Value of the Land Depletion Base Divided by: Estimated Resource Supply, in tons Depletion Base per ton Multiplied by: Withdrawal of Resources in 2005, in tons Depletion Expense, 2005 P100,900,000 900,000 P100,000,000 5,000,000 P20 500,000 P 10,000,000
Allowable Deduction for a Nonresident Alien individual Engaged in Trade or Business or a Resident Foreign Corporation Allowance for depletion of oil and gas
wells or mines shall be authorized only in respect to oil and gas wells or mines located within the Philippines. Charitable and Other Contributions Sec. 34 (H), RMC No. 88-07 Kinds Requisites for deductibility Limitations
Limitation: A reasonable allowance for depletion computed using the cost-depletion method shall be granted provided that the allowance for depletion shall not exceed the capital invested.
To Whom Allowed Only mining entities owning economic interest in mineral deposits. Economic interest means interest in minerals in place investment therein or secured by operating or contract agreement for which income is derived, and return of capital expected, from the extraction of mineral. Mere economic or pecuniary advantage to be derived by production by one who has no capital investment in the mineral deposit does not amount to economic interest. ILLUSTRATION: Land containing natural resources was purchased for P100,900,000. It was estimated that the land, after exploitation of its natural resources, will have a value of P900,000. It was estimated that the natural resource supply was 5,000,000 tons. If withdrawal of
SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; xxx (H) Charitable and Other Contributions. - (1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs.
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(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full; (a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fullyowned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection; (b) Donations to Certain Foreign Institutions or International Organizations. - donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; (c) Donations to Accredited Nongovernment Organizations. - the term 'nongovernment organization' means a non profit domestic corporation: (1) Organized and operated exclusively for scientific, research, educational, characterbuilding and youth 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 any private individual; (2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; (3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and (4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. (3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. December 07, 2007 REVENUE MEMORANDUM CIRCULAR NO. 88 2007 SUBJECT: Publishing the Full Text of Executive Order No. 671 dated October 22, 2007, Designating Entities that will Certify and Accredit Charitable Organization as Donee-Institutions Relative to the Deductibility of the Tax Reform Act Of 1997.
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T O : All Internal Revenue Officials, Employees and Others Concerned: Section 1. Accrediting Entity The following Departments are hereby designated Accrediting Entities to determine the qualification of non-stock, non-profit corporations, non-governmental organizations, associations, and foundations for accreditation as qualified donee institutions to wit: a. Department of Social Welfare and Development for charitable and/or social welfare organizations, foundations and associations including but not limited to those engaged in youth, child, women, family, disabled persons, older persons, welfare and development; c. Department of Science and Technology for organizations, associations and foundations primarily engaged in research and other Scientific activities; d. Philippine Sports Commission for organizations, foundations and associations primarily engaged in sports development; e. National Council for Culture and Arts - for organizations, foundations and associations primarily engaged in cultural activities; f. Commission on Higher Education for organizations, foundations and association primarily engaged in educational activities; Section 2. The Accrediting Entities shall comply with the Standards and Guidelines set by the Department of Finance relative to accreditation of non-stock, nonprofit corporations/NGOs as provided for in Revenue Regulations No. 13-98. Section 3. Repeal All executive and administrative issuances inconsistent with the provisions of the Order are hereby deemed repealed, amended or modified accordingly. Section 4. Separability - If any portion of this Order is declared unconstitutional, the other provisions of this Order shall not be affected by this Order. Section 5. Effectivity - This Order shall take effect after fifteen (15) days from publication in a newspaper of general circulation. Done on the City of Manila, this 22nd day of October in the year of Our Lord, Two Thousand and Seven. A. Deductible In Full 1) Recipient is: (a) Government of the Philippines; (b) Any of its agencies or political subdivisions; or (c) Any fully-owned
government corporation For priority activity in: (1) Science; (2) Education (3) Culture (4) Health (5) Economic Devt (6) Human Settlement (7) Youth and Sports Devt 2) Recipient is a foreign or international organization with an agreement with the Philippine Government on deductibility, or in accordance with special law. 3) Recipient is an accredited nongovernment organization, organized/ operated for (purposes): (a) Scientific; (b) Educational; (c) Cultural; (d) Character building/ youth and sports development (e) Charitable (f) Social welfare (g) Health (h) Research
For a non-priority activity in any of the areas mentioned in A, and exclusively for a public purpose.
2) Non-government organizations
3)
Recipient is an accredited domestic corporation or association organized/operated for (purposes): (a) Scientific (b) Educational; (c) Cultural; (d) Youth and sports development (e) Charitable (f) Social welfare (g) Religious (h) Rehabilitation of Veterans
And satisfying the following conditions:

(1) The donation must be utilized not later than the 15th day of the 3rd month following the close of its taxable year. (2) The administrative expense must not exceed 30% of total expenses. (3) Upon dissolution, assets must be
B. Deductible Subject To Limitation 1) Recipient is: (a) Government of the Philippines; (b) Any of its agencies or political subdivisions
If the conditions in Table A is not complied with: Subject to limitation: (1) Individual - 10% taxable income from trade business or profession before contribution (2) Corporation - 5% taxable income from trade business or profession before contribution
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distributed to another nonprofit domestic corporation or to the state. REQUISITES FOR DEDUCTIBILITY 1. The contribution or gift must be actually paid. 2. It must be given to the organizations specified in the code. 3. The net income of the institution must not inure to the benefit of any private stockholder or individual. UTILIZATION means: a. Any amount, including admin expenses, paid or utilized by an accredited NGO to accomplish one or more of its purposes b. Any amount paid to acquire an asset used directly in carrying out one or more purposes for which the accredited NGO was created or organized; or c. Any amount set aside for a specific project which comes within the NGOs purpose/s, but the NGO has to establish that the amount will be utilized within at least five (5) years, and that the project will be better accomplished by setting aside such amount than by immediate payments of funds d. Any amount in cash or in kind invested in any activity related to the purpose for which the NGO was created e. Any amount invested in capital sustaining and generating activities. Provided that, any income derived from those investments shall be exclusively used in activities directly related to one or more of its purposes (Sec. 1, RR 13-1998) ILLUSTRATION: N Co. had a gross income from business of P1,000,000 and allowable deductions (except deductions for contributions) of P400,000. It made during the year a contribution that is fully deductible of P10,000 and contributions subject to limitation of P50,000. Compute for the total deduction for contributions and the taxable income of the company. ANSWER: The total deduction for contributions is P40,000, and the taxable income is P560,000. Gross Income Less: Allowable Deductions (except deduction for contributions) Taxable Income before deduction for contributions Multiplied by: Statutory Limit (%) Statutory Limit (in Pesos) P1,000,000 400,000 P 600,000 5% P 30,000
Actual Contributions made (subject to limitation) Allowable Deduction for Contributions subject to limitation (whichever is lower)
50,000
30,000 P 600,000
Taxable Income before deduction for contributions Less: Allowable Deduction for Contributions Deductible in Full P Allowable Deduction for 10,000 Contributions subject to limitation 30,000 Taxable Income
40,000 P 560,000
Charitable and Other Contributions
Section 34 (H) SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; xxx
(H) Charitable and Other Contributions. (1) In General. Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of 10% in the case of an individual, and 5% in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. (2) Contributions Deductible in Full.
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Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full: (a) Donations to the Government. Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection; (a) Donations to Certain Foreign Institutions or International Organizations. Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; (b) Donations to Accredited Nongovernment Organizations. The term 'non-government organization' means a non profit domestic corporation: xxx (c) Organized and operated exclusively for scientific, research, educational, character-building and youth 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 any private individual; (1) Which, not later than the 15th day of the 3rd month after the close of the accredited non-government organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; (2) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, but in no case to exceed 30% of the total expenses; and (3) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. (i) Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means: (ii) (I) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the (i) accredited nongovernment organization was created or organized. (iii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. (3) Valuation. The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (4) Proof of Deductions. Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Kinds: Deductible In Full 1) Recipient: (d) Government of the Philippines; Deductible Subject To Limitation 1) Recipient: (c) Government of the Philippines;
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political subdivisions; or (f) Any fully-owned government corporation

Exclusively to finance or to be used in undertaking priority activities in: (8) Education (9) Health (10) Youth and Sports Development (11) Human Settlements (12) Science and Culture (13) Economic Development 2) Recipient: foreign or
(e) Any of agencies
its or
(d) Any of its agencies or political subdivisions For a non-priority activity and exclusively for a public purpose.
international organization in pursuance of: Agreements
nongovernmental organizations
2)
Recipient:
3)
non-govt org organized/ operated exclusively for:

(i) (j) (k) (l)
treaties, or commitments with the Govt of RP special laws Recipient: accredited
accredited corporation association
3) Recipient:
domestic or
(m) (n) (o) (p)
Scientific; Research Educational Characterbuilding and Youth and Sports Development Health Social Welfare Cultural or Charitable Purposes Or Combination
organized/operated for (purposes): (i) Religious (j) Charitable (k) Scientific (l) Youth and Sports Development (m) Cultural or Educational Purposes (n) Rehabilitation of veterans (o) Social welfare institutions
following the close of its taxable year; UNLESS, an extended period is granted by the Secretary of Finance (5) The administrative expense must conform w/ the rules & regs prescribed by the SOF IN NO CASE, to exceed 30% of total expenses for the taxable year (6) In the event of dissolution, assets must be distributed to: a. another nonprofit domestic corporation (organized for similar purposes) b. state (for public purpose) (7) the amount of any charitable contribution of property other than money shall be based on the acquisition cost of the property (8) all the Members of the Board of Trustees of the non-stock ,nonprofit corp,org, or NGO do not receive compensation or remuneration for their service to the said org.
(3) For Individual donor - 10% taxable income from trade business or profession before contribution (4) For Corporation Donor - 5% taxable income from trade business or profession before contribution
Subject to the following conditions:
(4) The donation must be utilized not later than the 15th day of the 3rd month
Subject to the rules and regs promulgated by the SOF The allowed limited deductibility in an amount not to exceed:
Requisites for deductibility (Mamalateo): (1) The charitable contribution must actually be paid or made to the RP govt or any political subdivision thereof exclusively for public purposes, or any of the accredited domestic
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corp or association specified in the Tax Code. (2) It must be made within the taxable year (3) It must not exceed 10% (individual) or 5% (corp) of the taxpayers taxable income before charitable contributions (4) It must be evidenced by adequate receipts or records. The amount of charitable contribution of property other than property shall be based on the acquisition cost of said property (****not its current market value: De Leon). Limitations RMC No. 88-07 December 07, 2007 REVENUE MEMORANDUM CIRCULAR NO. 88 2007 SUBJECT: Publishing the Full Text of Executive Order No. 671 dated October 22, 2007, Designating
Regulations No. 13-98. Section 3. Repeal All executive and administrative issuances inconsistent with the provisions of the Order are hereby deemed repealed, amended or modified accordingly. Section 4. Separability - If any portion of this Order is declared unconstitutional, the other provisions of this Order shall not be affected by this Order. Section 5. Effectivity - This Order shall take effect after fifteen (15) days from publication in a newspaper of general circulation. Done on the City of Manila, this 22nd day of October in the year of Our Lord, Two Thousand and Seven. Roxas v. CTA 23 SCRA 276 FACTS: Petitioners claim deductions for contributions to the following: 1. Pasay City Police, Pasay City Firemen, Baguio City Police Christmas funds 2. Manila Police Trust Fund 3. Philippines Heralds fund for Manilas neediest families 4. Our Lady of Fatima chapel at FEU HELD: 1. non-deductible these funds were not spent for public purposes but as Christmas gift to the families of the members. Contributions to a govt entity is deductible when used exclusively fir public purpose 2. deductible said trust fund belongs to the Manila Police, a govt entity, intended to be used exclusively for its public functions 3. deductible the contributions were not made to the Phil Herald but to a group of civic spirited citizens organized solely for charitable purposes [can be classified as an association organized exclusively for charitable purposes mentioned in Section 30 (h)] 4. non-deductible Contributions to the chapel at a private university ground owned by an educational institution that gives dividends to its stockholders is not deductible from the gross income of the taxpayer for the reason that the net income of said university inures to the benefit of its stockholders. Research and development
Entities that will Certify and Accredit Charitable Organization as Donee-Institutions Relative to the Deductibility of the Tax Reform Act Of 1997.
T O : All Internal Revenue Officials, Employees and Others Concerned: Section 1. Accrediting Entity The following Departments are hereby designated Accrediting Entities to determine the qualification of nonstock, non-profit corporations, nongovernmental organizations, associations, and foundations for accreditation as qualified donee institutions to wit: a. Department of Social Welfare and Development for charitable and/or social welfare organizations, foundations and associations including but not limited to those engaged in youth, child, women, family, disabled persons, older persons, welfare and development; g. Department of Science and Technology for organizations, associations and foundations primarily engaged in research and other Scientific activities; h. Philippine Sports Commission for organizations, foundations and associations primarily engaged in sports development; i. National Council for Culture and Arts - for organizations, foundations and associations primarily engaged in cultural activities; j. Commission on Higher Education for organizations, foundations and association primarily engaged in educational activities;
Section 2. The Accrediting Entities shall comply with the Standards and Guidelines set by the Department of Finance relative to accreditation of non-stock, nonprofit corporations/NGOs as provided for in Revenue
Section 34 (I) NIRC Section 34 (i) Research and Development.(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and
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necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. (2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses: (a) Paid or incurred by the taxpayer in connection with his trade, business or profession; (b) Not treated as expenses under paragraph 91) hereof; and (c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. (3) Limitations on deduction. - This Subsection shall not apply to: (a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas. MAMALATEO: This is a new deduction introduced under RA 8424 (effective Jan.1 1998). R&D is any systematic or intensive study carried out in the manufacturing and industrial fields, the results of which are to be used for the production
or improvement of products and processes. R&D only extends from the laboratory or drawing board to prototype status (i.e. so long as an activity still contains an element of uncertainty/ technical risk it is within the realm of R&D) o (Normally) not R&D quality control, routine product testing, data collection, efficiency survey, management studies, market research and sales promotion DE LEON: Optional treatment of R&D expenditures o A taxpayer may treat R&D expenditures as ordinary and necessary expenses deductible from gross income under Subsection (A). o At the election of the taxpayer, the expenditures may be treated as deferred expenses which shall be allowed as a deduction in computing taxable income. The expenditure in Subsection (I,3) are not deductible as ordinary and necessary expenses or as deferred expenses. Contribution to Pension Trusts
Section 34 (J) NIRC SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; xxx (J) Pension Trusts. An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this Section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount: (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made.
DE LEON: Deductible Payments:
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Payments to EE pension trusts which are deductible are: (1) Amounts contributed by the ER during the taxable year to cover the pension liability accruing during the year These are considered as ordinary and necessary business expenses deductible as such (2) 1/10 of the reasonable amount paid by the ER to cover pension liability applicable to the year prior to the taxable year, or so paid to place the trust in a sound financial basis.
Requisites for the deductibility of pension trusts (1) The ER must have established a pension or retirement plan to provide for the payment of reasonable pensions to his EEs (2) The pension plan must be reasonable and actuarially sound (3) It must be funded by the ER (he contributed cash to the plan) (4) The amount contributed must no longer be subject to his control or disposition (5) The amount has not been allowed before as a deduction (6) The amount is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made.
shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. (As amended
by RA 9504)
In lieu of itemized deduction of the items under

Sec. 34 (L) NIRC SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income; xxx (L) Optional Standard Deduction. In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding 40% of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he
iii. Optional Standard Deduction
MAMALATEO: It is a privilege that may be enjoyed by certain individual taxpayers. Requisites for its exercise: (1) OSD is available only to citizens or resident aliens (not to non-resident aliens) (2) The standard deduction is optional o Unless payer signifies in his return his intention to elect this deduction, he is considered as having availed of the itemized deductions (3) Such election, when made by the qualified taxpayer, is irrevocable for the year in which made HOWEVER, he can change to itemized deductions in succeeding year(s) (4) The amount of standard deduction is limited to 10% of taxpayers gross income (5) Proof of actual expenses is not required. iv. Rules on allocation deductions of expenses and
Section 50 NIRC SEC. 50. Allocation of Income and Deductions. In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business REVENUE REGULATIONS NO. 16-86
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REVENUE REGULATIONS NO. 16-86 SUBJECT : Amendment to Section 160 of the Income Tax Regulations (Rev. Regulations No. 2) regarding the basis of determining ratable part of overseas overhead expenses apportioned under Section 37(b) of the National Internal Revenue Code. Pursuant to Sections 4 and 277 of the National Internal Revenue Code, the first paragraph of Section 160 Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, is hereby amended to read as follows:
because of governmental requirement is not added back to the allocable amount. 8. Should there be an exception or qualification on the above requested certification, an explanation with supporting documents should be submitted. These regulations shall be effective on income tax returns to be filed for the taxable period which begins on or after January 1, 1986. (SGD.) ALFREDO PIO DE RODA, JR. Acting Minister of Finance Recommending Approval: (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue DE LEON: The purpose of Section 50 is to place a controlled taxpayer on a tax parity w/ an uncontrolled taxpayer, by determining, according to te standard of an uncontrolled taxpayer, the true taxable income from the property and business of a controlled taxpayer (Section 179, RR 2) Section 50 empowers the Commissioner to rectify abnormalities and distortions in income brought about by common control through the adoption of standards considered fair, reasonable or at arms length. controlled includes any kind of control (it is the reality of the control which is decisive and not its form or the mode of its exercise) Coverage of Section 50: This section applies to all forms of bona fide indebtedness and includes: (1) Loans or advances of money or other consideration (whether or not evidenced by a written instrument) (2) Indebtedness arising in the ordinary course of business out of sales, leases, or the rendition of services by or between members of the group, or any other similar extension (3) It does not apply to alleged indebtedness which was in fact a contribution of capital or a distribution by a corporation with respect to its shares. (RMO No. 63-99) Com. v. CTA 127 SCRA 9 Expenses of a multinational corporation directly related to the production of Philippine-derived income or to Philippine operations (ex. salaries of Philippine personnel, rental of office building in Philippines) can be deducted from gross income
Sec. 160. (a) Apportionment of deductions. From the items specified in Section 37(a) as being derived specifically from sources within the Philippines, there shall be deducted the expenses, losses, and other deductions properly allocated thereto and a ratable part of any other expenses, losses, and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot be definitely allocated to some items or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part shall be based upon any of the following ratios consistently allowed from year to year: (1) Gross income from sources within the Philippines to the total gross income. (2) Net sales in the Philippines to total net sales. (3) If any other method of allocation is adopted, a written permission from the Commissioner of Internal Revenue shall first be secured.
(b) External Auditor's certificate. The income tax return to be filed should be accompanied by a certification from an independent and reputable Certified Public Accountant containing the following information: 5. The home office deductions for the year involved have been examined in accordance with generally accepted auditing standards and accordingly included such tests of accounting records and such other auditing procedures as were considered necessary in the circumstances. 6. The deductions pro-rated to the Philippine branch do not include (a) net losses of any operating unit or branch; (b) income tax payment; (c) capital expenditures; and (d) expenses directly changeable to any branch. 7. The amount of allocable overhead expenses used in the pro-rata allocation to the Philippine branch is the same amount used in the pro-ration to all branches worldwide and the amount disallowed in other countries
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in the Philippines without the need of apportionment. BUT overhead expenses of its parent company which were incurred in relation to finance administration, and R&D all of which directly benefit its branches all over the world- are items which cannot be definitely allocated or identified with the operations of the RP branch. Thus, under Section 37(b) NIRC and Section 160 of the Regulations, Smith Kline can claim as its deductible share A RATABLE PART of such expense based upon the ration of the local branchs gross income to the total gross income, worldwide, of the multinational corporation.
the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust. DE LEON: Personal, living, or family expenses are not deductible from individual income except in the form of personal and additional exemptions. Ex: Insurance paid on a dwelling owned and occupied by a taxpayer Premiums paid for life insurance by the insured Alimony and an allowance paid under a separation agreement Capital expenditures: examples Cost of defending or perfecting title to property Expenses of the administration of an estate Amounts to be assessed and paid under an agreement between bondholders or shareholders of a corp, to be used in a reorganization of the corp. Sales between members of a family Subsection (B-1) Its purpose is the prevention of simulated sales or exchanges by persons who are members of a family to avoid payment of income tax. It is immaterial whether the sales or exchanges are bona fide or not. But while the losses therefrom are not deductible, the gains realized are taxable. Sections (B-2 to B-6): The law presumes the absence of free bargain between the seller and the buyer. Thus, tax evasion is minimized.
c. Non-deductible items Section 36 NIRC SEC. 36. Items not Deductible.(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to (1) Personal, living or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under Subsection (G) (1) of Section 34 of this Code. (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of
PICOP v. CA GR Nos.106949 Capitalized interest - Should the taxpayer elect to deduct interest payments against its gross income, he cannot at the same time capitalize such interest and claim depreciation on the undepreciated cost which includes the interest. 3. Income from dealings in properties other than capital assets (e.g. sale of delivery van)
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Included as part of business income or income from the practice of profession

4. Taxation of Passive Income a. Passive income subject to final tax (withheld at source and remitted to the
Income Taxes on Income Derived Under the Foreign Currency Deposit and Offshore Banking Systems
SCOPE: Pursuant to Section 244, in relation to Sections 24, 25, 27 and 28 of the National Internal Revenue Code of 1997, as amended by R.A. No. 8424, these Regulations are hereby promulgated to govern the imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore Banking Systems.l Sec. 2.22. Definition of Terms.
BIR by the payor of the income; no longer to be reported in the ITR)

i. Interest income
Section 24 SEC. 24. Income Tax Rates (B) Rate of Tax on Certain Passive Income (1) Interests, Royalties, Prizes, and Other Winnings A final tax at the rate of 20% is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); xxx Provided, however, that interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of 7% of such interest income: Provided, further, That interest income from longterm deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BSP shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the 5th year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: 4 years to less than 5 years - 5%; 3 years to less than 4 years - 12%; Less than 3 years - 20% REVENUE REGULATIONS NO. 10-98 August 25, 1998 REVENUE REGULATIONS NO. 10-98 SUBJECT: Implementing the Provisions of the National Internal Revenue Code, As Amended By Republic Act No. 8424, Relative to the Imposition of
(A) Foreign Currency Deposit System shall refer to the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of Republic Act No. 6426 entitled "An Act Instituting a Foreign Currency Deposit System in the Philippines, and For Other Purposes." (B) Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Bangko Sentral Ng Pilipinas (BSP) to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. ("Local bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended). (C) Offshore Banking System shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external and internal sources and the utilization of such fund pursuant to Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (D) Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the (BSP) to transact offshore banking business in the Philippines in accordance with the provisions of Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (E) Deposits shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest.
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(F) Resident shall mean (1) an individual citizen of the Philippines residing therein; or (2) an individual who is not a citizen of the Philippines but is permanently residing therein; or (3) a corporation or other juridical person organized under the laws of the Philippines; or (4) a branch, subsidiary, affiliate, extension office or other unit of corporations or juridical persons organized under the laws of any foreign country operating in the Philippines. (G) "Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of "resident". (H) Filipino Overseas Contract Worker (OCW) means an individual citizen of the Philippines referred to under Section 23(C) of the Code. A Filipino Seaman is a citizen of the Philippines who receives compensation for services rendered abroad as a member of the complement of an ocean-going vessel engaged exclusively in international trade as referred to under Section 23(C) of the Code.
(2) a certificate of residency which is issued by the Philippine Embassy or Consulate in the foreign country of his residence; or (3) a certificate of the contract of employment of an overseas contract worker which is duly registered with the Philippine Overseas Employment Agency (POEA); or a Seaman's Certificate, in the case of a Filipino seaman; or (4) a certification from the Bureau of Immigration of the Philippines that a non-resident alien is not a resident of the Philippines; or (5) a certification from the Department of Foreign Affairs (DFA) of the Philippines that the individual is a regular member of the diplomatic corps of a foreign government and is entitled to income tax exemption under an international agreement to which the Philippines is a signatory. (C) Name of the Foreign Currency Bank Account To be entitled to an exemption from the tax on interest income on foreign currency deposit, the Foreign Currency Bank Account shall be in the name of the non-resident individual or non-resident corporation. Otherwise, the interest income therefrom shall be considered as subject to the tax imposed herein. Xxxx Sec. 2.27 and Sec. 2.28 Corporate Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System. (A) Interest income which is actually or constructively received by a domestic corporation or a resident foreign corporation from a foreign currency bank deposit shall be subject to a final withholding tax at the rate of seven and one-half percent (7.5%) based on the gross amount of such interest income. The depository bank shall withhold and remit the tax pursuant to the provisions of Sections 57 and 58 (withholding tax at source) of the Code. (B) Compliance and Administrative Procedures for a Non-resident Corporation. The tax on interest income from foreign currency deposit shall be imposed unless the depositor, which is a non-resident corporation, can present documentary evidence that it is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of all the following requirements: (1) Certificate of registration of the corporation abroad; and (2) Certification from the Securities and Exchange Commission (SEC) that the non-resident corporation is not licensed to do business in the Philippines. (C) Taxation of Income of an FCDU or OBU from Foreign Currency Transactions. In general, income derived by an FCDU or an OBU from foreign currency transactions with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the
Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency Deposit. (A) Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System (1) Interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit shall be subject to a final withholding tax of 7.5%. The depository bank shall withhold and remit the tax pursuant to Sections 57 and 58 (withholding tax at source) of the Code. (2) If a bank account is jointly in the name of a non-resident citizen such as an overseas contract worker, or a Filipino seaman, and his spouse or dependent who is a resident in the Philippines, 50% of the interest income from such bank deposit shall be treated as exempt while the other 50% shall be subject to a final withholding tax of 7.5%
(B) Compliance and Administrative Procedures for Non-Resident Citizen and Non-Resident Alien. The tax on interest income from foreign currency deposit shall be imposed unless the depositor who is a nonresident citizen or a non-resident alien can present documentary evidence that he is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of any of the following: (1) an immigration visa issued by the foreign government in the country where he is a resident of; or
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foreign currency deposit system, shall be subject to a final withholding tax of ten percent (10%) based on gross income pursuant to Sec. 27(D)(3) and Sec. 28(A)(4) of the Code. Income from foreign currency transactions shall include interest income from lending operations, including bank charges, commissions, service fees, and net foreign exchange transaction gains. Income from foreign currency transactions with non-residents of the Philippines shall not be subject to income tax. The person making the income payment shall withhold and remit the tax withheld pursuant to the provisions of Sections 57 and 58 of the Code. Thus, in the case of interest payment by a resident of the Philippines on a foreign currency loan from an OBU or an FCDU, the withholding agent shall be the said resident. (D) Taxation of Other Incomes of an FCDU or an OBU . Income derived by an FCDU or an OBU from activities other than foreign currency transactions shall be subject to the pertinent income tax/taxes prescribed under Section 27 or Section 28 of the Code. To illustrate: Income derived by an FCDU from consultancy services and rentals shall be subject to an income tax based on net income at the tax rates prescribed under Section 27(A) of the Code. Capital gains derived from the sale, barter, exchange or disposition of shares of stocks in a domestic corporation shall be subject to tax prescribed under Section 27(D) of the Code. The aforesaid depository bank shall file its corporate income tax return for income referred to in the preceding paragraph in accordance with the provisions of Section 52 of the Code. It shall also declare thereunder all other incomes derived during the taxable period which are subject to the final withholding taxes, the fact that such final withholding taxes have been withheld therefrom by the payor notwithstanding, indicating the following information: (a) Name of the withholding agent; (b) His/its address; (c) His/its Taxpayer Identification Number (TIN); (d) Period covered; (e) Gross Income; (f) Rate of final withholding tax applied; and (g) Amount of final withholding tax withheld. The submission of the foregoing information shall not be required with respect to its interest income derived from bank deposits. Sec. 2.58. Information Requirement for Depositors/ Taxpayers Exempt from Withholding Tax on Interest Income from Foreign Currency Deposits. The Depository Bank shall submit with its quarterly withholding tax remittance prescribed under Sec. 58(A) of the Code a list of all persons and
corporations who were given exemption from the tax on interest income on foreign currency deposits. To avail of the exemption from the tax on interest income from foreign currency deposit, the depositor is required to execute a written permission allowing its depository bank to inform the Commissioner of Internal Revenue that as a nonresident, the depositor is exempt from the tax. A depositor who fails to comply with this requirement, which constitutes a limited waiver of the confidentiality of foreign currency deposits, shall not be entitled to the exemption privilege. EFFECTIVITY CLAUSE. These Regulations shall apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable. TRANSITORY PROVISION. No penalty shall be imposed for late payment of the tax herein prescribed for the first three quarters of calendar year 1998, provided, however, that the taxpayer's corresponding tax returns for the said taxable quarters are filed and the taxes due are paid not later than October 25, 1998. (SGD.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue Illustration Mr. Khan Tiu Tan, a Filipino citizen who is residing in the Philippines has a US dollar account with Sperm Bank. His gross interest earnings from his bank deposit for the first quarter of 1998 (i.e. from January 1 to March 31, 1998) amounted to US$1,000.00. This gross interest earning shall be considered as constructively received by Mr. Khan Tiu Tan during the first quarter of 1998 and shall be subject to a 7.5% final withholding tax. The 7.5% final withholding tax which is due thereon is US$75.00. ii Royalties Sec. 24 (B), RMC 44-05, RMC 77-2003 Royalties (except on books as well as other literary works and musical compositions) Royalties on books, as well as other literary works and musical compositions
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SEC. 24. Income Tax Rates. xxx (A) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. A final tax at the rate of twenty percent (20%) is hereby imposed upon xxx royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); xxx September 1, 2005 REVENUE MEMORANDUM CIRCULAR NO. 44-05 SUBJECT : Taxation of Payments for Software TO : All Internal Revenue Officers and Other Concerned SECTION 1. Scope. This Circular shall provide for the guidelines for the taxation of computer software payments. SECTION 2. Definition of Software. "Software" is a program, or a series of programs, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing or electronically, on a magnetic tape or disk, or on a laser disk or CD-ROM, or it can be downloaded through the Internet or through a network. It may be standardized with a wide range of application or be customized for specific users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware. SECTION 3. Payments For the Use of Software As Royalties. a. Definition of ROYALTIES The term "royalties", as generally used, means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right. b. Definition of royalties includes payments for the use of copyright over software Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries. Thus, payments in
consideration for the use of or the right to use a copyright relating to software are generally royalties. SECTION 4. Categories of Transactions. Transactions involving software may take any one or more of the following categories: a. A (full or partial) transfer of a copyright right in software; b. A transfer of a copy of the software (a copyrighted article); c. The provision of services for the development or modification of the software; or d. The provision of know-how relating to software programming techniques. Any transaction involving software which consists of more than one of the transactions above shall be treated as a separate transaction, with the appropriate provisions of this Circular being applied to each such transaction. However, any transaction that is de minimis, taking into account the overall transaction and the surrounding facts and circumstances, shall not be treated as a separate transaction, but merely as a part of another transaction. SECTION 5. Characterization of Transactions. The character of payments received in a transaction involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a. Transfers of copyright rights. A transfer of software is classified as a transfer of a copyright right if, as a result of the transaction, a person acquires any one or more of the rights described below: i. The right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending; ii. The right to prepare derivative computer programs based upon the copyrighted software; iii.The right to make a public performance of the software; iv. The right to publicly display the computer program; or v. Any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of said copyright. The determination of whether a transfer of a copyright right in a software is a sale or exchange of property is made on the basis of whether, taking into account all facts and circumstances, there has been a transfer of all substantial rights in the copyright. A transaction that does not constitute a sale or exchange because not all substantial rights have been transferred will be classified as a license generating royalty income.
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When only copyright rights are transferred, payments made in consideration therefor are royalties. On the other hand, when copyright ownership is transferred, payments made in consideration therefor are business income. b. Transfer of copyrighted articles. A copyrighted article incorporating a software includes a copy of a software from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The copy of the software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the main memory or hard drive of a computer, or in any other medium. If a person acquires a copy of a software but does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income. The determination of whether a transfer of a copyrighted article or right in a software is a sale or exchange of property is made on the basis of whether, taking into account all facts and circumstances, the benefits and burdens of ownership have been transferred. A transaction that does not constitute a sale or exchange because insufficient benefits and burdens of ownership of the copyrighted article have been transferred, such that a person other than the transferee is properly treated as the owner of the copyrighted article, will be classified as a lease generating rental income. c. After-Sales Service. Contracts for the use of software are often accompanied with the provision of services (e.g., installation, maintenance, and customization of the software) by personnel of the relevant foreign licensor/owner or of the relevant local subsidiary, reseller, and distributor. Payments as consideration for after-sales service in a mixed contract are not royalties alone, but will include income from services. The appropriate course to take with such a contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated payments according to the various parts of what is being provided under the contract, and then to apply to each part of it so determined the taxation treatment proper thereto. Thus, the part of the payments representing the use of the software will be treated as royalties and taxable as such and the other part of the payments representing the provision of services will be treated as income from services and taxable as such.
If, however, one part of what is being provided constitutes by far the principal purpose of the contract and the other parts stipulated therein are only of an ancillary and largely unimportant character, then the treatment applicable to the principal part should generally be applied to the whole amount of the consideration. (De minimis) d. "Site License" / "Enterprise License" / "Network License Arrangements". These refer to arrangements in which the transferee obtains rights to make multiple copies of the program for operation only within its own business. Although these arrangements permit the making of multiple copies of the program, such rights are generally limited to those necessary for the purpose of enabling the operation of the program on the licensee's computers or network, and reproduction for any other purpose is not permitted under the license. Payments under such arrangements will generally be dealt with as business income. e. Supply of information. Another type of transaction involving the transfer of computer software is the more unusual case where a software house or computer programmer agrees to supply information about the ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques. In these cases, the payments may be characterized as royalties to the extent that they represent consideration for the use of, or right to use, secret formulas or for information concerning industrial, commercial or scientific experience which cannot be separately copyrighted. f. Transfer of Ownership. Where consideration is paid for the transfer of full or partial ownership of the rights in the copyright, the payments made therefore are, in general, not royalties but business income or capital gains. SECTION 6. Computer Hardware Bundled With Software. The tax treatment of payments involving the sale of computer hardware bundled with software, where the software is bundled in the Philippines, are covered by this Circular. On the other hand, computer hardware bundled with software, where the software is bundled abroad will be dealt with in another revenue issuance. SECTION 7. Modes of Acquiring Software And the Relevant Tax Treatment Thereof. A. Acquisition of ownership over a copyright 1. From a local owner of a copyright. Payments made to a copyright owner for a full or partial transfer of a copyright shall be subject to Philippine income tax as follows: a. Transfer by a resident individual owner of copyright A resident individual owner of a
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copyright is subject to the graduated income tax rates (5% - 32%) under Section 24 of the National Internal Revenue Code of 1997 (NIRC). The amount paid in consideration of the copyright or portions thereof transferred shall form part of the copyright owner's gross income (Section 32, NIRC), from which his taxable income 1 shall be computed. b. Transfer by a domestic corporation owner The amount paid in consideration of the copyright or portions thereof transferred shall form part of the copyright owner's gross income (Section 32, NIRC), from which his taxable income, subject to 32% income tax under Section 27 of the NIRC, shall be computed. 2. From a foreign licensor. Payments made to a copyright owner for a full or partial transfer of a copyright shall be subject to Philippine income tax as follows: a. Transfer by a nonresident alien individual A nonresident alien individual engaged in trade or business in the Philippines shall be taxed in the same manner as a resident individual owner of a copyright. b. Transfer by a foreign corporation The amount paid in consideration of the copyright or portions thereof transferred by a resident foreign corporation engaged in trade or business within the Philippines shall form part of the copyright owner's gross income (Section 32, NIRC), from which his taxable income, subject to 32% income tax under Section 28 of the NIRC, shall be computed. The amount paid in consideration of the copyright or portions thereof transferred by a nonresident foreign corporation shall be subject to a final tax of 32%, based on the gross income (Section 28, NIRC). However, if the foreign owner of the copyright is a resident of a country which has an existing tax treaty with the Philippines, royalties paid to such owner are subject to the reduced tax rates on royalties under the relevant tax treaty, provided the conditions prescribed therein are complied with by the owner. B. Acquisition of copyright rights 1. By a Local Subsidiary/ Reseller/ Distributor/ Retailer a. From a local licensor or reseller/distributor licensee Payments made by a local subsidiary/ reseller/ distributor/ retailer to a domestic corporation owner of a copyright or a reseller/distributor licensee of a copyright shall be subject to a final income tax of 20%, based on the gross amount of royalties under Section 27(D) of the NIRC, to be withheld by the local subsidiary/ reseller/ distributor/ retailer making the payments.
b. From a nonresident foreign licensor Payments made by the local subsidiaries/ resellers/ distributors/retailers to a nonresident foreign licensor/owner of the software are royalties subject to 32 percent final income tax, based on the gross amount thereof (Section 28[B][1], NIRC), the full amount of which shall be withheld and collected by the subsidiary/reseller/distributor/retailer making the payments (Section 2.57-1[I][1], RR 2-98). However, if the foreign licensor/owner is a resident of a country which has an existing tax treaty with the Philippines, royalties paid to such licensor/owner are subject to the reduced tax rates on royalties under the relevant tax treaty, provided the conditions prescribed therein are complied with by the licensor/owner. 2. By an End-user a. From local subsidiaries, resellers, distributors of resellers Payments made by the end-user to the local subsidiaries, resellers, distributors of resellers for the purchase of copyrighted articles are business income subject to 32 percent income tax, based on the net taxable income of a domestic corporation (Section 27[A]), National Internal Revenue Code of 1997 [NIRC]). When making payments to the local subsidiaries, resellers, distributors of resellers, the end-user shall withhold 2 percent income tax of the gross amount of the payments creditable against the taxable income of the local subsidiaries, reseller or distributors (Section 2.57.2[E][4][m], Revenue Regulations [RR] 2-98, as amended by Section 2 of RR 14-02), provided the end-user is any of the following persons (under Section 2.57.3. of RR 2-98, as amended by Section 3 of RR 14-02) required to withhold such tax: (a) A juridical person, whether or not engaged in trade or business; (b) An individual, with respect to payments made in connection with his trade or business; or (c) A government office including a governmentowned or controlled corporation, a provincial, city, or municipal government. b. Directly from the foreign owner and/or licensor of the software. A local end-user may acquire license to use software directly from the foreign licensor/owner of the software. Payments made by the end-user to the licensor/owner are royalties subject to 32 percent income tax, based on the gross amount thereof, imposed on royalties derived by a nonresident foreign corporation (Section 28[B][1], NIRC), which amount shall be withheld and collected by the end-user making the payments (Section 2.57-1[I][1], RR 2-98). However, if the foreign licensor/owner is a resident of a country which has an existing tax treaty with the Philippines, royalties paid thereto are subject to the reduced tax rates on royalties under the
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relevant tax treaty, provided the condition prescribed therein are complied with by the licensor/owner. * SECTION 7. Value-Added Tax. A. The following payments for software transactions shall be subject to the 10% value-added tax (VAT) pursuant to Sections 106 and 108 of the NIRC: 1. Royalty payments for the use of a copyright over a software; 2. Payments made to resellers/ distributors/ retailers who are engaged in the trade or business of distributing or selling software; and 3. Payments for services rendered in the Philippine in connection with software purchased. B. Withholding of the VAT for nonresident payees The payor in control of the payment of VAT in the software transactions enumerated under (A) above shall be responsible for the withholding of VAT on such fees on behalf of the nonresident payee, by filing a separate VAT return for and on behalf of such payee using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from the payor. In addition, the payor is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate upon the request of the nonresident payee, the first three copies thereof to be given to the payee and the fourth copy to be retained by the payor as its file copy. SECTION 8. Repealing Clause. All existing revenue issuances, including Revenue Memorandum Circular No. 77-2003, or parts thereof which are inconsistent with the provisions of this Circular are hereby revoked or amended accordingly. SECTION 9. Effectivity. This Circular shall take effect immediately and shall cover software payments paid or payable starting said effectivity date. (SGD.) JOSE MARIO C. BUAG OIC Commissioner of Internal Revenue Footnotes 1. Section 31, NIRC provides "The term 'taxable income' means the pertinent items of gross income specified in this Code, less deduction and/or personal and additional exemption, if any, authorized for such types of income by this Code or other special laws. REVENUE MEMORANDUM CIRCULAR NO. 77-03 SUBJECT : Classification of Payments for Software for Income Tax Purposes TO : All Internal Revenue Officers and Others Concerned. Introduction:
Classification of payments received as consideration for computer software is, for taxation purposes, a matter of considerable importance in view of the rapid development of computer technology in recent years and the extent of transfers of such technology across national borders. "Software" is a program, or series of programs, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing or electronically, on a magnetic tape, diskette, or compact disks, or it can be downloaded through the Internet or through a network. It may be standardized with a wide range of application or be customized for specific users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware. Definition of Royalties Includes Payments for the Use of Software: The term "royalties" as generally used means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term "use" as contained herein shall include the reselling or distribution of software. Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines, thus, payments in consideration for the use of, or the right to use, a copyright or a copyrighted article relating to software are generally royalties. Modes of Acquiring Software and the Relevant Tax Treatment Thereof: (1) From local subsidiaries, resellers, and distributors. A local end-user may acquire license to use software from local subsidiaries, resellers, or distributors, authorized by the foreign licensor/owner of the software to distribute its products in the Philippines. Payments made by the end-user to the local subsidiaries, resellers, or distributors as royalties are treated as business income subject to thirty two percent (32%) income tax as that imposed on the net taxable income of a domestic corporation if they are derived from the ordinary
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conduct or in the active pursuit of business of the subsidiaries, resellers, or distributors (Section 27[A], National Internal Revenue Code of 1997 [NIRC]). When making payments to the local subsidiaries, resellers, or distributors, the enduser shall withhold two percent (2%) income tax of the gross amount of the payments, which shall be creditable against the tax due on the taxable income of the local subsidiaries, resellers, or distributors (Section 2.57.2[E][4][m], Revenue Regulations [RR]2-98, as amended by Section 2 of RR 14-020, provided the end-user is any of the following persons (under Section 2.57.3 of RR 298, as amended by Section 3 of RR 14-02) required to withhold such tax: (a) A juridical person, whether or not engaged in trade or business; (b) An individual, with respect to payments made in connection with his trade or business; or (c) A government office including governmentowned and controlled corporation, a provincial, city, or municipal government, and a barangay. If the payments made by the end-user to the local subsidiaries, resellers, or distributors will not result in an income derived from the ordinary conduct or in the active pursuit of business of the subsidiaries, resellers, distributors to which payments are made, such payments as royalties are treated as passive income which shall be subject to twenty percent (20%) final income tax based on the gross amount thereof as that imposed on royalties derived by a domestic corporation (Section 27[D][1], NIRC), and said amount shall be withheld and collected by the end-user making such payments (Section 2.571[G][2], RR 2-98). On the other hand, payments made by the local subsidiaries, resellers, or distributors to the foreign licensor/owner of the software as royalties are subject to thirty two percent (32%) income tax based on the gross amount thereof as that imposed on royalties derived by a nonresident foreign corporation (Section 28[B][1], NIRC), withheld and collected by the subsidiaries, resellers, or distributors making the payments (Section 2.571[I][1], RR 2-98). However, if the foreign licensor/owner is a resident of a country which has an existing tax treaty with the Philippines, royalties paid thereto are subject to the reduced tax rates on royalties under the relevant tax treaty, provided the conditions prescribed therein are complied with by the licensor/owner. (2) Directly from the foreign owner and/or licensor of the software. A local end-user may acquire license to use software directly from the foreign licensor/owner of the software. Payments made by the end-user to the licensor/owner as royalties are subject to thirty two percent (32%) income tax based on the gross amount thereof as that imposed on royalties derived by a nonresident foreign corporation (Section 28[B] [1], NIRC),
withheld and collected by the end-user making the payments (Section 2.57-[1][I][1], RR 2-98). However, if the foreign licensor/owner is a resident of a country which has an existing tax treaty with the Philippines, royalties paid thereto are subject to the reduced tax rates on royalties under the relevant tax treaty, provided the conditions prescribed therein are complied with by the licensor/owner. After-sales Service: Contracts for the use of software are often accompanied with the provision of services (e.g., installation, maintenance, and customization of the software) by the personnel of the relevant foreign licensor/owner or of the relevant local subsidiary, reseller, and/or distributor. Payments as consideration for after-sales service in a mixed contract are not royalties alone, but will include income from services. The appropriate course to take with such a contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated payments according to the various parts of what is being provided under the contract, and then to apply to each part of it the proper tax treatment therefore. Thus, the part of the payments representing use of, or the right to use, copyright relating to software will be treated as royalties and taxable as such. The other part of the payments representing the provisions of services will be treated as income from services and taxed as such. Computer Hardware Bundled with Software: Payments for the software, or that portion of the payments apportioned for the software bundled with computer hardware, where the bundling are done in the Philippines, shall taxed in the manner provided under this Circular. Payments for software where the software are bundled with computer hardware outside the Philippines shall be dealt with in a separate revenue issuance. All internal revenue officers, employees and others concerned are enjoined to give this Circular the widest publicity possible.
ROYALTY- payment for the use of an intellectual property. Such is a passive income of the owner thereof subject to final withholding tax, o From books, literary works, and musical compositions 10% o Other royalties 20% Such Royalty must have been paid by a domestic corporation to a citizen or a resident alien, or a nonresident alien engaged in trade or business in the
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Philippines, or a domestic corporation, or a resident foreign corporation. ii. Dividends from domestic corporations--cash and/or property dividends declared from income earned starting 1.1.98 actually or constructively received from a domestic corporation, Sec. 24(B) SEC. 24. Income Tax Rates. xxx (B) Rate of Tax on Certain Passive Income. (2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters 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 joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; Ten percent (10% beginning January 1, 2000. Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.
--20% for NRAETB (non-resident aliens engaged in trade or business) iv Prizes (except prizes amounting to ten thousand pesos (P10,000.00) or less which shall be subject to tax under Sec.24 (A) of the Code, Sec. 24 (B)
SEC. 24. Income Tax Rates. xxx (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. A final tax at the rate of twenty percent (20%) is hereby imposed upon xxx prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; xxx v other winnings (except PCSO/lotto winnings) derived from sources w/in R.P., Sec. 24(B)
SEC. 24. Income Tax Rates. xxx (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. A final tax at the rate of twenty percent (20%) is hereby imposed upon xxx other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: PRIZE, DIFFERENTIATED FROM WINNINGS A prize is the result of an effort made (e.g., prize in a beauty contest), while winnings are the result of a transaction where the outcome depends upon chance (e.g., betting). b. Passive Income NOT Subject to Final Tax (to be reported in the taxpayers ITR), Sec. 24(A)(1) SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein; (b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources
The following dividends are subject to final tax: cash and/or property dividends actually or constructively received by an individual from: a domestic corporation a joint stock company insurance or mutual fund companies regional operating headquarters of multinational companies 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 share of an individual member or coventurer in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation Rate 10% for residents (RC, RA) and non-resident citizens (NRC),
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within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. (As amended RA 9504) Income which is neither capital gain with capital gain tax, nor passive income with final tax, is other income or residual income. It may be derived from: 1. Employer-employee relationship, which is called compensation income 2. Business or profession 3. Sale or exchange of property which is not subject to the capital gain tax 4. Incidental sources, such as interest or dividend, which is not subject to final tax (i.e., dividend from a foreign corporation in case of resident citizens, rent income). The tax rates on NET ordinary or other income (schedular rates) are as follows: But less Tax Plus of than Excess over 10,000 5% 30,000 500 10% 10,000 70,000 2,500 15% 30,000 140,000 8,500 20% 70,000 250,000 22,500 25% 140,000 500,000 50,000 30% 250,000 125,000 32% 500,000
for purposes of verification for the taxable year. [Sec 51(D)] 5. Taxation of Capital Gains SUMMARY OF TAX RATES FOR CAPITAL GAINS ON INDIVIDUALS 1. On sale of shares of stock of a domestic corporation not listed and traded thru a local stock exchange, held as capital asset
On the Net Capital Gain

Amount in excess of P100,000
Not over P100,000
FT of 5% FT of 10%
2.
On sale of real property in the Philippines held as capital asset On the gross selling price, or the current fair market value at the time of sale, whichever is higher FT of 6%
Income from sale of shares of stock of a Philippine corporation i shares traded and listed in the stock exchange, Sec. 24(C); Sec. 127, RMC 73-07
Income over
10,000 30,000 70,000 140,000 250,000 500,000
RULE FOR MARRIED INDIVIDUALS - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses. [Sec 51(D)] 1. Compute the income tax separately on their respective incomes. 2. Add the two taxes to arrive at a single income tax still due and refundable. 3. Income which is clearly joint, or which cannot be identified as exclusively of one spouse, will be divided equally. [Sec 24(A)] EXCEPTION to the one-return rule: Where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau
SEC. 24. Income Tax Rates. (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not over P100,000.. 5% On any amount in excess of P100,000 10% SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or through Initial Public Offering. (A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange. - There shall be levied, assessed and collected on every sale, barter, exchange, or other disposition of shares of stock listed and traded through the local stock exchange other than the sale by a dealer in securities, a tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor.
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(B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. - There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange: Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty-three and one third percent (33 1/3%)
stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. (C) Return on Capital Gains Realized from Sale of Shares of Stocks. (1) Return on Capital Gains Realized from Sale of Shares of Stock Listed and Traded in the Local Stock Exchange. - It shall be the duty of every stock broker who effected the sale subject to the tax imposed herein to collect the tax and remit the same to the Bureau of Internal Revenue within five (5) banking days from the date of collection thereof and to submit on Mondays of each week to the secretary of the stock exchange, of which he is a member, a true and complete return which shall contain a declaration of all the transactions effected through him during the preceding week and of taxes collected by him and turned over to the Bureau Of Internal Revenue. (2) Return on Public Offerings of Share Stock. - In case of primary offering, the corporate issuer shall file the return and pay the corresponding tax within thirty (30) days from the date of listing of the shares of stock in the local stock exchange. In the case of secondary offering, the provision of Subsection (C)(1) of this Section shall apply as to the time and manner of the payment of the tax. (D) Common Provisions. - any gain derived from the sale, barter, exchange or other disposition of shares of stock under this Section shall be exempt from the tax imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the regular individual or corporate income tax. Tax paid under this Section shall not be deductible for income tax purposes.
2%
Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term 'closely held corporation' means any corporation at least fifty percent (50%) in value of outstanding capital stock or at least fifty percent (505) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. (2) Family and Partnership Ownerships. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of the paragraph, the 'family of an individual' includes only his brothers and sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants. (3) Option. - If any person has an option acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of options shall be considered as an option to acquire such stock. (4) Constructive Ownership as Actual Ownership. Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but
November 12, 2007 REVENUE MEMORANDUM CIRCULAR NO. 73-07 SUBJECT : Re-issuing the Guidelines on the Proper Treatment of Block Sale of Shares of Stock Disposed of in the Stock Exchange TO : The Philippine Stock Exchange, Internal Revenue Officers and Employees and All Others Concerned I. Background The National Internal Revenue Code has traditionally made a distinction between shares of stock that are listed and traded in the Stock Exchange from those that are not. Briefly, under Section 127 of the Tax Code of 1997, sale, barter, exchange or other disposition of shares of stock other than the sale by a
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dealer in securities, are taxed at the rate of 1/2 of 1% of the gross selling price or gross value in money provided the shares are listed and traded through the local stock exchange; while on the other hand, for shares that are not disposed of through the local stock exchange, a final tax at either 5% or 10% is imposed on the net capital gains under Section 24 (C); Section 25 (A) (3); Section 25 (B); Section 27 (D) (2); Section 28 (A) (7) (c) and Section 28 (B) (5) (c), all of the Tax Code of 1997, as amended. The fundamental principle underlying this preferential treatment was and still is the national goal of promoting and hastening the development of the domestic capital market by means of enticing and stimulating the general public to actively take part in the trading in the local stock exchange. II. Statement of Policy In order to keep-up with modern developments and more importantly give emphasis on the economic as well as substantial aspect rather than on the formal portion of the transaction, sale of shares of stock where the sale is prearranged or the buyer/s is predetermined is taxable under either Section 24 (C); Section 25 (A) (3); Section 25 (B); Section 27 (D) (2); Section 28 (A) (7) (c) and Section 28 (B) (5) (c) notwithstanding the fact that the transaction passed through the Exchange or the said facility was used. Accordingly, any transaction, which in effect excludes the public by any means from taking part in the trading, shall be taxed under the aforementioned relevant provisions as enumerated in the preceding paragraph. This Circular expressly covers but is not limited to cases of block sale. A block sale as defined in the Implementing Rules and Regulations of the Securities Regulation Code is a matched trade that does not go through the automated order matching system of an Exchange trading system but instead has been prearranged by and among the Broker Dealer's clients and is then entered as a done deal directly into the trading system. All internal revenue issuances which are inconsistent herewith, are hereby repealed, modified, and/or amended accordingly. All internal revenue officers and others concerned are enjoined to give this Circular as wide as publicity as possible. This Circular shall take effect immediately. If the seller or transferor is not a dealer in securities, the shares of stock are regarded as capital assets. There is then a need to determine if the shares of stock are listed and traded in a local stock exchange. If the shares of stock are listed and traded in the local stock exchange, the transaction is exempt from
income tax, regardless of the nature of business of the seller or transferor (individual or corporation) However, it is subject to the one-half of one percent (1/2 of 1%) stock transaction tax imposed in Section 127 (A) of NIRC, based on the gross selling price or gross value in money of the shares of stock sold or transferred. The stockbroker who effected the sale has the duty to collect the tax from the seller upon issuance of the confirmation of sale, issue the corresponding receipt thereof and remit the same to the Revenue District Office wherein the Philippine Stock Exchange is located within 5 banking days from date of collection thereof. ii. shares not listed and traded in the stock exchange, Section (C), RR 6-08 SEC. 24. Income Tax Rates. xxx (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not over P100,000.. 5% On any amount in excess of P100,000 10%
Revenue Regulation 6-08: SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c), 28(B)(5)(c) OF THE TAX CODE, AS AMENDED. (a) Tax Rate. The provisions of Sec. 39(B) of the Tax Code, as amended, notwithstanding, a final tax at the rates prescribed below is hereby imposed on the sale, barter or exchange of shares of stock not traded through the Local Stock Exchange pursuant to Secs. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c) , 28(b)(5)( c) of the said Tax Code, as amended. Amount of Capital Gain Tax Rate Not over Php 100,000.. 5% On any amount in excess of Php 100,000 10% (b) Tax Base. The tax imposed in Subsection (a) above shall be upon the net capital gains realized during the taxable year from the sale, barter, exchange or disposition of shares of stock, except shares sold or disposed of through the Local Stock
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Exchange which is covered by the provisions of Secs. 5 and 6 above. (c) Determination of Amount and Recognition of Gain or Loss. (c.1) Determination of Selling Price. In determining the selling price, the following rules shall apply: (c.1.1) In the case of cash sale, the selling price shall be the total consideration per deed of sale. (c.1.2) If the total consideration of the sale or disposition consists partly in money and partly in kind, the selling price shall be sum of money and the fair market value of the property received. (c.1.3) In the case of exchange, the selling price shall be the fair market value of the property received. (c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donors tax under Sec. 100 of the Tax Code, as amended. (c.2) Definition of fair market value of the Shares of Stock. For purposes of this Section, fair market value of the share of stock sold shall be: (c.2.1) In the case of listed shares which were sold, transferred, or exchanged outside of the trading system and/or facilities of the Local Stock Exchange, the closing price on the day when the shares are sold, transferred, or exchanged. When no sale is made in the Local Stock Exchange on the day when the listed shares are sold, transferred, or exchanged, the closing price on the day nearest to the date of sale, transfer or exchange of the shares shall be the fair market value. (c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale shall be the fair market value. Illustrations. (i) Assume that Ms. Girl Cantillep sold on October 31, 2008, 100 shares of stock of A Corporation. The corporations accounting period consistently employed in keeping its books of accounts is on a calendar year basis. In this case, the book value of the shares of stock of A Corporation shall be determined based on its audited financial statements for the calendar year 2007 since its audited financial statements for the calendar year 2008 is yet nonexistent as of the date of sale. (ii) Assume that Ms. Mape Sison sold on March 31, 2008, 100 shares of stock of B Corporation. The corporation likewise uses calendar year basis accounting period. In this case, the books of accounts of B Corporation have already been closed and
adjusted for Calendar Year 2007, but the independent Certified Public Accountant has yet to issue the audited financial statements for said calendar year 2007 which financial statements together with the annual income tax returns are due to be filed on or before April 15, 2008. In this particular case, the book value of the shares of stock of B Corporation shall tentatively be based on the financial statements for Calendar Year 2007 yet to be audited and not on the audited financial statements of Calendar Year 2006. Once the 2007 audited financial statements have been issued, adjustment to the book value shall be made for the difference. (c.2.3) In the case of a unit of participation in any association, recreation or amusement club (such as golf, polo, or similar clubs), the fair market value thereof shall be its selling price or the bid price nearest to the date of sale as published in any newspaper or publication of general circulation, whichever is higher. (c.3) Determination of Gain or Loss from Sale or Disposition of Shares of Stock. The gain from the sale or other disposition of shares of stock shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received, if any. (c.3.1) Basis for Determining Gain or Loss from Sale or Disposition of Shares of Stock. Gain or loss from the sale, barter or exchange of property, for a valuable consideration, shall be determined by deducting from the amount of consideration contracted to be paid, the vendor/transferors basis for the property sold or disposed plus expenses of sale/disposition, if any. (c.3.1.1) Acquired by Purchase. If the property is acquired by purchase, the basis is the cost of such property. Determination of the Cost. The cost basis for determining the capital gains or losses for shares of stock acquired through purchase shall be governed by the following rules: (i) If the shares of stock can be identified, then the cost shall be the actual purchase price plus all costs of acquisition, such as commissions, documentary stamp taxes, transfer fees, etc. (ii) If the shares of stock cannot be properly identified, then the cost to be assigned shall be computed on the basis of the firstinfirst-out (FIFO) method. (iii) If books of accounts are maintained by the seller where every transaction of a particular stock is recorded, then the moving average method shall be applied rather than the FIFO method.
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(iv) In general, stock dividend received shall be assigned with a cost basis which shall be determined by allocating the cost of the original shares of stock to the total number shares held after receipt of stock dividends (i.e., the original shares plus the shares of stock received as stock dividends). Illustration of cost allocated to stock dividends declared. Five (5) shares of stock in XYX Company were acquired at a total cost of Php 1,000.00 or at two hundred pesos per share (Php 200/share). XYX Company declared and issued five (5) shares of stock as stock dividend. In this case, the cost basis for each of the ten (10) shares of stock shall be computed by dividing the cost basis of the original shares by ten (10) shares, or one thousand pesos (Php 1,000.00) divided by ten (10) shares equals one hundred pesos (Php 100.00) per share. (c.3.1.2) Acquired by Devise, Bequest or Inheritance. If the property was acquired by devise, bequest or inheritance, the basis shall be the fair market value of such property at the time of death of the decedent. The term property acquired by bequest, devise or inheritance as used herein means acquisition through testamentary or intestate succession and includes, among others: (i) Property interests that the taxpayer received as a result of a transfer, or creation of a trust, in contemplation of or intended to take effect in possession or enjoyment at or after death; and (ii) Such property interests as the taxpayer has received as the result of the exercise by a person of a general power of appointment by will or by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after death, otherwise known as a donation mortis causa or a donation in contemplation of death. (c.3.1.3) Acquired by Gift. If the property was acquired by gift, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining the loss, the basis shall be such fair market value. Illustration. Assume that Mr. Era bought shares of stock in 1970 at a cost of Php 100,000. He donated these shares to Mr. Aio on January 1, 1998, during which time, the said shares has a fair market value of Php 1,000,000 and on the basis of such fair market value, Mr. Era paid the corresponding donors tax. Mr. Aio, the donee, sold the shares on January 1, 1999 for a consideration of PhP 2,000,000. In this case, the basis of Mr. Aio in computing his gain from the sale shall be at the historical cost basis thereof in the hands of Mr. Era, the donor, or at Php 100,000. The gain from the sale in the hands of Mr. Aio is
Php1,900,000 (i.e., selling price of Php 2,000,000 less historical cost thereof in the hands of Mr. Era the donor, at Php 100,000 equals gain from the sale made by Mr. Aio in the amount of Php 1,900,000. (c.3.1.4) Acquired for Inadequate Consideration. If the property was acquired for less than an adequate consideration in money or moneys worth, the basis of such property is the amount paid by the transferee for the property. Illustration. Assume that Mr. Esq sold to Mr. Nma, shares of stock for a consideration of Php 1,000,000. At the time of the sale, its fair market value is Php 3,000,000. If Mr. Nma later on sells this property and he is taxable on his gain derived from the sale, his gain from the sale shall be determined by deducting from the amount of consideration received his purchase price thereof at Php 1,000,000. However, at the time of sale by Mr. Esq to Mr. Nma, the former should pay Capital Gains Tax and Documentary Stamp Tax on the overthe-counter sale transactions of shares and at the same time Donors Tax on the indirect gift which is the difference between fair market value of shares/stocks sold and the actual consideration for the sold shares of stock. (c.3.2) Rules on Substituted Basis in cases of TaxFree Exchanges of Shares of Stock under Section 40(C)(2) of the Tax Code, as Amended. (c.3.2.1) Substituted Basis of Stock or Securities Received by the Transferor. The substituted basis of the stock or securities received by the transferor on a tax-free exchange shall be as follows: (i) The original basis of the property, stock or securities transferred; (ii) Less: (a) money received, if any, and (b) the fair market value of the other property received, if any; (iii) Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of any gain that was recognized on the exchange, if any. However, the property received as 'boot' shall have as basis its fair market value. The term "boot" refers to the money received and other property received in excess of the stock or securities received by the transferor on a tax-free exchange. If the transferee of property assumes, as part of the consideration to the transferor, a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of computing the substituted basis, be treated as money received by the transferor on the exchange. Finally, if the transferor receives several kinds of stock or securities, the Commissioner is authorized to allocate the basis among the several classes of stocks or securities. (c.3.2.2) Substituted Basis of the Transferred Property in the
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Hands of the Transferee. The substituted basis of the property transferred in the hands of the transferee shall be as follows: (i) The original basis in the hands of the transferor; (ii) Plus: the amount of the gain recognized to the transferor on the transfer. (c.3.2.3) The Original Basis of Property to be Transferred. The original basis of the property to be transferred shall be the following, as may be appropriate: (i) The cost of the property, if acquired by purchase on or after March 1, 1913; (ii) The fair market price or value as of the moment of death of the decedent, if acquired by inheritance; (iii) The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift, if the property was acquired by donation. If the basis, however, is greater than the fair market value of the property at the time of donation, then, for purposes of determining loss, the basis shall be such fair market value; or, (iv)The amount paid by the transferee for the property, if the property was acquired for less than an adequate consideration in money or money's worth. (v) The adjusted basis of (i) to (iv) above, if the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the property or appreciably prolong its life less accumulated depreciation. (vi)The substituted basis, if the property was acquired in a previous taxfree exchange under Section 40(C)(2) of the Tax Code, as amended. (c.3.2.4) Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Property Subject of the Tax-free Exchange. The substituted basis as defined in Section 40(C)(5) of the Tax Code as amended, and implemented in Section (c.3.2.1) and (c.3.2.2) above, shall be the basis for determining gain or loss on a subsequent sale or disposition of property subject of the tax- free exchange. (c.4) Limitation of Capital Losses. For sale, barter, exchange or other forms of disposition of shares of stock subject to the 5%/10% capital gains tax on the net capital gain during the taxable year, the capital losses realized from this type of transaction during the taxable year are deductible only to the extent of capital gains from the same type of transaction during the same period. If the transferor of the shares is an individual, the rule on holding period and capital loss carry-over will not apply, notwithstanding the provisions of Section 39 of the Tax Code as amended. (c.5) Shares of Stock Becoming Worthless. Losses from shares of stock, held as capital asset, which have become worthless during the taxable year shall be treated as capital loss as of the end of the year. However, this loss is not deductible against the capital gains realized from the sale, barter, exchange or other forms of disposition of shares of stock during
the taxable year, but must be claimed against other capital gains to the extent provided for under Section 34 of the Tax Code, as amended. For the 5% and 10% net capital gains tax to apply, there must be an actual disposition of shares of stock held as capital asset, and the capital gain and capital loss used as the basis in determining net capital gain, must be derived and incurred respectively, from a sale, barter, exchange or other disposition of shares of stock. (c.6) Losses from Wash Sales of Shares of Stock. The following rules shall apply with respect to losses from wash sales of shares of stock: (c.6.1) A taxpayer cannot deduct any loss claimed to have been sustained from the sale or other disposition of stock, if, within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date (referred to in this section as the sixty-one-day (61) period), he has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock. However, this prohibition does not apply in the case of a dealer in stock if the sale or other disposition of stock is made in the ordinary course of the business of such dealer. (c.6.2) Where more than one loss is claimed to have been sustained within the taxable year from the sale or other disposition of stock or securities, the provisions of this Section shall be applied to the losses in the order in which the stock the disposition of which resulted in the respective losses were disposed of (beginning with the earliest disposition). If the order of disposition of stock disposed of at a loss on the same day cannot be determined, the stock or securities will be considered to have been disposed of in the order in which they were originally acquired (beginning with earliest acquisition). (c.6.3)Where the amount of stock or securities acquired within the sixtyone (61) day period is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible shall be those with which the stock or securities acquired are matched in accordance with this rule: The stock or securities sold will be matched in accordance with the order of their acquisition (beginning with the earliest acquisition) with an equal number of the shares of stock or securities sold or otherwise disposed of. (c.6.4) Where the amount of stock or securities acquired within the sixtyone day period is not less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the acquisition of which resulted in the non-deductibility of the loss shall be those with which the stock or securities disposed of are matched in accordance with this rule: The stock or securities
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sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired. (c.6.5) The acquisition of any share of stock or any security which results in the non-deductibility of a loss under the provisions of this Section shall be disregarded in determining the deductibility of any other loss. (c.6.6) As provided in Sec. 2 of these Regulations, the word acquired as used in this Section means acquired by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into a contract or option within the sixty-oneday period to acquire by purchase or by such an exchange the subject shares of stock. Examples of losses from wash sales of stock or securities. (i) On December 1, 2000, Ms. Rose Miranda whose taxable year is the calendar year, purchased 100 shares of common stock of M company for Php10,000. On December 15, 2000, she purchased 100 additional shares for Php 9,000. On January 2, 2001, she sold the 100 shares purchased on December 1, 2000 for Php 9,000. Because of the provisions of this Section, no loss from the sale is allowable as deduction. (ii) Ms. Karren Punzalan, whose taxable year is the calendar year, had the following stock transactions: On September 21, 2000, purchased 100 shares of the common stock of M Company for Php 5,000 or at Php 50.00/share. On December 21, 2000, she purchased 50 shares of substantially identical stock for Php 2,750 or at Php 55/share. On December 26, 2000, she purchased 25 additional shares of such stock for Php1,125 or at Php 45/share. On January 2, 2001, she sold for Php 4,000 the 100 shares purchased on September 21, 2000 or at Php 40.00/share. Computation of the Indicated Loss Proceeds from sale of 100 shares Php 4,000 Cost of shares bought on September 21, 2000 5,000 Indicated Loss from the sale (Php 1,000) ========= Computation of Non-deductible Loss due to the Sixtyone Day Period of Purchase of Substantially Identical Shares. Number of Shares Purchased Within the 61-day period 75 shares X Cost/ share for shares bought on September 21, 2000 Php 50.00/share Amount Php 3,750.00 Less: Proceeds from Sale on January 2, 2001 for 75 shares (i.e. 75 x P40/share) 3,000.00 Non-Deductible Loss Php 750.00
========= The loss on the sale of the remaining 25 shares (Php 1,250 less Php1,000 or Php 250) is deductible subject to the limitations provided in items (c.6.3) above and (c.4) above. (iii) Ms. Ding Cruz, whose taxable year is the calendar year, had the following stock transactions: On September 15, 2000, purchased 100 shares of the stock of M Company for Php 5,000. On February 1, 2001, she sold these shares for Php 4,000. On each of the four days from February 15, 2001 to February 18, 2001, she purchased 50 shares per day of substantially identical stock for Php 2,000 per purchase. There is an indicated loss of P1,000 from the sale of the 100 shares on February 1, 2001, but since within the sixty-one-day period she purchased not less than 100 shares of substantially identical stock, the loss is not deductible. The particular shares of stock, the purchase of which resulted in the nondeductibility of the loss are the first 100 shares purchased within such period, that is, the 50 shares purchased on February 15, 2001, and the next 50 shares purchased on February 16, 2001. If the shares of stock are not listed, or they are listed but are not traded, in the local stock exchange, the net capital gains realized during the year, if any, shall be subject to the final capital gains tax equivalent to 5% of the net capital gains not exceeding P100,000, and 10%,on any amount in excess of P100,000. Under RR6-03, this tax imposed shall be upon the net capital gains realized during the taxable year from the sale, barter, exchange or disposition of shares of stock, except for shares sold or disposed of through the Local Stock Exchange. The determination of the amount and recognition of gain or loss is provided under RR 6-08 Sec. 7(c). Take note that it does not matter who is the seller or transferor-- whether he is an individual (citizen or alien) or a corporation (domestic or foreign) provided he/it is not a dealer in securities. If the seller is a dealer in securities, then the shares of stock whether listed and traded in the local stock exchange, listed but not traded in the local stock exchange, or not listed shall be treated as ordinary assets and the ordinary gain shall be subject to the graduated income tax rates for individuals or to the normal corporate income tax, in the case of corporate seller. b. Income from the sale of real property situated in the Philippines
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On sale, exchange, or other disposition of real property in the Philippines, held as a capital asset. On the gross selling price, or the current fair market value at the time of the sale, whichever is higher, a final tax of 6% shall be imposed. The capital gains tax is applied on the gross selling price, or the current fair market value at the time of the sale, whichever is higher. Any gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale resulted in a gain. EXCEPTION: When sale of residence is not liable for capital gains tax? a. There is a sale or disposition of their principal residence by natural persons. b. The proceeds of the sale are fully utilized in acquiring or constructing a new principal residence within 18 calendar months from the date of sale or disposition. The Commissioner shall have been duly notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption. A deposit is made of the 6% capital gain tax otherwise due, in cash or managers check, in an interest-bearing account with an Authorized Agent Bank (AAB), under an Escrow Agreement between the taxpayer and the Bureau of Internal Revenue that the same shall be released to the taxpayer when the proceeds of the sale shall have been utilized as intended. The tax exemption can only be availed of once every 10 years If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax (CGT). The GSP or FMV at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion.
In case of a sale or other disposition of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations, the tax shall be EITHER the year-end tax of the individual (i.e., capital gain to be included in the computation of income subject to schedular rates), OR the capital gain tax of 6%, at the option of the taxpayer
net capital gain or loss is included in the computation of net income subject to schedular rates (5% to 32%). i General rule, Sec. 24(D,1), RR 8-98
What is the tax implication of a sale / disposition of a The capital asset NOT subject to capital gains tax?
SEC. 24. Income Tax Rates. (D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. August 25, 1998 REVENUE REGULATIONS NO. 08-98 SUBJECT : Revenue Regulations Amending Pertinent Portions of Revenue Regulations Nos. 11-96 and 2-98 Relative to the Tax Treatment on the Sale, Transfer or Exchange of Real Property and for this Purpose Revising the Time and Place of Payment of the Capital Gains Tax Due Thereon TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, in relation to Sections 24(D)(1) and 27(D)(5) of the same Code, these Regulations are hereby promulgated amending pertinent portions of Revenue Regulations Nos. 11-96 and 2-98 and other relevant regulations and issuances regarding the tax treatment on the sale,
i.e.,
Unutilized amount GSP
x (higher of ) = Taxable GSP or FMV portion
ALTERNATIVE TAXATION:
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transfer or exchange of real property and amending for this purpose the date and venue for the filing of capital gains tax returns and payment of taxes due on transactions involving real properties classified as capital assets and likewise amending the venue for the filing and payment of creditable withholding tax due on transactions involving real properties classified as ordinary assets. SECTION 2. Final Tax on Sales, Exchanges or Transfers of Real Properties Classified as Capital Assets. The rate of six percent (6%) shall be imposed on capital gains presumed to have been realized by the seller from the sale, exchange or other disposition of real properties located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Code (i.e., the authority of the Commissioner to prescribe the real property values), whichever is higher. In case of disposition of real property made by individuals to the government or to any of its political subdivisions or agencies or to governmentowned or -controlled-corporations, the tax to be imposed shall be determined either under the normal income tax rate imposed in Section 24(A) or under a final capital gains tax of six percent (6%) imposed under Section 24(D)(1), both of the Tax Code of 1997, at the option of the taxpayer. SECTION 3. Time and Place of Payment of Capital Gains Tax. Within thirty (30) days following each sale or disposition, the Capital Gains Tax Return shall be filed by the seller and payment made to an Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located. SECTION 4. Creditable Withholding Tax on the Sale, Transfer or Exchange of Real Property Classified as Ordinary Asset. A creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent/buyer, in accordance with the following schedule: A. Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business as per proof of registration with the HLURB or HUDCC: With a selling price P500,000.00 or less 1.5%
With a selling price of more than P500,000.00 but not more than P2,000,000.00 With a selling price of more than P2,000,000.00
3.0% 5.0%
B. Where the seller/transferor is not habitually engaged in the real estate business 7.5% B. Where the seller/transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of Revenue Regulations No. 2-98
Exempt
SECTION 5. Time and Place of Payment of Creditable Withholding Tax. Creditable withholding taxes deducted and withheld by the withholding agent/buyer on the sale, transfer or exchange of real property classified as ordinary asset, shall be paid by the withholding agent/buyer upon filing of the return with the Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located within ten (10) days following the end of the month in which the transaction occurred. Provided, however, that taxes withheld in December shall be filed on or before January 25 of the following year. SECTION 6. Tax Clearance Certificate. Upon presentation of the Capital Gains Tax Return or Creditable Withholding Tax Return with a bank validation evidencing full payment of the capital gains tax or the creditable withholding tax due on the sale, transfer, barter, exchange or other disposition of real property classified as capital or ordinary asset, as the case may be, the Revenue District Officer (RDO) of the revenue district where the property being transferred is located shall issue the corresponding Tax Clearance (TCL) or Certificate Authorizing Registration (CAR) for the registration of the real property in favor of the transferee. SECTION 7. Repealing Clause. The provisions of any revenue regulations, revenue memorandum order, revenue memorandum circular or any other issuance of the Bureau of Internal Revenue inconsistent with these Regulations are hereby repealed, amended, or modified accordingly. SECTION 8. Effectivity Clause. These Regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation. (SGD.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (SGD.) BEETHOVEN L. RUALO
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Commissioner of Internal Revenue ii. Exception, Sec. 24 (D, 2), RR 13-99, as amended by RR 14-00, RMC 45-02
Disposition of a Principal Residence under Certain Conditions TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to Section 244, in relation to Section 24(D)(2) of the National Internal Revenue Code of 1997, these Regulations are hereby promulgated to govern the exemption of a citizen or a resident alien individual from capital gains tax on the sale, exchange or disposition of his principal residence. SECTION 2. Definition of Terms. For purposes of these Regulations, the following items shall have the following meaning: (1) "Natural person" shall refer to a citizen or resident alien individual taxable under Sec. 24 of the Code. It does not include an estate or a trust, the provision of Sec. 60 of the Code to the contrary notwithstanding. (2) Principal Residence. (a) The term "Principal Residence" shall refer to the dwelling house, including the land on which it is situated, where the husband and wife or an unmarried individual, whether or not qualified as head of family, and members of his family reside. Actual occupancy of such principal residence shall not be considered interrupted or abandoned by reason of the individual's temporary absence therefrom due to travel or studies or work abroad or such other similar circumstances. Such principal residence must be characterized by permanency in that it must be the dwelling house in which, whenever absent, the said individual intends to return. (b) Where ownership of the land and the dwelling house thereon belongs to different persons, e.g., where the land is leased to the dwelling house owner, only the dwelling house shall be treated as Principal Residence of the dwelling house owner. Thus, if the said land and the dwelling house thereon be jointly sold or disposed by the said owners, only the-sale or disposition of the dwelling house shall be entitled to the benefit of exemption from the capital gains tax herein prescribed: Provided, however, that where both the owner of the land and owner of the dwelling house actually reside in the said dwelling house, then both the said land and dwelling house shall be treated as their Principal Residence (e.g., owner of the land is the parent while owner of the house is his child, or vice versa). (c) Where the land and the dwelling house thereon be owned by several co-owners, e.g., inherited by two or more heirs through hereditary succession, and where the said property is actually used as Principal Residence by one or more of the said co-owners, including the members of .his/their family, the said property
SEC. 24. Income Tax Rates. xxx (D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. (2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon. July 26, 1999 REVENUE REGULATIONS NO. 13-99 SUBJECT : Exemption of Certain Individuals from the Capital Gains Tax on the Sale, Exchange or
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shall be treated as the Principal Residence of the co-owner/s actually occupying and using the same as his/their Principal Residence but to the extent of his/their proportionate share in the value of the principal residence. Conversely, the capital gains tax exemption benefit herein prescribed shall not apply in respect of the other co-owners who do not actually use and occupy the same as their Principal Residence. (d) The residential address shown in the latest income tax return filed by the vendor/transferor immediately preceding the date of sale of the said real property shall be treated, for purposes of these Regulations, as a conclusive presumption about his true residential address, the certification of the Barangay Chairman, or Building Administrator (in case of a condominium unit), to the contrary notwithstanding, in accordance with the doctrine of admission against interest or the principle of estoppel (e.g., if the property was sold on May 1, 2000, the vendor's annual income tax return for the year 1999, which he filed on or before April 15, 2000, showing his residential address, shall be treated as a conclusive presumption that his true residential address is that which is shown in his aforesaid income tax return). If the vendor is exempt from filing any tax return, in which case, he has no tax record immediately prior to the sale of his property, then the aforementioned certification from the Barangay Chairman or Building Administrator, as the case may be, shall suffice. (as amended by RR 14-00) (3) "Fully Utilized" shall mean that the taxpayer has actually commenced with the construction of his new principal residence or has actually entered into a contract for the purchase of his new principal residence within eighteen (18) calendar months from the date of sale, exchange or disposition thereof, with the intention of using the entire proceeds of sale for the acquisition or construction of his new principal residence. Provided, that any expense paid for by the seller in effecting the sale, i.e., documentary stamp tax, transfer fees, broker's commission, if any, shall be considered as part of the amount utilized. SECTION 3. Conditions for Exemption. The general provisions of the Code to the contrary notwithstanding, capital gains presumed to have been realized from the sale, exchange or disposition by a natural person of his Principal Residence shall not be imposed with six percent (6%) capital gains tax, subject to compliance with the following: (1) Escrow Agreement. The six percent (6%) capital gains tax otherwise due on the presumed capital gains derived from the sale, exchange or disposition of his Principal Residence shall be deposited in cash or manager's check in interestbearing account with an Authorized Agent Bank (AAB)
under an Escrow Agreement (ANNEX A hereof) between the concerned Revenue District Officer, the Seller/Transferor and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Seller/Transferor upon certification by the said RDO that the proceeds of sale or disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferor's new Principal Residence within eighteen (18) calendar months from date of the said sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property. In general, the term "Escrow" means "A scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promisee or obligee." (2) Capital Gains Tax Return. The Seller/Transferor shall file, in duplicate, his Capital Gains Tax Return (BIR FORM No. 1706) covering the sale or disposition of his Principal Residence with the concerned .Revenue District Office within thirty (30) days from date of its sale or disposition: Provided, however, that the Seller/Transferor shall not be required to pay any capital gains tax during the 18-month period on the sale of his principal residence duly established as such. Provided, further, that for purposes of the capital gains tax otherwise due on the sale, exchange or disposition of the said Principal Residence, the execution of the Escrow Agreement referred to in the immediately preceding Section 3 (1) hereof shall be considered sufficient. The following shall be submitted with the Capital Gains Tax Return herein required to be filed: (a) Proof of payment of the documentary stamp tax imposed under Sec. 196 of the Tax Code of 1997 on the deed of sale or conveyance of the said "Principal Residence;" (b) A sworn statement from the Barangay Chairman that the taxpayer's Principal Residence is located within the jurisdiction of that Barangay and that the same has been his residence immediately prior to the date of its sale or disposition: Provided, however, that if the taxpayer's Principal Residence sold or disposed is a condominium unit, in lieu of the said Barangay Chairman, the certification shall be issued by the Building Administrator of the Condominium building. (c) A duplicate original copy of the Deed of Conveyance of his Principal Residence; (d) A certified xerox copy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT), in case of a condominium unit, covering the Principal Residence sold or disposed; (e) A certified xerox copy of the latest Tax Declaration covering the said Principal Residence (land and improvement); and
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(f) If the building or improvement thereon has been constructed on or after the year 1990, the Building Permit or Occupancy Permit issued by the concerned city or municipality, showing the amount of the construction cost thereof. (3) Post Reporting Requirement. The proceeds from the sale, exchange or disposition of his old Principal Residence must be fully utilized in acquiring or constructing his new Principal Residence within eighteen (18) calendar months from date of its sale, exchange or disposition. in order to show proof that positive action was undertaken to utilize the proceeds for the acquisition or construction of his new Principal Residence within the 18-month reglementary period, he shall submit to the RDO concerned, within thirty (30) days from the lapse of the said period, the following documents: (a) A sworn statement that the total proceeds from the sale or disposition of his old Principal Residence has been actually utilized in the acquisition or construction of his new Principal Residence or, if the construction of his new Principal Residence is still in progress, a sworn statement that such amount shall be fully utilized to procure the necessary materials and pay for the cost of labor and other expenses for the construction thereof; (b) A certified statement from his architect or engineer, or both, showing the cost of materials and labor for the construction of his new Principal Residence; (c) A certified copy of the Building Permit issued by the Office of the Building Official of the City or Municipality where his new Principal Residence shall be constructed as well as xerox copies of documents (e.g., building specification plan, construction plans, or construction cost estimates) submitted with his application for the said Building Permit on which computation of the amount of the building license fee has been based; (d) In case his new Principal Residence is acquired by purchase, a duplicate original copy of the Deed of Absolute Sale covering the purchase of his new Principal Residence. (4) elease from the Escrow Agreement. Upon a showing, based on the foregoing documents, that the proceeds of sale, exchange or disposition of his old Principal Residence have already been fully utilized in the acquisition or construction of his new Principal Residence, the concerned Revenue District Officer shall, within fifteen (15) days from date of submission by the Seller/Transferor of the foregoing documents, release the Escrow on the aforesaid bank deposit in favor of the Seller/Transferor (ANNEX B hereof). (5) imitation on Tax Exemption Privilege. The tax exemption herein granted may be availed of only once every ten (10) years;
(6) Cost Basis of the New "Principal Residence". The historical cost or adjusted cost basis of his old Principal Residence sold, exchanged or disposed shall be carried over to the cost basis of his new Principal Residence; and (7) Assessment for Deficiency Capital Gains Tax; Application of the Escrowed Bank Deposit Against the Deficiency Tax. If the Seller/Transferor fails to submit documentary evidence within thirty (30) days after the lapse of the aforesaid 18-month period, showing that he has utilized the proceeds of sale, exchange or disposition of his old Principal Residence to acquire or construct his new Principal Residence, it shall be presumed that he did not, in fact, utilize the aforesaid proceeds of sale for the construction or acquisition of his new Principal Residence, in which case, he shall be treated deficient in the payment of his capital gains tax from the sale or disposition of his aforesaid Principal Residence, and shall be accordingly be assessed for deficiency capital gains tax, inclusive of the 20% interest per annum, pursuant to the provisions of Section 228 of the Code, as implemented by Revenue Regulations No. 12-99, in relation to Section 249 of the said Code. Pursuant to the provisions of Revenue Regulations No. 12-99, the taxpayer shall be issued with the required Post Reporting Notice informing him, in writing, of the aforementioned facts, in order that he may present his side of the case through informal conference, and the required Preliminary Assessment Notice, before issuance of the Formal Assessment Notice. If, at this point in time, the escrowed tax money is still in the custody of the Depository Bank, the full amount thereof, including its interest earnings, shall be applied in computing for the taxpayer's deficiency capital gains tax. Upon the time that the said deficiency tax assessment has become final and executory, the deposit in escrow, inclusive of its interest earnings, shall be forfeited and applied against the taxpayer's deficiency capital gains tax liability. The depository Bank shall forthwith be informed of this action, and shall, upon demand in writing, by the Commissioner or his duly authorized representative, turn over the money for application in payment of the taxpayer's deficiency tax liability. If the same is insufficient to cover the entire amount assessed, the seller/transferor shall remain liable for the remaining balance of the assessment. On the other hand, the excess of the deposit in escrow, if any, shall forthwith be returned to the Seller/Transferor, by the Bank, upon written authorization from the Commissioner or his duly authorized representative. (8) Partial Utilization of the Proceeds of Sales Exchange or Disposition. If there is no full utilization of the proceeds of sale, exchange or disposition of his old Principal Residence for the acquisition or construction of his new Principal Residence, he shall be liable for deficiency capital
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gains tax, inclusive of 20% interest per annum, computed from the 31st day after the date of sale or disposition of the said old Principal Residence. (as amended by RR 14-00) SECTION 4. Determination of Capital Gains Tax Due if the Proceeds of Sale, Exchange or Disposition of his Principal Residence has not Been Fully Utilized. In a case where the entire proceeds of sale is not utilized for the purchase or construction of a new principal residence, the capital gains tax shall attach. In computing the capital gains tax due on the sale of the principal residence, we follow the following steps: (1) Determine the percentage (%) of nonutilization applying the formula: Unutilized Portion of GSP -------------------------= Percentage (%) of Non-Utilization GSP (2) Multiply the % of non-utilization by the GSP or FMV, whichever is higher. (3) Multiply the product in item (2) above by the rate of six percent (6%). If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-month reglementary period, his right of exemption from the capital gains tax did not arise to the extent of the unutilized amount, in which event, the tax due thereon shall immediately become due and demandable on the 31st day after the date of the sale, exchange or disposition of principal residence. As such, he shall file his capital gains tax return covering the sale, exchange or disposition of his principal residence and pay the deficiency capital gains tax inclusive of the twenty five percent (25%) surcharge for late payment of the tax plus twenty percent (20%) delinquency interest per annum incident to such late payment computed on the basis of the basic tax assessed. The interest shall be imposed from the thirty-first (31st) day after the date of the sale of principal residence until the date of payment, provided, that the date of sale shall mean the date of notarization of the document of sale, exchange, or disposition of principal residence. Illustrations: (1) In case the proceeds from the sale, exchange or disposition of his principal residence has been fully utilized to acquire his new principal residence. Assume that Mr. Arnold Buendia acquired his principal residence in 1986 at a cost of P1,000,000.00. He sold the said property on January 1, 1998, with a fair market value of P5,000,000.00, for a consideration of P4,000,000.00. Within the 18-month reglementary period, he purchased his new principal residence at a cost of P7,000,000.00.
Computations: Historical cost of old principal residence P1,000,000.00 Gross selling price (GSP) P4,000,000.00 Fair market value (FMV) of old principal residence at the time of sale P5,000,000.00 Cost to acquire new principal residence P7,000,000.00 (a) To compute for the capital gains tax due. In this case, Mr. Buendia shall be exempt from the capital gains tax otherwise due from him since the entire proceeds of the sale has been fully utilized to acquire his new principal residence. (b) To compute for the basis of the new principal residence. The historical cost or adjusted cost basis of his old principal residence shall be carried over to the cost basis of his new principal residence, computed as follows: Historical cost of old principal residence P1,000,000.00 Add: Additional cost to acquire new principal residence Cost to acquire his new principal residence P7,000,000.00 Less: GSP of his old principal residence (4,000,000.00) ----------------3,000,000.00 ---------------Adjusted Cost Basis of New Principal Residence P4,000,000.00 ========== (2) In case the fair market value of the old principal residence is equal to the cost to acquire the new principal residence. Using the above illustration, if for example, instead of P7,000,000.00, Mr. Buendia was able to acquire his new principal residence at a cost of P4,000,000.00, which is equal to the gross selling price of his old principal residence. (a) To compute for the capital gains tax due. In this case, Mr. Buendia is still exempt from the payment of the capital gains tax otherwise due from him because there has been full utilization of the proceeds from the sale of his old principal residence within the 18-month reglementary period. (b) To compute for the basis of his new principal residence. Since the fair market value of his old principal residence is equal to the cost to acquire his new principal residence, the historical cost of his old principal residence shall be the basis of his new principal residence, computed as follows: Historical cost of his old principal residence P1,000,000.00 Add: Additional cost to acquire new principal residence: Cost to acquire new principal residenceP4,000,000.00 Less: GSP of old principal residence (4,000,000.00)
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----------------Adjusted Cost Basis of New Principal Residence P1,000,000.00 ========== (3) In case the proceeds from the sale of his old principal residence has not been fully utilized to acquire his new principal residence. If Mr. Buendia acquired his new principal residence within the 18month reglementary period but did not, however, utilize the entire proceeds of the sale in acquiring his new principal residence because he only used P3,000,000 thereof in acquiring his new principal residence, that portion of the gross selling price not utilized in the acquisition or construction of his new principal residence shall be subject to capital gains tax. Computations: Historical cost of old principal residenceP1,000,000.00 Gross selling price (GSP) P4,000,000.00 Fair market value (FMV) of old principal residence P5,000,000.00 Cost to acquire new principal residenceP3,000,000.00 (a) To compute for the capital gains tax due. To compute for the capital gains tax due, the following formula shall be used in determining capital gains tax due on the taxable portion pertaining to the unutilized amount of the proceeds of sale: Unutilized Portion ----------- x GSP = (P4,000,000 - P3,000,000) -------------------------------x P4,000,000 = P1,000,000 --------------- x P5,000,000 P4,000,000 = 25% x P5,000,000 x 6% = P75,000.00 ======== P5,000,000 x 6% (Higher of GSP and FMV)
------------Capital gains tax otherwise due thereon (6%) P300,000 Capital gains tax allocable to the unutilized portion 75,000 ------------Amount of exempt capital gains tax allocable to the utilized portion of proceeds from sale (P3,000,000/P4,000,000 = 75% P225,000 times P300,000) ======== (b) To compute for the basis of the new principal residence. In this case, since the entire proceeds was not utilized to acquire the new principal residence, the cost basis to be carried over to his new principal residence shall be equivalent to the proportion of the utilized amount over the GSP applied on the historical cost, computed as follows: Historical cost of old principal residence P1,000,000 Less: Portion of historical cost pertaining to the tax paid unutilized amount (25%) (250,000) ------------Adjusted Cost Basis of New Principal Residence P750,000 ======== or another way for computing the adjusted cost basis of the new principal residence is by using this formula: Utilized Amount of GSP -----------------x Historical Cost = Amount to be Carried Over GSP of Old of Old Principalto the Cost Basis of New Principal Residence Principal Residence Residence applied as follows: (P4,000,000 - P1,000,000) -------------------------------- x P1,000,000 = P750,000 P4,000,000 ======= SECTION 5. Disposition of the Principal Residence in Exchange for Property Other than Cash. (1) If the individual taxpayer's principal residence is disposed in exchange for a condominium unit, the disposition of the taxpayer's principal residence shall not be subjected to the capital gains tax herein prescribed, provided that the said condominium unit received in the exchange shall be used by the taxpayer-transferor as his new principal residence. In this particular case, the exempt provision of Sec. 24(D)(2) of the 1997 Tax Code shall only apply to the transferor of the principal residence and not to the
x Capital gains tax rate
x 6%
The capital gains tax due from Mr. Buendia for the said unutilized portion shall be P75,000 out of the total of P300,000 capital gains tax otherwise due from the sale of his old principal residence (i.e., P5,000,000 x 6% = P300,000). However, he shall be exempt from capital gains tax to the extent allocable to that portion which he actually utilized to acquire his new principal residence (i.e., capital gains tax portion of P225,000), as shown below: Fair market value of the principal residence sold
P5,000,000
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transferee who shall be subject to the capital gains tax in case his/its condominium unit is treated as capital asset or to the income tax which shall be withheld in accordance with Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended, in case the condominium unit is treated as an ordinary asset. However, if the condominium unit is similarly treated by an individual owner as his principal residence, then the same shall also be covered by the exempt provision under Sec. 24(D)(2) of the same Code. Example: Mr. Buendia assigned and conveyed his principal residence to ABC Realty Corporation in exchange for a condominium unit which Mr. Buendia will use as his new principal residence. Thus, Mr. Buendia is exempt the from imposition of capital gains tax on the exchange of his new principal residence while ABC Realty Corporation, on the other hand, shall be subject to income tax, on its exchange of the condominium unit. (2) If the said taxpayer's principal residence is disposed of in exchange for a parcel of land and such land received in the exchange shall be used for the construction of his new principal residence, no income tax or capital gains tax shall be imposed upon the owner of the principal residence. However, the owner of the land shall be subject to capital gains tax or to income tax, as the case may be. (3) If in the acquisition of his new principal residence, the taxpayer exchanged his old principal residence plus cash or other property, the unutilized portion subject to capital gains tax shall be determined by the difference between the total consideration made on the conveyance of old principal residence transferred (FMV of old principal residence + cash or FMV of other property) and the total consideration received (FMV of new principal residence) for such exchange. Example: Mr. Buendia assigned and conveyed his principal residence with fair market value of P4,000,000 and in addition paid P2,000,000 to acquire as new principal residence the principal residence of Mr. Yabut. Mr. Yabut, on the other hand, conveyed his principal residence to Mr. Buendia with fair market value of P5,000,000, with the intention of making the property received from Mr. Buendia as his new principal residence. The historical cost of the old principal residence of Mr. Buendia is P1,000,000 while the historical cost of the old principal residence of Mr. Yabut is P500,000. (a) Computation of capital gains tax due on the exchange of property by Mr. Buendia No capital gains tax is due from Mr. Buendia for the reason that there has been full utilization of the value of his old principal residence exchanged where in addition to fair market value of his old principal residence of P4,000,000, he still paid cash of P2,000,000 to acquire as his new principal residence the old principal residence of Mr. Yabut valued at P5,000,000.
(b) Computation of cost basis of the new principal residence of Mr. Buendia
Historical cost of his old principal residence P1,000,000.00 Add: Additional cost to acquire new principal residence: Cost to acquire new principal residence P6,000,000.00 Less: FMV of old principal residence at the time of exchange (4,000,000.00) ----------------Adjusted Cost Basis of New Principal Residence P3,000,000.00 ==========
(c) Computation of capital gains tax due from Mr. Yabut Mr. Yabut shall be liable to capital gains tax to the extent of the unutilized portion of the total value of consideration received in the exchange which is computed as follows: = (P6,000,000 - P5,000,000) ------------------------------- x 6,000,000 x 6% P6,000,000 = P1,000,000 --------------- x 6,000,000 x P6,000,000 = P60,000.00 ======== (d) Computation of the adjusted cost basis of the new principal residence of Mr. Yabut In computing for the adjusted cost basis of the new principal residence of Mr. Yabut, only that portion of historical cost corresponding to the unutilized portion of the value received shall be considered. In this case, the adjusted cost basis of the new principal residence is computed as follows: = P5,000,000 -------------x P500,000 P6,000,000 = P416,667 ======= In order to avail of the tax exemption from capital gains tax with respect to such exchanges, the aforesaid taxpayer is nevertheless required to acquire his new principal residence within the eighteen (18) month reglementary period, otherwise, he shall be liable to pay the capital gains tax on the disposition of his principal residence. In all cases of exchange of principal residence for another real property, the liability of documentary stamp tax provided under Sec. 196 of the 1997 Code shall accrue to both parties involved in the exchange. SEC 6. Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL). The 6%
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seller/transferor's compliance with the preliminary conditions for exemption under Sec. 3(1) and (2) of these Regulations shall be sufficient basis for the RDO to approve and issue the CAR or TCL of the principal residence sold, exchanged or disposed by the aforesaid taxpayer. Said CAR or TCL shall state that the said sale; exchange or disposition of the taxpayer's principal residence is exempt from capital gains tax pursuant to Sec. 24 (D)(2) of the Code but subject to compliance with the post-reporting requirements imposed under Sec. 3(3) of these Regulations. (as amended by RR 14-00) SECTION 7. Repealing Clause. All existing rules and regulations or parts thereof which are inconsistent with the provisions of these Regulations are hereby amended, modified or repealed accordingly. SECTION 8. Effectivity. The provisions of these Regulations shall take effect fifteen (15) days after publication in the Official Gazette or in any newspaper of general circulation without prejudice, however, to those persons who have availed of the capital gains tax exemption on account of such sale or disposition during the period from January 1, 1998 to the date of effectivity of these Regulations: Provided, however, that such persons shall be required to comply with the documentary requirements herein prescribed within thirty (30) days from date of effectivity hereof. (SGD.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (SGD.) BEETHOVEN L. RUALO October 14, 2002 REVENUE MEMORANDUM CIRCULAR NO. 45-02 SUBJECT : Amending the Procedural Requirements for the Tax Exemption of Sale of Principal Residence TO : All Internal Revenue Officers and Others Concerned This Circular is hereby issued to harmonize existing guidelines in the processing/issuance of Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL) on the sale or disposition of principal residence under Section 24(D)(2) of the Tax Code of 1997 in line with the One Time Transaction (ONETT) Program. SECTION 1. In the light of the provisions of Revenue Regulations (RR) No. 14-2000 requiring the execution of an Escrow Agreement covering the amount of capital gains tax involved by and among the Revenue District Officer (RDO), the Authorized Agent Bank (ABB) and the Seller/Transferor of real property classified and used as principal residence, the tax
exemption ruling referred to in RMC Nos. 3-2001 and 14-2001 is no longer necessary for the issuance of the CAR and/or TCL. SECTION 2. The concerned RDO shall see to it that if upon the lapse of thirty (30) days following the end of the eighteen-month construction/acquisition period, there is no showing that the seller has utilized the proceeds of sale, exchange or disposition of his old principal residence to acquire or construct his new principal residence, said RDO shall forthwith initiate the assessment of deficiency capital gains tax and, thereafter, apply the escrowed bank deposit account against the deficiency, in accordance with Sec. 3(7) of RR 13-99, as amended by RR 14-2000. SECTION 3. The provisions of all internal revenue issuances inconsistent herewith are hereby repealed, modified or amended accordingly. SECTION 4. This Circular shall take effect immediately upon approval. (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue c. Income from the sale/exchange/other disposition of other capital assets i
Special rules to be applied, Sec. 39 (B)(D) SEC. 39. Capital Gains and Losses. xxx (B) Percentage Taken Into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: (1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months; (C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses.
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(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months. Loss Limitation Rule Loss Carry-Over Rule Holding Period Rule
Limitation on Capital Losses GENERAL RULE: Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. SUMMARY OF RULES For Individuals, and Taxpayers Treated as Individuals: 1. The holding period is relevant in determining the percentage of capital gains and losses to be taken into account, as follows: 100% if the capital asset was held for not more than 12 months 50% if the capital asset was held for more than 12 months Net capital loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months (100% deduction) Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.
(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection (C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. The tax shall be computed in accordance with and at the rates established in the following schedule: 10,000 P10,000 P30,000 P30,000 P70,000 P70,000 P140,000 P140,000 P250,000 P250,000 P500,000 > P500,000 5% P500 + 10% of the excess over P10,000 P2,500 + 15% of the excess over P30,000 P8,500 + 20% of the excess over P70,000 P22,500 + 25% of the excess over P140,000 P50,000 + 30% of the excess over P250,000 P125,000 + 34% of the excess over P500,000 in 1998.
2.
3.
ii. Taxation of Capital Gain Sec. 24. Income Tax Rates. (A) Rates of Income Tax on Indiidual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year from all sources within and without the Philippines by every individual citizen of the Philippines residing therein;
Provided, That effective January 1, 1999, the top
marginal rate shall be 33% and effective January 1, 2000, the said rate shall be 32%.
For married individuals, the husband and wife, subject to the provision of Section 51(D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.
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C. Taxation of Non-Resident Citizens Sec. 23 General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: (B) A nonresident citizen is taxable only on income derived from sources within the Philippines. Sec. 24. Income Tax Rates. (see provision above under taxation of capital gain) 1. General Rule Income from sources within the Philippines are taxed exactly as income of resident citizens, except as indicated below. Exceptions
2.
a. Taxation of interest income from depository banks under the expanded foreign currency deposit system RR 10-98 Revenue Regulations 10-98 August 25, 1998 SUBJECT: Implementing the Provisions of the National Internal Revenue Code, As Amended By Republic Act No. 8424, Relative to the Imposition of Income Taxes on Income Derived Under the Foreign Currency Deposit and Offshore Banking Systems TO: All Internal Concerned Revenue Officers and Others
SCOPE Pursuant to Section 244, in relation to Sections 24, 25, 27 and 28 of the National Internal Revenue Code of 1997, as amended by R.A. No. 8424, these Regulations are hereby promulgated to govern the imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore Banking Systems.
Sec. 2.22. Definition of Terms.

(A) Foreign Currency Deposit System shall refer to the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of Republic Act No. 6426 entitled "An Act Instituting a Foreign Currency Deposit System in the Philippines, and For Other Purposes." (B) Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Bangko Sentral Ng Pilipinas (BSP) to engage in foreign
currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. ("Local bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended). (C) Offshore Banking System shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external and internal sources and the utilization of such fund pursuant to Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (D) Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas (BSP) to transact offshore banking business in the Philippines in accordance with the provisions of Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (E) Deposits shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. (F) Resident shall mean (1) an individual citizen of the Philippines residing therein; or (2) an individual who is not a citizen of the Philippines but is permanently residing therein; or (3) a corporation or other juridical person organized under the laws of the Philippines; or (4) a branch, subsidiary, affiliate, extension office or other unit of corporations or juridical persons organized under the laws of any foreign country operating in the Philippines. (G) "Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of "resident". (H) Filipino Overseas Contract Worker (OCW) means an individual citizen of the Philippines referred to under Section 23(C) of the Code. A Filipino Seaman is a citizen of the Philippines who receives compensation for services rendered abroad as a member of the complement of an ocean-going vessel engaged exclusively in international trade as referred to under Section 23(C) of the Code.
Sec. 2.24. Income Tax Rate of Income from Foreign Currency Deposit.
Interest
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(A) Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System (1) Interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit shall be subject to a final withholding tax of seven and one-half percent (7.5%). The depository bank shall withhold and remit the tax pursuant to Sections 57 and 58 (withholding tax at source) of the Code. (2) If a bank account is jointly in the name of a non-resident citizen such as an overseas contract worker, or a Filipino seaman, and his spouse or dependent who is a resident in the Philippines, fifty percent (50%) of the interest income from such bank deposit shall be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of seven and one-half percent (7.5%). (B) Compliance and Administrative Procedures for Non-Resident Citizen and Non-Resident Alien. The tax on interest income from foreign currency deposit shall be imposed unless the depositor who is a nonresident citizen or a non-resident alien can present documentary evidence that he is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of any of the following: (1) an immigration visa issued by the foreign government in the country where he is a resident of; or (2) a certificate of residency which is issued by the Philippine Embassy or Consulate in the foreign country of his residence; or (3) a certificate of the contract of employment of an overseas contract worker which is duly registered with the Philippine Overseas Employment Agency (POEA); or a Seaman's Certificate, in the case of a Filipino seaman; or (4) a certification from the Bureau of Immigration of the Philippines that a non-resident alien is not a resident of the Philippines; or (5) a certification from the Department of Foreign Affairs (DFA) of the Philippines that the individual is a regular member of the diplomatic corps of a foreign government and is entitled to income tax exemption under an international agreement to which the Philippines is a signatory. (C) Name of the Foreign Currency Bank Account To be entitled to an exemption from the tax on interest income on foreign currency deposit, the Foreign Currency Bank Account shall be in the name of the non-resident individual or non-resident corporation. Otherwise, the interest income therefrom shall be considered as subject to the tax imposed herein.
(D) Illustration. Mr. Juan de la Cruz, a Filipino citizen who is residing in the Philippines has a US dollar account with ABC Bank. His gross interest earnings from his bank deposit for the first quarter of 1998 (i.e. from January 1 to March 31, 1998) amounted to US$1,000.00. This gross interest earning shall be considered as constructively received by Mr. De la Cruz during the first quarter of 1998 and shall be subject to a seven and one-half percent (7.5%) final withholding tax. The 7.5% final withholding tax which is due thereon is US$75.00.
Sec. 2.27 and Sec. 2.28 Corporate Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System.
(A) Interest income which is actually or constructively received by a domestic corporation or a resident foreign corporation from a foreign currency bank deposit shall be subject to a final withholding tax at the rate of seven and one-half percent (7.5%) based on the gross amount of such interest income. The depository bank shall withhold and remit the tax pursuant to the provisions of Sections 57 and 58 (withholding tax at source) of the Code. (B) Compliance and Administrative Procedures for a Non-resident Corporation. The tax on interest income from foreign currency deposit shall be imposed unless the depositor, which is a non-resident corporation, can present documentary evidence that it is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of all the following requirements: (1) Certificate of registration of the corporation abroad; and (2) Certification from the Securities and Exchange Commission (SEC) that the non-resident corporation is not licensed to do business in the Philippines. (C) Taxation of Income of an FCDU or OBU from Foreign Currency Transactions. In general, income derived by an FCDU or an OBU from foreign currency transactions with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to a final withholding tax of ten percent (10%) based on gross income pursuant to Sec. 27(D)(3) and Sec. 28(A)(4) of the Code. Income from foreign currency transactions shall include interest income from lending operations, including bank charges, commissions, service fees, and net foreign exchange transaction gains. Income from foreign currency transactions with nonresidents of the Philippines shall not be subject to income tax.
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The person making the income payment shall withhold and remit the tax withheld pursuant to the provisions of Sections 57 and 58 of the Code. Thus, in the case of interest payment by a resident of the Philippines on a foreign currency loan from an OBU or an FCDU, the withholding agent shall be the said resident. (D) Taxation of Other Incomes of an FCDU or an OBU. Income derived by an FCDU or an OBU from activities other than foreign currency transactions shall be subject to the pertinent income tax/taxes prescribed under Section 27 or Section 28 of the Code. To illustrate: Income derived by an FCDU from consultancy services and rentals shall be subject to an income tax based on net income at the tax rates prescribed under Section 27(A) of the Code. Capital gains derived from the sale, barter, exchange or disposition of shares of stocks in a domestic corporation shall be subject to tax prescribed under Section 27(D) of the Code. The aforesaid depository bank shall file its corporate income tax return for income referred to in the preceding paragraph in accordance with the provisions of Section 52 of the Code. It shall also declare thereunder all other incomes derived during the taxable period which are subject to the final withholding taxes, the fact that such final withholding taxes have been withheld therefrom by the payor notwithstanding, indicating the following information: (a) Name of the withholding agent; (b) His/its address; (c) His/its Taxpayer Identification Number (TIN); (d) Period covered; (e) Gross Income; (f) Rate of final withholding tax applied; and (g) Amount of final withholding tax withheld. The submission of the foregoing information shall not be required with respect to its interest income derived from bank deposits.
foreign currency deposits, shall not be entitled to the exemption privilege. EFFECTIVITY CLAUSE. These Regulations shall apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable. TRANSITORY PROVISION. No penalty shall be imposed for late payment of the tax herein prescribed for the first three quarters of calendar year 1998, provided, however, that the taxpayer's corresponding tax returns for the said taxable quarters are filed and the taxes due are paid not later than October 25, 1998. b. Income from sources outside of the Philippinesnot subject to Philippine income tax. DE LEON: Income earned or derived from abroad by nonresident citizens, OCWs and Filipino seamen are now exempt from income tax. The tax exemption is granted as an incentive, in recognition of their significant contribution to the countrys foreign exchange reserves. Consequently, their income is also exempted from withholding tax. All employees whose services are rendered abroad for being seconded or assigned for at least 183 days may be classified as non-resident citizens deriving foreign-sourced income. The phrase most of the time means that the citizen shall have stayed abroad for at least 183 days in a taxable year (RR 1-79, sec. 2c). For OCWs, the time spent abroad is immaterial for tax exemption purposes. All that is required is for the workers employment contract to pass through and be registered with the Philippine Overseas Employment Agency (POEA). Note that a Filipina who constantly travels around the world ith her husband on a tourist visa without any permanent resident anywhere is not a non-resident citizen within the contemplation of Sec. 22(E)(1)(2) (BIR Ruling No. 150, 1986) D. Taxation of Non-Resident Aliens Engaged in Trade or Business in the Philippines Sec. 25. Tax on Nonresident Alien Individual.
Sec. 2.58. Information Requirement for Depositors/Taxpayers Exempt from Withholding Tax on Interest Income from Foreign Currency Deposits.
The Depository Bank shall submit with its quarterly withholding tax remittance prescribed under Sec. 58(A) of the Code a list of all persons and corporations who were given exemption from the tax on interest income on foreign currency deposits. To avail of the exemption from the tax on interest income from foreign currency deposit, the depositor is required to execute a written permission allowing its depository bank to inform the Commissioner of Internal Revenue that as a non-resident, the depositor is exempt from the tax. A depositor who fails to comply with this requirement, which constitutes a limited waiver of the confidentiality of
(A) Nonresident Alien Engaged in Trade of Business Within the Philippines. (1) In General. A nonresident alien individual
engaged in trade or business in the Philippines shall
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be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a nonresident alien doing business in the Philippines, section 22(G) of this Code notwithstanding. (2) Cash and / or Property Dividends from a Domestic
(3) Capital Gains. Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24. 1. General Rule A nonresident alien is taxed in the same manner as citizens and resident aliens, but only on income sourced within the Philippines. Thus, an aliens income is taxed at the graduate income tax rates of 5% to 32%. An aliens passive investment incomes (sales from shares of stock of domestic corporations, sales of real property in the Philippines, interest on bank deposits or yield substitutes, shares in profits of taxable domestic corporations) shall generally be subject to 20% final tax (for other preferential tax rates, see below) (Mamalateo; Vitug & Acosta; de Leon). The term trade, business, or profession shall not include performance of services by the taxpayer as an employee but it includes the performance of the funcions of a public office (de Leon). 180-day Rule: Sec. 25(A) adopts the 180-day rule to simplify the determination of whether a nonresident alien is engaged in trade or business in the Philippines. If an alien stays in the Philippines for 180 days or less during the calendar year, he shall be deemed a nonresident alien not doing business in the Philippines, regardless of whether he actually engages in trade or business therein. On the other hand, if his stay exceeds 180 days during the calendar year, he shall be deemed engaged in trade or business in the Philippines, although he does not actually engage in such. Note, however, that alien individuals who are employed in a. Regional or area headquarters and regional operating headquarters or MNCs in the Philippines (RHQ / ROHQ) b. Offshore banking units (OBU) established in the Philippines; and c. Foreign service contractor or sub-contractor engaged in petroluem operations in the Philippines are entitled to 15% preferential tax rate on their gross income (16% for those employed by entities engaged in petroleum operations according to Vitug & Acosta). For these aliens, the length of their stay is immaterial; the only qualification provided for in law related to their employer in the Philippines. Thus, the aggregate period of stay of an alien employee wll not create a permanent establishment in the Philippines for its foreign head office, even if he exceeds the 180day rule provided in the Tax Code, or the 183-day rule prescribed in a tax treaty.
Corporation or Joint Stock Company, or Insurance or Mutual Fund Company, or Regional Operating Headquarters of a Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association, Interests, Royalties, Prizes and Other Winnings.
Cash and / or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company, or from a regional operating headquarters of a multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a GPP) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to P10,000 or less which shall be subject to tax under Subsection [B][1] of Section 24); and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), shall be subject to an income tax of 20% on the total amount thereof: Provided, however, That royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of 10% on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the 5th year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depositary bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: 4 years to less than 5 years 5% 3 years to less than 4 years 12% Less than 3 years 20%
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NB: These alien employees are nonresident aliens NOT engaged in trade or business, but I included them here just to emphasize that the 180-day rule does not apply to them, esp. if their employers are any of the entities indicated above.
Income of nonresident foreign corporation subject to preferential tax rates: 1. Nonresident cinematographic film owner, lessor or distributor 25% of its gross income from sources within the Philippines. 2. Nonresident owner or lessor of vessels chartered by Philippine nationals 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations as approved by the Maritime Industry Authority. 3. Nonresident owner or lessor of aircraft, machineries and other equipment 7.5% of gross rentals or fees. 4. Interest income on foreign loans contracted on or after August 1, 1986 final withholding tax of 20%. 5. Cash and / or property dividends received from a domestic corporation final withholding tax of 15% subject to the condition that the country 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 Philippines equivalent to 17%. When the country or residence of the nonresident foreign corporation does not impose income tax on dividends paid by a domestic corporation, there is substantial compliance with the above condition on deemed paid tax credit, and only 15% shall be withheld by the domestic corporation paying the dividend to the foreign corporation. 6. Net capital gains realized by a non-resident foreign corporation during the taxable year from the sale, exchange, or other disposition of shares of stock in a domestic corporation, except shares sold or disposed of through the stock exchange 5% on net capital gains P100,000; and 10% on net capital gains > P100,000. 2. Exceptions
shall be allowed under this Section other than Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A) (1), there shall be allowed the following deductions from gross income:
(C) Taxes.
(2) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify his desire to have any to any extent the benefits of paragraph (3) of this Subsection (relating to credits for taxes of foreign countries); x x x Income, war-profits, and excess-profits taxes imposed by a foreign country are allowed as deductions only if the taxpayer does not signify in his return his desire to have, to any extent, the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries (Mamalateo).
Conditions for deductability of taxes:

1. 2. 3. 4.
Payments must be for taxes Taxes are imposed by law upon the taxpayer Taxes must be paid or accrued duringthe taxable year in connection with the taxpayers trade, business or profession Taxes are not specifically excluded by law from being deducted from the taxpayers gross income.
b. Interest income from foreign currencydenominated deposits with FCDUsexempt from tax Sec. 24. Income Tax Rates. (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes and Other Winnings. A final tax at the rate of 20% is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of 10%; prizes (except prizes amounting to P10,000 or less which shall be subject to tax under Subsection [A] of Section 24); and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of 7.5% of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or
a. Limitation on deductible tax credit Sec. 34 Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions
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individual trust funds, deposit substittues investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate preterminate the deposit or investment before the 5th year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depositary bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: 4 years to less than 5 years 5% 3 years to less than 4 years 12% Less than 3 years 20% (2) Cash and / or Property Dividends. A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies, and regional operating headquarters of multinational companies, or in the share of an individual in the distributable net income after tax of a partnership (except a GPP) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: 6% beginning January 1, 1998; 8% beginning January 1, 1999; 10% beginning January 1, 2000.
derived under the Foreign Currency Deposit and Offshore Banking Systems.

(A) Foreign Currency Deposit System shall refer to the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of Republic Act No. 6426 entitled "An Act Instituting a Foreign Currency Deposit System in the Philippines, and For Other Purposes." (B) Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Bangko Sentral Ng Pilipinas (BSP) to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. ("Local bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended). (C) Offshore Banking System shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external and internal sources and the utilization of such fund pursuant to Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (D) Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas (BSP) to transact offshore banking business in the Philippines in accordance with the provisions of Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (E) Deposits shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. (F) Resident shall mean (1) an individual citizen of the Philippines residing therein; or (2) an individual who is not a citizen of the Philippines but is permanently residing therein; or (3) a corporation or other juridical person organized under the laws of the Philippines; or (4) a branch, subsidiary, affiliate, extension office or other unit of corporations or juridical persons organized under the laws of
Provided, however, That the tax on dividends shall

apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax. Revenue Regulations 10-98 August 25, 1998 SUBJECT: Implementing the Provisions of the National Internal Revenue Code, As Amended By Republic Act No. 8424, Relative to the Imposition of Income Taxes on Income Derived Under the Foreign Currency Deposit and Offshore Banking Systems TO: All Internal Concerned Revenue Officers and Others
SCOPE Pursuant to Section 244, in relation to Sections 24, 25, 27 and 28 of the National Internal Revenue Code of 1997, as amended by R.A. No. 8424, these Regulations are hereby promulgated to govern the imposition of income taxes on income
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any foreign country operating in the Philippines. (G) "Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of "resident". (H) Filipino Overseas Contract Worker (OCW) means an individual citizen of the Philippines referred to under Section 23(C) of the Code. A Filipino Seaman is a citizen of the Philippines who receives compensation for services rendered abroad as a member of the complement of an ocean-going vessel engaged exclusively in international trade as referred to under Section 23(C) of the Code.
(4) a certification from the Bureau of Immigration of the Philippines that a non-resident alien is not a resident of the Philippines; or (5) a certification from the Department of Foreign Affairs (DFA) of the Philippines that the individual is a regular member of the diplomatic corps of a foreign government and is entitled to income tax exemption under an international agreement to which the Philippines is a signatory. (C) Name of the Foreign Currency Bank Account To be entitled to an exemption from the tax on interest income on foreign currency deposit, the Foreign Currency Bank Account shall be in the name of the non-resident individual or non-resident corporation. Otherwise, the interest income therefrom shall be considered as subject to the tax imposed herein. (D) Illustration. Mr. Juan de la Cruz, a Filipino citizen who is residing in the Philippines has a US dollar account with ABC Bank. His gross interest earnings from his bank deposit for the first quarter of 1998 (i.e. from January 1 to March 31, 1998) amounted to US$1,000.00. This gross interest earning shall be considered as constructively received by Mr. De la Cruz during the first quarter of 1998 and shall be subject to a seven and one-half percent (7.5%) final withholding tax. The 7.5% final withholding tax which is due thereon is US$75.00.
Interest
(A) Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System (1) Interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit shall be subject to a final withholding tax of seven and one-half percent (7.5%). The depository bank shall withhold and remit the tax pursuant to Sections 57 and 58 (withholding tax at source) of the Code. (2) If a bank account is jointly in the name of a non-resident citizen such as an overseas contract worker, or a Filipino seaman, and his spouse or dependent who is a resident in the Philippines, fifty percent (50%) of the interest income from such bank deposit shall be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of seven and one-half percent (7.5%). (B) Compliance and Administrative Procedures for Non-Resident Citizen and Non-Resident Alien. The tax on interest income from foreign currency deposit shall be imposed unless the depositor who is a nonresident citizen or a non-resident alien can present documentary evidence that he is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of any of the following: (1) an immigration visa issued by the foreign government in the country where he is a resident of; or (2) a certificate of residency which is issued by the Philippine Embassy or Consulate in the foreign country of his residence; or (3) a certificate of the contract of employment of an overseas contract worker which is duly registered with the Philippine Overseas Employment Agency (POEA); or a Seaman's Certificate, in the case of a Filipino seaman; or
(A) Interest income which is actually or constructively received by a domestic corporation or a resident foreign corporation from a foreign currency bank deposit shall be subject to a final withholding tax at the rate of seven and one-half percent (7.5%) based on the gross amount of such interest income. The depository bank shall withhold and remit the tax pursuant to the provisions of Sections 57 and 58 (withholding tax at source) of the Code. (B) Compliance and Administrative Procedures for a Non-resident Corporation. The tax on interest income from foreign currency deposit shall be imposed unless the depositor, which is a non-resident corporation, can present documentary evidence that it is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of all the following requirements: (1) Certificate of registration of the corporation abroad; and (2) Certification from the Securities and Exchange Commission (SEC) that the non-resident
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corporation is not licensed to do business in the Philippines. (C) Taxation of Income of an FCDU or OBU from Foreign Currency Transactions. In general, income derived by an FCDU or an OBU from foreign currency transactions with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to a final withholding tax of ten percent (10%) based on gross income pursuant to Sec. 27(D)(3) and Sec. 28(A)(4) of the Code. Income from foreign currency transactions shall include interest income from lending operations, including bank charges, commissions, service fees, and net foreign exchange transaction gains. Income from foreign currency transactions with nonresidents of the Philippines shall not be subject to income tax. The person making the income payment shall withhold and remit the tax withheld pursuant to the provisions of Sections 57 and 58 of the Code. Thus, in the case of interest payment by a resident of the Philippines on a foreign currency loan from an OBU or an FCDU, the withholding agent shall be the said resident. (D) Taxation of Other Incomes of an FCDU or an OBU . Income derived by an FCDU or an OBU from activities other than foreign currency transactions shall be subject to the pertinent income tax/taxes prescribed under Section 27 or Section 28 of the Code. To illustrate: Income derived by an FCDU from consultancy services and rentals shall be subject to an income tax based on net income at the tax rates prescribed under Section 27(A) of the Code. Capital gains derived from the sale, barter, exchange or disposition of shares of stocks in a domestic corporation shall be subject to tax prescribed under Section 27(D) of the Code. The aforesaid depository bank shall file its corporate income tax return for income referred to in the preceding paragraph in accordance with the provisions of Section 52 of the Code. It shall also declare thereunder all other incomes derived during the taxable period which are subject to the final withholding taxes, the fact that such final withholding taxes have been withheld therefrom by the payor notwithstanding, indicating the following information: (a) Name of the withholding agent; (b) His/its address; (c) His/its Taxpayer Identification Number (TIN); (d) Period covered; (e) Gross Income; (f) Rate of final withholding tax applied; and (g) Amount of final withholding tax withheld.
The submission of the foregoing information shall not be required with respect to its interest income derived from bank deposits.
The Depository Bank shall submit with its quarterly withholding tax remittance prescribed under Sec. 58(A) of the Code a list of all persons and corporations who were given exemption from the tax on interest income on foreign currency deposits. To avail of the exemption from the tax on interest income from foreign currency deposit, the depositor is required to execute a written permission allowing its depository bank to inform the Commissioner of Internal Revenue that as a non-resident, the depositor is exempt from the tax. A depositor who fails to comply with this requirement, which constitutes a limited waiver of the confidentiality of foreign currency deposits, shall not be entitled to the exemption privilege.
EFFECTIVITY CLAUSE. These Regulations shall apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable. TRANSITORY PROVISION. No penalty shall be imposed for late payment of the tax herein prescribed for the first three quarters of calendar year 1998, provided, however, that the taxpayer's corresponding tax returns for the said taxable quarters are filed and the taxes due are paid not later than October 25, 1998. c. Amount of deductible personal exemption DE LEON: Nonresident aliens engaged in trade or business in the Philippines are NOT entitled to additional exemptions for dependents, but may be entitled to personal exemptions under Sec. 35(D)which means, the personal exemption allowed by the income tax law of his / her country, or that provided by Sec. 35(A), whichever is lower Sec. 35. Allowance of Personal Exemption for Individual Taxpayer.
(D) Personal Exemption Allowable to Nonresident Alien Individual. A nonresident alien individual
engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a
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personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens or residents of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title. E. Taxation of Non-Resident Aliens NOT Engaged in Trade or Business in the Philippines 1. General Rule Gross income (i.e., WITHOUT deductions) from Philippine sources shall be taxed at the fixed FLAT rate of 25%. Foreign corporations not engaged in trade or business in the Philippines are taxed on their gross income derived from sources within the Philippines, subject to treaty covenants, at a rate of 35% and, beginning January 1, 2009, at the rate of 30% (RA 9337) Sec. 25. Tax on Nonresident Alien Individual.
engaged in petroleum operations according to Vitug & Acosta). - Income derived by foreign personnel from sources other than employment referred to in Subsections C, D, and E of Sec. 25 are taxed in the same manner as that received by resident or non-resident aliens. - With respect to compensation income of Filipino employees of regional area headquarters, regional operating headquarters, offshore banking units, and foreign petroleum service contractors and subcontractors, the applicable rate of tax on their gross income from sources within the Philippines is 15% to put them at par with their alien counterparts, who enjoy a 15% preferential income tax rate (Mamalateo). The 15% rate is not applicable, however, where there is no alien employed, for in such case there can be no disparity to speak of with respect to the tax imposed on Filipinos. - These Filipino employees have the option to be taxed either at the 15% rate or at the regular tax rate on their taxable income. 2. Exceptions
a. Capital gain from sale of shares of stock exactly the same as resident citizens b. Capital gain from sale of real property situated in the Philippines exactly the same as resident citizens c. Interest income from foreign currencydenominated deposits with FDCUs exempt from tax Sec. 24. Income Tax Rates. (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes and Other Winnings. A final tax at the rate of 20% is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of 10%; prizes (except prizes amounting to P10,000 or less which shall be subject to tax under Subsection [A] of Section 24); and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There
shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and / or property 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 equal to 25% of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. DE LEON: Alien individuals who are employed in a. Regional or area headquarters and regional operating headquarters or MNCs in the Philippines b. Offshore banking nits established in the Philippines; and c. Foreign service contractor or sub-contractor engaged in petroluem operations in the Philippines are entitled to 15% preferential tax rate on their gross income (16% for those employed by entities
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at the rate of 7.5% of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substittues investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate preterminate the deposit or investment before the 5th year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depositary bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: 4 years to less than 5 years 5% 3 years to less than 4 years 12% Less than 3 years 20% xxx
RR 10-98 Revenue Regulations 10-98 August 25, 1998 SUBJECT: Implementing the Provisions of the National Internal Revenue Code, As Amended By Republic Act No. 8424, Relative to the Imposition of Income Taxes on Income Derived Under the Foreign Currency Deposit and Offshore Banking Systems TO: All Internal Concerned Revenue Officers and Others
SCOPE Pursuant to Section 244, in relation to Sections 24, 25, 27 and 28 of the National Internal Revenue Code of 1997, as amended by R.A. No. 8424, these Regulations are hereby promulgated to govern the imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore Banking Systems.

(A) Foreign Currency Deposit System shall refer to the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of Republic Act No. 6426 entitled "An Act Instituting a Foreign Currency Deposit System in the Philippines, and For Other Purposes." (B) Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Bangko Sentral Ng Pilipinas (BSP) to engage in foreign currency-denominated transactions, pursuant to the
provisions of R.A. 6426, as amended. ("Local bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended). (C) Offshore Banking System shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external and internal sources and the utilization of such fund pursuant to Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (D) Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas (BSP) to transact offshore banking business in the Philippines in accordance with the provisions of Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended. (E) Deposits shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. (F) Resident shall mean (1) an individual citizen of the Philippines residing therein; or (2) an individual who is not a citizen of the Philippines but is permanently residing therein; or (3) a corporation or other juridical person organized under the laws of the Philippines; or (4) a branch, subsidiary, affiliate, extension office or other unit of corporations or juridical persons organized under the laws of any foreign country operating in the Philippines. (G) "Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of "resident". (H) Filipino Overseas Contract Worker (OCW) means an individual citizen of the Philippines referred to under Section 23(C) of the Code. A Filipino Seaman is a citizen of the Philippines who receives compensation for services rendered abroad as a member of the complement of an ocean-going vessel engaged exclusively in international trade as referred to under Section 23(C) of the Code.
Interest
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(A) Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System (1) Interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit shall be subject to a final withholding tax of seven and one-half percent (7.5%). The depository bank shall withhold and remit the tax pursuant to Sections 57 and 58 (withholding tax at source) of the Code. (2) If a bank account is jointly in the name of a non-resident citizen such as an overseas contract worker, or a Filipino seaman, and his spouse or dependent who is a resident in the Philippines, fifty percent (50%) of the interest income from such bank deposit shall be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of seven and one-half percent (7.5%). (B) Compliance and Administrative Procedures for Non-Resident Citizen and Non-Resident Alien. The tax on interest income from foreign currency deposit shall be imposed unless the depositor who is a nonresident citizen or a non-resident alien can present documentary evidence that he is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of any of the following: (1) an immigration visa issued by the foreign government in the country where he is a resident of; or (2) a certificate of residency which is issued by the Philippine Embassy or Consulate in the foreign country of his residence; or (3) a certificate of the contract of employment of an overseas contract worker which is duly registered with the Philippine Overseas Employment Agency (POEA); or a Seaman's Certificate, in the case of a Filipino seaman; or (4) a certification from the Bureau of Immigration of the Philippines that a non-resident alien is not a resident of the Philippines; or (5) a certification from the Department of Foreign Affairs (DFA) of the Philippines that the individual is a regular member of the diplomatic corps of a foreign government and is entitled to income tax exemption under an international agreement to which the Philippines is a signatory. (C) Name of the Foreign Currency Bank Account To be entitled to an exemption from the tax on interest income on foreign currency deposit, the Foreign Currency Bank Account shall be in the name of the non-resident individual or non-resident corporation. Otherwise, the interest income therefrom shall be considered as subject to the tax imposed herein.
(D) Illustration. Mr. Juan de la Cruz, a Filipino citizen who is residing in the Philippines has a US dollar account with ABC Bank. His gross interest earnings from his bank deposit for the first quarter of 1998 (i.e. from January 1 to March 31, 1998) amounted to US$1,000.00. This gross interest earning shall be considered as constructively received by Mr. De la Cruz during the first quarter of 1998 and shall be subject to a seven and one-half percent (7.5%) final withholding tax. The 7.5% final withholding tax which is due thereon is US$75.00.
(A) Interest income which is actually or constructively received by a domestic corporation or a resident foreign corporation from a foreign currency bank deposit shall be subject to a final withholding tax at the rate of seven and one-half percent (7.5%) based on the gross amount of such interest income. The depository bank shall withhold and remit the tax pursuant to the provisions of Sections 57 and 58 (withholding tax at source) of the Code. (B) Compliance and Administrative Procedures for a Non-resident Corporation. The tax on interest income from foreign currency deposit shall be imposed unless the depositor, which is a non-resident corporation, can present documentary evidence that it is not a resident of the Philippines. Such evidence shall consist of the original or certified copy of all the following requirements: (1) Certificate of registration of the corporation abroad; and (2) Certification from the Securities and Exchange Commission (SEC) that the non-resident corporation is not licensed to do business in the Philippines. (C) Taxation of Income of an FCDU or OBU from Foreign Currency Transactions. In general, income derived by an FCDU or an OBU from foreign currency transactions with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to a final withholding tax of ten percent (10%) based on gross income pursuant to Sec. 27(D)(3) and Sec. 28(A)(4) of the Code. Income from foreign currency transactions shall include interest income from lending operations, including bank charges, commissions, service fees, and net foreign exchange transaction gains. Income from foreign currency transactions with nonresidents of the Philippines shall not be subject to income tax.
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The person making the income payment shall withhold and remit the tax withheld pursuant to the provisions of Sections 57 and 58 of the Code. Thus, in the case of interest payment by a resident of the Philippines on a foreign currency loan from an OBU or an FCDU, the withholding agent shall be the said resident. (D) Taxation of Other Incomes of an FCDU or an OBU . Income derived by an FCDU or an OBU from activities other than foreign currency transactions shall be subject to the pertinent income tax/taxes prescribed under Section 27 or Section 28 of the Code. To illustrate: Income derived by an FCDU from consultancy services and rentals shall be subject to an income tax based on net income at the tax rates prescribed under Section 27(A) of the Code. Capital gains derived from the sale, barter, exchange or disposition of shares of stocks in a domestic corporation shall be subject to tax prescribed under Section 27(D) of the Code. The aforesaid depository bank shall file its corporate income tax return for income referred to in the preceding paragraph in accordance with the provisions of Section 52 of the Code. It shall also declare thereunder all other incomes derived during the taxable period which are subject to the final withholding taxes, the fact that such final withholding taxes have been withheld therefrom by the payor notwithstanding, indicating the following information: (a) Name of the withholding agent; (b) His/its address; (c) His/its Taxpayer Identification Number (TIN); (d) Period covered; (e) Gross Income; (f) Rate of final withholding tax applied; and (g) Amount of final withholding tax withheld. The submission of the foregoing information shall not be required with respect to its interest income derived from bank deposits.
foreign currency deposits, shall not be entitled to the exemption privilege. EFFECTIVITY CLAUSE. These Regulations shall apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable. TRANSITORY PROVISION. No penalty shall be imposed for late payment of the tax herein prescribed for the first three quarters of calendar year 1998, provided, however, that the taxpayer's corresponding tax returns for the said taxable quarters are filed and the taxes due are paid not later than October 25, 1998. N.B.: COMMON PROVISIONS for all nonresident aliens, whether or not engaged in trade or business in the Philippines: 1. They are taxable only on income from Philippine sources; 2. They are subject to the same rates of tax as citizens and resident aliens on capital gains from sales of shares of stock and real property under Sec. 24 (C, D). 3. Under Subsec. (A) (2), dividends, etc. received by a non-resident alien are subject to 20% final withholding income tax if the alien is engaged in trade or business in the Philippines; otherwise, he is taxable under Subsec. (B) at 25%. Subections 25 (A)(2) is similar to Sec. 24(B )(1, 2) except that under the former, cinematographic films and similar works are subject to tax under Sec. 28 and dividends, to 20%; under the latter, interest income from a epository bank under the Expanded Foreign Currency Deposit System is subject only to 7.5% final tax and dividends, to only 10%. INCOME TAX FORMULAE 1. For nonresident aliens engaged in trade or business in the Philippines: Gross Income within the Philippines Less: allowable (itemized) deductions (or 10% optional standard deduction) = Net Income Less: personal exemption, if entitled = Taxable Income / Tax Base Multiplied by the Tax Rate (Sec. 24(A)) = Income Tax Due
The Depository Bank shall submit with its quarterly withholding tax remittance prescribed under Sec. 58(A) of the Code a list of all persons and corporations who were given exemption from the tax on interest income on foreign currency deposits. To avail of the exemption from the tax on interest income from foreign currency deposit, the depositor is required to execute a written permission allowing its depository bank to inform the Commissioner of Internal Revenue that as a non-resident, the depositor is exempt from the tax. A depositor who fails to comply with this requirement, which constitutes a limited waiver of the confidentiality of
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2. For nonresident aliens NOT engaged in trade or business in the Philippines: Gross Income within the Philippines Multiplied by 25% = Income Tax Due 3. For aliens employed by regional or area headquarters (RHQs) and regional operating headquarters (ROHQs) of MNCs, by offshore banking units, and by foreign petroleum service contractors and subcontractors: Gross Compensation Income Multiplied by 15% = Income Tax Due F. Individual Taxpayers Exempt from Taxation 1. Senior Citizens
RA 7432 AN ACT TO MAXIMIZE THE CONTRIBUTION OF SENIOR CITIZENS TO NATION BUILDING, GRANT BENEFITS AND SPECIAL PRIVILEGES AND FOR OTHER PURPOSES. Be it enacted by the Senate and House of Representative of the Philippines in Congress assembled: xxx SECTION 2. Definition of Terms. As used in this Act, the term senior citizen shall mean any resident of the Philippines at least sixty (60) years old, including those who have retired from both government offices and private enterprises, and has an income of not more than Sixty thousand pesos (P60,000.00) per annum subject to review by the National Economic and Development Authority (NEDA) every three (3) years. The term head of the family shall mean any person so defined in the National Internal Revenue Code. xxx SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following: a) The grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit; b) A minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and amusements; c) Exemption from the payment of individual income taxes: Provided, That their annual taxable
income does not exceed the poverty level as determined by the National Economic and Development Authority (NEDA) for that year; d) Exemption from training fees for socioeconomic programs undertaken by the OSCA as part of its work; e) Free medical and dental services in government establishment anywhere in the country, subject to guidelines to be issued by the Department of Health, the Government Service Insurance System and the Social Security System; f) To the extent practicable and feasible, the continuance of the same benefits and privileges given by the Government Service Insurance System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be, as are enjoyed by those in actual service. SECTION 5. Government Assistance. The Government shall provide the following assistance to those caring for and living with the senior citizen: a) The senior citizen shall be treated as dependents provided for in the National Internal Revenue Code and as such, individual taxpayers caring for them, be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. b) Individuals or non-governmental institutions establishing homes, residential communities or retirement villages solely for the senior citizens shall be accorded the following: 1) Realty tax holiday for the first five (5) years starting from the first year of operations; 2) Priority in the building and/or maintenance of provincial or municipal roads leading to the aforesaid home, residential community or retirement village. SECTION 6. Retirement Benefits. To the extent practicable and feasible retirement benefits from both the Government and the private sectors shall be upgraded to be at par with the current scale enjoyed by those in actual service. IMPLEMENTING GUIDELINES April 3, 1993 NEDA SOCIAL DEVELOPMENT COMMITTEE RESOLUTION NO. 1-93 APPROVING THE IMPLEMENTING RULES AND REGULATIONS OF R.A. 7432 MAXIMIZING THE CONTRIBUTION OF SENIOR CITIZENS TO NATION BUILDING, GRANT BENEFITS AND PRIVILEGES RULE I xxx ARTICLE 3. Construction. These Rules shall be construed and applied in accordance with and in furtherance of the policy and objectives of the law. In case of conflict and/or ambiguity which may arise in
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the implementation of these rules, the concerned agencies shall issue the necessary clarification. In case of doubt, the same shall be construed liberally and in favor of the beneficiaries. RULE II Declaration of Policies and Objectives, Scope and Application xxx ARTICLE 5. Definition of Terms. As used in these rules, the following terms shall be defined as follows: 5.1 Senior Citizen Any resident citizen of the Philippines, at least sixty (60) years old, including those who have retired from both government offices and private enterprises and has an income of not more than sixty thousand pesos (P60,000.00) per annum subject to review by the National Statistics Coordination Board (NSCB) every three (3) years. Senior Citizens earning sixty thousand pesos (P60,000.00) per annum may be tapped as resource persons to provide transfer technology and consultancy services or other services in the community. Those without income are necessarily covered by this definition. xxx RULE III Creation of the Office for Senior Citizens Affairs xxx RULE IV Contributions in the Community xxx RULE V xxx E. Income Tax Benefits/Tax Credits For purpose of claiming tax credits, private establishments are required to keep a separate record of sales made to senior citizens which shall include the name, identification number, gross sales, discount and date of transaction. A senior citizen whose annual taxable income does not exceed the poverty level as determined by NSCB shall be exempted from payment of individual income tax. Provided that: (a) A senior citizen whose annual taxable income exceed the said poverty level shall be liable to the individual income tax for the full amount of his/her taxable income net of personal and additional exemptions; (b) Annual taxable income shall refer to the annual gross compensation, business and other incomes as defined in Section 28 of the National Internal Revenue Code (NIRC) other than income subject to under paragraphs (b), (c), (d) and (e) of Section 21 of the NIRC which include certain passive incomes, capital gains from sale of shares of stock and capital gains from sale of real property; (c) The senior citizen is a resident citizen; (d) NEDA shall inform the Commissioner of Internal Revenue in writing and publish in a
newspaper of general circulation the estimated poverty threshold. xxx RULE VI Government Assistance ARTICLE 10. Personal Tax Exemption for Benefactor. A senior citizen shall be treated as dependent provided for in the NIRC and as such, shall be accorded the privileges granted by the Code insofar as having dependents are concerned. In determining personal exemptions allowable to individuals under Section 29 (k) (1) of the NIRC, a senior citizen may be treated as a dependent. For this purpose, the definition of the term Head of the Family under the said Section shall be deemed amended to refer to the definition under Article (5) of this implementing rules and regulations. The OSCA shall require the senior citizen to declare his benefactor who will be granted the exclusive right to claim him as dependent and issue a certification thereof. The said certification shall be presented by the benefactor to the BIR for purposes of determining personal exemptions. The personal tax exemption shall take effect January 1992. ARTICLE 11. Property Tax Exemption and Privileges for Individuals and Non-Government Institutions. Individuals or non-government institutions establishing homes, residential communities or retirement villages solely for the senior citizen shall be accorded the following: a) One per cent (1%) property tax exemption for the first five years starting first year of operation: (1) The exemption is automatically withdrawn effective on the year after the institution ceases its operation before the end of the fifth year of operation. The owners of the properties shall thereafter be liable for the realty taxes applicable thereon. (2) The first year of operation shall be reckoned from the date the institution was granted a mayor's permit to operate the establishment. (3) The exemption shall apply prospectively. Establishments which are beyond their fifth year of operation shall not be entitled to refund of their payments or condonation of their realty tax delinquencies during their first five years of operation. However, existing establishments which have been operating for less than five years shall be entitled to the exemption in the remaining of the five years. b) Priority in the building and/or maintenance of provincial or municipal roads leading to the aforesaid home residential community or retirement village. Provided that: in both cases, said exemption and priority shall apply only when said homes, residential communities or retirement villages are non-stock, non-profit in nature as evidenced by a BIR certificate
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registration as such which shall be presented to the Assessor's Office of the LGUs concerned. RULE VII Penalty Provisions xxx RULE VIII Final Provisions xxx 2. Exemptions granted under International Agreements
which the premises belong through possession or ownership. The lawfulness or unlawfulness of acts there committed is determined by the territorial sovereign. If an attach commits an offense within the precints of an embassy, his immunity from prosecution is not because he has not violated the local law, but rather for the reason that the individual is exempt from prosecution. Commissioner vs. Robertson 143 SCRA 796 FACTS: CTA cancelled assessments for deficiency income tax for taxable years 1969-1972 against private respondents, Frank Robertson, James W. Robertson, Robert H. Cathey, and John L. Garrison. The Commissioner of Internal Revenue is appealing the said decision contending that since exemptions are construed strictly against the person/s claiming it, private respondents had the burden of proof to establish that their residence in the country is by reason ONLY of their employment in connection with the construction, maintenance, operation or defense of the US bases in the Philippines as provided for under Article XII, Par. 2 of the RP-US Military Bases Agreement of 1947. This, according to the Commissioner, the private respondents failed to do as they were proven to own properties in the Philippines which they used as residences aside from the fact that they were all employed by the US Navy. HELD: The law and the facts of the case are so clear that there is no room left for us to doubt the validity of private respondents defense. In order to avail oneself of the tax exemption under the RP-US Military Bases Agreement: he must be a national of the US employed in connection with the construction, maintenance, operation or defense, of the bases, residing in the Philippines by reason of such employment, and the income derived is from the US Government. Said circumstances are all present in the case at bar. Likewise, We find no justifiable reason to disturb the findings and rulings of the lower court in its decision. The ruling in the Reagan case cannot be applied to support the Commissioners contention, the facts in said case being different from those obtaining in the present suit. Tax Treaty Provision G. Individuals Subject to Special Rules 1. Aliens Employed by regional headquarters of multinational/by offshore banking units/ petroleum service contractors
Reagan vs. Commissioner 30 SCRA 968 FACTS: William C. Reagan, at one time a civilian employee of an American corporation providing technical assistance to the US Air Force in the Philippines, is contesting the assessment made on him by the Commissioner of Internal Revenue on an amount he realized from the sale of his automobile to a member of the US Marine Corps at Clark Field Air Base at Pampanga. According to William C. Reagan, the amount is not taxable since the sale was made outside Philippine territory and is, therefore, beyond the Philippines jurisdictional power to tax. Reagan is relying on a 1951 opinion which said that a trading firm as purchaser of army goods must respond for the sales taxes due from an importer, as the American armed forces being exempt could not be taxed as such under the National Internal Revenue Code. HELD: The 1951 opinion cited by Reagan is merely obiter and, hence, not controlling. The sale having taken place on what indisputably is Philippine territory, petitioners liability for the income tax due as a result thereof is unavoidable. (The SC, in explaining the basic doctrine on state sovereignty, cited US decisions saying..) The jurisdiction of the nation within its own territory is necessarily exclusive and absolute. It is susceptible of no limitation not imposed by itself. Any restriction upon it, deriving validity from an external source, would imply a diminution of its sovereignty to the extent of the restriction, and an investment of that sovereignty to the same extent in that power which could impose such restriction..xxxAll exceptions, therefore, to the full and complete power of a nation within its own territories, must be traced up to the consent of the nation itself. They can flow from no other legitimate source. XXX As a matter of fact, the eminent commentator Hyde in his three-volume work on International Law, as interpreted and applied by the US, made clear that not even the embassy premises of a foreign power are to be considered outside the territorial domain of the host state. Thus: The ground occupied by an embassy is not in fact territory of the foreign state to
SEC 25. Tax on Nonresident Alien Individual. -xxx
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(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied,
collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. SEC 22. Definitions When used in this Title: xxx (DD) The term 'regional or area headquarters' shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. (EE) The term 'regional operating headquarters' shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing 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. 2. Aliens employed by OBUs
percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. 3. Aliens employed by petroleum contractors/subcontractor
SEC. 25. Tax on Nonresident Alien Individual. xxx (E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. Any income earned from all other sources within the Philippines by the alien employees referred to under subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.
Special Classification of Individuals and Corresponding Tax Treatment [Sec 25(C), (D),
(E)] 1. Alien individuals employed by: a. Regional or Area Headquarters (RAHQ) and Regional Operating Headquarters (ROHQ) established in the Philippines by multinational companies o Multinational company, defined a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets Offshore Banking Units established in the Philippines
SEC. 25. Tax on Nonresident Alien Individual. xxx (D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen
b.
2. Alien individuals who are permanent residents of a foreign country but who are employed and assigned in the Philippines by a foreign operations in the Philippines
service contractor or by a foreign service engaged in petroleum subcontractor
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Tax Rate and Base - 15% of gross income received as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances o The same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these multinational companies, offshore banking units and petroleum service contractors and subcontractors. Note that the coverage of the special classification (and the corresponding tax rate) is limited to income received as wages. Hence, any income earned from all other sources within the Philippines by the alien employees shall be subject to the pertinent income tax (example: sale of real property in the Philippines is subject to 6% capital gain tax, imposed on the gross selling price or fair market value of the property at the time of the sale, whichever is higher).
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RESIDENT
CITIZEN CATEGORY OF INCOME
Other Income, subject to Graduated Tax Rates, except for NRANETB
NON-RESIDENT
CITIZEN Within Phils the NRAETB Within Phils the NRANETB Within Phils the the
ALIEN Within Phils
All sources
1. 2. 3. 4. 5.
Compensation / Business / Profession Prizes of P10,000 or less Proprietary, Educational / Hospital Cinematographic Film and the like Interest from any currency bank deposit , etc., Royalties (other than from books, literary works and musical compositions), Winnings / Prizes (except prizes P10,000 and below) Royalties from books, literary works, musical compositions Interest from long-term deposit or investment certificates, which have a maturity of 5 years or more Cash / Property Dividends from a domestic corporation, etc., OR share in the distributable net income after tax of a partnership (except a general professional partnership), etc. Interest (Expanded Foreign Currency Deposit System) Based on Taxable (i.e, Net) Income Schedular Income Tax Rates (Sec. 24, NIRC) (i.e, 5% to 32%) GIW - 25% GIW 25% Not Applicable
GIW 20% Final Withholding Tax
6.
GIW 10% Final Withholding Tax EXEMPT; However: In case of pre-termination, with remaining maturity of: 4 years to less than 5 years 5% on entire income 3 years to less than 4 years 12% on entire income less than 3 years 20% on entire income
GIW 25%
Passive Income from domestic sources, subject to Final Tax
7.
8.
GIW 10% Final Withholding Tax
GIW 20%
9.
GIW 7.5% Final Withholding Tax EXEMPT
EXEMPT
10. Winnings on Philippine Sweepstakes / Lotto

Capital Gains, subject to Capital Gains Tax
11. Capital Gains on Sale of Shares (not traded in a domestic stock exchange) 12. Capital Gains on Sale of Real Property
Net Capital Gains within: Not Over P100,000 5% Final Tax Amount in Excess of P100,000 plus 10% Final Tax on the excess Gross Selling Price or FMV, whichever is higher 6% Final Tax of 1% of the Selling Price (Stock Transaction Tax) Note: Stock Transaction Tax is not an income tax, but a business (percentage) tax
in the Philippines
13. Sale of Shares (traded in a domestic stock exchange)
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F. Tax Compliance Requirements 4. Who are required to file income tax returns
SEC. 51. Individual Return. (A) Requirements. (1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return: (a) Every Filipino citizen residing in the Philippines; (b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and (d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines. xxx (4) The income tax return shall be filed in duplicate by the following persons: (a) A resident citizen - on his income from all sources; (b) A nonresident citizen - on his income derived from sources within the Philippines; (c) A resident alien - on his income derived from sources within the Philippines; and (d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within the Philippines. Returns of married individuals
(E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax. Returns of persons under disability
SEC. 51. Individual Return. - xxx (F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns. Tax Return This is a report made by the taxpayer to the BIR of all gross income received during the taxable year, the allowable deductions including exemptions, the net taxable income, the income tax rate, the income tax due, the income tax withheld, if any, and the income tax still to be paid or refundable. Persons Required to File Income Tax Return a. Individual 1. Resident citizen; 2. Non-resident citizen on income from within the Phil.; 3. Resident alien on income from within the Phil.; 4. NRAETB on income from within the Phil. 5. An individual (citizens / aliens) engaged in business or practice of a profession within the Phil. regardless of the amount of gross income; 6. Individual deriving compensation income concurrently from two or more employers at any time during the taxable year; 7. Individual whose pure compensation income derived from sources within the Phil. exceeds P60,000. b. Taxable Estate and Trust c. General Professional Partnership d. Corporation 1. Not exempt from income tax; 2. Exempt from income tax under Sec. 30 of NIRC but has not shown proof of exemp (2) The following individuals shall not be required to file an income tax return; (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any
SEC. 51. Individual Return. - xxx (D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. Returns of minors
SEC. 51. Individual Return. - xxx
2.
Who are NOT required to file income tax returns
Sec. 51 Individual Return (A) Requirements. -
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alien individual engaged in business or practice of profession within the Philippines shall file an income tax return, regardless of the amount of gross income; (b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return; (c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and (d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. (3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. REVENUE REGULATIONS NO. 09-99 SUBJECT : Amending Revenue Memorandum Order No. 30-99 dated March 17, 1999 prescribing the filing of returns by those individuals exempt from tax as provided under Section 23 (B) and (C) in relation to Section 51 (A) (2) (d) and (A) (3) of Republic Act No. 8424 (NIRC of 1997) TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, in relation to Section 23 (B) (C), Section 51 (A) (2) (d) and (A) (3) of the same Code, this Regulation is hereby promulgated amending Revenue Memorandum Order No. 30-99 prescribing the filing of returns by non-resident citizens, overseas contract workers (OCWs), and seamen. This covers all income earned by nonresident citizens from abroad beginning January 1, 1998. SECTION 2. Pertinent Provisions: x x x Section 51 (A) (2) (d) "The following individuals shall not be required to file an income tax return: (a) ...; (b) ...; (c) ...;
(d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special." Section 51 (A) (3) "The foregoing notwithstanding, any individual not required to file a return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner." SECTION 3. Compliance and Administrative Procedures: 1. Every person classified within the scope of this Revenue Regulation, shall make an information return by accomplishing BIR Form 1701C or the new computerized Form 1703 properly labelling among others the appropriate "tax due space" as EXEMPT . The accomplished BIR Form 1701C or new BIR Form 1703 whichever is applicable, together with other relevant supporting papers (e.g. Employer's Declaration of Income Earned, Financial Statements), shall be filed not later than April 15 following the taxable year, to the Foreign Post or the Revenue District Office which has jurisdiction over the place of residence of the taxpayer. cdll 2. The Foreign Posts shall in turn forward these returns to the Revenue District Office No. 51 Pasay City for compilation/processing purposes. 3. The respective Revenue District Offices receiving similar returns shall likewise process and file returns within their own premises. 4. The Revenue District Offices concerned shall submit to the Chief, International Tax Affairs Division, an annual report consisting of statistical information covering the aforementioned returns for the preceding taxable year, as follows (Please refer to Annex A for the format of the report): a. Gross Income per country total and per type of income b. Number of filers according to the above classification This report must be submitted not later than July 30 following the taxable year being reported. Substituted Filing of ITR REVENUE REGULATIONS NO. 03-02 "Section 2.83.4.Substituted Filing of Income Tax Returns by Employees Receiving Purely Compensation Income. Individual taxpayers receiving purely compensation income, regardless of amount, from only one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly by the said employer (tax due equals tax withheld), shall not be required to file BIR Form No. 1700. In lieu of BIR Form No. 1700, the
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Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) (hard copy) filed by their respective employers, duly stamped "received" by the BIR, shall be tantamount to the substituted filing of income tax returns by said employees. The following individuals, however, are not qualified for substituted filing and therefore, still required to file BIR Form No. 1700 in accordance with existing regulations: (A) Individuals deriving compensation from two or more employers concurrently or successively at anytime during the taxable year. (B) Employees deriving compensation income, regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return. CSHEAI (C) Employees whose monthly gross compensation income does not exceed Five Thousand Pesos (P5,000.00) or the statutory minimum wage, whichever is higher, and opted for non-withholding of tax on said income. (D) Individuals deriving other non-business, nonprofession-related income in addition to compensation income not otherwise subject to a final tax. (E) Individuals receiving purely compensation income from a single employer, although the income tax of which has been correctly withheld, but whose spouse falls under Section 2.83A(A), (B), (C) and (D) of these Regulations. (F) Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income, or compensation income and other non-business, non-profession-related income. In case of married individuals who are still required to file returns under existing provisions of the law, i.e., in those instances not covered by the substituted filing of returns, only one return for the taxable year shall be filed by either spouse to cover the income of the spouses, which return shall be signed by the husband and wife unless it is physically impossible to do so, in which case signature of one of the spouses would suffice." Revenue Regulation 19-2002 (amending RR 32002) Section 2.83.1.Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316). In general, every employer or other person who is required to deduct and withhold the tax on compensation including fringe benefits given to rank and file employees, shall furnish every employee from whose compensation taxes have been withheld the Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316), on or before January 31 of the succeeding calendar year, or if the employment is
terminated before the close of such calendar year, on the day on which the last payment of compensation is made. Failure to furnish the same shall be a ground for the mandatory audit of payors income tax liabilities (including withholding tax) upon verified complaint of the payee. xxx xxx xxx The Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) shall contain a certification to the effect that the employers filing of BIR Form No. 1604-CF shall be considered as a substituted filing of the employees income tax return to the extent that the amount of compensation and tax withheld appearing in BIR Form No. 1604-CF as filed with BIR is consistent with the corresponding amounts indicated in BIR Form No. 2316. It shall be signed by both the employee and employer attesting to the fact that the information stated therein has been verified and is true and correct to the best of their knowledge. However, the withholding agents/employers are required to retain copies of the duly signed BIR Form No. 2316 for a period of three (3) years as required under the National Internal Revenue Code. The employee who is qualified for substituted filing of income tax return under these regulations, shall no longer be required to file income tax return (BIR Form No. 1700) since BIR Form No. 1604-CF shall be considered a substituted return filed by the employer. BIR Form No. 2316, duly certified by both employee and employer, shall serve the same purpose as if a BIR Form No. 1700 had been filed, such as proof of financial capacity for purposes of loan, credit card, or other applications, or for the purpose of availing tax credit in the employees home country and for other purposes with various government agencies. This may also be used for purposes of securing travel tax exemption, when necessary. However, information referring to the certification, appearing at the bottom of BIR Form No. 2316, shall not be signed by both the employer and the employee if the latter is not qualified for substituted filing. In which case, BIR Form No. 2316 furnished by the employer to the employee shall be attached to the employees Income Tax Return (BIR Form No. 1700) to be filed on or before April 15 of the following year. For the implementation of these Regulations, BIR Form No. 2316 herein referred to shall be BIR Form No. 2316 version October 2002 or any later version. Thus, the old version cannot be used for this purpose although may be used for those taxpayers still required to file BIR Form No. 1700. Revenue Memorandum Circular 1-03 This Circular aims to provide some basic information and answers to questions frequently asked on substituted filing.
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1. What is "Substituted Filing"? Substituted Filing is when the employer's annual return (BIR Form 1604CF) may be considered as the "substitute" Income Tax Return (ITR) of employee inasmuch as the information provided in his income tax return (BIR Form 1700) would exactly be the same information contained in the employer's annual return (BIR Form No. 1604-CF). 2. How is "Substituted Filing" different from "Non-Filing"? Under "substituted filing", an individual taxpayer although required under the law to file his income tax return, will no longer have to personally file his own income tax return but instead the employer's annual information return filed will be considered as the "substitute" income tax return of the employee inasmuch as the information in the employer's return is exactly the same information contained in the employee's return. "Non-filing" is applicable to certain types of individual taxpayers who are not required under the law to file an income tax return. An example is an employee whose pure compensation income does not exceed P60,000, and has only one employer for the taxable year and whose tax withheld is equivalent to his tax due. 3. Who are qualified and under what conditions will substituted filing of BIR Form No. 1700 apply? Substituted filing applies only to individuals who meet all the following conditions: a. The employee receives purely compensation income (regardless of amount) during the taxable year b. The employee receives the income only from one employer in the Philippines during the taxable year c. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer d. The employee's spouse also complies with all three (3) conditions stated above. e. The employer files the annual information return (BIR Form No. 1604-CF) f. The employer issues BIR Form 2316 (Oct 2002 ENCS) version to each employee 4. Who are not qualified for substituted filing of BIR Form 1700? The following individuals are not qualified for substituted filing: a. Individuals deriving compensation income from two or more employees, concurrently or successively at anytime during the taxable year b. Employees deriving compensation income, regardless of amount, whether from a single or several employers during the calendar year, the
income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to a collectible or refundable return c. Employees whose monthly gross compensation income does not exceed Five Thousand Pesos (P5,000) or the statutory minimum wage, whichever is higher, and opted for non-withholding of tax on said income d. Individuals deriving other non-business, nonprofession-related income in addition to compensation not otherwise subject to final tax e. Individuals deriving purely compensation income from a single employer, although the income of which has been correctly subjected to withholding tax, but whose spouse is not entitled to substituted filing f. Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income or compensation income and other business or profession related income 5. What will be presented in case an ITR is required? BIR Form 2316 (Oct 2002 ENCS version) is a statement signed by both the employee and the employer and serves the same purpose as if BIR Form No. 1700 had been filed. This, however, is not to be submitted or filed with the BIR if the employee is qualified for substituted filing. 6. What are contained in BIR Form No. 2316 Certificate? The new BIR Form 2316 (Oct 2002 ENCS version) consists of the following parts: a. Part I Employee Information (items 3 to 12.) This refers to employee's personal information as declared by him in the Certificate of Update of Exemption and Employer's and Employee's Information (BIR Form 2305). The same information should likewise be consistent with the information in the Annual Information Return (BIR Form 1604CF). b. Part II Present Employer Information (items 13 to 15A) The information herein refers to the present employer. c. Part III Previous Employer Information (items 16 to 24A) In cases where an employee has previous employer in the same taxable year, the present employer should mention the previous employer's information as contained in the employee's BIR Form 2316 issued by the previous employer. d. Part IV Details of Compensation Income and Tax withheld from the Present Employer (items 25 to 50) This part contains the details and summary of all taxable and non-taxable regular and supplementary compensation received by the
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employee including the summary of taxes withheld from the compensation of the employee. e. 1st Signature Box (items no. 51 and 52) This contains a declaration by the present employer that all the information contained in BIR Form 2316 (Parts I to IV and Summary) was made in good faith, verified, and to the best of their knowledge and belief, is true and correct pursuant to the provisions of the National Internal Revenue Code. f 2nd (Substituted Filing) Signature Box (items 53 and 54) This box shall be accomplished under the substituted filing scheme. 7. Who shall prepare and issue BIR Form 2316? In general, every employer or other person who is required to deduct and withhold the tax on compensation including fringe benefits given to rank and file employees, shall furnish every employee from whose compensation taxes have been withheld the Certificate of Compensation Payment/Tax Withheld (BIR Form 2316 Oct 2002 ENCS version). 8. 2316? When should the employer issue BIR Form
b. That the employer filed with the BIR the Annual Information Return (BIR Form 1604CF) 11. For substituted filing, what are the matters being certified to by the EMPLOYEE? The matters being certified to by the employee are as follows: a. That the employee is qualified under the substituted filing of income tax returns (BIR Form 1700), i.e., The employee receives purely compensation income (regardless of amount) during the taxable year The employee receives the income only from one employer in the Philippines during the taxable year The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer b. If married, that the employee's spouse also complies with all three (3) conditions stated above. c. That the employee has none of the instances for disqualification for substituted filing. (refer to question no. 4 of this issuance) d. That the BIR Form 1604CF filed by his employer shall constitute as his income tax return e. That BIR Form 2316 (Oct 2002 ENCS version) shall serve as the same purpose as if BIR Form 1700 had been filed pursuant to the provisions of RR 3-2002 as amended by RR 19-2002. 12. For other government agencies and other offices, public and private, requiring presentation of individual income tax return (BIR Form 1700) as proof of income earnings, what would be a replacement for BIR Form 1700 for those qualified for substituted filing? For those qualified for substituted filing, BIR Form 1700 should no longer be required as proof of financial capacity or proof of income earnings. Presentation of BIR Form 2316 (Oct 2002 ENCS version) is sufficient proof of income earnings since it is a statement signed by both the employee and the employer and it shall serve the same purpose as if BIR Form No. 1700 had been filed. 13. What is the use of the BIR Form 2316, for those qualified for substituted filing? The BIR Form 2316 (Oct 2002 ENCS version) can be used for the following purposes: a. As proof of financial capacity for purposes of loan, credit card, or other application b. As proof of payment of tax or for availing tax credit in the employee's home country c. In securing travel permits and travel tax exemptions when necessary; and d. For other purposes to meet the requirements of various government/private agencies
Employers should issue BIR Form 2316 to the employee on or before January 31 of the succeeding calendar year, or if employment is terminated before the close of such calendar year, on the day on which the last payment of compensation is made. 9. What is contained in the Substituted Filing signature box in BIR Form 2316? The lowest portion of BIR Form 2316 (Oct 2002 ENCS version) shall be accomplished only for substituted filing. It consists of two parts namely, matters certified to by the employer and matters certified to by the employee. The employer and employee, under the pain of perjury, shall sign the boxes for substituted filing. 10. For substituted filing, what are the matters being certified to by the EMPLOYER? The matters being certified to by the employer are as follows: a. That the information contained in BIR Form 2316 (Oct 2002 ENCS version) are the same as reported and declared in BIR Form 1604 CF, i.e., The employee's information is the same as that declared by the employs in BIR Form 2305 If employee had previous employer/s, the previous employer's information is the same as that declared in previous employer's BIR Form 2316 issued to said employee The information pertaining to the present employer is true and correct The details of compensation and taxes withheld is true and correct
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14.
When does substituted filing take effect? It took effect for taxable year 2001 on a voluntary basis and is mandatory for income/compensation earned starting taxable year 2002. Thus, employees who qualify for substituted filing for taxable year 2002 and beyond will no longer file BIR Form 1700 on or before the 15th of April of every year. 15. What will an employee do with BIR Form 2316 issued by the employer? If the BIR Form 2316 was issued by a previous employer as a result of termination of employment and the employee has been subsequently employed within the same calendar year, the employee should submit a copy of BIR Form 2316 issued by the previous employer to his present employer, for consolidation with his current compensation received from the present employer. If the employee is qualified for substituted filing, the employee concerned should sign the substituted filing signature box of BIR Form 2316 and have the same signed by the employer. A copy of BIR Form 2316 signed both by the employer and employee shall be retained and kept by the employer and the employee. If an employee is not qualified for substituted filing, he is required by law to file his income tax return (BIR Form 1700 or BIR Form 1701). BIR Form 2316 should be attached as proof of his compensation income and withholding taxes as well as other necessary and applicable attachments, like financial statements, certificate of creditable withholding taxes. 16. For those qualified for substituted filing, is it necessary to have BIR Form 2316 notarized? No, it is not necessary to have BIR Form 2316 notarized for those qualified for substituted filing. 17. Can an employee file an ITR (BIR Form No. 1700) even if he is qualified for substituted filing? No, for taxable year 2002 and beyond, substituted filing is mandatory for qualified employees. 3. When income tax return is required to be filed
(a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and (b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition. 4. Where income tax return required to be filed
Sec. 51 (B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner. 5. Payment of the Tax
Revenue Regulation 16-2002 SUBJECT : Modes of and Procedure for the Payment of Internal Revenue Taxes through Authorized Agent Banks (AABs) SECTION 2. Recording of BIR Tax Payments by the AABs. A) All internal revenue taxes collected through authorized agent banks (AABs) shall be credited to the demand deposit accounts opened and maintained by the Bureau of Treasury (BIR) for BIR in the head offices of AABs; B) Head offices of AABs shall assign and maintain a separate general ledger account for said BTr demand deposit accounts; C) Using the online tellering system, the bank tellers shall immediately post the BIR tax payments they collect by crediting the BTr demand deposit accounts in the head offices of the AABs, instead of recording them as mere payables to BTr at the end of each banking day in the AABs backrooms. D) In filing a tax declaration and making payment to an AAB, a taxpayer must accomplish and submit a BIRprescribed deposit slip which AABs must design, print and make available in all participating branches. The deposit slip must in addition to those needed by the bank, provide for the following information: Transaction Date
Sec. 51 (C) When to File. (1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year. (2) Individuals subject to tax on capital gains;
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Name of Taxpayer TIN BTR-BIR Account Number Account Name which must be BTRBIR Name of Drawee Bank Check Number Bank Debit Advice Number (for debit system payments) Amount E) The bank teller shall machine validate the BIRprescribed deposit slip accomplished by the taxpayer as evidence that the BIR tax payment was deposited to the account of the BTr. Said deposit slip shall be accomplished and issued in triplicate copies, distributed as follows: original (taxpayers copy), duplicate (AABs copy) and triplicate (to be attached to the tax return. Additionally, the AAB receiving the tax return/payment form shall also machine validate and stamp mark the word "Received" on the return/payment form as proof of filing the return/payment form and payment of the tax by the taxpayer. The machine validation on the return/payment form shall reflect the date of payment, amount paid and transaction code, the name of the bank, branch code, tellers code and tellers initials. F) Before 12:00 NN of the following banking day, the head offices of the AABs shall provide to BTR/BIR the daily total amount of BIR taxes they collected. G) After receipt of payment but not later than 24 hours thereafter, the AAB branch shall encode into the LBDE System and transmit to the concerned BIR Data Center, the below data and copy furnish the AAB head office. 1. Date of the transaction; 2. Name of the taxpayer; 3. Taxpayer Identification Number (TIN) of the taxpayer; 4. Tax type which is being paid for; 5. Return period for the tax type being paid for; 6. Amount of tax paid; 7. Name of the drawee bank and check number, for tax payments through checks; SECTION 3. Modes of Payment To AABs. Aside from the electronic payment system currently used by some taxpayers in paying their BIR taxes, the rest shall pay their tax liabilities through any of the following modes: a) overthecounter cash payments; b) bank debit system; or c) check payment system. a) "Overthecounter cash payment" refers to payment of tax liabilities to authorized agent bank in the currencies (paper bills or coins) that are legal tender in the Philippines. The maximum amount allowed per tax payment shall not exceed ten thousand pesos (P10,000.00)
b) "Bank debit system" refers to the system whereby a taxpayer, through a bank debit memo/advice, authorizes withdrawals from his/its existing bank accounts for payment of tax liabilities. The bank debit system mode is allowed only if the taxpayer has a bank account with the AAB branch where he/it intends to file and pay his/its tax return/form/declaration, provided said AAB branch is within the jurisdiction of the BIR Revenue District Office (RDO)/Large Taxpayers District Office (LTDO) where the tax payment is due and payable. c) "Checks" refers to a bill of exchange or Order Instrument drawn on a bank payable on demand. In the issuance and accomplishment of checks for the payment of internal revenue taxes, as illustrated below, the taxpayer shall indicate in the space provided for "PAY TO THE ORDER OF" the following data: (1) presenting/collecting bank or the bank where the payment is to be coursed and (2) FAO (For the Account Of) Bureau of Internal Revenue as payee; and under the "ACCOUNT NAME" the taxpayer identification number (TIN). (Below is a sample of a tax check payment where the drawee bank and presenting bank are different from each other.) (Below is sample of a check tax payment drawn from and presented to the same bank.) The following checks are, however, not acceptable as check payments for internal revenue taxes: 1. Accommodation checks checks issued or drawn by a party other than the taxpayer making the payment; 2. Second endorsed checks checks issued to the taxpayer as payee who indorses the same as payment for taxes; 3. Stale checks checks dated more than six (6) months prior to presentation to the authorized agent bank; 4. Postdated checks checks dated a day or several days after the date of presentation to the authorized agent bank; 5. Unsigned checks checks with no signature of the drawer; 6. Checks with alterations/erasures. AABs accepting checks for the payment of BIR taxes and other charges must see to it that the check covers one tax type for one return period only. Moreover, AABs must strictly comply with the systems and procedures for the reception, processing, clearing and accounting of the checks to be prescribed under a separate regulation. Second indorsement of checks which are payable to the Bureau of Internal Revenue or Commissioner of Internal Revenue is absolutely prohibited.
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SECTION 4. Tax Returns Partly Paid Thru Tax Debit Memos (TDMs) AABs are mandated to accept tax returns/payment forms partly paid thru any of the modes of payment mentioned in Section 3 hereof and partly thru TDMs duly and validly issued by the BIR. Before accepting the BIR tax return/payment form partly paid thru tax debit memo, the AAB shall insure that the number of the TDM is indicated in the BIR tax return/payment form in the same manner that the check number/drawee bank and bank debit advice number are indicated in the tax return/payment form paid thru check or bank debit system, respectively. A photocopy of the tax credit certificate (TCC), front and back page, which was the source of the TDM, together with a copy of the TDM, must be required from the taxpayer and attached to the BIR tax return/payment form. TDMs are, however, not acceptable as payments for withholding taxes, including Fringe Benefit Tax (clarified and implemented under RR No. 2-98, as amended, and RR No. 3-98), and for taxes, fees and charges collected under special schemes/procedures/programs of the Government / BIR as discussed and elucidated in a separate revenue regulation. AABs shall see to it that this restriction is strictly observed in the BIR tax returns/payment forms they receive. SECTION 5. Enrollment Of Taxpayers With Authorized Agent Bank Not Required Taxpayers are not required to enroll with any AAB where they intend to file tax returns/payment forms and/or pay internal revenue taxes. Taxpayers may file tax returns/payment forms and pay internal revenue taxes with any AAB of the appropriate BIR office (Revenue District Office (RDO), Large Taxpayers District Office (LTDO), or Large Taxpayers Service, etc., whichever is applicable) where they are required to file the particular return/payment form. SECTION 6. Responsibility And Privilege Of Taxpayers. Taxpayers shall see to it that their tax returns/payment forms with payment are filed with and internal revenue taxes paid to legitimate AABs of the BIR. Nonetheless, they may confirm their tax payments with their home RDO/LTDO or LTDO/RDO where they are required to file tax returns/payment form and pay internal revenue taxes. a. Pay as you file
husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. (3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, 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 payments shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments. No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. b. Income subject to withholding tax
SEC. 56. Payment and Assessment of Income
Tax for Individuals and Corporation. -
(A) Payment of Tax. (1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the
SEC. 57. Withholding of Tax at Source.
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Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the
(A)
Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payorcorporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. (B) Withholding of Creditable Tax at Source. The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. (C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines. 58. Returns and Payment of Taxes Withheld at Source. (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under SEC.
place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by 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 payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. (B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year. (C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments. The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection.
Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal
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(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 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 subject to the provisions of Section 204; 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 Section 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. (E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code.
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payorcorporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. Sec. 57 (C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines.
ii.
Creditable withholding tax
Sec. 58 (D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 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 subject to the provisions of Section 204; 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 Section 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. SEC. 56. Payment and Assessment of Income
RR 2-98 i. Final withholding tax
Sec. 57 (A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a),
Tax for Individuals and Corporation. -
(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail
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himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments. No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. Sec. 57 (B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. REVENUE REGULATIONS NO. 08-98 SUBJECT : Revenue Regulations Amending Pertinent Portions of Revenue Regulations Nos. 11-96 and 2-98 Relative to the Tax Treatment on the Sale, Transfer or Exchange of Real Property and for this Purpose Revising the Time and Place of Payment of the Capital Gains Tax Due Thereon SECTION 4. Creditable Withholding Tax on the Sale, Transfer or Exchange of Real Property Classified as Ordinary Asset. A creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the
withholding agent/buyer, in accordance with the following schedule: A. Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business as per proof of registration with the HLURB or HUDCC: With a selling price of Five hundred thousand pesos (P500,000.00) or less 1.5% With a selling price of more than Five hundred thousand pesos (P500,000.00) but not more than Two million pesos (P2,000,000.00) 3.0% With a selling price of more than Two million pesos (P2,000,000.00) 5.0% B. Where the seller/transferor is not habitually engaged in the real estate business 7.5% C. Where the seller/transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of Revenue Regulations No. 2-98 Exempt SECTION 5. Time and Place of Payment of Creditable Withholding Tax. Creditable withholding taxes deducted and withheld by the withholding agent/buyer on the sale, transfer or exchange of real property classified as ordinary asset, shall be paid by the withholding agent/buyer upon filing of the return with the Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located within ten (10) days following the end of the month in which the transaction occurred. Provided, however, that taxes withheld in December shall be filed on or before January 25 of the following year. -ENDTax Reviewer Group
Thanks to everyone who made this possible: Aaron Ho Benjoe Panahon Carol Deang Chino Baybay Deng De Guzman DS Corpuz Ghia De Guzman James Donato Marvin Ibarra Nicole Torres Reizel Tanchico Rio Diaz Awi Mayuga Bernice Mendoza Charles Lejano Cris Ortua Des Mayoralgo Emee Macabales Jam Cuizon Linus Madamba Mona Baro Niner Guiao Rach Uy Shamby Yambot

Income Tax Rates & Classifications

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Income Tax Rates & Classifications

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Block BD 2010

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b. General classifications of income i.

1. Schedular in nature - income is taxed

a. Schedular tax system v. global tax system

Income Taxation Reviewer

Income Taxation Reviewer

Income is taxed depending classification of the taxpayer Basis of classification of taxpayers

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BASIS OF CLASSIFICATION OF TAXPAYERS

Resident Aliens (Taxable only for income from within)

4 | Follosco Tax Reviewer

Income Taxation Reviewer

D. Basic Accounting Income Taxation 1. Taxable period

5 | Follosco Tax Reviewer

Income Taxation Reviewer

Income Taxation Reviewer

Income Taxation Reviewer

(CIR v. Isabela Cultural Corporation)

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9 | Follosco Tax Reviewer

Income Taxation Reviewer

10 | Follosco Tax Reviewer

Income Taxation Reviewer

Income Taxation Reviewer

12 | Follosco Tax Reviewer

Income Taxation Reviewer

Income Taxation Reviewer

14 | Follosco Tax Reviewer

Income Taxation Reviewer

When is income taxable

his proportional interest or participation in the capital of a corporation.

15 | Follosco Tax Reviewer

Income Taxation Reviewer

Convenience of the Employer Rule Generally,

Income Taxation Reviewer

i. commercial transactions (merchandising/manufacturing/sales of services)

17 | Follosco Tax Reviewer

Income Taxation Reviewer

18 | Follosco Tax Reviewer

Income Taxation Reviewer

Income Taxation Reviewer

Cost or basis of property exchanged in corporate readjustment - Sec 40 (C) (5)

20 | Follosco Tax Reviewer

Income Taxation Reviewer

Income Taxation Reviewer

22 | Follosco Tax Reviewer

Income Taxation Reviewer

23 | Follosco Tax Reviewer

Income Taxation Reviewer

24 | Follosco Tax Reviewer

Income Taxation Reviewer

Exchange not solely in kind Sec 40 (c)(3)

25 | Follosco Tax Reviewer

Income Taxation Reviewer

Wash sales compared with short selling Sec

26 | Follosco Tax Reviewer

Income Taxation Reviewer

more than 12 mos.; than 12 mos.

(2) 50% = where capital asset was held for more

Transactions between related taxpayers

27 | Follosco Tax Reviewer

Income Taxation Reviewer